Capacity Market Confusion Affects the Whole Market

Capacity market confusion affects the whole market

The UK’s Capacity Market has been suspended following a legal challenge by an energy technology firm, Tempus Energy. The EU court’s ruling annuls a decision by the European Commission which had said the scheme was not in contravention of EU State Aid rules.[1] It could have major implications for all businesses involved in the UK’s energy market.

Uncertainty could threaten security of supply

The Capacity Market was introduced in 2014 to ensure electricity supplies, particularly at peak times during the winter. It provides payments to owners of reliable generating assets, mainly gas-fired power stations, for keeping them operational and the energy they supply.[2] Capacity Market payments are a significant source of revenue for many businesses that operate these plants. Without these revenues the financial viability of existing and new plants may be at risk. A supply gap could be critical as coal and older nuclear power stations are shut down and more renewables are introduced into the system. [3]

The ruling will have an impact on suppliers’ cashflows

Suppliers collect money through consumer bills to fund the Capacity Market. With payments suspended there are questions about what now happens to this money. Ministers have urged suppliers to voluntarily cut tariffs [4] but this raises doubts about how generators will be paid if the system is reinstated.

There are also implications for the recently announced price cap and whether the Capacity Market component forms part of Ofgem’s calculation. The level of the cap that is due to be introduced in January was set to account for the costs of the scheme. [5]

It could open up a new discussion on how the capacity market is used

Those with interests tied to the capacity market will need to increase engagement with policymakers now, as many will see the ruling as an opportunity to restructure the scheme to support alternative technologies including renewables. The Shadow Minister for Energy and Climate Change, Alan Whitehead MP called for the Government to rethink the scheme criticising it as a ‘bizarre arrangement which simply throws money at old dirty power stations.’[6]

Businesses can offer solutions

The Government says it is focussing on ensuring the Capacity Market can be reinstated as soon as possible but it is not obvious what will happen. Businesses from all parts of the system must engage in order to help shape policy decisions and construct a favourable environment.

Brevia Consulting provides straightforward political advice and support to businesses and organisations.

Discover how Brevia can help you and your organisation by contacting the Brevia Energy Team on 020 7091 1650 or contact@brevia.co.uk


[1] Court of Justice of the European Union, 15 November 2018, link

[2] Department for Business, Energy and Industrial Strategylink

[3] Institution of Mechanical Engineerslink

[4] The Times, 17 November 2018, link

[5] Ofgem, 6 November 2018, link

[6] Alan Whitehead MP, 15 November 2018, link

LATEST NEWS

Energy

What the Energy Security Strategy tells us about the Government’s current priorities

After several weeks of reported delays, disagreements and leaks, the Government has finally published its Energy Security Strategy. Crucially, the Strategy provides us with an insight into the main influences and influencers of this Government. With the next general election a mere two years away, the Prime Minister appears to be moving away from the climate focus seen at COP26. Instead focusing on internal party politics and maintaining support within the Conservative . Below, Brevia has unpacked some of the telling signs of what is currently influencing Government direction on energy policy.

Read More »
Brevia

Russia’s invasion of Ukraine will impact UK energy policy

The Russian invasion of Ukraine has changed the world. The ways it has done so are yet to be fully understood. Many of our post Cold War assumptions have been upended: Germany has abandoned its longstanding policy of maintaining a limited armed forces to commit €100 billion to defence spending; Switzerland has departed from its historical neutrality to apply sanctions to Russia; Finland is now openly discussing NATO membership and things we had assumed would never happen continue to do so on a daily basis. Set against the human tragedy that is unfolding in Ukraine, these events can seem small or insignificant in comparison. Nonetheless, they are likely to have enduring consequences for everyone in Europe. Particularly when it comes to how Europe, including the UK, powers itself.

Read More »
General

What did the White Paper tell us about the Levelling Up Agenda?

Last week, the Government published its long-awaited Levelling Up White Paper. The White Paper goes some way to answering the vexed question of ‘What is levelling up?’, by setting out twelve missions the Government hopes to accomplish by 2030. In addition, the Paper sets out a framework for extending devolution in England which could increase the transparency of the process. However, new funding commitments are thin on the ground, and critics suggest the Government has not provided enough money for Levelling Up to succeed.

Read More »
  • Get in touch to arrange your free monitoring trial.