Electricity Capacity (Amendment and Transitional Provision) Regulations 2026
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Lord Whitehead
That the Grand Committee do consider the Electricity Capacity (Amendment and Transitional Provision) Regulations 2026.
The Minister of State, Department for Energy Security and Net Zero (Lord Whitehead) (Lab)
My Lords, these draft regulations were laid before the House on 14 May. This instrument seeks to make technical improvements and changes to the capacity market, the Government’s main tool for ensuring security of electricity supply in Great Britain. Before I turn to the provisions in detail, I will outline some of the background to the capacity market.
Great Britain’s capacity market was introduced in 2014 and is designed to maintain security of electricity supply by ensuring that sufficient electrical capacity is available to meet future demand predictions. Through auctions held annually one year and four years ahead of delivery, the capacity needed to meet future peak demand under a range of scenarios is secured based on advice from the National Energy System Operator, NESO. Participants secure agreements through these auctions, requiring them to make capacity available at times of system stress. It is a technology-neutral scheme that pays providers for making capacity available when needed, covering generation, storage, consumer-led flexibility and interconnection.
Since its introduction, the capacity market has contributed to investment in around 20 gigawatts of new capacity needed to replace older, less efficient plants as we transition to meet our clean power 2030 target. To ensure that the capacity market continues to function effectively, we regularly amend the implementing legislation based on what is required to best ensure continued security of electricity supply.
This instrument will amend 11 regulations and introduce one new regulation in the Electricity Capacity Regulations 2014, amend two regulations in the Electricity Capacity (Supplier Payment etc.) Regulations 2014 and revoke one chapter of the Electricity Capacity (No. 1) Regulations 2019. The draft instrument will ensure that assets awarded a contract for difference, or CfD, following a direction from the Secretary of State will be allowed to participate in the capacity market until the start of the asset’s CfD support. This will better align the capacity market with our clean power 2030 ambition and ensure a smooth transition from payments under the capacity market to a CfD.
This draft instrument will strengthen delivery assurance by increasing termination fees and credit cover to restore their value broadly in line with 2016 levels in real terms. It will also make several amendments and a revocation to ensure that the legislation delivers on the policy intent. As a result, the Secretary of State and NESO will have the power to extend the pre-qualification deadline for an auction following a major IT outage. It will align the capacity market timetable with the ongoing market-wide half-hourly settlement reforms. Finally, it will also remove obsolete provisions.
Two public consultations were conducted in relation to the measures in this instrument towards the end of 2025. Respondents were broadly supportive of the measures included in the instrument that clarified regulations or enabled participants awarded a direct award CfD to manage their transition off capacity market payments. Responses to the delivery assurance reforms were more mixed, with some respondents raising concerns about the impact of higher termination fees and credit cover. The Government have proceeded on the basis that these increases are necessary to realign delivery incentives and strengthen delivery assurance. The changes are proportionate, aligning fees with their real-terms equivalent values in 2016, and will apply only to participants entering the scheme after the instrument comes into force.
We have also made several technical amendments to the capacity market rules, which support the changes made by these regulations, in the form of the Capacity Market (Amendment) (No.2) Rules 2026 laid before the House on 14 May. A final set of amendments to the capacity market rules will be laid on 13 July.
To conclude, this instrument will enable the continued efficient operation of the capacity market, so that it can deliver on its objectives, improve delivery assurance and ensure that the legislation is as clear as possible for all participants. I beg to move.
Earl Russell (LD)
My Lords, I thank the Minister for the clarity with which the instrument was introduced. The capacity market has served us well, and we welcome this examination and updating of its functionality so that it can continue to do so long into the future.
From these Benches, the Liberal Democrats have long championed a decentralised, resilient and, above all, clean energy system. We recognise the necessity of the capacity market as a mechanism that keeps the light on during periods of high demand and low generation, and we support the broad thrust of these technical reforms. They should improve confidence that providers can deliver on their obligations, increase value for money and help to further integrate low-carbon technologies into the market. These regulations may be highly technical, but it is important that they are looked at closely, so I hope the Minister will forgive me in advance for asking a couple of technical questions from these Benches.
I welcome the Government’s intent to strengthen the delivery assurance. The 30% increase in termination fees, and in initial credit cover from £10,000 to £13,000 per megawatt, rising to £19,500 for new-build units that miss their 11th-month financial commitment milestone, is a reasonable restoration of real-terms value, given that these figures have not moved since 2016. I find it surprising that these instruments, which govern so finely balanced a market, have not been updated for over a decade. As I understand it, even with these new regulations, there is no standing process to ensure that future regular updates are in place. Were such processes contemplated and examined in the work that was done in preparing this? What guarantees do we have that we will continue to see future upgrades to this important marketplace?
The plan to suspend capacity payments the moment an insolvency termination notice is issued is good stewardship of public money, and we do not oppose it. I am, however, concerned that in seeking real-terms parity, these changes may inadvertently raise the drawbridge behind the incumbents already inside the market. A near doubling of credit cover for those who miss a milestone is a serious sum for smaller storage developers or for demand-side responses, even if it is entirely reasonable for a more established or bigger generator. What assessment has been made of the impact of these credit cover changes on the smaller and newer entrants and on the diversity of technologies bidding in future auctions?
On the new provisions in relation to severe IT issues, which would allow the delivery body to extend the pre-qualification window by up to five working days, we generally welcome this flexibility and understand why this has been updated. But what objective threshold defines “severe”? Bidders deserve certainty that such extensions will be applied consistently and transparently and that they will not be left to the delivery body’s unreviewable discretion. I am not asking the Minister to be too specific, but are these changes partly motivated by any broader concerns about the future functioning of or threats to these systems?
On the treatment of contracts for difference, the instrument will allow a generator that receives a CfD via direct Secretary of State award to pre-qualify for the capacity market, provided that there is no overlap in the delivery period, yet auction-allocated CfD holders are not afforded the same route. I ask the Minister to explain the policy rationale for that distinction and confirm that it will not in any way create a two-tier system for low-carbon generators, depending on how they come by their contracts.
On the shift to accelerated reconciliation, cutting the final settlement from 14 months to four to align with the market-wide half-hourly settlement, we support modernisation, but faster reconciliation means less time to correct errors that might have crept in. What support is being offered, particularly to smaller suppliers, which may lack the systems to absorb the increased administrative velocity?
Finally, the instrument confirms that traditional gas-fired generation continues to sit comfortably within the capacity market alongside wind, solar, storage and demand-side response. Indeed, the market remains technologically neutral. It is worth saying clearly that our systems are among the most resilient in the world and these sensible upgrades will help to keep them that way.
I remind the Minister that this instrument, as sensible as it is, is no substitute for the deeper electricity market reforms that this country still needs. We continue to urge the Government to extend contracts for difference from 15 to 25 years. I have previously talked to the Minister about Greenpeace’s Power Shift proposals and the Minister has spoken about the openness of the Government to perhaps looking at a strategic gas reserve outside of the market. Obviously, those are conversations for another day. We are beginning to see signs of the decoupling of the gas and electricity prices, but more must be done. These changes would unlock future investment in renewables, strengthen our energy security and pass on cheaper home-grown power to consumers. I would welcome the Minister’s thoughts on how the Government plan to keep the capacity market under review and reform it further in the future and I look forward to his response.
Lord Whitehead (Lab)
I thank noble Lords for their important contributions to this debate. As I had slightly anticipated, the very specialist nature of elements of these regulations has been somewhat expanded on in the questions that have come forward in this afternoon’s debate. As I am sure the noble Lord, Lord Moynihan, is used to me saying, there are some areas where these things are really a debate for another day, but I will attempt to answer as well as I can the particular and constructive way in which the noble Lord put his wider points on the table.
To start with the narrower points on the regulations, concentrated on by the noble Earl, Lord Russell—I very much welcome his general support for this SI—he asks the key question, which I have asked officials myself: why have we not done anything about the level of the delivery arrangements, which were there in 2016 and are there today? Why are we therefore now raising those by 30%? On the main issue with the purpose of that raising, I cannot answer for why things were not done between 2016 and 2024, but I agree with the noble Lord that perhaps some consideration of a stepped change upwards, on an index-based arrangement or some such, might have been a good idea during those years. However, that is not the case and we are now faced with the position that we have to get these levels back to those 2016 levels to ensure, among other things, that there is a proper penalty consideration for providers who undertake participation in the capacity market, win a place in an auction and then, importantly, when it is their turn to come on stream, because of a particular issue that needs to be resolved, simply do not do so and cannot do so because the penalties for not doing so are so relatively slight. It is important that we know that there is a properly regulated delivery arrangement so that we can genuinely rely on the capacity market to operate itself properly when those calls are made.
This rise, although perhaps not ideally graduated for the reasons I have mentioned, is nevertheless proportionate. It takes us back to the situation that we were in, in the earlier days of the capacity market. It is a question not of introducing much larger fees but of getting us back to a position where the guarantees are affordable and the delivery mechanisms are not overly punitive, so that we can say that this is a reliable market for the future.
The noble Earl asked about IT issues and what a severe IT outage is. In essence, the SI is drafted to give the Secretary of State some leeway in determining a serious IT outage—and not just that but whether it affects the operation of the capacity markets, bidding and settlement arrangements. In that context, the Secretary of State would have the ability to determine what a severe outage is: obviously, it is not the lights going off for two minutes, when everyone is happy again afterwards. It would be a serious issue within the range that the Secretary of State can consider.
The noble Earl also asked about the provision in these regulations that relates to the holder of a capacity market arrangement being able to transition it to a CfD at a future date. As he rightly points out, that does not apply to those who have allocation via an auction but applies to those who have allocation by specification. Under those arrangements, if a body is seeking an extension to its existing operations, for example, and has negotiated an allocated CfD to allow that to happen, that organisation may be in receipt of capacity market arrangements until that CfD has been allocated. However, once that CfD has been allocated, it would clearly not be eligible for capacity market arrangements, because it has a CfD and the two cannot be run at the same time. The solution under those circumstances is to enable the body that has sought that extension to run its capacity market arrangements until such time as that CfD comes in—it may be a little down the line—and, at that time, to make a smooth transition from one to the other, but not to run both at the same time. That clears up a number of issues about the allocation of CfDs.
The noble Earl asks about half-hour settlements and the arrangements that smaller companies might make around the burdens related to them. We think that they are also fairly proportional, as these are not particularly onerous burdens to place on companies if they have undertaken a capacity market arrangement. The bidding process should properly have taken them into account before the company went into the capacity market in the first place. I believe I have addressed most of the noble Earl’s technical issues but, if there are any still outstanding, I am happy to write to him to clarify those points.
The noble Lord, Lord Moynihan, raised a number of very important but rather wider points. His first question was about whether the public are going to pay more and more for capacity market payments over a period. I cannot give him complete comfort on that point because, as he will know, both the T-1 and T-4 auctions will come forward at a settlement level based on what capacity is required—or thought to be required —at that particular time, how many people are competing for that particular capacity market, and how things may then turn out in terms of how the auction works.