Significant Capacity Market reforms proposed by UK Government

On 2 October 2025, the Department for Energy Security and Net Zero (“DESNZ”) launched two consultations proposing significant reforms to the electricity Capacity Market (“CM”), focusing on proposed:

• changes to the 2026 prequalification process; and
• updates to enable hydrogen-to-power (“H2P”) technologies to participate in the CM, and technical changes to de-rating for interconnector arrangements.

Both consultations close for stakeholder input on 27 November 2025.

This briefing looks at the proposals put forward under the below consultations:

Capacity Market: proposed changes for Prequalification 2026 - Capacity Market: proposed changes for Prequalification 2026 - GOV.UK

Capacity Market: Hydrogen to Power and interconnectors - Capacity Market: Hydrogen to Power and interconnectors - GOV.UK

Capacity Market: proposed changes for Prequalification 2026 (“Prequalification Consultation”) - Capacity Market: proposed changes for Prequalification 2026 - GOV.UK

Capacity Market: proposal regarding locational changes of Capacity Market Units - Capacity Market: proposal regarding locational changes of Capacity Market Units - GOV.UK

The Prequalification Consultation proposes sweeping reforms to the CM Rules with the aim of maintaining security of supply, aligning with decarbonisation goals, and improving the scheme’s functionality. Proposed changes focus on the 2026 prequalification process, including the introduction of multiple pricing mechanisms, measures to promote efficient and competitive bidding, enhancements to consumer-led flexibility, the self-nomination process for battery energy storage system (“BESS”) connection capacity, and initiatives to facilitate access for non-fossil fuel generators to a low-carbon CM.

The consultation also addresses a range of broader administrative and operational enhancements to the CM framework, which are not covered in detail in this briefing.

Multiple price CM

Since its inception in 2014, the CM has operated under a fixed price cap of £75/KW/year. With no adjustment for inflation or market developments, this now represents about a 30% real-terms reduction from initial auction values. The Prequalification Consultation proposes the introduction of a second, higher price cap for new build dispatchable enduring generation projects or technologies participating in the T-4 auction, while maintaining the existing £75/KW/year cap for all other CM agreements. DESNZ states that this proposed change aims to incentivize investment in new, flexible generation capacity to support system reliability and decarbonization objectives.

DESNZ has identified a range of potentially eligible technologies for the proposed higher price cap, including biomass, combined cycle gas turbines, combined heat and power plants, energy from waste facilities, hydroelectric power, nuclear generation, open cycle gas turbines, and reciprocating engines. Most hydrogen-to-power projects and power carbon capture, usage, and storage technologies are expected to qualify once enabled to participate in the CM. DESNZ is targeting support towards new, flexible, and low-carbon generation assets that can enhance system reliability and contribute to the decarbonisation of the electricity sector.

Ensuring efficient bidding

DESNZ is evaluating two potential reforms aimed at limiting the amount of information disclosed to participants both prior to and during all CM auctions. These measures aim to mitigate the risk of strategic bidding behaviour that could undermine auction integrity and distort competitive outcomes, while simultaneously ensuring that the CM remains transparent, accessible, and appealing to a broad spectrum of investors.

Specifically, it has been noted that recent T-4 auctions have exhibited low liquidity, signalling limited excess capacity and reduced competition — reminiscent of the CM’s early days. This raises risks of strategic portfolio manipulation, undermining pricing and efficiency. DESNZ aims to curb these risks and to ensure the CM remains reliable and delivers cost-effective outcomes for consumers.

Consumer-led flexibility

Consumer-led flexibility (“CLF”) refers to a broad spectrum of demand-side response (DSR) initiatives that empower consumers to actively manage electricity usage  —  directly or via an authorised third party (such as their energy supplier) — by shifting or reducing demand during peak demand periods or when renewable generation is low. This supports grid stability and efficiency and offers financial rewards to consumers.

DSR offers consumers financial incentives, such as lower off-peak prices, while boosting grid reliability by cutting demand or adding supply, e.g. via vehicle-to-grid enabled electric vehicles. By making energy use more dynamic, DSR strengthens system resilience and efficiency for operators and market participants.

DESNZ first considered CLF in its December 2014 consultation, and issued its summary of responses on 2 October 2025 alongside the Prequalification Consultation. DESNZ is now advancing a series of proposed reforms intended to broaden and strengthen the participation of CLF resources in the CM. These reforms aim to enhance market access, boost transparency, and better integrate consumer-led DSR initiatives into the Capacity Market framework.

Key proposals include:

• Minimum capacity demonstration requirement proportional to the capacity obligations secured within the CM.
• Streamlined administrative processes for aggregated small-capacity assets.
• Stronger pre-qualification standards to facilitate enhanced regulatory oversight.
• Improved data collection and reporting on DSR participation in the CM.
   

Self-nomination of BESS connection capacity

The Prequalification Consultation proposes to allow BESS operators to "self-nominate" their connection capacity within CM agreements. This mechanism would enable BESS operators to specify a connection capacity that more accurately reflects real operational performance over the agreement term, rather than being bound by initial or maximum capacity figures.

Under the current framework, BESS operators risk CM agreement termination if battery degradation drops performance below required thresholds.  The proposed self-nomination mechanism would allow operators to declare a lower, sustainable capacity that matches ageing assets. This would not only provide greater operational flexibility for BESS operators but would also support long-term market stability by aligning declared capacities with the realistic performance profiles of battery assets as they age. It is also expected to reduce the administrative burden associated with compliance monitoring and to boost investments in energy storage by reducing the risk of contract termination due to unavoidable technical degradation.

Facilitating access for non-fossil fuel generators to low-carbon CM benefits

The Prequalification Consultation seeks to fill a gap in methodology for verifying how biomass and other non-fossil technologies meet the CM’s 100gCO₂e/kWh low-carbon threshold. Without a clear and accepted calculation method, these technologies may be unable to qualify for the specific incentives otherwise available to low-carbon technologies under the CM, such as extended contract durations and the ability to declare longstop dates. This risks undermining investor confidence and hindering the deployment of innovative low-carbon generation solutions.

DESNZ has outlined an interim approach for the 2026 prequalification process, requiring biomass generators to demonstrate compliance with the existing Renewables Obligation (RO) sustainability criteria. Looking ahead, it intends to develop a more comprehensive, long-term framework that aligns with broader national policy objectives for biomass generation. This future framework is expected to provide greater clarity and consistency for market participants, supporting investment decisions, and ensuring that sustainability standards keep pace with evolving technologies and policy priorities.

Capacity Market: Hydrogen to Power and interconnectors

Alongside the Prequalification Consultation, DESNZ also published  call for evidence regarding the participation of H2P technologies and the revision of interconnector de-rating factors within the CM (the “Call for Evidence”). This initiative builds upon DESNZ’s December 2024 commitment to establish a dedicated H2P business model, which is expected to be operational by 2026. The Call for Evidence seeks to ensure that the CM framework remains responsive to the evolving role of hydrogen in the energy sector.

H2P Participation

Demonstrating a broader commitment to advancing hydrogen technologies, DESNZ outlined its intention  to support the development and integration of H2P solutions in its Clean Power Action Plan. This included fostering an enabling environment for innovative business models and facilitating the commercial deployment of hydrogen-based power generation.

Allowing H2P technologies into the CM would provide revenue streams for project developers and mitigate financing risks associated with hydrogen as an emerging technology. By opening access to established market mechanisms, the government aims to accelerate hydrogen investments and support the transition to a low-carbon energy system.

The Call for Evidence seeks input on whether H2P systems, including both combustion plants and fuel cells, can be effectively accommodated within existing technology classes under the CM or if there is a need to establish dedicated H2P provisions, including the implications of creating specific sub-classes for different H2P configurations, such as plants connected to the broader hydrogen network, closed-loop hydrogen systems, or facilities using hydrogen-blended fuels. These considerations are intended to ensure that the CM accurately reflects the technical and commercial characteristics of emerging hydrogen technologies.

Interconnector de-rating factors

Under the existing CM framework, DESNZ retains ultimate authority to determine de-rating factors for interconnectors. This decision is made following a comprehensive review of technical assessments conducted by the National Energy System Operator and recommendations from the DESNZ Panel of Technical Experts. The de-rating process is intended to ensure that interconnectors are accurately valued for their contribution to system reliability, by considering both technical performance and market conditions. The Call for Evidence questions whether the existing approach remains fit for purpose in light of evolving energy system dynamics and increased interconnection with neighbouring markets.

DESNZ is actively evaluating whether to exclude "high-impact, low-probability" events from the technical adjustment calculations used to determine de-rating factors for interconnectors. This proposal remains under review, as there are concerns that omitting such events could result in an overestimation of the reliability and system contribution of interconnectors, potentially impacting overall energy security. The Call for Evidence seeks input on the appropriateness of this approach, including any potential implications for risk management, market confidence, and alignment with international best practices.

Removal of change of location rules for prequalification

DESNZ has now also confirmed a minded‑to position to remove the CM Rules that allow Capacity Market Units (“CMUs”) to change location after prequalification. The proposed reform would omit Rule 8.3.7 in its entirety, together with consequential deletions including Rule 12.2.1(ca)(iv) and Rule 7.5.1(r). The policy objective is to strengthen delivery assurance by ensuring that new build and DSR CMUs that secure Capacity Agreements commission their projects as described at prequalification, and that auction outcomes reflect deliverable capacity at the stated site. Notably however, the proposal would not affect the existing ability of DSR CMUs to add or reallocate components under Rule 8.3.4(e) as the restriction targets relocation of the CMU/site rather than component management.

An alternative “limited change of address” route that would have permitted relocations subject to additional evidential thresholds and Delivery Body review has been explicitly rejected on the basis that it was an insufficient deterrent to the submission of unfeasible projects.

If implemented, the change would apply to current and future agreements from commencement. Practically, developers and capacity providers will need to ensure that prequalification applications reflect a fully viable site with secured consents, grid arrangements and metering solutions that can be delivered without relocation. A formal government response is expected in winter 2026, after which draft rule changes would proceed to implementation.