Capacity Market: proposed changes for Prequalification 2026

What this is about

DESNZ is reopening the Capacity Market rulebook ahead of the 2026 prequalification window, and the centrepiece is an admission dressed as a refinement. The headline proposal is a second, higher price cap inside the auction, triggered when needed to procure new-build dispatchable capacity that can run through prolonged tight-supply periods. The plain reading: the single clearing price the CM has used since 2014 is not bringing forward the firm, long-duration plant the system operator now thinks it needs. Rather than ask why a single uniform price underprices firm capacity relative to the system value it provides, the government proposes to bolt on a parallel, higher-priced procurement track for the technology it wants.

The rest of the package is a mix of housekeeping and quieter structural moves. A bundle of interventions would reduce the information given to participants before and during auctions, on the theory that uncertainty deters strategic bidding and protects value for money. Battery CMUs would be allowed to self-nominate a connection capacity below their full network capacity, so cell degradation does not tip them into extended-performance-test failure. Biogenic generators get a conditional route to low-carbon CM benefits via sustainability criteria. Consumer-led flexibility faces a higher delivery-assurance bar. And the administration cleanup introduces a Termination Fee where currently none applies, plus payment suspension for units in Insolvency Termination Events. Timing is driven by the prequalification calendar: changes have to be settled before the 2026 auctions open, which is why a security-of-supply argument and a set of Rules tidy-ups are travelling in the same vehicle.

Options on the table

Multiple price Capacity Market

The auction would gain a second, higher price cap that can be activated to secure new-build dispatchable enduring capacity capable of generating over prolonged periods of tight supply. Today the CM clears at a single price: everyone who clears is paid the same, and the price ceiling is uniform. The proposal carves out a higher ceiling for a defined class of capacity the system needs and the existing price is not delivering.

This is an administered judgement, not a market discovery. A single-price auction that fails to bring forward firm dispatchable plant is telling you something: either the de-rating factors undervalue the system contribution of long-duration firm capacity relative to short-duration storage and DSR, or the clearing price is being set by a glut of cheap, heavily de-rated capacity that crowds out the expensive plant the system actually relies on in a long cold dunkelflaute. The clean fix addresses the cause: re-examine de-rating methodology so that capacity which can actually run through a multi-day stress event is paid for the reliability it provides. The proposed fix addresses the symptom: keep the flawed single auction, then add a higher cap so the wanted technology can clear above it. Winners are new-build dispatchable developers (gas peakers, longer-duration storage, anything that can credibly commit to prolonged output), who get access to a richer payment track. Losers are consumers, who fund a higher ceiling whenever the second cap binds, and incumbent technologies that clear under the existing cap and now compete against a subsidised firm-capacity carve-out. The deeper loss is price discovery: a second administered cap is a second administered price, and two administered prices do not aggregate information any better than one.

Ensuring efficient bidding in Capacity Market auctions

A package that reduces the information disclosed to participants before and during the auction, raising uncertainty about the gains and losses from bidding strategically, with the stated aim of deterring strategic bidding and maximising value for money. In practice this means withholding parameters that sophisticated bidders currently use to model the auction and shade their bids.

Strategic bidding is a symptom of a thin, concentrated auction. In a deep, competitive market no single participant can move the clearing price, so there is nothing to game. The CM has a small number of large players who can. The proposal treats that concentration not by deepening the market but by blinding everyone to the auction's mechanics. That favours the administrator's control over the outcome and disadvantages any participant who lacks the analytical resource to reconstruct the hidden parameters: large incumbents will still model the auction, just with wider error bars; smaller participants lose the transparency they relied on to bid at all. Less information also means worse price signals flowing back to investors deciding whether to build. The winner is the auction administrator, who gets a more controllable clearing outcome. The losers are smaller participants and the long-run quality of the investment signal.

Consumer-led flexibility delivery assurance

New delivery-assurance processes for consumer-led flexibility assets entering the CM, covering both operational performance and the CM value attributed to diverse consumer-led flexibility technologies in providing system response. This raises the evidentiary bar for the de-rated capacity aggregators and DSR providers can claim, and tightens what they must prove operationally once in the scheme.

The direction is defensible: capacity that cannot be relied on in a stress event should not be paid as if it can, and DSR has a weaker delivery record under stress than firm plant. But the burden falls on aggregators and demand-side providers, who already operate on thin margins and now face higher proof obligations for a lower claimable de-rated position. Winners are the integrity of the de-rating regime and, indirectly, firm capacity whose relative value rises if DSR is de-rated more honestly. Losers are aggregators and the consumer-led flexibility sector, which carries more compliance cost for less paid capacity.

Self-nomination of connection capacity for battery storage

Battery CMUs would be allowed to self-nominate a connection capacity below their full network connection capacity. Lithium-ion cells degrade; a battery rated at full connection capacity at the start of an agreement may not pass the extended performance test years later. Self-nominating a lower figure builds headroom against degradation so the unit does not tip into a termination event simply because its cells aged as expected.

This is a sensible, low-controversy fix that aligns the rule with battery physics. The trade-off is borne by the operator: a lower self-nominated connection capacity means a lower de-rated CM position and therefore lower CM revenue, in exchange for materially reduced termination risk over the agreement life. Winners are battery storage operators, who get a tool to manage a known engineering reality instead of being penalised for it. There is no real loser; consumers arguably benefit from fewer spurious terminations and the administrative cost they carry.

Low-carbon access for non-fossil generation

Sustainability criteria that biogenic sources can evidence against to access low-carbon CM mechanisms. Biomass, biogas, and energy-from-waste operators would get a route to low-carbon CM benefits conditional on meeting defined sustainability standards.

This opens a door for biogenic generation, but the door has a gate. The benefit is real for operators that can evidence compliance; the cost is the certification and compliance burden of proving it, which falls hardest on smaller operators with less ability to absorb a new evidentiary regime. The pattern is familiar: a low-carbon benefit conditioned on a government-defined standard becomes, in practice, a compliance cost that incumbents with established sustainability reporting can absorb and entrants cannot. Winners are larger biogenic operators with mature sustainability documentation. Losers are smaller biogenic operators, for whom the criteria are a barrier as much as an opportunity. Whether the net effect helps or hinders depends entirely on where the thresholds are set, which the consultation does not yet pin down.

Administration and delivery assurance improvements

Policy clarifications, amendments and revocations to the CM Rules; a new Termination Fee for Termination Events that currently carry no fee; and suspension of payments for CMUs subject to an Insolvency Termination Event. This tightens the consequences of non-delivery and insolvency and, importantly, claws value back from defaulting units rather than from consumers.

This is the one place in the package where the incentive structure is being sharpened in the right direction. A Termination Event that costs nothing to trigger is a free option to walk away from a CM commitment; pricing it removes the free option and makes the commitment mean something. Suspending payments to insolvent units stops consumers paying for capacity that cannot deliver. Winners are consumers and the credibility of CM agreements as binding commitments. Losers are capacity providers who currently rely on cost-free exit, and units heading into insolvency that would otherwise have continued drawing payments. This is the rare proposal that fixes the incentive rather than layering a process on top of a broken one.

Questions being asked

The consultation document as supplied does not enumerate specific numbered questions. Respondents should work from the consultation's six areas and the published consultation document for the exact question set, but the load-bearing questions implied by the proposals are:

Multiple price Capacity Market

- Whether a second, higher price cap is the right instrument to procure new-build dispatchable enduring capacity, versus reforming de-rating factors or the existing cap. (This is the core question: it asks respondents to accept the carve-out framing rather than challenge why the single auction underprices firm capacity.) - How the second cap is set, what triggers it, and which capacity qualifies for it. (The trigger and eligibility definitions determine how often consumers pay the higher ceiling.)

Efficient bidding

- Which information should be withheld before and during auctions, and whether reduced disclosure is proportionate to the strategic-bidding problem. (Really asking respondents to accept opacity as the remedy rather than market depth.)

Delivery assurance and technology access

- What delivery-assurance evidence consumer-led flexibility providers should supply, and how diverse flexibility technologies should be valued for system response. - What sustainability criteria biogenic sources should evidence against to access low-carbon CM benefits. (Threshold-setting question; the location of the bar decides who clears it.) - Whether the battery self-nomination mechanism is appropriately specified.

Administration

- Whether the Termination Fee level and the insolvency payment-suspension mechanism are correctly calibrated.

How to respond

The source text provided does not include the consultation deadline, submission email or address, or the responding official's contact details. It states only that the consultation is open to anyone, with energy industry, consumer groups, academia, think tanks, and organisations interested in security of supply and decarbonisation flagged as particularly relevant, and it points to a consultation privacy notice.

To respond, consult the published consultation page on GOV.UK ("Capacity Market: proposed changes for Prequalification 2026", DESNZ, 14 May 2026) for the closing date and the online response form or submission email. Given the prequalification timing, expect a closing date that allows changes to be finalised before the 2026 prequalification window opens; treat the deadline as time-critical and confirm it directly from the GOV.UK consultation page rather than relying on a typical consultation period.