Capacity Market suspended after landmark EU ruling

The UK's Capacity Market has been suspended until further notice after a shock ruling from the European Court of Justice (ECJ) concluded the mechanism could be in breach of EU State Aid rules. 

The ECJ issued its judgement in response to a legal challenge brought by clean technology firm Tempus Energy, which argued the mechanism for securing back-up power during the winter months unfairly favoured fossil fuel generators over newer, cleaner technologies. 

In its ruling the ECJ said the European Commission was wrong not to more closely investigate the UK's plans to establish the Capacity Market back in 2014, when it was tasked with assessing whether the policy complied with State Aid rules.

A spokesman for the UK Department for Business, Energy, and Industrial Strategy (BEIS) today confirmed the UK government will pause Capacity Market operations in light of the ruling. He added the UK government will be "working closely with the Commission so that the capacity market can be reinstated as soon as possible."

The decision means the UK government can not issue capacity market payments to energy firms or hold auctions, including the upcoming auctions scheduled to run in January and February 2019, to secure additional power capacity for the winter of 2019/2020 and 2022/23. 

"We are disappointed with this judgment but it poses no issues for our security of supply," the BEIS spokesman stressed.

The Capacity Market allows generators to bid for contracts to provide back-up power to the grid during times of peak demand over the winter months. The market has seen millions of pounds of subsidies awarded to coal, diesel, and gas plants, as well as some Demand-Side Response (DSR) and battery storage projects, to keep the lights on.

However, developers of DSR and battery storage projects have long argued the rules governing the market make it harder for them to compete with established fossil fuel plants.

Tempus Energy, which provides software to support DSR, said the system unfairly biases the market towards fossil fuel power, leaving cleaner alternatives "virtually unable to compete". The ECJ argued the European Commission should have considered the complaints in more detail during its 2014 investigation, which lasted only one month.

Under EU State Aid rules, member states are obliged to consider alternative ways of meeting market demand for power before subsidising polluting generators. They also require any capacity-boosting measures to be designed in a way that provides "adequate incentives" for operators of new, cleaner technologies. 

In its judgement the ECJ said the Capacity Market was a "significant, novel and complex" policy involving large amounts - up to £2.6bn per year - of public subsidy. It criticised the European Commission for failing to independently analyse the claims made by the UK that the policy was in line with State Aid rules.

"The Court therefore finds that the Commission should have concluded that there were doubts which should have led it to initiate the formal investigation procedure in order to allow interested parties to submit their observations and to put at its disposal the relevant information in order better to assess the compatibility of the planned capacity market," the judgement reads.

Speaking to BusinessGreen, Tempus Energy CEO Sara Bell said the government should now cancel all future Capacity Market auctions in light of the ruling.

She also said the ruling invalidates all previous payments made by EMR Settlement, the body authorised by the government to deliver settlement payments for CM participants, which amounts to £5.6bn.

"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," she added in a statement.

The move was also welcomed by Doug Parr, chief scientist at Greenpeace UK, who said the government's Capacity Market was "effectively rigged in favour of old-fashioned dirty generation".

"Shutting out modern, smart technologies turns out to not only be short-sighted and foolhardy, but potentially illegal," he said. "The government should heed the many expert voices explaining that we're not in the 20th century any more, and our energy policy needs to reflect that. The smarter technologies that allow easier and faster uptake of clean renewable energy are ready, and urgently needed."

Capacity Market auctions were scheduled to run in January and February 2019, to secure additional power capacity for the winter of 2019/2020 and 2022/23. The most recent auctions saw more than half of agreements awarded to gas-fired power plants.

The decision comes just hours before the government is expected to release its response to Professor Dieter Helm's Cost of Energy review, which called for a radical simplification of the UK energy system to allow market forces to deliver grid decarbonisation.

It also comes amidst high drama in Westminster as Ministers resign in protest at the government's proposed Brexit deal, which would effectively require the UK to continue to honour EU state aid rules and environmental goals post-Brexit.