Ten-year Review of the Capacity Market Rules

What this is about

Ofgem is publishing the conclusions of its statutory ten-year review of the Capacity Market Rules, the secondary instrument that governs how the CM actually operates: prequalification, auction conduct, agreement terms, satisfactory performance days, termination, dispute resolution. The review was launched by a January 2024 consultation that combined narrow Rules amendments with wider policy questions on whether the framework still fits the system it was designed for in 2014. This December 2024 publication is the Authority's formal response to that consultation, recording which proposed amendments will proceed, which have been deferred, and which structural issues Ofgem flags for further work.

The timing matters. The CM has been running auctions since 2014 and dispatching capacity since 2017. It has now cleared eleven T-4 auctions and ten T-1 auctions, paid out several billion pounds to capacity providers, and accumulated the kind of operational record that a five-year review (published July 2019) could not. Three things have changed since the last review that make this one substantive rather than housekeeping: the system has decarbonised faster than the original CM design contemplated, with gas-CCGT now the residual rather than the workhorse; clearing prices have moved from sub-£10/kW in the mid-2010s to record highs above £60/kW in the 2024 T-4; and the policy environment has accumulated parallel mechanisms (CfD, low-carbon CM, the Review of Electricity Market Arrangements) that overlap with what the CM was built to do. The statutory trigger is Regulation 82 of the Electricity Capacity Regulations 2014 and Rule 15.2 of the Rules themselves. The substantive trigger is that the body of evidence on what the CM has and has not delivered is now long enough to argue about.

How to respond

The 5 December 2024 publication is the conclusions report from a consultation that has already closed, not the opening of a fresh comment period. The original Ten Year Review consultation ran from January 2024 and closed earlier in 2024; this document records Ofgem's response to those submissions and sets out which Rules changes will proceed and which issues remain open for further work.

For the issues Ofgem has flagged as requiring further investigation, engagement now runs through the standard CM Rules change process: industry parties can submit Rules change proposals via the established Code Administrator route, and Ofgem will consult separately on any proposed amendments before making them. The main document is the "Ofgem 10 Year Review of the Capacity Market Rules" PDF (250 KB) linked from the publication page. The companion documents are the January 2024 consultation itself and the July 2019 Five Year Review report, both linked under "Related links" on the Ofgem publication page.

For follow-up correspondence on the conclusions or to flag a Rules issue Ofgem has not picked up, the standard route is Ofgem's Capacity Market team via the CM mailbox on ofgem.gov.uk. Substantive structural questions, whether the CM should procure capacity at all in its current form, the relationship between CM and CfD, the treatment of unabated gas, sit outside the Rules review remit and belong in responses to the Review of Electricity Market Arrangements and DESNZ's parallel CM consultations on decarbonisation and low-carbon flexibility.

What is actually at stake

The ten-year review is framed as a Rules review, which is a narrow legal exercise: are the operational provisions of the Rules fit for purpose, do they need amendment, are there gaps. But the January 2024 consultation invited wider policy comment, and the responses Ofgem received, and the issues it flags for further investigation, point at structural questions the Rules review cannot itself resolve.

Three are worth naming because they will dominate the follow-on work.

First, the CM pays capacity that would have stayed in the market anyway. This is the Stigler-Peltzman point: a programme that pays providers to do what they were already going to do transfers consumer money to incumbents without changing the physical outcome. The CM's defence is that you cannot tell ex ante which capacity is at risk of exit, so you pay everyone who clears the auction. The counter is that ten years of clearing data now lets you test which technologies have actually exited when they failed to clear, and which have stayed regardless. If the answer is that most of the fleet would have stayed, the CM is closer to a transfer than an insurance mechanism, and the design needs to change.

Second, clearing-price volatility. The CM was supposed to produce a stable revenue stream that would underwrite investment in new capacity. In practice clearing prices have moved by an order of magnitude between auctions, with the 2024 T-4 clearing at record highs after years of sub-£10/kW prices. Volatility of that scale is incompatible with the investment-signal function the CM was sold on. Either the auction design is producing the wrong signal, or the underlying scarcity dynamics are not the kind a single-clearing-price auction can price well. The Rules review can adjust auction mechanics; it cannot resolve the more fundamental question of whether annual capacity auctions are the right instrument at all.

Third, the relationship with parallel mechanisms. When the CM was designed in 2013-14 it was the only major non-renewables support mechanism. It now sits alongside CfDs (which provide capacity in everything but name to renewables), the emerging low-carbon CM track, the planned Clean Flexibility mechanism, and the ongoing REMA workstreams on locational pricing and dispatchable power. The boundaries between these mechanisms are not clean. A CCGT with a CCS retrofit might receive a Dispatchable Power Agreement; a battery might receive both a CM agreement and arbitrage revenue that the CM auction model assumes away; a low-carbon DSR provider has multiple routes to revenue that the CM treats as a single bid. The Rules review can clarify some of this at the margin but the underlying overlap is a policy choice that sits with DESNZ, not Ofgem.

What the Rules review can and cannot do

The Rules review is the right vehicle for amendments to prequalification thresholds, satisfactory performance day calculations, agreement length provisions, termination notice periods, dispute resolution timelines, treatment of unproven DSR, anti-gaming provisions in the secondary trading market, and the operational mechanics of how agreements are issued, monitored, and terminated. The 5 December 2024 publication will say what Ofgem has decided to change in each of these areas, and those changes will then be made via the standard Rules amendment process.

What the Rules review cannot do is change the basic architecture: that the CM is an annual auction for a one-year (or fifteen-year, for new build) firm capacity obligation, paid by all consumers via the supplier obligation, with derating factors that translate nameplate capacity into a system-relevant contribution, and a stress event trigger that determines when payments must be earned. Those design choices sit in the Electricity Capacity Regulations 2014 and in the underlying policy framework, not in the Rules. The Rules can change how the auction is run; they cannot change whether there should be an auction.

This matters for how to read the December 2024 document. The amendments Ofgem confirms are operational. The issues it flags for further investigation, particularly anything that touches the boundary between the CM and adjacent mechanisms, are signals about what the next round of DESNZ-led reform will need to address. The substantive policy work on the CM's future is happening in the parallel DESNZ consultations on decarbonising the CM, low-carbon flexibility, and the REMA workstream on dispatchable power, not in this Rules review.

What to watch next

Three things will determine whether the ten-year review marks a real inflection or a paperwork exercise.

The first is whether Ofgem's list of "issues requiring further investigation" turns into actual Rules change proposals within the next twelve months, or whether they sit on the shelf. The five-year review in 2019 flagged a forward work plan; reviewing what got delivered from that plan is the cleanest test of whether this one will move.

The second is whether DESNZ's parallel work on CM decarbonisation, the emissions limit trajectory, the treatment of unabated gas after 2035, the design of the low-carbon CM track, lands as a coherent set of changes or as a series of bolt-ons. The Rules will need to follow whatever DESNZ decides; if DESNZ decides incrementally, the Rules will accumulate exemptions and special cases the way the CHP regime has, with a corresponding compliance cost.

The third is whether the ten-year review prompts a serious revisit of the supplier obligation as the funding mechanism. The CM is paid for by suppliers via a charge on electricity demand, which means it functions as a levy on electricity use to subsidise capacity provision. That structure made sense when capacity was the binding constraint and demand was given. With demand now growing fast and elasticity becoming a policy lever, funding capacity adequacy through a charge that suppresses demand is starting to look like the wrong sign. None of that is in the Rules review remit, but the review is the moment when the cost of the mechanism becomes most visible, and the question of whether the supplier obligation is still the right funding route is unlikely to stay out of view much longer.