Brussels, 23 July 2014
State aid: Commission authorises UK Capacity Market electricity generation scheme
The European Commission has concluded that the proposed UK Capacity Market is in line with EU state aid rules. The scheme aims to ensure that sufficient electricity supply is available to cover consumption at peak times. The Commission found in particular that the scheme will contribute to ensuring the security of energy supply in the United Kingdom (UK), in line with EU objectives, without distorting competition in the Single Market. This is the first time that the Commission has assessed a capacity market under the new provisions on capacity markets in the new Environmental and Energy State Aid Guidelines (see IP/14/400).
Commission Vice-President in charge of competition policy Joaquín Almunia said: "The UK Capacity Market embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules."
Under the Capacity Market, the Great Britain System Operator will organise annual centrally-managed auctions to procure the level of capacity required to ensure generation adequacy. Auctions will be open to existing and new generators, demand side response (DSR) operators and storage operators. The UK has also committed to opening the participation to new interconnectors as of 2015.
The UK has announced its intention to auction a total of 53.3 GW of capacity for the first delivery year in 2018/19, of which 50.8 GW is to be auctioned in December 2014. The balance will be auctioned one year ahead of delivery in 2017. The Government will take decisions on the amount of capacity to procure in future auctions, based on advice from the System Operator. The scheme will run for 10 years.
In return for a steady payment for the duration of the capacity agreement, successful bidders in the auctions will be required to provide capacity at times of stress on the electricity system or face financial penalties. New generators will be eligible for a 15-year capacity agreement. Other capacity providers will be eligible for 1-year capacity agreements (except in the case of existing generators requiring significant refurbishment which are eligible for 3-year capacity agreements).
Aid granted will be paid out as a function of the amount of capacity set out in each provider’s capacity agreement. The measure will be financed through a levy on electricity suppliers.
The Commission assessed the measure under its new state aid Guidelines on Energy and Environmental Protection (see IP/14/400the UK has only introduced the Capacity Market following a thorough investigation of its necessity and the potential for alternative measures to contribute to ensuring the security of supply objective. Further, as described above, the measure itself will be open to a range of technologies, including demand side response and interconnection. The use of auctions should ensure aid granted is limited to the minimum necessary.
The Capacity Market, which will be applicable in Great Britain (Northern Ireland has separate electricity market arrangements), aims to ensure security of electricity supplies in view of the projected increases in electricity demand and the upcoming closure of a significant share of the current UK generation capacity. The UK has estimated that the Great Britain electricity market will reach critical levels of generation adequacy around 2017/2018.
The Capacity Market is part of the comprehensive UK Electricity Market Reform that also includes other support measures, such as the UK compensation to energy intensive users for indirect costs of carbon price floor (see IP/14/577), the Contract for Difference (CfD) scheme (see IP/14/866) and the planned support for the construction and operation of a new nuclear power plant at Hinkley Point in Somerset (see IP/13/1277). The Commission's in-depth investigation in relation to the latter is ongoing.
The non-confidential version of the decision will be published in the State aid register on the Competition website once any confidentiality issues have been resolved. They will be available under case number SA.35980. The State Aid Weekly e-Newslists new publications of State aid decisions on the internet and in the Official Journal.