Power grid

UK’s Capacity Market is not fit for purpose

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We have written to the European Commission arguing that there is no proven need for the UK’s Capacity Market – and that as designed, it favours coal and gas power plants over cleaner technologies.

Our observations come as the European Commission is deciding whether to re-approve the Capacity Market as a State aid. It is totally inappropriate for the scheme to be approved at a time when the UK Parliament has declared a climate emergency, and when the UK’s Climate Change Committee has called for a net zero greenhouse gas emissions target by 2050.

A legal quagmire: the story so far

The Capacity Market was originally approved by the European Commission in 2014 and was the first such scheme ever to receive State aid approval. It covers most of the United Kingdom, but not Northern Ireland (and so is more accurately referred to as Great Britain’s Capacity Market; for simplicity, we refer to the UK throughout this piece).

The Commission’s State aid approval was challenged in the EU courts by Tempus Energy, a ‘demand-side response’ management company. Tempus argued that the Commission had rushed through its State aid approval without properly considering whether the Capacity Market discriminated in favour of fossil fuels (gas, coal and diesel generators), and against cleaner technologies, such as storage and demand-side management.

We agree with Tempus’s arguments – the Commission only spent one month investigating this huge scheme, and did not listen to any third parties, only the arguments of the UK government.

It refused to conduct an in-depth investigation, which could have lasted up to 18 months, and would have considered the views of market players, technical experts, and civil society groups, who provide an alternative well-informed perspective.

In November 2018, the General Court found that the Commission had breached its legal requirements and annulled its decision to approve the Capacity Market. The UK government suspended its operation – and was forced to ask the Commission to re-assess whether the scheme was lawful. This time, the Court ordered the Commission to run an in-depth investigation, and open a consultation.

Capacity markets: theory vs reality

Capacity markets allow ‘capacity providers’ – electricity generators, demand-side management providers, and others – to bid for contracts, awarded by national government.

Under these contracts, providers commit to provide capacity in specified future ‘delivery years’. In return, these capacity providers receive huge subsidies – in the case of the UK’s Capacity Market, potentially as much as £24 billion, collectively, awarded over a period of ten years.

The theory behind the Capacity Market is that market forces alone are not enough to ensure that there is enough electricity supply at times of peak demand – and without additional incentives, there is a risk lights will go out. Capacity agreements reward operators who make electricity capacity available – and the same operators can make money by using that capacity to sell electricity to the grid. This theory is fundamentally flawed.

Our analysis

Our legal and technical analysis shows that the UK has not established any need for the Capacity Market – any capacity concerns should be addressed by the market reforms that the UK has already implemented, and there should be no real risk of lights going off. Rather, the Capacity Market helps prop up carbon-intensive coal and gas power plants, and suppresses opportunities for cleaner technologies to grow their role in the UK’s electricity market.

The scheme must not be approved unless it complies with the new rules on capacity mechanisms adopted under the Clean Energy for All Europeans package (in force as of 1 January 2020).

Regardless, if such a scheme is to be implemented, it must be redesigned so that all technologies (including demand-side response, storage and interconnection) that can provide capacity are able to participate effectively.

The Commission must complete its assessment of the Capacity Market by summer 2020. In reality, we expect the UK to push the Commission to speed up the process and issue a final decision by autumn 2019.

This decision could take one of three forms. It could re-approve the Capacity Market and give the UK the go-ahead to implement it. It could prohibit the scheme altogether, on the basis that it is anticompetitive. Alternatively, as a compromise, it might force the UK to make changes to the scheme to ensure it supports cleaner technologies.

ClientEarth will be following the assessment process closely, and will be checking that whatever decision the Commission makes is strictly in accordance with the law.

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Fré Sonneveld