Amidst a fraught and challenging day for the UK government, the European Court of Justice (ECJ) found in favour of Tempus Energy, who have challenged EU state aid approval of the Capacity Market (CM). With state aid approval now annulled, the CM is in a ‘standstill period’ with no capacity payments able to be made, or auctions held. What exactly will happen next is unclear, but the February auction is almost certainly off the cards. The UK government is “seeking immediate state aid approval for a T-1 auction” and are working to reinstate the CM as soon as possible with the aim of holding a T-3 auction to replace this year’s T-4.

The short-term uncertainty for the industry, particularly storage, is concerning and the government is working to provide as much information as possible to reduce this. Although the CM doesn’t represent a significant amount of revenue for many storage assets, it could affect smaller companies, particularly new projects that are relying on prospective CM contracts to de-risk investment. Fortunately, prequalification is still going ahead, so those with some confidence of winning a CM contract can choose to continue with this intensive process whilst waiting for the CM to be re-instated. Some information from the European Commission (EC) would be welcome at this stage to better understand the timings of the investigation and possible re-approval of state-aid.

The challenge has been a long time in the making for Tempus, who started this process in 2014, and although the ruling itself is regarding a procedural point (the EC should have carried out a more thorough consultation before granting state aid), it brings to the fore the CM bias towards fossil fuels. Although we have concerns about the logistics of the suspension and its short-term effect on the industry, this judgement prompts debate of how to better align security of supply with decarbonisation and address the contentious issue of using this mechanism to continue to keep carbon intensive generating plants open and even support new build fossil fuel generators.

The propensity of the CM to tend towards fossil fuels is in some way understandable – intermittent generation is not always the ideal candidate to provide security of supply in an unpredictable system stress event. However, if we are serious about moving to a world of low carbon generation – and potentially a world of net-zero emissions, as per the formal request from government – then our security of supply must adapt in tandem, and reduce its reliance on carbon intensive fossil fuel generators. It would be a mistake to continue to depend on fossil fuels until we approach the cliff edge of their feasibility, due to emission levies and resource costs. Unfortunately, this ‘last minute’ approach seems to be in line with current BEIS policy –in a recent speech, Greg Clark continued to refuse to address a realistic carbon tax (arguing the world is not yet ready). He also stated he cannot predict how we will decarbonise heat and re-iterated government support for extracting yet more fossil fuels through fracking.

Since the inception of the CM, many existing fossil fuel plants have been supported though this mechanism and new plants have been built – including 2 large CCGT gas plants and an increase in diesel generation. Giving long term contracts to generation, which we plan to phase out before those contracts come to an end, puts the UK’s long-term energy security strategy at risk. The technology neutral approach that the government takes to the CM, designed so the market will allow the most cost-efficient technology to win contracts, is driving this increase in carbon intensive capacity.

Although technology neutrality is a laudable aim, it is only compatible with the decarbonisation agenda if an effective carbon price is in place. A blanket approach which treats all technology equally only advantages technologies that are well developed and able to compete at low rates – we have seen CM auction prices driven down by these technologies. At the same time,  storage, which has a key role to play in providing energy security, has been disadvantaged by policies which cannot be described as technology neutral. The CM must take an approach which values certain aspects of technology over others – namely their carbon intensity.

So in the context of this current political landscape, it is very positive to see BEIS proposing to include renewables to provide security of supply as part of their statutory five-year review of the CM. There is no dearth of ideas how renewables and carbon intensity could be factored into the CM, many taking on the problem with different approaches;

  • One approach would be to align awarded contracts in the CM with carbon targets. Dieter Helm’s Cost of Energy review, which Greg Clark addressed for the first time in his recent speech, suggests a possible two stage auction process, using the second round to address carbon targets.
  • In Massachusetts, an approach is being trialled which sets minimum clean energy standards for peak times; a ‘clean peak standard’ which requires a minimum amount of power used at peak times to come from low-carbon sources.
  • The EU has proposed a carbon intensity limit, with no generators over 550gCO2/kWh being allowed to participate in the CM, although we would suggest 450gCO2/kWh as per the Emissions Performance Standard.

Combined with the restrictions placed on diesel generators through the EU Medium Combustion Plant Directive (now part of UK law) and halting long term CM contracts to fossil fuels generators, any of the above solutions could reduce the reliance of our security of supply on fossil fuel generation and should be considered by BEIS as part of the CM review. We detailed many of these proposals in our response to the call for evidence for the review and hope that BEIS will carefully consider such suggestions. There is a risk, however, that the suspension will overshadow the review and delay any major changes – the priority for BEIS is of course to get the CM up and running as soon as possible and if significant changes from the review hinder that process, then they could be delayed.

Security of supply will become more and more difficult to sustain with fossil fuels – not only are they being phased out of the energy system because of their carbon intensity, but come with their own supply issues during times of extreme system stress. In a recent blog on fracking, Johnny Gowdy called out the ill thought-out logistics of getting shale gas to market, arguing that it would not be reliable or readily available during a stress event.

We are creating an energy system that will be increasingly reliant on renewables, storage, demand-side response and smart technologies to manage them effectively. It’s vital that we ensure there is adequate capacity and diversity of such technologies to provide security of supply. The Capacity Market should be allowed to perform exactly as it was designed to do – encourage new build capacity to ensure security of supply. But it must do so in line with the evolution of the rest of the energy system and our decarbonisation obligations.

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