European judicial ruling leads to Capacity Market “standstill period”, but replacement auction likely

A decision on a legal challenge confirmed earlier today (15 November) has resulted in BEIS immediately suspending the Capacity Market (CM). This means cessation to payments to existing CM agreement holders and no CM auctions for future agreements early next year.

The ruling is the result of a legal challenge launched by technology firm Tempus Energy way back in December 2014 against the treatment of demand-side response (DSR) in the CM. Unlike generation capacity, DSR capacity bidding in auctions for CM agreements can only win one-year deals compared to the 15 year deals available to power stations.

The legal challenge centred on whether the decision by the European Commission (EC) to grant State Aid clearance for the CM scheme sufficiently considered whether the design and treatment of different types of capacity was compatible with wider European internal market compatibility.

The ruling by the General Court of the European Union, issued this morning, concluded that in reaching its decision the EC did not complete sufficient research and examination of the impacts of the CM on the operation of the internal energy market. The EC had maintained that its preliminary examination was robust enough to establish that no doubts had arisen that required a more detailed assessment of the schemes impact on the internal energy market. But this decision was rejected by the Court as it pointed to the fact that the State Aid clearance was complex and the first time the EC had had to assess a capacity market. The Court further ruled that the EC could not have established whether any doubt whether the impact on the operation of the internal market existed without itself conducting its own investigation, which it failed to do.

The cost of the CM scheme for 2018-19 is just short of £1bn, with agreement holders paid monthly from the start of the delivery year and payments collected by suppliers through customer bills. The November payment was due yesterday (14 November) and means two of the 12 monthly payments at the 2018-19 prices due have been made. It should be noted that  payments are related to the underlying demand for electricity, and so less than half of the expected annual revenue will have been received by agreement holders. Share prices in all listed companies participating in the CM fell sharply.

The consequences of this ruling are immediate and to say the least very significant—the government has already stated that the ruling “imposes a standstill period” on the CM.

National Grid quickly confirmed its take on the impact of the judgment. It highlighted three immediate actions:

  • It is still able to continue with activities that do not involve granting State Aid, including completing the prequalification process for 2019, but only in case it is required for future capacity market auctions 
  • BEIS is “doing everything [it] can to re-obtain State Aid approval from the Commission as soon as possible”.  It noted the Commission will now need to undertake a formal investigation before providing State Aid approval for the CM. BEIS said it will also support the Commission’s investigation where required.  As part of this process, it will “carefully consider whether any changes to the design of the CM” are needed. But, it concluded that it was unable to speculate how long it will take the Commission to conclude its formal investigation into this case. In the meantime BEIS will work closely with them to ensure the process runs smoothly and that State Aid for the CM can be approved as soon as possible, but
  • BEIS is intending to seek separate State Aid approval from the Commission to run a one-off ‘replacement’ T-1 Auction.  The postponed T-4 will be run as a T-3 Auction in next year’s auction round, subject to the Commission completing its formal investigation and providing State Aid approval for the main CM scheme

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