‘Brave’ legal challenge launched against UK capacity market
Simon Evans
12.04.14A legal challenge has been launched today against the government’s capacity market, the policy designed to make sure the lights always stay on.
The challenge has been launched by Tempus Energy, a firm that aims to cut consumer energy bills by helping them use cheaper, off-peak power.
Tempus says consumers who would like to participate in the capacity market by managing their demand for energy are being discriminated against in favour of power stations that promise to be available during peaks in demand.
Tempus argues the capacity market will result in higher energy bills and subsidies to fossil fuel generators. It wants the capacity market annulled.
We take you through the basics of the capacity market, the next steps in the legal challenge and what the significance is for efforts to tackle climate change.
Electricity sector transformation
The way the UK generates electricity is undergoing a massive transformation as old coal and nuclear plants start to retire and large quantities of renewables are added to the system.
The government is committed to decarbonising the energy sector so renewables are going to make up an ever larger share of electricity supplies.
The amount of electricity generated by windfarms and solar panels is variable because it depends on the time of day and the weather. Broadly speaking there are two ways to manage this.
The first is to build plenty of gas-fired power plants which can be switched on quickly for relatively short periods when the wind drops or when demand peaks. This is a relatively straightforward solution, but unfortunately the profitability of gas-fired plant is being undermined by a combination of low coal prices, low carbon prices and the near-zero cost of producing power from existing renewable capacity.
Making it profitable for power companies to build new gas capacity was the original aim of the the government’s capacity market, which will pay a retainer to capacity promising to be available during peaks in demand.
The second way to balance variable wind and solar output is to encourage electricity users to be more flexible in when they use energy through demand-side response, an approach favour by the International Energy Agency among others.
There are good arguments for encouraging consumers to be flexible instead of building new power plants. Marc Borrett, chief executive of demand-side response firm Reactive Technologies says a megawatt of demand side response is much cheaper to build than a megawatt of new plant.
While there may be costs associated with managing demand, like investing remote switching control equipment or variable speed electric motors that can ramp power up and down, DECC believes the costs for demand side response to be well below that needed for power plants.
As a result its capacity market will only offer short one year contracts to demand-side response participants. That’s compared to power plants that carry out retrofits to stay open, which can claim three year contracts, while new-build plants can claim 15 year deals.
Discriminatory contracts?
Tempus says this difference is discriminatory and that one year contracts are too short for firms to justify investing in the technology they need to manage demand flexibly.
It has lodged the contract-length and several other legal complaints with the General Court of the European Union. It wants to force the European Commission to overturn or at least review its decision that the capacity market rules are legitimate state aid.
Tempus chief executive Sara Bell tells Carbon Brief her barristers are “very, very confident” in their case. However the move is likely to be unpopular with most of the power industry according to John Pickett, energy and infrastructure partner for law firm Linklaters. He called the legal challenge “brave”.
The reason it might be unpopular is explained by Marcin Stoczkiewicz, head of climate and energy at legal NGO ClientEarth, which is supporting the Tempus case. He says that if Tempus wins the case, capacity contracts could be considered unlawful and capacity payments might have to be repaid.
Secretary of state Ed Davey is legally obliged to “postpone or cancel” the capacity market auction if he thinks it would breach state aid rules to proceed. This doesn’t look likely to happen, however. A DECC spokesperson tells Carbon Brief:
“The European Commission has concluded that the capacity market is within European state aid rules. This challenge will have no impact on the running of the capacity auction in December. We are fully confident in this auction.”
European Commission spokesman Ricardo Cardoso tells Carbon Brief the commission will defend its decision in court. The commission says any attempt to work out the consequences of a successful legal challenge would be highly speculative at this stage.
It’s also worth noting that the commission heard and rejected similar appeals from the demand-side response sector during its approval of the capacity market rules. Its approval document says:
“The commission does not consider that shorter contracts clearly put existing plants and demand side response at a disadvantage to new generation.”
Why this matters for the climate
Tempus boss Bell says it could take six to twelve months to secure a ruling that would force DECC to rewrite the capacity market rules. Another legal source tells Carbon Brief this sort of case takes an average of 18 to 36 months.
It isn’t only the success of demand side response firms that could be affected by the outcome of this process. ClientEarth’s Stoczkiewicz says the Tempus legal challenge is crucial for climate protection too because the current rules amount to a subsidy mechanism for fossil-fuel based generation. Indeed the commission’s decision acknowledges that the capacity market “may result in support to fossil fuel generation”.
Stoczkiewicz says:
“If allowed to go ahead, the UK’s capacity mechanism will artificially prop up the existing coal-reliant energy system by paying generators extra to produce more electricity at peak times. The costs will be passed on to consumers, regardless of when they use power. This is bad for the environment and for our pockets.”