UK must halt back-up power scheme after EU court ruling

By Susanna Twidale

LONDON (Reuters) - Britain must halt a back-up power scheme aimed at avoiding electricity shortages pending a further investigation by European Union regulators, an EU court ruled on Thursday, which sent shares in UK energy companies tumbling.

The judgement by the EU's General Court annuls a decision by the European Commission, which had said Britain's so-called power capacity market was compatible with EU state aid rules.

Britain began power capacity auctions in 2014, offering to pay providers for making supplies available at short notice, and so avoid shortages that might occur as coal plants close and low prices dissuade investors from building new power plants.

However, British energy company Tempus Energy launched an appeal against the capacity market, saying it amounted to subsidies for fossil fuel generators and discriminated against technology designed to cut electricity demand during peak times.

In Thursday's judgement, the General Court said the European Commission did not carry out enough checks and that payments under the British scheme should be halted until further due diligence could be carried out.

The Business, Energy and Industrial Strategy (BEIS) department said the ruling imposes a "standstill period", which prevents it from holding capacity auctions or making any capacity payments under existing agreements until the scheme can be approved again.

Shares in British power firms SSE, Drax and Centrica, which won contracts under the scheme, fell between 5 and 7 percent, underperforming the wider FTSE 100 index, which was little changed.

Greg Clark, Secretary of State for BEIS, said the judgement was a matter of procedure rather than one on the government's policy of capacity markets.

The British government is working with its European counterparts to find a swift resolution, he said at a government energy briefing in London.

National Grid said it has been asked to postpone indefinitely upcoming auctions for capacity to be delivered in the winter of 2022/23 and a nearer-term one for 2019/20.

The government will seek separate approval from the Commission to run a replacement nearer-term auction, while the postponed one for four winters ahead could be run in next year's auction round, subject to Commission approval for the main capacity scheme, National Grid added.

Tom Glover, chief commercial officer at RWE Generation, said the company was "deeply disappointed" by the court ruling.

"There is a material negative impact for RWE and we will be reviewing our obligations under the capacity market," he told reporters at a government energy event.

Analysts at Bernstein said the Commission's formal investigation will take time and create uncertainty for the UK power market.

"Given that a number of European countries have capacity market schemes that have no demand-side participation, we fail to see how the UK capacity market can be singled out," they said, adding that the decision can be appealed by Britain.

(Reporting by Susanna Twidale and Nina Chestney; Editing by Kirsten Donovan and David Evans)