S.11. State Aid

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Landmark ruling in favour of DSR provider Tempus Energy confirms generation bias in UK capacity market design

Thursday, November 15, 2018


The ruling on UK capacity market design could pave the way for a significant overhaul of electricity market rules and level the playing field for demand-side response.

The European Court of Justice (ECJ) ruled that the EC did not effectively scrutinise the UK capacity market design when it was originally sanctioned under State Aid rules in 2014. Tempus Energy brought the case before the ECJ the same year, alleging that European policy favoured incumbent generators over technologies facilitating demand-side response (DSR). The company’s CEO, Sara Bell, said at the time: “A five year-old can see that it is anticompetitive to grant 15-year contracts to large generators and one-year contracts to DSR”.

The ECJ has ordered the EC to annul its approval, which will lead to the suspension of a £0,99bn/year capacity market designed to safeguard the security of UK power supplies over the winter months. The scheme guarantees payments to owners of coal and gas power stations to ensure that they are ready to provide emergency backup at times of peak demand. More than half of the total amount remained to be paid this winter.

The UK has also been blocked from holding any capacity market auctions for new contracts for the supply of back-up power. The auctions planned for early 2019 will now likely be delayed indefinitely. The interruption of payments and auctions will likely come as a significant blow to fossil-fuel generation plants owned by Centrica, RWE, Uniper and SSE, among others.

While the UK government has insisted that power supplies are sufficient to cover demand in the coming months, the judgement promises to trigger significant disruption in energy markets at pan-European level where the EC has approved a number of capacity market schemes, which appear to favour fossil-fuel generators.

In February 2018, the EC approved six capacity mechanisms, namely in Belgium, France, Germany, Greece, Italy and Poland. Italy and Poland now have market-wide capacity mechanisms similar to the UK model, while Belgium and Germany operate so-called strategic reserves. France and Greece operate capacity mechanisms designed to promote DSR.

The Emission Performance Standard (EPS), which sets a 550g CO2/kWh carbon criterion for plants seeking inclusion in capacity schemes, excludes the majority of coal-fired generation plants from consideration. However, following a vote in the EP, strategic reserves have been exempted from compliance with the EPS standard, allowing Germany to integrate eight idle lignite power plants into its strategic reserve approved earlier this year. The German government has argued that the reserve is necessary to facilitate the nation’s transition to RES as it phases-out nuclear power.

The EP Decision led a group of seven countries – France, Poland, Italy, Hungary, Greece, Ireland and the UK – to issue a common position arguing that strategic reserves for electricity should not receive favourable treatment from regulators.

The finalisation of the Clean Energy Package planned for 2019 promises to overhaul the legal architecture of the European power system via the introduction of support measures for demand-side response technologies. However, stakeholders are still struggling to come to an agreement on the contentious issues of regulated energy prices and capacity market design. It is unclear whether the ECJ ruling will have any bearing on the debate going into the next round of trilogues.