Investor sentiment is the "biggest casualty” of yesterday’s ruling by the European Court of Justice that has resulted in a 'standstill’ being imposed on the UK Capacity Market (CM), indefinitely postponing auctions and payments to existing contract holders.
But hopes have emerged that the decision, brought about by a challenge from Tempus Energy claiming the CM design unfairly discriminated against clean energy projects, will result in a good outcome for flexible technologies in the years to come.
The ECJ’s judgement is the latest bump in the road for the UK’s principle means of ensuring security of supply, after low clearing prices and existing plant dominated 2018’s auction which also saw new de-rating factors hit energy storage projects.
The immediate effect of the ruling was described by Erik Nygard, chief executive and co-founder of Limejump which operates a number of CM-backed projects, as potentially causing “confusion and uncertainty”, an issue that was picked up by a number of affected parties.
Speaking to Current± this morning Ricardo Pineiro, partner at infrastructure investor Foresight Group, bemoaned the uncertainty the development had created but described it as "unhelpful, but not critical".
Foresight owns two battery storage projects in receipt of Capacity Market payments, but those make up for a relatively small portion of their revenue stacks.
Mark Hollands, head of energy strategy at BSR Group, said: “The way this point has been made and the resulting suspension of the capacity market is potentially damaging to investor confidence and the energy industry as a whole.”
The suspension of existing contract payments is of particular concern in this regard as Tim Rotheray, director of the Association of Decentralised Energy (ADE) said: “It is industry that will suffer the most from [the] ruling, which leaves the market in limbo, without access to revenue streams it had been guaranteed by government.”
This is particularly true for gas projects, which have won the lion’s share of capacity in each of the auctions since they began in 2014. Lawrence Slade, chief executive of the trade body Energy UK which represents many of the affected generators, said: “We are extremely disappointed by today’s General Court judgment as the CM has proven that it can successfully deliver security of supply at the lowest cost to consumers.
“Given the serious financial implications for capacity providers as well as the need for investor certainty and security of supply, this issue needs to be resolved as soon as possible.”
While only gathering a small portion of revenue from the CM for its portfolio of battery projects, Eelpower’s chief executive Mark Simon agreed, telling Current±: “The main fly in the ointment is the element of uncertainty and that basically puts the onus on BEIS to get on with it and come back with a clear resolution of it within weeks rather than many months.”
This pertains particularly the possibility that government may have to recover payments made under the CM, which BEIS was unable to rule out yesterday.
Hollands added: “Any attempt to recover payments already made would cause investors in future projects to discount CM revenues effectively increasing the cost to consumer per MW of installed generation, severely impacting the overall efficacy of the scheme.
“It may also have the effect of rendering generators bankrupt, despite the clear need for stability within the system where possible during this period of technological and regulatory flux.”
However, this extreme outcome has been questioned by Simon who said it was “very difficult to imagine”.
"The letter of the law would say indeed they would have to ask after payments and indeed they can't rule that out or make any suggestion that they might rule that out. But can I see that happening in practical politics? No I can't,” he added.
Opening the door for flexibility
In spite of these concerns, the sector has already looked beyond the court’s decision towards the opportunities it may unlock, despite the uncertainty sparked off by the ruling
Wayne Muncaster, managing director at GridBeyond, said: “The key to succeeding, despite the uncertainty of the quickly evolving market, lays in investing in technologies proven to bring value despite the continual changes.”
Tempus’ claim rested on the fact that the original design of the CM favoured generation over demand-side response which can only apply for a one year contract compared to 15 years on offer to other technologies.
By having to reassess the scheme less than a year before a scheduled review under EU laws, many consider that the ECJ ruling offers the opportunity to restructure the scheme to reflect the growing prevalence of flexible technologies in the UK energy market.
Nygard said: “While this result is not the scenario we would prefer nor is the ideal methodology for change as this ruling will have an immediate impact on many of our customers with contracts and those who have been preparing for the next auction, we do see that this decision will force wholesale markets to embrace flexibility while increasing the adoption of innovative technologies.”
He added that it could likely see an increase in the speed of coal and gas coming off the system by having to compete more evenly with emerging technologies, which will be better placed to deal with the resulting price volatility on the wholesale market,
Simon agreed, adding: “In a funny sort of way, even if this doesn't go the way that Tempus would like, I think it will just accelerate the demise of thermal power.”
Technology providers aiming to take advantage of the issues surrounding the CM are also poised to act. Alex Moor, principle energy analyst at flow machine company redT energy said: “The increased volatility and rise in wholesale market prices we expect to see as gas peakers and conventional generation try to recover lost revenue from the CM suspension further strengthens the case for flexible energy storage infrastructure.
However Gareth Miller, chief executive of consultant Cornwall Insight who made the opening claim that confidence from the investment community offered “the biggest casualty”, suggested that the state aid suspension could impact new flexible assets seeking returns on capital expenditure hardest.
“The consequences of the state aid ruling on capacity market will likely hit flexible new build investors the hardest. The suspension of payments for new plant looking to recover capex & make a return is challenging,” he said.
“Over 8GW of plant fits the new build flex category. Already hammered by MCPD [Medium Combustion Plant Directive], battery de-rating changes & embedded benefit reforms I imagine investment committees in the decentralised flex sector are running out of patience.”
Despite this view, flexible assets are readily finding more revenue stacking strategies to build a business case, often with long-term CM contracts providing a basis for further, more lucrative revenue streams. This is likely to continue while more traditional generation more reliant on CM could face more challenging times ahead.