Capacity Market ruling: the industry responds

The European Court has annulled a 2014 European Commission decision that the UK’s Capacity Market  passes State Aid tests. See story here. The industry responds:

Erik Nygard, chief executive & co-founder, Limejump: “In these circumstances, the abruptness of such a decision can cause confusion and uncertainty. With other news such as the Brexit decision also filtering through, seeing a clear outcome can be difficult.

While this result is not the scenario we would prefer nor is the ideal methodology for change as this ruling will have an immediate impact on many of our customers with contracts and those who have been preparing for the next auction, we do see that this decision will force wholesale markets to embrace flexibility while increasing the adoption of innovative technologies.

We also see this as potentially increasing the speed of which coal and gas generation is replaced with renewable resources and battery storage, which in turn could increase price volatility on the wholesale markets. Both of these results will benefit flexible assets in the long term.”

 

Michael Phelan, chief executive, GridBeyond:  “The energy markets are continually transitioning in order to best support a digitalised and decentralised system. This is reflected in the regulatory changes we see today.

“GridBeyond maintains its advocacy for technological neutrality in the energy services markets, with the long-held view that both generators and DSR services should have equal opportunities to obtain capacity contracts. We support the principle behind today’s decision, having openly spoken to National Grid, Ofgem and BEIS about the need to reform the Capacity Market in a way that would level the playing field.

“GridBeyond provides clients access to a whole suite of energy services, where the Capacity Market is just one of many programmes available. Our energy platform, which is powered by machine learning and advanced data analytics, enables I&C businesses to benefit from multiple grid balancing programmes at the same time. We find that this holistic approach to the energy market provides peace of mind, even at a time of regulatory uncertainty.”

 

Lawrence Slade, chief executive, EnergyUK: “We are extremely disappointed by today’s General Court judgment as the Capacity Market has proven that it can successfully deliver security of supply at the lowest cost to consumers.

“We are already working closely with BEIS and are fully supportive of their efforts to work with the European Commission to reinstate future auctions and continue the CM scheme. Given the serious financial implications for capacity providers as well as the need for investor certainty and security of supply, this issue needs to be resolved as soon as possible.”

 

Dr Alastair Martin, chief strategy officer, Flexitricity: …“We urge government to see this ruling as an opportunity.  If fifteen-year contracts are really needed, then these contracts should be open to all – this would improve competition and keep the long-term price low.  If long contracts are in truth unnecessary, then all capacity types should compete for one-year contracts.  International experience and other features of the GB electricity market both indicate that single-year contracts can keep the lights on and the costs down perfectly well.

“At Flexitricity, we’ve always believed that flexibility and capacity have value, but that the source of value moves around.  At times, reserve contracts have been the best opportunity for our industrial and commercial customers.  Over recent years, capacity payments became important.  We expect that fast-moving electricity markets such as the Balancing Mechanism (BM) will become very important in the near future.  Today’s ruling shows that business energy users participating in DSR need access to all opportunities in order to optimise revenue.

“This is a challenging time for our customers.  It’s our duty to represent them to government and the regulator.  We don’t believe that security of supply is at risk this winter, but it’s unfair to ask customers to deliver capacity for free, and it’s not sustainable in the long run.  We urge government to act both quickly and diligently, and to keep the industry informed as it does so.

“We believe that if the Government simply seeks state aid approval for the same CM as before, the hiatus in the industry could last longer.  The likelihood of refusal is high, now that the flaws in the CM are so visible.  Government already knows how to fix the CM.  Now is the time to come forward with a plan that recognises the capabilities of the new energy economy, harnessing DSR, storage, combined heat and power, and engaged customers.”

 

Sebastian Blake, head of markets & policy, Open Energi: “There have always been flaws in the Capacity Market, not least that it solves a problem which doesn’t yet exist. There is much evidence to suggest that the UK is well supplied with capacity – borne out by the low prices seen in the CM – and that grid resiliency is better served by a decentralised system able to run more intelligently and efficiently.

“The suspension of the CM at a time when the mechanism was coming under review anyway provides an opportunity to address some of these flaws and deliver a market where demand-side technologies can compete fairly with incumbent generators and advance the UK’s shift to a smarter, cleaner, more affordable energy future.

“It is possible we will see greater price volatility while the future of the CM is determined but flexibility providers who display an appetite for merchant risk are well placed to take advantage of market-based opportunities to deliver increased value to clients.”

 

Matthew Clayton, managing director, Thrive Renewables: “The capacity market was another short-term fix applied to our energy system, which has been over-complicated from 20-years repeated patching, tweaking and knee-jerk reactions. The labyrinth of patches makes it a very difficult environment for long-term capital-intensive infrastructure investment decisions.

“A systematic approach, reflecting the objectives of competitively priced power, energy security and environmental performance, is required. The answer could be to make the CM technology agnostic or removing it, this would level the playing field a little further and allow the UK to benefit from the most affordable and sustainable solutions sooner.”

 

Mark Hollands, Head of Energy Strategy, BSR: “The decision to uphold Tempus Energy’s claim was the correct one. The Capacity Market is flawed and needs restructuring with a balanced approach to all technologies, which is currently lacking. However, the way this point has been made and the resulting suspension of the CM is potentially damaging to investor confidence and the energy industry as a whole.”

 

Richard Black, director, Energy and Climate Intelligence Unit: “The court’s decision makes no difference to power supplies this winter, but opens a number of interesting questions for the next few. The government says it’s expecting to get the Capacity Market re-approved – but how long will this take, how deeply will the European Commission probe this time, and what changes will it require to the market’s design, if indeed it approves it at all?

“BEIS is seeing this as a challenge; but actually, the court has presented it with a massive opportunity to constructively re-think a measure that while keeping the lights on is working against other government aims on cost and decarbonisation.

“Re-shaping the market to incentivise battery storage and genuine demand-shifting rather than dirty diesels will bring in a system that’s cheaper for consumers; prioritising low-carbon capacity would speed the demise of coal and gas, helping ministers cut emissions faster, which they know they have to do in order to meet climate targets.”

 

David Oliver, Inenco: “Today’s announcement to suspend the UK’s Capacity Market until further notice brings with it yet another layer of unwanted uncertainty to the UK energy market and businesses alike. Established in 2014, the CM has enabled much-needed investment in a range of new generation and storage projects. Suspending the CM, and with it capacity payments for existing agreements, poses grave questions about the future security of supply, threatening the closure of plants without the certainty of new generation to replace it. We hope BEIS can ensure this is reinstated promptly in order to re-establish confidence in UK plc.“

 

Doug Parr, chief scientist, Greenpeace UK: “The government’s Capacity Market was effectively rigged in favour of old-fashioned dirty generation. Shutting out modern, smart technologies turns out to not only be short-sighted and foolhardy, but potentially illegal. The government should heed the many expert voices explaining that we’re not in the twentieth century any more, and our energy policy needs to reflect that. The smarter technologies that allow easier and faster uptake of clean renewable energy are ready, and urgently needed.”

 

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