The Energy Transition | UK government sets out Capacity Market reforms ahead of Prequalification 2026

This week we look at amendments to Contracts for Difference to implement Clean Industry Bonus reforms, the introduction of a commitment fee for oversubscribed technologies through CMP470, proposed changes to the RIIO-2 Electricity Price Control Financial Instruments and Ofgem's decision to approve early construction funding for a further set of energy projects. 

UK government sets out the Capacity Market reforms ahead of Prequalification 2026 

The government has published its response to the consultation on proposed changes to the Capacity Market (CM) ahead of Prequalification 2026. The consultation, which ran from 2 October to 27 November 2025, detailed a range of proposals for reform, including the Multiple Price Capacity Market (MPCM) and reforms addressing auction information, Demand Side Response (DSR), battery storage and biomass sustainability criteria, as well as various administrative improvements. 

Proposals proceeding

Auction information and efficient bidding

The government plans to increase the excess capacity rounding threshold from 1GW to 3GW.  In addition, the publication of prequalified capacity data will be delayed from the pre-auction stage, with a consolidated, rounded figure published periodically instead. These changes are designed to reduce strategic bidding by limiting the market intelligence available to participants ahead of and during auctions

DSR reforms

A comprehensive package of DSR reforms will proceed, including streamlined component notification for small assets (the reporting threshold for individual component notification will be revised to 30kW), improved data capture on technology and customer type within the DSR category, stronger multi-year evidence requirements, a floor threshold of capacity demonstration (set at minimum 50%) relative to Capacity Obligation during DSR tests, an interim extension of the current de-rating methodology, and the introduction of termination fees for the non-declaration of Permitted On-Site Generating Units.

Battery energy storage system 

CM units will be permitted to self-nominate their connection capacity, subject to a 50% floor relative to full connection capacity, stated to reflect a "fair assessment of the maximum expected loss of capacity due to degradation".  Additional information will be required, including the full connection capacity and the self-nominated capacity.

Biomass sustainability

The government will implement a Renewables Obligation-based interim sustainability framework for eligibility for low-carbon benefits in the CM, with enhanced criteria for CM-eligible woody biomass of 1MW and above. This biomass will need to be evidenced as 100% sustainable, with stricter supply-chain emission requirements and the exclusion of old-growth forest material.  No changes will be made to enable Energy from Waste (EfW) generators to access low-carbon CM benefits.

Administrative improvements

These will include introducing a definition of "waste" into the CM Rules for EfW purposes, clarifying de-rating rules, suspending Capacity Payments to any Capacity Provider during insolvency termination events, introducing TF8 termination fees for false declarations, allowing the Delivery Body to extend the Prequalification window by up to five working days for severe IT-related issues, amending the definition of 'Long Stop Date' for one-year agreements so that it is fixed at the start of the Delivery Year, irrespective of whether the agreement was awarded through a one-year-ahead T-1 or four-years-ahead T-4 auction), and amending the Electricity Capacity (Supplier Payment etc.) Regulations 2014 to enable alignment with the Market-wide Half-Hourly Settlement timetable.

Proposals not proceeding

MPCM proposals 

Having previously trialled, the government has decided not to proceed with the MPCM ahead of Prequalification 2026, following concerns that the MPCM would: increase consumer costs without additional security of supply benefits; depart from technology neutrality; and risk driving early retirements.

DSR testing following component reallocation

The government has decided not to proceed with this proposal, acknowledging that requiring additional tests could disincentivise active component portfolio management. 

ITE reports and penalties 

The government has decided not to proceed with independent technical expert (ITE) reports at this stage. Instead of using ITEs, it will work with the Delivery Body to issue guidance and a standardised template to provide Capacity Providers with further direction when completing reports.  Further measures will be consulted on if compliance does not improve. 

Implementation of the changes will take place prior to the commencement of Prequalification in July by way of amendments to the Capacity Market Rules 2014, the Electricity Capacity (Supplier Payments etc.) Regulations 2014, and the Electricity Capacity Regulations 2014.

UK government publishes response to consultation on CIB contract amendments for AR8 

The government has published its response to the March 2026 consultation on the contractual changes needed to implement the Clean Industry Bonus (CIB) reforms for Allocation Round (AR) 8

The government has confirmed it will take forward certain proposed amendments to schedule 2 of the CfD contract, in order to effect the required changes to the CIB.

In February, the government published its final policy positions on the CIB reforms, which included the introduction of workforce protection and skills investment criteria, the extension of the CIB to onshore wind from AR9, the introduction of project-level bids; and a payment on delivery mechanism.

The principal contractual changes to the CfD relating to the CIB confirmed in this response relate to definitions and scope, payment on delivery, phased projects, secretary of state determinations and payment mechanics.

Definitions and scope

New definitions of CIB financial minimum standards and non-financial CIB minimum standards will be added to schedule 2 of the CfD. The distinction between them is operationally significant: failure to meet the financial minimum standards will give rise to performance-related adjustments to CfD payments, whereas failure to meet the non-financial minimum standards will result in forfeiture of CIB payments only, without any performance-related adjustments to the CfD payments. In addition, the scope of schedule 2 will be expanded so that the contract can accommodate technologies beyond fixed and floating offshore wind in future allocation rounds.

Payment on delivery

The government has confirmed the introduction of a payment on delivery mechanism, allowing CIB payments to commence once a generator has obtained a CIB implementation statement, rather than waiting until the CfD Start Date. This addresses a structural issue in the AR7 payment system under which generators could expect to wait one to three years after completing their supply chain investments before receiving CIB payments. 

The Low Carbon Contracts Company (LCCC) will retain discretion over the timing and profile of payment instalments, subject to all payments being made no later than the end of the fourth year following the relevant contractual milestone. The government concluded that introducing a more prescriptive payment deadline could create unintended consequences, including reducing the LCCC's ability to manage payment flows efficiently and increasing settlement volatility.

Phased projects

Following representations from respondents, the government has confirmed that, for phased projects, once the financial minimum standards have been met, the project may apply for a CIB implementation statement for the whole unit without waiting until the final phase has been delivered. The requirement for obligations to be placed on the final phase is a backstop to ensure delivery and does not delay the right to apply for an Implementation Statement where all relevant requirements have already been met.

Secretary of state determinations

The government will take forward the changes to section 7 of schedule 2, making the secretary of state's determinations on performance-related adjustment amounts and CIB Extra Commitment Reward amounts conclusive and binding on both the generator and LCCC. 

One respondent proposed the introduction of an appeals mechanism: however, the government has declined to implement this on the basis that this would undermine the finality of secretary of state determinations. The Department for Energy Security and Net Zero will instead hold monitoring meetings with generators at least twice a year, at which a clear record of feedback will be kept and shared.

Payment mechanics

The government will take forward the introduction of section 11 (payment amounts) to schedule 2. This sets out four categories of payment: two where LCCC receives funds, being the minimum standards performance-related adjustment and the minimum standards performance-related instalment; and two where the generator receives funds, being the extra commitment reward amount and the extra commitment reward amount instalments. This change ensures consistency with the payment mechanics in the CfD's standard terms and conditions.

Ofgem opens consultation on modifications to RIIO-ED2 Price Control Financial Instruments 

Ofgem has opened a consultation on two proposed modifications to the RIIO-2 Electricity Distribution Price Control Financial Instruments. Subject to the outcome of the consultation, the changes are proposed take effect from 1 July 2026.

The main change proposed is the addition of a new pass-through mechanism to the RIIO-ED2 Price Control Financial Model, which would allow electricity distribution network operators to recover costs incurred as a result of implementing TMO4+ as part of connections reform (i.e. the one-off "Gate 2 to Whole Queue" exercise from code modification proposal (CMP) 435). The new mechanism follows an earlier amendment to the electricity distribution licence special conditions and is intended to implement that change and to ensure that the financial model reflects the evolving cost environment that distribution network operators are navigating as connections reform takes effect. Ofgem does not consider this change to constitute a significant modification.

Responses should be submitted by 8 June 2026 via email to david.simpson@ofgem.gov.uk. 

Ofgem approves fast-track review of commitment fee for oversubscribed grid connections 

By way of update in relation to the connections reform process, Ofgem has approved the request for urgent progression of the Connection and Use of System Code Modification Proposal CMP470, given its potential significant impact on industry.

The CMP470 proposal seeks to introduce an in-queue commitment fee payable by projects for technologies that are oversubscribed relative to the capacity ranges in the Clean Power 2030 Action Plan (CP2030) with a view to deterring  unviable projects from remaining in the queue to connect. Battery storage projects are the focus, as there appears to be a surplus of 14.8GW of battery storage capacity (and 61.7GW over the 2035 target) currently in the queue.

The commitment fee would start at £10,000/MW and could incrementally increase to £25,000/MW depending on the enduring surplus, with Ofgem reviewing the position every six months. During the consultation for this proposal, alternatives were proposed such as: a one-off fee payable nine months after the acceptance of a Gate 2 offer such fee to be fully refundable upon energisation; and delaying the payment of the commitment fee until 12 months from acceptance of a Gate 2 offer, to better facilitate "natural queue attrition" and avoid disproportionate discrimination against smaller developers. 

Ofgem has decided that CMP470 should be progressed on an urgent basis. Ofgem has committed to making a decision on the original CMP470 proposal "at the earliest opportunity", and as soon as is reasonably practicable after receiving the Final Modification Report. 

Ofgem greenlights early construction funding for 26 strategic transmission projects 

Ofgem has announced approval of early construction funding (ECF) for a number of large electricity transmission projects in Scotland, meaning that ECF has now been granted across all 26 projects in the Accelerated Strategic Transmission Investment (ASTI) programme. ASTI, launched by Ofgem in 2022, is designed to expedite regulatory assessment of strategically important transmission projects by streamlining the approval process. The 26 projects were selected on the basis that they represent strategically important enhancements to the electricity transmission network, identified as necessary to support the government's clean power targets.

ECF allows Transmission Operators (TOs) to receive funding to begin early procurement of in-demand long-lead materials, strategic land acquisition, surveys and design work, ahead of receiving full planning consent. TOs finance transmission projects through debt and equity, underpinned by Ofgem's RIIO price control framework, under which efficient costs are recovered over time through network charges on consumer bills. 

The ECF approval relates only to each project's eligibility for early funding; a full cost efficiency assessment will follow, to ensure that only costs judged efficient will ultimately be recoverable from the consumer.

Projects awarded ECF span a range of onshore and offshore infrastructure, including high-voltage direct current  subsea links, overhead line upgrades, and new substation construction across Scotland.  Subject to planning consents, the current construction programme targets completion of the upgrades by 2030.

This article was written with the assistance of trainee solicitors  Alice Smith, Elise Hill, and Maggie Hudson, and solicitor apprentice Jackson Clay.