I am pleased to announce that today the European Commission has confirmed its original decision in 2014 to grant state aid approval for the capacity market, enabling this vital tool for electricity security of supply to be restored and payments that have been suspended since November 2018 to be made.
The Commission opened an in-depth investigation to gather more information on certain elements of the capacity market after the General Court of the Court of Justice of the European Union annulled the Commission’s earlier state aid approval of the scheme on procedural grounds on 15 November 2018.
The Commission has now satisfactorily concluded its investigation and has concluded that the capacity market as operated since 2014, including during the investigation, complies with state aid rules. Notably, the Commission did not find any evidence that the capacity market puts demand side response or any other capacity providers at a disadvantage with respect to their participation in the scheme.
The Government welcome the Commission’s decision, which enables the capacity market to resume its important work as Great Britain’s principal tool for ensuring electricity security of supply and provides confidence that its design is fit for purpose.
We are awaiting the Commission’s full decision, but expect that its decision means we will be able to:
Restart the mechanism for making payments to capacity providers, including the c.£1 billion of deferred payments that have been suspended because of the standstill period as well as future capacity payments. The vast majority of the back-payments will reach capacity providers in January 2020;
Invoice suppliers for the supplier charge relating to the standstill period which will be used to fund the deferred capacity payments. The Government have been engaging with suppliers during the standstill period to ensure they have been setting aside funding to meet what will be a substantial post-standstill invoice;
Confirm that the conditional capacity agreements awarded in the replacement T-1 auction, held in July 2019, have become full capacity agreements. This will ensure we have in place all the capacity needed to ensure security of supply this winter; and
Confirm the three capacity auctions scheduled for early 2020 will take place. These will secure the majority of our capacity needs out to 2023-24.
The Commission’s decision also notes that the UK has committed to implementing a number of improvements to the capacity market’s design to reflect recent market and regulatory developments, including those identified through our recent five-year review of the effectiveness of the capacity market. These will ensure the continued compatibility of the capacity market with state aid rules in the future and relate to: (i) the lowering of the minimum capacity threshold for participating in the auctions; (ii) the direct participation of foreign capacity; (iii) the participation rules for new types of capacity; (iv) the access to long-term agreements; (v) the volume of capacity to be secured in the year-ahead auction and (vi) compliance with the new electricity regulation.
My Department will shortly consult on arrangements for implementing these commitments.
I will be writing imminently to our delivery partners responsible for delivering the capacity market—the capacity market delivery body (National Grid Electricity System Operator) and the settlement body (Electricity Settlements Company)—to notify them of the Commission’s approval decision and confirm the occurrence of the deferred capacity payment trigger event and T-1 capacity agreement trigger event (the triggers for the resumption of capacity payments). These bodies will subsequently be required to resume making capacity payments, carry out new duties arising from the triggers, and restart any duties that had been suspended during the standstill period. Our delivery partners have worked closely with my Department to ensure that their systems and processes remain fit for purpose; they stand ready to support the restart process immediately.