Battery developers claim UK funding for long-duration storage distorts market

A new UK funding mechanism for long-duration energy storage is biased against batteries and could "dramatically reduce investment" in short-duration assets, a group of battery storage developers said in an open letter April 22.

The cap-and-floor support program, unveiled in October 2024, aims to spur the build-out of assets like pumped-storage hydroelectric plants, which the government said are needed to back up Britain's growing fleet of renewables.

While battery storage systems are eligible to apply for funding, assets must be able to discharge continuously at full power for at least eight hours.

This threshold distorts incentives to build projects at shorter storage durations, executives from seven UK battery developers said in the letter to the Department for Energy Security and Net-Zero, energy regulator Ofgem and the National Energy System Operator.

The signatories -- including Gresham House Asset Management, Harmony Energy and Zenobe Energy -- argued that lithium-ion batteries are the "most competitive" form of long-duration storage but said the cap-and-floor mechanism lacks a level playing field.

Compared with pumped hydro projects, batteries are faster to build -- taking two years to install rather than seven -- and are not geographically constrained, the battery developers said. Batteries are also more efficient at charging and discharging, they added.

"Our industry has adopted [battery storage] over other technologies as they are the most reliable, commercially viable and cost-effective technology, and with the greatest potential for lower costs through continued rapid innovation," the companies said.

"As experienced investors who have invested billions in the energy transition, we are clear that the alternative -- government trying to pick winners -- sends a signal that the UK is closed for inward investment and fair competition," they said.

Risk of investment hiatus

The groups said batteries could save UK consumers some GBP2.22 billion ($2.95 billion) compared to other long-duration storage technologies, citing analysis by consultancy LCP Delta.

By subsidizing long-duration storage assets, the UK government risks missing its target to have 27 GW of shorter-duration batteries online by 2030, they said.

"Revenues available for shorter-duration assets are reduced when additional [long-duration energy storage] is built, due to cannibalized price spreads and increased competition," LCP Delta said in its report.

The result is a roughly 12% reduction in operating margin for both two-hour and four-hour batteries, and a fall in the rate of return of about 2%, the consultancy said.

The reduced revenues for shorter-duration batteries will impact the investment climate and lead to a "hiatus" in the early 2030s, given market revenues will be insufficient to support new assets, LCP Delta said.

That could result in the UK's short-duration battery capacity reaching only about 27.3 GW by 2040, rather than the projected 35.4 GW in a scenario without the cap-and-floor mechanism, the consultancy added.

A Department for Energy Security and Net-Zero spokesperson said the new support program is "technology-neutral, and all battery developers can apply if they meet the eligibility criteria."

"There are also over 30 GW of lithium-ion battery projects with planning permission, meaning we are on track to meet the short-duration storage ambitions set out in the Clean Power Action Plan," the spokesperson said.

Large pumped storage project proposals have proliferated ahead of the LDES investment support mechanism, which opened on April 8.

Regulator Ofgem expects a first batch of projects under the cap-and-floor scheme to be agreed in Q2 2026.

Applications are to be sorted into two delivery "tracks," one for 2030 and one for 2033.

The indicative capacity range for the first application window is between 2.7 GW and 7.7 GW.