What does the Capacity Market suspension mean for electricity bills?

The UK’s Capacity Market scheme for ensuring power supplies during the winter months has been suspended after the European Court of Justice (ECJ) ruled that it constitutes illegal state aid.

With the cost of running the Capacity Market recouped via consumers electricity bills, (currently accounting for 2.9% of the invoice), the suspension could potentially impact UK businesses and households.

What is the Capacity Market and why has it been suspended?

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 back-up power during the winter months unfairly favoured fossil fuel generators over newer, cleaner technologies.

In its ruling the ECJ said the European Commission was wrong not to more closely investigate the UK’s plans to establish the Capacity Market back in 2014, when it was tasked with assessing whether the policy complied with State Aid rules.

What does the ruling mean for the UK power market?

The ruling renders the capacity market unlawful for a “standstill period” while the UK government seeks state aid approval from the European commission. It is not clear how long that will take, but it could be many months. In the meantime, the UK has been blocked from holding any capacity market auctions for energy firms to bid for new contracts to supply backup power in the future.

While the government has insisted that power supplies were not at risk due to the UK having more than a sufficient number of power plant to cover demand, the ruling is likely to have a big impact on generators.
Ed Reed, head of research at analysts Cornwall Insight, said: “The consequences are absolutely huge. Immediate cessation of payments is going to have immediate consequences for electricity generators that were relying on them,” said Ed Reed, head of research at analysts Cornwall Insight.

Sara Bell, founder and CEO of Tempus Energy, which started the challenge in 2014, said: “This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

Energy suppliers have already begun rolling out time-of-use tariffs in 2018 to incentivise consumers to move their energy consumption away from periods of peak demand.

What does the Capacity Market suspension mean for electricity bills?

The suspension of government payments to generators may result in a halt to the Capacity Market charge (the cost of running the Capacity Market which is recouped via consumer electricity bills). It could even result in UK consumers getting a refund for previous Capacity Market charges paid via their electricity bills. However, this has yet to be stipulated.

Whatever the fallout, the loss of capacity market revenues to generators and any resultant cost benefit to consumers is likely to be – at least in some part – offset by a hike in wholesale energy prices instead.

If the scheme is cancelled all together, however, it would result in a permanent discontinuation of the Capacity Market charge – one of several rising non-commodity charges that are forecast to increase the price of electricity by up to 65% over the next decade.

If you are UK Business, you can get a clearer visualisation of this impact today by using SMS Plc’s free-to-use Energy Risk Forecaster.