Energy UK backs government response to capacity market freeze

The boss of Energy UK has backed the government’s “common sense” response to the suspension of the capacity market, saying he is “confident that it offers a way out of this impasse”.

In a blog on the trade association’s website, chief executive Lawrence Slade said he can see “no reason” why auctions and payments cannot be resumed once the scheme is reapproved by the European Commission.

All auctions and payments were halted in November last year after the European Court of Justice overturned a 2014 decision by the commission to approve the capacity market under state aid rules.

In response to the ruling, the Department for Business, Energy Industrial Strategy (BEIS) initially instructed suppliers to stop charging customers for capacity market payments.

However, BEIS reversed course in a consultation published in December, which stated its intention to resume collecting payments from suppliers during the current standstill period. This would enable contract holders to receive the payments promptly if the scheme is reinstated.

The department therefore advised suppliers to continue charging customers, pending the outcome of the consultation.

Slade said this “sensible move” would avoid a situation where, “if payments end up being merely deferred, these obligations just mount up in the meantime.”

“It also hopefully provides some clarity for suppliers facing the dilemma of whether to carry on collecting payments from customers or not – in the face of somewhat hasty suggestions that they should just take these off bills,” he added.

“And most importantly, it should provide reassurance for providers that by them continuing to fulfil their previous commitments under capacity market contracts, they won’t run the risk of doing so without being paid.”

He also mounted a defence of the capacity market itself: “There were plenty of sceptics at its inception but it has done what it says on the tin – kept the lights on at the lowest cost.

“Helped by falling demand, the annual media story raising fears of a winter blackout amidst ‘wafer thin’ margins in previous years has become a thing of the past. And it’s done so at an ever-falling cost”.

Slade admitted the scheme “isn’t perfect” but said reform is “infinitely preferable” to “throwing the baby out with the bathwater”. He said there is no reason why the mechanism cannot be technological neutral and also include renewables. Even in its current form, newer technologies such as demand-side response and storage have been gaining ground.

He said the sudden removal of this “apparently guaranteed” revenue stream could “jeopardise security of supply” and prove the “final straw for investor confidence”.

“I firmly believe that it is the interests of all those in the energy market – and those whom it supplies – that the capacity market is reinstated”, he concluded, “and as such Energy UK will be supporting BEIS to achieve that as soon as possible.”

Earlier this month, the chief executive of Tempus Energy – the company which mounted the legal challenge against the capacity market – slammed the government for failing to propose reforms to the capacity market.

Writing to BEIS, Sara Bell said their case was not upheld merely on procedural grounds. She said judges had “serious doubts” over the compatibility of the capacity market with state aid guidelines, meaning substantive changes would be necessary to “future-proof” the scheme against further challenges.