Unlocking investment: Why 2026 is a critical year for LDES and the cap & floor regime

Introduction

As the Winter months draw back and Spring approaches, we're looking ahead to what promises to be a make-or-break year for Long Duration Energy Storage (LDES) in the UK. The Government views LDES as being at the heart of its long term energy security strategy and central to achieving Clean Power 2030, as made clear in an open letter to industry published on 18^th December 2025 when the new Planning & Infrastructure Act 2025 ("PIA") became law.

The PIA, already a headline piece of legislation for planning reform, may turn out to be highly significant for LDES and for the renewables sector more generally, as discussed below.

Re-ordering the queue

Sections 14-18 of the PIA grant the Secretary of State ("SoS") the power to direct Ofgem to make changes to the grid connection queue by modifying distribution agreements and electricity licences (including generation licences) 'for the purpose of improving the process for managing connections to the transmission system or the distribution system'. The power to 'modify' is defined by section 15 of the PIA as including amendments, additions and revocations, and can be exercised however the relevant authority sees fit, on a case-by-case basis. This gives the SoS and Ofgem a wide scope to unilaterally re-order the queue, provided that the changes are done 'for the purpose of improving the process'.

This power is only limited by an informal duty to consult (which does not extend beyond the holder of the licence and 'such other persons as the relevant authority considers appropriate') and a limitation period of 3 years which began on 18 December 2025 when the PIA became law.

This is likely to raise some concerns amongst energy sector participants, who have already had to contend with delays in the re-ordering of the grid connection queue following the conclusion of the Gate 2 to Whole Queue ("G2TWQ") process and the indication that 'Protected' projects may not be as 'protected' as originally thought. It remains to be seen whether the SoS or Ofgem will exercise this power due to the risk of judicial review in an already unsettled market.

What is the cap & floor scheme? A recap

Ofgem's cap and floor scheme for LDES ("C&F"), modelled on the similar highly successful scheme for interconnectors, aims to encourage investment in long duration storage technologies by guaranteeing investment returns (the floor) while protecting consumers from high prices (the cap). We are currently in the second stage of the projects' selection process, following the Eligibility stage (we talked about the first round winners and losers here) with an announcement on an initial list of successful projects anticipated in early Spring 2026. Projects will be assessed based on the Multi-Criteria Assessment (MCA) Framework as set out in the Ofgem consultation, with successful projects being awarded a place in the cap and floor regime in window 1.

There has, at the time of writing, been no confirmation whether further windows of the C&F will be run, but Ofgem refers to this round as 'window 1' and during debates on the passage of the PIA, the Minister for Energy confirmed that additional rounds were anticipated. Furthermore, following the results of the G2TWQ process in December 2025, NESO has confirmed that LDES is slightly under capacity for 2035, so with 161.5MW (correct as of January 2026) available for future grid connection application windows, there are still opportunities for developers in this space, a fact that cannot be said for some of the more oversaturated technologies in the market (e.g. solar, offshore wind, short duration BESS). This capacity is still subject to change, depending on project attrition and the publication of the Strategic Spatial Energy Plan (SSEP).

The cap & floor MCA assessment

Each project will be examined against an Economic, Strategic and Financial Assessment with the overriding objective being the protection of existing and future consumers' interests, using the Future Energy Scenarios 2025: Pathways to Net Zero Holistic Transition pathway as the base case.

The assessments will consider the following:

Economic Assessment

The Economic Assessment will focus on the social and economic value of the project. It evaluates benefits across several groups within the electricity system—consumers, producers, and LDES asset owners.

A key metric is the Benefit-Cost Ratio (BCR), which divides total benefits (both monetised and non-monetised) by project cost. This allows projects of different scales to be compared on a consistent basis, which reflects the fact that the C&F is technology agnostic.

While natural capital, landscape, and community impacts are not formally scored (these remain under local planning jurisdiction), projects demonstrating strong positive contributions in these areas may still be recognised.

Supply chain impacts are not directly assessed, although positive effects on local markets can improve a project’s overall standing so projects located in areas of greater identified system need will receive higher scores. Projects that can expand their capacity over time may also be viewed more favourably than those with fixed configurations because of their ability to fulfil the Government's intent for the scheme to encourage long term energy resilience.

Financial Assessment

The Financial Assessment examines projected revenues and overall financial resilience. Projects expected to operate below the floor under normal conditions will not be awarded contracts, while those projected to perform above the cap will receive the highest possible score.

The central metric is the average projected annual revenue as a percentage of the floor level—for instance, a score of 90% indicates expected revenue 10% below the floor, while 120% means revenues 20% above it (and thus no floor payments required).

Revenue projections must be based solely on four eligible streams:

1. Temporal Arbitrage
2. Non-Energy Balancing Mechanism (BM) Actions
3. Ancillary Services
4. Capacity Market participation

Other private arrangements, such as Power Purchase Agreements (PPAs), are excluded from consideration.

Projects were able to bid on two financial parameters in order to simplify submissions (reduced from five in the earlier consultation following feedback that the original five were too complex):

• Regime duration (permits alternatives to the default 25 year duration)
• Residual value (for projects proposing a non-zero residual value due to potential to earn revenues following the end of the C&F)

Strategic Assessment

The Strategic Assessment considers broader policy objectives, risks and opportunities beyond immediate economic metrics. Ofgem has made clear its intent to encourage diversity in technology types—reducing overreliance on any single storage approach.

However, technological diversity is not mandatory. Ofgem may select a single dominant technology type if it best serves consumer interests. Indeed, 48 out of the total 77 successful projects which passed the Eligibility Phase are Li-ion BESS projects, which does not represent the diversity of technology types that the C&F was believed to be targeting.

Other strategic factors in the assessment include:

• Expected timelines for funding and project supply chains
• Supply chain robustness
• Developers’ track record (“Reference Projects”)
• Operational resilience (e.g. cybersecurity)
• Deliverability, particularly in light of NESO’s connection reforms

As the scheme is designed to minimise potential transfers of financial risk to consumers, cost overrun risks will be closely examined. Where projects experience material changes in connection status, Ofgem may conditionally award contracts subject to deliverability. Developers who have been unsuccessful in the recent G2TWQ process will therefore need to re-submit evidence of their Gate 2 outcome to Ofgem, as this will need to be factored into the assessment as a material change.

How we can help

At Foot Anstey, we regularly support clients with all stages of their renewable energy projects, including company structuring and financing, land acquisition, planning advice, applications for grants and subsidies, advice on grid connection, negotiation of land and supplier contracts, and dealing with disputes that may arise. If you would like to discuss new or existing developments, please do get in touch with us.

We also provide training on a range of topics, including those listed above, so please reach out if you are interested in arranging a session.