The Energy Transition | DESNZ launches consultation on changes to the Capacity Market

This week we look at two Capacity Market initiatives from the Department for Energy Security and Net Zero: a consultation on proposed reforms ahead of its Prequalification 2027 process and its open letter seeking views on new technologies in the market.

DESNZ launches consultation on proposed changes to the Capacity Market 

The Department for Energy Security and Net Zero (DESNZ) has opened a new consultation to gather views on proposed reforms to the Capacity Market (CM) ahead of its Prequalification 2027 auction eligibility process.

The CM is the government's primary mechanism for ensuring the reliability of electricity supply through the procurement of "standby" power that can be called upon in a system stress event. 

The consultation sets out proposals that the government says are designed to enhance the clarity and accessibility of the Capacity Market Rules, further develop previous reforms relating to consumer-led flexibility, and align the scheme with decarbonisation goals. The consultation focuses on three main areas.

Improving delivery assurance

The proposals aim to reinforce the CM testing framework by reforming the Satisfactory Performance Day (SPD) process, which currently requires CM units (CMUs) that have committed capacity to perform at a level at or greater than their commitment for at least one settlement period on three consecutive days; if they fail to do so, their capacity payments are suspended. The consultation suggests that the broad flexibility provided to these units in determining when they may carry out the SPD has limited its effectiveness. It proposes that the CMU must respond to three SPDs during the peak winter demand period and demonstrate an ability to respond to at least one instruction from the delivery body, the National Energy System Operator, within that period. 

The consultation argues that this reform would better assess both responsiveness as well as availability, rather than the current process which focusses on availability alone. The consultation also suggests changes to strengthen underlying processes to ensure that sufficient requirements are applied to the provision of supporting data. 

Consumer-led flexibility

The consultation includes a detailed consideration of the treatment of Demand Side Response (DSR) assets. 

With the government concluding that using a single de-rating factor for DSR does not adequately capture the differing characteristics of DSR resources, the consultation proposes two alternative de-rating methodologies: a duration-based approach, under which CMUs would be de-rated according to how long they can fulfil their capacity obligation; and a technology-based approach under which CMUs would be de-rated according to the specific technology providing the response. Initially, this would be split into the categories of generation, storage and demand turn-down.

The consultation also seeks to amend the treatment of DSR in secondary trading. Under the proposals, Unproven Demand Side Response (UDSR) CMUs that have not yet completed their DSR test would be prevented from secondary trading to existing generating assets that have received UDSR secondary trades in the previous delivery year. This proposal intends to ensure that UDSR CMUs participating in auctions reflect a genuine commitment to deliver. The proposal would apply only to agreements entered into following the effective date of the amendments. 

Administrative improvements

The consultation proposes several other amendments aimed at improving the efficiency and clarity of the CM's rules. These include the introduction of more explicit consequences for non-compliance with the rules, with the government suggesting that compliance is not currently sufficiently incentivised, a mandatory disclosure requirement of ultimate holding companies, and a more proportionate penalty regime for CMUs that are terminated due to market manipulation or prohibited activities. 

The consultation will remain open until 27 October 2026. 

DESNZ publishes open letter on new technologies in the Capacity Market

DESNZ, in an open letter and consultation published on 2 September, has sought stakeholder views on whether there are any emerging or new generating technologies that could help maintain security of electricity supply and may need recognition in the CM.

The government is encouraging respondents to provide evidence on any generating technologies that have emerged since the 2025 consultation which are capable of contributing to security of supply, are not already a generating technology class, and may be eligible to participate in future CM auctions. Technologies highlighted in the 2025 consultation were thermal plasma electrolysis, consumer-led flexibility, flexible compute capacity and offshore hybrid assets.

Respondents are invited to share information on how technologies operate, whether they are commercially viable and how they could contribute at times of system stress, including any limitations on their ability to operate continuously at full capacity during peak periods.

The consultation may be of interest to a range of participants in the GB energy market, including suppliers, aggregators and developers of emerging technologies. It is also expected that consumer-led flexibility providers and other CM participants, as well as organisations with an interest in security of electricity supply, may be interested in responding.

Responses should be submitted by 4 October 2026. The government will publish the outcome of the review by 1 December 2026.

This article was written with the assistance of Osborne Clarke trainee solicitors Maggie Hudson and Elise Hill.