Government needs ‘plan B’ for capacity market

The government should work on a back-up plan for the capacity market in the event the European Commission does not reapprove the scheme, Rachel Reeves has warned.

Following the European Court of Justice ruling in November last year to suspend the capacity market, the Business, Energy and Industrial Strategy (BEIS) committee wrote to energy minster Claire Perry outlining industry concerns.

The chair of the committee argued that the suspension risks further undermining investor confidence in the power sector, which is already shaky as a result of Brexit.

Reeves welcomed the clarity of the government’s next steps, which Perry highlighted in her response letter published today (10 January).

But she said the approach rests on European Commission reapproval and does little to suggest there is “any preparation work on a back-up plan” in the event of a negative decision from the commission.

“The government needs a ‘plan B’, so that businesses and investors can ensure the UK’s electricity system is prepared for next winter, whatever the commission’s ruling,” Reeves urged.

In her response dated 3 January, which was made public today, the energy minister advised that the government continues to believe that the capacity market is the “right mechanism for delivering security of supply at the lowest cost to consumers”.

“My department are therefore working closely with the European Commission to ensure that the capacity market can be reinstated swiftly,” Perry said.

She outlined that National Grid has already made clear that there is “no risk” to security of supply this winter.

Earlier this week the electricity system operator at National Grid published draft de-rating factors for renewables participating in the capacity market over the coming years.

On 19 December 2018, the government published a technical consultation to ensure the capacity market can continue to operate “as fully as possible” during the standstill period.

“My department are also regularly engaging with generators, suppliers and the investment community to ensure they are kept fully informed and maintain market confidence,” Perry said.

The energy minister said the government expects the commission to publish an “opening decision” on the capacity market investigation early this year, with its final decision following later in the year, although she made clear it is up to the commission to establish its own timetable.

Perry said the government expects that agreements and payments, including those for the current 2018/19 period would be honoured if the commission reaches a positive decision after its formal investigation.

In Reeve’s letter to Perry on 18 December, the BEIS committee chair questioned what actions are being taken to address concerns by Tempus Energy regarding the capacity market’s design.

Perry responded: “The court did not rule that aspects of the scheme design were incompatible with state aid rules or question the necessity of having a capacity market.  The judgement related to the process followed by the commission in approving the scheme in 2014.”

She added: “The government consistently reviews the operation and design of the capacity market and has regularly consulted on amendments in the light of new evidence.

“Most recently we have begun a statutory review of the mechanism, as required by law at the five-year stage.  As a first step in that process we published a call for evidence on 8 August 2018.  This asked a number of questions relevant to the DSR sector and provided an opportunity for all stakeholders to submit views.  We are considering these responses and will publish our response next year.”

Perry reiterated that the government is minded that suppliers should continue to collect payments from customers during the standstill period.

“Our consultation of 19 December discusses two options for doing so and we plan to make a final decision early this year,” Perry said.

The capacity market was suspended indefinitely after an EU court overturned a 2014 decision by the European Commission to authorise the scheme under state aid rules.