Ofgem selects 16 projects for long duration energy storage scheme

Ofgem has provisionally selected 16 long-duration electricity storage projects under its cap and floor scheme, spanning pumped hydro, compressed air, lithium-ion batteries, and vanadium redox flow batteries. The projects are intended to support renewable integration and reduce grid costs by easing transmission and distribution pressure. The announcement is constructive for the storage and grid-infrastructure theme, but remains a preliminary selection subject to stakeholder feedback.

Analysis

This is a capital-allocation signal more than a headline on one regulator. By pre-approving a diversified set of long-duration storage projects, Ofgem is effectively creating a de-risked pipeline that should compress financing spreads for the entire UK storage stack, especially equipment vendors, EPCs, and balance-sheet-heavy infrastructure funds that can write cheques before offtake uncertainty clears. The second-order winner is not the battery names alone, but grid-adjacent assets that monetize congestion relief and ancillary services while avoiding the merchant volatility that has punished storage returns in Europe.

The key implication is timing: the policy is supportive now, but cash flows will not matter for 12–36 months, so the trade is about repricing development optionality before permits, supply-chain contracts, and final investment decisions tighten. If stakeholder feedback does not materially dilute the program, expect a gradual rerating in UK utility-infrastructure multiples, with the strongest reaction in listed owners of pumped hydro and transmission-linked storage exposure. Vanadium flow and compressed-air projects are strategically important because they diversify away from lithium, but they remain execution-heavy; that makes them more sensitive to financing conditions than to near-term power prices.

The contrarian risk is that the market overestimates how much this reduces system costs in the first phase. Long-duration storage only monetizes if spreads, curtailment, and capacity-market rules remain supportive; a mild power-price environment or delayed grid reform would push project IRRs below hurdle rates and turn today’s policy win into a 6-12 month disappointment. Another overhang is technology selection: if capex inflation or interconnection delays hit the smaller, novel chemistries, capital could rotate back to established utilities and away from the pure-plays everyone initially chases.

Key Decisions for Investors

• Long UK-listed grid/infrastructure beneficiaries over pure-play storage developers: buy SSE or National Grid on pullbacks and pair against higher-beta storage developers such as Gore Street Energy Storage (GSF) for 3-6 months; thesis is policy-driven de-risking favors regulated cash flows more than merchant storage.
• Buy a basket of long-duration storage enablers via infrastructure funds or equipment proxies for 6-12 months; focus on names with UK/EU project pipelines, as the re-rating can start on financing announcements rather than COD. Use a 15-20% stop if stakeholder feedback meaningfully dilutes the scheme.
• Pair trade: long pumped-storage exposure, short lithium-ion-adjacent valuation excess. The market is likely to overpay for battery headlines while underpricing pumped hydro’s lower execution risk; target 10-15% relative outperformance over 6-9 months.
• Avoid chasing small-cap flow-battery names into the consultation phase; wait for final award terms and grid connection visibility. If the market bids them up 20%+ on headlines, fade into strength via short-dated call overwrites or outright reduction.
• For event-driven exposure, consider buying medium-dated call spreads on National Grid or SSE into the next policy milestone; the payoff is asymmetric if the scheme expands, while downside is limited if the announcement stays incremental.