Cap-and-floor investment framework for long-duration electricity storage
Cap-and-floor investment frameworks support long-duration electricity storage by reducing revenue uncertainty while preserving market-based operation. Under this model, storage assets continue earning revenues from electricity market activities, but a regulated floor provides minimum revenue protection if market earnings fall below an agreed threshold, while a regulated cap limits excess revenues and can return upside value to consumers. This creates a clearer investment case for storage assets that have high upfront costs, long development timelines and uncertain future market revenues.
Long-duration electricity storage can provide flexibility over extended periods, helping shift surplus renewable generation, manage periods of low renewable output, support security of supply and reduce reliance on fossil-fuel-based backup or balancing resources. However, many long-duration technologies face financing barriers because their full system value is not always captured through short-term wholesale or ancillary service markets. A cap-and-floor framework helps address this gap by creating a bankable revenue structure, while still incentivizing projects to operate efficiently in the market.
Main Outcomes of the Solution
- Business value: Improves investor confidence and project bankability by creating minimum revenue protection while allowing upside from market operation.
- Reliability and flexibility: Supports investment in long-duration storage assets that can provide extended balancing, system flexibility and security-of-supply benefits.
- Affordability: Protects consumers through a revenue cap and helps unlock storage that can reduce wider system costs by improving renewable integration and reducing reliance on more expensive balancing options.
Key Deployment and Scaling Factors
- Clear eligibility criteria defining qualifying long-duration storage technologies, minimum duration requirements and project readiness conditions.
- Transparent cap-and-floor revenue design, including how the cap, floor, rates of return and revenue assessment periods are calculated.
- Robust project assessment process covering eligibility, project cost assessment, cost-benefit analysis and consumer value.
- Consumer protection mechanisms ensuring that excess revenues above the cap are returned and that floor payments are justified.
- Defined institutional roles for government, regulator, system operator and project developers, including licensing, cost recovery, monitoring and reporting arrangements.
Case study
Ofgem Long Duration Electricity Storage Cap-and-floor Scheme (2025), United Kingdom
Ofgem is implementing a cap-and-floor scheme to enable investment in long-duration electricity storage while protecting consumers. Under the model, Ofgem sets a minimum and maximum level of revenue for an LDES project: when revenues fall below the floor, consumers top up the difference through energy bills; when revenues exceed the cap, the extra money is returned to consumers through reductions in network charges. Ofgem states that this model encourages investment by guaranteeing revenues that can offset high upfront costs and market uncertainty for LDES projects.
The first application window is structured around two streams. Stream 1 applies to more mature technologies, requiring at least 100 MW of capacity and TRL 9. Stream 2 supports less mature technologies, requiring at least 50 MW of capacity and TRL 8. Both streams must be able to discharge continuously at full power for at least eight hours. The scheme responds to a clear system need: Ofgem identifies an indicative capacity range of 2.7–7.7 GW of additional LDES required by 2035, based on NESO advice.
The case shows how a regulated investment framework can improve bankability for long-duration storage, while using eligibility thresholds, cost-benefit analysis and consumer-protection mechanisms to support system flexibility and security of supply.
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