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EU clears path for reinstating UK's backup power program

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Essential Energy Insights - September 17, 2020

Essential Energy Insights September 2020

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EU clears path for reinstating UK's backup power program

The European Commission reapproved the U.K.'s capacity market, the multibillion-pound program that pays power generators for providing backup capacity, clearing the way for delayed payments to utilities and keeping alive a key route to market for planned power assets.

In a widely expected move, the commission said Oct. 24 that it found the capacity market was compatible with EU state aid rules. The program has been suspended since an EU court ruled it illegal on procedural grounds in November 2018 after a U.K.-based provider of demand-side response services claimed it favored large-scale generation.

The ruling was appealed by the commission but, in the meantime, also triggered an in-depth review of the capacity market, which was first approved by the EU in 2014. On Thursday, the commission said it found no evidence that the capacity market puts demand response operators at a disadvantage.

"The investigation confirmed that the scheme is necessary to guarantee security of electricity supply in Great Britain, is in line with EU energy policy objectives, and does not distort competition in the single market," the commission said in a statement.

The U.K. government said it was still waiting for the full decision but expects to start doling out capacity payments again, including about £1 billion in deferred payments for the standstill period, which will mostly reach capacity providers in January 2020. It also plans to confirm the next three capacity auctions scheduled for early 2020 to secure backup power out to 2024.

Utilities that have active capacity contracts include Germany's RWE AG and Uniper SE, France's Electricité de France SA, and British generators Drax Group PLC, Centrica PLC and SSE PLC. The capacity market has awarded contracts for up to 15 years to coal, gas and nuclear plants as well as battery storage.

The commission noted in its announcement that the U.K. has already committed to several improvements in the capacity market framework, which will lower the minimum capacity threshold for participating in the auctions, change the participation rules for new types of capacity and amend access to long-term contracts, among others.

Roger Miesen, CEO of RWE's generation business, welcomed the reinstatement of the program and noted that the certainty it provides for generators is especially crucial at a time when the conventional power market in Europe remains "extremely challenging," with large-scale plants squeezed out by renewables and other low-carbon generation. A report released by an environmental group Oct. 24 found that almost 80% of coal plants in Europe are running up losses.

Meanwhile, Drax CEO Will Gardiner said in a statement that the company's planned gas plants, in particular, depend on revenue from the capacity market. The company, which expects £75 million in back payments, has more than 9,000 MW of combined- and open-cycle gas plants in various stages of development in the U.K., according to S&P Global Market Intelligence data, the most of any operator.

"We will be prequalifying a number of Drax's flexible and reliable power stations, as well as some of our development projects, later this year with a view to participating in the capacity market auctions in 2020," Gardiner said.

But critics argue the capacity market is not needed at all and puts money into the wrong technologies.

"Without changing tack, the U.K. is now at risk of continuing to shovel cash towards old coal, gas and nuclear power stations, which would be running anyway, rather than clearing space for low carbon generation and innovative technologies," said Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit, a green think tank.