Somewhat lost amongst the noise surrounding the proposed Brexit Agreement comes the news that UK’s Capacity Market (CM) will undergo a temporary suspension.
What is the Capacity Market?
The Capacity Market allows plant to offer capacity to the electricity system at a price set by auction. The market has been introduced to prevent a short-fall in electricity generation due to the closure of older fossil fuel plant. Every year, the Government decides how much capacity will be needed to safeguard the system. Both generators that are currently operating, and those that are being developed, can take part in the scheme.
The Court’s Ruling
The ruling from the European Court of Justice (ECJ) follows Tempus Energy’s challenge to the UK Government that took place in 2014. The company took issue with the decision to grant the UK’s Capacity Market with State Aid approval, making claims that the design was biased against small, clean energy, making it easy for coal, gas, and diesel generators to control the market.
The ECJ said that the European Commission was wrong to not more closely investigate the UK’s plans to establish the CM in 2014, when the organisation was originally responsible for assessing whether the policy complied with State Aid rules.
Under EU State Aid rules, it is required that member states need to consider alternative options to meeting power demand before subsidising fossil fuel generation. The rules also require any measures taken to increase capacity to be designed in a way that encourages operators of new clean technologies.
The ECJ’s decision means that payments made under the Capacity Market scheme will be frozen until the UK Government can obtain permission from the European Commission to continue.
Furthermore, the UK will also not be allowed to conduct any further CM auctions for energy firms to bid on new contracts. The nearest auctions were scheduled for early 2019.
Sara Bell, CEO of Tempus Energy, said: “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.”
How will this affect you?
The Government has released a statement saying that security of supply will not be impacted over this winter.
They acknowledge a ‘standstill period’ on the Capacity Market during which they will be working closely with the European Commission in order to aid their investigation and seek approval for the Capacity Market.
The cost of the Capacity Market is recouped via customers and currently accounts for 2.9% of an electricity bill.
The suspension of the payments to generators may result in customers receiving a refund, or at least a halt to ongoing payments while the suspension is in place.
However, if the scheme is cancelled all together it would lead to the removal of one cost to customers; the Capacity Market charge is just one of numerous non-commodity charges, paid on top of the wholesale price of energy, that are rapidly increasing.
Stay informed with EIC insights
For the latest news on the energy markets and industry updates, you can find us on Twitter.
Follow @EICinsights today.