European Court of Justice censors European Commission approval of UK capacity market

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The European Court of Justice (ECJ) has criticized the European Commission’s approval of the U.K. capacity market after critics alleged the mechanism – established in 2014 to ensure sufficient electricity supply at times of peak demand – amounts to a back-door incentive scheme for traditional power generators by not giving sufficient weight to demand-side response (DSR) technology.

In a slap down for the European Commission, the ECJ said its fellow EU body had been unable to investigate whether the capacity market would be at odds with European internal market rules when the U.K. submitted plans for the mechanism four years ago, and had instead simply submitted questions for Westminster to answer – and then taken the responses at face value.

The court has annulled the commission’s decision not to object to the scheme, and has initiated a formal investigation into the capacity market after a complaint by the Tempus corporate shareholder group.

The ruling comes at a particularly problematic moment for British Prime Minister Theresa May, who was this week facing a full-scale rebellion from her party and cabinet, as she tries to persuade them – and then parliament – to accept a Brexit deal that could leave the U.K. having to take heed of ECJ rulings for considerably longer than pro-Brexit MPs are likely to accept.

In its finding, the ECJ held the commission did not sufficiently investigate the effects of the U.K. capacity market in order to reasonably rule out any conflict with EU law, especially concerning the internal market.

The Tempus group says the capacity market “privileges generation over demand-side response ‘DSR’ in a discriminatory and disproportionate manner that goes beyond what is necessary to achieve its objectives and satisfy the state aid rules.”

State-run incentive scheme for fossil fuels

Under the capacity market system, annual auctions are held one or four years ahead of each power delivery year, and successful bidders secure agreements to either generate electricity at times of system stress, or to reduce demand. They are paid a clearing price per kilowatt-hour, for the capacity they have committed to provide or for the level of demand they will guarantee to reduce.

Critics claim the scheme goes beyond its stated objective and amounts to a state-run incentive for non-renewable electricity generation. When the U.K. delivered its legal notice of the scheme to the commission in July 2014, multiple stakeholders pointed out the incentive effect, its lack of proportionality and its potential discrimination between capacity providers.

In its proceedings, the ECJ found the commission was unable to assess the concerns and had instead forwarded questions to the U.K. government to answer. The Tempus group says the resulting responses were simply accepted at face value and the ECJ agrees the responses should have undergone further investigation.

The court further found the commission failed to adequately assess the role of DSR in the capacity market. According to the ECJ, the commission was obliged to establish the capacity market be designed in such a way that DSR would work alongside generation capacity to solve the capacity problem. The court finds both technologies equally viable to address the principal objective of the capacity market, and found each should, thus, be treated equally.

The ECJ found the Commission was made aware of the need to treat both technologies equally, after receiving the advice of a panel of technical experts.

The commission did not perform its role

The court said: “In light of the elements available to the commission, and of the size of the role that could be played by DSR within the capacity market in order, inter alia, best to decide whether state intervention is needed, and to limit aid for electricity generation to the appropriate amount, the commission must have had doubts. In particular, the commission could not be satisfied merely by the ‘openness’ of the measure and conclude, consequently, that it was technology neutral, without examining in greater detail the reality and the effectiveness of the appreciation of DSR on the capacity market.”

The renewable industry is examining the U.K. government’s review of its Electricity Market Reform package – a review that is mandated every five years – as it bids to establish a presence in the capacity market.

At an event in London this week, Charles Philipps, Head of the Capacity Market at the Department of Business, Energy and Industrial Strategy, cautioned renewable energy resources might not be able to participate in the mechanism before 2020.

Explaining why renewables, specifically solar and wind, have not been included, the government wrote: “The CM’s [capacity market’s] eligibility framework does not currently provide a route for some types of renewable capacity, specifically wind and solar, to participate in the auctions. Up until recently, it was expected that such technologies would already benefit from low-carbon support schemes such as Contracts for Difference (CfD) or the Renewables Obligation (RO) and so be excluded from the CM. Moreover, until recent evidence which may suggest the contrary, it was considered that solar was not capable of providing any contribution to security of supply.

“However, the costs of new wind and solar have fallen more quickly than anticipated, and we understand that a limited number of new onshore wind and solar projects are reaching the point where they may soon be viable without subsidy. Ofgem [The U.K.’s electricity and gas regulator] received three formal requests from industry to change the CM framework to allow participation in future auctions.”

This article was amended on 16/11/18 to reflect the fact the ECJ has annulled the European Commission’s decision to find no fault with the proposed establishment of the U.K. capacity market. The ECJ has not found the capacity market amounts to a back-door incentive for generators, but has launched a formal investigation into the mechanism.