Brussels sets dangerous precedent by clearing UK capacity market

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Coal plant, Madrid, New Mexico, ca 1935 (Unk, via Wikimedia Commons)

Coal plant, Madrid, New Mexico, ca 1935 (Unk, via Wikimedia Commons)

The European Commission has given the green light to a proposed UK capacity market that aims to ensure enough electricity is available to cover consumption at peak times. This is the Commission’s first assessment of a capacity market under new EU guidelines on energy and environment state aid that entered force on 1 July. The Commission says the aid is justified because it will contribute to the UK’s security of supply “without distorting competition in the single market”. But some stakeholders fear exactly the opposite is true and that it could spell the end of demand response, for example. Sonja van Renssen reports

First, a caveat: when the European Commission announced its decision to authorise the UK’s plan for a capacity market on 23 July, it did not publish the text of this decision. Nor indeed, of a second decision on the same day to authorise the UK’s proposed subsidies for renewables (Contracts for Difference); a decision on record subsidies for a new nuclear plant at Hinkley Point C remains outstanding. The text of the two state aid decisions of 23 July, taken at the last meeting of all 28 EU Commissioners in Brussels before the summer break, will only be published a few months from now, after confidential information has been removed. This means that any analysis of them must remain incomplete until then.

Specifically, what stakeholders want to know is what changes the Commission has requested to the UK’s plans in return for granting them the green light. Energy Post understands the UK has made some commitments. But what these are, will only be known once the decisions are published. Nevertheless, there is serious cause for concern, warn stakeholders including ClientEarth (an organisation of activist environmental lawyers), the Regulatory Assistance Project (RAP, a global, non-profit team of power and gas experts advising policymakers on energy and environment issues), E3G (an independent, non-profit think tank focused on sustainable development), the Smart Energy Demand Coalition (SEDC, representing the demand response industry) and campaigners WWF.

“In the name of energy security […] the UK is planning on providing illegal subsidies and preferential treatment to existing coal plants via the capacity market. The intention is to keep old coal in the mix into the 2020s, with consumers paying the bill for coal plants to upgrade to meet air pollution regulation.”

-E3G, 23 July 2014

If the Commission has not demanded adequate changes – and some of these stakeholders suspect it hasn’t – the UK capacity market decision could set a very bad example for future state aid decisions, warns Maria Kleis from ClientEarth. She and colleagues at RAP question the UK’s need for a capacity market and state aid at the level proposed; E3G and WWF criticise the open door to long-term subsidies for old coal plants that they say fly directly in the face of decarbonisation and do not represent value for money for consumers. Jessica Stromback from the SEDC says the plans will decimate the demand response industry.

“This is going to severely damage the demand response industry long term throughout Europe. Right away in the UK, I fear that several of the aggregators [companies who offer demand response services] will leave as of next year. This damages competition: if you do not own generation assets, you now cannot compete on an equal footing.”

-Jessica Stromback, Executive Director, Smart Energy Demand Coalition (SEDC)

The UK Plan

What is the UK proposing? Great Britain’s transmission system operator (TSO) National Grid (Northern Ireland is not part of the planned capacity market) will run annual, centrally-managed auctions for the level of capacity required to ensure generation adequacy – critics already say this should be “resource adequacy” to put demand on an equal footing with supply. Auctions will be open to new and existing generators, demand side response operators and storage operators, confirms the Commission. The UK has also committed to opening participation to new interconnectors from 2015, it adds. The whole scheme will run for 10 years.

The UK plans to hold its first auction in December this year, for 50.8 gigawatts (GW), to be delivered in 2018-19. Successful bidders will be required to provide capacity at times of stress on the electricity market, or face financial penalties. New generators would be eligible for a 15-year capacity agreement; others, a 1-year agreement, with the exception of existing generators requiring significant refurbishment – these could win 3-year or 15-year contracts if they spend at least £125/kW (€158/kW) or £250/kW (€316/kW) respectively. Or at least this is what all the publicly available information suggests. Energy Post understands however, that in reality only new generators would be eligible for 15-year contracts; refurbished plants would get 3-year contracts at most. In return for being on standby, successful bidders would get steady payments, the aid paid out as a function of the capacity they have to hand. The money will come from a levy on electricity suppliers.

“The UK capacity market embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules.”

-Joaquín Almunia, Commission Vice-President in charge of competition policy

In its press release on 23 July, the Commission says that as required by its state aid guidelines, the UK “has only introduced the capacity market following a thorough investigation of its necessity and the potential for alternative measures”. Further, the market will be “open to a range of technologies, including demand side response and interconnection” and the use of auctions “should ensure aid granted is limited to the minimum necessary”. Growing demand for electricity and the imminent closure of much existing generation capacity create the case for a capacity market, the UK says.

Troubling questions

But RAP and ClientEarth believe that the UK’s analysis of its generation adequacy problem is “probably incorrect”, ongoing balancing market reform discussions in the UK further mitigate the need for a capacity market as proposed, and that competition will be harmed more than is necessary. There are other, more appropriate solutions to security of supply, they suggest. More specifically, the two groups argue that the UK is overly pessimistic about peak generation availability, support via interconnectors and the potential contribution of demand response. The UK has also chosen a tough security of supply standard against which to assess the amount of capacity to be tendered, they say.

“We believe that DECC [the UK’s Department for Energy & Climate Change] have made the wrong choice and that the decision to introduce a market-wide capacity mechanism which will commit electricity consumers to underwrite 15-year contracts for capacity, is simply not supported by the available evidence.”

-RAP and ClientEarth

Starting with plant availability to cover peaks, RAP and ClientEarth cite evidence that actual availability is more than what the average data used by National Grid suggests; for example 92% vs. 85% for coal-fired plants. The data used by National Grid also covers the period since 2000, which corresponds they say, to a time when generators had no commercial incentive to maximise peak season availability. Such incentives can make a difference: combined cycle gas turbine (CCGT) availability is estimated at 85%, but the figure was over 96% for CCGTs in the PJM wholesale electricity market in the US where strong incentives to maximise peak availability exist.

Second, no electricity imports are assumed from continental Europe, despite recent and projected increases in interconnector capacity and the existence of emergency support arrangements with neighbouring TSO, the groups say. This denies the reality of the EU internal energy market – and threatens much-needed future investments in interconnection. European bodies such as ENTSO-E, which unites TSOs across the bloc, are at this very moment working towards regional resource adequacy assessments. “The proper coupling of intra-day and balancing markets, as mandated by the Third Energy Package, will only increase the statistical contribution to resource adequacy by cross-border interconnectors.” RAP and ClientEarth say. They argue that a final report by UK Electricity Market Reform experts supports their view. The experts stress that interconnectors should be treated identically to generators and that doing so could result in 2.6GW of imports.

Third, RAP and ClientEarth call the estimated demand side contribution to winter peaks “very conservative”. “Ample experience in other markets demonstrates it [demand response] could deliver as much as 10% of all capacity requirements at a far lower cost than new generation and at least as reliably.” Yet the proposed design for the initial capacity auction “seems almost deliberately to be designed to foreclose this”. Demand response is not due to participate in the December 2014 auction, with discussion of a set-aside of 400-900MW to be filled by it in subsequent auctions. This assumes a contribution of demand response of just 1% of peak demand, with no prospect of that changing any time soon because capacity contracts will be handed out for 15 years. Demand side bidders incidentally, can only bid for 1-year contracts. This adds up to 4GW of unnecessary new power plant investments, calculate RAP and ClientEarth, and raises the overall cost of security of supply.

“I am highly disappointed in this ruling. This is a rubber stamp approval of a subsidy for fossil fuel based generation assets. It damages small new entrant retailers who do not own these assets and it damages demand response. Worse, this structure is now likely to be copied in France, Germany and Poland.”

-Jessica Stromback, Executive Director, Smart Energy Demand Coalition (SEDC)


“In this instance, the European Commission is a judicial organ. Its decisions should therefore be based on legal considerations and in particular on state aid rules.”

-Maria Kleis, ClientEarth

Coal criticism

E3G and WWF have singled out potential subsidies to coal plants for particular criticism. Just as the UK government announced it will not revise its 4th Carbon Budget, i.e. it will stick to its commitment to reduce emissions by 50% from 1990 levels by 2025, it also welcomed a new lease of life for coal plants from Brussels.

Coal plants will be able to win 15-year capacity contracts if they spend at least £250/kW (€316/kW) on upgrades, and 3-year contracts for spending £125/kW (€158/kW). This is a real possibility: Ratcliffe-on-Soar, operated by E.ON, recently spent £800 million (€1000 million) on refurbishments, WWF believes, enough to have won it a 15-year deal. Baroness Verma, the UK government’s energy spokesperson in the House of Lords, argued on 24 July however that in practice existing coal plants would not bid for 15-year contracts because the investment threshold is too high – similar to that for building a new plant. The carbon price will make coal uneconomic anyway in the 2030s, she added.

Nevertheless, around 10GW of old coal capacity could win multi-year capacity contracts later this year, E3G calculates. It labels these subsidies illegal because it says they would be used to upgrade the plants to meet air pollution standards coming into force in 2016 under the EU’s Industrial Emissions Directive. The EU cannot authorise state aid for companies to meet legislative requirements, ClientEarth’s Kleis explains – state aid can only go to companies that go beyond these.

“The capacity market risks pushing up bills and holding up progress towards a decarbonised power sector. it’s hard to believe that a country which has just reaffirmed its commitment to tackling climate change… is about to introduce a policy which could lock in vast payments to its oldest and dirtiest power stations until the 2030s.”

-Jenny Banks, energy and climate specialist at WWF-UK

“Specific restrictions on subsidies to existing coal plants are required to ensure coherence between objectives on climate change, energy security and the completion of the internal energy market,” E3G’s Chris Littlecott writes in his report. “Capacity mechanisms are emerging as a convenient wrapping that disguises recompense to generators as a means of addressing security of supply concerns.”

The news about coal comes just as a coalition of NGOs released a fresh report – Europe’s Dirty 30 – about how coal plants are undermining EU climate efforts. The UK and Germany rank top, with nine of the dirtiest plants each. Separately, Sandbag, a UK-based NGO focused on emissions trading, issued a report – Europe’s failure to tackle coal – showing that coal emissions rose 6% from 2010-13 even as power demand fell and there was massive investment in renewables. Renewables are displacing gas, that’s the problem. Coal today accounts for 18% of EU CO2 emissions, the same as road transport, Sandbag calculates. There is no carbon capture and storage (CCS) option on the horizon just yet and an emission performance standard (EPS) in the UK will only apply to new, not existing, plants. E3G asks: if a 50-year old coal plant effectively counts as “new” when it spends enough to qualify for a 15-year capacity contract, should it not qualify as new for the EPS too?

“The UK is the biggest offender, and unfortunately, the UK’s capacity mechanism is making it increasingly likely that coal is here to stay. Policy changes are needed, including most importantly the strengthening of the carbon market.”

-Dave Jones, Policy Analyst at Sandbag

There is logic to keep coal plants up and running however:

“For the UK, retaining in reserve some old coal capacity is an insurance policy against the failure of its nuclear ambitions. Carbon emissions are not affected, since this is already harmonised at EU level. Such flexibilities mean the UK wins time to optimise its system adequacy auctions, both for quality and quantity, and overall to develop a less lumpy strategy.”

-Mark Johnston, senior adviser with European Policy Centre

Dangerous precedent

What the critics propose to relieve at least some of their concerns is that capacity contracts are limited to just one year. Fifteen years leaves very little room for any flexibility to adapt to changing circumstances or to give new, more innovative offerings such as demand response and interconnectors a chance to prove their worth.

Ideally, critics would have seen the UK go for a so-called strategic reserve rather than market-wide capacity mechanism. The former would have been smaller, more flexible and only deployed in emergency situations. In other words, the market would not have been affected in normal periods. The market-wide capacity mechanism proposed by the UK, on the other hand, effectively creates a new “capacity” product sold in parallel to the normal wholesale market for electricity. In its guidance on optimising public intervention in the internal energy market last November, the Commission warned against the potential high costs and complexity of such a mechanism.

“A strategic reserve… should be implemented in preference to market wide mechanisms unless there is clear evidence that they are unsuited to filling the identified adequacy gap. Mechanisms based on capacity payments should not be implemented as they do not ensure that the identified adequacy gap is filled and create significant risks of overcompensation.”

-European Commission, November 2013, internal energy market guidance

Everyone now awaits the final text of the 23 July decision on a UK capacity market. This is expected to be published in the autumn. What changes the UK has agreed to are crucial because this decision, being the Commission’s first on capacity markets under its new state aid guidelines for energy and environment, will set a precedent for how it handles others: Germany, France and Poland are next on the list with capacity plans to submit for approval. Poland in particular will no doubt take heart from the Commission’s stance towards coal in the UK plan, if that is indeed borne out in the final decision.

The implications of this first decision are momentous: for interconnectors, decarbonisation and demand-side innovation. The ultimate goal of a state aid decision is to promote competition. Critics argue that this decision may do exactly the opposite. Legal challenges look likely – from the demand response and renewables sectors and indeed consumers, who will have to fork out more for a reliable electricity supply as a result. The devil truly is in the detail and nothing less than the future of EU energy and climate policy is at stake.


  1. says


    An interesting article.

    You state “Ratcliffe-on-Soar, operated by E.ON, recently spent £800 (€1000) on refurbishments…” Ummm…I think a few zeros have been left off this figure? How much indeed did EON spend on SCR and other measures to comply with the IED? I am certainly curious! As far as I know, Ratcliffe is the only such major coal upgrade meaning (I think) that very dangerously, it may be the only coal plant surviving the 2023 IED deadline!

    The only objectors you cite seem to be the usual “environmental” NGOs + lobby groups with axes to grind. I would be much more interested to see a wider range objectors represented, eg Eurelectric, if such exist?

    • Michael Hogan says

      The Regulatory Assistance Project is neither an environmental NGO nor a lobby group. RAP is a non-profit group of former energy regulators and energy industry experts with no “ax to grind” other than promoting regulation and policies that ensure a reliable, affordable transition to a clean, low-carbon energy sector. Eurelectric, by the way, is a lobby group, one that represents companies who would no sooner object to the UK’s proposal than shoot themselves in the head.

  2. Paul Hunt says

    In the midst of all of this reporting of hand-wringing by the usual suspects there is one pithy, precise sentence:
    “Renewables are displacing gas, that’s the problem.”

    And this leads to some consideration of economic and political economy factors which, more often than not, explain the delivery of packages of policy and regulatory stupidity such as this. But these factors are rarely highlighted and explored. Almost all of the so-called ‘stakeholders’ have some skin in the game and special interests to advance or protect and they are all constrained, conflicted or compromised in some way. They produce a flood of public utterances and of the findings of ‘research’ and ‘studies’ (whose terms of reference are drafted to generate the required results) which indundates and confuses any citizen seeking disinterested information and guidance.

    More and more voters, quite rightly, are taking the view that ‘they’ are all lying to us. Anf the ‘they’ are politicians, policy-makers, regulators, energy businesses, NGOs and the army of advisers and consultants who thrive parasitically on the energy industry. None of these have an incentive to explain to voters who pay for every activity in the electricity and gas supply chains either as taxpayers or final consumers, either in the UK or throughout the EU, why and how they have made such a costly mess of what should be boring utility businesses. And they every incentive not to.

    The simple reality is that the British model of competition and regulation in the electricity and gas sectors – which has been adopted and adapted throughout the EU – has failed. Political exigencies, the adoption of an excessively ambitious climate change agenda and eternal factors have compounded this costly mess. Labour, when it came to power in 1997, imposed a windfall tax on the profits of regulated utilities. This inevitably, led to a hollowing out of balance sheets, excessive leverage, insufficient investment and all sorts of financial engineering to maximise short-term results. Labour then failed to create the conditions to attract the necessary investment in generation capacity to replace the coal capacity facing closure under the Large Combustion Plant Directive and ageing nuclear capacity. They then compounded this error by allowing the emergence of 6 dominant vertically integrated suppliers to compete. not on the basis of clearly differentiable service offers, but to gouge consumers and by adopting climate change policies that were evern more ambitious than those adopted by the EU. The current Labour leader was succeeded in 2010 as the minister responsible for energy and cliamte change by two successive Liberal Democrat who demonstarted, and the current incumbent continues to demonstrate, a pathological ability to deal with the realities of governance and the sorry legacy they inherited from Labour. They simply layered on more interventions and complexity – a carbon floor price, emission performance standards, contracts for difference and this truly awful capacity ‘market’ (in addition to many other silly and costly interventions) – as if the EU did not exist. And like most stakeholders they were blind-sided by the impact of the shale boom in the US on international coal prices and supply. This put the tin-hat on their excessive subsidisation of excessively expensive renewables and blew gas out of the generation market.

    The chickens are now coming home to roost. However, it is not surprising that the Commission has consented to the implementation of this costly folly. It, on its own patch, is as culpable as successive UK governments are on their own patch for the costly follies being perpetrated throughout the EU. Its credibility would be blown if it chose to come clean. But its credibility is increasingly being shredded and more and more EU voters can see this. It’s only a matter of time before the EU’s Grand Panjandrums will be compelled to confront the reality. But, in the meantime they will give the Brits what they want. The impact of a refusal in the context of an almost certain ‘in/out’ EU referendum in the UK is something to which they do not wish to be a party.

    • mats nilsson says

      I think a more correct sentence would be

      “Subsidized renewables are replacing non-subsidized gas” Then the discussion becomes more interesting. The reason to have subsidies is that whatever is subsidized cannot survive on market prices. So it must, almost per definition be more expensive. Now, if subsidized renewables would have replaced coal we would perhaps being able to see a climate benefit. But is this what is happening in Europe? In the meantime we now see all kind of schemes to get investment into capacity of electricity generation even in markets with overcapacity. Something is rotten but maybe we should look at the mistakes of the CAP in Europe?

  3. Math Geurts says

    I do agree with Hugh Sharman. The article would have been even more interesting if not only the view of the usual environmental groups would have been included.

    • Michael Hogan says

      See my response directly to Mr. Sharman. RAP is not an “environmental group.” In this instance our considered expert opinion, based on our extensive knowledge of capacity markets in North America and our many decades of collective experience in power system planning and reliability, happens to overlap with the more environmentally focused assessment of the Commission’s decision from one subset of interested stakeholders. We have, in the past, found common ground with many varied stakeholders, including Eurelectric, on any number of matters dealing with the technical and regulatory dimensions of the clean energy transformation. Our interest here is in achieving the agreed objective of a decarbonized power sector whilst preserving (or improving upon) the current security standards and at the lowest practical cost to consumers. The UK’s proposed capacity mechanism fails that test across multiple dimensions.

  4. says

    I am still looking forward to Sonja’s answers to my original questions about Ratcliffe – but never mind. What should concern the UK public (who must pay for all this) far more is whether the capacity payments, and the auction for these, will incentivize the sort of capacity that is actually needed by the system.

    30 GW of wind in the UK system, operating for 8,760 hours per year will require balancing plants that can be ramped up and down and constantly turned on and off for 8,760 hours per year. Overwhelmingly, these will be frame-type CCGTs; but these were never designed for this activity. Each one requires up to 120 minutes to start up and 40 minutes to turn off safely.

    Each start and stop will cost £tens of thousands in shortened life-time, down-time repairs and additional spare parts.

    The complete absence of suitable generating plant that is needed to deliver stable balancing power to the stochastically operating renewables will extend the UK’s electricity supply crisis by another decade, at the least and cost many £billions of further investment that are not presently recognised by the UK’s policy makers.

    During the six years remaining before 2020, if this is not recgnised, the quality of supply will worsen. The fact that no proper financial provision has been made for balancing so much stochastically available electricity will also drive up the price of power to the general public.

    I have explored this issue in depth at and would be pleased to hear from you.

  5. Sonja van Renssen says

    Thank you for all the comments – it’s a pleasure to see an article generating such debate! A few responses: Hugh, you’re right, the £800 is indeed missing a few zeros: it should be £800 million, or about €1 billion. I’ve made the change in the article. The future of coal in Europe – including the impact of the IED – is potential fodder for a future article I’d say.

    Re voices in this piece, I’d point you and Math to Michael Hogan’s reply that RAP is not an environmental NGO with an axe to grind. As Michael writes, their analysis happens to coincide with that of environmental stakeholders in this case, but that does not turn them into an environmental lobby group. For the record, I did approach others – including Eurelectric – about the broader interplay between climate change and energy security, and capacity markets and the UK decision in that context, but all the relevant people were on holiday… This issue is not about to disappear however and I intend to return to it in a future piece that could include other viewpoints.

    There is plenty of material to come in the autumn which will feed this discussion and others – the European Commission’s paper on energy subsidies is one and its decision on Hinkley Point C another. Paul Hunt’s comment suggests that it may be very difficult for the Commission not to give the UK what they want on this occasion too…

    Meanwhile, other countries are expected to submit capacity market proposals to the Commission and the UK will hold its first capacity auction in December: what kinds of capacity these new markets will stimulate, and at what cost, will be very interesting indeed – and decisive to the future of Europe’s energy system.

  6. Jan Ingwersen says

    Interesting article – and in particular interesting to read the differing comments. However, the dilemma on how to incentivize market-based and carbon-reducing investments in generation capacity – without relying fully on subsidized investments – still persists.

    It was mentioned in the article that ‘…the figure was over 96% for CCGTs in the PJM wholesale electricity market in the US where strong incentives to maximise peak availability exist.’ Maybe it is time for Europe to look for some new inspiration?

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