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Capacity Market Suspended for Failure to Comply with State Aid

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Summary: Following a ruling of the General Court of the European Union (the Court), the UK’s capacity market has been suspended from 15 November 2018. This includes the suspension of capacity market availability payments to capacity providers with existing capacity market agreements.

The Ruling

The suspension has come about following the Court’s ruling in Tempus Energy Ltd and Tempus Energy Technology Limited v European Commission, that the European Commission (the Commission) failed to property scrutinise the capacity market for compliance with rules on state aid, annulling the Commission’s state aid approval of the scheme.  In particular, the Court ruled that the Commission failed to properly assess the role of demand side response technologies (DSR) within the capacity market.  

Implications of the ruling

The ruling has imposed a ‘standstill period’ on the capacity market. In the longer term, this will likely foreshadow a significant overhaul of the scheme – one that will provide a more level playing field for DSR and other less established, innovative generation technologies.

Capacity payments will no longer be made under existing agreements.  This could have severe consequences for those relying on capacity payments to satisfy debt repayments (and is likely to test a few change in law clauses in the process).

The upcoming T-4 and T-1 auctions for delivery years 2022/23 and 2019/20 respectively will not take place.  The Government does intend to seek separate state aid authorisation for a one off replacement T-1 auction, whilst the T-4 auction is intended to run as a T-3 auction in next year’s round, subject to the Commission completing a sufficient investigation and reapproving state aid for the scheme.  

For holders of capacity agreements, all credit cover currently being held in relation to postponed auctions is to be returned.  Agreement holders may also request the return of credit cover for capacity agreements arising from past auctions.

The Government “hopes” that it can avoid the need to recover capacity payments previously made. BEIS is set to discuss with the European Commission the extent to which any aid already paid out may need to be recovered as part of the impending formal investigation into the scheme.

If you have any questions on the ruling, please do not hesitate to get in touch.

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