UK ‘fully confident’ in capacity market despite legal challenge

The UK’s new electricity capacity market suffered a potential setback on Thursday when it emerged that a demand response company is to launch a legal challenge against the mechanism in the European General Court.

Tempus energy, which is a member of the UK’s Demand Response Association, said the mechanism acts as an “unlawful subsidy” that unfairly favours new generation assets above consumers capable of moving demand away from peak hours.

The market is set to open to auction later this month for delivery of power capacity from Winter 2018. However the government said it remained “fully confident” in its timetable.

Some operators of new-build plant are eligible to enter this month’s auction for contract lengths of up to fifteen years, while customers offering demand response capabilities are only allowed to enter a separate subsidy scheme that will entitle them to maximum one-year contracts.

In a statement, Tempus Energy said an unlawful ruling by the European Court against the capacity market would force the EU Commission to hold a formal inquiry, risking a “destabilising impact” on this month’s first auction.

“We’ve received very strong legal advice that the commission needs to hold an inquiry, meaning that the state aid approval would be annulled,” said Tempus chief executive Sara Bell, for whom state-aid barrister Jacques Derenne from Hogan Lovells law firm is bringing the action.

“This would mean generators would have to make a risk assessment as the obligations from the contracts [would] be annulled,” Bell added.

Such a scenario could dissuade developers of new-build plant entering the auction until the outcome of the legal action becomes clear.

‘No impact’

The EU Commission granted state aid approval to the UK’s capacity market in July.

But Tempus Energy is claiming the decision should be re-examined on ground that it violates the Commission’s own environmental guidelines, as well as those governing the awarding of state aid itself.

The first auction is scheduled between 16 and 19 December before the results are announced at the start of January. The Department of Energy and Climate Change (DECC) said Thursday’s announcement would not alter this month’s auction schedule.

“This challenge will have no impact on the running of the capacity auction in December,” a spokesman said. “We are fully confident in this auction.”

The legal action is a step up in pressure on DECC to revise the conditions of the mechanism to place demand side response on an even keel with conventional generation.

The UK parliament’s Energy and Climate Change Committee raised a formal concern with DECC in September over the absence of provision for demand side in the capacity market along with the role that National Grid had in devising the policy ( see EDEM 12 September ).

There is a fear that the inability of demand response services to compete with new generation on the basis of contract lengths could stall the growth of the industry.

“The one-year contracts offered for demand flexibility are not a viable proposition to customers who would, for a longer revenue stream, be able to invest in flexible technology that would save money and energy in the long term while making our system more secure,” Bell said. Henry Evans