Utility Week

UTILITY WEEK | 8TH - 14TH NOVEMBER 2019 | 17 Policy & Regulation "Throughout the summertime, BEIS con- ducted an exercise to assure themselves that suppliers were collecting that money," she explains. "Now, they didn't contact all sup- pliers because of course there's about 60 suppliers in the market, but they contacted suppliers that cover about 90 per cent of the market and 90 per of the customers, and they satisfied themselves that the money is there." Another, slightly less pressing issue is whether there is any risk to the capacity mar- ket from a further legal challenge. Frustrated at ministers' efforts to keep the scheme partially running – encouraging sup- pliers to make voluntary payments, advising capacity providers to continue complying with their agreements, and holding or arrang- ing two replacement auctions – Tempus Energy applied to the High Court in March for a judicial review of the government's actions in an attempt to enforce the shutdown. The firm was successful, with the start date set for 11 November. It's unclear quite what effect the reinstatement of the capacity market will have on the case, although it's hardly likely to help. Tempus also has a two-month window in which it can file an appeal against the com- mission's latest decision. But with the European Commission hav- ing undertaken the in-depth investigation, which the court said it should have done originally, the procedural grounds for an appeal have become much weaker. "Any appeal will likely have to be against the sub- stance of this decision itself," notes a brief- ing on the decision from KPMG. Responding to the announcement, Tem- pus Energy nevertheless accused the com- mission of having "rushed through" the reapproval of the capacity market, "ensuring the energy industry can rip off consumers to the tune of £1 billion a year." With National Grid forecasting a 13 per cent supply margin for the coming winter, the company said it is "ludicrous to suggest consumers should be paying for subsidies to keep the lights on". But Tempus did not say whether it plans to continue the fight, merely stating that it will be "studying the judgement" before commenting further. Lasting effects A question for the longer term, assuming the capacity market is here to stay, is whether its suspension will have any lasting effects on the scheme and its rules. Certainly, the government has made a number of commit- ments as part of the reapproval, for example, to review the contract lengths available to different technologies and the minimum size for capacity market units. They were all touched upon in its sched- uled five-year review of the capacity market but this was published in July – months a˜er the scheme was suspended. Whether it would have considered these changes any- way or its hand was forced is difficult to say from the outside. The inability to access the 15-year con- tracts available to new build generation and create units of less than 2MW were both key complaints from Tempus, which said these arrangements le˜ nascent technologies such as demand-side response unable to compete on a level footing. Alistair Martin, chief strategy officer for fellow aggregator Flexitricity, says it's "great" to have the capacity market back: "Our cus- tomers are now going to receive the payments for the service that they have delivered." But he also strongly welcomes the gov- ernment's commitments: "It's not exactly as if they made an undertaking, but they've clearly opened that page of the book and are beginning to study the options there." "However, it was arrived at," he adds, "we're looking forward to seeing detail and getting demand response much closer to trading on an equitable basis." Tempus has called for the 2MW thresh- old for capacity market units to be lowered to 100kW. In its briefing on the reapproval, KPMG said it would be "surprised" if the gov- ernment did reduce it to this level. Any ben- efits would have to be weighed against the "operational burden" on the delivery body, and few participants actually took advantage of the lower thresholds in the few transi- tional auctions designed specifically for DSR. The briefing argues that longer contract lengths will have a limited impact given that the accompanying thresholds for capex will probably remain in place and "prove too high for demand-side response (DSR). Also, it warns that longer contracts could create an incentive for batteries to move behind the meter and disguise themselves as demand-side response to benefit from more favourable de-rating factors. And the government has committed itself to allowing foreign capacity to par- ticipate in the auctions. The EU's recently passed clean energy package may have required this anyway, but the briefing sug- gests this is likely to be the most important of the government's pledges. "Once this commitment is implemented, we do not believe that interconnectors will continue to be eligible to participate in the capacity market," it explains. "This will impact interconnector revenues and could potentially have some impact on the attractiveness of future interconnection projects, coming as it does on the back of the uncertainty caused by Brexit." The suspension of the capacity market may be over, but it will be a while before its full effects are known. Tom Grimwood, energy correspondent, Utility Week CAPACITY MARKET REINSTATEMENT IMPACT ON REVENUES Intergen SSE RWE* ESB EDF Centrica** Engie National Grid EDF RWE SSE Engie Intergen Centrica* ESB National Grid Source: Moody's £ millions, current financial year * Excludes future dividends associated with capacity payments to nuclear joint venture 0% 10% 20% 30% 40% 50% £0 £100 £200 £300 £400 £308 £204 £151 £84 £39 £22 £22 £10 * Pro forma for completion of asset swap with Eon ** Excludes future dividends associated with capacity payments to nuclear joint venture Current financial year

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