European Court of Justice delivers ‘very damaging’ verdict for UK storage projects

The nation’s capacity market auctions have been ruled illegal state aid, throwing several gas and battery storage projects into doubt.

The European Court of Justice has ruled the UK’s capacity market energy auctions as illegal state aid, ceasing all payments and planned auctions with immediate effect.

The UK introduced the capacity market auctions in 2014 and held the first of them in 2015. The auction provides payments to generators to ensure standby power is available when demand is high or when intermittent generation is unavailable.

Gas-fired generators have traditionally won the bulk of the contracts awarded each year, although the more recent auction results have also seen a significant boost for battery storage projects, with 4.7GW of projects successfully pre-qualified for an auction that was planned early next year.

However, the UK government said those auctions and payments to previously awarded projects are now at a “standstill period” after the ECJ responded to an appeal by clean energy group Tempus Energy that the auctions discriminated against clean power, saying the European Commission failed to carry out proper analysis on whether the auction met state aid rules.

“The court finds that the Commission should have concluded that there were doubts which should have led it to initiate the formal investigation procedure,” the ECJ said in its ruling.

The UK’s Renewable Energy Association agreed with Tempus that the system was “flawed” with regard to decarbonisation, but expressed worries over the consequences for battery projects.

“We believe the decision to completely suspend the capacity market in the UK by the ECJ is very damaging for the energy storage and DSR [demand side response] sectors in the short term, which rely on the mechanism as part of a ‘stacking’ of revenues alongside those from other sources, without which such projects could not proceed,” said Frank Gordon, REA’s head of policy.

“While industry is still seeking further details on the ECJ ruling and next steps, a complete stop to payments and the mechanism is very damaging to storage companies and investor confidence and this really does seem a case of throwing the baby out with the bathwater.”

Infrastructure investors such as Foresight, 3i Infrastructure, InfraRed and Quinbrook have all made investments in gas or battery projects with capacity market contracts. Foresight and 3i declined to comment on the ruling, while InfraRed and Quinbrook had not responded to requests for comment at the time of publication.

The UK government responded, saying it is working closely with the Commission to help the investigation and seek a resolution for the auctions.

“The ruling does not change the UK government’s commitment to delivering secure electricity supplies at least cost, or our belief that capacity market auctions are the most appropriate way to do this. The ruling will not impact security of supply this winter,” it said in a statement.