The Energy Transition | Grid connections reform continues at pace

This week we look at the continuing grid connection reforms, DESNZ's consultation on changes to the Capacity Market, Ofgem's call for input into its long duration energy storage cap and floor mechanism, and more.

Grid connections reform continues at pace

On 20 December 2024, NESO submitted its final methodologies on connections reform for approval by Ofgem, along with the proposed code modifications CMP434, CMP435 and CMP095. These modifications will introduce the reforms into the Connection and Use of System Code (CUSC). As previously reported, the final submissions came after NESO published draft connection reform documents for consultation on 5 November 2024, alongside its Clean Power 2030 report.

The methodologies include:

• the Gate 2 Criteria Methodology;
• the Project Designation Methodology; and
• the Connections Network Design Methodology.

Gate 2 Criteria Methodology

This methodology sets out what projects will need to demonstrate in order to be allocated a confirmed connection date, connection point and queue position. Projects must meet i) the Gate 2 Readiness Criteria (by meeting either the Land or Planning requirements) and ii) one of the Gate 2 Strategic Alignment Criteria.

A key update in NESO's final proposals is the confirmation that projects can meet the Gate 2 strategic alignment criteria by being eligible for "protections". These include, for example, projects which are significantly progressed (for example, have obtained planning consent where the application was submitted on or before 20 December 2024) or hold a CfD or a CM agreement by the closure of the Gate 2 to Whole Queue application window.

Project Designation Methodology

This methodology document sets out which projects can be prioritised as "designated" projects in the reformed queue and therefore meet one of the Gate 2 Strategic Alignment Criteria (for example, projects that are critical to the security of supply).

Designated projects will get priority access to available capacity/earlier connection dates and they may be eligible for acceleration post-Gate 2 if other projects are removed from the queue.

Connections Network Design Methodology

This methodology provides an overview of NESO's approach to assessing new Gate 1 and Gate 2 applications under the reformed connections process, TMO4+.

The methodology also sets out the approach being taken to apply the Gate 2 criteria to the existing queue, and describes how capacity will be reallocated following termination or Gate 2 offer rejection.

Next steps

NESO anticipates a decision from Ofgem on the updated methodologies, the impact assessment (which was published along with the methodologies) and final Code Modifications by the end of March 2025. The impact assessment indicates that NESO and Ofgem aim to implement the reforms on 1 May 2025 and start issuing Gate 1 offers from Q2 2025. NESO has also committed to issue Gate 2 offers by the end of 2025.

DESNZ opens consultation on proposed changes to the Capacity Market

The Department of Energy Security and Net Zero (DESNZ) launched a consultation on 16 December seeking views on proposals to modernise Capacity Market Rules, improve participation and ensure the future security of supply. The Capacity Market (CM), established in 2014, aims to secure sufficient capacity to meet electricity demands in Great Britain, which is particularly relevant as the UK transitions towards a cleaner energy system.

Key proposals within the consultation include:

• Simplifying the Capacity Market Rules: The proposed changes aim to clarify and streamline the existing rules governing the CM, making it more accessible to participants while ensuring it remains effective in securing electricity supply. The government is proposing amendments to improve clarity and accessibility, including allowing Capacity Market Units (CMUs) to change their opt-out status based on new information, clarifying that CMUs cannot change their generating technology class after prequalification and removing outdated rules related to transitional arrangements. These changes aim to streamline the CM rules and support the government's Clean Power mission.
• Consumer-led flexibility: Consumer-led flexibility in the CM is facilitated through demand side response (DSR) mechanisms, allowing consumers to adjust their electricity usage and receive capacity payments via DSR service providers. The consultation emphasises enhancing consumer participation through DSR mechanisms. The CM can reduce overall demand and reliance on additional generation capacity by allowing consumers to adjust their electricity usage during peak times.  
• Administrative efficiency: Efforts are underway to reduce the administrative burdens faced by both CM participants and delivery bodies. This initiative aims to improve overall delivery assurance and increase participation rates.
• Mothball plant prequalification: Extending the application period for mothballed plants for 2025 prequalification in 2026 auctions.
• Termination fee introduction: Implementing fees for failure to demonstrate agreed DSR capacity ahead of delivery years.

In conjunction with the Consultation on the Capacity Market, DESNZ published a call for evidence and a 10-year review of the Capacity Market. The call for evidence seeks views on boosting DSR participation, adding new technology classes, and refining delivery milestones and the 10-year review aims to evaluate the scheme from 2019-2024 to determine if its objectives are still appropriate.

The deadline to respond to both the consultation and call for evidence is 17 February 2025.

Ofgem calls for input into cap and floor scheme for long duration energy storage

Ofgem issued a call for for input into its proposed long duration energy storage (LDES) cap and floor regime. Ofgem was tasked by the government to develop the regime in October 2024, on which we previously reported. The floor mechanism, which will provide a guaranteed minimum income, is intended to assist developers in managing high capital costs and lengthy build times associated with LDES. The cap, on the other hand, will act as an upper limit on revenue for those developers but is also intended to reduce costs for consumers.

Ofgem is calling for stakeholder input on various issues including:

• the way in which it plans to assess deliverability of LDES project wishing to participate;
• its approach to requiring planning consent ahead of project assessment;
• the possibility of increasing minimum duration requirements from six hours to 10 hours;
• the technology and readiness level requirements;
• whether the scheme should only apply to new projects or whether extension and refurbishment of existing projects should come within scope; and
• how Ofgem proposes to asses project costs.

As part of the call for input, Ofgem has also set out its intended approach to the cap and floor. It has proposed two possible options for the way in which it could operate. The first is an administrative cap and floor that is set by Ofgem and the second is a market and competitive derived cap and floor intended to be used for project finance. Ofgem notes that, as with the cap and floor mechanism that applies to interconnectors, it expects to be able to maintain multiple models for the LDES regime.

Ofgem has also highlighted potential areas where the system could be "gamed". It cites the possibility of developers manipulating their books to report lower gross margins, either to increase floor payments or avoid cap payments. Ofgem also notes that market manipulation could be possible, by developers offering higher prices to other assets in their portfolios, leading to losses from the LDES asset and thus a greater floor payment or lower cap payment. As a result, it suggests that additional regulations may be required to protect consumers, and calls for input on its proposals.

Stakeholders were required to submit their responses to the call for input by 8 January 2025 and Ofgem is working with DESNZ to publish a joint Technical Decision Document in Q1 2025, with the intention that the first projects will be approved in Q2 2026.

Call for evidence published for Ofgem reform

A call for evidence has been issued by DESNZ, with the aim of introducing reforms to help Ofgem adapt to the changing energy market and ensure it is fit for purpose in the current regulatory landscape. The call for evidence is the first step in the review of Ofgem's mandate and duties, its remit, and its role in supporting economic growth (see our more detailed Insight).

The review is part of a wider initiative introduced by Sir Keir Starmer at the International Investment Summit to review the UK's regulatory regimes. It will consider how to ensure that Ofgem is able to regulate the rapidly changing energy market and unlock the benefits of net zero in a sustainable way that promotes growth, while ensuring consumers are protected.

One proposed reform suggests mirroring the abilities of the Financial Conduct Authority (FCA) so that Ofgem is able to hold executives more strongly to account via a "Consumer Duty". Much like the FCA's Consumer Duty, this duty would require firms regulated by Ofgem to show that they have processes and frameworks in place which are actually and effectively delivering good outcomes for consumers.

Further proposals are included to enhance Ofgem's investigatory and enforcement powers. These include changing the current system of a maximum fine of 10% of a company's turnover for non-compliance and introducing the ability for Ofgem to issue fixed penalties. DESNZ hope these measures would "not only deter irresponsible management practices, but also reinforce consumer confidence in the sector".

DESNZ is also considering enhancing Ofgem's investigatory and enforcement powers, noting that currently Ofgem's powers are inconsistent across the areas it regulates. The intention is that this should provide greater consumer protection as well as management of potential breaches.

This call for evidence will close on 28 February 2025 and the government will consider the responses received to establish the next steps.

This article was written with the assistance of Rosie Shaw and Joe Sandom, trainee solicitors, Sumaiya Hafiza, solicitor apprentice and Tomi Agbonifo, paralegal.