Capacity is procured via two auctions: a T-4 auction, held four years ahead of the delivery year, where the majority of the capacity is secured; and a T-1 auction, held a year before the delivery year, to secure any remaining requirements. Successful bidders, (which can include new and existing generators, demand side response (‘DSR’) providers, interconnectors and storage operators), receive steady payments from National Grid during the term of their respective agreements in return for a commitment to deliver electricity, (or reduce demand), at times of ‘system stress.’
In November 2018, however, this £3.8 billion market was brought to a standstill, after a landmark European General Court (EGC) ruling – the Court found in favour of Tempus Energy, against the European Commission.
Tempus Energy have long had their grumbles with the Capacity Market; arguing that the system unfairly biases larger generation, in particular as they are able to obtain 15 year contracts, (as opposed to the mere yearlong contracts available to DSR). It was then on a procedural issue that they took the case to court, contending that the European Commission could not have concluded the UK Capacity Market satisfied state aid rules had it undertaken a proper investigation back in 2014.
Thus, we have arrived at a situation whereby the Capacity Market is now in a ‘standstill period,’ during which the government is prevented from holding any capacity auctions, making capacity payments under existing agreements or undertaking any action which could be seen as granting state aid. Both the upcoming T-4 and T-1 auctions have been postponed, indefinitely!
So, what lies ahead?
Much remains uncertain, but the shock suspension of the Capacity Market has sparked several questions. Here are just a few of my initial thoughts:
- Will there be fundamental changes to the Capacity Market, should it resume?
The government have reaffirmed their commitment to the Capacity Market, however, the European Commission will now have to conduct a formal investigation into the mechanism. The investigation will consider as to whether changes to the design of the Capacity Market are required. With a more levelled playing field, this could be good news for DSR going forward!
- What does this mean for security of supply?
Security of supply has been brought into question, particularly as this may pose a serious commercial challenge to plant operators, (who are reliant on CM payments). With payments suspended, we could see an acceleration in the closure of older plants. The National Grid, however, have confirmed that there is no immediate risk of security of supply – it appears they’re banking on assets extracting as much value as possible out of this winter, before making end of life decisions.
Could the Energy Minister be subject to legal action from asset developers who have already put kit on the ground?
Well, on that, we’ll just have to wait and see!