Modernising the UK Capacity Market: Key Takeaways for Generators and DSR Providers

Since its introduction in 2014 under the Electricity Market Reform programme, the Capacity Market (CM) has been a crucial mechanism in ensuring the security of electricity supply to UK consumers. 

In June 2025, the Department for Energy Security & Net Zero (DESNZ), published a response to its consultation on proposed amendments to the framework which organises the CM (the CM Rules). Shortly after this, Ofgem published a corresponding decision on its statutory consultation on CM Rule change proposals. 

The changes proposed by DESNZ and Ofgem are intended to improve the operation of the CM for participants and clarify existing ambiguities under the CM Rules. 

Background

As the UK moves towards a decarbonised grid, on-demand flexibility is increasingly important in matching intermittent wind and solar generation with consumer requirements. The CM is, in essence, the insurance policy which ensures security of supply. This scheme is operated by the EMR Delivery Body.

The CM offers financial incentives to businesses if they can be available at times of system stress. This capacity comes in one of the following two forms:

1. Generation: this includes power stations or energy storage systems which can provide electricity on demand during exceptional periods (e.g. times of particularly high demand, or times when generation units are offline). These can be either existing generators looking for payments to subsidise operation costs or new-build generators seeking a CM contract at the project financing stage. 
2. Consumer led flexibility: This primarily takes the form of demand side response (DSR), where businesses adjust their energy demands in line with signals from the grid to help manage capacity. Similar to generation, these can be proven or unproven technologies/offerings, noting that unproven offering face a more rigorous application process. 

Potential CM participants who operate a generation asset or consumer led flexibility offering (CM Units) must first pass pre-qualification steps to prove eligibility for the scheme before competing in a reverse auction; those participants who have satisfied these steps are said to have ‘pre-qualified’. Participants bid by indicating the lowest price at which they are willing to provide capacity from a CM Unit. The auction continues until the required capacity (as set by the EMR Delivery Body) is secured at the most cost-effective price, regardless of technology. There are two auctions each year: one for the following delivery year (the T-1 Auction); and one for the delivery year four years ahead (the T-4 auction). The T-4 auction assigns most of the volume and is crucial to the bankability of new-build generators which can receive contracts up to 15-years. The T-1 auction is a smaller top-up auction to ensure capacity matches predicted demand.

Successful participants then receive monthly payments for their readiness to provide capacity, which they must be able to offer at four hours’ notice. Payments to participants are based on two factors: (i) their potential capacity; and (ii) their deemed likelihood of being able to provide such capacity as any given time (known as the de-rating factor). 

Overview of the Consultations

DESNZ

DESNZ held a consultation on changes to the CM Rules between December 2024 and February 2025, receiving 25 responses from a broad range of stakeholders, including DSR providers, delivery partners, electricity suppliers, generators and industry trade bodies. Proposed changes to the CM Rules aim to:

1. Modernise existing CM Rules, by improving clarity and removing outdated provisions; and
2. Enhance participation and delivery assurance for consumer-led flexibility, primarily through DSR incentives.

Respondents broadly welcomed the proposed changes, underscoring that the revisions would reduce administrative burdens, streamline eligibility, and improve delivery assurance.

Ofgem

Ofgem held a consultation from 9 January to 19 February on five proposed changes to the CM Rules. The proposed changes, effective from the 2025 prequalification submission window, address critical operational challenges facing capacity providers.

In its decision, Ofgem approved four of the proposed changes with varying degrees of modification but rejected one that would have significantly impacted demand-side response providers.

Key Proposed Changes to the Capacity Market Rules

1. Modernising the Rules

This tranche of proposed changes to the CM Rules is intended to provide greater clarity for potential participants and make clearer the remit of the EMR Delivery Body in administering the scheme. 

Opt-out status changes

• Participants can currently ‘opt-out’ of auctions in a given delivery year where they will not be able to participate (e.g. when undergoing maintenance or upgrades). Under the proposed rule change, such participants would be allowed to change this status if new operational information emerges before the relevant delivery year which would allow them to participate.

Clarification on updating the Capacity Market Register

• The proposed rules changes will make it clear that participants may not alter the generating technology class of a CM Unit after pre-qualification, preventing ambiguity where different technology classes are aggregated in the register.

Capacity calculation method changes 

• Ofgem’s proposed rule CP381 re-introduces an additional method previously available under the CM Rules for calculating capacity which provides potential participants with increased flexibility in making their applications. 

EMR Delivery Body decision-making powers

• A further proposed rule clarification confirms that if new information reveals a CM Unit no longer meets pre-qualification requirements, the EMR Delivery Body can change a pre-qualification decision before the auctions.

Extension for mothballed plant

• This proposed change reinforces the temporary allowance for ‘mothballed’ (inactive but ready to use) CM Units to use their most recent 24 months of data for pre-qualification, acknowledging that some plants need extended offline periods (e.g. for conversions).

Protecting CM Units facing connection delays

• Under the existing rules, CM Units facing connection delays due to expanding grid connection queues must reapply for an extension to their long stop date each year. As part of the Ofgem changes, new rule CP371 will allow participants to instead extend their long stop date based on planned connection dates in a single application, which will minimise the administrative burden on such participants.

Administrative clarifications and streamlining

• Ofgem’s proposed rules CP376 and CP377 amend the effective definitions of agent and portfolio respectively. The change in the definition of agent is intended to prevent a single agent or agent group acting for multiple applicants from different groups. There were concerns that this could allow system gaming, leading to market power concentration. Meanwhile, CP377 allows portfolios to be formed across company groups, which would remove the administrative burden of ownership transfers to holding companies when multiple CM Units are owned by a common parent but entered under different applicant companies.

Removal of redundant provisions and drafting errors

• Under the proposed changes, chapters and rules covering expired arrangements (e.g. COVID-19 measures and certain auction-specific provisions) will be removed, in order to simplify the overall framework. In addition, errors such as those in Exhibit ZA (referencing Rule 3.15.6(b) which does not exist) will be corrected to maintain consistency and accuracy.

1. Consumer-Led Flexibility Reforms

This tranche of proposed changes to the CM Rules is designed to create a less burdensome and more effective framework for consumer-led flexibility offerings, particularly DSR.

Streamlining DSR business model submissions

• DSR participants can now consolidate ‘duplicative’ or ‘similar’ CM Unit components into a single line entry in their applications, reducing the administrative burden for both providers and the EMR Delivery Body. For example, a DSR participant may have a portfolio of thousands of EV charging stations at different properties which can be managed to provide capacity on demand. Under the proposed rule change, instead of requiring a ‘portfolio DSR provider’ to provide individual entries for every charging station, these could be grouped in a single application.

Separation period for DSR Tests

• Under the CM Rules, DSR providers must carry out a DSR test at the pre-qualification stage to prove that they can provide the necessary capacity in the four-hour time window. The proposed rule changes include the introduction of a gap between the DSR test deadline and certain other pre-auction milestones (e.g. metering assessments), set at 10 working days for the T-1 auction and 20 working days for the T-4 auction. This separation aims to ease last-minute bottlenecks and reduce risks related to validations and test scheduling ahead of the auctions.

Termination fees for failing to deliver a DSR Test

• A notable change to the CM Rules is the proposal to introduce a new termination fee (£5,000/MW) for unproven DSR CM Units that fail to produce a DSR test certificate by the required deadline. This aligns with other comparable termination events (e.g. metering test failures) and is intended to deter speculative entries that undermine security of supply.

Removal of 50MW CM Unit Limit (Rejected)

• Ofgem notably rejected the proposed rule change CP378, which would have removed the 50MW limit on individual CM Units in portfolios due to strong opposition from demand-side response providers, who cited fundamental business model challenges. This rejection shows a commitment to protecting diverse participation in the CM. 

1. Amendment to Phase 2 Changes: Low Carbon Declaration

• The final proposed rule change relates to a discrete point relating to ‘Low Carbon Declaration’ timings which arose under the Phase 2 changes. These Low Carbon Declarations are statements which set out the CM Unit’s emissions characteristics and provide certain benefits to declarants under the CM. One of the benefits of submitting such a declaration is that CM Units falling below a certain low-carbon threshold are permitted to transfer their CM obligations to another company (known as secondary trading). Under the proposed changes, the CM Rules will now permit those providers to submit a Low Carbon Declaration after an auction, preserving their eligibility for secondary trading. Previously this was only permitted at the pre-qualification stage.

Next Steps

The Government intends to implement these changes through amendments to the CM Rules (see Capacity Market (Amendment) Rules 2025) and Electricity Capacity Regulations 2014 ahead of the 2025 pre-qualification window. A further response to the associated Call for Evidence on consumer-led flexibility will be published later in 2025.

Participants in the CM, including generators, DSR providers, and intermediaries should review these reforms and prepare for updated compliance obligations and opportunities, especially in relation to DSR processes, termination fee exposure, and new registration and opt-out provisions.

Additionally, on 30 June 2025 Ofgem opened a further public consultation on proposed rule changes which would allow projects with a grid connection date more than four years from the T-4 Auction to gain conditional prequalification where such project has applied for accelerated grid connection under the NESO Connection Reform Package. Participants in the CM should consider these proposals and the possibility of benefiting from any resulting changes.  

The Bird & Bird team has substantial experience in advising energy clients on all aspects of energy regulation. If you have any questions, please contact Peter Willis or Hadrien Espiard.