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The government will move ahead with its plans for the first capacity market auction despite a pending legal challenge against the regime which has increased the financial risk for auction participants.
The capacity auction is due to begin 16 December to secure generation capacity for delivery in four years’ time, but new energy company Tempus Energy has lodged a legal challenge with the European Court saying the regime discriminates against demand-side response (DSR) technologies.
If the legal challenge is successful, the auction result would be nullified retrospectively, which could take a heavy financial toll on developers that move forward on investment plans in the meantime. That in turn would leave the government open to further legal action.
“We are fully confident in this auction,” a spokesman for the Department of Energy and Climate Change said.
“The European Commission has concluded that the capacity market is within European state aid rules. This challenge will have no impact on the running of the capacity auction in December,” he added.
Intergen director Chris Elder told a select committee hearing on Tuesday that a successful legal challenge from Tempus would pose a financial risk for the operators of plant that was successful in the upcoming auction, but he added that there would be a far bigger risk for those developing new plant.
Intergen successfully qualified for the auction with two development projects totaling 1.8GW of gas-fired power capacity worth an estimated £1 billion in investment. But without the guarantee of a capacity payment the projects might not move forward, and any investment undertaken so far would be lost.
Other energy market participants facing the committee said their concerns over the structure of the auction were not so great that the process should be delayed by legal wrangling.
Scottish Power’s director of regulation, Rupert Steele, told the hearing: “We are now a week from the auction, for good or ill, we just need to do it.”
At the same committee hearing, Tempus Energy chief executive Sara Bell brushed off speculation from Labour MP John Robertson that her newly formed company was created soley as a vehicle for mounting a legal challenge, saying the company believed “strongly” in a competitive market.
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