Capacity mechanism schemes in many EU countries are harming innovators, taxing consumers and enabling the construction of new coal-fired power plants. Margrethe Vestager, nominated Executive Vice-President of the next European Commission in charge of competition and digital, can change this, argues Sara Bell from Tempus Energy

After five years as EU competition commissioner, the Danish politician Margrethe Vestager has been named an Executive Vice-President of the European Commission, pending confirmation by the European Parliament in the coming weeks. She has a powerful brief, coordinating the EU executive’s digital and energy agendas while continuing to lead the competition brief. At first glance she appears well-suited. Throughout the European elections in spring 2019, she made much of her credentials as a tough competition commissioner and a modern eco-warrior. As someone who runs a cleantech business, I certainly value competition in the service of environmentalism and welcome a pitch along these lines. I am also fully aware of the degree to which digitalisation is one of our best tools for transitioning beyond fossil fuels. Sadly, Vestager's words have not yet matched her actions. DG COMP, under her leadership, has been rubber-stamping long-term subsidy schemes in member states that provide a lifeline to fossil fuel generation while new, cleaner, technologies go unsupported. This means that subsidies are blocking market entry for innovative technologies, many of them on the demand side of the market. Bringing much needed change to the European energy industry is a momentous challenge. Subsidy schemes like capacity mechanisms should not be providing yet another obstacle to overcome in the fight to achieve a cleaner future. My company, Tempus Energy, is one of those being blocked. We support renewable energy and reduce the need for fossil fuel power stations using demand flexibility, a sophisticated form of demand side response (DSR).

Powerful legislation

The good news is that Vestager and the whole of the new Commission, under the leadership of president Ursula von der Leyen, will inherit a powerful set of legislation under the Clean Energy for all Europeans package. The most important features of the high-tech, low carbon power networks envisioned by the directive and regulation on electricity market design are flexibility and DSR. Developing DSR is just as important as building low carbon generation as it allows more green energy to be used, while reducing the need for expensive fossil fuel power stations to be kept in reserve for energy spikes. The Commission has created an opportunity for Europe to decarbonise at lowest cost to consumers, while creating a vibrant economy, supported by the Environmental Guidelines for State Aid, which prevent member states unfairly supporting existing, generally high-carbon, incumbents at the expense of new technologies and innovations. But if the policy is ignored it is pointless. DG COMP must apply the policy and enable consumers to participate fairly. For this to happen, capacity markets need to be updated as follows:

1. Equal contract lengths, of no longer than five years, for all resources.
2. Entry criteria that genuinely allow new entrants to participate, for example through 100 kilowatt minimum participation sizes.
3. Guaranteed minimum reserve for the year ahead’s T-1 auctions of 25% with no power for politicians to reduce or cancel the auctions at the last minute.
4. A customer charging methodology that promotes system efficiency and minimises costs by providing a clear price signal to incentivise customers to be flexible.
   The sight of new coal plants being constructed in Poland and Greece, paid for by citizens via complex capacity mechanisms they barely understand would be enough to rock this new Commission’s climate credibility from the start. DG COMP under a newly promoted Vestager is an important player in the clean energy transition and needs to force member states to redesign their capacity markets so European consumers can reap the rewards through lower energy bills, cleaner air and future jobs growth.

   UK market

In 2018, research published by Greenpeace showed the total costs of capacity mechanisms in the EU touch nearly €60 billion a year. But these schemes are not born equal. Our research reveals that in the UK the vast majority of these payments go to fossil fuel generation. And while nearly two-thirds of the contracts for fossil fuel generation in 2018 were for 15-year contracts, providers of demand response were blocked from bidding for long-term contracts. This is obviously one of the reasons that DSR was hugely underrepresented in the UK capacity market. Battery storage also failed to win any substantial investment, despite being able to secure the grid in a much cleaner manner. When you consider these developments in the light of the UK’s and the EU’s 2030 climate and energy targets, the situation is little short of madness, which is why we were so disappointed to see DG COMP rubber-stamping the UK scheme without launching a formal investigation. As the UK scheme is being widely replicated across the EU, Tempus had no choice but to challenge the Commission’s decision in the courts. We were encouraged when, on 15 November 2018, the General Court of the Court of Justice of the EU annulled the state aid approval for the UK capacity market, confirming our belief that the approval was unlawful because it broke the Commission’s own rules. We are also involved in a challenge to the Polish capacity market system, which very largely apes the UK’s flawed scheme. The new EU electricity market rules have only recently been published in the Official Journal. They state clearly that capacity mechanisms should be instituted only as an absolute last resort. They should be fair and should not violate the principles on which the market is being redesigned. We are hopeful that this will lead to a revolution on the demand side of the market with energy consumers increasingly taking control of their own consumption, participating in short-term markets and avoiding overpaying for generation when they do not need it. We must always place consumers at the heart of the future energy system, precisely where they belong. Von der Leyen says she wants a European Green Deal to become Europe's hallmark. This can only happen if the Commission enforces its own competition laws properly. I am hopeful that this is a new start.Sara Bell is Chief Executive of Tempus Energy. She tweets at@sarabelltempus

Do you have a thoughtful response to the opinion expressed here? Do you have an opinion regarding an aspect of the global energy transition you would like to share with other FORESIGHT readers? If so, please send a short pitch of 200 words and a sentence explaining why you are the right person to deliver this opinion to opinion@foresightdk.com.