Utility Week

UTILITY WEEK | 12TH - 18TH APRIL 2019 | 13 Operations & Assets only buy renewable energy – we generate it too. These huge gasholders are where we store biogas aer we've manufactured it from Manchester's toilet waste. Once the gas is cleaned up we can either use it ourselves to generate electricity for the treatment works, or inject it back into the gas grid." If you have an asset or project you would like to see featured in this slot, email: paulnewton@fav-house.com. Market view Capacity market: what next? Claire Millard and Jayne Harrold explore the risks and uncertainty presented by the suspension and litigation over the capacity market. I n the latest developments in the chal- lenge to the capacity market, Tempus Energy has launched a judicial review of the continued operation of the capacity market (albeit with payments suspended), and the European Commission has both appealed the European Court of Justice's (ECJ's) decision and announced a state aid investigation. The Department for Business, Energy and Industrial Strategy (BEIS) has given effect to the initial ECJ decision by suspending pay- ments to capacity providers. However, the capacity market itself has continued to oper- ate and providers have been encouraged to continue to meet their obligations. Tempus Energy's judicial review com- plaint is that the continuing operation of the capacity market, even with payments sus- pended, is not sufficient and that demand- side response operators continue to be disadvantaged by the aid granted to capac- ity providers under the scheme. If it is suc- cessful in its challenge, this could result in complete suspension of the operation of the capacity market. In terms of the Commission's investiga- tion, an open letter to the UK was published on 22 March 2019. All interested parties are able to contribute and have four weeks to do so. Input into the investigation by key stakeholders: capacity providers; demand- side response operators; energy suppliers; regulators and industry bodies; will be key to ensuring that affected parties are heard. Par- ticipation presents an opportunity to influ- ence the outcome of the investigation. The Commission has stated that the outcome of its investigation will not be pre-judged. Brexit does not affect the power of the Commission to initiate state aid proceed- ings, including the potential clawback of any "aid" unlawfully given by the government during the period of Britain's membership of the EU. If a withdrawal agreement is adopted or if there is an extension to Article 50 [which Theresa May is travelling to Brussels to seek as Utility Week goes to press], this could include a transition period during which the Commission will continue to have power in relation to state aid for a specified period (such as until December 2020). The outcome of the Commission's inves- tigation will either be to approve or reject the capacity market from a state aid per- spective. Rejection could lead to permanent suspension. The natural consequence of this is also the clawback from recipients of the aid granted under the scheme. This would most likely be the capacity market payments already received. Alternatively, the Commis- sion may approve a modified version of the capacity market. Again, there remains the question of whether there will be a clawback. If the capacity market is not approved and payments need to be clawed back, consid- eration will need to be made as to how that will take place. It may require the involve- ment of Ofgem to determine whether and how payments can or should be refunded to customers. This underscores the importance of all affected parties making their voices heard now and engaging with both the Commis- sion and BEIS. The key point at issue is whether the scheme unfairly distorts compe- tition, and effective engagement will need to address that question. Legal and commercial considerations It could take time for the Commission investi- gation and the various strands of litigation to be resolved, which will extend the period of uncertainty for capacity providers. Capacity market operators may wish to consider their rights and obligations and the impact on their business models, including decisions with regard to whether planned new capacity or refurbishments are deferred, as well as whether penalty provisions can be enforced when payments are suspended and the scheme is under investigation. Capacity market operators and energy suppliers may also wish to consider whether they need to recognise a contingent liability or provision for potential state aid clawback or future liabilities for payments not made. Claire Millard, manager, solicitor, and Jayne Harrold, director, UK environment tax leader, PwC

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