Tempus Energy, a UK start-up company, has submitted a legal challenge to the European General Court on the basis that the UK Government’s Capacity Market is an unlawful subsidy which prioritises fossil fuel generation over cheaper, and more reliable, demand-side options.
The Capacity Market was established as part of the British Government’s Electricity Market Reform (EMR) in order to offer subsidies to reliable forms of power capacity – both demand-side (for customers) and supply-side (for power stations) – in return for creating a 50 GW back-up power store available for when the system is tight. Tempus Energy is now challenging the Capacity Market on the grounds that its bias towards fossil fuels violates State Aid rules.
“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” said Sara Bell, UK CEO of Tempus Energy. “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, obligations of up to £2.5 billion 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, at a time when over 2.28 million households are living in fuel poverty. In its current form, energy bills will be pushed up by locking in outdated electricity generation technologies when innovation in this sector is proceeding apace.
New regulations, to be created under the Energy Act, will award new generators with ‘capacity contracts’ guaranteeing a revenue stream of up to 15 years to provide energy when called upon by National Grid. The contracts are to be awarded in annual Capacity Market auctions, the first of which is scheduled to take place on 16th December. 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.
“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” Sara Bell added. “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. It’s the equivalent of the US Government in 1876 turning a blind eye to the first transatlantic telephone call and instead diverting its investment into improving the Postal Service.”
Tempus Energy will challenge the government, aiming to obtain a ruling by the European Court that the state aid approval was unlawful. This will force the EU Commission to hold a formal inquiry. The case will have a destabilising impact on the December Capacity Market Auction as well as challenging the validity of the subsidy scheme in its current form.
In the US, 10 percent to 12 percent 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 on the lights.
The British Government’s policy has had far-reaching impacts across Europe in that countries such as Germany are now beginning to debate whether or not to introduce a Capacity Market scheme by subsidising coal and gas generation. Other European countries are lining Capacity Market policies that also discriminate against demand-side resources in favour of generation. 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 percent 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 reducing the need for spending more on infrastructure which customers pay for 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.
Energy costs are made up not just of the commodity cost of each kilowatt unit used, but include transmission charges, distribution charges, system imbalance charges, and capacity charges. Demand-side management algorithms enable the energy sector to move to a customer-centric model, whereby consumers have the choice to buy the cheapest possible price point for every unit they use.
Tempus Energy is a new type of electricity supplier, for customers who choose to be flexible. Its mission is to remove artificial price barriers from the electricity markets, bringing transparency and connecting customers with the cheapest available energy. The company is aiming to put smart technology into homes and businesses, which automatically shift non-time critical energy use into the cheapest price period.
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