Pumped storage’s role in UK long duration storage

The Long Duration Electricity Storage (LDES) Technical Decision Document (TDD) was published on 11 March 2025 by Ofgem and the Department for Energy Security and Net Zero (DESNZ). It sets out the UK government’s approach to supporting investment in long duration electricity storage through a cap and floor scheme, similar to the one used for electricity interconnectors. The document provides key details on how the scheme will operate; eligibility criteria; project assessment processes; financial parameters; and next steps for implementation.

The LDES TDD follows the government’s October 2024 consultation response, which confirmed its intention to introduce a long duration storage support mechanism. This decision aligns with the Clean Power 2030 Action Plan and Ofgem’s Forward Work Programme, aiming to enable investment in large-scale energy storage projects.

The scheme will be delivered and regulated by Ofgem, with its legal framework set out in the Planning and Infrastructure Bill (introduced in March 2025). The primary mechanism for cost recovery will be network charges, ensuring that any required consumer support payments (floor payments) or revenue redistributions (cap payments) are handled efficiently.

Cap and floor design

The core concept of the cap and floor scheme is to provide a minimum revenue guarantee (floor) to protect investors from downside risks, while also capping excessive profits, ensuring that consumers benefit if projects perform exceptionally well. Although this model draws on the electricity interconnector cap and floor framework, it has been specifically adapted to meet the requirements of LDES technologies.

The financial structure under the scheme will involve:

under the scheme will involve:

Cap: Set to allow a fair return for investors.

Floor: Designed to cover investment costs and provide financial stability, especially for debt financing.

Revenue sharing: Ensuring consumer protection through a proposed “soft cap” that allows consumers to receive a share of revenue generated beyond the cap and an expected “soft floor” that means a

Further consultation on the specific financial parameters is expected during 2025, while projects applying to the scheme must:

Provide long duration energy storage services (minimum eight-hour storage duration).

Demonstrate a significant contribution to system flexibility and net-zero objectives.

Be located in Great Britain.

Meet technical and financial

The first application window for LDES projects opened in Q2 2025 and Ofgem is planning for Window One to create between 2.7GW and 7.7GW of additional storage capacity in the system by 2035.

Many elements of fine detail for the scheme are still to be finalised, with some being the subject of consultation over the coming months. Key financial parameters under review include encouraging competitive funding competitions for project finance structures, and ensuring LDES projects operate efficiently both under normal conditions and during system stress events.

The LDES TDD is a crucial milestone for developers promoting long duration energy storage projects. While the cap and floor mechanism provides a promising investment framework for these projects that will play a key role in the UK’s energy transition, further details on scheme financials, regulatory oversight and post-regime arrangements will need to be carefully refined in the coming months so as to achieve the right balance between the interests of consumers and developers (and their funders), and whole-system benefit.

Challenges

Pumped storage hydro (PSH) developers in the UK face several challenges under the LDES cap and floor scheme, mainly due to the unique financial and operational characteristics of PSH compared to other storage technologies. While the scheme aims to reduce revenue risk and attract investment, its design raises several challenges specific to PSH.

Misalignment between contract duration and PSH asset life

The cap and floor scheme is designed with a 25-year contract duration, whereas PSH assets typically have lifespans of 50-100 years. The accelerated cost recovery model may result in higher floor payments in the early years, leading to concerns of excess consumer subsidisation. While uncertainty about post-regime market conditions may deter investment in large-scale, capital-intensive projects. However a potential solution is that Ofgem is reviewing extended depreciation models to better align financial recovery with PSH’s long life.

Uncertainty around post-regime revenue model

Currently, there is no clear visibility of how PSH projects will earn revenue beyond the 25-year cap and floor support window and therefore developers and funders are likely to want to recover the full value of their investment within this 25-year period.

This means developers may hesitate to invest if post-regime financial sustainability is uncertain and they are unlikely to recover the value of their investment within the 25-year cap and floor support window. However, Ofgem is considering a mechanism where post-regime revenues can offset past consumer-supported floor payments. Whilst this approach ensures that consumers who provided investment support through floor payments can benefit from the continued operation of assets beyond the 25-year regime period, if designed correctly it could ensure that developers do not ultimately record a negative return for their overall investment.

Risk of competitive distortions

The cap and floor design is uniform across all LDES technologies, but PSH has higher upfront investment costs and a longer payback period. So if the floor level is set too low, project financing may be difficult for PSH and investors/funders may look at other LDES technologies with lower CAPEX values but also lower asset lifetimes (e.g. lithium-ion with longer discharge) as being a more attractive investment opportunity.

The current model also disadvantages projects with much longer lifespans due to their longer development cycles, potentially leading to longer-term financial inefficiencies. However a potential solution is that there are calls for technology-specific financial structures to avoid distorting investment incentives.

Financing risks despite revenue certainty

Debt financing is crucial for PSH projects, but the existing scheme treats all projects with a standardised cost of debt, rather than using actual borrowing costs for each project. It may also not offer sufficient flexibility for highly leveraged PSH developers who need longer-term debt.

So a lack of tailoring for actual debt and equity requirements makes it harder for private sector financing to work under the scheme. Ofgem is exploring a hybrid floor mechanism, where project-financed PSH developers could set their floor based on actual cost of debt rather than a notional benchmark.

Regulatory complexity and monitoring burden

The multi-stage assessment (eligibility, cost-benefit analysis, final award and post-construction review) creates a significant administrative burden. This means that PSH developers will need to continuously demonstrate ongoing financial viability and system benefits, adding to the complexity of project planning. However, developers are lobbying for a simplified regulatory process for proven technologies like PSH.

Restrictions on revenue stacking and ancillary services

PSH typically operates by stacking multiple revenue streams (arbitrage, capacity market, frequency response), but the cap and floor model does not incentivise seeking additional revenue streams. So if revenues hit the floor level too frequently, PSH may be forced to rely more on the cap and floor mechanism than market-driven income. It remains unclear whether PSH can fully participate in ancillary service markets while under the cap and floor scheme. However a potential solution is in the form of a revenue-sharing mechanism above the soft cap, which is being trialled to maintain market-based incentives.

Although it’s a complex but potentially investable framework for pumped storage, the LDES cap and floor scheme provides some much-needed revenue certainty. And it is a step in the right direction but further adjustments are needed to make pumped storage investments more viable under this framework.

Several unresolved challenges remain for developers:

Mismatch between contract duration and asset lifespan.

Unclear post-regime revenue mechanisms.

Risk of competitive distortions with shorter-duration LDES technologies.

Difficulties in securing appropriate project financing under a notional debt model.

Regulatory and administrative complexity.

Approach to revenue

These challenges can be addressed by: extending contract durations; allowing post-regime revenue-sharing mechanisms; introducing a tailored floor rate for project-financed PSH; and encouraging projects to generate ancillary service income.

Inertia value

Another issue for pumped storage schemes under this mechanism is the difficulty in valuing inertia. Under Ofgem’s CBA framework for LDES, inertia-related benefits are likely to be assessed within the “Other System Impacts” category. However, given the challenges in quantifying inertia’s value, how Ofgem integrates these benefits into decision-making will be key.

Inertia as an essential grid service but a hard-to-monetise benefit

Grid operators currently need inertia to maintain system frequency stability but, unlike energy arbitrage or capacity payments, there is no widely accepted market mechanism for valuing inertia on a consistent basis, making its financial inclusion complex.

Ofgem will likely assign an indicative value to inertia benefits but not give them direct financial weighting in the cap and floor mechanism, instead ensuring that system needs are factored into the application process. It should be noted that not all LDES technologies can provide inertia services and so recognition of inertia value may be a key differentiator between projects.

Likely methods for considering inertia in “Other System Impacts”

To account for inertia within the CBA framework, Ofgem may use the following methodologies:

1. Shadow pricing based on NESO stability contracts – Ofgem could reference existing NESO procurement prices for stability services (e.g. synchronous compensation contracts). This will provide a benchmark for assigning indicative inertia value, though it may not be a direct financial component of cap and floor payments.

2. System security weighting factor in CBA applications –  Ofgem may assess inertia qualitatively by applying a weighting factor to LDES projects that provide clear stability benefits. It ensures that projects like PSH, which offer inertia services, are not disadvantaged in cost-benefit rankings against storage technologies that do not provide inertia services.

3. Minimum stability contribution criteria for eligibility – LDES projects could be required to demonstrate inertia contribution potential as part of the cap and floor approval process. This can help by recognising the strategic system value of inertia-providing systems like PSH without needing to assign a specific monetary value; and preventing over-reliance on inverter-based storage that do not inherently provide inertia.

Potential gaps and future market development for inertia valuation

While Ofgem’s existing cap and floor model can indirectly reflect inertia benefits, the lack of an explicit inertia market outside of NESO contracts remains an issue. Future considerations for improving inertia recognition are:

Developing a structured market for inertia payments at NESO to support fair valuation.

Forming a regulatory “stability incentive” mechanism in new LDES application rounds. Exploring long-term system planning models to credibly and reliably evaluate the continued need for inertia to maintain grid stability.

Strategic consideration

Under the LDES Cap and Floor CBA, inertia benefits from PSH will likely be considered but not directly monetised. Ofgem’s best approach will involve:

Using NESO contracts as a valuation proxy but not a direct funding mechanism.

Applying a weighting criteria for projects contributing essential system stability.

Avoiding market distortions by ensuring non-inertia-providing assets do not undermine grid resilience in LDES project selections.

Encouraging future market mechanisms to formally recognise and compensate inertia in a structured way.

While inertia may not yet be explicitly factored into cap and floor calculations, its current strategic system importance should be an influential factor in final assessments. 

Mark Macaulay is a Partner in Dentons’ Projects team. He advises on all aspects of transactional construction work with a particular focus on major energy and infrastructure related projects.  He has worked on a number of significant projects throughout the UK and internationally, including on a number of hydropower projects. Mark is co-author of a book entitled Construction and Procurement Law and is ranked as a leading individual in both Legal 500 and Chambers & Partners legal directories. Email: mark.macaulay@dentons.com

Roddy Cormack is Counsel in Dentons’ Projects team.  Roddy has been advising clients in the construction sector for over 20 years in the allocation and management of legal risk.  He was part of the International Hydropower Association working group that produced the “Enabling New Pumped Storage Hydropower” guidance note.  He is ranked in Chambers & Partners legal directory as a Star Associate. E-Mail: roddy.cormack@dentons.com

Dentons’ experience in the hydropower sector

Dentons has established itself as a leading legal advisor in the global hydropower sector, with particular strength in pumped storage hydropower projects. The firm’s expertise spans project development, procurement strategies, contract negotiation, risk management, and dispute resolution across multiple jurisdictions.

In the pumped storage hydropower space, Dentons has advised on several significant projects including the 3500MW Glen Earrach scheme on Loch Ness in Scotland, the 1000MW Meaford Facility in Ontario, and the Coire Glas project in Scotland. The firm recognises PSH’s critical role in energy transition, providing expertise in procurement and contracting strategies that help developers secure robust supply chains in an increasingly competitive market.

Beyond PSH, Dentons has extensive experience in conventional hydropower projects worldwide. Notable examples include the Rogun Hydropower Project in Tajikistan (featuring what will be the world’s highest dam), the 800MW Muskrat Falls facility in Canada, the 1100MW Site C project in British Columbia, and the 6450MW Grand Renaissance project in Ethiopia. The firm has also advised on numerous smaller-scale and run-of-river hydropower schemes, particularly throughout Scotland.