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European Commission clears Capacity Market scheme to continue

Image: Getty.

Image: Getty.

The European Commission has approved Britain’s Capacity Market scheme following an in-depth investigation into its state aid compliance.

The mechanism was suspended last year following a landmark ruling, which found that the EC had erred on procedural grounds in granting state aid approval back in July 2014.

The case was launched after UK energy technology company Tempus Energy challenged the approval, claiming that the inner workings of the mechanism inherently favoured some forms of generation over others.

The General Court of the European Commission annulled the decision, effectively suspending the Capacity Market and preventing Britain from both running any further auctions and issuing any payments.

This prompted an in-depth investigation from the EC, which today concluded that the scheme was clear to continue.

The Commission said it received and analysed feedback and comments from 35 interested parties.

The Commission said it did not find any evidence that the scheme would put any capacity providers at a disadvantage with respect to their participation in it, nor was it concluded that the mechanism distorted competition in the Single Market.

Industry reaction

Warning that the CM’s continued suspension posed “serious consequences” for the sector, Energy UK chief executive said the decision to reinstate state aid approval was “good news for the whole industry”.

“The CM can now continue to do the job it has done successfully for a number of years, ensuring security of supply at the lowest cost to customers in times of high demand. The Capacity Market has been rightly evolving to reflect a different mix of energy generation with newer technologies gaining a greater share in recent auctions.

“With the inclusion of renewables in future auctions - something we have long called for – a technology-neutral CM will continue along this path and drive progress towards a net-zero economy bringing benefits for both the environment and the economy, while reducing costs for customers,” Slade said.

Industry players with Capacity Market contracts have, predictably, also welcomed the news. Drax chief executive Will Gardiner said the development was “great news” for the UK energy system and lauded the role the CM had played in maintaining energy security.

“We will be prequalifying a number of Drax’s flexible and reliable power stations, as well as some of our development projects, later this year with a view to participating in the capacity markets auctions in 2020,” Gardiner confirmed.

RWE Generation chief executive Roger Miesen echoed Gardiner’s sentiments, welcoming the news that deferred payments are to be forthcoming. “The conventional power market in Europe remains extremely challenging with large scale plants operating for shorter periods of time to support the transition to a low carbon energy system,” he said.

However Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit, said that while the CM had been green lit to continue, “serious questions persist” about the necessity for such a mechanism, insisting that there was still “little evidence” that it’s needed.

“…there are major doubts if it is the right tool to deliver low-carbon electricity during the 2020s, and it continues to shut out innovative and disruptive technologies that are vital in the transition to a smarter, cleaner and cheaper electricity system.

“Without changing tack, the UK is now at risk of continuing to shovel cash towards old coal, gas and nuclear power stations, which would be running anyway, rather than clearing space for low carbon generation and innovative technologies to achieve their full potential, bringing energy bills down with them,” Marshall said.

What happens next

The industry expects that the Capacity Market will be reinstated shortly, with outstanding payments held back by the scheme’s suspension now free to be paid in full. That will be strongly welcomed by generators who’ve had to shoulder the fallout on their respective accounts. For some, these payments are sizeable. Drax, for instance, expects a £75 million boost to its 2018 earnings on the back of the scheme’s reinstatement.

Attention will now immediately turn to forthcoming auctions. Three are scheduled to take place between late January and early March 2020, the prequalification results for all is slated for 22 November 2019.

The T-3 auction is to start on 30 January, the T-1 auction on 6 February and the T-4 auction on 5 March 2020.

The Capacity Market is, however, not quite out of the woods yet. While it may now be a formality, it is still the subject of a High Court hearing next month after Tempus Energy escalated its case against the Department for Business, Energy and Industrial Strategy back in March.

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