HANSARD
Electricity Capacity (Amendment and Transitional Provision) Regulations 2026
- Considered in Grand Committee
- 3:45 pm
- 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.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.
- 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?
- 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 be called into force.The most recent T-1 auction for 2025-26 secured 7.9 gigawatts of capacity compared with 7.6 gigawatts in 2024. The most recent T-4 auction secured 43.1 gigawatts of capacity compared with 42.8 gigawatts in 2024. Let us be clear and blunt about this: the public are being forced to pay an extra £600 million this year to ensure that there is back-up capacity for the already more expensive renewables that they are subsidising. Conventional forms of power generation from existing generating capacity, including nuclear and gas, were the most common source of capacity in the most recent auction, with 3.6 gigawatts of capacity coming from nuclear and 2.4 gigawatts coming from gas. Electricity supply from gas and overseas interconnectors were the most common source of capacity in the most recent T-4 auction, with 27.3 gigawatts of capacity coming from gas and 6.8 gigawatts coming from interconnectors.
- 4:00 pm
- 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”.