Pumped storage | A strategic consideration
Mark Macaulay and Roddy Cormack from Dentons Projects team give an insight into long duration energy storage and the role of pumped storage in the UK
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 Email:
mark.macaulay@
dentons.com
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
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 IHA working group that produced the “Enabling New Pumped Storage Hydropower” guidance note. He is ranked in Chambers & Partners legal directory as a Star Associate. Email:
roddy.cormack@
dentons.com
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 project needs to achieve minimum availability thresholds to remain eligible for support.
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.
10 | July 2025 |
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Be located in Great Britain. Meet technical and financial viability criteria.
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
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