Tempus Energy files legal challenge to enforce capacity market shutdown

Tempus Energy has filed a legal claim with the High Court in an attempt to enforce a shutdown of the capacity market after the scheme was judged to be illegal by the European Court of Justice (ECJ).

The company has accused the government of flouting the ECJ’s ruling by instructing capacity providers to continue complying with their agreements and encouraging energy suppliers to make voluntary capacity payments to the Electricity Settlements Company (ESC).

It says the money already paid to capacity providers should be returned to customers.

“We are astounded at the UK governments’ complete disregard for the law,” said Tempus Energy founder and chief executive Sara Bell.

“Energy consumers should not be paying for these subsidies which have already been declared unlawful.”

The capacity market was approved by the European Commission under EU state aid rules in 2014. However, the following year Tempus Energy lodged an appeal against the decision, arguing the scheme discriminated against demand-side response (DSR) providers.

The ECJ upheld the appeal in November. It said the commission had failed to establish the technological neutrality of the mechanism and should have conducted an in-depth investigation before giving the go-ahead.

In response to the ruling, the government suspended all auctions and payments pending reapproval of the capacity market by the European Commission. It initially encouraged energy suppliers to return any corresponding savings to customers.

But in a consultation published in December, the Department for Business, Energy and Industrial Strategy (BEIS) reversed course, stating its intention to resume the collection of capacity charges from suppliers. It said suppliers would therefore be “sensible” to bill their customers accordingly.

The department said the charges could either be collected by the ESC, as per the usual arrangements, or by the Balancing and Settlement Code (BSC) administrator Elexon.

Under the second option, the proceeds would have been held in a temporary fund that would be transferred to the ESC once the standstill comes to an end.

However, this option was dependent on a modification to the BSC, which was rejected by Ofgem last month. The regulator said it did not have the necessary legal powers to approve the proposal.

Last week BEIS decided against imposing a mandatory capacity charge on suppliers based on feedback from the consultation. It instead encouraged them to make voluntary payments to the ESC, whilst warning that deferred charges will be collected promptly and in full if the capacity market is reinstated.

The department has consistently advised capacity providers to continue meeting their obligations during the standstill.

Tempus Energy claims the government’s recent decisions represent an attempt to circumvent the ECJ’s ruling. It is now seeking to challenge them in the High Court and force the government to return to customers all previous capacity payments.

Energy and clean growth minister Claire Perry told parliament in December that the ECJ’s ruling was made on “procedural grounds” and did not constitute “a challenge to the nature of the UK capacity market mechanism itself”. Bell described Perry’s statement to parliament as “disingenuous” and urged investors to seek independent legal advice rather than relying on government proclamations.

“The government has not been honest with investors and parliament,” she remarked. “The legal basis for existing capacity market agreements has been withdrawn and the government has a legal obligation to return the money to customers.

“The government is desperate to give the impression that capacity market investments are safe. But they are not safe.”

A spokeperson for BEIS said: “Working with the commission and industry, we are confident in the steps we are taking to reinstate the capacity market. We will robustly defend this challenge by Tempus.”

Subject to state aid approval, the government is planning to hold a T-1 auction over the summer and a T-3 auction in 2020 to replace those that were due to take place earlier this year.

The European Commission opened an in-depth investigation into the capacity market last month but is also appealing against the ECJ’s ruling.