Foresight Group – Written evidence (LES0039)

By way of introduction, Foresight Group is a leading infrastructure investment manager, managing over £12 billion of sustainability-led investments. We strongly agree with the Committee that medium and long duration energy storage will play a crucial role in delivering a net zero energy system.

We welcome that the Committee is investigating whether the Government has sufficient policies in place to support investment in these resources. As we explain below, we consider that current policies and market designs will not attract investment in medium and long duration storage. That places the UK at risk of not being able to create a responsive electrical system that meets future needs. The need for investment is urgent, in that the UK is already falling behind other countries that better recognise the need for such investment. We would highlight the following key points for the Committee’s consideration:

1. We aim to be a leading investor in long duration storage

Foresight Group already has an extensive portfolio of renewable electricity investments in the UK and internationally. We are the first UK investment fund to move into long duration Pumped Storage Hydro (PSH) by acquiring the rights to a 210MW PSH project in Dumfries and Galloway, Scotland. The project is fully permitted and ready to commence construction.

We are an investor committed to enabling the energy transition and are pleased to take a leadership role in the development of such critically important projects for the achievement of Net Zero. We anticipate that our leadership in securing finance and delivering this project, will provide a strong example to others in the investment industry seeking to invest in such projects.

2. Current government policies are restricting access to capital markets

In order to secure economically viable financing for these projects, it is important that we are able to access capital markets to secure project debt financing. Debt providers need certainty that their loans will be repaid, and therefore long-term revenue certainty will be required to secure this long-term finance.

While we recognise that Government has been considering policies to enable long duration storage and has committed to enabling investment by 2024, the proposed policy is still uncertain. This uncertainty is chilling investment – holding up investment decisions because we cannot obtain long-term revenue certainty through the current UK electricity market or other policy arrangements, and consequently are unable to raise long-term project debt finance.

3. There is international competition for capital

Foresight Group, in common with other infrastructure investors, will prioritise investments that are able to attract finance from capital markets and deliver returns for investors. There is international competition for such investments and many countries have introduced or are introducing policy regimes to attract such investment. Examples include the Inflation Reduction Act in the USA, and the Green Deal Industrial Plan in the EU.

The UK risks a pivot of investment capital to countries that better recognise the urgency for policies to enable investor confidence in medium and long duration storage.

Our response to the Committee questions

We are a member of the Scottish Renewables Pumped Storage Hydro Group which has submitted a separate response to you, and we concur with the comments provided therein.

In addition, we have provided our own answers to the questions asked by the Committee, and these are attached to this summary note. We would highlight the following points:

• There is a clear need for dispatchable electricity capacity as shown by the recent ESO and Net Zero reports; an extra 50GW may be required by 2035.
• PSH is a proven technology with a 7GW project pipeline, which may grow further, but planning and construction timescales may exceed are long, so early action is needed if these resources are going to be available for 2035.
• Policy reforms will enable the acceleration of project development and investment. We recommend the urgent introduction of a cap and floor regime similar what has been proven successful for UK interconnectors with Europe. 

Our PSH investments can help deliver economic growth, ensure security of supply and resilience, and enable lower energy costs. These investments can play a significant role in delivering the aims of the Government’s energy and economic growth strategies including with respect to Levelling Up.

We trust that our response is helpful and, as a leading representative of the financial and infrastructure investment industry, we would welcome the opportunity to discuss our views with you.

Annex - Responses to Questions

1. How much medium- and long-duration energy storage will be needed to reach the Government’s goal of a fully decarbonised power grid by 2035 and net zero by 2050, and by when will it need to be ready?

• Under what scenarios would the grid draw heavily on long-duration storage? How well are these scenarios understood?
• What is the range of estimates for likely electricity demand in 2035?

The need for low carbon ‘dispatchable’ electricity capacity will increase by 2035, and pumped storage hydro is very well suited to provide this capability. The latest Electricity System Operator Future Energy Scenario ‘Leading the way’, predicts that 52 GW of storage could be needed by 2035, an increase from 3GW today. This may be higher if the expected interconnector capacity, or dispatchable hydrogen or carbon capture and storage capacity does not emerge.

This challenge was also highlighted in the recent ‘Mission Zero’ report by Chris Skidmore MP.

2. How sensitive is the amount of storage needed to assumptions about the future balance of supply and demand on the grid?

• What role could nuclear power, fossil fuel generation with carbon capture and storage, or other energy technologies, play in reducing the need for energy storage on a net zero grid?
• What role could greater grid interconnectivity between Great Britain, Northern Ireland and other nations play in addressing the imbalance between supply and demand?
• What role could demand-side management of electricity play in reducing the dependence on storage?
• What impact will future climate change have on demand – for example, how much will the seasonal differences in power demand change with warmer winters and greater use of air conditioning? 

It is becoming more certain that electricity demand will increase over the coming decades as more transport and heating switches from fossil fuels to electricity. This growth will increasingly be met by renewables, but as described above, a key challenge will be in deploying sufficient ‘dispatchable’ low carbon energy resources to ensure demand can be always met.

While demand response and interconnection will have important roles to play, we consider that they will both have limitations: demand response is dependent on customer participation, and interconnections on the availability of low carbon energy for transfer when needed. Climate change and geopolitics may impact the availability of reliable interconnection capacity.

Addressing such issues will be critical to ensure future energy resilience and security of supply. As such, reliable storage resources such as pumped storage hydro should provide a valuable national strategic resource.

3. Which technologies can scale up to play a major role in storage?

• Which timescales for storage are different technologies most suited to? Is there a preferred technology for medium-duration and long-duration storage?
• What are the technology readiness levels for these energy storage technologies?
• Is it possible to produce enough domestic green hydrogen to fulfil long-term energy storage demand needs?
• Is there a distinct role for technologies that store heat instead of electricity?

Pumped storage hydro projects are able to operate flexibly on a daily or multi-day basis. They are able to time shift renewable output across demand peaks and troughs. They can directly displace the use of unabated gas generation used as dispatchable generation.

Pumped storage technology is proven and does not face the novel technology or operational challenges involved with hydrogen, air, or other forms of storage. It is not expected to need ongoing subsidy for development.

4. What policy support is currently in place to support deployment of storage technologies? Is it sufficient to support deployment at scale?

• How good is the economic case for long-duration energy storage? What policies and market structures need to be put in place to make the business case viable?
• How will the grid need to change to support long-duration storage? Which stakeholders (e.g. energy companies, the Electricity System Operator, National Gas) should be planning for these changes?
• What role does the Review of Electricity Market Arrangements need to play to support medium- and long-duration storage development?
• Is the Government’s current reliance on market actors and technology competitions likely to deliver the storage needs on time?

We consider there is a strong economic case for deployment of pumped storage hydro. While up-front construction costs are high, projects have long operational timescales and low asset management costs. They are using a proven technology. The major challenge for investors is the certainty of future revenues. Whereas an economically viable revenue stack can be built from wholesale, capacity, balancing and ancillary service markets, it is not currently possible to obtain long-term certainty across all these revenues, thereby restricting investment.

We consider that a cap and floor regime similar to that used for interconnectors should be used to allow investors to participate in each of these markets, safe in the knowledge that a minimum revenue can be realised. This will attract financing and investment and allow pumped storage to compete in all these markets to the benefit of electricity customers.

We consider that the scale of Government’s wide ranging REMA initiative is likely to deliver timely market reforms to deliver early investment in pumped storage hydro projects and therefore early action is required.

5. How well developed is the UK industry across different storage technologies, such as hydrogen or redox flow batteries? How does the UK compare to global competitors in these industries?

• Are there any storage technologies that have a significant export potential for the UK?
• For which technologies does the UK have significant existing research or industrial capacity? Is the Government doing enough to support the industry to grow and drive exports and economic growth?

The UK already has several very successful pumped storage hydro projects, but it is over 40 years since the most recent project, Dinorwig in North Wales commenced operation, and the GB market structure does not provide the necessary long term investment signals for such projects.

According to the International Hydro Association, over 95% of all electricity storage worldwide comprises pumped storage hydro. Countries all over the world are increasing deployment of pumped storage hydro alongside renewable energy growth. China is leading and is building vast amounts of pumped storage hydro.

The UK has significant operating expertise of pumped storage hydro in electricity markets, and the growth of the UK pumped storage sector offers significant opportunities for international export. Such exports could range from development, design, construction, operation, and especially financing expertise.

6. Beyond the cost of deploying long-duration energy storage, what major barriers exist to its successful scale up (e.g. the availability of a skilled workforce, the ability to construct the necessary infrastructure on time, or safety concerns around new technologies)?

• Are there sufficient training schemes in place to ensure the UK has the workforce to deliver the energy storage the grid will need?
• How long is it likely to take to develop the necessary infrastructure?

We are a leading, experienced investor in UK renewables and have a UK pumped storage hydro project ready to begin construction. This is a proven technology with little construction, operation, or safety risk. After obtaining planning consent, projects are expected to take 4-5 years to construct.

Most of the project construction of pumped storage hydro comprises civil works, where expertise is available in the UK. The UK financial markets can, given appropriate cap and floor pricing mechanisms, provide a strong source of capital.

7. What steps should the Government take now to ensure this storage can come online later in the current decade?

11 September 2023