Long Duration Energy Storage (LDES) Cap and Floor - Ofgem consults on Project Assessment and the Financial Framework

The Cap and Floor Scheme for long duration energy storage (“LDES”) projects continues to develop at pace, following Ofgem and DESNZ’s Technical Decision Document (“TDD”) (published in March 2025), and confirmation that 171 LDES projects have submitted applications for Cap and Floor support.

May and June have seen Ofgem publish two further consultations on key aspects of the Cap and Floor Scheme, providing much-needed clarity on the assessment process through which LDES projects will be allocated a Cap and Floor, and giving stakeholders a chance to feed into policy development.

The Project Assessment Consultation sets out Ofgem’s proposed criteria for evaluating LDES projects, including financial viability, socio-economic impacts, strategic considerations, and wider system effects.

The Financial Framework Consultation sets out the proposed financial framework that will feed into that Project Assessment, and determine the level at which both the cap and the floor will be set. The Financial Assessment Consultation is open for input until 17 July 2025.

We have set out below the key takeaways from the two consultations for developers, lenders, investors, and other key stakeholders. To catch up on the state of play on LDES so far, you can read our previous commentary on the TDD here.

Project Assessment Consultation

What is the proposed assessment methodology?

Ofgem has proposed a Multi-Criteria Assessment (“MCA”) framework for assessing proposed projects, developed in collaboration with NESO and external advisors.

The framework includes three assessment dimensions - Economic, Strategic, and Financial, intended to capture the range of benefits and costs associated with each LDES proposal (referred to as the Project Assessment). The Project Assessment Consultation invited respondents to comment on whether these dimensions address relevant system-wide considerations and to suggest any additional quantitative or qualitative elements.

How will projects be assessed, and will this be competitive?

Projects who meet the eligibility criteria set out in the Eligibility Criteria Assessment Framework will proceed to the full Project Assessment, and Ofgem plans to select a portfolio of projects that collectively fall within a target range of LDES capacity. This target will be determined ahead of the Project Assessment process, in consultation with NESO and DESNZ and alignment with the CP2030 Action Plan and the Strategic Spatial Energy Plan, and will be published in advance of the award of the Cap and Floor in Q2 of 2026. The Project Assessment Consultation also considers the use of a competitive mechanism for certain cap and floor parameters, such as the rate of return, to benchmark projects and potentially reduce consumer costs. As part of this competitive process, projects will be asked to set out their proposed regime length and residual value of the project at the end of that regime, in addition to specifying their preferred rate of return.

More information on how competition would work within the assessment process is expected in upcoming consultations, but the Project Assessment Consultation suggests that competitive features will feed into both the economic and financial assessment (as set out in more detail below).

Stakeholders were asked for views on project-specific bidding for financial parameters and on the approach to maintaining a level playing field across different technologies in response to the Project Assessment Consultation.

What do the individual elements of the Project Assessment look like?

The Project Assessment Consultation sets out three main elements for assessment, each addressing different aspects of a project’s impact:

1. Economic Assessment: NESO will model the costs and benefits of each LDES project compared to a counterfactual scenario where the system relies on existing or alternative flexibility solutions. Monetised considerations include:
   1. changes to wholesale market costs;
   2. effects on renewables support payments; and
   3. security-of-supply metrics such as Expected Energy Not Served.
      The Project Assessment Consultation also references non-monetised benefits (such as macroeconomic growth and environmental impacts) and seeks stakeholder input on their inclusion.
2. Strategic Assessment: This dimension considers factors that may be difficult to monetise, such as:
   1. diversity in LDES technologies;
   2. system resilience benefits; and
   3. the need for cap and floor support.
      Stakeholders were asked whether additional strategic benefits should be included and whether certain technologies or locations should be prioritised for resilience.
3. Financial Assessment: The Project Assessment Consultation outlines a model of revenues, costs, and financing arrangements for each project, using data from the Economic Assessment. This approach examines whether a project’s cashflows will exceed or fall below the proposed floor and whether it may generate payback to consumers via cap payments. The Project Assessment Consultation asks whether the assumption that LDES projects remain “revenue neutral” after balancing market actions is appropriate, and whether more detailed modelling of re-optimisation and ancillary services revenues is needed.

Any issues with this approach?

The Project Assessment Consultation notes several limitations in the proposed methodology. These include challenges in fully capturing real-time flexibility revenues and ancillary service benefits within standard power-market modelling, as well as difficulties in assessing large-scale system interactions (such as the potential for additional LDES to displace network upgrades). The modelling is based on assumptions about supply, demand, and carbon pricing that may change over time. The Project Assessment Consultation also notes that cross-technology competition may require careful calibration of bidding processes and parameter-setting to maintain neutrality. Stakeholders were asked for their views on whether the approach is robust, fair, and adaptable.

Financial Framework Consultation

What financial metrics will Ofgem consider when setting the cap and floor levels?

Under the proposal set out in the Financial Framework Consultation, projects will be asked to submit bids at the Project Assessment phase that detail five key financial parameters:

1. Target rates of return at the cap and the floor: these will include the agreed costs of building, maintaining, and decommissioning the project (the Regulated Asset Value, or “RAV”), with a proposed benchmark of 7.31% (CPIH-real) at the cap, and 4.47% (CPIH-real) at the floor.
2. Residual value at the end of the scheme: this is assumed to be zero, and will be deducted from the calculation of the RAV.
3. Requested regime length: this will be a minimum of 20 years, with Ofgem’s benchmark set at 25 years.
4. Target Interest During Construction: Ofgem will not propose a general benchmark here, and will vary depending on the length of the construction phase.
5. Estimated decommissioning cost: this will be calculated as a percentage of total project capex.

Ofgem will calculate the cap and floor levels for each project based on these submitted parameters, assess them against the administrative levels (based on Ofgem’s benchmarks), and use the difference as part of the financial assessment described in the Project Assessment Consultation.

Additional detail about the levels of the cap and floor

Building on the TDD, the Financial Framework Consultation provides some additional colour on how the cap and floor will be determined. In particular:

1. Ofgem sets out an increased level of flexibility for setting the cap and floor levels, whereby projects can bid across the five parameters set out above to set their own floor, as long as it stays below the administrative floor set by Ofgem.
2. Ofgem has confirmed its proposal to set the administrative floor on the basis of the iBoxx index of BBB+ rated GBP non-financial bonds with 15+ years remaining maturity. This will use 8 April 2025 (which is the day that projects submitted their eligibility assessment) as a common reference date across all projects, as opposed to setting project-specific reference dates.
3. The soft cap, which was trailed in the TDD, allows projects to retain a proportion of revenue above the cap, in order to incentivised continued operation where the cap has been exceeded. Ofgem suggest that developers may retain revenue share of 10% above the cap. We expect the level of this revenue share to be the subject of much stakeholder feedback, as 10% seems to be at the lower end of the expected range from developers’ perspective. Ofgem is also proposing that the top 25% of bids, based on the biggest percentage cut from the administrative Cap and Floor levels set by Ofgem, will receive an enhanced sharing rate on revenue above the cap, as part of its truth-telling incentive proposals.
4. Ofgem has clarified its proposal for inclusion of decommissioning costs in calculating the Cap and Floor. Projects will estimate their full decommissioning cost as a percentage of their total capex, and will bid to recover a proportion of this estimated cost (as set out above). Where awarded a Cap and Floor, projects will be limited to that proportion when recovering decommissioning costs through the levels of the Cap and Floor.
5. On interest during construction, Ofgem sets out a detailed proposal in respect of the way in which projects will be entitled to recover (through the floor) the interest payable on their financing arrangements during the construction phase.
6. Projects will be allowed to recover transaction costs of 5% of opening RAV for equity transactions, and 2.5% of opening RAV for debt transactions.  
7. Ofgem has clarified when it will permit re-openers to provide for changes to the recoverable costs, specifically after 10 years for opex re-openers, and, for decommissioning, following a relevant change in law that affects the cost (in either direction).  

Cost and delivery incentives for projects

The Financial Framework Consultation also provides further detail on the cost and delivery incentives Ofgem will rely on to ensure timely and efficient delivery of LDES projects. Ofgem has proposed the following cost and delivery incentive mechanisms:

1. A RAV adjustment approach, which would increase the levels of the RAV to account for higher costs, and decrease it to account for lower costs. Where the RAV is increased, efficient and economic costs above a benchmark (based on the range of costs subject at Project Assessment) are shared equally between Ofgem and the project, and where the RAV is decreased the savings are similarly shared. Ofgem’s view is that this would incentivise delivery within the cost range provided.
2. An outturn cost comparison approach, which provides for full recovery (through the RAV) of additional efficient and economic costs, but with a clawback of these costs after the end of the Cap and Floor Regime in the event that a project receives floor payments.
3. A 25 bps adjustment to the allowed level of interest during construction to account for on time/ahead of schedule delivery (increase) or delayed delivery (decrease).
4. A clawback mechanism allowing Ofgem to recover higher costs directly where projects receive floor payments.

Additional financial resilience requirements

The TDD signposted Ofgem’s intention to impose certain financial resilience measures on LDES projects, which could have significant impacts on the projects’ cost of capital as well as their operational models. The Financial Framework Consultation develops these commitments, specifically:

1. A gearing cap of 80% to guard against excessive leverage.
2. Asset ringfencing, including restrictions on asset disposal, grants of security, and inclusion of cross-default provisions (which we note are present in many other licence regimes regulated by Ofgem).
3. Reporting requirements which require projects to report annually on a number of key metrics, to allow Ofgem to assess the financial health of projects and take steps to protect consumers and system reliability as needed.

What are the next steps for LDES?

The Project Assessment Consultation closed on 25 June 2025, and Ofgem plans to publish the final Project Assessment framework in Q3 2025.

The Financial Framework Consultation is open until 17 July 2025. following which Ofgem will publish the final version of the Financial Framework in Q3 2025. Both the Project Assessment Consultation and the Financial Framework Consultation will need be in place for Ofgem to begin its cost benefit analysis in Q4. 

The overall timeline for the first window of the Cap and Floor Scheme is set out below.