UK Capacity Market suspended after General Court ruling

The UK Government has suspended actions in the Capacity Market after the General Court delivered its judgment annulling state aid approval for the scheme.

On 15 November 2018, Tempus Energy’s challenge was successful as the General Court of the EU overruled the European Commission’s (the Commission) state aid approval in relation to the UK Capacity Market.

Tempus Energy, a UK based demand side response operator, had claimed that the Capacity Market was unfairly privileged towards polluting energy companies at the expense of cleaner technologies and that the Commission had not properly assessed these concerns when approving the Capacity Market in 2014. The General Court agreed; it was held that the Commission should have identified and raised doubts regarding the planned scheme and a formal investigation should have been initiated in order properly to assess its compatibility with state aid law.

The ruling does not find, nor suggest that the Capacity Market breaches state aid law; but rather it constitutes a finding that the Commission failed properly to scrutinise that market in order to determine compliance with those state aid rules. The Commission will now have to carry out a new assessment for the scheme and this is likely to trigger a formal investigation.

What is the Capacity Market and why is it important?

The aim of the Capacity Market is to ensure that there is sufficient generation capacity available on the system during periods of high demand in order to meet the UK’s electricity needs. This can in particular be an issue during winter months. The overarching aim of the Capacity Market is to act as an insurance policy against the risk of electricity black and brown-outs. This is achieved by providing subsidies to operators if they have successfully bid for “capacity agreements” in auctions. The auction clearing price will determine the level of capacity payment that they will be entitled to receive. These auctions take place either four years ahead (T-4 Auction) or one year ahead (T-1 Auction) of the year in which the operator will commit to supply the capacity. The agreements generally vary in length - existing electricity generators can secure agreements for up to three years, new-build generators can secure agreements for up to fifteen years.

Tempus Energy, who develop software algorithms to allow consumers to cut electricity demand during peak times and thereby ensuring the grid has sufficient capacity, launched its appeal against the Commission’s decision to approve the scheme on the basis that, whilst fossil fuel generators were able to bid for three-year contracts or fifteen-year contracts, technology companies designed to cut electricity demand during peak times were limited to bidding on annual contracts only.

What are the consequences of the judgment?

Although this was a procedural challenge, the judgment has triggered a “standstill period” in the Capacity Market, preventing the UK Government from taking any further action to grant state aid under the scheme. This includes auctioning any further generation capacity or making any payments under existing agreements until the scheme has been re-approved.

National Grid ESO released guidance further to the decision, stating that the T-4 Auction for delivery years 2022/2023 and the T-1 Auction for 2019/2020 have been suspended in accordance with Regulation 26(3)(a) of the Electricity Capacity Regulations 2014.

The Government has not taken steps to recover capacity payments, but possible revocation of payments cannot be excluded until the Commission’s final decision is issued. National Grid will still be able to continue with any Prequalification processes for 2019 if this is required for future capacity auctions. It is also unclear to what extent generators are required to continue to make capacity available notwithstanding the suspension of capacity payments.

Energy and Clean Growth Minister Claire Perry is reported as having stated:

“We believe the Capacity Market is an effective mechanism that is designed in such a way as to minimise costs to consumers. The design of the Capacity Market has not been called into question, and our focus is therefore on ensuring it can be reinstated as soon as possible.

As part of this, we are seeking immediate State Aid approval for a T-1 auction that will cover winter 2019/20. Alongside this, we are working to reinstate the full Capacity market regime and are discussing the swiftest means of doing so with the Commission.”

Tempus Energy has challenged this interpretation, stating that the reason the General Court overturned the Commission’s approval was that the design of the Capacity Market meant a more detailed investigation into it was required before the Commission could approve the scheme.

The General Court’s decision leaves the future of the Capacity Market scheme uncertain whilst the Commission re-assesses the way in which it operates and the standstill period therefore remains in place. It is too early to tell whether the General Court’s insistence on the importance of scrutinising the scheme will lead the Commission to a different outcome. For now, participants in the UK electricity market will probably wish to consider implementing revenue generating alternatives to any existing capacity market agreements they have in place and the pipeline for investment in new generating capacity is also likely to be detrimentally affected.

If you would like more information or need to discuss this further, please contact Peter Broadhurst, Andrew PetryPatrick Wallace or Simon Kenolty.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.