The Energy Transition | Government backs cap and floor support for long-duration storage projects

This week, we look at recent government announcements affecting the long-duration energy storage and the carbon capture and hydrogen sectors, Ofgem's review of capacity market rules, and the world's longest undersea cable linking the UK and Denmark.

Government backs cap and floor support for long-duration storage projects

The government has launched a consultation on its proposal to develop a cap and floor mechanism designed to overcome the investment barriers it has identified in the long-duration electricity storage (LDES) sector.

The consultation states that the use of a cap and floor mechanism has already boosted growth in the number of interconnector projects in the UK. The mechanism guarantees investors a minimum level of revenue to cover construction and debt costs (the floor). If the project's revenue does not reach the floor it is topped up by the electricity system operator (ESO) using funds derived from transmission charges paid by all users of the national transmission network. In addition, a maximum revenue is imposed on the project (the cap), and where this is exceeded, the excess revenue is paid to the ESO and used to reduced transmission charges across the network.

The government believes that replicating this system in the LDES sector could kickstart investment into projects such as new generation pumped hydro plants. The consultation states that deployment of up to 20GW of LDES could result in system savings of up to £24bn by unlocking the ability for excess renewable generation to be reserved for times of high demand. There is currently just 2.8GW of LDES capacity in the UK spread across four hydro projects.

The consultation is open until 5 March 2024 and seeks stakeholders' views on the proposal's ability to combat the “historic lack of investment” in LDES projects.

Ofgem launches ten-year review of Capacity Market Rules

Ten years on from the formation of the Capacity Market, Ofgem has launched a consultation seeking feedback on whether the scheme is functioning, whether its objectives remain appropriate and whether those objectives could be met more efficiently. The Capacity Market was established by the Electricity Capacity Regulations 2014 and has three main objectives:

1.     promoting investment in capacity to ensure security of electricity supply;

2.     facilitating the efficient operation and administration of the capacity market; and

3.     ensuring the compatibility of capacity market rules with other subordinate legislation.

Ofgem must achieve these objectives by implementing Capacity Market rules and must consult on these rules at five-year intervals. The previous consultation in 2019 found that the rules were helping Ofgem to meet the three objectives above.

Ofgem is seeking feedback from stakeholders on whether specific rules should be changed to ensure the efficient operation of the Capacity Market and is inviting any rule change proposals to be submitted to the Capacity Market Advisory Group (CMAG). CMAG was established in 2022 to help the Capacity Market be more adaptive and dynamic to changing market conditions. Ofgem believes that rule changes proposed to CMAG will have the benefit of exposure to wider industry expertise and be subject to better scrutiny.

The ten-year review consultation will run until 19 February.

Government unveils plan to scale 'competitive' UK carbon capture industry

The government has announced plans to transform the carbon capture, usage and storage (CCUS) industry in the UK, with the intention of creating a competitive market in the sector by 2035. The plan, known as CCUS Vision, sets out the government's strategy to transition the market away from early-stage government-backed projects and towards becoming a global industry leader.

One of the main takeaways from the strategy is the plan to launch allocation rounds for government funding for CCUS projects in 2027. The government will also seek to expand the carbon dioxide (CO2) transport network, and has set out the intention to publish an initial call for evidence in 2024 focussing on how the government may facilitate non-pipeline transport of CO2in the UK.

The government has pledged a £20 billion investment to achieve storage of 20-30 million tonnes of CO2 per year by 2030 and estimates that there is space under the North Sea for a total of up to 78 billion tonnes of CO2.

The Secretary of State for Energy Security and Net Zero, Claire Coutinho, said that the UK's geology, skills and infrastructure put the country in a "unique position to lead the way on carbon capture technologies". The Minister for Energy Efficiency and Green Finance, Lord Callanan, called the strategy "a pivotal milestone in our journey to net zero".

CfD contract administrator selected to manage hydrogen scheme

The Department for Energy Security and Net Zero (DESNZ) has announced that the Low Carbon Contracts Company (LCCC) will be the counterparty for the Hydrogen Production Business Model. This model was announced in August 2023 and aims to reduce up-front costs being imposed on hydrogen producers during the growth phase. This is similar to the Contracts for Difference (CfD) scheme in that the government pays a subsidy to hydrogen producers which is equal to the difference between a strike price (which is the cost of hydrogen production) and a reference price (the market value of hydrogen).

The LCCC has spent the last three years advising DESNZ on the deployment of this new business model and acts in a similar capacity in relation to the CfD scheme. DESNZ will soon direct the LCCC to offer contracts relating to 11 major hydrogen projects across the UK. The 11 projects announced in December will produce green hydrogen by electrolysis and it is hoped that these projects will deliver 125MW of green hydrogen to businesses.

Oliver Coe, lead contract manager for Hydrogen Scheme Development at LCCC said: “This is fantastic news - we are looking forward to supporting the selected projects in 2024 and beyond. As things progress, the Hydrogen Production Business Model contracts will support the development and operation of a number of both Green and Blue Hydrogen Production Facilities in line with the UK's net zero targets. We are excited by these steps and will continue to work with our partners to deliver positive outcomes.”

Viking Link interconnector begins powering UK homes

The world's longest land and subsea interconnector has become operational for the first time.

Spanning 475 miles, the link extends from Revsing substation in southern Denmark through to Bicker Fen substation in Lincolnshire. Run by National Grid Ventures (NGV) as a joint venture with Danish System Operator, Energinet, the link is currently operating at 800MW capacity. National Grid projects that during the coming year there will be a gradual incremental rise towards the interconnector's full capacity of 1.4GW.

Named the "Viking Link", the interconnector is expected to power up to 2.5 million homes, which NGV states will bring over £500 million of cumulative savings for UK consumers over the next decade due to cheap imported power imported from Denmark. The Viking Link has a converter station on each end of the cable where the power is transformed into the correct frequency before being transported onto each country’s transmission systems.

National Grid states that Viking Link will bring further benefits for UK consumers including lower carbon power and increased energy security. This due to the UK's ability to call on additional power from Denmark as and when it is needed. NGV also claims that Viking Link is expected to save more than 600,000 tonnes of carbon emissions in its first year.

President of National Grid Ventures, Katie Jackson, said: "This record-breaking new link is a fantastic example of engineering and collaboration with our partner, Energinet. As we deploy more wind power to meet our climate and energy security targets, connections to our neighbouring countries will play a vital role increasing security of supply and reducing prices for consumers."

This article was written with the assistance of Jack Duffy, Johnny Hartrick, and Luke Webb, trainee solicitors.