AECB News : Andrew Warren reflects on the EU’s challenge to the UK’s capacity market

Andrew Warren reflects on the EU’s challenge to the UK’s capacity market and asks if this really is all about the ‘procedural matters’ Ministers have claimed 

BUSINESS GREEN

Shortly before last Christmas, a decision from the European Court of Justice (ECJ) brought to a crashing halt the UK government’s flagship capacity market scheme.

This caused howls of anguish from those who are in business to sell electricity, who have been the almost exclusive beneficiaries of the £5.6bn paid out by the UK government through the scheme over the past four years. 

The decision followed a case brought to the European Court back in 2015 by a small company, Tempus Energy. It revolved around a claim that the way the capacity  market was being operated discriminated against companies that offered demand side response (DSR), thus reducing the amount of electricity being consumed.

Government’s absurd response 

The formal response to this binding legal decision from the UK government has been completely absurd. 

The capacity market is the government’s primary policy for ensuring security of electricity supply. The market takes the form of an annual auction for capacity to be deliver four years hence. Theoretically, firms bid into the auction at the price they need either  to keep existing  plants open to generate electricity, or to create new capacity from scratch.

According to the official Background Briefing, the “Capacity Market scheme aims to ensure security of electricity supplies (sic), in view of the projected increases in electricity demand”. No reference is made to the undeniable fact that electricity consumption is already over 30 per cent below  the “projected increases” that government was forecasting 12 years ago!

The amount of capacity that is deemed to be needed is decided by the relevant Secretary of State  – currently Business Secretary Greg Clark. The quantities involved appear not to reflect the continuing annual decline in electricity consumption.

As it happens, on the same day that the ECJ judgement was published, Greg Clark was giving a “state of the nation’s energy”- type speech. He immediately announced that the ECJ judgement was entirely “on a procedural matter, concerning the European Commission’s process for granting State Aid approval – rather than on the policy on Capacity Markets per se.” 

Handouts withheld

Nonetheless an impending capacity market auction was placed on hold –  prompting howls of anguish from electricity generators that had anticipated further multi-million pound handouts.

The scheme’s suspension has meant the UK government is unable to make £1bn of payments to companies that hold capacity market contracts for this winter. The halt to payments caused energy company SSE to recently warn on profits, saying it was unlikely to receive £60m owed under the scheme before the end of its financial year in March.

It is Clark’s “purely procedural” dismissal that has been regularly  reiterated by his colleague, the Energy and Clean Growth Minister Clare Perry. She told Parliament that the nature of the legal challenge “was not a challenge to the nature of the UK Capacity Market mechanism itself”

She has written formally to the chair of the Commons Business Select Committee, Rachel Reeves, stating unequivocally that “the Court did not rule that aspects of the scheme design were incompatible with State aid rules, or question the necessity of having a Capacity Market. The judgement related to the process followed by  European Commission in approving the scheme in 2014.”

To put it kindly, this is a very selective reading. It is difficult to study that final judgement from the ECJ in full, and then accept that the issues concluded upon are purely procedural. In particular paras 203 to 207 of the Judgement, and paras 27(e)and 69 of the official guidance. 

Serious doubts”

Tempus’ challenge was upheld precisely because various substantive features of the policy design did give rise to “serious doubts” about compatibility with State Aid rules, and that these really should have led the European Commission to launch a formal investigation when the capacity market was started back in 2014.

Before any payments can be restarted, the Commission is required to run a formal investigation, invite and consider formal evidence upon the legality of the design of the UK scheme. Despite wishful thinking in Whitehall, it has no scope to provide any reliable assurance as to the outcome of that investigation, particularly in any preliminary statement. This investigation will not be completed in a few months.

The root of the initial complaint by Tempus Energy is that the methodology for charging electricity customers artificially inflates the cost of the scheme. For years those anxious to help companies reduce energy wastage have fought a hitherto largely losing battle with UK energy policy makers, who seem perpetually to favour those in business to encourage energy consumption. Remember how on the walls of the old Department of Energy there was that poster proclaiming that “Real Men Build Power Stations”?

Demand Management vs Fossil Fuel Supplies

As it stands, the Capacity Market scheme is a very unlevel playing field, where maximum 12 month arrangements on the demand side have been “competing” with up to 15 year contracts on the fossil fuel supply side.

Government should stop pretending that this legal ruling does not impact upon policy design. It transparently does. 

It reveals clearly a bias in favour of existing (mostly fossil fuel) generation. And against better energy management. We could do with greater honesty towards consumers, towards investors, and most of all towards Parliament.

Andrew Warren is a former special advisor to the House of Commons environment select committee.

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