Tempus Energy and the capacity market in the UK

Publication | November 2018

The General Court of the Court of Justice of the European Union (CJEU) has annulled the European Commission’s State aid approval for the Capacity Market, by ruling in favour of Tempus Energy, in a case against the Commission (press release and judgement). This means the capacity market enters a standstill period’ which prevents the UK 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 the scheme can be approved again.  

The decision

Tempus argued that the Commission could not conclude, following nothing more than a preliminary examination and in the light of the information available at the time of the decision, that the planned aid scheme did not raise doubts as to its compatibility with the internal market. According to Tempus, the scheme privileges generation over demand side response (‘DSR’) in a discriminatory and disproportionate manner that goes beyond what is necessary to achieve its objectives and satisfy the State aid rules. Tempus argued successfully that the following aspects of the capacity market should have led the Commission to have doubts as to the compatibility of the measure at issue with the internal market:

  • Length of capacity market agreements: DSR providers are eligible for 1 year contracts, whereas new build or refurbished generation are eligible for 3 or 15 year contracts, depending on the level of capex. The difference in treatment was based upon detailed examination of the expenditure and financing needs of generation, but no similar scrutiny was applied to DSR.
  • The cost recovery method selected:  Cost recovery is based on electricity consumption between 16.00 and 19.00 each weekday in winter, rather than consumption during the three highest annual demand peaks (‘the triad’). Tempus argued that the mechanism failed sufficiently to incentivise consumers to reduce their consumption during demand peaks and therefore does not allow the total amount of aid to be limited to the minimum amount necessary.
  • The conditions to participating in enduring auctions: DSR providers must bid for open ended capacity events and must procure a bid bond at the same level as generation which was claimed as a barrier to entry to DSR.

CJEU examined whether the measure notified by the UK raised doubts as to its compatibility with the internal market in the light of, amongst other things, the guidelines on State aid for environmental protection and energy 2014-2020. The existence of doubts should have led to a formal investigation procedure. The CJEU found that the Commission should have looked at more information than just the UK’s submissions contained in the notification. CJEU also found that the Commission failed properly to assess the role of DSR within the capacity market. The Court noted, first of all, that it was for the Commission to satisfy itself that the aid scheme was designed to allow DSR to participate alongside generation, because their respective capacities provide an effective solution to the capacity adequacy problem. In that context, the aid measures should be open and provide adequate incentives to the relevant operators. In the light of the elements available to the Commission and of the size of the role that could be played by DSR within the capacity market in order, amongst other things, best to decide whether State intervention is needed and to limit aid for electricity generation to the appropriate amount, the Commission must have had doubts. In particular, the Commission could not be satisfied merely by the ‘openness’ of the measure and conclude, consequently, that it was technology neutral, without examining in greater detail the reality and the effectiveness of the appreciation of DSR in the capacity market. 

The CJEU has therefore annulled the contested decision.

The immediate consequences

  1. The Department for Business, Energy & Industrial Strategy (BEIS) has announced the court’s decision here, and links to information and guidance for suppliers. This ruling imposes a ‘standstill period’ on the UK’s Capacity Market. BEIS have announced that “the ruling does not change the UK Government’s commitment to delivering secure electricity supplies at least cost, or our belief that Capacity Market auctions are the most appropriate way to do this”.
  2. The Commission are required to conduct an investigation and grant State aid approval for the Capacity Market.
  3. National Grid as EMR Delivery Body (NG) is contacting all affected parties. It has published an advice document here. Key points from that document are:
    1. NG is proceeding with all activities which do not constitute State aid, including pre-qualification process for the auctions in 2019.
    2. NG is postponing indefinitely the upcoming T-4 and T-1 Auctions for Delivery Years 2022/23 and 2019/20 respectively, in accordance with Regulation 26(3)(a) of the Electricity Capacity Regulations 2014.\
    3. Subject to the Commission completing its formal investigation and providing State aid approval for the main capacity market scheme, the postponed T-4 auction will be run as a T-3 Auction in next year’s auction round (which may impact construction lead times).
    4. The Government is intending to seek separate State aid approval from the Commission to run a one-off ‘replacement’ T-1 Auction.
    5. No capacity payments can be made. The Government hopes that capacity payments will resume as soon as possible but these are subject to the Commission providing State aid approval for the capacity market and agreeing that the UK can make payments under existing capacity agreements. BEIS are considering whether capacity providers are still required to perform during this period or can withdraw from their agreement.
    6. Credit cover will be returned on request that is being held in relation to postponed auctions and arising from past auctions.
    7. BEIS is not taking steps to recover capacity payments at this stage. It is not clear whether this can be avoided and will depend on the outcome of the Commission’s investigation.

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