Electricity Capacity Mechanisms (CMs) were conceived to make sure there is always enough energy for the grid, even as demand and supply fluctuate. A legal challenge from Tempus Energy in the European General Court led to the UK’s CM being suspended by the government. Now a similar case is being brought to the Court, relating to the Polish CM. Another win for Tempus could lead to further cases across the EU and could dent the way countries finance contingency capacity for their grids. In our second article on CMs, political columnist Joe Mitton looks at the cases and their possible effects.
Our first article examined the way CMs operate, and their political importance, especially for national political figures and policymakers. In short, the European Commission allows governments to run schemes to make sure there is always spare capacity. And spare capacity is vital for an economy, particularly as electricity demand and supply can be unpredictable.
Two legal cases regarding CMs have been initiated by a British company, Tempus Energy. Tempus uses algorithms and artificial intelligence to optimise when flexible assets use energy. This is known as a Demand Side Response, in CM-speak. CMs can either incentivise companies to increase backup supply capacity (Supply Side Responses, or SSRs), or incentivise reducing demand (Demand Side Responses, or DSRs). The legal cases relate to whether DSRs and SSRs are both treated fairly by the CM design.
It is important to differentiate between the technical arguments in the court cases, regarding the designs of the CM auctions, and the wider commentary and media statements about the case. Some reporting has characterised the cases as a green energy push against subsidies for carbon-emitting power sources. Statements by Tempus itself have referred to the environmental aims of the case. But the European Commission has already stipulated that CMs must be technology-neutral in design. In the UK case, the General Court focused on the EU’s approval of the scheme design, and did not rule on environmental grounds nor on compatibility with the State Aid rules. It is expected that the Polish case may take a similar route.
The UK case
In Tempus’ argument against the UK’s CM scheme, they pointed out that DSR contracts have been for as short as one year, while SSR contracts can hold for many times longer. In its judgement in November 2018, the General Court did not rule on the equity of the UK’s scheme, but it did find that the European Commission’s competition authorities had not properly assessed the UK’s scheme before approving it. Due to the novelty and complexity of the UK’s measure, the Court asked the European Commission to conduct a new assessment of the UK’s CM scheme.
In response, the UK government suspended their CM scheme in late 2018. The response from the UK’s energy producers was mixed. The decision caused concern from some of the UK’s energy producers who were dependent on capital raised through the UK’s CM auction. A committee of British thermal power analysts reacted with concern about the suspension and its impact on market certainty and engineering skills.
The Polish case
In March 2019 Tempus has brought a case to the same General Court, regarding the Polish CM scheme. Media reports about the new case suggest that Tempus will make similar arguments to its successful UK challenge last year, and that the European Commission will once again defend its decision to approve the CM.
Points of difference
A win for Tempus in the UK case will not translate automatically into a win against the Polish market-wide capacity mechanism. A point of contention is the length of contracts available for auction to DSR companies under Poland’s scheme. In a statement, Tempus says, “Due to the flawed policy design, DSR customers are effectively shut out of the main auctions, meaning they can only access contracts of one year maximum”. However in the Polish capacity mechanism DSR operators can bid for contracts up to five years in length, provided that the CAPEX threshold is met.
There are 15-year contracts available for SSR companies under CMs. But there does not appear to be a rule that SSR and DSR contracts need to be the same length of time. It could be argued that 15-year deals acknowledge the significant capital investments needed to create new power supplies.
This point appears to be accepted. In the General Court’s ruling on the UK case, clause 187 stated:
“Thirdly, both UKDRA and Tempus accept that new DSR operators do not necessarily have the same capital expenditure as generators building new plants. Nevertheless, they submit that, much like new generating CMUs, new DSR CMUs have capital expenditure and financing difficulties that justify them being granted capacity contracts of longer than one year in order to allow them to participate fully in the capacity market.”
Taking all this into account, the question for the European Commission may hinge on whether five-year contracts are appropriate for DSRs.
In addition, the UK scheme excluded DSRs which were not able to provide at least 2MW of capacity eligibility threshold. In contrast, DSRs which are not able to provide at least 2MW of capacity are able to participate in the Polish capacity mechanism through aggregation with other units – their joint capacity should be at least 2MW. There is no minimal threshold with respect to units, which may be aggregated.
A further point of difference between the two cases is that Tempus was already active in the UK market when it launched its case concerning the UK CM. Its status as an “interested party” was uncontested in the General Court. To date, however, neither Tempus nor its subsidiaries does appear to be active in Poland, so its status as an “interested party” in the Polish CM may be much less straightforward. Tempus has, however, recently registered in Germany and Sweden.
Tempus funding questioned, and blackout concerns
A further case from Tempus has been brought to the English Courts, funded in part by the NGO, Greenpeace. This led to a statement by the large UK trade union, GMB, calling on Tempus to “come clean” about other sources of funding for its legal cases. GMB said that “As things stand, this litigation ultimately could force the UK to accept powers cuts – a breath-taking gamble to put on the paying public”. The trade union went on to call on the government to clarify how it intends to guarantee security of supply.
The Commission investigates
The General Court called for the European Commission (EC) to conduct a thorough assessment of the UK’s scheme, saying it should have done so before approving the scheme. The EC investigation into the UK CM is still underway. When completed, the General Court may take a view on the Commission’s findings. It is also possible that the Court might order a similar assessment of the Polish model in its decision on the second case. But the findings of the EC assessments could offer different conclusions for each case, especially as the Polish CM design came after the UK’s scheme, and Poland has amended its design accordingly.
Wither the CMs?
If the second case is successful for Tempus, it is possible other CMs could be challenged in the courts (whether by Tempus or other interested parties). Challenges and suspensions of multiple European CMs could send a signal of uncertainty to investors in both DSR and SSR solutions. Market uncertainty is seldom welcomed by investors, particularly investors in renewable energy sources who sometimes struggle to make returns.
The value of the CM market across the EU is difficult to estimate, but to give a sense of the scales involved, one analysis reckoned the German Strategic Reserves scheme (also approved by the EU Competition body) is a €1.6 billion concern. The UK’s 2016 auction (for delivery in 2020/21) awarded some €1.3 billion in contracts. The Polish TSO has already awarded €8 billion in contracts concluded during the first three main auctions (for delivery from 2021 onwards).
The UK government, like several others, has explicitly linked its CM investment scheme to its low carbon goals, saying the scheme would “encourage the investment we need to replace older power stations and provide backup for more intermittent and inflexible low carbon generation sources”. It is clear that if CM markets shut down in Europe, the electricity sector will lose access to an important avenue of finance and co-investment to help “keep the lights on” at all times.