Referral of the modified Capacity Market scheme by the Department for Energy Security and Net Zero
Source: gov.uk (2025-03-28)

The Subsidy Advice Unit (SAU) has published a report providing advice to the Department for Energy Security and Net Zero (DESNZ) concerning its proposed Capacity Market scheme, as amended in 2025.

Administrative timetable

Final report

28 March 2025: The SAU has published its report providing advice to DESNZ concerning the proposed Capacity Market scheme, as amended in 2025. The report sets out the SAU’s evaluation of DESNZ’s Assessment of Compliance of its proposed scheme with the requirements set out in the Subsidy Control Act 2022.
- Final report (https://www.gov.uk/government/publications/report-on-the-modified-capacity-market-scheme) (28.3.25)
Request from DESNZ

14 February 2025: The SAU has accepted a request for a report from DESNZ concerning the proposed Capacity Market scheme. This request relates to a Scheme of Particular Interest.

The SAU will prepare a report, which will provide an evaluation of DESNZ’s assessment of whether the scheme complies with the subsidy control requirements (Assessment of Compliance). The SAU will complete its report within 30 working days.

Information about the Capacity Market scheme provided by DESNZ

The Capacity Market scheme was introduced in 2014 as part of the Electricity Market Reform scheme. It is the government’s principal mechanism for capacity adequacy, or in other words, for securing sufficient electricity supplies to meet future peak demand. The scheme ensures security of electricity supply by providing a payment for reliable sources of capacity, alongside their electricity revenues, to ensure they deliver energy when needed. This encourages the investment required to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources.

The Capacity Market has been designed to support generators, interconnectors, storage and active demand management in the electricity market. It secures electricity capacity through competitive auctions held four years ahead of the delivery year, known as the T-4 auction; and one year ahead of the delivery year, the T-1 auction, to effectively “top up” capacity closer to the delivery year should we need to (based on the latest information available such as the latest electricity demand forecast, and any commercial information).

The auctions are technology neutral, with existing capacity competing against a range of new generators, of different technology types, to obtain capacity agreements. Capacity providers receive regular payments in exchange for their capacity being available when consumers need it most i.e., when consumer demand is high compared to available electricity supplies. Capacity providers may face financial penalties if they fail to deliver against their agreements.

New build capacity can win agreements of up to 15 years. Longer agreements guarantee revenue certainty for capacity providers and de-risk the significant upfront capital investment involved in building new capacity. Existing capacity is allowed to compete for annual agreements, to incentivise investment in maintaining existing capacity, and reducing the overall cost to the consumer of having to continually invest in new build capacity.

The scheme has an annual delivery cycle. Two auctions are held each year with the auction targets set in July and later updated just ahead of the auctions. Capacity can apply to prequalify for the auctions from July to September, with auctions taking place a minimum of ten weeks from the Prequalification Assessment closing.

The auctions are a competitive process therefore it is not possible to precisely know what the costs of each auction will be in advance and there is no set budget. The costs depend on the number of entrants/volume of capacity bidding into each auction, which can drive the clearing price up or down, though this is limited to what is proportionate and necessary through the parameter setting process and various controls embedded into the scheme.

With regard to the scheme’s duration, a statutory instrument has been laid to revoke the requirement that capacity mechanisms must be approved for no more than ten years and removes the references to a temporary nature. This requirement is contained in the assimilated EU Electricity Regulation (2019/943), which was brought into domestic legislation following EU Exit.

These changes are being made to ensure the domestic statute book is consistent with the continued operation of the Capacity Market. To ensure the Capacity Market remains proportionate and limited to what is necessary, there are several controls embedded into the broader legislative framework. A decision can be made each year not to hold auctions, for example if there was no security of supply concern. There is also a statutory requirement to review the Capacity Market every five years, providing an opportunity to review the need for the scheme.

We are also proposing to implement several policy measures to improve security of supply and align the scheme with Net Zero, which were consulted on in October to December 2024. DESNZ is considering responses to this consultation and how to implement proposals. Several changes are likely to be more than administrative or legacy modifications and the scheme (as it is proposed to be amended) is therefore being referred to the Subsidy Advice Unit prior to implementation on the mandatory basis.

Information for third parties

If you wish to comment on matters relevant to the SAU’s evaluation of the Assessment of Compliance concerning the Capacity Market scheme, please send your comments on the date stipulated in the timetable above. For guidance on representations relevant to the Assessment of Compliance, see the section on reporting period and transparency in the Operation of the subsidy control functions of the Subsidy Advice Unit (https://www.gov.uk/government/publications/guidance-on-the-operation-of-the-subsidy-control-functions-of-the-subsidy-advice-unit/operation-of-the-subsidy-control-functions-of-the-subsidy-advice-unit).

Please send your submissions to the public authority: xxx@xxx.xx (mailto:xxx@xxx.xx).

Please also provide a contact address and explain in what capacity you are making the submission (for example, as an individual or a representative of a business or organisation).

Notes to third parties wishing to make a submission

The SAU will only take your submission into account if it can be shared with DESNZ. The SAU will send a copy of your submission to DESNZ together with its report. This is to allow the public authority to take account of the submission in its decision as to whether to modify the scheme or its assessment. We therefore ask that you provide express consent for your full and unredacted submission to be shared. We also encourage you to share your submission directly with the DESNZ using the email address provided above.

The SAU may use the information you provide in its published report. Therefore, you should indicate in your submission whether any specified parts of it are commercially confidential. If the SAU wishes to refer in its published report to material identified as confidential, it will contact you in advance.

For further details on confidentiality of third party submissions, see identifying confidential information in the Operation of the subsidy control functions of the Subsidy Advice Unit (https://www.gov.uk/government/publications/guidance-on-the-operation-of-the-subsidy-control-functions-of-the-subsidy-advice-unit/operation-of-the-subsidy-control-functions-of-the-subsidy-advice-unit).

Contacts
- CMA press team: xx-xxxx-xxxx or xxx@xxx.xx (mailto:xxx@xxx.xx)