TECs take as the UK see’s the Capacity Market Suspended
The Capacity Market is the regulated scheme designed to ensure payments are made to available generators on the network to provide electricity when the ever more significant volume of renewable energy on the grid cannot.
On 15 November, the UK Government suspended Capacity Market auctions and payments after the European Court of Justice annulled the European Commission’s 2014 approval of the Capacity Market scheme.
The UK Government has since responded that they are aiming to reobtain approval as soon as possible. After liaising with our suppliers, we can’t predict how long this will take or what the outcome will be.
What’s the Impact? - For electricity generators
The scheme is designed to ensure payments are made to generators in return for being available to generate power when called upon to meet demand on the grid. However, following the ruling, BEIS has suspended payments to all scheme participants and also put all planned auctions on hold. This means, for the time being at least, and with immediate effect that generators will not receive the capacity market payments they were expecting. It’s a difficult market for generators at the moment and you can read our Chair – Jo Butlins article covering some of the issues here.
What’s the Impact? - For larger electricity users
The Capacity Market charge makes up about 3% of an average electricity bill for our Members. So if payments to generators are suspended, what happens to the money that electricity suppliers are collecting from users to cover the costs of the scheme?
If they are on a Flexible Power Framework, they are on a pass-through contract which means that they pay these costs as a reference value within their unit rate. There is no individual line item on their bill. The reference value is set at the anniversary of their contract period and based on the suppliers forecast of the CM cost at the time.
Under normal circumstances, the Energy supplier would reconcile the reference value to the final published cost of the scheme. That’s what will still happen if things revert to the situation before this ruling and they receive confirmation of the published costs of the scheme in time to process a normal reconciliation.
If the outcome is still unknown, the supplier would typically still process the reconciliation. If the outcome of the Government’s appeal is unsuccessful they could receive a rebate based on the full reference rate applied.
If you were on a fixed price contract you could find that even if the outcome of the ruling is unsuccessful, that the price has effectively been fixed and the supplier may decide to keep the proportion to cover Capacity Market costs included as additional margin. Just another reason TEC advocate the use of flexible power frameworks as part of a smart risk management strategy.
No one knows which way this will go and with so much uncertainty we will continue to monitor the situation to ensure our Members are kept upto date with the latest information. A copy of the statement made by Claire Perry, Minister of State for Energy & Clean Growth can be found below.
The UK Government’s response: Statement from Claire Perry, Minister of State for Energy & Clean Growth
“On 15 November 2018 the General Court of the Court of Justice of the European Union found in favour of Tempus Energy, against the European Commission, removing the Commission’s State aid approval for the UK Capacity Market. The Court held that the Commission should have consulted more fully before granting State aid approval in 2014. This judgment was decided on procedural grounds. It was not a challenge to the nature of the UK Capacity Market mechanism itself.
The judgment removes State aid approval for the Capacity Market, preventing the UK Government from holding any capacity auctions or making any capacity payments under existing agreements until re-approval.
National Grid has confirmed that they do not believe the judgment will cause any risk to security of supply this winter. They have informed market participants of the judgement.
We are considering the judgment in detail alongside the European Commission and are working to support them as they consider the legal options available.
We believe the Capacity Market is an effective mechanism that is designed in such a way as to minimise costs to consumers. The design of the Capacity Market has not been called into question, and our focus is therefore on ensuring it can be reinstated as soon as possible.
As part of this, we are seeking immediate State aid approval for a T-1 auction that will cover winter 2019/20. Alongside this, we are working to reinstate the full Capacity Market regime and are discussing the swiftest means of doing so with the Commission.
The Government and National Grid will ensure that market participants are kept updated. I will keep the House updated as appropriate.”
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