The General Court of the European Union has annulled state aid approval for the UK’s capacity market following a successful challenge by demand-side response outfit Tempus Energy.
Tempus argued the mechanism gave unfair advantages to power generation plants over DSR beyond what is necessary to achieve its objectives and satisfy state aid rules.
The Luxembourg court ruled the European Commission failed to assess properly the role of DSR within the capacity market when it gave approval in June 2014, a month after the UK government gave formal notification of the scheme.
In a statement, Tempus said £5.6bn committed in customer-funded subsidies had been ruled unlawful and could lead to an overhaul of UK energy policy.
“This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way while maximising the use of climate-friendly renewables,” said chief executive Sara Bell.
The capacity market will enter a ‘standstill period’ which prevents the UK government from holding any capacity auctions, making any capacity payments under existing agreements, or undertaking any other action which could be seen as granting state aid, until the scheme can be approved again.
A BEIS spokeswoman said the UK government will be “working closely with the Commission so that the capacity market can be reinstated as soon as possible”.
“We are disappointed with this judgment but it poses no issues for our security of supply,” she added.
Capacity market delivery body National Grid said BEIS had instructed it to postpone indefinitely the upcoming T-4 and T-1 Auctions for Delivery Years 2022/23 and 2019/20 respectively.
The UK is intending to seek separate state aid approval from the Commission to run a one-off ‘replacement’ T-1 auction.
The postponed T-4 is intended to be run as a T-3 Auction in next year’s auction round, subject to the Commission completing its formal investigation and providing state aid approval for the main capacity market scheme.