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UK: European Commission launches in-depth investigation into the UK capacity market

  • United Kingdom
  • Energy and infrastructure

26-02-2019

The European Commission announced on Thursday 21 February that it has opened an in-depth investigation so as to determine whether the UK capacity market scheme, which seeks to safeguard electricity supply during periods of peak demand, is in line with the EU State aid rules.

The capacity market was suspended in November 2018 following Tempus Energy’s successful challenge against the Commission’s original clearance decision at the EU General Court.

In its challenge, Tempus Energy had raised a number of issues which in its view demonstrated that the capacity market scheme favoured electricity generators and discriminated against demand-side response (DSR) operators. Ultimately, the Court annulled the Commission’s decision on the basis that, as Tempus Energy had also alleged, the issues raised by the capacity market scheme were sufficiently complex to merit an in-depth investigation (which the Commission had not carried out) before reaching a view as to whether the scheme was compatible with EU State aid rules.

It should be noted that the Commission has also appealed the Tempus Energy judgement. However, the appeal does not have a suspensory effect on the Court’s decision, hence the need for the Commission to proceed with a new investigation. In the absence of a State aid clearance, the capacity market remains suspended and will only recommence once either the Tempus judgement is successfully appealed or the Commission clears the scheme following its in-depth investigation.

The current assumption is that the Commission’s in-depth investigation (which in principle can take up to 18 months to complete) will be completed and a new decision adopted before the appeal is heard in the Court of Justice of the EU. Clearly, there is also an element of uncertainty as regards Brexit implications. In the event of the Withdrawal Agreement being ratified, the Commission will continue to have jurisdiction over the issue during a transitional period (but also beyond that period in specific circumstances). In the event of a “no deal” Brexit, it is likely that the arrangement would require re-notification to the Competition and Markets Authority.

The uncertainty over the arrangements is causing concerns in the energy industry. Interested parties will have the opportunity to submit their views on the capacity market scheme and its compatibility with State aid rules within a month from the publication of the decision.

The investigation and clearance (if forthcoming) could entail various changes to the structure of the capacity market, most foreseeably in relation to DSR participation. This could include, for instance, longer term capacity contracts being available to DSR participants in the scheme.

The UK Government is also currently consulting on amendments to the scheme required to cater for the suspension of the capacity market, and its continuation (if and when State aid approval is granted).

Our team of energy and State aid experts have been involved in advising clients in the context of State aid investigations across the EU. If you would like to discuss any aspects of the Commission’s in-depth investigation announcement, including how best to formulate and submit your views, please contact the team below.

For more information contact

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