Proposed GB Capacity Market Reforms To Integrate Low Carbon Technologies And Enhance Delivery Assurance: What You Need To Know

The Department for Energy Security and Net Zero (DESNZ) is consulting on proposed reforms to GB's Capacity Market (CM). The proposals aim to update the CM to ensure it remains effective against the backdrop of a changing energy landscape and are part of a series of changes being made to the CM to ensure if remains fit for purpose.

The proposed reforms cover several key areas, such as the relationship between the CM and Contracts for Difference; measures to strengthen the CM's delivery assurance framework; clarification of rules for secondary trading, and adjustments to the Multiple Price Capacity Market. In this article, we take a look at what is proposed and the potential impact of the changes.

1. Managing CfD Transitions for Existing Generators

DESNZ is proposing changes to current rules which would allow generators that enter into a bespoke Contract for Difference (CfD) to continue participating in the Capacity Market, provided there is no timing overlap between CM and CfD payments.

Under current rules, once generators are awarded a CfD, they become instantly ineligible for CM participation (even if they have not yet started receiving CfD payments), leaving a gap in support until CfD payments commence and potential disqualification from future CM rounds where existing CM agreements are terminated. Under the government's proposal, Capacity Market Units (CMUs) would still be allowed to enter the CM if they can evidence that they will not be receiving any benefit from their directly awarded CfD (measured from the earliest possible benefit date) during the relevant CM delivery period. No change is proposed for projects which apply to take part in competitive CfD auctions, which will remain barred from prequalifying into the CM.

The change will be welcome to those projects looking to transition from the CM to a bespoke CfD and follows the government's decision in May 2025 to allow managed exits of unabated gas from the CM to transfer to a Dispatchable Power Agreement for power CCUS.

2. Long-Duration Electricity Storage (LDES) Cap and Floor Integration

Following the launch of the first LDES cap and floor scheme in April 2025 (for more detail, read our blog post on the topic) and the government's confirmation that projects receiving LDES cap and floor support could still participate in the CM, this consultation now aims to shape the mechanics of the interaction between the CM and LDES cap and floor schemes to ensure the CM continues to deliver value for money and maintain delivery incentives in respect of LDES projects. The government proposes to introduce additional eligibility criteria for LDES projects' participation in the CM, which would limit the level of access which LDES projects would have to the CM and protect against potential distortions in the market.

The proposals include:

• Price-Taker Status – LDES cap and floor projects to default to be Price Takers, to prevent strategic bidding by such projects causing distortions to the auction clearing price received by all CMUs in the relevant auction. The option to apply to Ofgem to be a Price Maker will remain available.
• Restrictions on CM agreement length – the government is considering whether LDES cap and floor projects should be limited to one-year agreements or permitted to apply for multi-year agreements, potentially with additional criteria such as revising the agreement length where an LDES cap and floor is awarded after the relevant CM auction.
• Long-stop dates – LDES cap and floor projects to be restricted from accessing long stop options (long stop dates would be set to the start of the first delivery year to which their CM agreement relates) to reduce the capacity gap risk caused by projects delaying operations.

LDES projects will need to carefully assess the impact of the final changes on their revenue stack.

3. Improving Delivery Assurance through Standardising Termination Fees

The consultation presents two alternative options to reform the termination fee regime for the 2027 CM auction onwards, alongside proposals to amend the credit cover regime. Multiple factors are driving the need for reform. The regime has not been substantially reviewed since 2016, during which time inflation has weakened the deterrent effect of the termination fees. Furthermore, recent CM auctions have seen a reduction of liquidity, which makes it even more critical that capacity is of a high quality, to ensure a secure supply of electricity. Termination fees help to do this.

Option one is to amend the termination fee regime, which would involve raising all existing fee levels (and associated credit cover requirements) by 30%, to reflect the impact of inflation since the fees were last reviewed. The government has ruled out directly linking termination fees to indexation on an annual basis and applying a multiplier which scales with the clearing price. The second option involves simplifying the regime through a single flat-rate termination fee of £45,500/MW (being the highest of the current five rates, adjusted for inflation) for all termination events, regardless of the technology type or cause of termination (with possible exceptions for very early-stage terminations). Termination fees are not proposed to be introduced for voluntary termination events (e.g. where there is a transfer to a CfD).

Alongside the proposed termination fee changes, the government is proposing amendments to credit cover requirements for the 2027 CM auction onwards, to incentivise build-out and address the current gap in credit cover before a project reaches its Minimum Completion Requirement. Credit cover requirements are proposed to be extended until a New Build CMU has completed commissioning (currently, credit cover is required until the Financial Completion Milestone is met, other than for Unproven DSR, for which credit cover is required until a DSR test is completed), with variations in the amount of credit cover required during the build-out period.

If the proposals are taken forwards, projects seeking CM agreements in the 2027 auction and subsequent auctions will need to factor in the increased credit cover requirements and potentially much higher termination fees if they fail to meet their obligations.

4. Secondary Trading Clarifications

The consultation proposes amendments to the CM rules to remove ambiguity around secondary trading applications. The rules prohibit one CM Unit from holding two CM Agreements for the same Delivery Year but there is uncertainty, including as to the status of a plant that has traded away all its obligations. The proposed amendments include clarification that secondary trading entrant applications cannot be made for a CMU that already has a CM agreement for the relevant Delivery Year. The changes will bring welcome clarification of the CM rules for secondary trading market participants and help to ensure the secondary trading market can function smoothly.

5. Multiple Price Capacity Market (MPCM) Eligibility

The MPCM, which was consulted on separately in October 2025, will introduce a second, higher price cap specifically for New Build CM Units to obtain additional dispatchable capacity as a back-up supply for extended system stress event periods as older assets retire. This consultation proposes the introduction of a new, higher capital expenditure threshold that New Build CM Units would need to meet to qualify for the higher price cap available in T-4 auctions, with penalties if they fail to meet the threshold. The initial higher threshold is proposed to be £475/kW (the current Fifteen Year Minimum £/kW Threshold is £340/kW). The Delivery Body could also be given enhanced powers to request evidence to verify total project spend for all projects.

The rationale for these proposals stems from the fact that the higher price cap is more expensive than standard CM contracts. Therefore, the government requires assurance that only those projects which genuinely require premium support can gain access to it. The consultation seeks views on the £475/kW threshold and whether the proposed penalties for failure to meet the threshold are proportionate.

The government also proposes introducing requirements for New Build CM Units applying for the higher price cap to evidence that any previous generation on the relevant site has been decommissioned, to ensure that the CMU is genuinely new.

Timeline and next steps

The consultation is open until 8 January 2026. The government expects to publish its response in spring 2026, after analysing consultation responses and undertaking further stakeholder engagement. Subject to parliamentary time, the changes are expected to take effect before the 2026 prequalification round and 2027 CM auction cycle, alongside earlier changes to introduce an additional higher clearing price which the government consulted on in October 2025.

For the full consultation document, and to respond online, click here.

Our trainee, Hannah Jennings, contributed to drafting of this blog.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.