An innovative energy company today launched a legal challenge to UK Government electricity market ‘reforms’ in the European Court of Justice.

According to Tempus Energy, which brought the challenge, the new system represents an “unlawful subsidy” worth as much as £2.5 billion a year to fossil fuel power generators, for a 15-year period.

As part of the Electricity Market Reform, the Capacity Market was set up to offer subsidies to reliable forms of power capacity to switch in when needed to balance demand.

This includes both the supply of new power on demand (‘supply side’); and cuts in demand for power from power users (‘demand side’). The intended result is to create a 50 GW back-up capability for when the system is tight. 

But Tempus says the way the Capacity Market has been designed violates the EU’s State Aid rules by prioritising fossil fuel electricity generation over “cheaper and more reliable” demand-side options.

Specifically, ‘supply side’ contracts will last for 15 years, but inexplicably, ‘demand side’ contracts will last for only one year – giving power generation a clear advantage over demand reduction.

An ‘engrained bias’ in favour of building new generation assets

Tempus CEO Sara Bell said: “The Capacity Market was originally set up to keep the lights on at the lowest possible cost; a format that has been used very successfully in the US.

“But an engrained, institutional bias in favour of building new assets to boost supply means that cost effective ‘no build’ technologies for managing demand have been ignored. This will push up electricity bills needlessly and commit consumers to paying for capacity that we would not need if we invested in building demand-flexibility, for those who want to use it.”

In the first year of the Capacity Market alone, she added, obligations of up to £2.5bn for expensive peaking power stations to be switched on will be created.

Those costs, plus year on year additional peaking power costs for the next 15 years, will be passed onto customers, potentially costing them over £35 billion – at a time when over 2,280,000 million households are living in fuel poverty.

Under regulations made under the Energy Act, the Government plans to award new generators with ‘capacity contracts’ guaranteeing a revenue stream for up to 15 years to provide energy when called upon by National Grid.

Conversely, customers who volunteer to turn down energy use during peak times, and the companies that aggregate capacity created by customers, will be awarded capacity contracts of just one year.

Notably, the generation contracts will mostly involve the consumption of fossil fuels, often in inefficient plant, and financial benefits will go to large, centralised power companies. By contrast ordinary consumers can benefit from reducing their power usage at times of peak demand.

Marcin Stoczkiewicz, head of climate and energy at ClientEarth, said: “If allowed to go ahead, the UK’s ‘capacity mechanism’ will artificially prop up the existing coal-reliant energy system by paying generators extra to produce more electricity at peak times.

“The costs will be passed on to consumers, regardless of when they use power. This is bad for the environment and for our pockets. We are supporting their action because it’s crucial to driving progress on climate change.”

One year contracts ‘not a viable proposition’

The problem with one year contracts is that technology investments are required to enable equipment to be switched off automatically at times of strong power demand, and these cannot reasonably be paid off in a single year, says Bell.

“The one year contracts offered for demand flexibility are not a viable proposition to customers who would, for a longer revenue stream, be able to invest in flexible technology that would save money and energy in the long term while making our system more secure.”

“Instead, the lack of commitment to innovation from the Government will stymie investment and therefore the advancement of a smart industry that could fundamentally transform our energy economy.”

And this is Tempus’s business model: it aggregates the power-saving potential of many households and businesses using smart technology to automatically shift non-time critical energy use into the cheapest price period. It then shares the benefits with its providers.

By bringing the challenge, Tempus Energy aims to obtain a ruling by the European Court that the state aid approval was unlawful, which will force the EU Commission to hold a formal inquiry.

The case may therefore have a destabilising impact on the first Capacity Market Auction – scheduled for 16th December – as well as challenging the validity of the subsidy scheme in its current form.

However a DECC Spokesperson insisted: “We are fully confident in this auction. The European Commission has concluded that the Capacity Market is within European State aid rules. This challenge will have no impact on the running of the capacity auction in December.”

Europe-wide repercussions

In the US, 10-12% of power is now provided by customers with demand flexibility technology. The EU legal challenge will raise a serious question for investors as to why the UK cannot emulate the successful way in which other countries, like the US, use demand-side capability to cost effectively keep the lights.

As a result of the UK Capacity Market approval, other European countries are lining Capacity Market policies that also discriminate against demand-side resources in favour of generation, said Bell:

“In countries where renewables generation already makes up a significant proportion of the grid mix, such as Germany, the legal challenge will be particularly beneficial as demand side flexibility is the only scalable means to efficiently use ‘wrong time’ renewable generation, which is otherwise wasted. This challenge will ensure other countries are forced to develop level playing fields for all resources.”

Up to 40% of the UK electricity grid is underutilised at a given time. By increasing the use of smart technology to manage energy demand spikes, it is possible to utilise much more of the grid.

That would reduce the need for spending more on infrastructure (paid for by consumers) as well as limiting the need to pay for expensive ‘peaking’ generation, and enabling better access to renewables at times when they are cheap and plentiful.

Oliver Tickell edits The Ecologist.