Tenmpus Energy says the capacity market prioritises fossil fuel energy generation over efforts to reduce demand

Legal challenge to capacity market in European court

A legal challenge has been launched against the Government’s ‘capacity market’ scheme to ensure there is enough back-up to meet peaks in electricity demand.

The scheme offers subsidies to energy generators who agree to bring power plants online to meet peak demand as well as companies who reduce power use at times of peak demand, to create a 50GW back-up power store available for when the UK’s power system is squeezed.

But British firm Tempus Energy is submitting a challenge to the European General Court on the grounds that the scheme violates state aid rules by prioritising fossil-fuel energy generation over cheaper and cleaner efforts to reduce demand.

The firm, which puts smart technology into homes and businesses that automatically shifts energy use that is not time-sensitive to times when electricity prices are cheapest, said that in the first year of the capacity market, obligations of up to £2.5bn for expensive peaking power stations to be switched on will be created in contracts up to 15 years long.

But customers such as factories that volunteer to turn down energy use during peak times or companies which do so on behalf of a number of consumers will only get one-year contracts, Tempus said.

This means the system will favour fossil-fuel power plants, the company claims, going against EU rules which say subsidies must be in line with European goals such as tackling climate change.

Sara Bell, chief executive of Tempus, 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."

The contracts are to be awarded in annual Capacity Market auctions, with the first scheduled to take place on 16 December.

Tempus says the £2.5bn of obligations, plus year-on-year additional peaking power costs, will be passed onto customers at a time when over 2.28 million households are living in fuel poverty.

The firm says that up to 40 per cent of the UK electricity grid is under-utilised at any given time and that by increasing the use of smart technology to manage demand spikes, it is possible to utilise much more of the grid, reducing the need for spending more on infrastructure and expensive ‘peaking’ generation.

The move has been backed by environmental lawyers ClientEarth, whose head of climate and energy Marcin Stoczkiewicz 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. ClientEarth welcomes Tempus Energy's case. We are supporting their action because it's crucial to driving progress on climate change."

Tempus said that it hopes 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.

A Department of Energy and Climate Change spokesman said: "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. We are fully confident in this auction."

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