Threatening EU’s capacity mechanisms: Understanding unintended consequences for the Clean Energy package

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In contrast to energy companies and NGOs, governments have to balance their climate as well as environmental needs with the other two objectives of the “energy trilemma”, namely economic competitiveness and energy supply security. [Lumppini / Shutterstock]

Dr Frank Umbach is a research director at the European Centre for Energy and Resource Security (EUCERS), King’s College, London. He is also Adjunct Senior Fellow at the S. Rajaratnam School of International Studies (RSIS), Nanyan Technological University (NTU), Singapore, and Senior Associate at the Centre for European Security Strategies (CESS GmbH), Munich.

A hardly known British energy company, Tempus Energy, has challenged the UK’s capacity mechanism (CM) at General Court, which has led to the suspension of British CM auctions and capacity payments. A similar initiative of Tempus’ subsidiaries registered in Germany and Sweden now threaten Poland’s, though Tempus has no direct business activity and a subsidiary company in Poland. In the Polish case, Tempus argues before the General Court against procedural failings, it is claimed that the Commission should have opened the formal investigation procedure, instead of adopting no-objections procedure. The main reason for that is the Tempus assumption regarding the discrimination of the demand-side response operators (DSR). It should be noted that Tempus’ argumentation has been successful with regard to the UK’s CM scheme. In November 2018, the General Court ruled that the European Commission did not open a formal consultation concerning the UK scheme before approving it. While the focus of the argumentation in both cases is based on procedural failings, the real intention appears directed against the agreed CM for ensuring the security of supply for growing European economies. The entire story may have wide-ranging und unintended consequences for European energy supply security and the EU’s energy policies agreed between the Commission, the EU’s Member States, as well as European industry.

Background

In February 2018, the EC approved six different capacity mechanisms in France, Greece, Italy, Poland, Germany and Belgium. Each scheme belongs to three different models (market-wide capacity markets, demand response mechanism and strategic reserve models). They often include state auctions for contracts with energy suppliers.

After the European Parliament – two weeks after the CM approval of six EU member states by the Commission in February 2018 – voted for a new electricity market design for 2030 by promoting renewables and decreasing coal consumption by setting new emission limits for national CM’s, new difficult negotiations between EU member states, the Commission and the European industry occurred. This is because the Parliament’s own bureaucratic compromise had created double standards as it had exempted “strategic reserves” from the 550g CO2/kWh standard largely due to Germany’s insistence on its “strategic reserve” model dedicated to lignite plants at the expense of other countries’ CMs .

The final negotiated, approved and agreed compromise on the new electricity market design was agreed in December (entering into force on January 1, 2020) as part of the “Clean Energy for all Europeans” package. This envisages a rise of renewables from at least 32% and that capacity subsidies power plants emitting more than 550gr CO2/kWh and 350 kg CO2/kWe per year will be phased out in Europe after mid-2025.

Puzzling Background of Tempus’ Initiative

Tempus Energy is a start-tech-up, created in 2014. It has developed software for a flexible demand-side management, which promises to reduce electricity demand at peak times. It is currently piloting its technology with Australia’s largest energy retailer (Origin Energy). In Europe, it operates in the UK, German and Swedish power markets. Tempus claims also that it has business plans for Poland as part of its European expansion “as long as the demand-side response market opportunity is not destroyed by the Polish CM”. But altogether, it has less than a dozen employees in its European subsidiary companies. Moreover, the total DSR capacity in Europe, managed by Tempus, does not extend 2 MW. According to the British media, Greenpeace financially supports Tempus’ legal activities in UK for opposing its CM. But it has not provided any transparency about its financial structure, which does not appear to be financed by the DSR activity. While Greenpeace and other NGOs are often demanding transparency from the industry and banking sector, they often don’t live up to their own financial transparency they demand from the other side.

Tempus has shown no real interest in the Polish CM as it has no Polish subsidiary and has neglected any participation in the Polish CM consultations, which were held twice in 2016 and 2017. Therefore, its claims at the General Court against the Polish CM are not backed by any legitimate interest. Tempus Energy Germany was only established in October 2018. However, established in 2018, Tempus Energy Sweden failed to participate for highlighting its interests at any domestic public consultations. If the General Court rules that Tempus’ action is admissible than any of the Commission’s agreed State aid decisions might be questioned post ante by any actor even having shown no interest before. It would make any negotiated, agreed and adopted state-aid measure for ensuring energy supply security after difficult lengthy consultation and negotiation processes highly unpredictable for implementa­tion. It would also send disastrous signals to any investor of European energy projects, including for renewables, as they are dependent on predictability and reliability of negotiated and adopted support schemes.

With respect to the Polish case, it would force all sides into new consultations and lengthy as well as even more difficult re-negotiations with a new Commission in Brussels as well as European capitals. Hence, it would make any new compromise of adopted CMs much more uncertain. Additionally, it would threaten what the EU, the Commission and its Member States have already achieved in regard to the EU’s expansion of renewables and its ambitious decarbonisation strategy. It would also send disastrous signals to all negotiating sides, investors and particularly for the DSR operators as they are all dependent on predictability and reliability of negotiated and adopted energy policies. Furthermore, it could politically polarise debates between the conflicting sides of European and national climate policies, strengthening further right-wing, anti-climate movements such as the French yellow vest one, fuelling already existing re-nationalisation trends of Member State energy policies. This in turn could weaken the Single Market as well as Energy Union projects, including the implementation of what has already been agreed in the Clean Energy Package supported by NGOs themselves.

In contrast to energy companies and NGOs, governments have to balance their climate as well as environmental needs with the other two objectives of the “energy trilemma”, namely economic competitiveness and energy supply security. Tempus court actions are apparently based on environmental grounds as the Paris agreement is often mentioned as justification. However its overall impact of its actions and argumentation on global and European CO2 emissions are rather limited while  security of supply implications in the UK, Poland and other Member States  may turn out much more direct and significant as they already concern around 100 million consumers.

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