Capacity Market: Proposals to integrate low carbon technologies and enhance delivery assurance ahead of Prequalification 2026
This consultation is open for responses
Respond to this consultationSummary
DESNZ proposes changes to Capacity Market rules affecting CfD projects, Long Duration Electricity Storage, and delivery assurance ahead of 2026 prequalification. Key changes include allowing CfD units strategic participation in CM, setting LDES Cap and Floor eligibility criteria, and raising termination fees by 30% or simplifying to single £45,500/MW fee. Multiple Price Capacity Market eligibility tightens with higher CapEx thresholds and disconnection certificate requirements.
Why it matters
This reform attempts to integrate low-carbon technologies into capacity payments while strengthening delivery penalties — creating tension between supporting net zero goals and maintaining competitive pricing. The termination fee increases will favour established developers over entrants, as such the reforms protect incumbents while socialising stranded asset risk through continued CM payments to CfD projects.
Key facts
- •Termination fees increase 30% for inflation or simplify to single £45,500/MW rate
- •CfD projects can participate in CM when no concurrent support periods
- •LDES Cap and Floor projects get specific CM eligibility criteria
- •Multiple Price CM requires higher CapEx thresholds and disconnection certificates
- •Credit Cover held until New Build CMU commissioning complete
Timeline
Areas affected
Related programmes
Memo
What this is about
DESNZ is reforming Capacity Market rules to integrate low-carbon technologies while strengthening delivery penalties ahead of 2026 prequalification. The changes address four key areas: allowing CfD projects strategic participation in CM, setting eligibility criteria for Long Duration Electricity Storage Cap and Floor projects, raising termination fees to improve delivery assurance, and tightening Multiple Price Capacity Market rules.
These reforms reflect the government's attempt to balance net zero objectives with security of supply concerns. The timing aligns with increasing deployment of renewable generation requiring backup capacity, while addressing poor delivery rates that have plagued recent CM auctions. The proposals create new pathways for low-carbon technologies to receive capacity payments while imposing higher penalties on developers who fail to deliver.
Options on the table
Termination fee structure - Two approaches
Option 1: Across-the-board 30% increase All existing termination fees would rise by 30% to account for inflation since 2016. This maintains the current tiered structure where fees vary by project type and delivery timeline, but adjusts all levels upward. New Build CMUs currently face fees ranging from £5,000-£35,000/MW depending on technology and timing of termination. Under this approach, penalties would reach £6,500-£45,500/MW.
Option 2: Single simplified fee Replace the complex tiered system with a single £45,500/MW termination fee for all projects. This represents the inflated value of the current highest penalty tier. The approach eliminates complexity but removes differentiation between project types and termination timing.
Both options increase credit cover requirements to match higher termination fees and extend credit cover periods until New Build CMUs complete commissioning. Established developers with strong balance sheets benefit from simplified financing arrangements, while smaller entrants face higher barriers to participation. Consumers ultimately fund both the increased credit costs and any termination payments through capacity charges.
CfD project participation framework
DESNZ proposes allowing existing CMUs to continue capacity market participation after receiving CfDs through Secretary of State direction, provided no concurrent support periods occur. This addresses cases where strategic assets receive CfDs for policy reasons but remain essential for system security.
Projects would need to demonstrate clear temporal separation between CfD and CM support - effectively receiving capacity payments during periods when CfD support is unavailable or insufficient. This benefits asset owners by maintaining revenue streams during CfD gaps, while consumers pay for dual support mechanisms across different timeframes. The arrangement favours incumbent generators with existing capacity agreements over new entrants competing purely on economic merit.
LDES Cap and Floor integration
The consultation proposes specific CM eligibility criteria for Long Duration Electricity Storage projects participating in the separate Cap and Floor regime. LDES C&F projects would face adapted prequalification requirements and delivery obligations designed to prevent market distortions while ensuring CM auction participation doesn't delay operational delivery.
Projects successful in CM auctions but subsequently entering LDES C&F would face modified termination arrangements reflecting their regulated revenue framework. This creates a pathway for storage developers to access capacity payments before transitioning to regulated returns, but adds complexity to revenue stacking arrangements. Storage developers gain additional revenue certainty, while the framework protects against double compensation for the same capacity services.
Multiple Price Capacity Market tightening
DESNZ proposes raising the CapEx threshold for MPCM eligibility and requiring disconnection certificates for new builds on previously commissioned sites. The current regime allows projects meeting lower capital expenditure requirements to access higher price caps designed for genuinely new capacity.
Higher CapEx thresholds ensure only substantial new investments qualify for premium pricing, while disconnection certificates prevent gaming where developers claim "new build" status for minor upgrades. These changes favour large-scale developments over incremental capacity additions, potentially reducing competition from smaller flexible assets. The measures protect consumers from paying premium prices for marginal capacity upgrades while ensuring MPCM delivers genuine additionality.
Questions being asked
CfD integration mechanisms
The consultation seeks views on the proposed framework for allowing CfD projects continued CM participation, including: - Whether the temporal separation approach adequately prevents double compensation - How to handle delivery obligations for projects transitioning between support schemes - What evidence requirements should apply to demonstrate strategic importance
LDES Cap and Floor eligibility
Questions focus on adapting CM rules for storage projects in the regulated framework: - Appropriate prequalification requirements for LDES C&F projects - Modified delivery obligations reflecting regulated revenue arrangements - Treatment of projects moving between CM and C&F regimes
Delivery assurance improvements
DESNZ asks for preferences between the two termination fee approaches: - Whether 30% increases across all fee levels or single simplified fees better incentivise delivery - Appropriate credit cover requirements and duration for different project types - How extended credit cover periods until commissioning completion would affect project financing
Secondary trading clarifications
The consultation examines rules around CMU transfers and new entrant procedures: - Whether proposed eligibility criteria for Secondary Trading Entrants provide sufficient clarity - How to balance market access with delivery assurance for transferring parties - What additional evidence requirements would improve transfer processes without creating unnecessary barriers
MPCM eligibility criteria
Questions address preventing gaming while maintaining competition: - Appropriate CapEx threshold levels for accessing higher MPCM price caps - Whether disconnection certificate requirements adequately distinguish genuine new builds - How additional evidence powers should be applied to verify Total Project Spend compliance
How to respond
The consultation runs until 10 February 2025. Responses should be submitted via email to [capacitymarket@energysecurity.gov.uk](mailto:capacitymarket@energysecurity.gov.uk) with "CM Consultation Response" in the subject line.
Responses can address all or selected aspects of the proposals. DESNZ particularly welcomes evidence on: - Quantitative impacts of termination fee changes on project financing - Implementation timelines for proposed rule changes - Interaction effects between different reform elements
For technical queries about the consultation process, contact the Capacity Market team at the same email address. The consultation document and supporting materials are available on GOV.UK.
Source text
The government has recently published a [consultation](https://www.gov.uk/government/consultations/capacity-market-proposed-changes-for-prequalification-2026) on proposed changes to the Capacity Market Rules and Regulations. Alongside this, a set of urgent reforms have been identified which require changes to the Capacity Market Rules and Regulations. This consultation forms part of the government’s commitment to regularly review the function and requirements on the participants of the Capacity Market. This is to ensure the scheme remains fit for purpose and reflects changing market conditions. The proposals in this consultation aim to reform the Capacity Market to improve security of supply, align the scheme with the government’s net zero goals, and improve the functioning of the scheme, and strengthen delivery assurance. This consultation includes proposals to address the following: * Managing the transition of Existing Generating Capacity Market Units (CMUs) into alternative schemes: Ensuring that where a Contract for Difference (CfD) has been awarded following a Secretary of State direction, the relevant Generating Unit can continue participation in the CM, so long as there are no periods where the unit would be supported by both the schemes concurrently. The change recognises the strategic importance of these assets for the UK's energy transition and to Security of Supply. * Long Duration Electricity Storage Cap and Floor (LDES C&F): Capturing the interaction between the LDES C&F and the CM by proposing CM eligibility criteria for participating LDES Cap and Floor projects. The proposals consider where any adaptations to existing Rules are necessary. These include mitigations against market distortions and addressing scope for delays to projects becoming operational having succeeded in CM auctions. * Improving Delivery Assurance: Strengthening the CM delivery assurance framework by proposing two approaches to making the termination framework in the CM more stringent: either raising all fees by 30% in line with inflation from 2016 to today, or by simplifying the regime to have one fee, set at £45,500/MW, to reflect inflationary changes to the current highest fee level since 2016. Both approaches improve the regime by incentivising delivery of CM agreements. We are also proposing to hold Credit Cover until a New Build CMU has completed commissioning in order to further incentivise Capacity Providers to build their CMUs and fulfil their obligations. Credit Cover will be increased to align with the new uprated Termination Fee levels. * Clarifying Rules around Secondary Trading entrants and CMU transferors: Providing greater certainty on the eligibility criteria for Applicants who wish to become an Acceptable Transferee through the Secondary Trading Entrant process. The proposal also aims to improve the clarity of the Rules, removing barriers to entry. * Introducing additional measures for Multiple Price Capacity Market (MPCM) eligibility to ensure eligible capacity provides genuinely new capacity and offers value for money. This includes a new requirement to meet a higher capital expenditure (CapEx) threshold in order to qualify for the second, higher price cap. In addition, eligible capacity will be required to provide evidence of a certificate of disconnection where new builds are located on a previously commissioned site. The Delivery Body will also have the ability to request additional evidence to ensure all projects, whether eligible for the MPCM or not, are meeting the necessary Total Project Spend requirements. The consultation is open to anyone to respond to, but will be of particular interest to: * energy industry * consumer groups * academia * think tanks * other organisations who have an interest in security of supply and decarbonisation