EU gives green light to UK’s ‘fossil fuel subsidy scheme’

The European Commission has reapproved the UK’s subsidy scheme for the power sector after a court ruling brought it to a standstill last year.

Tempus Energy, a grid balancing company, had successfully argued at the EU’s General Court that the UK capacity market discriminated against companies providing demand management services in favour of gas, nuclear and coal power stations.

However, following an investigation into the UK’s scheme, the Commission has found that it complies with EU state aid rules. Officials found no evidence that it would “put demand response operators or any other capacity providers at a disadvantage” in bidding for capacity market payments, according to an announcement made yesterday.

Business secretary Andrea Leadsom has laid a statement before parliament welcoming the Commission’s decision and announcing that the government expects to restart the scheme, including distributing £1bn of back payments.

Conditional agreements for generation capacity, signed in July 2019, “have become full capacity agreements”, Leadsom added, while three capacity auctions will take place early next year. “These will secure the majority of our capacity needs out to 2023/24,” she said. 

Both the Commission and the Department of Business, Energy and Industrial Strategy have noted that the capacity market’s design will be tweaked to reduce barriers to entry, including “the participation rules for new types of capacity”. A consultation on the changes is expected shortly.

However, Tempus Energy, the grid balancing company behind the successful legal complaint, questioned the logic behind the Commission’s decision.

Describing the scheme as a “fossil fuel subsidy scheme”, it claimed evidence shows the UK power sector as “excess capacity between 13% and 16%, indicating that it is an unnecessary scheme, inflating consumer bills and extending the life of fossil fuel power stations”.

Industry group Energy UK welcomed the decision, with chief executive Lawrence Slade saying it would ensure “security of supply at the lowest cost to customers in times of high demand”.

He added: “The Capacity Market has been rightly evolving to reflect a different mix of energy generation with newer technologies gaining a greater share in recent auctions. With the inclusion of renewables in future auctions - something we have long called for – a technology-neutral CM will continue along this path and drive progress towards a net-zero economy.”

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