Consultation on Long Duration Electricity Storage Financial Framework

What changed

Ofgem has finalised the financial framework for the first application window of the LDES cap-and-floor regime, having consulted on its proposals in June 2025 and received 35 responses. The decision was published on 23 September 2025 and governs how revenue caps and floors are set for projects bidding into Window 1, which opened on 8 April 2025.

Four substantive changes from the consultation text. First, the competitive bid parameters have been cut from five to two, narrowing what developers compete on and reducing the scope for gaming through cross-parameter trade-offs. Second, the share of revenue above the cap that flows back to consumers has been raised from 10% to 30%. Third, the cost and delivery incentives have been pared back. Fourth, the indexation approach for inflation has been updated. The decision sits alongside the project assessment consultation decision, the eligibility outcome, and the multi-criteria assessment framework, which together form the full Window 1 regime.

What this means in practice

The 30% above-cap share is the parameter that matters most. Cap-and-floor was designed for interconnectors, where the historic above-cap share has been 10%. Tripling that share for LDES pulls the instrument significantly closer to a fixed-return contract: developers keep 70p of every pound earned above the cap rather than 90p, which compresses the upside distribution and makes the floor more economically dominant in project valuation. For a long-duration asset earning revenue across arbitrage, balancing, and ancillary markets over a 25-year regulatory period, a 20-point shift in above-cap retention is a material change to the IRR a financier will underwrite.

This is consistent with the design logic, even if it goes further than developers wanted. Cap-and-floor's purpose is to bankable an asset class that the wholesale market will not finance on its own. The tighter the band between cap and floor, the more the regulator is doing the price discovery the market would otherwise do. At 30% above-cap share, Ofgem has decided that consumers should capture more of the upside, on the view that the floor is what unlocks the investment and the cap should not become a windfall mechanism. Developers will read it the other way: the floor is doing less work than the headline suggests once you net out the higher claw-back above the cap.

Reducing bid parameters from five to two simplifies the auction but also reduces the information Ofgem extracts from bidders. With five parameters, developers reveal preferences across cap level, floor level, cost incentive strength, delivery incentive strength, and indexation. With two, the auction discriminates on fewer dimensions, which makes outcomes more comparable but also more vulnerable to bidders converging on similar bids. The pared-back cost and delivery incentives suggest Ofgem found the original incentive structure either too aggressive or too administratively complex to operate over a project's life.

Who pays: consumers, through network charges. Cap-and-floor payments flow through NESO as system operator and are recovered via transmission charges. Anyone on a transmission-connected demand point ultimately pays. The volumes are not trivial: Window 1 is sized to support several gigawatts of long-duration storage, and the floor is a contingent liability on consumers if wholesale revenues underperform across a full delivery year.

For developers, the framework determines whether projects reach final investment decision. Pumped hydro schemes at Coire Glas, Cruachan 2, and others have been waiting for this framework to confirm bankability. The financial model and handbook published alongside the decision are the documents project financiers will run their sensitivities against. The handbook explains how revenue levels are calculated and how bids are assessed; the model is the spreadsheet that turns assumptions into cap and floor numbers.

What happens next

Window 1 project assessment is now underway, with the eligibility stage complete and the multi-criteria assessment framework in place. Decisions on which projects receive cap-and-floor support are expected during 2026. Developers who clear assessment will then negotiate cap and floor levels under the rules confirmed in this decision.

A second window is anticipated but not yet scheduled, with timing dependent on how many projects clear Window 1 and how the Clean Power 2030 capacity targets evolve. Ofgem will likely review the financial framework before Window 2 opens, particularly the above-cap revenue share if Window 1 outcomes suggest the parameter is mispriced in either direction.

Watch for two related decisions. First, NESO's treatment of LDES in the Centralised Strategic Network Plan and the Clean Power 2030 pathway, which will determine how much capacity the regime is being asked to deliver. Second, any review of how cap-and-floor revenues interact with Balancing Mechanism participation and the wider wholesale market reform under REMA, where the question of whether contracted assets distort price formation in the energy market is unresolved.