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UK capacity market 'standstill' begins after CJEU ruling

The UK government has temporarily suspended its electricity capacity market after the EU's General Court annulled state aid approval for the scheme.21 Nov 2018

The 'standstill period' announced by the government prevents it from auctioning off any further generation capacity, making payments under existing agreements or taking any other action which could be seen as granting state aid under the scheme until it can be reapproved by the European Commission. The government said it was "already working closely" with the Commission on its investigation, and will be seeking separate state aid approval for a one-off replacement auction for delivery in 2019-20.

"The ruling does not change the UK government's commitment to delivering secure electricity supplies at least cost, or our belief that capacity market auctions are the most appropriate way to do this," the government said in a statement. "The ruling will not impact security of supply this winter."

National Grid has written to existing capacity agreement holders and capacity market applicants to inform them of the standstill period. It has also postponed indefinitely any upcoming capacity market auctions. Further guidance on the detailed implications of the judgment for existing capacity agreement holders will be issued at a later date.

The UK's capacity market auction system is governed by the 2013 Energy Act. It is intended to boost energy security by subsidising plant to be on standby for generation in times of additional need or peak demand, including additional winter demand. Energy suppliers and generators bid in regular auctions to provide a share of capacity when the system needs it in exchange for a regular revenue stream.

Demand-side response provider Tempus Energy challenged the European Commission's decision not to raise objections to the scheme proposed by the UK when the UK formally notified the Commission about its plans. The General Court, in its judgment, found that the Commission should have had doubts about certain aspects of the planned scheme, and should have initiated a formal investigation procedure in order to better assess its compatibility with state aid laws.

"Although the length of the 'standstill period' cannot be predicted with any certainty, the UK government has signalled its commitment to ensuring security of supply and to obtaining state aid re-approval as soon as possible," said energy market expert Jeremy Chang of Pinsent Masons, the law firm behind Out-Law.com.

"Developers who are currently looking to develop projects in reliance on capacity market revenues will need to consider the implications of the court's decision very carefully, not only in relation to the impact on the project's financial model, but also on how the 'standstill period' may affect construction timelines," he said.