This article is more than 1 year old

This article is more than 1 year old

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 to energy firms under the £1bn capacity market scheme will be halted until the government can win permission from the European commission to restart it.

The scheme subsidises owners of coal, gas and other power stations so the plants are ready to ensure that 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. National Grid said ministers had instructed it to indefinitely postpone auctions that had been planned for early 2019.

The government said it was disappointed by the judgment but insisted that power supplies were not at risk.

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, but it could be many months.

The court’s surprise judgment was an embarrassment for Greg Clark, the business secretary, who hours later outlined his vision for the future of the power market to energy executives at an event in London.

Industry watchers said the decision would send shockwaves throughout the sector.

“The consequences are absolutely huge. Immediate cessation of payments is going to have immediate consequences for electricity generators that were relying on them,” said Ed Reed, head of research at analysts Cornwall Insight.

While electricity supplies were unlikely to be at risk, he added, companies may seek to recoup lost capacity market revenues through wholesale power prices instead.

“The lights are not going to go out. We certainly have enough power stations. But the consequence is the market price might go up.”

Tom Glover, UK country chair of RWE, which owns the biggest fleet of gas power plants in the UK, said he was “deeply disappointed” and his company was facing a “significant negative hit” to its earnings.

Bernstein Research said the suspension of payments would hit earnings at British Gas owner Centrica, plus RWE, Uniper and SSE.

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 due to receive £990m for 2018/19.

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 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.”

Richard Black, director of the ECIU thinktank, said the ruling should be seen as an opportunity for the government to reshape the market away from fossil fuels and towards battery storage and cleaner technologies.

Clark said the government was already in contact with the European commission and seeking state aid approval, so the capacity market could be reinstated. The business secretary used his speech to celebrate the rise of renewables. “Cheap power is now green power,” he said.