Today, the General Court of the European Union ruled that the European Commission did not effectively evaluate the UK capacity market when it approved the scheme for government aid in 2014. As a result of this ruling, the capacity market has been put in a “standstill period” until the European Commission can conduct a thorough review of the capacity market. This includes suspending all payments to organizations participating in the capacity market.
The capacity market is mechanism that provides compensation to generators for agreeing to have their units available to meet system demand during the winter months. This scheme is viewed by many as an important tool to ensure generation supply is available to meet future demand.
In 2014, Tempus Energy challenged the competitiveness of the capacity market arguing that it unfairly benefited generating technologies over demand side response technologies. Tempus Energy argued that a market which can award a 15-year contract to a generator yet only allows one year contracts to be awarded to demand side participants is inherently anticompetitive.
Sara Bell, founder and CEO of Tempus Energy said today : “This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”
As a result of today’s ruling, the T-4 auction for capacity delivery in 2022/23 and the T-1 auction for capacity delivery in 2019/20 have been postponed. The government will now have to seek approval from the European Commission to run a “one-off” T-1 auction for the upcoming 2019/20 delivery period.
While market experts believe there is no risk to grid reliability this winter, this ruling could impact both spot market prices as well as forward prices. With generators now not being able to recover some of their costs through the capacity market payments, they may seek to recover these costs through higher energy prices.