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What’s happening to the Capacity Market?

Last week, the Government shocked the energy industry by announcing that it was suspending the Capacity Market indefinitely – including auctions and payments to those who already have contracts in place.

This move has caused great uncertainty and unease among key players in the energy industry, and those participating in the Capacity Market in particular. Many have questions about what the suspension of the Capacity Market will mean for their business, and while many aspects are yet to be decided, here’s what we know so far…

Why has the Capacity Market been suspended?

The Government has been obliged to suspend the Capacity Market as the European Court has found that the European Commission didn’t effectively scrutinise the plans for it before it was approved in 2014. They have ruled that the Commission should have instigated a formal investigation to ensure that it was compatible with State Aid regulations, and that they failed to properly assess the role of demand-side response (DSR) within the Capacity Market.

Tempus Energy brought the case to the European Court back in 2015. They argued that the Capacity Market is anticompetitive, because it favours large generation over technologies like DSR. Currently, DSR can only apply for one-year contracts, while large generators can apply for contracts of up to 15 years, which Tempus Energy believes gives generators an unfair advantage – and it seems the Court agrees with them.

What will happen next?

We’re currently in a ‘standstill period’ – all current auctions and contracts are suspended while the Commission carries out an investigation into the Capacity Market. The Government has stated that it is working with the Commission to ensure that this takes place as soon as possible, but we don’t know how long this could take, or what changes the Commission will be required to make to ensure that the Capacity Market is re-approved for State Aid.

In the meantime, they plan to seek separate state aid approval from the Commission to run a one-off ‘replacement’ T-1 Auction, which they are confident will be approved as T-1 auctions don’t award long-term agreements, so they don’t have the same contract disparity issues. They also intend to run the postponed T-4 Auction as a T-3 Auction in next year’s auction round – although this will depend on whether the Commission has completed its formal investigation and approved the Capacity Market for State Aid by that time.

Questions also remain around whether or not they will need to recover payments that have already been made. BEIS has stated that they’re not looking to recover aid that’s already been paid at this stage, but the decision will ultimately rest with the Commission, and we won’t find out what this is until their investigation is complete.

How will this affect the energy industry and businesses alike?

The Capacity Market was established with the aim of ensuring security of supply, and so suspending it could jeopardise our ability to meet demand in the future. Capacity providers were due to be paid £1bn through the Capacity Market this winter, but now that there’s no guarantee that they will be paid for responding to stress events, they might simply decide not to.

This is unlikely to be a problem this year, as the National Grid has confirmed that the system will be able to cope without the Capacity Market this winter and the current high wholesale prices provide adequate incentives for power stations to stay open. By winter 2019/20, however, we could be facing some real issues. This year, generators received their Early Auction payments in the summer, which should enable them to stay open. But if they haven’t received payments by this time next year, we could see plants forced to close without sufficient new generation available to replace them.

There could be some positive changes made as a result of the Court ruling, as there are hopes that the Government will need to either offer 15-year contracts to DSR technologies, or only offer one-year contracts to all types of generation. This could even out the playing field for DSR technologies, and it could mean that we can phase out coal and gas more quickly than previously anticipated. But again, whether this will be a positive or negative thing depends on whether we have enough new generation to meet demand without coal and gas.

If the Capacity Market is not reinstated by next year, businesses will face yet more energy cost rises as the Grid will need to find alternative ways to ensure security of supply, and generators will look to recover their costs from customers. Within just 24 hours of the ruling, for example, winter power price futures for 2019/20 rose by an average of £1.40 per MWh.

How can Inenco help?

We hope that BEIS will reinstate the Capacity Market, or something similar, as soon as possible to give businesses the clarity they need and to ensure security of supply going forward. We know that until this happens, businesses will have a lot of questions about how the suspension will affect them, so our energy experts are on hand to help.

Whether you’re participating in the Capacity Market this year, or you’re wondering about how your energy bills could be affected next year, we can guide you on the best course of action – give us a call today on 08451 46 36 26 or email