Inertia – the ability of large rotating machinery, such as Pumped Storage Hydro (PSH) turbines, to provide system stability by resisting sudden changes in frequency – is a crucial but difficult-to-value grid benefit. Under Ofgem’s Cost-Benefit Analysis (CBA) framework for Long Duration Energy Storage (LDES), inertia-related benefits are likely to be assessed within the “Other System Impacts” category. However, given the challenges in quantifying inertia’s value, how Ofgem integrates these benefits into decision-making will be key.

1. Inertia as an essential grid service but a hard-to-monetise benefit

• Why it matters: PSH and other synchronous generation-based storage solutions provide physical inertia, which grid operators currently need to maintain system frequency stability.
• Challenge: Unlike energy arbitrage or capacity payments, there is no widely accepted market mechanism for valuing inertia on a consistent basis, making its financial inclusion complex.
• Current market landscape:
• System operators currently procure inertia indirectly via ancillary services markets (e.g. stability contracts with the National Grid Electricity System Operator (NESO)).
• The lack of a fully developed inertia market makes it harder to include formally in cap and floor assessments.

Ofgem will likely assign an indicative value to inertia benefits but not give them direct financial weighting in the cap and floor mechanism, instead ensuring that system needs are factored into the application process. It should be noted that not all LDES technologies can provide inertia services and so recognition of inertia value may be a key differentiator between projects.

2. Likely methods for considering inertia in “Other System Impacts”

To account for inertia within the CBA framework, Ofgem may use the following methodologies for system impact recognition:

(A) Shadow pricing based on NESO stability contracts

• What this means: Ofgem could reference existing NESO procurement prices for stability services (e.g. synchronous compensation contracts).
• How it helps: It provides a benchmark for assigning indicative inertia value, though it may not be a direct financial component of cap and floor payments.

Recent NESO contracts for synchronous compensators suggest a proxy value for inertia, which could be used as a reference point. Shadow pricing based on NESO stability contracts is best for estimating system-level benefits in relative terms.

(B) System security weighting factor in CBA applications

• What this means: Ofgem may assess inertia qualitatively by applying a weighting factor to LDES projects that provide clear stability benefits.
• How it helps: It ensures that projects like PSH, which offer inertia services, are not disadvantaged in cost-benefit rankings against storage technologies that do not provide inertia services.

System security weighting factors are best for preventing over-prioritisation of short-term financial metrics at the expense of primary grid stability needs.

(C) Minimum stability contribution criteria for eligibility

• What this means: LDES projects could be required to demonstrate inertia contribution potential as part of the cap and floor approval process.
• How it helps:
• Recognises the strategic system value of inertia-providing systems like PSH without needing to assign a specific monetary value.
• Prevents over-reliance on inverter-based storage (e.g. batteries) that do not inherently provide inertia.

Minimum stability contribution criteria are best for aligning LDES deployment with whole-system needs beyond arbitrage value alone.

3. Potential gaps and future market development for inertia valuation

While Ofgem’s existing cap and floor model can indirectly reflect inertia benefits, the lack of an explicit inertia market outside of NESO contracts remains an issue.

Future considerations for improving inertia recognition are:

• Developing a structured market for inertia payments at NESO to support fair valuation.
• Forming a regulatory “stability incentive” mechanism in new LDES application rounds.
• Exploring long-term system planning models to credibly and reliably evaluate the continued need for inertia to maintain grid stability.

Conclusion: ensuring inertia remains a strategic consideration

Under the LDES Cap and Floor CBA, inertia benefits from PSH will likely be considered but not directly monetised. Ofgem’s best approach will involve:

• Using NESO contracts as a valuation proxy but not a direct funding mechanism.
• Applying a weighting criteria for projects contributing essential system stability.
• Avoiding market distortions by ensuring non-inertia-providing assets do not undermine grid resilience in LDES project selections.
• Encouraging future market mechanisms to formally recognise and compensate inertia in a structured way.

While inertia may not yet be explicitly factored into cap and floor calculations, its current strategic system importance should be an influential factor in final assessments.