Fact Sheet: Tempus Legal Challenge of Polish Capacity Market
Fact Sheet on Tempus Legal Challenge of Polish Capacity Market
Capacity Markets and Security of Supply
A Capacity Market (CM) is a subsidy scheme to ensure that a country or region has sufficient electricity supply to meet peak demand and balance the grid. This is known in EU energy policy as “resource adequacy” (which is a subset of security of supply policy).
Resource adequacy can be achieved either through the supply-side (increasing the amount of electricity generated by power stations), or through the demand-side (customers reducing their demand on the grid at peak times, e.g. by load-shifting to off-peak period or using onsite storage and/or renewables – this is called Demand Side Response (DSR). Both actions increase the capacity in the system, to ensure that demand does not outstrip supply.
The most secure and resilient energy systems feature a mix of both supply and demand capacity. In extreme weather events such as the New York polar vortex, centralized generating stations failed when coal stocks froze and gas plants ran out of fuel, while decentralized DSR action helped to keep the lights on.
The Polish CM was introduced in 2018. Under the scheme, capacity providers in Poland and in future years neighbouring markets, will be remunerated for making themselves available to turn on/up (in the case of generators) or turn off/down (in the case of DSR) when called upon. This creates a back-up capacity resource, which the Polish grid operator Polskie Sieci Elektronenergetyczne (PSE) can utilize when capacity margins are tight, to ensure that supply and demand are matched. In order to receive capacity payments, parties must compete in auctions for CM agreements. All costs associated with the CM are ultimately paid for by Polish electricity customers, through bills.
The CM dampens real-world market incentives for customers to use DSR while awarding 15 year subsidies for the building of new coal and gas stations. Due to the flawed policy design, DSR customers are effectively shut out of the main auctions, meaning they can only access contracts of one year maximum. This, combined with other barriers created by the scheme, puts DSR at a serious competitive disadvantage and provides windfall profits to fossil fuel incumbents.
In Tempus view, without intervention this will lead (as the UK CM has done), to over-procurement of generation capacity in the CM, inflated allocation of State aid, greater cost to electricity customers and greater carbon and GHG emissions. The current system creates long-term fossil-fuel lock in, while locking customers and innovators out of the market.
European Commission’s approval of the Polish CM
Because the CM is a public subsidy for certain market actors, it has the potential to influence trade within the EU internal energy market. For this reason, the scheme required State aid approval by the European Commission (EC).
Under EU law, the EC must open an in-depth investigation into a CM before approving it, if there are doubts as to compatibility with State aid rules. On 7 February 2018, the EC approved the Polish CM without opening an investigation, depriving DSR companies and other innovators of the opportunity to submit evidence on cleaner, cheaper alternatives to long-term fossil fuel subsidies.
By bringing the legal challenge, Tempus now asks the EU General Court to annul the EC’s decision and force it to open up an investigation.
In 2014, Tempus successfully brought a similar challenge in relation to the UK CM. The Court agreed that the CM should have raised doubts in the EC’s minds and ordered the to EC launch an investigation into the UK CM, which it did on 21 February 2019.
More on Tempus and Energy Innovation
Tempus is a clean-tech start-up, which has developed software that interacts with existing DSR technology and smart appliances to help customers to be “demand-flexible”, by actively reducing their electricity demand at peak times and shifting usage to cheaper, off-peak times, usually when renewable power is plentiful. In addition to the UK and Australia, Tempus operates in the German and Swedish power markets, which are connected to the Polish market via cross-border lines. Tempus also has plans to set up in Poland directly as part of its European expansion, as long as the DSR market opportunity is not destroyed by the Polish CM.
All European energy bill payers and citizens (not just DSR customers) would benefit from allowing demand-side innovation to compete on equal terms, since reducing national electricity demand by a "negawatt" of demand avoided is much cheaper and cleaner for the overall system than building a megawatt of new plant generating capacity. Tempus technology only supports “true” demand-side turn-down and green Distributed Energy Resources (DERs), it never uses behind-the-meter diesel generation.
As with other sectors, the potential scope and speed of progressive disruption to traditional energy structures risks being underestimated by policy-makers. Political interference in markets, especially when designed around the interests of incumbents, reduces incentives for innovation and does not bring forward the most economically and environmentally rational solutions. This is holding back an efficient energy union in Europe and beyond.