🌎 UK's cap-and-floor plans for LDES #218

Happy Tuesday, and happy Indigenous People’s Day!

This week, we’re putting on our policy wonk hats and diving into a new UK cap-and-floor scheme that could boost long duration energy storage projects — if the economics can pencil out.

In other news, BP abandons its decarbonization goals, chaos in cat bond markets, and Rio Tinto’s lithium play.

In deals, $491m for critical mineral exploration, $405m for iron-air multi-day energy storage, and $219m for hydrogen vehicle rental services.

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UK amps up LDES

Last week, the UK announced it was charging ahead with a new cap-and-floor scheme for long duration energy storage (LDES) projects, intended to power up debt finance for the sector and boost energy security in the country.

Set to open applications next year, the scheme guarantees LDES developers a minimum annual revenue (the floor) in return for a limit on their maximum revenue (the cap) — which could help them overcome some of the main challenges facing the sector: high investment costs and low revenue.

What happened?

After four decades of largely stalled new LDES projects in the country, the new scheme aims to “unlock investment opportunities in vital renewable energy storage technologies,” according to the UK government. As the country pushes ahead on boosting new renewable capacity (and closed down its last coal plant last month), energy storage is a must to smooth out generation in the long-term, while also reducing reliance on natural gas to avoid price volatility after Russia’s invasion of Ukraine.

The program covers LDES that can discharge for 6 hours or longer. It supports traditional pumped hydroelectric storage (minimum capacity 100MW), as well as emerging technologies like flow batteries, liquid air energy storage, and novel electrochemical systems (minimum capacity 50MW, although this could change). It will be administered by Ofgem, Great Britain’s energy regulator, which has experience implementing a cap-and-floor system (its 2014 program to expand transmission capacity to the rest of Europe was successful in spurring installation of undersea power cables, and the transmission program’s network charges will likely fund this LDES one).

Cap-and-floor market mechanism in energy markets, via Aurora Energy Research.

The cap-and-floor system guarantees minimum revenue above an agreed upon floor for a year, seemingly on a case-by-case basis, depending on the amount of debt that the project has taken on. The project owner will report annual assets, and then the UK government will pay the difference between that and the floor, or get back the difference between that and the cap. This is key for creditors behind these projects to guarantee returns.

However, importantly, this program won’t bring a change in capacity markets, a scheme in which the UK government procures power via auctions that power generators, including LDES projects, bid into. But as of today, extra LDES capacity is not often discharged, so LDES isn’t very profitable (since lower revenues per unit of capital cost mean these projects currently have a high LCOS).

What’s next?

This scheme is seen as a logical next step beyond intra-day storage, which until now has been sufficient. But higher renewables penetration in the UK grid requires more energy storage. Different LDES technologies have different use cases, depending on precise duration. For example, 12-hour batteries could help smooth out wind generation during periods of slow wind speeds, while 100-hour ones would help keep the lights on during multi-day weather events like winter storms. If (or when) renewables become close to 100%, seasonal storage will be needed.

More guidance is expected this winter to address key issues, including whether the minimum duration should remain at 6 hours or be extended, and whether the 50MW minimum capacity for emerging LDES should be reduced. This cutoff is larger than the systems of key players like Form Energy (typically 10MW, up to 85MW), Energy Dome (standardized 20MW system), and Invinity (<5MW).

The final ruling will be impactful for companies like Highview Power, whose commercial FOAK is 50MW with 6-hour liquid air energy storage systems. However, projects that exceed a 50MW cutoff might struggle to receive interconnection permission, and larger project costs could make already difficult FOAK financing even harder.

Key takeaways

Time(lines) will tell. Projects like Highview’s that meet these criteria are coming online in the next few years, and will speak to the success of the program. Other developers may have to resize and reconfigure to meet criteria. But some early-stage LDES technologies, from advanced batteries to novel pumped hydro, are not expected to deploy for the next 5-10 years, and could still be considered risky by investors. Meanwhile, large-scale pumped hydro is site-specific and capital-intensive, but already mature. Even once projects get built, to connect to the grid, they play a waiting game for permitting.
The political case for LDES' investment case. To achieve the UK's net zero goal, LDES is necessary. But if LDES project deployment remains slow, it could indicate the need for more generous compensation to incentivize developers. This, however, could be politically unpopular as it involves taxpayer funds. Still, policymakers could reconsider future broader market reforms, in the UK and elsewhere.
The devil’s in the details. While this scheme may make LDES FOAKs easier to finance, the cost of capital will still determine investment appetite. This cap-and-floor scheme might lower the risk for creditors and help developers access project finance, but it doesn't necessarily change the underlying math or guarantee a return on equity for these projects. And if the LDES projects still struggle to earn sufficient revenues in UK capacity markets, the sector could still run out of charge.

Deals of the Week (10/7 - 10/13)

Late-Stage / Growth

⚒️ KoBold Metals, a Berkeley, CA-based AI-based critical mineral exploration platform, raised $491m in Series B funding from Andreessen Horowitz, Bill Gates, Breakthrough, the Jack Ma Foundation, and T. Rowe Price.

🔋 Form Energy, a Somerville, MA-based iron-air multi-day energy storage developer, raised $405m in Growth funding from T. Rowe Price, Blindspot Ventures, Breakthrough, Capricorn Investment Group, Claure Group, and VamosVentures.

🚗 HysetCo, a Paris, France-based hydrogen vehicle rental service provider, raised $219m in Growth funding from Hy24.

🏗 Gropyus, a Vienna, Austria-based sustainable homes developer, raised $110m in Growth funding from Practical Venture Capital and Semapa Next.

🌾 Basecamp Research, a London, UK-based biodiversity mapping platform, raised $60m in Series B funding from Singular, Hummingbird Ventures, and True Ventures.

🌾 xFarm Technologies, a Lugano, Switzerland-based SaaS solutions for sustainable agriculture management, raised $39m in Series C funding from Partech, Mouro Capital, Swisscom Ventures, and United Ventures.

🥩 La Vie, a Paris, France-based plant-based meat producer, raised $27m of funding from Sparkfood, and Zintinus.

🌱 Scope3, a New City, NY-based collaborative sustainability platform for advertisers, raised $25m of funding from GV, Aperiam Ventures, Craft Ventures, Room40 Ventures, Venrock, and other investors.

🔋 Altris, an Uppsala, Sweden-based sodium-ion battery technology developer, raised $14m in Series B funding from Clarios, EIT InnoEnergy, Maersk Growth, and Molindo.

🥩 The Jackfruit Company, a Boulder, CO-based plant-based jackfruit producer, raised $5m in Series B funding from Creadev, Grosvenor Food & AgTech, and Investeco Capital.

Early-Stage

⚡ Blue Energy, a New York City, NY-based modular nuclear power plants developer, raised $45m in Series A funding from At One Ventures, Engine Ventures, Angular Ventures, Nucleation Capital, Propeller Ventures, and other investors.

🧱 Paebbl, a Rotterdam, Netherlands-based CO2 capture and mineralization service provider, raised $25m in Series A funding from Capnamic Ventures, 2050, Amazon Climate Pledge Fund, Aurum Impact, Goldbeck, and other investors.

🏠 Purpose Green, a Berlin, Germany-based digital twin for building efficiency service provider, raised $15m in Seed funding from Fifth Wall, Atlantic Labs, and Speedinvest.

⚒️ Lithios, a Medford, MA-based lithium extraction technology service, raised $12m in Seed funding from Clean Energy Ventures, GS Futures, Lowercarbon Capital, MassCEC 2030 Fund, and TechEnergy Ventures.

🌳 Airforestry, an Uppsala, Sweden-based airborne forest thinning technology platform, raised $11m in Seed funding from Northzone, CapitalT, Cloudbreak, Kiko Ventures, SEB Greentech Venture Capital, and other investors.

🧪 Emvolon, a Boston, MA-based waste to carbon-negative fuels platform, raised $10m in funding.

🔋 MOLG, a Sterling, VA-based circular e-waste platform, raised $6m in Seed funding from Closed Loop Ventures, ABB, Amazon Climate Pledge Fund, Elemental Impact, Overture VC, and other investors.

🏗 baCta, a Paris, France-based biosynthetic rubber production manufacturer, raised $4m in Pre-Seed funding from OVNI Capital, Nicolas Morin, Sharpstone Capital, Thibaud Elziere, and another.vc.

🌱 forward earth, a Berlin, Germany-based automated carbon management, raised $5m in Seed funding from Revent and Speedinvest.

Exits

⚡Tritium, a Brisbane, Australia-based EV charging infrastructure provider, was acquired by Exicom at an implied valuation of $37m.

⚡ ChargeNet, a San Francisco, CA-based EV charging for franchise service provider, was acquired by Genesis Energy for an undisclosed amount.

🥩 SIMULATE, a Queens, NY-based plant-based chicken nuggets manufacturer, was acquired by Ahimsa Companies for an undisclosed amount.

New Funds

Ember Infrastructure, a New York, NY-based investment firm, raised $500m for its second fund that invests in infrastructure solutions across climate.

Virescent Ventures, a Sydney, Australia-based investment firm, held a $100m first close of its second fund that invests across all climate verticals.

Diagram Ventures, a Montreal, Canada-based investment firm, raised $58m to invest in early-stage climate companies.

Can’t get enough deals? See full listings and deal analytics on Sightline Climate

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In the News

Under a new CEO, BP abandoned its goal to cut oil and gas output by 25% by 2030. The original goal to cut 40% by 2020 was the most ambitious in the sector until 2023, when it was scaled back to 25%, and now, the oil supermajor is eyeing new investments in Iraq, Kuwait, and the Gulf of Mexico. This development points to a trend of oil and gas companies returning to their fossil fuels roots and reneging on their previous commitments.

After Hurricane Milton, catastrophe bond players are bracing for record losses. It’s expected to be a trigger event for “cat bonds,” which help manage risk from the most extreme natural disasters. Large payouts could force a restructuring of the frameworks and the market, as parts of Florida may join parts of wildfire-stricken California in becoming uninsurable.

Australian mining giant Rio Tinto is buying Arcadium Lithium for $6.7bn, in a new bet on the critical mineral. Despite the downturn in the EV market and rock-bottom lithium prices, the acquisition indicates Rio Tinto's bullish stance on lithium in the energy transition and its interest in Arcadium's Direct Lithium Extraction (DLE) technology.

Utah launched a new initiative, “Operation Gigawatt,” to boost Utah's energy supply with nuclear and geothermal power. The state is already the home of advanced geothermal developer Fervo’s new project, Cape Station, which is set to deliver 400 MW of 24/7 carbon-free electricity. Now, the state is spending money to build out its clean firm power supply, potentially a play to bring in more data centers, as the sector expands and data center developers look to build in regions they can access cheap, reliable, renewable electricity.

A green hydrogen project in Mississippi, led by developer Hy Stor Energy and linked to SSAB’s new green steelmaking initiative, is facing delays. Hy Stor had signed an agreement with Norwegian electrolyzer manufacturer Nel to secure over 1GW of electrolyzer capacity, but recently canceled this deal, citing headwinds in the industry. These economic challenges in the clean hydrogen market, including uncertainty over the IRA’s tax credits, are slowing industrial decarbonization.

In nuclear news, Kazakhstan voted to build its first nuclear power plant, in spite of the region’s troubled history with nuclear waste. Japan is also looking to restart closed nuclear plants, while the Italian government has also lifted its ban on nuclear power, amid rising energy demand. Meanwhile, the US’ Export-Import Bank approved a $98m loan for a small modular reactor (SMR) project in Romania, all signals that public sentiment is shifting and momentum is gaining for nuclear.

Pop-up

A new IEA report shows a sunny future: China is set to account for almost 60% of all renewable capacity installed worldwide between now and 2030..

Switzerland is stopping climate change in its (train) tracks.

New York has a new pest: mosquito-like, window-breaking “breach drones” designed to respond to increasingly frequent natural disasters.

Scientists discovered that sound makes fungi grow 7x faster.

New space technology could advance climate change mitigation in astronomical ways.

The DOE’s updated Nuclear Liftoff Report includes plans to restart closed reactors and support new nuclear projects.

The economic viability of decarbonization through green hydrogen requires more calculation.

Utilities are feeling the heat after an Oregon county sued a local utility for global warming-related deception.

A new WWF analysis reveals that Earth’s wildlife populations have fallen on average by a rate of 73% in the past half-century.

Engine Ventures released a clean energy transition roadmap, and it doesn’t involve turning down the thermostat and putting on more layers.

John Kerry, Biden’s former U.S. special presidential envoy for climate, is the new co-chair for investment firm Galvanize Climate Solutions.

Opportunities & Events

📅 SOSV Climate Tech Summit: Join virtually from October 14–18th for this free event hosted by SOSV for investors, founders, and scientists to explore the emerging climate tech startup ecosystem.

📅 Argus Biofuels Europe Conference: Register to attend the Argus Biofuels Conference and Exhibition from October 15-17th to network, do business, and gain industry insights from leaders across the biofuels value chain.

📅Energy Storage Global: Register to attend the Energy Storage Global Conference in Brussels from October 15-17th for insights on energy storage policies, markets, and technologies.

📅 CRI Fellowship: Apply to the Chain Reaction Innovations fellowship by November 8th for a chance to receive non-dilutive funding to de-risk technological innovations at Argonne National Laboratory.

📅 ClimateImpact Clubhouse Growth Retreat: Join us on November 25th from in Mayfair, London to join a gathering of 250 growth-stage climate entrepreneurs and investors focused on raising/funding between $50m - $1bn.

💡 Breakthrough Energy Fellowship: Apply to be a part of the fifth cohort of the Breakthrough Energy Fellowship by December 2nd for an opportunity to accelerate the development of your early-stage climate technology.