We take a deeper look at the practical implications for the GB Capacity Market of the Tempus Energy judgment of the General Court of the EU.
Background to the judgment: the GB capacity Market
In 2014 the European Commission concluded that the GB's Capacity Market scheme was compliant with EU State aid rules and the Capacity Market has been operating in the UK since. That decision was challenged by Tempus Energy, who complained that the scheme was discriminatory against demand-side response technology. For example, Tempus pointed out that demand-side response technology could only win one-year capacity market contracts, as compared to generators, who were able to win 15-year contracts.
The General Court of the European Union issued its judgment last week (15 November 2018), finding that the Commission should have concluded that there were sufficient doubts as to the compliance of the scheme with State aid rules to merit a formal investigation procedure. The Court held that that the Commission was not in a position to rely on the UK Government's submissions and should have investigated the incentive effect of the planned measure, its proportionality and potential discrimination between capacity providers.
Consequences for the Capacity Market
As a result of the decision, the Capacity Market will enter a 'standstill period', preventing the UK Government from making payments that could be seen as State aid until the scheme can be re-approved. The National Grid, as the EMR delivery body, has published guidance (available under the 'latest news' tab) for holders of capacity agreements and market applicants. The forthcoming T-4 and T-1 auctions have been postponed indefinitely, with the UK Government stating its intention to run the suspended T-4 auction as a T-3 in next year's round, as well as seeking one-off State aid authorisation for a replacement T-1 auction.
Capacity Market payments from existing agreements will be suspended. All credit cover held for upcoming auctions is to be returned, with existing capacity agreement holders also able to request the return of credit cover for existing agreements. BEIS has also indicated that it will discuss the need to recover capacity payments that have already been made with the Commission, as part of the latter's formal investigation. However, the supplementary auctions arranged for the delivery year 2017/2018 were covered by a separate decision which has not been challenged.
The Commission may appeal to the Court of Justice against the judgment, although that currently seems less likely than a re-opening of the original investigation in order to carry out the in-depth examination of the capacity mechanism that, according to the General Court, should have been carried out. An in-depth investigation is likely to take around 12 months.
What does Industry say?
Some industry players have voiced concerns over the uncertainty that the ruling brings. In particular, the suspension of payments for those companies who have already secured capacity market contracts is highlighted as an issue. Director for the Association for Decentralised Energy, Dr. Tim Rotheray, highlighted concerns that it "is industry that will suffer the most from today’s ruling, which leaves the market in limbo, without access to revenue streams it had been guaranteed by Government".1 Despite the worries about uncertainty, certain parties within the energy sector have highlighted opportunities it may present, in particular emphasising the renewed possibility to focus on forward-looking solutions and embrace flexibility. Gerard Wynn, a financial consultant for the Institute for Energy Economics and Financial Analysis, notes that the ruling may provide an opportunity "to focus on more cost-effective and forward-looking solutions for safeguarding the country's energy-supply security".2 Erik Nygard, CEO of Limejump, an energy startup, has stated that "this decision will force wholesale markets to embrace flexibility while increasing the adoption of innovative technologies".3
If you want more information about how these changes to the capacity market may impact your business, please feel free to reach out to one of our energy experts.
1 Press Release - "ADE response to Capacity Market state aid challenge", 15 November 2018, https://www.theade.co.uk/news/press-releases/ade-response-to-capacity-market-state-aid-challenge
2 Gerard Wynn, "IEEFA U.K.: Suspension of £3.8 billion capacity market is an opportunity for re-think", 16 November 2018
3 Erik Nygard, "European judicial ruling on Capacity Market to bring change to UK Wholesale Markets", 15 November 2018