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UK: European Commission (Re) Approves GB Capacity Market

  • United Kingdom
  • Energy and infrastructure - Clean energy

25-10-2019

The European Commission (“EC”) has now completed its in-depth investigation of Britain’s capacity market scheme (“CM scheme”), which was introduced in 2014 following EU state aid approval to help safeguard security of electricity supply.

The CM scheme has been suspended since November 2018, when Tempus was successful in its appeal of the original 2014 state aid approval on procedural grounds. The General Court found that the Commission should have opened an in-depth investigation to gather more information on certain elements of the scheme, including aspects of the design which Tempus alleges discriminate against demand-side response (“DSR”) providers.

Following that case, the Commission appealed the decision, the CM scheme was suspended, the UK Government made changes to the scheme (also challenged by Tempus) to enable ‘conditional’ CM auctions to be run, and the Commission carried out an in-depth investigation (which has now been completed).

In the meantime, CM providers have been without payments for making their capacity available, and without the certainty in respect of future revenues which is needed to support many new investment decisions; and suppliers were no longer required to raise and pay “CM levies” to fund the scheme. The UK government consulted on the issue, but ultimately decided to leave it up to suppliers to make their own provision for levies to fund the CM scheme if and when it came back.

The in-depth investigation

During the in-depth formal investigation, the Commission received and analysed feedback from 35 interested parties from a wide range of players in the industry (including generators, interconnector operators, DSR providers, trade associations, and network operators).

The Commission confirmed that the CM scheme, since 2014, has complied with EU state aid rules, is necessary to guarantee security of supply in Great Britain, is in line with EU energy policy objectives (in particular with the 2014 Guidelines on State Aid for Environmental Protection and Energy) and does not distort competition in the EU single market.

No finding was made that the CM scheme would put DSR providers or other capacity providers at a disadvantage in respect of their participation.

What now?

We are still awaiting formal announcements from the UK Government and the EMR delivery body as to the impact of this and the next steps. Generators and suppliers will be interested in getting answers to some key questions as soon as possible, including:

  • when their CM payments will restart;
  • how backdated payments will be funded and paid out (eg, as a lump sum or in instalments, and what the evidential requirements will be to show past performance during the suspension period);
  • when the new ‘conditional’ CM agreements will become unconditional; and
  • when the milestones in new build CM contracts will be updated and the timer ‘re-started’.

Whilst this news will be well received by CM generators, suppliers will soon be facing a bill for the suspended levies. Many will have seen this coming, and will have made adequate provision, but with a number of failed suppliers recently, the burden will fall on a diminished pool of suppliers.

Changes to be made to CM scheme

The UK Government has committed to implementing certain improvements to the scheme for the future, in particular in relation to:

  • lowering the minimum capacity threshold for participating in CM auctions;
  • direct participation of foreign capacity;
  • participation rules for new types of capacity;
  • access to long-term contracts;
  • volume in the year-ahead (T-1) auctions;
  • compliance with the new EU Electricity Regulation (Regulation (EU) 2019/943, 5 June 2019).

This has arisen in light of recent market and regulatory developments (including the new EU Electricity Regulation) and other issues identified in the UK’s recent 5-year CM review (available here).

The Commission’s full press release is available here. The full text of the decision is not yet publically available, but will be made available under the case number SA.35980.

For more information contact

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