Recognising that energy markets might not always be able to meet demand on their own, the European Commission allows EU Member States to operate Capacity Mechanisms (CMs). These schemes offer contracts via publicly administered auctions to suppliers who help ‘guarantee’ there is always spare power for the grid, even as demand and supply fluctuate. But the designs of the CMs are proving contentious, and legal challenges to CMs threaten to shut them down. A British firm, Tempus Energy, has already challenged the UK’s CM in court, leading to the suspension of CM auctions in that country. A similar case from Tempus before the courts now threatens the Polish model, and could lead to further cases against CMs across the EU.
In the first of two articles on this subject, political columnist Joe Mitton looks at the policy questions around CMs, and the legal cases, while Energy Post’s Matthew James spoke to senior European Commission officials about the issues.
When electricity grids were solely national, and supply to consumers was a one-way street, the politics of electricity supply were relatively straightforward. But with cross-border supply and demand, the dawning of a European Energy Union, and renewable energy sources such as wind and solar introducing growing but variable supply to grids, national politicians and policymakers seek new mechanisms to ensure that the lights will stay on, no matter what.
At the risk of stating the obvious, losing electric power damages an economy considerably. Electricity blackouts in South Africa cost that economy 38 billion Rand – over €2 billion – in February and March this year. Myriad problems arise with blackouts, from food spoilage to hypothermia, and stalled industrial output. It is no surprise, then, that elected officials prioritise guarantees of constant electricity supply.
Security of supply: underpinning development of RES
In 2018, the EU’s Competition Commissioner approved four CM schemes, in France, Greece, Italy and Poland. Related “Strategic Reserves” schemes were approved for Belgium and Germany. The EU had previously approved CMs in the UK and Ireland. Each scheme is different, but they often include state auctions for contracts with energy providers.
After the Commissioner’s decision, Energy Post held an event in Brussels where controversy over CM designs became apparent. We reported then that several electricity firms expressed concern that national CMs might distort the market, discouraging cross-border projects and innovation. There were also concerns that CMs would subsidise coal-fired power stations, slowing the transition to decarbonisation.
Latest opposition to CMs seem to conflate concerns about subsidising fossil fuels, with technical complaints about the design of CM auctions. While the legal challenges against CMs have focused on the fairness of the auction processes (more on this in our next article), public messaging by the plaintiff, Tempus Energy, has instead pitched this as a battle between green energy and fossil fuels. Tempus CEO Sara Bell said, “We have one planet. We need to work together to rapidly deploy technologies and commercial solutions in the interest of consumers so we can decarbonise as cheaply and quickly as possible. Our legal action will ensure this happens”. However, CM schemes must themselves be technology-neutral on the basis that their primary objective is protecting security of supply to hundreds of millions of homes in Europe while governments such as the UK argue CMs are a way to generate parallel investment in renewables.
New legislation on coal
Last week, Energy Post spoke to the European Commission about developments since 2018. Megan Richards, Director for Energy Policy, pointed to new EU legislation approved in May that focuses on electricity markets including CMs. This legislation makes sure that CMs are only introduced if really needed and the participation of polluting power plants in such mechanisms is restricted. Power stations emitting more than 550 grams of CO2 per kilowatt hour of electricity will not receive subsidies from the state to remain on stand-by in case of a demand peak. “This relates to new construction”, said Ms Richards. (For pre-existing power plants, the emissions limit will be applied five years later). “Many existing power plants will start using other sources. We hope that coal will be substituted by gas in the short term at least, and then renewables”.
EU rules require CMs to be technology-neutral but there is some evidence that CM markets are raising the capital needed for cleaner electricity. In coal-rich Poland, the CM is funding gas-fired infrastructure: the Dolna Odra power plant’s new gas units will be in operation by 2024.
Ms Richards added that “the CM is the last resort but there are other mechanisms we are pursuing to make CMs unnecessary”. She said, “The main objective of the EU is to create a market to avoid capacity mechanisms”, with regulation but also infrastructure aimed at this. Ms Richards pointed to the work of the Commission supporting Trans-European Energy Networks (TEN-E) to facilitate the construction of interconnections between states’ grids as an illustration.
For some Member States though, being reliant on electricity generated abroad raises concerns about energy security. Last month Lithuania announced significant investment in domestic renewable energy infrastructure. Our interview with Lithuania’s Vice-Minister for Energy revealed that the investment was part of a “National Energy Independence Strategy”. Clearly, relying on electricity generated abroad carries some perceived risks, and Lithuania’s national parliament made a cross-party commitment to domestically-generated energy.
Litigation threat to CMs
Litigation against CMs is being led by Tempus Energy, a firm that uses artificial intelligence and algorithms to support demand-side flexibility. In its case before the European General Court, Tempus argued that the UK CM scheme unfairly rewarded companies which increase the supply of electricity, and may have discriminated against firms like Tempus which focus on demand management. The Court ruled that the European Commission had not conducted sufficient investigation into the UK scheme before approving it.
A further case from Tempus has been brought to the English Courts, funded in part by the NGO, Greenpeace. Following the Greenpeace funding revelations, the UK trade union GMB has called on Tempus to “come clean” about other sources of funding for its legal cases.
A similar case has now been brought to the Court concerning the Polish scheme, with the possibility of more such cases. Polish spokesmen maintain that there are significant differences between the UK and Polish CM’s, but the case nevertheless is a threat to the Polish scheme. Further lawsuits could bring significant risks to CMs and the infrastructure investments, many of them in renewables, that the schemes seek to incentivise.
With some companies arguing against CMs and state intervention in the energy market, and elected national politicians fretting about the risks of shortages, there is perhaps a parallel with a different sector, some ten years ago: financial services. From the 1980s until 2008, global investment banks insisted that “light-touch regulation” was the best way to allow banking to innovate and grow itself. But when the system failed, politicians were punished. Elected officials across the world lost support as a clear market failure was revealed, resulting in the credit crunch and global financial crisis. Perhaps similar concerns haunt energy policymaking today. It is one thing to argue that the market will innovate and keep the lights on, but if power is lost during, say, an extreme cold snap as demand soars, political figures would be blamed. Political caution about relying on an electricity market without CMs is understandable.
Legal challenges are surfacing but they might not be able to halt the CM market in Europe. There were certain design flaws with the UK’s CM system which subsequent systems have corrected. In our next article on this topic, we will examine the UK case, the forthcoming legal challenges, and why the courts and elected officials may want to maintain the European CM markets and the investments they generate.