British electricity capacity market reinstated following EU approval

Following an in-depth investigation, the European Commission found that the scheme is necessary to guarantee security of electricity supply in Great Britain, is in line with EU energy policy objectives and does not distort competition in the EU single market.

The capacity market scheme was suspended in November 2018 after it was annulled on procedural grounds by the EU General Court. The European Commission previously approved the scheme under EU state aid rules on its introduction in 2014.

UK energy secretary Andrea Leadsom has written to National Grid, in its capacity as electricity system operator, and the Electricity Settlements Company to notify them of the Commission's decision and confirm the resumption of capacity payments. She told the House of Commons that around £1 billion worth of deferred payments attributable to the 'standstill period' following the General Court's ruling will be paid to capacity providers in January 2020.

Suppliers will also shortly be invoiced for their share of the 'supplier charge', used to fund capacity payments, which relates to the standstill period, Leadsom said. The government has been in touch with suppliers during this period to ensure that they have been setting aside the necessary funding.

The UK's capacity market auction scheme is governed by the 2013 Energy Act, and covers the period from 2014-2024. It is intended to boost energy security by subsidising plant to be on standby for generation in times of additional need or peak demand, including additional winter demand. Energy suppliers and generators bid in regular auctions to provide a share of capacity when the system needs it in exchange for a regular revenue stream.

The General Court, in its 2018 judgment, did not rule on the compatibility of the capacity market scheme with EU state aid rules. However, it found that the Commission should have opened an in-depth investigation to gather more information on certain elements of the scheme, including on the participation in the scheme of so-called 'demand side response (DSR) operators'. The term refers to energy consumers who offer to reduce their electricity consumption at times of peak demand, or operators who are able to control consumers' demand.

The Commission's investigation found no evidence that the scheme would put DSR operators or any other capacity providers at a disadvantage. It also noted that the UK had committed to implementing certain improvements to the scheme following a recent review of the capacity market. The UK's Department for Business, Energy and Industrial Strategy (BEIS) intends to consult on the arrangements for implementing these commitments shortly, according to Leadsom.

The UK government awarded conditional capacity agreements in July 2019, intended to secure electricity supplies over winter 2019-20. Leadsom told the House of Commons that three auctions planned for early 2020, to secure capacity up until winter 2023-24, will take place as planned.