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

Related thinking

Regulation and policy

Electricity transmission charging reform – overtaken by changing priorities?

Charging for the transmission network is never out of the development process for long. From major reviews, such as that initiated under Project Transmit in 2010, to significant reforms such as removing the triad benefit from distributed generation in 2018, and a host of smaller developments, change seems the only...

Energy storage and flexibility

Glory Days – T-1 auction clears at £45/kW

To say the T-1 Capacity Market (CM) auction clearing at £45/kW per year was a surprise feels like an understatement. It looks like a major windfall for successful participants in the auction –  many are asking just what happened? Easy money Until February, it looked like prices would clear at...

Regulation and policy

Answers to some FAQs about Brexit

Following the end of the transition period on 31 December 2020 and the signing of the Trade and Cooperation Agreement, aspects of the relationship between UK and the EU in respect of the arrangements for energy trading and cooperation have changed. We set out answers to some Frequently Asked Questions...

Low carbon generation

Divergent electricity prices in the wake of Brexit

On 1 January 2021, the UK left the European Union (EU) and as such is no longer part of the Internal Energy Market (IEM). While the UK and the EU agreed a post-Brexit Free Trade Agreement (FTA) on 24 December, outlining how energy markets, interconnectors and regulation will be affected,...


The top 5 podcasts of 2020

We released 13 podcasts in 2020 covering all aspects of the energy market, from the Capacity Market and Electric Vehicles to Faster Switching and heat networks. Here are our top five podcasts of the year, ranked by the number of people who listened. 5. The Impact of COVID-19 on System...

Energy storage and flexibility

All mod cons: Routes to market for household flexibility

According to National Grid’s 2019 Future Energy Scenarios[1], meeting decarbonisation targets could require deployment in GB of 13GW of flexibility from commercial and industrial consumers by 2050, compared to around 1GW currently available. While there are currently no comparable forecasts for domestic demand-side response (DSR), energy suppliers and technology companies...

Regulation and policy

COVID-19-driven changes to electricity Third Party Charges

The impact of COVID-19 on the energy sector has been a hot topic for the last few months. As we progress further into the UK’s lockdown period we are now beginning to piece together the wider picture of effects across energy Third Party Charges (TPCs). These impacts are expected to...

Low carbon generation

Flexible Asset PPAs – more capacity, more competition

The Power Purchase Agreement (PPA) market for flexible assets in the last six months has both grown in size and seen increased levels of competition as new offtakers and optimisers make themselves known in the market. What do we mean by the PPA market for flexible assets? We mean the...