The European Court of Justice (ECJ) ruled on 15 November that the Capacity Market programme constitutes illegal state aid, leading the UK government to suspend it.
The cost of the Capacity Market currently accounts for almost 3% of the average invoice, so its suspension has the potential to impact UK businesses and households significantly.
The UK Government established the Capacity Market in 2014. The scheme subsidises owners of coal, gas, and other power stations so the plants are ready to ensure that electricity for businesses and homes is available at peak times in winter.
The ECJ issued its judgement in response to a legal challenge brought by clean technology firm Tempus Energy, which argued the mechanism for securing backup power during the winter months unfairly favoured fossil fuel generators over newer, cleaner technologies.
What does it mean for the UK power market?
The ruling means the capacity market will be in a “standstill period” while the UK government seeks state aid approval from the European Commission. At this stage, it is not possible to say how long that will take. In the meantime, the UK will not be able to hold any capacity market auctions for new contracts to supply backup power in the future.
The government has insisted that power supplies are not at risk and that the UK has more than a sufficient number of power plants to cover demand. However, the ruling is likely to have a significant impact on generators.
Energy suppliers too had already begun rolling out time-of-use tariffs in 2018 to incentivise consumers away from periods of peak demand.
What does it mean for electricity bills?
With the decision from the ECJ only a few days old, there is yet no clarity on what the suspension might mean. With the stop of government payments to generators, the Capacity Market charge (the Capacity Market cost that is recouped via consumer electricity bills) might be halted. There is even some speculation that his could result in a refund for previous Capacity Market charges paid via electricity bills.
However, it is likely that the loss of revenues to generators and any potential cost benefit to consumers will be at least partially offset by a hike in wholesale energy prices.