Capacity Market: Proposals to maintain security of supply and enable flexible capacity to decarbonise

Now I have the full 33-page consultation document. Here's the memo:

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What this is about

DESNZ is trying to solve two problems at once. First, the GB gas fleet is ageing — Baringa estimates 4-8 GW of CCGTs could retire by 2030, with 15 GW gone by 2035 — and the Capacity Market's current rules make it hard for operators to justify the capital expenditure needed to keep these plants running. One-year CM agreements do not underwrite major refurbishment. Second, gas plants locked into multi-year CM agreements (some running to the 2040s) have no route to decarbonise, even if they wanted to. The CM is simultaneously paying them to stay available and preventing them from converting to low-carbon technology.

NESO estimates GB will need 30-40 GW of short-duration and 40-50 GW of long-duration flexible capacity by 2030. Power CCUS, hydrogen-to-power, and long-duration storage are years from deployment at scale. In the interim, unabated gas remains the only mature, dispatchable technology capable of filling the gap. This consultation proposes three changes to the CM rules, intended for implementation before prequalification in 2025, alongside a Call for Evidence on longer-term market design. A government response was published on 6 May 2025.

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Options on the table

#### Proposal 1: Lower the capex threshold for three-year CM agreements

Currently, an existing plant must spend at least £165/kW (inflation-adjusted from £125/kW) to qualify as a "Refurbishing CMU" and access a three-year CM agreement. A typical lifetime extension project — component replacement, structural maintenance — costs around £50/kW, well below this threshold. The result: ageing plants that need investment to stay open cannot access the multi-year revenue certainty that would justify that investment.

DESNZ proposes cutting the three-year threshold to £50/kW. Plants would also need a certificate from an Independent Technical Expert confirming the work genuinely extends operational life for the agreement's full term.

Who wins: Operators of ageing CCGTs and other thermal plant, who get three-year revenue certainty at a lower investment bar. Consumers potentially benefit from retained capacity keeping auction prices down and avoiding premature retirements that tighten the market.

Who loses: The lower threshold applies to all plants regardless of age, creating a gaming risk — younger plants could claim three-year agreements for routine maintenance that would have happened anyway, locking up auction liquidity and reducing competitive pressure. DESNZ acknowledges this risk but considers existing prequalification rules plus the new ITE certification sufficient to manage it.

#### Proposal 2: Decarbonisation Readiness requirements in the CM

Since 2009, the Carbon Capture Readiness regulations have required new combustion plants above 300 MW to demonstrate they could retrofit CCS. The 300 MW threshold created a perverse incentive: developers have been consenting gas plants at 299 MW to avoid the requirement entirely.

New Decarbonisation Readiness legislation (expected from 28 February 2026) will replace CCR with broader requirements: no minimum capacity threshold, scope expanded to include biomass, energy-from-waste, and CHP, and the requirement extends to demonstrate readiness for hydrogen conversion as well as carbon capture. The consultation proposes amending the CM Rules so that plants prequalifying for the 2026 T-4 auction (delivery year 2029/30) that seek agreements over three years must demonstrate compliance with the new DR requirements, even before the DR legislation itself takes effect.

Three options for how to enforce this:

- Option A (light touch): Require applicants to commit at prequalification to applying for an environmental permit that includes DR requirements. No enforcement mechanism beyond the commitment. - Option B (medium): Same commitment, plus a declaration that they will provide evidence of a secured DR permit by approximately February 2028. Failure results in CM agreement termination. - Option C (via Extended Years Criteria): Embed the DR permit requirement in the existing EYC framework. Evidence required by the EYC deadline; failure triggers agreement reduction to three years rather than outright termination.

Who wins under Option A: Developers, who face minimal burden. Who loses: Everyone else — a commitment with no teeth does nothing to prevent plants receiving 15-year CM agreements with no credible path to decarbonisation.

Who wins under Options B and C: The system, which gets genuine assurance that new gas capacity can convert. Option C is more forgiving — shortening the agreement rather than terminating it — and gives more time to secure permits, reducing the risk of penalising plants for regulatory delays outside their control.

#### Proposal 3: Managed exit pathway (Pathway A — CM to DPA via power CCUS)

Currently, a gas plant with a multi-year CM agreement cannot leave. Exiting triggers termination fees. This locks plants into unabated operation even when decarbonisation options become available — some agreements run into the 2040s. The consultation proposes "Pathway A": allowing multi-year CM agreement holders to exit and transfer to a Dispatchable Power Agreement, enabling conversion to power CCUS.

The mechanism: a Capacity Provider notifies the CM Delivery Body during a designated window (opening January 2026, closing 10 working days before the T-4 auction) in their penultimate delivery year. They must provide evidence of being party to a DPA, including a director-signed declaration. The exit takes effect at the end of the following delivery year, giving NESO at least 19 months' notice to adjust auction target setting. Once exited, the plant cannot re-enter the CM or secondary trade CM capacity — a one-way door to prevent gaming.

Three additional exit pathways (B-D) are flagged for future development via the Call for Evidence: - Pathway B: Exit CM to a hydrogen-to-power business model - Pathway C: Exit CM to a new refurbishment agreement after decarbonising - Pathway D: Convert technology class during a CM agreement (in-situ decarbonisation)

Only Pathway A is being consulted on now. The others depend on business models (H2PBM) and infrastructure (CO2 transport and storage networks) that do not yet exist.

Who wins: Gas plant operators who want to convert to power CCUS and can secure a DPA — they get a penalty-free exit from the CM. The system gets accelerated decarbonisation of dispatchable capacity.

Who loses: Consumers bear the risk if CCUS conversion timelines slip. The consultation explicitly warns that first-of-a-kind gas-to-CCUS conversions are "particularly prone to risks of delay." Once a plant exits the CM, it cannot return. If the DPA project stalls, that capacity is gone from the CM with no replacement mechanism beyond NESO adjusting the next auction target.

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Questions being asked

#### Lifetime extensions (Questions 1-6)

- Q1: Do you support changing the CM to reduce capacity risks by facilitating investment to extend the lifetime of CMUs? What would you do differently if implemented? - Q2: Do you agree that lowering the capex threshold would achieve the desired outcome? [Asking whether a lower bar actually changes investment decisions, or just subsidises work that would happen anyway] - Q3: Do you agree with the proposed £50/kW reference cost level? Do you have evidence that this specific level would overcome existing barriers? If not, what level? - Q4: Would this proposal create a gaming risk, and would the proposed Independent Technical Expert certification be sufficient to mitigate it? If not, what other safeguards? [The key question — at £50/kW, younger plants could game the system] - Q5: How should the ITE certification be implemented proportionately and reasonably? - Q6: Any potential unintended consequences or risks?

#### Decarbonisation Readiness (Questions 7-12)

- Q7: What impact does the DR compliance proposal have on plant participation in prequalification 2025 and the 2026 T-4 auction? [Asking whether plants will avoid the auction rather than take on DR obligations] - Q8: Any difficulties complying under Option A? - Q9: Any difficulties complying under Option B? - Q10: Any difficulties complying under Option C? - Q11: Which option do you prefer? Explain why. - Q12: If Option B or C, should this be a permanent measure for all future CM applicants? [Testing whether this is a transitional patch or a permanent feature of the CM]

#### Managed exit pathway (Questions 13-20)

- Q13: Would you consider using Pathway A? [Testing demand — if no one would use it, the proposal is academic] - Q14: Do you agree with the managed exit process timings in Figure 1? - Q15: Do you agree with the proposed eligibility criteria (Table 1)? Any barriers to providing DPA evidence at the required time? [Asking whether securing DPA evidence before notifying is realistic given CCUS programme timelines] - Q16: Any unforeseen consequences in the CM from Pathway A? - Q17: If you held a multi-year agreement for an unabated gas CMU converting to power CCUS, how would you manage conversion outages? [Three options offered: outage during final CM months, secondary trading during extended outage, or convert after CM exit but before DPA delivery] - Q18: Any additional barriers preventing use of Pathway A? - Q19: Should refusal of a managed exit notice be a Delivery Body reviewable decision under Regulation 68? [Asking whether there should be an appeal mechanism] - Q20: What wider CM and policy changes are needed to enable gas CMU decarbonisation?

#### Impact assessment (Question 21)

- Q21: Do you agree with the impact assessment? Any additional impacts not considered?

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How to respond

Deadline: 11:59pm, 10 December 2024

Preferred method: Online platform at https://energygovuk.citizenspace.com/energy-security/capacity-market-security-supply-flexible-capacity (the same form covers both this consultation and the parallel Call for Evidence)

Alternative: Written responses or email to futureelectricitysecurity@energysecurity.gov.uk. Responses should directly address the questions with supporting evidence. State whether responding as an individual or representing an organisation.

Contact: Electricity & Market Arrangements, Future Electricity Security Team, DESNZ, 3-8 Whitehall Place, London SW1A 2EG

Note: A government response was published on 6 May 2025.