The European Commission has concluded that the UK's proposed Capacity Market, intended to ensure that sufficient electricity supply is available to cover consumption at peak times, is in line with EU state aid rules. The Commission found in particular that the scheme will contribute to ensuring the security of energy supply in the United Kingdom, in line with EU objectives, without distorting competition in the Single Market. This is the first time that the Commission has assessed a capacity market under the new provisions on capacity markets in the new Environmental and Energy State Aid Guidelines.
The UK's Energy and Climate Change minister Ed Davey commented: "This is great news, and shows that our major reforms to the electricity markets are urgent and needed to turn around the historic neglect of the sector. We are the world leader in investment for low-carbon energy and energy security. The average annual investment in renewables has doubled since 2010 - with ... £8billion worth in 2013. And we'll continue to lead in building a low-carbon electricity sector based on homegrown energy sources, reducing our reliance on polluting fuels and volatile energy markets at the lowest possible cost to consumers."
The Capacity Market, which will be applicable in Great Britain but not Northern Ireland, which has separate electricity market arrangements, aims to ensure security of electricity supplies in view of the projected increases in electricity demand and the upcoming closure of a significant share of the current UK generation capacity. The UK government has estimated that the Great Britain electricity market will reach critical levels of generation adequacy around 2017/2018.
Under the capacity market the Great Britain system operator will organise annual centrally-managed auctions to procure the level of capacity required to ensure generation adequacy. Auctions will be open to existing and new generators, demand side response (DSR) operators and storage operators. The UK has also committed to opening the participation to new interconnectors from 2015.
The UK has announced its intention to auction a total of 53.3 GW of capacity for the first delivery year in 2018/19, with 50.8 GW is to be auctioned in December this year The balance will be auctioned one year ahead of delivery in 2017. The government will take decisions on the amount of capacity to procure in future auctions, based on advice from the system operator. The scheme will run for 10 years.
In return for a steady payment for the duration of the capacity agreement, successful bidders in the auctions will be required to provide capacity at times of stress on the electricity system, or face financial penalties. New generators will be eligible for a 15-year capacity agreement. Other capacity providers will be eligible for 1-year capacity agreements (except in the case of existing generators requiring significant refurbishment).
Aid granted will be paid out as a function of the amount of capacity set out in each provider's capacity agreement. The measure will be financed through a levy on electricity suppliers.
The Commission assessed the measure under its new state aid Guidelines on Energy and Environmental Protection. This assessment concluded that, as required by the guidelines, the UK has only introduced the capacity market following a thorough investigation of its necessity and the potential for alternative measures to contribute to ensuring the security of supply objective. Further, the measure itself will be open to a range of technologies, including demand side response and interconnection. The use of auctions should ensure aid granted is limited to the minimum necessary.
-The Capacity Market is part of the larger UK Electricity Market Reform that also includes other support measures, such as compensation to energy intensive users for indirect costs of the carbon price floor, the Contract for Difference (CfD) scheme, and the planned support for the construction and operation of a new nuclear power plant at Hinkley Point in Somerset. The Commission's in-depth investigation in relation to the latter is still going on.
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