Ofgem has finalised its Economic Assessment methodology for Window One of the Long-Duration Electricity Storage (LDES) Cap and Floor scheme, a key step toward unlocking investment in large-scale storage. Developed in conjunction with the National Energy System Operator (NESO), the methodology determines how Ofgem will quantify a project’s system-wide value, a crucial determinant of which LDES projects secure support under the scheme. NESO leads the system modelling and Cost-Benefit Analysis (CBA) (the focus of this article), while Ofgem applies the results of that along with its Strategic and Financial Assessments in Ofgem’s Multi-Criteria Assessment (MCA) to select projects and decide on support levels.
A whole-system cost-benefit approach
At its core, the Economic Assessment methodology is built around a CBA that measures the net system and societal contribution of each applicant project. The CBA models the incremental effect of a project against a carefully defined counterfactual – a “world without this project” – across a wide range of welfare and system metrics. By capturing both monetary and non-monetary effects, Ofgem can compare very different technologies on a like-for-like basis.
The methodology captures:
- Consumer welfare impacts: Changes to wholesale prices, constraint management costs and support scheme costs (such as Contracts for Difference).
- Producer welfare impacts: Including the revenues of existing generators, interconnectors and other storage operators.
- System-level benefits: Improvements in security of supply (quantified using Expected Energy Unserved and the Value of Lost Load), avoided renewable curtailment and operational flexibility.
- Environmental impacts: Monetised reductions in carbon emissions.
- Qualitative assessments: Covering aspects such as system operability, ancillary service potential and resilience.
Together, these measures provide Ofgem with a balanced view of each project’s value (both in monetary and non-monetary terms) and form part of the broader MCA framework against which decisions will be made.
What changed after consultation?
Ofgem’s consultation process generated extensive industry feedback, much of which has been incorporated into the final methodology. The changes are substantive, addressing key concerns raised by developers, investors and system operators, and seek to ensure that the framework is both technically credible and policy aligned.
Project-specific counterfactuals
Previously, each project would have been assessed against a uniform baseline. Stakeholders warned this risked “size bias”, where larger projects could appear more valuable simply by displacing more assumed background capacity. The final methodology adopts project-specific counterfactuals, removing half the project’s capacity from the baseline before reintroducing the actual project. This mitigates size bias and ensures that the assessment reflects each project’s true marginal contribution. This ensures that each project is assessed on its true incremental value, not its absolute size – a critical fairness issue for smaller developers.
Recognition of ancillary services
Industry feedback stressed that ancillary services such as inertia and short-circuit level provide vital system benefits that were underrepresented in the original framework. NESO will now provide the data needed to estimate these services’ potential value, using benchmarks from its Stability Pathfinder programme. This ensures projects are not undervalued simply because their benefits lie outside wholesale arbitrage. NESO’s separate CBA methodology guidance note does, however, indicate that applicants will be expected to provide their own view of potential ancillary service revenues as part of their project assessment submissions (in part, to reflect the fact that ancillary services are largely procured via competitive tenders). Including ancillary services brings regulatory valuation closer to how storage assets actually operate, providing stability and resilience rather than pure arbitrage.
Removal of clustering
The consultation draft suggested grouping projects into “clusters” for efficiency. Stakeholders argued this risked obscuring individual project value and introducing bias. In response, NESO has confirmed that each project will be assessed independently using the marginal addition method. NESO’s view is that this improves transparency and ensures comparability. Assessing projects individually improves transparency and helps investors understand how their project will be judged on its own merits.
Policy alignment: zonal pricing removed
With government confirming the UK will maintain national pricing, Ofgem has dropped the previously proposed zonal pricing sensitivity. This avoids speculative modelling of a market design that is not currently being pursued and keeps the methodology consistent with present arrangements, thereby reducing policy risk for applicants.
Expanded scenario coverage
A central concern during consultation was that the framework relied too heavily on optimistic assumptions about system flexibility. NESO has now committed to modelling three Future Energy Scenarios (FES 2025) pathways:
- Holistic Transition (central case, high renewables, consumer engagement).
- Electric Engagement (stress test scenario with very high electrification).
- Falling Behind (slower decarbonisation, higher gas reliance).
This broader coverage allows for a more balanced and realistic picture of potential outcomes. It stress-tests each project’s benefits under both optimistic and challenging futures, increasing regulatory confidence in the outcomes.
Improved revenue modelling
Stakeholders warned that the earlier methodology undervalued projects designed to participate heavily in the Balancing Mechanism (BM). In response, Ofgem has accepted a revised approach: day-ahead revenues and BM revenues will both be modelled and treated as additive. This ensures BM-oriented strategies are properly recognised in the assessment. Recognising BM revenues rewards flexible operating strategies and better reflects how many storage assets earn value in practice.
Refurbished and extended assets clarified
Finally, the methodology now clearly distinguishes between refurbishments (where the old asset is removed from the counterfactual) and extensions (where only the incremental capacity is assessed). This prevents double-counting and ensures fairness across new and upgraded projects. The distinction between extensions and refurbishments prevents double-counting and ensures a fair comparison between new and existing assets.
Why this matters for industry and policy
Ofgem intends that the changes to the consultation version of the methodology will create greater confidence that the scheme will fairly identify the most beneficial projects. Several themes stand out:
- Transparency: Removing clustering and applying project-specific counterfactuals makes the assessment more understandable and credible.
- System relevance: Recognising ancillary services reflects the reality that storage assets provide value beyond wholesale arbitrage.
- Policy consistency: Excluding zonal pricing aligns the methodology with confirmed government direction, avoiding speculative assumptions.
- Resilience testing: Expanded scenario coverage ensures that LDES value is tested against both optimistic and pessimistic pathways, reducing the risk of underprocurement.
- Fair treatment of diverse assets: Clarifying the treatment of extensions, refurbishments and BM-oriented projects ensures that different technologies and business models are valued appropriately. In addition, there are different submission forms tailored to the four forms of LDES technologies being assessed during Window One (Compressed Air, Electro Chemical, Liquid Air Electricity Storage and Pumped Storage Hydropower).
The result is a framework that Ofgem believes balances rigour with pragmatism – detailed enough to capture system complexities, but streamlined enough to be applied consistently across a large number of applicant projects. Together, these refinements make the assessment more credible to both investors and policymakers, which is a crucial step toward bankable LDES business models. If Window One proves successful, Ofgem’s model could become the template for future flexibility schemes in the UK and beyond.
