European Court of Justice Suspends Capacity Market

The European Court of Justice has ruled against the European Commission’s assessment of state aid rules in respect of the Capacity Market, and in favour of a challenge that the scheme gave an unfair advantage to conventional generation over cleaner options. This advantage lies in the ability of fossil fuel generators to secure fifteen-year contracts, whilst less polluting technologies and demand side response can only obtain a one-year deal.

 

What is the Capacity Market?

• It offers generators agreements that secure a revenue stream in return for guaranteed power generation during peak demand hours in future delivery years. It also gives large consumers the chance to have a revenue stream in return for lowering their consumption during peak demand hours in these periods. It is part of the UK government’s plans to ensure security of supply in future winters.
• Contracts are allocated via auction, with several old coal plants securing deals since the scheme's inception.

What does the ruling mean?

• The capacity market has been suspended and no payments can be made by the Government to current agreement holders. This could tighten the supply outlook in Q1-2019, however higher prices this winter may contain this impact.
• No auctions for future periods are to be held.
• Therefore, no generators with an agreement will be paid for producing, and no more guaranteed peak capacity for future periods can be secured.   

Why did the challenge win?

• The European Commission’s rules on State Aid for the energy markets states: “Member States should therefore primarily consider alternative ways of achieving generation adequacy which do not have a negative impact on the objective of phasing out environmentally or economically harmful subsidies, such as facilitating demand side management and increasing interconnection capacity.”
• State Aid rules are designed to limit any unfair advantage afforded to companies/industries as a result of government support, to ensure the single market allows competition in as pure a form as possible. There are exemptions for the benefit of economies, such as to prevent mass unemployment for example.

What next?

• The UK Government and the European Commission need to reach a new agreement on the scheme and the UK government will have to re-apply for state aid approval. We are now in a “Stand Still” period.
• If the Capacity Market does fall away this could reduce available capacity for several winters, given the fifteen-year contracts already in place.  
• The Department for Business, Energy, and Industrial Strategy has released a statement saying the UK government will work with the European Commission to have the scheme reinstated as soon as possible but that security of supply will be unaffected.

What does this mean for our Customers?

• TotalEnergies Gas & Power will continue to  monitor developments closely and we expect further announcements from the UK Government over the next few weeks.  This should help us understand how the Government intends to react and how long the process might take. It is possible that suppliers will still be required to make CM payments during this stand still period. In the meantime, existing contractual terms will continue to apply and your account manager will be available to discuss any queries that you might have.