EU Court Blocks UK Capacity Market State Aid

The UK Department for Business, Energy and Industrial Strategy (Beis) said November 15 that the ruling by the General Court of the Court of Justice of the European Union imposes a ‘standstill period’ on the capacity market for power generators.

In a November 15 presentation, National Grid, which delivers the mechanism, explained that the capacity market will enter a ‘standstill period’ which prevents the UK government from holding any capacity auctions, making any capacity payments under existing agreements, or undertaking any other action which could be seen as granting state aid, until the scheme can be approved again.

National Grid said the government is taking no steps to recover payments at this stage, and hopes that this can be avoided. However, the government and the European Commission (EC) will discuss the extent to which aid already paid may need to be recovered, as part of the EC’s formal investigation. The final position will need to await the results of the EC’s investigation, it said.

Capacity mechanisms are common across the European Union in one form or another. In the absence of market signals in the UK power market, potential investors in new plant capacity have awaited the guarantee of payments from National Grid to finance the construction, despite the thin surplus of available capacity over maximum demand.

The UK's Tempus Energy, however, challenged this as it gave an advantage to companies who had fossil-fuelled plants; Tempus' energy business model was to turn down demand instead of increasing supply.

The European Commission (EC) agreed with Tempus, and cancelled its own state aid approval for the UK capacity market. Beis said it was "already working closely with the EC to aid their investigation and seek timely state aid approval for the capacity market. The ruling does not change the UK government’s commitment to delivering secure electricity supplies at least cost, or our belief that the capacity market auctions are the most appropriate way to do this. The ruling will not impact security of supply this winter."

National Grid said it did not believe the judgement caused any risk to security of supply this winter, and stated that it would work closely with government and industry to ensure electricity supply and demand is balanced each second.

One operator of such plant, Centrica, said in a statement that it "noted today’s ruling by the General Court of the European Union and the associated statements issued by Beis, which we are reviewing".

Tempus was not alone. Another company, GridBeyond, said November 15 that it "maintains its advocacy for technological neutrality in the energy services markets, with the long-held view that generators and demand side response services should have equal opportunities to obtain capacity contracts. We support the principle behind today’s decision, having openly spoken to National Grid, Ofgem and Beis about the need to reform the capacity market in a way that would level the playing field.

In a speech November 15, the secretary of state for Beis, Greg Clarke, said: "The judgement was, as everyone knows that’s read it, on a procedural matter – the EC’s process for granting State Aid approval – rather than on the policy on capacity markets per se. The EC and the government are already working together to consider the judgement and the best means to respond swiftly and appropriately. And National Grid has confirmed today that the decision will not cause any risk to supply this winter."