Capacity Market reset: raising the stakes on delivery

On 14 July 2026, the Department for Energy and Security (“DESNZ”) confirmed the parameters for the next Capacity Market (“CM”) auctions and on the same date, published a package of reforms that materially increases the financial consequences of failing to deliver awarded capacity. 

Whilst the auction targets themselves indicate continued confidence in the CM as the UK’s principal mechanism for safeguarding electricity security of supply, the accompanying regulatory changes send an equally important message that capacity agreements are increasingly being reserved only for projects that can demonstrate a credible route to delivery. 

This Law Now looks at the latest auction parameters and considers the implications of the new measures designed to strengthen delivery incentives across the CM. 

Auction parameters

In a letter to the National Energy System Operator (“NESO”) dated 14 July 2026, DESNZ confirmed the key parameters for the T-1 auction for delivery year 2027/28 and the T-4 auction for delivery year 2030/31. DESNZ has decided to procure 5.0 GW in the T-1 auction and 40.9 GW in the T-4 auction, having reserved a further 0.5 GW of capacity for the associated T-1 auction for the 2030/31 delivery year. The headline auction parameters are summarised below. 

The CM’s existing reliability standard of three hours’ Loss of Load Expectation (“LOLE”) per year has been retained. LOLE is the planning metric used to assess security of supply and represents the average number of hours per year in which electricity demand could exceed available supply. It is the benchmark used when determining how much capacity should be procured to maintain system reliability. 

The Government has also retained the Net Cost of New Entry (“Net CONE”) at £49/kW/year. Net CONE is an estimate of the cost of developing new capacity after accounting for the revenues that a generator could expect to earn from participation in electricity markets outside the CM. It remains a key input into the auction demand curve and influences the amount of capacity procured at different price levels. 

The stability of these headline parameters is itself significant. DESNZ held procurement targets broadly flat despite continued growth in renewable generation, battery storage and interconnection, which suggests that DESNZ still sees a substantial need for capacity capable of supporting system reliability into the early 2030s.

Tougher consequences for non-delivery

The Electricity Capacity (Amendment and Transitional Provision) Regulations 2026 (“2026 Regulations”), came into force on 17 July 2026and introduced a package of measures aimed at strengthening delivery incentives and increasing the financial consequences of non-compliance. 

Key changes are to the termination fee and credit cover regimes. Under the previous framework, the CM operated a five-tier termination fee structure. Those fee rates were £5,000/MW, £25,000/MW, £10,000/MW, £15,000/MW and £35,000/MW. The 2026 Regulations introduce four additional rates: £6,500/MW, £13,000/MW, £19,500/MW and £45,500/MW. The new highest termination fee rate therefore represents an increase of approximately 30% against the previous highest rate of £35,000/MW. The 2026 Regulations set the monetary value of each termination fee band. However, it is the CM rules that determine the termination grounds and specify which termination fee rate is payable where a capacity agreement is terminated on a particular ground. 

The credit cover provisions have also been revamped. Baseline applicant credit cover has increased from £5,000/MW to £6,500/MW in relevant cases, and from £10,000/MW to £13,000/MW in others. For newbuild capacity market units, where 12 months have elapsed after auction results day and the financial commitment milestone has not been met, credit cover must be increased to £19,500/MW. If the financial commitment milestone is subsequently met, that amount may be reduced to £13,000/MW at the Delivery Body’s discretion.

Another material change is the new £45,500/MW credit cover requirement. The 2026 Regulations provide that, where a capacity market unit is not an unproven demand-side response CMU and the Delivery Body gives notice under the CM rules requiring an increase in applicant credit cover, the provider must increase that cover to £45,500/MW of de-rated capacity. The increased cover must be provided within 15 working days of the notice being given. 

The £45,500/MW figure mirrors the new highest termination fee rate. Rather than relying only on termination after a failure has crystallised, the revised framework allows collateral to be called while the project remains within the regime. The intention appears to be for DESNZ to shift more delivery risk back onto capacity providers and their investors, and it is doing so in a way that is clearly designed to influence bidding behaviour at the outset by discouraging projects from entering auctions before they are sufficiently mature, financed and deliverable. 

One of the key concerns associated with the CM has been the risk that capacity procured through auctions does not translate into delivered infrastructure. Stronger collateral requirements and more substantial termination liabilities should provide greater comfort that successful auction outcomes will translate into operational assets. By increasing the financial consequences of non-delivery and requiring greater collateral commitments from participants, DESNZ is seeking to strengthen the credibility of CM awards and the associated revenue. If successful, this could increase investor and lender confidence in CM revenues as a financing assumption.

Greater flexibility alongside Contracts for Difference support

The 2026 Regulations also amend the interaction between the CM and the Contracts for Difference (“CfD”) regime. The explanatory note in the 2026 Regulations confirms that capacity providers are not able to benefit concurrently from the CM and a CfD, but that the amendments allow applicants to prequalify where they have entered into a CfD and support under that CfD will commence only after the relevant capacity agreement ends. 

What does this mean for market participants?

For well-developed projects, the reforms should be welcome news. A tougher regime reduces the competitive advantage of speculative or under-developed projects and should improve confidence in auction outcomes. For less mature projects, the message is clear that the cost of securing a capacity agreement without a credible route to delivery has increased. In particular, the higher credit cover requirements may make participation more challenging for smaller developers and newer market entrants with more limited access to capital. Over time, this could favour larger and more established participants with stronger balance sheets and easier access to financing. Developers, investors and lenders should therefore assess auction strategy, collateral availability, milestone planning and termination exposure well ahead of the March 2027 auctions, rather than treating these issues as matters to be resolved after a successful bid.

The March 2027 auctions will therefore test not only whether there is sufficient appetite to provide capacity, but whether market participants are willing to accept a framework in which delivery risk carries materially greater financial consequences.