With Greenpeace backing a judicial review into the Capacity Market suspension, hopes are fading fast that auctions could go ahead this year - and that implications for coal and clean tech alike
Coal power is no longer a force to be reckoned with on the UK power grid. It now makes up a small and dwindling fraction of UK electricity supply and is predicted to be off the system entirely by 2025 under the government's high profile coal phase out plans.
More casualties have come thick and fast for the industry in recent weeks, with the closure of the 2GW Cottam coal power plant last month followed last week by the news SSE is retiring one of the four coal units operating at its 2GW Fiddler's Ferry coal-fired power plant in Cheshire.
In a statement announcing the move, SSE said the challenging economics for coal-fired power in the UK are "well known", thanks to the falling cost of renewables and the costs associated with the carbon floor price.
The suspension of the UK's Capacity Market late last year only adds to the sector's woes. In response to a legal challenge from Tempus Energy, the UK government was forced to suspend the scheme, which offers generators who can secure contracts at auction top-up payments for providing power during times of peak demand, in November 2018.
Tempus argued the scheme was unfairly weighted in favour of fossil fuel generation, and indeed many of the Capacity Market contracts - particularly in the scheme's early years - went to large existing thermal power stations such as Cottam, which relied on the payments to prolong their life. According to Tempus, fossil fuels won 76 per cent of payments under the scheme.
"In order to transition to a low carbon grid as cost effectively as possible we need to ensure commercial arrangements incentivise the cheapest form of flexibility," Tempus Energy CEO Sara Bell told BusinessGreen. "Demand flexibility is the cheapest form. The UK capacity market has been designed to hold customers outside the rewards which is why the European Court found in our favour. There is only negligible DSR [demand-side response] in the capacity market and it has incentivised new build diesel generators, the emissions from which will shorten our lives."
The ruling has undoubtedly dealt a blow to fossil fuel generators that would otherwise have stood a good chance of securing further contracts through the capacity market. As the next set of grid access fees loom due for major coal plant operators next month, the prospect of the Capacity Market's ongoing suspension makes any contract awards this year unlikely, potentially prompting some additional plant owners to cut their losses earlier than planned.
Coal closures are music to the ears of campaigners such as Greenpeace, which it was revealed this week is supporting the judicial review being brought by Tempus against the UK government over what it sees as its failure to comply with the November 2018 European Court of Justice ruling.
But since the November ruling the government has been pressing ahead with legislation necessary to run a top-up auction later this summer. "It's basically carried on assuming that this legal challenge will go away, and that after a short inconvenience it will be able to go back to what was planned," says Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit (ECIU).
Officials insist the government is operating within the bounds of the court's ruling. "We remain confident in the steps we are taking to reinstate the Capacity Market and operate the scheme to the fullest extent possible during the standstill period (within State aid constraints)," the Department for Business, Energy and Industrial Strategy (BEIS) said earlier this month. "The actions we have taken are in accordance with the UK's standstill obligations imposed by the judgment. We have been in frequent contact with the European Commission to discuss the measures we have taken during the standstill period, including rescheduling the T-1 auction and deferred payments."
Yet in a characteristically bullish statement on its website posted earlier this month, Tempus argued the government must suspend all capacity market operations and recover all the payments already issued under the scheme to be in full compliance with the court's ruling. It said it was launching its judicial review to force the government to enact its "legal duty to stop the scheme and recover the subsidies (aid) already paid out".
Dr Doug Parr, Greenpeace's chief scientist, argues the government has "failed to accept the implications" of the ECJ's ruling. "When a climate emergency, the court, and the government's own soaring rhetoric about a modern smart grid all say we need to embrace the new, no-one should accept policies designed to favour business as usual," he tells BusinessGreen.
If Tempus is successful, BEIS could be required to halt any attempt to enforce the delivery of existing contracts or plans to procure new ones via an auction this summer. The hope is that such a ruling would then trigger a major rethink and the emergence of a new market that is more supportive of the kind of modern smart grid services campaigners insist are essential to an ultra low carbon grid.
But while a longer term suspension of the current capacity market would cut off any chance of ageing coal stations winning fresh contracts this summer - potentially forcing more such generators off the grid - the short to medium-term uncertainty could also hit operators of smart technologies such as demand-side response asset owners and battery providers, Marshall warns.
"In terms of the stuff that's contracted to go forward, a lot of it is the sort of capacity you need for the power system 2.0 that we need to move to," Marshall tells BusinessGreen. For example, he points out, "all the gas stuff that has won new contracts is small peakers that work well in a high renewables system".
"The stuff that is coming out of [the Capacity Market] isn't too far away from the way in which BEIS and Ofgem and others are seeing the future of the energy system," he says.
There is therefore a real risk the development of this 'power system 2.0' could be stymied - in the short term at least - by the uncertainty surrounding the Capacity Market. "A lot of these companies have grown quite quickly on the back of these auctions and getting these contracts in," Marshall adds. "They are quite exposed to it now and they are quite heavily leveraged. Any delay could be amplified for certain companies that have gone into it more ambitiously."
All this comes just as it seems the UK's market for flexible energy technology is starting to accelerate. Yesterday brought the news that as part of its rebrand of First Utility, Shell will introduce a raft of new smart home technologies and services in the coming months, starting with smart thermostats. Meanwhile, Octopus Energy this week launched a dedicated green power EV charging tariff that charges EV fleets at the cheapest time of the day. The moves are just the latest in a string of announcements from across the energy sector, as utilities and technology companies seek to provide more flexible grid services.
Marshall is keen to stress that any solution to the current Capacity Market stand-off must reward such system flexibility and promote the UK's transition to a low-carbon electricity grid. Virtually all commentators agree that subsidising carbon intensive coal plants and diesel generators is a bizarre look for a government that is committed to the deep decarbonisation of the energy system.
But unfortunately for generators of all stripes, there looks to be no quick way out of the mess. The European Commission only formally launched its investigation into the UK Capacity Market - as ordered by the ECJ - last month, with some experts warning the probe could take upwards of 20 months.
The chances of BEIS sticking to its original timetable of a summer auction are now "vanishingly small" reckons Marshall.
If it tries to press ahead with auctions before the Commission's review is concluded, not only will the legal challenges mount, but there will be precious little confidence in the system, he points out. "The UK can't really do anything before this EC judgement starts," he argues. "It can't really go about holding the next auctions because it doesn't know if people will take it seriously or not."
And although the government could free itself from its current legal suit by redesigning the Capacity Market scheme in a way more palatable to Tempus Energy, for example by standardising contract lengths and removing any discrimination between generation types, such changes could, like a game of whack-a-mole, only serve to cause another legal challenge to pop up elsewhere.
"If you're a company and you've got the contract that you want for the next three years locked in, you would be hoping that everything is reinstated and you can go ahead how it's planned," Marshall points out. "You might not be too happy to have the auctions and everyone compete again, because you might lose this time. And if it's a big company you would just get your lawyers on it - that's obviously more of a headache for government and will slow things down even more."
Therefore the most likely outcome for the coming months is that the UK limps along with generators honouring existing contracts without payment, and the market remains stuck in an enforced stasis awaiting the outcome of the Commission's investigation.
Tempus Energy, however, insists pressing ahead with its legal challenge is still the right thing to do for the DSR industry in the long run. "We need to urgently reform the Capacity Market to make sure it genuinely facilitates and rewards clean customer participation so we transition quickly and cheaply to a clean energy system," Bell says.
Sophie Yule, a consultant lawyer on energy markets and climate governance who is working with Tempus, adds that the UK DSR industry should maintain a united front, arguing "must not fall into the same trap as the renewables industries, where solar, wind, biomass etc were encouraged to fight amongst themselves for a limited pot of subsidies, instead of working together to call for greater systemic change".
"This is just playing into the hands of the incumbents," she adds. "A significant amount of the 'DSR' that has been awarded contracts in the Capacity Market so far is actually behind-the-meter diesel generation, because the auction design precludes genuine 'turn down' DSR. The Tempus case actually opens the door to changing the design so that real, low-carbon DSR can thrive."
Other than in the event of a no-deal Brexit, under which the government would presumably have the freedom to reinstate the Capacity Market in whatever form it chooses, it is looking increasingly likely the UK will have to cope without a functioning Capacity Market for some time to come. Some generators might continue to honour their services even as they face a second year without payment, but as each month goes by the risks of serious financial damage increases. Tempus Energy may be vindicated in its legal challenge and could yet secure the long-term system change it is seeking. But in the interim coal plants and clean tech firms alike are facing many more months of capacity market confusion.
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