Electricity Capacity (Amendment and Transitional Provision) Regulations 2026
House of Lords · Grand Committee · 7 Jul 2026 · 26 speeches · Official Report
Considered in Grand Committee
Moved by
That the Grand Committee do consider the Electricity Capacity (Amendment and Transitional Provision) Regulations 2026.
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....
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...
My Lords, I declare my interests as chair of Amey, an infrastructure and support service company in the UK, Acteon, a global subsea engineering company with interests in offshore wind and oil and gas production facilities, and Buckthorn Partners, which invests in energy transition companies. I am grateful to the Minister for introducing these regulations and for broadening our debate to a wider consideration of the capacity market, which allows me to make a few additional comments. As he said, these regulations make technical amendments to the capacity market, so let me address that first. They provide reliable power generators with CMU auctions at either one year, T-1, or four years, T-4, ahead of when they must deliver future electricity capacity. Does he agree that this instrument allows the capacity market delivery body to extend the window for generators to apply to pre-qualify for the capacity market in the event of a severe IT issue? I believe that he does, but I would like him to confirm that. I ask the Minister to confirm that the changes in these regulations will not be retroactive. Again, I understand that they will not, but it would be good to have that on the record. As I read it, the instrument accelerates the timetable for reconciliation runs in which the CM settlement body must make reconciliation payments to generators, subject to Ofgem approving them to do so. I would be grateful if the Minister could tell the Committee when the new timetable is expected to...
The instrument itself is not controversial. As the Minister informed the Committee, the majority of the respondents to the consultation agreed with the measures, but there was inevitable pushback against the increase in termination fees and the credit cover, which is understandable. While speaking on this, I take the opportunity to ask a few related questions. The UK capacity market was introduced to guarantee security of supply, so how does the Minister respond to the critics who argue that it is costly, hinders the net-zero transition and distorts the free market? Critics contend that, instead of bridging temporary gaps, it has locked billions of pounds into older fossil fuel infrastructure at the expense of greener alternatives.
On unnecessary subsidy and consumer costs, how does the Minister respond to critics who say that the system is funded by a compulsory levy added to consumer bills? Critics argue that the capacity market often subsidises older power plants that would have remained operational anyway to capture wholesale energy prices. This has been compared to state aid that inflates energy bills unnecessarily.
How would the Minister respond to discrimination against new and flexible tech? Emerging technologies, such as demand-side response and battery storage, struggle to compete. Critics point out that these technologies do not have access to the same long-term contracts that power stations receive, making it difficult for them to secure financing.
How does the Minister respond to flawed derating and overprocurement? To measure the reliability of intermittent renewable sources, the Government apply derating factors. Analysts and think tanks have criticised these metrics for overestimating the reliability of imported energy interconnectors and underestimating the contribution of wind and solar, often leading the grid to overprocure expensive capacity. I add to that a question about how the capacity market charges materialise on commercial bills. Is it the case that capacity market charges typically account for 6% to 10% of a standard business energy bill while, for heavy manufacturers and industrial users, they can represent up to 30% or indeed even 50% of total power costs?
The Minister, via the National Energy System Operator, recognises and utilises the capacity market to pay gas suppliers and power stations a steady retainer to guarantee electricity grid reliability and to prevent blackouts during the increasing numbers of supply crunches that we face. As the UK slams down the accelerator on a high-cost transition to clean energy, with no attention paid to low-cost energy, the economic landscape of the power grid has changed, forcing the Government to adapt and restructure these capacity payments.
As wind and solar power increasingly dominate the grid, they drive wholesale electricity prices down during peak generation periods. Because gas power plants are used less frequently and are back-up generators, which are absolutely essential, they cannot survive financially on electricity sales alone. As the Government know, the capacity payment solves this missing money problem by paying gas plants simply to remain open and on standby for when renewables drop off. The costs rise every year by billions of pounds.
Does the Minister accept that much of the UK’s existing fleet of combined cycle gas turbine-CCGT-power stations is aging and facing steep maintenance costs? Without guaranteed capacity contracts, commercial operators would choose to decommission these facilities early because they are unprofitable. To counteract this, the Government lowered capital expenditure thresholds to subsidise the refurbishment and life extension of these essential back-up plants.
I conclude by saying that the Tony Blair Institute, which always issues wise and considered views on the energy market, recently stated:
“Clean power 2030 must become cheaper power 2030, fundamentally changing the prism through which every energy decision is made”.
In a blog post for arguably a soft Labour opinion website, Ryan Wain, the executive director of the TBI, urged Mr Burnham to prioritise ditching Mr Miliband’s 2030 net zero target. He said:
“The … Prime Minister must start by recognising that the real enemy is not Nigel Farage but Britain’s decline. Confronting it requires a single day-one plan that generates the real and political capital to make Britain powerful again. That starts with literal power-and making it as cheap as possible. This requires a change of mission”.
Does the Minister agree with me that our paltry storage capacity, which has significantly deteriorated under this Government, forces the UK to rely heavily on just-in-time deliveries and daily production? Does he agree that purposely increasing the UK’s reliance on imports is rising as North Sea commercial gas reserves deplete, making the nation increasingly dependent on pipelines from Norway and global LNG? Does he also agree that, as we have seen from this instrument, because of the UK’s clean power transition, gas power stations are still needed to provide back-up when wind and solar drop off, resulting in highly volatile demand-a position exacerbated by the zealotry of DESNZ and the Secretary of State, who surely cannot be going anywhere near the Treasury?
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...
As the noble Lord mentioned, the most recent T-1 capacity market auction cleared at a very low amount per kilowatt hour per year and secured over seven gigawatts of derated capacity for 2026-27 delivery at a total cost of only £36 million. It was a relatively cheap-if you want to put it that way-settlement of the auction. A much larger amount of capacity-57.4 gigawatts-has been procured under the T-4 capacity market auction, and that cleared at a price of 27.1 kilowatts per year and secured over 40 gigawatts of derated capacity for delivery in 2029-30. On the basis of those figures, we consider that the contribution to the typical annual household bill is about £37 for T-1 and about £12, in 2029 prices, but not until those capacity market agreements take up in 2029.
So, yes, there is a cost to households, but it is not inevitably rising. One has to make a judgment as to whether that is a reasonable amount for households to pay for the assurance that the lights will not go out over those periods and that the delivery of power will be firm and continuing, backed up by that capacity market certainty.
The noble Lord, Lord Moynihan, also asks about the role of the capacity market as the market changes overall, and again I cannot give him any immediate comfort on that inasmuch as he is quite right. But as the march of renewables and low-carbon energy continues -although, of course, the capacity market can apply to low-carbon, non-intermittent technology as well as to high-carbon technology; it is not just gas for the future-with gas going to a much more marginal place in the order of delivery, there will be a heightened position concerning whether those gas plants will be completely reliant on the capacity market and would otherwise go completely out of business if they are running only about 5% of nameplate per year, for example.
Clearly, there is a question of reviewing overall how the capacity market works in the long-term future. Indeed, the noble Earl, Lord Russell, asked what you do with those gas-fired power stations, which, as the noble Lord, Lord Moynihan, mentioned, are ageing. Some of them will go out of business fairly soon because of their age-they were built in the early 1990s. Others may be mothballed or go out of business simply because they cannot live on 5% of capacity over a period.
The capacity markets will certainly have to support those, going forward. The noble Lord said, and I agree, that gas will be with us for a long time but with a rather different role over the future period, in the 2030s. It may be that we will need to continue to review the role of the capacity market, just as we have done over the period since it came in, to make it fit for purpose for that particular period in the future.
I am being told to wind up. I hope I have addressed the noble Lord’s wider comments, but if he considers that there are any points I have not engaged with, I am certainly very happy to write to him on those. I hope that we have covered these points reasonably well this afternoon. I ask that noble Lords agree this instrument, because it will enable the continued efficient operation of the capacity market so that it can deliver on its objective, improve delivery assurance and ensure that the legislation is as clear as possible for all participants.
Motion agreed.