Capacity Market: proposals to integrate low carbon technologies and enhance delivery assurance ahead of Prequalification 2026

What this is about

This is the second tranche of Capacity Market Rule changes for the 2026 prequalification cycle. DESNZ already consulted on 2 October 2025 on broader CM changes for Prequalification 2026; this consultation carves out the subset of reforms deemed urgent enough to need Rules and Regulations amended before prequalification opens in July 2026, with auctions following in 2027. The framing is housekeeping ("regularly reviewed to ensure it remains fit for purpose"), but the substance is not housekeeping. Two of the five items change who keeps a capacity revenue stream and what it costs to hold a capacity agreement you do not deliver against.

The proximate trigger is the collision of the CM with two newer administered mechanisms. The CfD is now directing existing strategically important plant via Secretary of State direction, which creates an asset that is contracted under one consumer-funded scheme while still holding an agreement under another. Separately, the Long Duration Electricity Storage Cap and Floor scheme is producing projects whose operational timelines and revenue floors interact awkwardly with CM auction rules. The remaining three items, delivery assurance, Secondary Trading drafting, and the MPCM CapEx threshold, are the recurring maintenance of a mechanism that consistently pays out for capacity that is never built.

Options on the table

CfD-directed CMU transition

Where a Generating Unit has been awarded a CfD following a Secretary of State direction, it would be allowed to keep participating in the Capacity Market, with a rule that it cannot draw CfD and CM support in the same period. DESNZ presents this as protecting value for money (no double payment) while keeping strategically important capacity in the scheme.

Read against the incentive structure, this is one administered support mechanism stacked on top of another, with a no-double-dip clause attached so it can be billed as consumer protection. The CfD already pays to build and run the asset; the CM payment is a second consumer-funded revenue line for the same plant. The carve-out prevents simultaneous payment, but it does not prevent the asset from holding a CM agreement that a genuinely new entrant could otherwise have competed for, and it preserves an option to switch back to CM revenue when the CfD term or direction lapses. The winners are large existing generators directed into CfDs: they get a strategic-asset exemption that keeps a CM revenue stream alive and a place in the capacity stack that would otherwise have to be re-won competitively. The losers are new-build CMUs that have to clear the auction on price and consumers, who fund the continued presence of plant the CfD already underwrites. "Value for money for consumers" describes the no-double-payment rule, not the underlying decision to keep subsidised incumbents in a second subsidy scheme.

LDES Cap and Floor CM eligibility

This sets the eligibility criteria for Long Duration Electricity Storage projects in the Cap and Floor scheme to also participate in the CM, with adaptations to existing Rules and Regulations and explicit mitigations against market distortion. The mitigation that matters most addresses projects that can delay becoming operational relative to the CM auctions they have entered, which is the LDES version of the generic CM problem: a project wins an agreement, then is not there to deliver against it.

The genuine question buried here is double-counting of revenue. An LDES project with a regulated floor has a downside underwritten by consumers through the Cap and Floor scheme; a CM agreement adds a second consumer-funded payment for the same capacity. DESNZ's framing of "avoiding market distortions" is the right instinct but the consultation does not commit to whether CM revenue counts toward the Cap and Floor revenue stack or is additive. Until that is pinned down, the eligibility criteria are the easy part. The hard part, who bears the cost when one mechanism's floor and the other's availability payment overlap, is deferred to the detailed Rules.

Stronger delivery assurance

Two changes. First, two alternative approaches to a more stringent termination framework (the consultation asks which one respondents prefer rather than presenting a single design). Second, and more consequential, holding Credit Cover until a New Build CMU has completed commissioning, instead of releasing it at an earlier milestone.

This is the one structurally sound move in the package. A capacity agreement held by a speculative new-build CMU is close to a free option: secure the agreement, hold the position, and the cost of not delivering has historically been modest relative to the value of the option. Holding Credit Cover all the way through to commissioning makes the position cost something for the entire build period. That is the difference between a rule that informs developers of their obligation and a rule that makes them bear the cost of not meeting it. It disciplines speculative entry directly: a developer who is not serious about building now has capital tied up until they do. It shifts non-delivery risk back onto Capacity Providers rather than socialising it onto consumers through replacement procurement and security-of-supply margin. The losers are thinly capitalised speculative entrants, which is the intended effect. The one thing to watch in the detailed Rules is whether the Credit Cover quantum is set high enough to bite; a delivery-assurance rule that holds a trivial sum until commissioning is the appearance of discipline without the cost.

Secondary Trading clarification

Secondary Trading is the mechanism that lets a Capacity Provider transfer all or part of a capacity obligation for a Delivery Year to an Acceptable Transferee. The proposal tightens and clarifies the eligibility criteria for entrants and CMU transferors and tidies the drafting generally. This is genuine maintenance: ambiguous eligibility rules raise the transaction cost of trading an obligation, and a capacity obligation that is expensive to transfer is a less liquid, less efficiently allocated right. Clearer rules lower that transaction cost. No identifiable winners or losers beyond participants who currently face drafting ambiguity; the gain is a more tradeable obligation, which is the point of having a secondary market at all.

MPCM CapEx threshold

The Multiple Price Capacity Market, consulted on 2 October 2025, runs two price caps. This proposal adds a requirement to meet a higher capital expenditure threshold before a CMU qualifies for the second, higher cap, on the rationale that the higher cap should be reserved for genuinely new capacity offering value for money. The mechanism is a screen: spend more capital, qualify for the higher price ceiling. The intent is to stop refurbished or marginal-investment plant from accessing a cap designed to fund genuinely new build. Whether it works depends entirely on where the threshold is set, which the consultation puts in play. Set too low, every modest upgrade clears it and the screen is decorative; set too high, genuinely new capacity with a lower capital intensity is excluded from the cap it needs. This is a parameter change within the MPCM design, not a structural reform of it. It is worth noting that the wider question, whether a two-cap administered auction discovers prices better than a single clearing price, is not on the table here.

Questions being asked

CfD-directed CMU transition

- Do you agree with the proposed approach to allowing CfD-directed Generating Units to continue participating in the Capacity Market without receiving support from both schemes simultaneously? *(This is really asking whether you accept the principle that CfD-directed incumbents should retain a CM agreement at all, not just whether the no-double-payment mechanic is well drafted. The substantive objection, if any, belongs here.)*

LDES Cap and Floor

- Are the proposed CM eligibility criteria for LDES Cap and Floor projects appropriate? - Do the proposed mitigations adequately address market distortions and delayed operational dates relative to CM auctions? *(The real test: do the mitigations stop an LDES project winning a CM agreement and then not being operational to deliver it, and do they prevent CM revenue stacking on top of the Cap and Floor floor for the same capacity.)*

Delivery assurance

- Which of the two proposed approaches to a more stringent termination framework do you support? *(DESNZ has not picked a design; this question chooses it. Respondents with a view on speculative new-build discipline should engage here rather than treat it as a drafting detail.)* - Do you agree with holding Credit Cover until a New Build CMU has completed commissioning? *(The substantive question is whether the Credit Cover quantum and the commissioning trigger are set so the held capital actually disciplines non-delivery, not whether the principle is sound.)*

Secondary Trading

- Do the proposed changes provide sufficient certainty on eligibility criteria for Secondary Trading entrants and CMU transferors?

MPCM eligibility

- Is the proposed higher CapEx threshold for the second, higher price cap set at an appropriate level? *(The level is the whole question. A threshold too low is a decorative screen; too high excludes genuinely new low-capital-intensity capacity. Respondents should propose a number and a rationale, not just agree or disagree.)*

How to respond

The source text provided does not include the consultation deadline, submission email or postal address, or a named contact. It refers to a separately published consultation document and privacy notice that carry these details. Before responding, retrieve the full consultation on GOV.UK ("Capacity Market: proposals to integrate low carbon technologies and enhance delivery assurance ahead of Prequalification 2026", DESNZ, published 14 May 2026) and take the closing date and submission route from the "How to respond" section there. Given prequalification commences July 2026, expect a compressed response window, likely shorter than the standard period, so confirm the deadline early rather than assuming a default consultation length.