Collecting capacity market payments could prove tricky


On 24 October, the European Commission announced its decision to approve the British capacity market – established to ensure the lights stay on during periods of peak energy demand for the grid. Standstill payments of around £1 billion (€1.17 billion) were due to be issued last Thursday with a payment deadline of tomorrow. However, the process of collecting and distributing deferred capacity payments could prove tricky.

Lee Drummee, an analyst at Cornwall Insight, said: “The collection of the £1 billion back payment bill is likely to prove problematic as some suppliers may not have been actively billing large business customers – particularly those on ‘pass-through’ contracts – during the suspension of the scheme. The collection of these costs could prove even more challenging if customers have switched suppliers during the capacity market suspension.

“It is likely that domestic suppliers will have collected these costs from customers, especially following [regulator] Ofgem’s decision to include CM [capacity market] costs in the price cap. However, with 17 suppliers exiting the market during the scheme’s suspension, additional charges will come through the CM mutualization process.

“There is a potential for initial payments to be reduced to avoid a delay in deferred payments to capacity providers. Following the first mutualization exercise payments will be proportionately adjusted if there is a shortfall. If payments are reduced, capacity providers will be entitled to supplementary payments following another mutualization process.

“While structures are in place to ensure providers will receive payments, stresses in the supply market could result in delayed payments to capacity providers. The collection of these payments will ultimately be a test of the effectiveness of the Electricity Settlements Company debt recovery process, Ofgem’s ability to recover unpaid capacity payments through financial penalties and for these funds to be included in a capacity payment reconciliation.”