Thursday 15 November 2018

Capacity Market suspension: What you should know

Capacity Market suspension: What you should know

The European Court of Justice has suspended the UK’s Capacity Market scheme.

Clean technology company Tempus Energy had brought forward a legal challenge, arguing the scheme gave an unfair advantage to fossil fuel generators over demand side response (DSR) technologies.

The government said the decision “poses no issues for our security of supply” and it is working closely with the European Commission so the scheme can be reinstated “as soon as possible”.

What is the Capacity Market?

Under the scheme, generators are offered financial incentives for ensuring power plants are kept on standby and are ready to provide emergency back-up electricity when demand is at its peak.

What does the ruling mean for the scheme?

The Capacity Market will now enter a “standstill period”, preventing the government from holding any capacity auctions, making any capacity payments under existing agreements or undertaking any other action which could be seen as granting state aid until it has been approved again.

What happens next?

National Grid, which administers the scheme, said it is still able to continue with activities which do not involve granted state aid, including completing the prequalification process for 2019, in case it is required for future Capacity Market auctions.

The Commission is required to undertake a formal investigation before providing approval for state aid under the scheme and as part of the process, BEIS will consider if any changes to the design of the Capacity Market are required.

Will capacity providers be subject to penalty payments or termination fees if they do not comply with their agreement during the standstill period?

National Grid said BEIS is reviewing the judgement, including the implications for capacity providers and will provide guidance as soon as possible.

It also hopes the payments will resume “as soon as possible” but these are subject to approval from the Commission.

Can a capacity provider withdraw from their agreement during the standstill period?

BEIS is reviewing this and expects to provide guidance to the delivery body “as soon as possible”.

Will happens to the next round of auctions?

The upcoming T-4 and T-1 auctions for delivery years 2022/23 and 2019/20 respectively have been postponed indefinitely.

The government intends to seek separate state aid approval from the Commission to run a one-off “replacement” T-1 auction.

The postponed T-4 auction is intended to be run as a T-3 auction in next year’s round, subject to the Commission completing its formal investigation and providing state aid approval for the main Capacity Market scheme.

Will the UK Government recover capacity payments already made?

The government is not seeking to recover payments at this stage and hopes this can be avoided. EBIS will discuss with the Commission the extent to which aid already paid may need to be recovered, as part of the formal investigation which can be confirmed after the investigation.

What about new build projects expecting to participate in the upcoming T-4 auction?

The government expects the postponed T-4 auction to be run as a T-3 auction in next year’s auction round subject to the Commission completing its formal investigation and providing state aid approval.

National Grid said: “BEIS appreciates this has the potential to be problematic for certain construction lead times.”

Written by

Bruna Pinhoni

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