The Cost-Benefit Analysis (CBA) stage of the Long Duration Electricity Storage (LDES) cap and floor mechanism, as outlined in the Technical Decision Document (TDD), introduces a complex dynamic by incorporating socio-economic welfare impacts on other LDES owners. This inclusion, alongside the recognition of inherent conflicts between consumer and producer interests, means that Ofgem faces a delicate balancing act in setting cap and floor levels.

1. The consumer v. producer welfare trade-off

Consumer interests:

• Consumers benefit from lower energy prices, particularly if new LDES projects increase energy storage competition and reduce price spikes whilst also reducing the need for consumers to meet the costs of curtailment of wind and solar energy generation.
• The design of the cap and floor mechanism ensures that excess revenues at the cap flow back to consumers, while floor payments ensure continued viability of LDES assets.
• However, if the scheme overcompensates new LDES entrants, consumers bear the cost via network charges, leading to inefficient economic outcomes.

Producer (non-LDES) interests:

• Traditional power generators (e.g. CCGTs, nuclear and renewables) may see reduced revenues due to increased energy storage optimising market spreads.
• Lower peak prices could reduce profitability for some generation assets, shifting socio-economic welfare away from traditional producers.
• However, increased demand from LDES operators during periods of low demand from other off-takers could raise off-peak prices.

LDES owner impacts:

• Revenue cannibalisation: If too many LDES projects enter the market, existing owners may experience diminishing returns, as arbitrage opportunities compress and secondary revenues weaken.
• Cost of capital decisions: If market cannibalisation is too high, prospective investors may demand higher cap levels to de-risk entry, ultimately raising consumer costs.

Ofgem will likely seek a mid-point where new LDES deployment is encouraged while ensuring that excessive revenue cannibalisation is avoided to preserve viable investment conditions for both new and existing LDES owners, and consumer protections are in place (e.g. soft cap mechanisms) to prevent unnecessary cost burden.

2. Managing the impact on other LDES owners

Ofgem has explicitly acknowledged that introducing new LDES projects must not distort existing storage markets. This implies two key balancing objectives:

• Preventing overcrowding in the market

• Excessive competition among too many LDES projects could undermine the revenue potential of those already approved.
• A staggered rollout approach – possibly informed by NESO’s future system needs assessment – could space out projects to protect long-term viability.

• Ensuring the floor is not set too generously

• If floor payments are overly protective, inefficient LDES projects may enter the market and disrupt revenue dynamics for existing operators.
• Ofgem will likely calibrate risk exposure carefully, perhaps requiring higher operational efficiency thresholds or demonstrated ability to operate independently beyond floor support.

Ofgem will likely apply a market-wide impact test during the CBA stage to assess whether approving new projects would unduly erode existing LDES revenues. It could also introduce “first mover” protections, where early-approved LDES operators are safeguarded from distortive future expansions.

3. Practical example of balancing the conflict

A scenario where a 100MW/8hr PSH project enters under the scheme might look like this:

• Benefit to consumers: It enables more off-peak storage, reducing power prices during peak demand.
• Risk to other LDES owners: If several such projects enter, cannibalisation of arbitrage revenue may threaten previously built LDES projects, requiring some to operate closer to the floor.
• Impact on traditional producers: Natural gas peaking plants lose profitability, increasing calls for alternative capacity revenues.

Ofgem will likely use NPV welfare tests to ensure that the consumer price benefits outweigh negative investment risk to LDES and producers, and may also adjust cap and floor levels based on market saturation levels, possibly limiting new approvals if too much capacity is set to enter the market.

Conclusion: a delicate and iterative process

Ofgem will not take an extreme position in favour of either consumers or producers, but will instead seek a dynamic, market-responsive approach to balancing LDES deployment, consumer pricing and investment sustainability.

Key strategies to expect are:

• Gradual market entry assessments to avoid LDES revenue cannibalisation.
• Market-wide cost-benefit modelling assessing all participants, not just new entrants.
• Refinements in floor levels to ensure efficient entry without over-subsidising projects.
• Active monitoring and reassessment post-deployment to ensure that unintended market impacts are mitigated in subsequent application windows.

The inclusion of LDES owner impacts in the socio-economic welfare category suggests that Ofgem will not just focus on bringing in new projects, but also on maintaining a balanced storage market that remains investable, consumer-friendly and aligned with system needs.