European Commission has ‘caved’ to industry pressure

The boss of the company that successfully challenged state aid approval for the Capacity Market has accused the European Commission of caving to industry pressure by reapproving the mechanism earlier today (24 October).

Sara Bell, the chief executive of demand-side response (DSR) aggregator Tempus Energy, said the commission had “rushed through” the reinstatement of the scheme, “ensuring the energy industry can rip off consumers to the tune of £1 billion a year.”

Tempus appealed the commission’s original decision to grant state aid approval in 2014 on the grounds that the Capacity Market discriminated against DSR aggregators, for instance, due to the minimum sizes of Capacity Market units and their inability to bid for the same 15-year contracts available to new generation.

The European Court of Justice overturned the decision in November last year after ruling the commission had failed to properly investigate such concerns. Payments to generators and by suppliers were immediately suspended, as were the upcoming auctions.

The commission began an “in-depth” investigation into the capacity market in February. Responding to today’s announcement, Bell said the scheme has “unjustly favoured fossil fuels and stifled energy innovation”.

Citing National Grid’s forecast of a nearly 13 per cent supply margin over the coming winter, she said “it is ludicrous to suggest consumers should be paying for subsidies to keep the lights on. The commission has demanded multiple changes which suggests the idea that the scheme complies is a joke.”

She continued: “We will be studying the judgement to determine what to do on behalf of consumers who deserve better than this. We will be commenting further once we have reviewed this information and have understood how the governments proposed improvements to the scheme will change the nature of the capacity market.

“With multiple demonstrations around the country showing voter concern about the lack of action on climate change, reinstating a rip-off scheme to support coal and diesel beggars belief.”

Despite the scheme being nominally suspended, the government has already held a replacement for the year-ahead (T-1) auction which was otherwise due to take place in early 2019. The auction for delivery over the 2019/20 winter was massively oversubscribed, resulting in a record-low clearing price of just £0.77/kW.

It has also arranged a three-year-ahead (T-3) auction for delivery in 2022/23 to the replace the four-year-ahead auction (T-4) which was due to take place around the same time.

In December last year, the government also floated the idea of continuing to collect capacity payments from suppliers but later decided against it, instead urging the companies to make “prudent provision” and warning them that the charges would be collected promptly and in full, if and when the scheme was reapproved.

Tempus reacted by applying for a judicial review in the High Court, arguing the government’s was flouting the ECJ’s ruling by instructing capacity providers to continue complying with their agreements and encouraging suppliers to make voluntary payments.

The company was reportedly successful, with a review being scheduled to commence on 11 November.

In a written statement to parliament, business and energy secretary Andrea Leadsom said today: “The commission has now satisfactorily concluded its investigation and has concluded that the Capacity Market as operated since 2014, including during the investigation, complies with state aid rules.

“Notably, the commission did not find any evidence that the Capacity Market puts demand-side response or any other capacity providers at a disadvantage with respect to their participation in the scheme.

“The government welcomes the commission’s decision, which enables the Capacity Market to resume its important work as Great Britain’s principal tool for ensuring electricity security of supply and provides confidence that its design is fit for purpose.”

She said the government is still awaiting the commission’s full decision, but it is expected to allow around £1 billion of deferred payments to be made, the “vast majority” of which will reach capacity providers in January 2020.

The secretary of state said it is also expected to allow deferred charges to be collected from suppliers, although she gave no indication as to when this would begin. She gave assurances that the government has been “engaging with suppliers during the standstill period to ensure they have been setting aside funding to meet what will be a substantial post-standstill invoice.”

She said it should additionally confirm that the contracts awarded in the replacement T-1 auction have become “full capacity agreements” and that the replacement T-3 auction can take place as planned in early 2020.

The commission’s initial announcement notes that the government has committed to implement a number of improvements to the Capacity Market, identified as part of a five-year review of the scheme.

Leadsom said it will begin consulting shortly on these commitments, which she said will ensure the mechanism remains complaint with state aid rules.

Furthermore, the minister said she would be writing imminently to the delivery and settlement bodies for the Capacity Market – National Grid Electricity System Operator and Electricity Settlements Company respectively – to notify them of the decision.

“These bodies will subsequently be required to resume making capacity payments, carry out new duties arising from the triggers, and restart any duties that had been suspended during the standstill period,” she added.

“Our delivery partners have worked closely with my department to ensure that their systems and processes remain fit for purpose; they stand ready to support the restart process immediately.”