Despite the UK imminently award BESS contracts at roughly four times the volumes of MACSE round 1, attention to the impacts is irrationally low, despite far-reaching and uncomfortable consequences for UK BESS.
We turn our attention to long duration energy storage [LDES] in our third article addressing the investment impacts of high renewables penetration.
LDES defined
‘Shorter than a cricket match’ is not everyone’s definition of Long Duration. A better definition might be the time between UK energy policy announcements and their delivery. We do not use duration: we define LDES by the purchasing mechanism – the salient parameter for project investors. The UK’s LDES scheme covers projects >8 hours, whereas Ireland and Italy settled at >4 hours. The technologies are generally familiar but deployed under new contracting models and configurations. LDES is typically just a more infra-aligned incarnation of batteries: long asset lives, significant capex, bankable contracts and inflation adjustments.
UK Cap and Floor
The biggest live scheme is now the UK (40 GWh vs MACSE 10 GWh). The British government intends to purchase 2.7-7.7 GW of LDES (minimum 8 hours), coming online in 2030, typically with 25 year contracts. This volume will be selected from nearly 30 GW or pre-screened projects. Li-ion dominates the shortlist: 70% of capacity (in the low technology risk category called Track 1), with some pumped storage and flow batteries (see chart below). ‘Diversity of technologies’ and remaining ‘technology-neutral’ are nominal priorities, but the fact is that only Li-ion gets reliably built in this time.
Startling context
Work though the implications of this, and the capex maths is startling. A volumetric mid point of Ofgem’s volume target is 5 GW: at least 40 GWh at 8 hrs. If each MW costs £1.5m at 8 MWh (£190k/MW), then midcase volumes imply at least £7.5bn of investment. This spending is concentrated in three years: 2027-29. That is £2.5bn p.a – an astonishing sum, with serious implications. For context, Opus estimates this exceeds the UK’s total annual grid scale BESS investment in 2023, or even 2024.
Project Finance
Project Finance should cover a high shares of capital costs for LDES, rendering it significantly less equity intensive than shorter duration BESS, but the point stands: this is a material opportunity for grid infrastructure investors, and a material demand on UK supply chains.
Timings
Ofgem’s initial decisions on selected projects are due soon (this month), with final awards due in “summer”. Fortunes are unlikely to be made by betting on regulatory timetables being met, but we should anticipate frenetic Q3 activity as successful bidders rush to deliver this £2.5bn pa of investment (financing, supply chain, EPC) to get projects online before 2030 and ahead of 3 year transformer delivery times.
Risk
But we’ve been here before, then confounded by simplistic expectations. The risk is we see MACSE-type fat tail outcomes, distorted by bidder considerations around the post-contract [residual] value of the grid connection distorting the cap and floor bids. Or of upstream generators seeing synergistic value in progressing projects, then partnering the developers to bid projects below standalone economic thresholds. These are far-fetched, but so was October’s black swan MACSE outcome.
Impacts
This scale of investment will strain supply chains, impacting availability, cost and timelines from project financiers, transformer OEMs, BoP contractors, EPCs, ICPs and DNO TPWs [third party works]. Current 3 year lead times for transformers will ensure many capital formation transactions are accelerated into 2027.
Worse, this large 40 GWh LDES deployment rush coincides with the imminent surge in shorter duration BESS deployment from TMO-4 Gate 2 delayed short-duration BESS assets. This is a potent cocktail for market tightness, cost pressures, and heightened execution risks. In some regions, notably Scotland, which has a high concentration of LDES, may see concentrated local effects.
Returns
Even assumping zero delivery and capex impacts, LDES will impact returns. Zenobe argues that “by allowing subsidised LDES assets to compete directly with unsubsidised BESS in markets like balancing, response and capacity, the [LDES] policy could distort pricing and bidding behaviour, reducing the competitiveness of battery storage”. This is not wrong. 40 GWh of LDES assets will need to compete in the same arbitrage and ancillary revenue stacks, potentially depressing returns. LCP estimate LDES awards will knock 200 bps from BESS returns, creating a five year UK BESS investment freeze.
Major players
These concerns are not endemic to LDES, they are a bug in British implementation. Returning to the expected winners of LDES cap and floor contracts, we can’t yet know how attractive these returns will prove. Nor do we know which projects will be awarded, but the published shortlist reveals which LDES developers dominate. The charge is being led by NatPower (9.5 GW across 10 projects), DIF’s Field (1.6 GW across 5 projects), and Innova (1.6 GW across 4 projects). These could exceed current funding capability: so anticipate asset M&A as well as equity rounds following the final awards.
A European phenomenon
Like BESS and syncons, the LDES opportunity too should spill out across Europe, and implementation there may be smoother. Italy used MACSE to deliver LDES. Ireland has started too (200 MW or 4 hour duration), and we expect others to follow. There are three reasons:
Conclusions
Planned UK LDES contract awards in the next 4-12 weeks will concentrate minds on LDES’ rewards, but also the risks. The scale of implied investment in the UK is being overlooked: it dwarfs recent UK BESS investment. It may pose a significant opportunity for winners, and for the BESS supply chain, but it brings risks, for LDES winners and for planned Gate 2 projects: 1) to timelines, 2) to their actual capex costs and achieved returns, 3) to broader project finance availability, and 4) to post 2030 revenues.
Stay tuned.
