The Breakthrough Energy Storage Technology Poised to Revolutionise Renewable Energy
Executive Summary
The UK has committed to achieving net zero by 2050, and reducing reliance on fossil fuels and the expansion of renewable energy (RE) is instrumental to achieving this goal. Long-duration energy storage (LDES) plays a pivotal role in reducing the intermittency of variable renewable energy (VRE) sources and improving their integration with the grid (Hittinger & Ciez, 2020). Liquid air energy storage (LAES) is an emerging LDES technology which has demonstrated its technological and economic viability and is uniquely situated in the energy storage technology (EST) mix to balance grid supply and demand. Despite its potential, LAES has a low round-trip efficiency, and faces regulatory challenges which this paper seeks to address. It explores these challenges and proposes policy options to overcome them, before finally recommending a policy of R&D tax credits to stimulate LAES R&D and facilitate market access.
Intended Audience
This white paper has been produced for the Secretary of State for the Department of Energy Security and Net Zero (DESNZ), The Rt Hon Claire Coutinho MP, and the Minister of State for the Department of Science, Innovation and Technology (DSIT), Andrew Griffith MP. Due to the focus on LDES and innovation, policy recommendations of this white paper fall under the remit both government departments. Financial policy instruments will also require consultation with HM Treasury.
Policy White Paper Objectives
The key objectives of this policy white paper are as follows:
Introduce LAES and demonstrate its potential as a technologically and economically viable UK LDES technology
Highlight the drawbacks of LAES and provide an understanding of the regulatory challenges that are faced by ESTs in the UK
Use theoretical frameworks to outline key evaluation criteria for assessing the effectiveness of future policy recommendations to support LAES
Understand current UK policy towards LAES
Propose and evaluate alternative policy options to nurture the LAES industry
Introduction
The UK has an obligation to reach net zero by 2050, and seeks to be a global leader in low-carbon energy technologies. Central to this plan is the transition away from fossil fuels to more low carbon RE for electricity generation, and a reliance on the UK’s comparative advantage for innovation (De Lyon et al., 2022). The share of UK electricity being produced from RE has significantly increased to 41% in 2023, up from just 14.6% in 2013 (National Grid, 2023). In 2023, wind energy accounted for 75% of RE generation, with the UK possessing the largest offshore wind capacity in Europe, second only to China globally (ibid.). Increasing RE generation is critical for reducing carbon emissions and meeting another UK target of complete de-carbonisation of the electricity system by 2035. By 2050 it is predicted that 86% of global electricity generation will come from RE, with solar and wind energy making up 72% of this supply (Mostafaeipour et al., 2022).
VRE sources, such as wind and solar are inherently intermittent, less energy dense than fossil fuels, and are non-dispatchable, meaning that they can only produce electricity when receiving wind or sunlight. Technological innovation and cost reductions have improved efficiency and deployment rate of RE, and wind and solar are now cost competitive with fossil fuels without financial support (Gavin, 2019). Despite this progress, these characteristics pose significant challenges for integrating VRE into the grid and effectively managing supply and demand due to their unpredictable nature. Without economically viable ESTs, VRE’s unpredictability means that during peak times, the UK often relies heavily on fossil fuels to bolster electricity supply (ibid.).
ESTs provide a dispatchable form of electricity that can store energy for later useful application to suit national or regional demand (Hittinger & Ciez, 2020). While the energy industry has no standard definition for LDES, technologies able to store energy for more than 10 hours can be considered LDES (Twitchell et al., 2023). When integrated with the grid, ESTs can contribute to improved grid reliability, storing excess electricity during periods of low demand/high output and providing electricity discharge during periods of high demand/low output.
Integrated LDES will facilitate a deep de-carbonisation of the UK electricity system, however its R&D has failed to attract significant government investment, with most investment coming from the private sector. To date, the UK government has only announced $37 million of support for LDES, which is dwarfed by the $2 billion and $500 million that Chile and the United Sates have committed respectively (LDESC, 2023). If the UK government wants to play a pioneering role in LDES, as has been achieved with offshore wind, higher levels of investment in R&D and ensuring a fair regulatory environment should be key considerations.
Advancements in Energy Storage Technology
Energy storage capacity in the UK stands at over 5GW, predominantly comprised of pumped hydroelectric storage (PHES) and lithium-ion battery storage (L-IBS), which are both mature technologies. L-IBS capacity is increasing rapidly in the UK and is expected to grow significantly over the next decade, with over 3GW of capacity deployed in the UK since 2017 (Flint, 2023). PHES has existed for over a century and the UK has four operational facilities located in Wales and Scotland.
Integrating a diverse mix of ESTs is vital for the future of the grid, with varying power ratings and discharge times fulfilling different roles within the electricity system (Figure 1). High capital costs, geographical and geological constraints, use of finite resources and poor efficiency are drawbacks present for many ESTs, and thus technological innovation and government support are essential.
This paper will explore options for the development of LAES as a technologically and economically viable LDES technology that could have significant benefits for VRE integration. LAES is situated between PHES and L-IBS with respect to power discharge time and power rating. This allows for greater versatility meaning that LAES could support both longer-term grid balancing as well as more reactive demand (Figure 1).
Introduction to Liquid Air Energy Storage (LAES)
Background
LAES is a thermo-mechanical LDES technology, with the technical and economic potential to compete with utility-scale, mature ESTs. The first tangible progress in LAES development came via a joint venture between the University of Leeds, UK, and Highview Power (Vecchi et al., 2021). The pilot project was commissioned in 2010 and represented the world’s first operational LAES plant, with a 350kW capacity. Successful testing has led to the development of two 50MW ‘CryoBattery’ plants in the UK and US (Highview Power, 2019). The UK plant, still under construction in Manchester, UK, will be the world’s first grid-connected LAES plant (Vecchi et al., 2021).
Process Overview
During the charging phase LAES uses RE to purify, cool and compress air until it turns to a liquid at around −195 °C. This liquid air is then stored in insulated tanks, readily available from the industrial gases industry (Damak et al., 2020). When discharging, electricity is generated by rapidly heating and evaporating the liquid air, with the resulting high-pressure air driving turbines. Throughout its life cycle, hot and cold thermal streams are produced during the compression and evaporation stages. These can be harnessed and recycled to operate their opposing processes i.e. a hot thermal stream produced during compression can be used to heat up the liquid air during discharging (Vecchi et al., 2021).
Demonstrating Potential
LAES is not faced with the same geographical and geological constraints as PHES and CAES, and yet still maintains a high discharge duration of between 12-24 hours (Borri et al., 2021). A LAES system can be installed anywhere and requires up to 700 times less storage space than CAES and PHES, making it a ‘compact’ LDES technology (Rabi et al., 2023).
LAES has shown early signs of economic viability due to its use of readily available components, high energy density, low capital cost, easy scalability, and long operational lifespan of between 30-40 years (Borri et al., 2021). The projects in development strongly suggest that LAES can be used as a LDES technology to improve grid penetration of VRE and mitigate against intermittency. Due to the cryogenic temperatures the liquid air is stored at, stand-alone LAES plants can discharge and produce electricity using ambient air temperatures, therefore removing the need for fuel combustion and the carbon emissions that result (Ding et al., 2022).
Highlighting Challenges
Despite its technical and logistical potential, system efficiency has been identified as the main drawback of LAES, with large-scale plants operating a round-trip efficiency of between 50-60%, with lower efficiencies of 40% found in smaller-scale plants (O'Callaghan & Donnellan, 2021). Efficiency challenges could impact LAES’ economic viability, and whilst not in direct competition with L-IBS due to differing discharge durations, is significantly less efficient. LAES is not a mature technology and is yet to be deployed at scale, with only smaller-scale pilots being relied upon to infer appropriability.
Researchers have found up to 20% efficiency improvements by integrating a waste heat recovery system to capture and recycle thermal streams produced from the LAES process (Borri et al., 2021). LAES’ scalability is simultaneously beneficial for increased VRE penetration and LAES economic viability, with larger-scale plants which exploit thermal streams demonstrating potential for profitability (Liang et al., 2023). Increased capacity (MW) and efficiency improvements also reduce the payback time of LAES plants, increasing the commercial attractiveness of the technology to potential investors (ibid.)
Literature Review
In 2023, UK electricity supply was responsible for 11.5% of national greenhouse gas emissions, representing a 78% reduction from 1990 levels (DESNZ, 2024). This is largely due to the changes in the UK’s energy mix, with coal being replaced by natural gas and the growth in RE sources (ibid.). The UK has made significant headway in de-carbonising the electricity system, but the variability of RE still represents a significant challenge in expanding its grid integration and reducing reliance on fossil fuels (Gavin, 2019). LDES has great potential to help alleviate these challenges, storing electricity produced from VRE sources and dispatching this electricity when required, in turn assisting with grid balancing (ibid.).
UK energy storage capacity is dominated by PHES and L-IBS, however more broadly ESTs can be categorised as: mechanical (e.g. pumped hydro), thermo-mechanical (e.g. LAES), electrical (e.g. capacitors), electro-chemical (e.g. L-IBS), and thermal energy storage (e.g. molten salt) (Radcliffe, 2020). ESTs vary drastically in their maturity, for example PHES is a technology over a century old and accounts for 94% of global energy storage capacity (Vecchi et al., 2021), whereas LAES, whilst it shows great promise, is still a niche technology in its development phase and seeking commercialisation.
Differing technological maturity can raise challenges for commercialisation of ESTs and increase the complexity for policy makers who wish to design market structures that encourage their innovation and deployment (Gissey et al., 2018). Figure 1 demonstrates that ESTs vary considerably in their discharge duration and power ratings. Technologies with a high power rating and long discharge duration, such as PHES and to some extent LAES, are able to provide grid balancing services to the National Grid transmission system. Those with a lower power rating and shorter discharge duration, such as L-IBS, can assist distribution network operators (DNOs) in their regional electricity distribution (Gissey et al., 2018).
ESTs earn revenue through arbitrage, buying and selling electricity on the wholesale market. Despite an energy storage capacity of 5GW, National Grid frequently under-utilise the energy available from ESTs in favour of electricity from other sources, such as gas-fired power stations. This is typically due to technical problems, with dated computer systems failing to manage and integrate the multiple smaller sources of electricity generation (Millard, 2024).
A hybrid approach utilising multiple ESTs, both LDES and shorter term, reactive technologies are important for sustaining the grid of the future (Murphy et al., 2021). Despite its position as a niche LDES technology, LAES’ characteristics suggest that with sustained policy support and buy in from key stakeholders it could reach commercialisation and hold a valuable place in the UK’s low-carbon energy future.
Current Regulatory Challenges
Despite recent regulatory changes, several barriers still exist in the UK which affect EST competitiveness, grid access and investor confidence. ESTs are classed as generators, with no specific classification existing in regulatory processes. This restricts the revenue streams that LAES can exploit and neglects the benefits that it can provide in managing distribution and transmission networks (Gailani et al., 2020). Storage facilities in the UK are charged for using the grid’s infrastructure. These charges increase the operational cost for storage owners, and it is argued that ESTs are not the final consumer but an intermediary, so should be exempt from these charges (ibid.).
The capacity market, a UK policy to ensure consistent electricity supply at a fair price to consumers provides payments to generation providers but places no premium on electricity generated from renewable sources. ESTs have a limited discharge duration and can be penalised by failing to meet their capacity obligations, meaning that the UK’s 50MW LAES plant under construction may struggle to capitalise fully on capacity market payments (ibid).
Theoretical Basis for Policy Evaluation Criteria
The impacts of climate change have applied landscape pressures on incumbent regimes and provide the rational for the shift away from fossil fuel electricity generation towards the continued expansion of RE. The multi-level perspective (MLP) highlights the role of niches, such as LAES in sustainable transitions, and can be used to frame how niche technologies can be protected, via shielding, nurturing and empowerment (Smith & Raven, 2012). Niche technologies face structural disadvantages within socio-technical regimes due to a complex and multi-faceted selection environment of public policy, existing markets, and incumbent actors. Niche technologies should therefore be shielded from selection pressures to increase their chances of proliferation via supply-side policies such as regulation, subsidies, and taxes. Nurturing niche technologies, elaborated on using the technological innovation systems (TIS) approach is important for their development, and in the case of LAES to support its innovation to improve its efficiency. Niche technologies become empowered as they become more competitive under incumbent regimes, meaning that policies to shield them become redundant and can be removed. Removing redundant shielding policies once a niche technology becomes competitive is important to ensure that the policies that originally shielded them do not disproportionately benefit them as they break into the regime (ibid.).
TIS is more targeted than the MLP and highlights the importance of actors and institutions in driving the speed and direction of technological change (Markard, 2020). By remaining cognisant of the interplay between key stakeholders, and functions of the TIS, government policy instruments can be effectively deployed to nurture the innovation process of LAES. Highview Power are fulfilling the entrepreneurship function, with the development of two 50MW LAES plants, which when operational will have to contend with regulatory processes that are not inherently conducive to fostering EST profitability. Being cognisant of TIS, government policy directed at nurturing LAES should focus on continuous cost reductions, improving visibility of LAES through projects, removing regulatory barriers and de-risking R&D investment to stimulate private-sector innovation (Gallagher et al., 2012). Stimulating R&D and improving competitiveness should be the target outcomes of policy intervention, and historically government investment and facilitation of university-industry collaborations have shown to lead to superior innovation outcomes (Tian et al., 2022).
Evaluation criteria
The MLP and TIS have been drawn upon to determine the key evaluation criteria for policy intervention. These criteria will be used to support this white paper’s policy recommendations, ensuring that consistent policy signals are employed and that it achieves the most optimal outcome for the DESNZ and DSIT. These evaluation criteria are:
Political feasibility – acceptability of policies to key stakeholders and politicians, policy trade-offs, and impact on other ESTs.
Stimulating R&D and market facilitation – likelihood that a policy will promote LAES R&D, extent to which policy can facilitate LAES market entry and revenue certainty.
Fair regulatory environment – Removal of regulatory barriers which have rendered ESTs uncompetitive and impacted profitability.
Cost and speed of implementation – how quickly and cost effectively a policy can be implemented.
Policy Options
Policy Option 1: (Status Quo): Cap and Floor Scheme
Following a Call for Evidence on LDES, the UK government has identified a cap and floor scheme as their preferred policy option to support LDES. Cap and floor schemes seek to provide security to investors by providing a minimum revenue for an EST (floor), whilst also implementing a regulated limit (cap) on revenues to avoid excessive returns (Whiter, 2024). This policy is yet to be implemented and would require a bespoke policy design to suit LDES technologies such as LAES and optimise the arbitrage profitability of LDES. The UK government have provided funding specific to LAES, awarding Highview Power’s CryoBattery with a £10 million grant to support its development.
Policy Option 2: EST Re-classification and Removal of Grid Fees
ESTs are classed as generation assets and as such are subject to the same regulations (Lambe, 2020). This option proposes a regulatory change to re-classify ESTs as ‘intermediaries’ in the electricity system, which would remove the need for storage owners to pay grid charges entirely. Defining ESTs as an independent asset class that can support VRE integration and help to manage distribution and transmission networks, rather than competing with traditional generators could nurture the development of LAES (Gailani et al., 2020). Despite recent regulatory changes, ESTs are still liable to pay Distribution Use of System charges to cover the cost of maintaining distribution networks (Eardley, 2023). Removing these charges for new LAES plants for a period of five years would allow LAES owners to generate higher revenues, which could stimulate its proliferation and private sector investment in R&D. This policy proposal should have a sunset clause of April 2029 to allow for enough time to have a material impact on LAES profitability and R&D but avoid disproportionately benefiting LAES over the longer-term.
Policy Option 3: LAES R&D Tax Credits
Policy option 3 proposes tax credits for LAES R&D, with the aim of stimulating innovation and improving the round-trip efficiency of LAES plants. Tax credits should apply to energy storage companies, universities and research institutions engaged in specific LAES R&D and have an initial lifespan of 10 years. A tax credit totalling 25% of R&D expenditure for approved LAES research projects should be deductible from the firm’s corporation tax. Tax credits would act as an investment de-risking mechanism and provide a financial incentive for firms to invest in LAES R&D. Due to its position as a niche technology, targeted LAES tax credits could help to nurture innovation and drive LAES proliferation and improve current efficiency challenges. A similar policy in Canada found that technology R&D tax credits correlated directly to increased R&D investment and had a positive impact on product innovations (Czarnitzki et al., 2011).
Policy Comparison
Table 1: Summary of Policy Options and Their Impact Against Policy Evaluation Criteria
The primary challenge facing LAES is its efficiency. While the regulatory environment still affects the competitiveness of all forms of ESTs (Gailani et al., 2020), the potential for a policy to stimulate R&D and facilitate LAES’ market entry should be viewed as the main policy goal, and as such is the most heavily weighted evaluation criteria. LAES is endowed with many favourable technological characteristics that suggest that it could develop into an effective LDES technology. Due to the importance of LDES for the future of the grid, policies that could lead to the greatest long-term outcome are favoured.
Political feasibility is an important consideration when assessing policy options, and this relates to the likelihood that that a given proposal will garner sufficient support when enacted (May, 2005). In the rapidly evolving sustainable energy field, the cost and speed of implementation should be considered. In the case of policy 1 and 2, due to the significant regulatory changes that would be required, this is likely to take years to successfully implement. When recommending policy options, both direct and indirect effects must be considered as well as policy trade-offs (Nilsson & Weitz, 2019).
Policy Recommendation and Discussion
On balance, Policy 3: R&D tax credits is recommended as the most effective policy instrument for nurturing LAES as a technologically and economically viable LDES technology. Drawing on theoretical literature, policies that nurture and empower LAES are recommended to drive innovation in round-trip efficiency, facilitate its market entry and de-risk investment (Gallagher et al., 2012). R&D tax credits score highly against the R&D and market facilitation and the cost and speed of implementation criteria. This policy would have relatively low costs and could be more quickly implemented than policy options 1 and 2, and will involve a consultation between DESNZ, DSIT and HM Treasury. The reduction in tax revenue from companies engaging in LAES R&D would be relatively low, preventing impacts to other public services. Policy 3 may face challenges with political feasibility as it singles out and provides direct benefit to LAES as opposed to other ESTs, therefore there may be some resistance from lobby groups for more mature ESTs. Policy 3 does not directly make the regulatory environment fairer, however a reduction in tax liability and a long-term focus on innovation is likely to improve LAES’ profitability in the long-term and mitigate against the impact of regulatory barriers (Labeaga et al., 2021).
Policy 1: status quo, scored well against most criteria and could indirectly help to stimulate R&D due to improved investor confidence. Policy makers however cannot confidently infer that a potential indirect benefit of a policy will necessarily occur, making this policy less certain to stimulate LAES R&D. Policy 2: Re-classification and removal of grid fees, on balance scored the lowest against the evaluation criteria. It demonstrated potential to have a short-term benefit on the fairness of the regulatory environment, however was politically unfeasible and has the potential to disproportionately benefit LAES.
When considering policy options, policy makers should focus on the long-term effects of policies to address desired outcomes and target dynamic policy mixes rather than static policy instruments (Geels et al., 2017). Therefore, the policies that are implemented should be reviewed frequently to keep pace with the evolving field of low-carbon energy technologies.
