The Energy Transition | UK government consults on Contracts for Difference AR8

This week, we look at the Department for Energy Security and Net Zero (DESNZ) consultations on the Contracts for Difference (CfD) Allocation Round 8 (AR8) and on corporate power purchase agreements (CPPAs), the announcement by Scottish and Southern Electricity Networks (SSEN) of the launch of its long-term flexibility auction, and the operational priorities of the National Energy System Operator (NESO) for 2026.

Government launches consultation on Contracts for Difference AR8 policy

DESNZ has published its consultation on the proposed refinements to the CfD AR8 and future rounds.

The consultation proposes, amongst others, the following updates:

• Permanent surrendered capacity restrictions: Projects that surrendered capacity in previous allocation rounds will be permanently prohibited from bidding that capacity into future rounds. This includes capacity surrendered through either the Permitted Reduction or Final Installed Capacity mechanisms under the CfD contract.
• Permitting hybrid metering. Rather than requiring separate balancing mechanism units (BMUs) for each CfD project, developers may meter at the point of generation using SCADA (supervisory control and data acquisition) data for sub-BMU calculations. While currently permitted for phased offshore wind and tidal projects, this will extend to both multiple CfD facilities of the same technology as well as CfD and merchant facilities of the same technology. Any project looking to utilise hybrid metering will be subject to enhanced low carbon contracts company (LCCC) monitoring.
• Changes to the longstop date and required installed capacity threshold for floating offshore wind. The consultation proposes increasing the longstop date from 12 to 24 months and reducing the required installed capacity (RIC) from 95% to 85%.
• Introducing a new other deepwater offshore wind (ODOW) category. DESNZ intends this to enable innovative and novel foundation designs for deepwater sites to compete for CfD support. ODOW will be established as a subset of the offshore wind category and, therefore, will be subject to any provisions that already apply to offshore wind under the CfD. Additionally, this new technology category will also be caught by the proposed extension of the longstop date and the reduced RIC threshold currently proposed for floating offshore wind, should those proposals be adopted.
• Scheme efficiency improvements. Proposals include introducing a pause for pending applications while the applicant considers appealing a disqualification decision; removing the tier 1 appeal stage so that appeals would proceed directly to Ofgem; granting the delivery body discretion to consider new evidence to remedy non-material errors or omissions; and revising the pending application regulations.
• Removal of default bids. Currently, if an applicant fails to submit a bid for a qualifying application and does not withdraw that application, a default bid is automatically assigned. It is proposed that if a sealed bid is not submitted within the sealed-bid window in respect of an application, then the application will be considered withdrawn.
• Updating the unilateral commercial operations notice (UCON) procedure. It is proposed that the LCCC is permitted to obtain near real-time monitoring information for projects to ensure generators are not delaying their commercial operations date to benefit from high wholesale prices. This will include a clarification on when the metering access obligations begin to ensure that LCCC has the right to access, inspect and test metering equipment and to permit access during the commissioning period and prior to the start date. It is also proposed to include a new clause where a generator fails to cooperate with the UCON procedure and to apply default interest to reconciliation amounts where a generator fails to provide metering information.
• Excluding projects holding a 'gate 1' connection offer from the CfD. This change would be to ensure that the CfD prioritises those projects with a firm connection date. The proposal applies to projects with both distribution and transmission connections.
• Providing the secretary of state with visibility of sealed bids. This would follow the approach taken for offshore wind in AR7.
• Other minor amendments to the CfD contract, including updating the definition of "base year CPI" to reflect full-year 2024 CPI.
• Confirmation that DESNZ will not proceed with the proposed amendments to the appeals process set out as part of the AR7 consultation.

The consultation closes on 30 January 2026, and responses can be submitted here.

SSEN announces the launch of its long-term flexibility auction

The network operator SSEN Distribution has announced the launch of a new long-term flexibility auction to procure another 46 megawatts (MW) of strategically-located flexibility across its network. During the first half of the current ED2 (electricity distribution) price control period, SSEN has procured more than 934MW of flexibility.

Paul Fitzgerald, SSEN's flexibility manager, said that parties involved will "be supporting our wider efforts to decarbonise communities, and create the conditions for further, sustainable economic growth, as well as generating their own income stream.

"Our effective DNOA [distribution network options assessment] gives us vital information about where we need flexibility, so we can work to secure it effectively”.

Full details of the tender (which will run from 12 to 26 January) can be found on SSEN's website under the "current long-term bidding" section. Details on the bidding process and additional information are available on the ElectronConnect platform.

Government launches an open call for evidence on CPPAs

The Department for Business and Trade and DESNZ have jointly launched an open call for evidence on how the market for corporate power purchase agreements (CPPAs) in Great Britain (GB) can be developed and improved for industry.

The government notes that recent volatility in electricity prices, along with rising electricity prices, has meant that CPPAs have grown in popularity. The consultation is, therefore, looking to improve competitiveness, provide price stability, increase efficiency and remove barriers to growth by seeking the views and experiences of current and potential market participants on ways to strengthen the market.

It also notes that CPPAs may serve as an alternative route to market for generators, as opposed to other options such as CfDs. The call for evidence focuses only on physical CPPAs (including private wire CPPAs), both "sleeved" and "unsleeved", but does not cover "virtual" PPAs (that is, arrangements for the financial not physical settlement of the power).

The government lists the areas that it considers represent a challenge to the CPPA update in GB. These include the volume of electricity usually sold under them, given that CPPAs tend to be for large volumes, and this can be problematic for smaller commercial offtakers. Further, generators would also usually be looking to contract with counterparties with good creditworthiness, which can limit the range of potential offtakers. Additionally, CPPAs can be complex and lengthy to negotiate. The legal fees can, therefore, be high, which can act as a barrier to smaller entrants or those who don't have experience in this area.

The call for evidence is likely to be of interest to companies using significant volumes of electricity (whether or not they have CPPAs in place); investors and funders of electricity infrastructure; those developing and operating electricity generation projects; and electricity suppliers, traders and intermediaries.

The call for evidence is seeking specific answers to the following questions:

• To what extent and in what ways are CPPAs attractive for industrial and commercial electricity consumers compared with other supply arrangements?
• To what extent can CPPAs support the development of new electricity generation capacity?
• What actions could support growth in the GB CPPA market and make these agreements a better option for electricity buyers and electricity generators?
• What best-practice approaches developed in comparable markets could address the challenges in developing and agreeing on CPPAs in GB?

The call for evidence is open until 6 March and responses can be submitted by responding online via Qualtrics; emailing cppaevidence@businessandtrade.gov.uk; or writing to Industrial Energy Unit, Room 1.75, Department for Business and Trade, Old Admiralty Building, Admiralty Place, London, SW1A 2DY.

NESO sets out core operational priorities for 2026

The National Energy System Operator (NESO) has outlined three core operational priorities for 2026, centred on system security, cost reduction and sustainability objectives. These priorities operate within NESO's six strategic priorities extending through 2026, the end of the current regulatory period under the RIIO (revenue equals incentives plus innovation plus outputs) -2 framework.

Security

NESO's first operational priority is security. It plans to continue to balance the electricity system to maintain grid reliability, while taking on wider resilience and planning roles. It will implement North Hyde resilience recommendations (the report into the March 2025 power outage following the substation fire near Heathrow airport). It will also assume planning responsibilities for GB’s gas network, embed whole‑system resilience and emergency management functions, and deliver the first NESO‑led gas network development plan.

Affordability

NESO aims to prioritise connections reform in 2026, working with customers to overhaul the process with a view to unlocking around £40 billion in annual investment. It expects RIIO-2 activities to deliver consumer benefits by 2026, alongside a reformed connections process, improved dates for net-zero projects, a balancing costs strategy, increased market participation and technology modernisation.

Sustainability

NESO intends to take on its "first of a kind" spatial energy plans nationally and regionally, mapping where and when clean energy infrastructure will be needed. It is also looking to deliver a centralised strategic network plan, regional and spatial strategic energy plans, and a flexibility strategy, embedding these into its core strategic planning functions.

NESO also notes that in 2025, Great Britain's power system was transformed to enable zero-carbon operation. It expects that the zero-carbon operation will become an operational reality during 2026.

This article was written with the assistance of Oliver Derham, Yasmine Jauffur, trainee solicitors and Tomisin Agbonifo, paralegal.