The amount of renewable, low-carbon, energy the UK produces is increasing, but it is very different to traditional types of power. It can't just be turned on when wanted. As a result, the capacity market scheme – essentially a programme of subsidies – was set up to help provide backup power when the supply of renewable energy the UK produces is outpaced by demand.
Until recently this was the flagship mechanism for helping the UK meet its climate change reduction targets while maintaining a secure electricity supply. However, on November 15 the European Court of Justice ruled that the European Commission had failed to properly investigate the scheme, rendering it unlawful. Despite its huge implications, this news was buried beneath blanket coverage of prime minister Theresa May's Brexit deal, which came out at the same time.
How did the capacity market work?
Participants in the capacity market scheme – predominately fossil fuel-based power suppliers – were paid per megawatt (MW) for the capacity they offered. In order to offset the risk of investing in less predictable supply, fixed monthly payments were made to these suppliers. The first contracts were agreed at the end of 2014 and their requirement to start providing capacity started last winter.
Funding of up to £2.6 billion a year was set aside in 2012 by the UK government, as it was deemed the most appropriate mechanism for helping meet demand in an increasingly supply-led system.
However, in 2014 Tempus Energy raised objections about the scheme to the European Court of Justice. Its stance was that it favoured the use of fossil fuels rather than considering other mechanisms, such as flexible price incentives for industry and domestic users, which involve reducing costs when there is an abundance of wind and solar, and increasing the cost when there is not. Smart metering is one way in which this can be done on a domestic scale. This can also happen on an industrial level with incentives to increase or reduce demand based on supply levels, for example, Demand Turn Up or Firm Frequency Response.
In essence Tempus argued that the scheme made it harder for it and other demand management companies to compete with the well established fossil fuel-based power generators.
Under EU state aid rules, member states are obliged to consider alternative ways of meeting market demand for power before subsidising polluting generators. They also require any capacity boosting measures to be designed in a way that provides "adequate incentives" for operators of new, cleaner technologies.
Subsidising fossil fuels
Tempus data shows that the capacity market had predominantly supported fossil fuel providers. Therefore, the UK had effectively been state funding fossil fuel power generators to be on standby to produce power when, and if, there was a shortfall in the electricity being produced. The concern is that by using the scheme to predominantly fund fossil fuel provision, Britain will continue to rely on such technologies into the future, reducing the ability to cut climate change targets and uphold agreements.
So on November 15, the ECJ ruled in favour of Tempus and stated that the European Commission was wrong to clear the scheme for state aid approval in 2014 without looking into it in more detail. As a result the market has been suspended indefinitely.
The decision means the UK government cannot now issue capacity market payments to energy firms. In addition, it cannot hold any further auctions, including the upcoming auctions scheduled to run in January and February 2019 to secure additional power capacity for upcoming winters.
Britain will, most probably, be able to keep the lights on, but it might come at a higher financial cost in the short term. Energy policy in the UK is incredibly complex. There are numerous incentives, taxes and subsidies all with the aim of reducing cost, reducing carbon and meeting green house reduction targets and producing a sustainable supply.
A review of the cost of energy in 2017, by the Department for Business, Energy & Industrial Strategy, outlined the UK's energy policy to be lacking in terms of consistency and ability to meet the needs of the country. It stated that, "energy policy, regulation and market design are not fit for the purposes of the emerging low carbon energy market".
A chance for green energy
It's hard to move from a dispatchable system to a more supply-led system. All of the UK's costing models and energy policies are essentially based on the ability to burn something to provide power, and the economics have developed from the traditional supply-and-demand approach. What Britain now needs to do is move from traditional demand based policies to those which include the whole energy system.
The capacity market attempted to do part of this by favouring fossil fuels as a mechanism to cope with short term shortfalls in supply. The UK needs to be doing better than this. It must adopt a truly systems-based approach to dealing with its increasing renewable supply.
This ruling, while problematic in the short term, is a long term opportunity to develop a more dynamic and flexible energy system. The UK must invest in demand management programmes rather than only investing in generating assets. Britain needs to embrace a truly low carbon system with active demand management systems alongside renewable technology – enabling it to phase out its reliance on fossil fuels.
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