Pumped Storage Hydropower Series: UK's Pumped Storage Future
The UK has been a pioneer in liberalised electricity markets, with the industry privatised in the early 1990s. Over the last 20+ years, policy has supported the transition to variable renewable generators, so that in 2023 just over one-third of the country’s power was provided by wind and solar. PSH projects that were built when the industry was nationalised have provided important grid services and the flexibility required through the new generation mix which has led to increased price volatility. This has encouraged developers to scope sites for new PSH projects, but moving from planning into construction and operation has stalled due to lack of long-term revenue visibility.
The power market in Great Britain has many of the characteristics of a successful market, with the recommendations around long-term planning, predictable planning processes, access to arbitrage value and ancillary service remuneration at least partially in place. What has been missing has been a long-term revenue mechanism that would allow finance to be secured. In October 2024, the UK Government announced a ‘cap and floor’ mechanism for long duration energy storage. The announcement follows a consultation held earlier this year which proposed a ‘cap and floor’ scheme to encourage LDES investment.
Cap and floor models provide a guaranteed minimum income for developers, in return for a limit on revenues. This will provide a revenue top up should the total gross margin drop below the floor level, while requiring asset owners to pay back revenue above the cap. The gross margin is defined as the difference between revenues earned from dispatching energy and services of the asset and the costs of buying the energy to charge the asset. Revenue from the GB Capacity Market and ancillary services would be included in this calculation. The support would be in place for the project lifetime, i.e. for PSH, up to the point where an asset would first need refurbishment.
Ofgem has agreed to act as regulator and delivery body and the scheme’s first round is expected to be open to applicants in 2025 which could result in some of the ‘shovel-ready’ PSH projects in development reaching Final Investment Decision later in 2025.
