Capacity market suspended after EU court overturns state aid clearance

The capacity market has been suspended until further notice after an EU court overturned a 2014 decision by the European Commission to authorise the scheme under state aid rules.

The General Court of the Court of Justice of the European Union said in making its decision the commission failed to properly establish the technological neutrality of the mechanism.

As a result, future auctions and payments under existing contracts have both been halted until the scheme receives fresh approval. The Department for Business, Energy and Industrial Strategy (BEIS) said it is working closely with the European Commission to resolve the matter.

Tempus Energy lodged an appeal against the commission’s decision in 2015, arguing the capacity market discriminated against demand-side response (DSR), for example, due to the shorter contract lengths available to DSR aggregators when compared to generators.

The company later claimed it was paradoxical for the commission to clear the UK scheme without conducting a formal investigation and then launch a general inquiry into capacity markets in 2016.

In its ruling on the matter, the court said the commission had approved the mechanism following a preliminary examination lasting just one month. It said this, by itself, did not demonstrate that the commission held doubts over the compatibility of the capacity market with state aid rules.

However, the judgement also noted it had declined to launch a formal investigation into the capacity market, despite several industry players raising objections to its authorisation and the Electricity Market Reform Panel of Technical Experts highlighting a lack of understanding over the potential of DSR to meet capacity requirements in a 2014 report.

The court said the commission should not have “simply relied” on information provided by the UK to reach its conclusion without undertaking its own analysis and has therefore annulled the decision.

Responding to the ruling, BEIS said in statement: “We are already working closely with the commission to aid their investigation and seek timely state aid approval for the capacity market.

“The ruling does not change the UK government’s commitment to delivering secure electricity supplies at least cost, or our belief that capacity market auctions are the most appropriate way to do this. The ruling will not impact security of supply this winter.

“This ruling imposes a standstill period on the capacity market. We are working with National Grid to contact affected parties.”

Tempus Energy chief executive Sara Bell commented: “A customer revolution is on the cards. This ruling opens the door for cheaper energy – greater use of demand-side innovation would change the way we use electricity in practice, and place customers at the heart of the energy system for the first time.”

She continued: “Customers are not only footing the bill for this ill-designed scheme, they are also being prevented from accessing its potential benefits themselves.

“If the government is serious about decarbonising energy at the lowest cost to the customer, it must design a market that encourages, not stifles, environmentally friendly technology.

“The energy transition is about supporting smart technology and equipping the consumer to manage their own energy – not funding fossil fuels.”

Further reaction:

Lawrence Slade, chief executive, Energy UK

“We are extremely disappointed by today’s General Court judgment as the capacity market has proven that it can successfully deliver security of supply at the lowest cost to consumers.

“We are already working closely with BEIS and are fully supportive of their efforts to work with the European Commission to reinstate future auctions and continue the capacity market scheme.

“Given the serious financial implications for capacity providers as well as the need for investor certainty and security of supply, this issue needs to be resolved as soon as possible.”

Richard Black, director, Energy and Climate Intelligence Unit

“The court’s decision makes no difference to power supplies this winter but opens a number of interesting questions for the next few.

“The government says it’s expecting to get the capacity market re-approved – but how long will this take, how deeply will the European Commission probe this time, and what changes will it require to the market’s design, if indeed it approves it at all?

“BEIS is seeing this as a challenge; but actually, the court has presented it with a massive opportunity to constructively re-think a measure that while keeping the lights on is working against other government aims on cost and decarbonisation.

“Re-shaping the market to incentivise battery storage and genuine demand-shifting rather than dirty diesels will bring in a system that’s cheaper for consumers; prioritising low-carbon capacity would speed the demise of coal and gas, helping ministers cut emissions faster, which they know they have to do in order to meet climate targets.”

Tim Rotheray, director, Association for Decentralised Energy

“Industry raised concerns about the need for a level playing field for DSR when competing for capacity market contracts and today’s announcement is therefore not a surprise.

“It is industry that will suffer the most from today’s ruling, which leaves the market in limbo, without access to revenue streams it had been guaranteed by government.”

“If government is serious about growing the flexibility market to deliver a decarbonised, cost-efficient system, we hope it will work with the European Commission to ensure that the state aid approval process runs smoothly and that any necessary reforms to the capacity market are made as soon as possible.”

Mark Hollands, head of energy strategy, British Solar Renewables

“The decision to uphold Tempus Energy’s claim was the correct one. The capacity market is flawed and needs restructuring with a balanced approach to all technologies, which is currently lacking.

“However, the way this point has been made and the resulting suspension of the capacity market is potentially damaging to investor confidence and the energy industry as a whole.”

Mathew Clayton, managing director, Thrive Renewables

“The capacity market was another short-term fix applied to our energy system, which has been over-complicated from repeated patching, tweaking and knee-jerk reactions. The labyrinth of patches makes it a very difficult environment for long-term capital-intensive infrastructure investment decisions.

“A systematic approach, reflecting the objectives of competitively priced power, energy security and environmental performance, is required. The answer could be to make the capacity market technology agnostic or removing it, this would level the playing field a little further and allow the UK to benefit from the most affordable and sustainable solutions sooner.”

David Oliver, energy expert, Inenco

“Today’s announcement to suspend the UK’s capacity market until further notice brings with it yet another layer of unwanted uncertainty to the UK energy market and businesses alike.”

“Suspending the capacity market, and with it capacity payments for existing agreements, poses grave questions about the future security of supply, threatening the closure of plants without the certainty of new generation to replace it.

“We hope BEIS can ensure this is reinstated promptly in order to re-establish confidence in UK plc.”