The cap and floor mechanism, which is used to finance interconnectors, should be adapted to stimulate an eight-fold increase in long-duration electricity storage capacity that the UK will need by 2035, Aurora Energy Research has urged.
In a new study, the consultancy said up to 24GW of long-duration storage, which can store electricity for four hours or more, will required by then to ensure continuity of supply as the electricity system becomes increasingly reliant on intermittent solar and wind power.
Scaling up long-duration storage to this level could reduce by 50 TWh per annum the UK’s reliance on gas, which is currently the chief way that the power grid currently copes with mismatches in supply and demand for electricity. It would also cut annual carbon dioxide emissions by 10 million tonnes and system costs by £1.13 billion per annum, saving the average household £26 on their energy bill, the study estimated.
However, according to the report, the electricity market’s current design and support mechanisms do not reward long-duration storage for the “full value” of the services they provide.
Investors in long-duration storage can also be put off by the uncertain nature of the revenue streams generated by such projects, as well as the long lead times and upfront costs that their construction often entails.
Under the cap and floor mechanism, which has been used to bring forward interconnector projects, investors are guaranteed a minimum level of revenue to reflect construction and debt costs. Any profits are then capped.
The Aurora report suggested the mechanism could be adapted for long-duration storage to include a hard floor price, while setting the cap flexibly in order to incentivise output for the grid.
A cap and floor scheme for long-duration storage should also recognise the value such projects contribute to operating the grid, such as not having to constrain wind power production, the study recommended.
While contracts for long-duration storage are likely to be decided on a case-by-case basis initially, a competitive auction should be considered eventually, the report said.
The report was produced by Aurora on behalf of a number of its clients, including SSE Renewables, Drax and National Grid Energy System Operator.
Stephen Wheeler, managing director of SSE Renewables said: “The introduction of a new policy mechanism such as the cap and floor could unlock the investment required in projects such as our 1,500MW Coire Glas pumped storage project which has the standalone capability to more than double the UK’s total electricity storage capacity and significantly scale up system flexibility.”