Innovative Energy Consultancy Ltd
Innovative Energy Consultancy Ltd

EC announces full Capacity Market investigation

The European Commission (EC) has announced that it is to carry out a full investigation of the GB Capacity Market (CM) in response to the European Court of Justice (ECJ) decision to annul the existing state aid approval.

This is the latest in a series of developments that have seen the SM at a standstill since 15 November 2018, when the General Court of the ECJ ruled that the CM scheme was unlawful as the EC had failed to launch a proper investigation when it cleared the scheme under state aid rules in 2014. This was in response to a challenge by demand-side response (DSR) provider Tempus Energy. The challenge was sustained on the grounds that the commission should have taken a more detailed look at interactions between the scheme and the internal electricity market.

As a result of the decision, the CM immediately entered a standstill period, with no new payments being made to agreement holders, and scheduled January 2019 T-1 and T-4 auctions cancelled. It is conceivable that the commission could insist on the return of payments already made. BEIS has already committed £3.8bn of consumer backed payments to capacity providers under the measure, and until a new approval is obtained, these will be at risk.

In the intervening period, BEIS has carried out several measures centring on submitting new information to the EC as part of the process to reapply for the state aid approval and on ensuring payment flows can be quickly resumed after the reapplication process. It has also set out plans to hold a rescheduled T-1 auction for 2019-20 in the summer (ahead of any renewed approval) and a new T-3 auction in early 2020 for the 2022-23 capacity year.

Investigation

The Commission’s announcement of its full investigation follows a previous into the information originally provided as part of the original submission back in 2014. It also issued its opening decision on 15 March, in the form of a 57-page letter from Competition Commissioner Margrethe Vestager to Foreign Secretary Jeremy Hunt. The focus of the investigation is to ascertain “whether certain aspects of the measure provide adequate incentives to allow DSR to participate effectively in the CM or whether they might disadvantage DSR operators compared to generating CM Units.”

The EC is assessing the compatibility of the CM with the internal market based on the Environmental and Energy Aid Guidelines (EEAG), which set conditions for state aid for generation adequacy. Under the EEAG, measures must: be coherent with other measures aimed at addressing the same market failure; only compensate the service of availability of capacity; be open to all relevant capacity providers; allow sufficient lead times for new investments; and take into account the extent to which interconnected capacity can contribute to addressing adequacy concerns.

Three areas of focus

The Commission noted in the opening decision that all but the third of these points are currently met by the scheme, although it expressed doubts about whether the approach the UK has taken in relation to allowing foreign capacity to participate under an interconnector-led model may not be appropriate in the future given EU guidance issued following its sector inquiry into CMs in 2016.

In carrying out its investigation the EC said it will focus on three aspects of the CM:

  • appropriateness: Is the CM sufficiently open to all relevant capacity providers, including DSR providers? This relates to the different contract lengths offered to the different types of capacity providers (that is, three years for refurbished generation and 15 years for new generation, otherwise a year)
  • proportionality: Is the CM proportionate due to the “potentially discriminatory differences” in how DSR is treated in terms of the length of contracts available? The EC is also examining whether the cost recovery method applied under the CM fails to adequately encourage consumers to reduce their consumption during peak times, thereby not minimising the total amount of state aid paid out. The issue here is that costs are targeted at all winter peak demand periods rather than specific hours, and whether this discourages DSR, and
  • avoidance of negative effects on competition and trade: Does the CM avoid these as long-term contracts are reserved for generating units?

The EC is also looking to assess the legal situation not only in relation to contract length but also the levels of capacity set aside to be auctioned off in the T-1 auctions, including reserved volumes for DSR. The investigation will also examine whether the current 2MW minimum threshold for CM participation has created a barrier to entry.

Finally, the EC highlighted that, unlike other European CRMs since approved, the GB does not allow foreign generation capacity to participate (as its rules were signed off before full implementation of the Internal Electricity Market). Instead the GB scheme has allowed since 2015 interconnectors to take part as equivalent generation capacity. While the EC accepts the UK’s arguments for why foreign capacity was not been allowed to participate in the scheme at the time, it expresses doubts over whether cross-border participation in the GB CM should continue to be limited to the interconnector-led approach in the future.

Government confident in CM

Following the announcement, BEIS sent an email to stakeholders noting that it was still “confident that the CM is the most appropriate way to deliver secure electricity supply at least cost to consumers, and that the investigation will determine that it is fully compliant with state aid rules upon a full review of the evidence.”

BEIS and interested parties now have a month to respond to the opening decision. The comments submitted will be presented to it, and it will then be given a month to reply to the comments. At the end of the formal investigation procedure, the commission can adopt a positive decision, a conditional decision (applying conditions on the measure for it to be granted approval) or a negative decision. A full investigation can take anything between six to 18 months to wrap up.

Overall, then, the EC has been quick off the mark It appears to be dealing with the need to obtain a new approval as a priority pointing to relatively early resolution ahead of any T-3 auction, and there is much in the opening decision that will encourage BEIS

Most agree to maintain CM

Separately, on 7 March, BEIS published the outcome of its Capacity Market (CM) and Emissions Performance Standard Review: Call for Evidence, finding that the “overwhelming majority agreed there is a need to maintain the CM”.

Published on 7 March, the consultation outcome reported 68 responses to the question of whether the CM should be maintained. Some of the small number of respondents that argued against the continuation of the CM cited the low clearing price of the most recent auctions as evidence of the availability of surplus capacity, arguing that other market developments such as smart meters and cash out will ensure security of supply. However, respondents in favour of the continuation of the CM said that, although the clearing prices in recent auctions have been low, they have not been zero. As such, they said that they are likely to rebound in future due to the upcoming closures of coal and nuclear capacity and the likely increased demand in the 2020s.