A technology company whose software enables customers to reduce their electricity demand at peak times and shift usage to cheaper, off peak times has successfully won a court ruling that has forced the Capacity Market to be suspended.
Tempus Energy launched their legal challenge in December 2014, arguing that the Capacity Market favoured fossil fuels, ensuring profits for coal, gas and diesel generators, while cheaper, cleaner alternatives were unable to compete on the same terms.
What is the Capacity Market?
The Capacity Market (CM) was introduced by the UK government in 2014. It meant National Grid could cater for peak demand by allowing payments to be made to the generators and consumers in order to ensure supply. Generators were able to bid for long term (15-year) agreements whilst Demand Side Response (DSR) based capacity bidding in auctions for CM agreements could only win one-year deals.
Why was the ruling in favour of Tempus Energy?
The ruling by the General Court of the European Union concluded that the European Commission (EC) did not sufficiently complete research and examination of the impacts of the CM on the operation of the internal energy market.
What does the ruling mean for the price of energy?
Capacity Market charges are a third party cost which is included in your energy bill. If you have agreed a pass-through contract, then it will be one of the charges that is passed through. This landmark ruling can therefore deliver energy savings to customers on pass through contracts, but those on contracts where the third party costs are fixed won’t yet see any reduction.
CEO of Tempus Energy, Sara Bell, said of the news: “This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”
However, the price of wholesale energy is determined by supply and demand. Therefore the suspension of a scheme that guarantees supply when margins are tight may see wholesale energy prices rise. It is therefore critical that businesses consider a strategy for reducing consumption where they can during peak periods, especially in the winter months.
What happens next?
According to Cornwall Insight, the cost of the CM scheme for 2018-19 is almost £1bn, with agreement holders paid monthly from the start of the delivery year and payments collected by suppliers through customer bills. Two of the 12 monthly payments at the 2018-19 prices due have been made. Payments are related to the underlying demand for electricity, which means that less than half of the expected annual revenue will have been received by agreement holders. As a result, share prices in all listed companies participating in the CM fell sharply.
The ruling has imposed a standstill period on the CM. Meanwhile, the Department for Business, Energy and Industrial Strategy (BEIS) is urgently reviewing any required changes to the design of the CM, but is unable to provide a timeline.