Ofgem has now confirmed how it will judge which long-duration energy storage (LDES) projects can receive government-backed revenue support. This is a key step in the UK’s plan to ensure the electricity system can stay reliable as more renewable power comes online.
Ofgem published its final Project Assessment Document on 24 September 2025, setting out how it will judge which LDES projects qualify for revenue support under the Cap and Floor (C&F) mechanism. The scheme, based on the model first used for electricity interconnectors, sets a minimum (“floor”) and maximum (“cap”) level of revenue that eligible projects can earn. This is a major step in ensuring the UK’s power system remains reliable as renewable generation grows.
Each application will be assessed through three interlinked tests: (i) an economic assessment measuring overall benefit to the energy system, taking the form of a cost-benefit analysis (CBA) of system and welfare impacts (in respect of which the National Energy System Operator (NESO) has issued an “LDES Cost-Benefit Analysis Guidance Note” describing the methodology); (ii) a financial assessment comparing project costs and revenues that looks at a project’s projected construction and operation costs and compares them against the likely revenue stack earned from the asset once in operation; and (iii) a strategic assessment capturing wider resilience and innovation benefits, by applying a qualitative strategic overlay that weighs up the risks and opportunities a project presents. Together these form a multi-criteria assessment (MCA) guiding Ofgem’s final C&F decisions.
The guidance builds upon consultation documents that were published earlier in the year, which we commented upon in our article entitled Ofgem’s LDES cap and floor consultation: what it means for pumped storage hydropower. The finalised MCA reflects input from stakeholders provided during the consultation process and there are some key changes.
Economic Assessment: measuring system benefit
At its core, the CBA estimates the total benefit to the energy system, including consumer and producer welfare, security of supply and carbon impacts. National pricing is used as the base case following Ofgem’s decision not to introduce zonal pricing in its July 2025 Review of Electricity Market Arrangements.
The analysis draws on three Future Energy Scenario (FES 2025) pathways: (i) holistic transition – central case with high renewables and active consumer engagement; (ii) consumer transformation – very high electrification (stress test); and (iii) falling behind – slower decarbonisation and higher gas reliance.
NESO runs a two-stage market model for each scenario: first, a wholesale (day-ahead) simulation, followed by a Balancing Mechanism (BM) run that applies grid constraints. This approach links market and operational outcomes to reflect congestion and redispatch costs in the welfare metrics.
A key feature is the “marginal addition” approach. Each project is evaluated against a project-specific counterfactual for each Future Energy Scenario – essentially, what the system would look like without the applicant project. In constructing that counterfactual, NESO considers all LDES projects that are planned but have not yet reached Final Investment Decision, up to and including 2035. To ensure the model remains balanced, the applicant project’s capacity is included but scaled down by 50% in the background scenario. The factual scenario is then remodelled with the real project’s characteristics. Such a marginal addition approach avoids size bias (reducing the impact of the large capacity holes where the applicant project is large).
NESO will also account for wider, hard-to-monetise effects. Network-related benefits are partly captured through lower dispatch costs, while broader system resilience or operability impacts sit within the separate strategic assessment.
Financial Assessment: revenues, costs and exposure
Alongside the CBA, Ofgem will review a financial model comparing project costs and expected revenues. NESO provides inputs estimating potential income from wholesale market arbitrage and BM operations. These are explicitly treated as additive sources of revenue – a key change prompted by consultation feedback.
The final methodology also includes supported estimates for inertia-related revenues, drawing on NESO’s Stability Pathfinder programme. Short-circuit strength is considered qualitatively rather than monetised. These additions better recognise the contribution of stability services that were previously undervalued.
Ofgem also clarifies treatment of refurbished or extended assets to avoid double-counting and explains how combining BM modelling with strategic analysis helps capture ancillary-service capabilities that are otherwise difficult to forecast.
Strategic Assessment: capturing resilience and operability
The strategic assessment provides a qualitative overlay for benefits that support system resilience but are not easily monetised, such as fast-response capability, restoration support or reactive power. This qualitative assessment overlay allows key factors to be considered that cannot be viewed in purely monetary terms. Where revenues can be robustly monetised, they are included in the financial assessment. Where not, they are reflected qualitatively partly within the economic assessment and otherwise captured in the strategic assessment. The guidance recognises that certain grid stability services are the subject of competitive tenders and, therefore, Ofgem/NESO will be reliant upon applicants providing their assessment of likely revenues in this regard.
The framework responds to feedback (including from pumped storage hydropower and grid-forming battery stakeholders) that purely qualitative scoring understated their value. Additional scenario testing, including stress weather years, will explore operability and resilience under less flexible futures.
Decision process: from capacity need to project selection
Final assessment has three steps: (i) ranking projects by system benefit using the monetised impacts assessed in the Economic Assessment’s benefit-cost ratio; (ii) filtering out projects that fail to meet the minimum financial threshold; and (iii) applying a strategic weighting to the results of steps (i) and (ii) to capture broader risks and opportunities.
Results of the assessment will be published in an initial decision list expected in spring 2026 for public consultation, with all stakeholders invited to respond. Projects offered C&F support must confirm acceptance before the final awards, expected by August 2026.
Looking ahead
Ofgem will apply this framework to the 77 eligible projects, with the final award decisions expected by the Gas and Markets Authority in summer 2026. The first LDES window will serve as a proof of concept for future rounds and could influence other flexibility support mechanisms. Success here will not only secure investment in critical infrastructure but will also provide a replicable template for future rounds.
The UK’s approach is being closely watched internationally. Regulators in Australia and India, as well as in Italy through early consultations, are exploring similar mechanisms. Lessons learned here are likely to shape global policy on long-duration storage investment.
