Capacity market consultation - The 2026 shake-up: Cleaner power, tougher delivery and clearer rules

Background  

On 2 December 2025, the Department for Energy Security and Net Zero (DESNZ) launched a consultation proposing a new round of reforms to the Capacity Market (CM). The consultation runs until 8 January 2026 and sets out a series of possible rule changes aimed at integrating low-carbon technologies, managing interactions with new support schemes and tightening delivery assurance as auction liquidity becomes more constrained. It also looks to clarify how secondary trading and transfer rules operate by suggesting amongst other things that a CMU cannot hold more than one agreement for the same delivery year and that prequalification tests for trading should be tied to the relevant delivery year.

The Government plans to issue a formal response to the consultation in spring 2026 and implement any new rules in time for the 2026 prequalification round and the 2027 auctions. This Law Now summarises the key proposals and their potential implications for market participants.

CFD Transitions and LDES Interface

The consultation has proposed a targeted relaxation for existing generating Capacity Market Units (CMUs) that are awarded a Contract for Difference (CfD) following a direction from the Secretary of State. Under these new rules, such CMUs would be permitted to continue participating in the Capacity Market up until the point their CfD commences, so long as there is no overlap in support. This safeguard would be enforced through a “non-support” confirmation process and the requirement for documentary evidence defining the CfD's start terms, with the earliest possible commencement date being used to determine any potential overlap.

It is important to note that Competitive Allocation Round CfDs are still excluded from this arrangement, upholding the longstanding “no double subsidy” principle in the sector. This ensures that generators cannot benefit from two forms of government support simultaneously, maintaining fair competition and value for money for consumers.

The consultation also addresses the interface between the forthcoming Long Duration Electricity Storage (LDES) cap-and-floor regime and the CM. Further background on the LDES cap-and-floor regime is available in our earlier Law Nows, available here and here. To prevent distortions in CM auctions and deliver better value for money, LDES projects benefiting from the cap-and-floor mechanism would automatically be assigned price-taker status. However, they would retain the option to submit a Price Maker Memorandum to Ofgem should they wish to participate differently. Additionally, these LDES recipients would be barred from using long-stop extensions, ensuring that capacity secured in the T-4 auction is available for the first delivery year as intended.

All of these new measures would be reinforced by the requirement for director attestations during prequalification and at key project milestones, embedding a stronger culture of accountability and transparency in the market. Collectively, these proposals are aimed at integrating low-carbon and storage technologies more effectively, while maintaining robust delivery standards and safeguarding public investment.

Increased Termination Fees

A key theme of the consultation is delivery assurance of a project. The consultation outlines two possible approaches for revising termination fees and the associated credit cover requirements:

• Option 1 would update the existing five-tier termination fee structure and corresponding credit cover levels by around 30% to reflect inflation since 2016. It would also require credit support to be held up until satisfaction of the Substantial Completion Milestone and introduce stepped increases at key project milestones. From the worked examples in the consultation, we understand that this would work by having credit cover increase at defined milestones, for example, the Financial Completion Milestone, so that the level of credit cover is commensurate with the potential termination fee exposure. 
• Option 2 would simplify the current termination fee framework by replacing the current tiered structure with a single fixed termination fee of £45,500/MW (which would represent the inflation adjusted value of the current Tier 5 fee). Credit cover requirements would also be increased to align with the increase in the termination fee.

Secondary Trading and Residual Liability

DESNZ has clarified that a CMU cannot hold more than one agreement for the same delivery year even if its original obligation has been traded down to zero. This effectively means that the original CM agreement holder retains a degree of residual liability.  This seems to be a deliberate policy choice, as by keeping the original CM agreement holder on the hook, the intention appears to be to discourage excessive trading and speculative prequalification applications. In our view, some limited carve-outs would be reasonable such as where obligations need to be transferred because of genuine operational or force majeure events. Such flexibility would help ensure that developers are not penalised for genuine circumstances outside of their control while also not undermining the policy objective of preventing speculative prequalification. 

Multiple Price Capacity Market Measures

The concept of a “Multiple Price Capacity Market” was first introduced in the October reform package (this Law-Now provides a summary of that consultation package). The idea is to distinguish between standard capacity and genuinely new, capital‑intensive dispatchable CMUs by offering a higher clearing price to the latter.

The current consultation is largely focused on implementation details. The Government appears keen to ensure that any CMU benefiting from the higher price can demonstrate a genuine and material investment. New build projects on previously commissioned sites would need to show proof of new capacity, for example a certificate of disconnection and where relevant, updated CM and BM identifiers. If a project cannot substantiate the claimed level of capital spend, the agreement price or duration would be reduced to the standard cap and/or limited to a single delivery year term.

The Delivery Body would also have discretion to request further evidence of total project spend to validate the conclusions of an Independent Technical Expert for any Prospective Generating CMU or Unproven DSR CMU. Failure to provide that evidence could result in a reduced CM agreement length to only one delivery year, signalling an increased emphasis on ensuring that claimed project expenditure is properly evidenced and verified.

Hydrogen: Pathway to CM Participation

The consultation builds on the Government’s October 2025 call for evidence on categorising Hydrogen‑to‑Power (H2P), and its 2024 commitment to an H2P Business Model. The stated goal remains to enable H2P projects to participate in the Capacity Market (CM) as soon as possible. For further background on these topics, please refer to our earlier Law Now on that topic here.

Although no H2P specific rule changes are proposed in this consultation, the wider reform package is relevant for hydrogen generators as it sets the CM framework that they are likely to enter. Provisions such as the default treatment of price takers for projects receiving parallel support, tighter delivery assurance measures and the clarified approach to secondary trading would in practice extend to H2P projects too.

How to Respond

The consultation closes on 8 January 2026. Responses are invited via an online questionnaire (accessible here). The consultation notes that respondents are strongly urged to use the online questionnaire but that responses in writing (to be addressed to the Capacity Market Delivery Team at the address listed on page 6 of the consultation) or via email (capacity.market@energysecurity.gov.uk) will also be accepted. All responses should be framed as direct responses to the questions posed in the consultation and should be supported by evidence where possible.