The GB Capacity Market Standstill: What is Happening and Why?

Investigating the Impact of the Tempus State Aid Judgment

On 15 November 2018, the General Court of the European Union issued a judgment on Case 793/14 Tempus Energy Ltd and Tempus Energy Technology V Commission, annulling the Commission’s original State aid decision to approve a capacity mechanisms scheme for Great Britain. The General Court ruled that the Commission should have initiated the formal investigation procedure before adopting a decision. This judgment renders aid granted through the scheme unlawful (i.e. granted without the approval of the Commission, which should be regarded as never been decided since its annulment). As a result, the UK Government decided to suspend the capacity market, meaning that it will not grant new associated subsidies until it is newly decided if they are compliant with EU law. However, in December 2018, the UK Government confirmed that it will operate the capacity market as normal, but without payments being made to agreement holders. The UK Government also confirmed that it intended to hold a replacement T-1 auction for the delivery year 2019/2020, which would be held by rearranging the postponed T-1 auction that had been scheduled for January 2019.

In the meantime, the Commission lodged an appeal against the General Court’s judgment before the Court of Justice on 25 January 2019. It also initiated the formal investigation on 21 February 2019 in order to adopt a new decision.

Why did the General Court annul the decision? What has been the effect on the industry and how will the market operate in this limbo period? What impact might it have on the UK energy policy? How will past unlawful payments be treated? Will they be recovered? Will a deal or no-deal scenario for Brexit play a role in the next steps?

Background

The capacity market in Great Britain[1] was established following the European Commission’s decision of 23 July 2014 to approve the aid scheme for the market, with the Commission having concluded that it was compliant with EU State aid rules. The purpose of capacity market is to ensure electricity supply in periods of peak demand by offering subsidies to capacity providers that successfully bid for capacity agreements in auctions. In December 2014, Tempus Energy, a UK-based demand side response (DSR) operator, contested the Commission’s decision.

The Tempus Argument & the GC’s Judgment

Tempus contended that the GB capacity market scheme privileges generation (largely fossil fuel operators) over demand-side response (DSR) in a discriminatory and disproportionate manner that goes beyond what is necessary to achieve its objectives and fulfil State aid requirements.

Tempus’s main argument was that the Commission approved the capacity market following the preliminary examination of its notification but without initiating the formal investigation, which is required when there are doubts about the compatibility of an aid. Tempus submitted that the Commission heavily relied on the UK government’s submissions on the market. The GC agreed that the Commission had not followed the necessary procedure and should have addressed doubts about the scheme. In order to show the existence of objective doubts, Tempus successfully argued that the scheme unfairly discriminates between capacity providers in the length of contracts awarded through the auction system, with DSR limited to one-year contracts as opposed to the fifteen-year contracts available to generators. Despite DSR offering an equivalent solution and having similar circumstances with respect to upfront investment and benefitting from long-term support, it is not offered the same opportunities as generators.

The Next Steps

Following the judgment, the UK government department for business, energy and industrial strategy (BEIS) did not re-notify the scheme. The effect of the GC’s judgment was to put the Commission in the situation it was when the UK notification was submitted in 2014. Until newly approved, the capacity market remains suspended. In the meantime, BEIS and National Grid, as the EMR delivery body, have issued guidelines for existing capacity providers during the standstill. On 25 January, the Commission lodged an appeal against the Court’s ruling. On 21 February, the Commission announced it had launched an in-depth investigation on the compatibility of the scheme with the EU State aid rules, inviting all interested parties to submit comments. On 5 March, Tempus initiated judicial review against the UK Government before the English High Court. Tempus is asking orders (i)  preventing the replacement T-1 auction, (ii) preventing the administration and enforcement of existing capacity agreements, (iii) preventing collection of the supplier charge financing the capacity market and (iv) requiring to recover any unlawful aid.

In the meantime, what does this uncertainty mean for the market? Is the security of supply at risk? What opportunities does the judgment present? How might the capacity market rules be reformed? Will it force the adoption of more innovative technologies? Will flexibility play a greater role in a future mechanism?