On 15 November 2018, the European Court of Justice ("ECJ") found in favour of a challenge to the European Commission’s 2014 decision to give state aid approval to the scheme establishing a Capacity Market in the UK. As a result, the Capacity Market has entered into a 'standstill period' - preventing the Government from holding any capacity auctions or making any capacity payments, until such time as it successfully obtains state aid clearance. The repercussions for those participating in (or intending to participate in) the scheme, as well as the electricity market and investor confidence more generally, will be significant.
Background to the challenge
The UK established the Capacity Market to incentivise back-up electricity supply that could meet peak demand at times of system stress, which intermittent renewables (such as wind and solar) may not be able to meet. Regular competitive Capacity Market auctions are held, with winning generators effectively paid to guarantee availability of an agreed capacity, under agreements which may last up to 15 years. With renewable subsidies falling away, this mechanism had - rather ironically given the latest news – been increasingly popular as a means to reliable, longer term revenue support, helping many projects get funding. A number of similar schemes exist in other EU countries.
Given the scheme involves support provided by national public authorities to private undertakings on a selective basis, state aid approval from the European Commission was required under EU rules. The UK applied for this approval in June 2014, and received it within one month – with the Commission deciding that an in-depth investigation into the impact of the mechanism on the market was not warranted.
However, in December 2014, Tempus Energy Limited ("Tempus") applied for a declaration that the Commission's 2014 approval was unlawful. Tempus - who provide electricity consumption management technology (also known as demand-side response or "DSR") - argued that the Capacity Market discriminates against DSR providers, and favours large fossil fuel generators. DSR providers are restricted to one year agreements on the Capacity Market, in contrast to generators who are able to bid for agreements up to 15 years. Tempus claimed that the Commission did not undertake an adequate investigation into the UK scheme, and that had there been a proper investigation of the DSR role in the market the Commission would not have concluded the UK Capacity Market satisfied state aid rules. Tempus also submitted that the Commission had failed to state the reasons for its decision, but this was not commented on by the ECJ.
The ECJ ruling
The ECJ – in a judgment which has taken the market by surprise - agreed with Tempus's primary submission on inadequate preliminary investigations, and found that the Commission should have instigated a formal investigation to assess compatibility with state aid rules. The ECJ ruling noted that the Commission should not have simply relied on information provided by the UK to reach its conclusion, particularly given the differentiated approach to DSR, stating:
In such circumstances, taking into account, inter alia, the importance of the role that could be played by DSR within the capacity market, the available elements concerning the potential of DSR are such as to give an indication that there were doubts as to the compatibility of that scheme with the internal market, which, upon reading the contested decision, cannot be held to have been allayed following the Commission's preliminary examination.