Open letter to BEIS Energy Security Team
7 January 2019
Open letter to BEIS Energy Security Team in Response to UK Government Consultation on “Proposals for Technical Amendments to the Capacity Market”
A Capacity Market “standstill” was put in place following the EU General Court’s decision of 15 November 2018 (the Judgment) on the legal challenge brought by Tempus Energy. It is there to protect investors, customers and capacity providers during this period of uncertainty and to ensure that good money is not thrown after bad, while the proper legal process is carried out.
The need for honesty and clarity
Contrary to the misleading statement by Claire Perry in Parliament on 19 November, the procedural nature of the legal challenge does not in fact mean that it “was not a challenge to the nature of the UK Capacity Market mechanism itself”. The Court upheld the challenge because various substantive features of the policy design gave rise to “serious doubts” about compatibility with State aid rules, which should have led the European Commission to launch a formal investigation. We urge the government to stop pretending that the Judgment does not impact upon the policy design and to start being honest with investors and Parliament. Only then can we get the policy right and rebuild market confidence.
An unnecessarily costly and harmful scheme
The methodology for charging electricity customers, who ultimately pay for the Capacity Market, artificially inflates the cost of the scheme. The methodology makes it practically impossible for electricity customers to escape costs by avoiding system use during demand spikes, unless they switch to using behind-the-meter generators. This makes the scheme more expensive for everyone, and prevents innovators from helping flexible customers to reduce peak demand. The policy increases business costs for energy intensive industries and stops customers from getting the full value out of their smart meters and appliances. The Court agreed with Tempus that the Commission did not properly assess the methodology against the relevant legal guidelines, which state that an aid measure is proportionate only if its amount is limited to the minimum needed to reach the objective aimed for (See paragraphs 27(e) and 69 of the EEAG and paragraphs 203-207 of the Judgment in particular.). Continuing to charge customers under that methodology in the face of the Judgment is reckless and unjustifiable.
Worst of all, the methodology creates a perverse incentive for large energy users to use small, onsite diesel generators, which are not required to meet the same environmental standards as larger equipment. Diesel particulate emissions are carcinogenic. They pollute our air causing disease and death.
Assurances over EU investigation conclusions are worthless and risky
A formal EU level investigation must now be carried out. The Commission has not yet launched the investigation, let alone invited or considered formal evidence. Let us be very clear - the Commission has absolutely no scope to legitimately provide any real, reliable assurance as to the outcome of the investigation. It must follow the proper process as directed by the Court, or it will face further litigation.
Capacity Market for a modern, efficient and secure energy system
Any mechanism that interferes with the energy market must be genuinely open to new market entrants and forward-thinking customers. It should incentivise the most cost-efficient, cleanest resources first, only resorting to subsidising fossil fuel generation as a last resort. As a minimum, the following changes to the Capacity Market are needed to meet these requirements:
Equal contract lengths for all resources, no longer than 5 years
Entry criteria that genuinely allow new entrant participation such as 100kW minimum participation size
Guaranteed minimum reserve for year ahead T-1 auctions of 25% with no power for the Secretary of State to reduce or cancel the auctions at the last minute
Customer charging methodology that promotes system efficiency and minimises costs by providing a clear price signal to incentivise customers to be flexible
As a start-up, we sympathise entirely with the frustrations of the industry and the need for investor certainty. We would much rather have spent the past four years working with the government to put customers at the heart of the policy. It is not too late to do this.
We urge the government to be proactive in taking on board the Court’s findings, gathering the necessary substantive evidence and redesigning the Capacity Market so that it is workable, bankable and future-proof. Proper consultation with all stakeholders would be necessary before the scheme could be re-notified to the Commission. However, this would still be quicker, allow you more control and give investors more certainty than waiting until after the EU investigation and then being forced to redesign the scheme anyway.
The Capacity Market should be positioned to provide a genuine launch pad for the technologies that will replace the aging fossil fuel plant of today for the benefit of electricity customers. It should be a space to develop the financing structures and business models that need to evolve in order to support this transition. Security of supply “at any cost” is no security at all. The UK can do better than this.
CEO and Founder,