Following the decision of the General Court of the European Union in November last year to annul the capacity market in Great Britain, the European Commission has now embarked on a detailed formal investigation of the market’s design.
The Court’s decision no doubt caused the Commission some embarrassment. However, a positive outcome of the annulment would be for the Commission to confirm its belief — clearly articulated in the recast Regulation on the internal electricity market — that appropriate energy market reform should preclude the need for a capacity market.
Unfortunately, the Commission’s recently published opening opinion suggests that it is minded to pass up this opportunity and accept Great Britain’s case that a capacity market is necessary to secure energy supplies in the future.
In 2014, Great Britain introduced a capacity market following the Commission’s conclusion that the initiative was necessary to ensure future security of supply and was compatible with State Aid rules. However, all of the capacity auctions held so far have been oversubscribed, with auction clearing prices consistently lower than anticipated.
This is hardly a surprise as, in fact, Great Britain currently has a surplus of capacity. The scale of this overcapacity is evidenced by a low loss of load expectation (LoLE) — or likelihood of any amount of power shortage — in recent winters. Compared with the reliability standard of three hours, the forecast LoLE for winter 2018‑2019 hardly registered at 0.001 hours.
Although we have yet to see National Grid’s Winter Outlook Report for winter 2019‑2020, a similar situation seems likely. While the closure of around 2.5 GW of nameplate capacity (Cottam and one Fiddler’s Ferry unit) during 2019 has been announced, this is partially offset by the newly commissioned 1 GW high-voltage direct current link to Belgium and the expected commissioning of the 1 GW Eleclink interconnector with France later this year. It is still possible that further transmission-connected generation closures will be announced, however this seems unlikely as generators will have by now committed to paying transmission charges for the year 2019‑2020. Furthermore, within 24 hours of the Court’s annulment of the capacity market, forward energy prices for winter 2019-2020 saw a step change upward, a fact likely to discourage further exit (as well as demonstrating clearly the energy price distortion effects of capacity markets).
Overall, it seems likely that Great Britain will have a healthy capacity surplus going into next winter.