The Energy Transition | UK government consults on raft of changes to the Capacity Market

This week we look at the UK government and Ofgem's latest consultations on the Capacity Market, the GB Energy strategic plan, Ofgem's RIIO-3 final determinations and more. 

UK government opens a consultation on integrating low carbon technologies into the Capacity Market 

The government has launched a consultation on five elements of the Capacity Market (CM) regime. The proposals seek to maintain security of supply as the grid decarbonises, ensure fairness and transparency in market participation, and deliver reliable capacity at the lowest cost to consumers. 

Transitioning existing generating Capacity Market Units into alternative schemes

In response to the Capacity Market Phase 2 consultation, the government clarified that an applicant to the CM must not prequalify for a CM auction if they had already entered into a Contract for Difference (CfD). The original intent for this was to avoid a double subsidy for these Capacity Market Units (CMUs). The consultation highlights the "unintended consequence" of this policy being that the regulations and rules inadvertently capture schemes utilising the CfD framework where offers are made by direct award of the Secretary of State (and not through the competitive auction process of allocation rounds).

The government now wishes to address concerns that an existing generating CMU wishing to enter into a targeted support scheme (payments under which may not commence for several years) would be unable to participate in the CM after entry into that scheme. The plant would therefore not receive payment under the CM or the targeted scheme during the period between entry into the targeted support scheme and that scheme commencing.

The government proposes to allow existing generating CMUs that have been awarded a CfD by direction of the Secretary of State to continue to participate in the CM, until the plant begins to receive support under the CfD. Operators of these projects would need to provide evidence that they will not be receiving CfD support during that period.

This proposal will only affect existing generating CMUs that are awarded a CfD by direction of the Secretary of State (and not those awarded following competitive auction), and where there would be a gap in delivery years between the completion of a CMU's most recent capacity agreement and the starting of the terms of their CfD.

Long-Duration Electricity Storage Cap and Floor

In its response to the October 2024 consultation on the introduction of the Long-duration electricity storage cap and floor (LDES C&F), the government confirmed that projects receiving LDES C&F support could participate in the CM.

The current consultation proposes additional eligibility criteria for this participation, framed as a counterbalance to the support received by an LDES project under the parallel C&F regime: 

• Default Price-Taker status: defaulting LDES C&F recipients to  Price Taker status in the CM (except where a Price Maker Memorandum is submitted to Ofgem). This seeks to mitigate the perceived risk of strategic bidding in the CM, as well as potential distortions due to the guarantees provided by the LDES C&F scheme support.
• Agreement length: either (i) restricting LDES C&F recipients to single-year agreements, or (ii) retaining the option for agreement lengths extending up to 15 years, subject to meeting wider qualifying criteria under existing CM rules.
• Long stop dates for LDES C&F recipients and applicants: restricting recipients of (and live applicants to) the LDES C&F from benefiting from the extension of  long stop dates under the CM (instead, they would be set to the starts of the first delivery year under a CM agreement). This appears to be because (a) LDES C&F projects obtain sufficient "investment impetus and income floor" under the C&F scheme to incentivise development, and (b) the government expects such LDES C&F projects to delay their participation in CM auctions to the point when they can meet the T-4 delivery year timings.
• Director’s declarations and storage CMUs: requiring prospective CMUs under a storage generating technology class to submit a director’s declaration at the point of prequalification, with updates provided at specified points between prequalification and the project being operational. This declaration will include confirmation of that CMU’s application status in relation to the LDES C&F.Knowingly providing a false declaration would see CMUs subject to potential termination. 

Standardisation of termination fees and credit cover

Neither the rates of termination fees nor the credit cover framework have been substantially reviewed since 2016. The government highlights an approximate 30% increase in inflation since 2016.

Beyond the loss of capacity payments, the rate of the termination fee payable by a CMU is outlined in the Capacity Market rules. The current rates differ between CMUs according to a CMU's de-rated capacity. These aim to balance not creating a barrier to entry and participation in the CM with mitigation of speculative participation, and ensuring that non-delivery is appropriately disincentivised.

Given the stated need to "maintain the link between new build terminations and Credit Cover through the termination fee process", the government sets out the following proposals:

• Option 1 - Introduce an inflationary increase to both termination fee rates and credit cover requirements. This would see a 30% increase in both termination fee rates and credit cover requirements.
• Option 2 - Introduce a single, fixed termination fee structure. This approach would standardise termination fee levels, creating a single rate of termination fee for CMUs of all de-rated capacities, and all termination events. The government proposes that the fee be set at £45,500/MW (this being the current TF5 level, increased by 30% inflation since 2016).

The consultation clarifies that the termination fees would not apply for agreed voluntary termination events, such as CMUs transferring to CfD or Renewables Obligations. 

Additionally, the government also proposes, with effect from agreements won in auctions in 2027 onwards: 

• holding credit cover for longer, with new build CMUs posting credit cover until meeting the substantial completion milestones; and
• the quantum of credit cover posted by new build CMUs varying over the build-out period.

Clarifying rules around secondary trading entrants and CMU transferors

The government is proposing to amend the following rules to clarify their intended operation: 

• Rule 3.13: to clarify that for secondary trading applicants, when applying the other rules in Chapter 3, “Capacity Auction” must, where appropriate, be read as “the Delivery Year to which the Application relates”. This will provide greater certainty on the eligibility criteria for Applicants who wish to become an acceptable transferee through the secondary trading entrant process.
• Rule 9.2: to clarify that transferors will maintain their capacity agreement, even when they trade their obligation down to 0MW and as a result are only permitted to be a transferee so long as the obligation is below their initial declared de-rated capacity.

Introducing additional measures for Multiple Price Capacity Market (MPCM) eligibility

The government previously proposed to introduce a second, higher price cap in the Capacity Market: proposed changes for prequalification 2026 consultation. This proposal to develop an MPCM aims to secure additional new build dispatchable enduring capacity.

The government now sets out further measures to ensure that any capacity in an MPCM will justify the potentially higher price, by (a) being genuinely new and (b) involving substantial capital investment:

• Proposal 1 - Introducing a new, higher, fifteen year minimum £/kW threshold for new build CMUs eligible for the higher price cap. The government seeks to ensure that only new build plants, investing a significant level of CapEx commensurate with the value of the higher value MPCM agreements, are able to participate. It has proposed £475/kW as the higher price cap for the 2027 CM auction. Refurbishing CMUs will not be eligible for the higher price cap in the MPCM.
• Proposal 2 - Adding a pre-qualification requirement for new build CMUs eligible for the second, higher price cap, to provide evidence of a certificate of disconnection, if they are building on a site that has been previously commissioned. This will ensure that any plants on a site that has previously been commissioned are not a refurbishment of an existing plant but are genuinely new capacity.
• Proposal 3 - Introducing a new provision under rule 8.3.6 to enable the delivery body to request additional evidence relating to total project spend. Capacity providers would need to evidence that their total project spend meets the agreed capital expenditure threshold for their CM agreement. This proposal, unlike 1 and 2, would apply to all capacity providers, and not just those eligible for the MPCM, from prequalification 2026 onwards.

The consultation closes on 8 January 2026, and responses can be submitted here. A response is expected in spring 2026, outlining the proposals the government intends to implement.

Concurrently with the government's consultation, Ofgem has also published a consultation on enabling the use of Market-Wide Half-Hourly Settlements within the CM. This consultation contains a single proposal to update definitions in the CM rules so that they reflect recent changes made by the Market-Wide Half-Hourly Settlement Programme. The consultation will run until 13 January 2026, with a decision to be published in February. Responses should be submitted to EMR_CMRules@ofgem.gov.uk.

Great British Energy launches strategic plan

Great British Energy (GBE), established in 2024, has published its first strategic plan. The plan sets out how it intends to continue to operate as a publicly owned energy company focused on accelerating UK generation and crowding in private capital. GBE has set targets to mobilise £15 billion of private finance and deliver 15GW of clean energy generation and storage assets by 2030.

The strategy indicates priority focus on technologies aligned with wider UK energy policy objectives, including offshore and onshore wind, solar, long‑duration storage, flexible low‑carbon generation, and emerging technologies such as floating offshore wind, CCUS‑enabled power and hydrogen.

Relating to governance, the plan states that GBE will be operating at arm’s length from ministers under a defined investment framework. It will coordinate with other public finance bodies such as the Department for Energy Security and Net Zero (DESNZ), National Wealth Fund and UK Infrastructure Bank, using competitive processes with clear eligibility criteria. 

The strategic plan focuses on three priority areas: 

• GBE Local: GBE Local's stated objective is to expand local energy and community ownership through end-to-end business solutions. A joint Local Power Plan with DESNZ sets a long-term vision leveraging partnerships with public services to achieve energy cost savings for schools and hospitals, which will be published in 2026.
• Onshore energy: GBE plans to utilise public land for energy generation, through an Independent Power Producer model, focusing on repowering wind sites as 60% of capacity nears end-of-life by 2040. It intends to de-risk near-term projects as a cornerstone investor and support high-risk long-duration energy storage (LDES) technologies to enhance grid stability.
• Offshore energy: GBE aims to contribute to employment and economic development in Scotland and the Celtic Sea by investing in the emerging deepwater offshore wind sector, leveraging 25GW seabed exclusivity for strategic development. According to GBE's projections, these investments could support 100,000 UK offshore wind jobs and contribute £47 billion to the economy by 2030.

Ed Miliband, energy secretary, stated that the plan "shows what a publicly-owned energy company will deliver: an abundance of clean, homegrown energy for British people and thousands of good jobs across the country."

Ofgem publishes RIIO-3 final determinations 

Ofgem has now published its RIIO-3 final decision, covering the price control period between 1 April 2026 and 31 March 2031. This follows publication of the draft determinations earlier this year and the subsequent consultation.

Ofgem has committed to an initial investment of £28 billion across the gas and electricity networks - the split of investment being £17.8 billion for the UK's gas networks and the remaining £10.3 billion for the electricity transmission network. The investment is expected to rise to approximately £90 billion by 2031 across the two networks.

Notable in the RIIO-3 support for electricity is more "early-stage development funding", "strengthened delivery incentives to reduce system bottlenecks [and] connect customers more quickly" and a "stepped Totex Incentive Mechanism to balance cost efficiency and delivery risk"; and for gas "enhanced monitoring and delivery checks to ensure funded work is completed". 

The significant changes made by Ofgem from the draft determinations are: 

• A reduction in permitted investment by 15% from the previous RIIO-2 period, compared to the proposed 25% in the draft determinations;
• The increase in upfront expenditure by £3.2 billion (representing a 28% increase) for gas transmission. However, the amount confirmed is still below the amounts requested by network operators;
• Setting real-terms cost of equity allowances of 6.12% for gas networks and 5.70% from electricity transmission (a slight increase on draft determinations which were 6.05% for gas and 5.64% for electricity transmission).

Ofgem's analysis suggests that the funding will result in the network charges portion of bills increasing by around £108 by 2031 (gas: £48 and electricity: £60). However, the improvements to grid resilience will make for bill savings of around £80 in the same period (a predicted £50 due to electricity grid expansion lowering gas use and the reduction in constraints and associated costs), meaning a net increase of around £30. 

UK government publishes response to consultation on a hydrogen economic regulatory framework 

The UK government has published its response to its consultation on the proposed economic regulatory framework for hydrogen pipeline networks, following the consultation's closure on 9 September 2025.

The response confirms the government's intention to develop a regulatory framework to support the expansion of the hydrogen industry in the UK. Key outcomes include government-led development of a new hydrogen network code, maintaining primary and residual balancing licence structures, assigning system operator responsibilities to pipeline network owners, and initially exempting hydrogen supply to premises from licensing requirements.

Hydrogen network code development

The response confirms the development of a new hydrogen-specific network code, which the government will lead the development of, in collaboration with Ofgem and industry stakeholders. The code will adopt a "Minimum Viable Product" approach, prioritising essential requirements for early-stage hydrogen networks whilst maintaining scope and flexibility for future updates.

The government intends to retain an ongoing role in amending the code following implementation, to ensure strategic alignment with policy objectives. The majority of respondents to the consultation also indicated that hydrogen investment decisions are subject to seeing a near-final form of the code. In response, the government confirmed that it recognised the benefits of transparency in the drafting process and the publication of early iterations of the code, such as heads of terms.

It also confirmed that early hydrogen networks, including those funded through the Hydrogen Transport Business Model, will be subject to the code.

Balancing

The government has confirmed that it will retain the "primary" and "residual" balancing licensing structure for hydrogen pipeline networks, ensuring distinct roles and responsibilities for market participants. Hydrogen producers are expected to assume primary balancing responsibilities, as they are best placed given their direct control over gas flows. Other participants, such as offtakers, will also be able to apply, subject to meeting specific criteria.

System operation responsibility will be allocated to hydrogen pipeline network owners under their transporter licences, mirroring arrangements from the natural gas sector.

Licensing

The government also confirmed that it intends to introduce secondary legislation to initially exempt hydrogen supply to premises from supplier licensing requirements. This, the government states, will remove regulatory barriers from an emerging market and synthesise investment. This arrangement will be kept under review as networks develop and offtakers diversify.

It has also confirmed that it will not be introducing new licenses for regulation of activities including production and storage given the there are various other protections in place such as the Gas Act and other safety regulations. This position, however, will be kept under review. 

System operator

The government has confirmed that it will assign the role of system operator to hydrogen transporters. Its reasoning for doing so being that transporters (those who own the hydrogen networks) are best placed to undertake this role through their licence. It also concludes that the system operator role should include balancing, management of emergencies and ensuring networks are operating safely and efficiently.

If this response to consultation is of interest and you would like further detail, please get in touch with one of our experts.

DESNZ announces timeline extension for publication of the Strategic Spatial Energy Plan 

DESNZ has announced a delay to the publication of the Strategic Spatial Energy Plan (SSEP).

The SSEP is being developed by the National Energy System Operator (NESO) tospatially optimise the UK's energy system by assessing the location, quantity, and types of energy infrastructure required to meet future demand. (See further on the SSEP here and here).

NESO was previously expected to publish the SSEP in 2026. However, DESNZ has confirmed that this will now be delayed "by several months" to allow NESO to incorporate refreshed "cost inputs" and data into its modelling. These have been updated since the original publication of methodologies. DESNZ also acknowledged that this delay would potentially impact NESO's other regulatory deliverables on the Centralised Strategic Network Plan and Regional Energy Strategic Plans, which, together with the SSEP, form the three strategic energy plans being developed for the UK to meet net zero by 2050.

No revised publication date has yet been announced.

This article was written with the assistance of Oliver Derham and Adam Budd, Trainee Solicitors and Tomisin Agbonifo, Paralegal.