08:14, November 15 319 0 theguardian.com

2018-11-15 08:14:12
UK's backup power subsidies are illegal, European court rules

The UK’s scheme for ensuring power supplies during the winter months has been suspended after a ruling by the European court of justice that it constitutes illegal state aid.

Payments under the capacity market scheme will be halted until the government can win permission from the European commission to restart it.

The scheme hands tens of millions of pounds a month to owners of coal and gas power stations so that the plants are kept on standby ready to provide emergency back-up in times of high demand. It started operating last year to ensure electricity for businesses and homes is available at peak times in winter.

The UK has also been blocked from holding any capacity market auctions for energy firms to bid for new contracts to supply backup power in the future. Auctions were planned for early 2019.

The government said it was disappointed by the judgment but insisted that power supplies were not at risk. Labour said the scheme would need to be rethought.

On Thursday, the ECJ ruled that the European commission had failed to launch a proper investigation into the UK’s capacity market when it cleared the scheme for state aid approval in 2014. The ruling renders the capacity market unlawful for a “standstill period” while ministers seek state aid approval from the European commission. It is not clear how long that will take.

The court’s surprise judgment will be a huge embarrassment for Greg Clark, the business secretary, who is due to give a speech on energy later on Thursday.

Sara Bell, founder and CEO of Tempus Energy, which started the challenge in 2014, said: “This ruling should ultimately force the UK government to design an energy system that reduces bills by incentivising and empowering customers to use electricity in the most cost-effective way – while maximising the use of climate-friendly renewables.”

The company believes that the capacity market favours fossil fuel generation at the expense of alternative ways of securing electricity supplies, such as “demand side reduction”, where companies reduce electricity demand at times of need.

The winter of 2017/18 was the first year the capacity market was in effect, with companies receiving around £1bn. The scheme works by energy companies bidding years in advance for billpayer-funded subsidies to provide backup power at crunch times during winter.

Labour said the ruling meant that the government would have to rethink the capacity market.

Alan Whitehead, shadow energy minister, said: “This judgment effectively annuls previous state aid permission to provide subsidies for existing fossil fuel power plants. I have long criticised this bizarre arrangement, which simply throws money at old dirty power stations.”

A spokesperson for the Department for Business, Energy and Industrial Strategy said: “As a responsible government, we have prepared for this outcome, and we will be working closely with the commission to seek state aid approval so that the capacity market can be reinstated as soon as possible.”