Capacity Market Confusion Affects the Whole Market

Share on facebook
Share on twitter
Share on linkedin

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

Brevia

Energy White Paper Audit

Last week Brevia Energy released the findings of its audit of the Government’s 2020 Energy White Paper. The results, which were covered by Energy Live News, highlighted how nearly half of the commitments included in the Energy White Paper have been hit or look likely to be reached. However, the research also showed that answers to the ‘Who Pays?’ question remain needed. With the Government expected to publish both its Net Zero Strategy and Heat and Buildings strategy soon, greater detail on that may be soon forthcoming. That is likely to provoke debate about the direction of policy and open new fronts for businesses to make their case about how the net zero transition should be delivered.

Read More »
Energy

At-risk suppliers have put the energy supply industry at risk

Since the beginning of August 2021, the UK has experienced a record increase in gas prices, which has grown into a retail energy crisis that has already caused ten suppliers to exit the market this year. This crisis is the product of several factors, which the UK Government will seek to remedy in the short term and avoid in the long term. This means regulatory reforms are almost inevitable. Once the crisis is over and government turns to reforming the UK’s retail energy market, businesses that operate within it must actively engage with policymakers and regulators to ensure their voices are heard.

Read More »
Energy

COP26 Update: New Energy Minister

With less than 50 days until the COP26 Summit, Brevia will be tracking the latest milestones in the UK’s preparations for the upcoming climate conference. This week the Prime Minister carried out an extensive reshuffle of his ministerial team, including a shake up at BEIS, with Greg Hands MP becoming the new Energy Minister. Other notable highlights this week include the publication of the funding details for the upcoming Contracts for Difference (CfD) Round 4 auction.

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