New European Commission research has highlighted failings in the different state subsidies offered to electricity utilities across the EU, while giving qualified support to the ‘market-based’ model used in the United Kingdom.
But analysts, campaigners and politicians have criticised the model favoured by the UK, saying it will do nothing to further the goals of the EU’s Energy Union project – greater interconnectivity between countries, energy security and the shift to a low carbon future.
Capacity mechanisms are offered pay utilities for the amount of power they can produce, rather than the amount they generate.
The idea is this surplus can quickly be brought online in case of a shortage or to cover peak time consumption, and ultimately prevent black-outs. Critics argue the systems entrench often fossil fuel companies with taxpayers’ cash, which would be better spent on clean renewables.
Competition Commissioner Margrethe Vestager, speaking today (13 April) at a press conference launching the study, gave support for the market-based mechanism favoured by the British.
Such mechanisms typically rely on competitive tender processes open to the private sector, which can result in lower prices for consumers and taxpayers, Vestager said.
But campaigners said that the December 2015 capacity auction in the UK was a “shambles” that failed to boost interconnectivity, system modernisation or further decarbonisation.
Vestager’s powerful state aid department, which is investigating whether such subsidies breach EU law, is at pains to stress that each case must be judged on its individual merits.
But the study reads, “In general, market-based competitive procedures are more likely to offer efficient tools to address generation adequacy problems than alternatives.”
Officials later confirmed to EURACTIV that reflected the Commission’s 2014 state aid approval for the UK capacity mechanism. The approval is also subject to a legal challenge by company Tempus Energy, which claims the system holds back energy innovation.
UK not in study
The research, a first step in evaluating the EU internal energy market, does not cover the UK, instead focusing on 11 other EU member states.
Asked why the UK was not chosen for the study despite the state aid approval, Vestager said the countries were selected to give a representative pool of countries using different systems and of different sizes.
“There was no specific non-selection of some countries,” she added.
Vestager said, “There is a lot of room for member states to improve how they assess whether capacity mechanisms are needed, and how they design them.
“For a capacity mechanism to be well-designed it needs to be open and take into account electricity that can be provided across EU borders, thereby also contributing to building an Energy Union in Europe.”
— Miguel Arias Cañete (@MAC_europa) April 13, 2016
The Energy Union’s ultimate goal is an interconnected market, where shortages in one part of the EU could be met with supplies from elsewhere. It is a strategy that aims to wean the bloc off its addiction to Russian gas, and to fight climate change.
Senior figures in DG Energy back the idea of allowing cross-border investment in capacity mechanisms to ensure security of supply.
They argue it could underpin variable renewables, lessen reliance on unreliable suppliers, and encourage greater interconnectivity between countries.
But that support is dependent on the mechanisms across the EU, which vary widely, being cleared by the Commission’s antitrust department. That can only happen if the state support is found not to be anticompetitive, that it doesn’t give the beneficiary an unfair advantage.
Failed auction and widespread regret
Jonathan Gaventa is director of E3G, a London-based environmental think tank. He said that there was “quite widespread regret” that the market-based mechanism was adopted in Britain.
“There is not a whole lot of evidence it is supporting energy security but there is evidence it is keeping old coal plants on the system,” he said.
That's a bit worrying … UK model widely seen as a messy failure (except by those in receipt of capacity payments). https://t.co/yLpkvKEvw1
— Jonathan Gaventa (@jonathangaventa) April 13, 2016
Gaventa and Luxembourgish Green MEP Claude Turmes both pointed to the December 2015 capacity auction held in the UK.
It was the first held after the state aid approval, and came after the Commission launched its Energy Union plan in February 2015. It was also the first time foreign interconnectors could compete.
Despite that, and an open and competitive tender process, it did little to bolster interconnectivity with the rest of the EU, one of the strategy’s key goals.
1.8GW out of a total capacity of 46GW went to interconnectivity tenders, about 4% of the total.
But all of those contracts went to already existing interconnectors, rather than new market entrants.
Gaventa said that the system actually acted as a barrier to cross-border trade of energy. Companies in receipt of the subsidies can offer lower prices on the wholesale market, he said.
That pushed the cost down, giving an unfair advantage over the interconnector, even if it was more efficient, he said.
Claude Turmes MEP said, “I am astonished that DG COMP recommends to open the door to large-scale, indefinite and purely national interventions based on the UK central buyer mechanism.”
The central buyer mechanism is a market-wide mechanism based on a central bidding process.
— StollmeyerAlice (@StollmeyerEU) April 13, 2016
Campaigning organisation Sandbag said that the capacity auction had been a shambles.
“The capacity mechanism is having the perverse effect of slowing the modernisation and decarbonisation the UK electricity system,” said policy analyst Dave Jones.
“The capacity mechanism has failed to attract any new efficient gas plant or interconnectors, and it is paying coal to stay open longer than it would have otherwise.”
Greenpeace EU climate and energy policy adviser Bram Claeys said, “This public financing is a foolish lifeline to failing power plants. Europe’s energy market is choked with polluting coal, nuclear and gas plants that need to go.
“It is hard to understand why the Commission does not see renewables and flexible demand as a solution to Europe’s overcapacity problem, and instead backs capacity mechanisms that further pervert the energy market.”
EURACTIV contacted Euracoal, the coal association,but they were unable to comment before publication.
ClientEarth lawyer Maria Kleis said, "State aid is illegal, unless it helps achieve other EU policy objectives. Vestager is looking at state aid from a purely competition viewpoint. But nothing operates in a vacuum. Her findings make no sense when viewed alongside the EU's climate and energy policy, and its international commitments to decarbonise."
"Capacity mechanism" describes a system in which power generation capacities are rewarded through financial compensation.
Supporters claim this model will prevent possible blackouts, such as on days with high demand and low wind and sun.
Under this model, compensation for secure supply is meant to help cover the costs of conventional power stations - mainly gas and coal.
Former EU Energy Commissioner Günther Oettinger has said he is critical of capacity mechanisms. "If the German government wants to take this path, then it must be a cross-border model. Otherwise it will become an undesirable cost driver," he warned.
Although capacity mechanisms are already on the daily agenda in many EU member states, Germany is still in the discovery phase