What is going on with the UK Capacity Market?

The beleaguered UK Capacity Market remains suspended following a legal challenge by Tempus Energy (a UK-based energy developer) over concerns that the mechanism favored particular technologies over others and constituted state aid or, more technically, that such concerns were not properly considered. The challenge was upheld by the European Court of Justice, leading to the suspension of the Capacity Market in November 2018 pending a full state aid investigation by the European Commission. It is anticipated that the European Commission will complete their investigation by October 2019.

A second challenge against the Capacity Market has also been issued by Tempus Energy by way of judicial review, questioning the legality of payments made under the capacity market so far. This may lead to such payments being declared unlawful. The outcome of this case is likely to known by the end of 2019 or early 2020.

2018 Capacity Market Auction

Notwithstanding the suspension, a delayed auction for 2018 T-1 (one year ahead) contracts for delivery in 2019/2020 was held in June 2019. The results of this auction have been the cause of some dissatisfaction amongst market participants, with the contract price of 77p/kW too low for several DSR and storage developers, leading many bidders to pull their projects. The largest numbers of contracts were awarded to gas generators, reiterating the complaints of many market participants that the mechanism is failing to deliver innovation, favouring only established forms of generation. Indeed, quick-fire diesel generators were the big winners from earlier auctions until they were effectively excluded from the Capacity Market. The primacy of such technologies over greener alternatives such as DSR was the main objection of Tempus Energy (and other stakeholders including Greenpeace) to the scheme.

Re-opening the Capacity Market

BEIS are hoping to re-open the capacity market in early 2020 for delayed T-3/T-4 auctions (for delivery in 2022/2023 and 2023/2024 respectively), seemingly confident that the issues facing the scheme are relatively straightforward procedural problems that can be easily rectified. Plans for the T-3 and T-4 auctions published by BEIS in July include some alterations, notably:

  • Certain renewables technologies will be eligible to bid on an "equivalent firm capacity" basis where they do not receive RO, FIT or CFD.
  • Capacity market projects financed by EIS or VCT schemes may become less attractive by losing entitlement to some reliefs;
  • Commissioned projects for the postponed T-4 auction will only be able to bid for one year contracts (with BEIS claiming that commissioned projects do not need a longer agreement to secure financing) ;
  • Credit cover requirements for the T-3, T-4 and T-1 auctions during the standstill period will be suspended, but will be required within 15 days after the standstill ends (this will be slightly longer for DSR and interconnectors); and
  • The historic data-floor for interconnector projects will be removed from the de-rating factors affecting interconnectors.

The need for additional capacity on the UK grid, particularly at peak times, is widely acknowledged and forms an important cornerstone in the transition to a 'smart' energy system. Whether the capacity market is an appropriate method for encouraging innovation and investment whilst bringing such capacity online is yet to be seen. Whether it is compatible with meeting the UK's climate change commitments remains hotly debated. It is clear, however, that failure of any of the mechanism to meet its goals is likely to have an impact on the stability of the grid, particularly as older power stations go offline and decarbonisation of heat and the transport sector necessitates a shift towards using more electricity instead of gas, petrol and diesel.

The continuing disruption to this mechanism is undoubtedly having an impact on the confidence of investors in the UK energy market, when investor confidence generally is not at its highest.