A court ruling over the Capacity Market could pave the way for a significant overhaul of the policy – and level the playing field for demand-side response.
However, the ruling may have broad ramifications. The short-term implications for all market participants are not yet fully clear.
Beis has temporarily suspended the Capacity Market as a result of the ruling, calling it a “standstill period“.
Update: National Grid ESO has now confirmed that payments for all existing agreements have been suspended.
It also states: “The Secretary of State has today instructed us to postpone indefinitely the upcoming T-4 and T-1 Auctions for Delivery Years 2022/23 and 2019/20 respectively, in accordance with Regulation 26(3)(a) of the Electricity Capacity Regulations 2014.
“The Government is intending to seek separate state aid approval from the Commission to run a one-off ‘replacement’ T-1 Auction. The postponed T-4 is intended to be run as a T-3 Auction in next year’s auction round, subject to the Commission completing its formal investigation and providing state aid approval for the main capacity market scheme.”
The note adds that the government “hopes” it won’t have to clawback payments already made under the CM.
The General Court of the European Union today ruled that the European Commission did not effectively scrutinise the UK’s planned market and should have instigated a formal investigation in order better to assess its compatibility with State Aid rules instead of effectively waving the policy through.
Tempus Energy challenged the UK government back in 2014. CEO Sarah Bell argued the policy was anticompetitive – because it favoured large generation over technologies such as demand-side response.
While the old department of energy and climate change (Decc) was “confident” it would win the case, Bell was adamant it would lose.
“A five year-old can see it is anticompetitive” to grant 15-year contracts to large generators and one-year contracts to DSR, she told the Energyst at the time.
The company took the case to court on a procedural issue, arguing that the Commission could not have concluded the UK Capacity Market satisfied State aid rules had it undertaken a proper investigation.
“The Commission didn’t do a very thorough job,” said Bell.
Today’s judgment backs that view.
The Court also found that the Commission “failed properly to assess the role of DSR within the capacity market”.
“The Court notes, first of all, that it was for the Commission to satisfy itself that the aid scheme was designed to allow DSR to participate alongside generation, because their respective capacities provide an effective solution to the capacity adequacy problem. In that context, the aid measures should be open and provide adequate incentives to the relevant operators.”
That could force the government to redesign the Capacity Market policy and resubmit it for State Aid approval. It will likely have implications ahead of this winter’s auctions and may potentially affect existing agreements (The Energyst has requested comment from Beis).
Update: A Beis spokesperson said:
“We are disappointed with this judgment but it poses no issues for our security of supply. As a responsible Government, we have prepared for all outcomes, and we will be working closely with the Commission so that the Capacity Market can be reinstated as soon as possible.”
Update: The government has now published a statement:
“Today the General Court of the Court of Justice of the European Union found in favour of Tempus Energy, against the European Commission, annulling the Commission’s State aid approval for the UK Capacity Market. We are already working closely with the Commission to aid their investigation and seek timely State aid approval for the Capacity Market. The ruling does not change the UK Government’s commitment to delivering secure electricity supplies at least cost, or our belief that Capacity Market auctions are the most appropriate way to do this. The ruling will not impact security of supply this winter.
“This ruling imposes a ‘standstill period’ on the Capacity Market. We are working with National Grid to contact affected parties.”
Tempus intends to enforce its judgement.
“This ruling should ultimately force the UK Government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables,” said Bell in a statement.
Aggregators have long argued that demand-side response should be able to bid for the same agreements that are on offer for generation, currently up to 15-years.
See the judgment here.