V
(Avis)
PROCÉDURES REL ATIVES À LA MISE EN ŒUVRE DE LA POLITIQUE DE 
CONCURRENCE
COMMISSION EUR OPÉENNE
AIDE D’ÉT AT — ROYAUME-UNI
Aide d’Éta t SA.35980 (2018/NN) — Réfor me du marché de l’électr icité: mécanisme de capacité
Invita tion à présenter des obser vations en application de l’article 108, parag raphe 2, du traité sur le 
fonction nement de l’Union européenne
(Texte présentant de l’intérêt pour l’EEE)
(2019/C 109/02)
Par lettre du 21 février 2019, reproduit e dans la langue faisant foi dans les pages qui suivent le présent 
résumé, la Commission a notifié au Royaume-Uni sa décision d’ouvr ir la procédure prévue à l’article 108, 
paragraphe 2, du traité sur le fonctionnement de l’Union européenne au sujet de la mesure susmentionnée.
Les parties intéressées peuvent présent er leurs obser vations sur la mesure à l’égard de laquelle la Commission 
ouvre la procédure, dans un délai d’un mois à comp ter de la date de publication du présent résumé et de la 
lettre qui suit, à l’adresse suivante:
Commission européenne,
Direction générale de la concur rence
Greffe des aides d’État
1049 Bruxelle s
BELGIQUE
Fax + 32 22961242
Stateaidgreffe@ec.europa.eu
Ces obser vations seront communiquées au Royaume-Uni. Le traitem ent confidentiel de l’identité de la partie 
intére ssée qui présent e les obser vations peut être demandé par écrit, en spécifiant les motifs de la demande.
1.PROCÉDURE
Le 23 juin 2014, les autor ités britanniques ont notifié à la Commission une mesure visant à sout enir les fournisseurs de 
capacit é sur le marché de l’électr icité en Grande-Bretagne, appelée «marché de capacit é». La base juridique nationale est la loi 
britannique sur l’énergie de 2013 (Energy Act 2013).
Au cours des contacts de prénotifica tion et de l’examen préliminaire, la Commission a reçu plusieurs déclarations émanant 
de certains opérateurs au Royaume-Uni alléguant que certains éléments de la mesure étaient potent iellement incom patibles 
avec le march é intérieur en vertu de l’article 107, paragraphe 3, point c), du traité. Le 23 juillet 2014, après avoir examiné la 
notif ication, qui répondait aussi aux allégations formulées dans les déclarations desdits opérateurs, la Commission a décidé 
de ne pas soulever d’objections à l’égard du régime d’aides établissant la mesure, au motif que ce régime était compatible 
avec les règles de l’Union en matière d’aides d’État.
Le 15 novembre 2018, dans l’affa ire T-793/14, Temp us Energy et Temp us Energy Technology/Commission (ECLI:EU: 
T:2018:790), le Tribunal de l’Union européenne a annulé la décision de la Commission. Le Tribunal a estimé que comp te 
tenu, d’une part, de la durée et des circonstances de la phase de prénotifica tion et, d’autre part, de l’absence d’instr uction 
appropr iée par la Commission, au stade de l’examen préliminaire, de certains aspects du marché de capacit é, et plus 
précisément en ce qui concer ne le rôle et le traitem ent de la gestion de la demande dans le mécanisme de capacit é notif ié, la 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/3
Commission aurait dû avoir des doutes quant à la compatibilit é de la mesure avec le marché intérieur, lesquels doutes 
auraient dû la conduire à ouvr ir la procédure formelle d’examen prévue à l’article 108, paragraphe 2, du traité.
Afin de se conf ormer à l’arrêt du Tribunal, la Commission a réexaminé la mesure notif iée et a décidé d’ouvr ir la procédure 
formelle d’examen prévue à l’article 108, paragraphe 2, du TFUE.
2.DESCRIPTION DE LA MESURE À L’ÉGARD DE LAQUELLE LA COMMISSION OUVRE LA PROCÉDURE
La libéralisation des marchés de l’électr icité et leur intégrat ion croissante en un march é intérieur unique s’accom pagnent de 
défis s’agissant de garantir l’adéquation des capacit és de production. En 2014, le Royaume-Uni a estimé que le march é de 
l’électr icité en Grande-Bretagne atteindrait des niveaux critiques d’adéquation des capacités de production vers 2017/2018. 
Le Royaume-Uni a par conséquent conçu la mesure sous la forme d’un marché de capacité.
Dans le cadre de ce marché de capacit é, l’opérate ur du système britannique organise chaque année des enchères centralisées 
de façon à obtenir le niveau de capacit é requis pour garantir la capacit é du système électr ique à couvr ir la charge de point e. 
Les fournisseurs de capacité peuvent soumissionner pour des délais de réalisation d’un ou de quatre ans. En contrepar tie 
d’un paiement régulier pour toute la durée du contrat de capacit é (qui va de 1 à 15 ans), les adjudicataires retenus lors des 
enchè res sont tenus de mettre à disposition leur capacité pendant les périodes de tension sur le réseau électr ique, à défa ut de 
quoi ils s’exposent à des sanctions financ ières. Les enchères sont ouver tes aux producteu rs d’électr icité existants et 
nouveaux, aux opérateurs de gestion de la demande et aux opérateurs de stockag e. Les interconnexions peuvent y prendre 
part depuis 2015. Les coûts du march é de capacité (c’est-à-dire les coûts suppor tés pour financ er les paiements de capacité 
aux fournisseurs) sont suppor tés par l’ensemble des fournisseurs autor isés sur la base de la consommation d’électr icité entre 
16 heures et 19 heures chaque jour de la semaine en hiver .
La base juridique nationale est la loi britannique sur l’énergie de 2013 (Energy Act 2013). La législation dérivée, à savoir le 
règlement relatif à la capacité électr ique (Electr icity Capacity Regulations) et les règles relatives au march é de capacité 
(Capacity Marke t Rules), a été adop tée par le Parle ment le 1er août 2014.
3.APPRÉCIA TION DE LA MESURE
3.1. Existenc e d’une aide au sens de l’article 107, parag raphe 1, du TFUE
La Commission considère que le paiement de capacité constitue une ressource contrôlée par l’État et qu’il est imputable à ce 
dernier. La Commission note que les soumissionnaires retenus reçoivent, dans le cadre du mécanisme notif ié, une 
rémunération qu’ils ne recevraient pas s’ils continuaient à opérer sur le marché de l’électr icité dans des conditions 
économiques normales en vendant de l’électr icité et des services auxiliaires uniquement. En outre, la mesure confère un 
avantage uniquement à certaines entrepr ises capables de contr ibuer à remédier au problème d’adéquation identifi é qui sont 
en concur rence avec d’autres producte urs d’électr icité. La mesure notifiée conf érera donc un avantag e économique à des 
entrepr ises se trouvant dans une situation factuelle et juridique comparable à celle d’autres producteu rs d’électr icité. En 
conséquence, la mesure est sélective. La production d’électr icité ainsi que les march és de gros et de détail de l’électr icité sont 
des activités ouver tes à la concur rence dans toute l’Union européenne. Dès lors, tout avantage confé ré au moyen de 
ressources d’État à une entrepr ise de ce secteur est susceptible d’affect er les échanges au sein de l’Union et de fausser la 
concur rence. Par conséquent, la Commission conclut que la mesure constitue une aide d’État au sens de l’article 107, 
paragraphe 1, du TFUE.
3.2. Légalité de l’aide
Bien que le march é de capacit é ait été notifié par les autor ités britanniques avant d’être mis à exécution, la décision de la 
Commission de 2014 autor isant le régime a été annulée par le Tribunal. Comp te tenu de l’arrêt du Tribunal annulant la 
décision de la Commission de 2014, la mise en œuvre de l’aide en question doit être considérée comme illégale (1).C 109/4 FR Jour nal officiel de l'Union européenne 22.3.2019
(1) Voir l’arrêt dans l’affaire C-199/06, CELF et ministre de la Culture et de la Communication (ECLI:EU:C:2008:79, points 61 et 64).
3.3. Compatibilité de la mesure
Conf ormément à la communication de la Commission sur la détermi nation des règles applicables à l’appréciation des aides 
d’État illégales (2), la Commission a apprécié la compatibilit é de la mesure avec le march é intérieur, de 2014 à novembre 
2018 et pour l’avenir . L’appréciation est fondée sur les conditions établies à la section 3.9 des lignes directr ices concer nant 
les aides d’État à la protect ion de l’envi ronnement et à l’énergie (LDAEE) (3), qui fixent des conditions spécifiques pour les 
aides en faveur de l’adéquation des capacit és de production et sont applicables depuis le 1er juillet 2014.
3.3.1. Objectif d’intérê t commun et nécessité de l’aide
Les problèmes d’adéquation des capacit és de production au Royaume-Uni sont détermi nés au moyen d’un indicateur 
quantifiab le, et les résultats concordent avec l’analyse effectuée par le réseau européen des gestionnaires de réseaux de 
transpor t d’électr icité (REGRT -E). La mesure poursuit un objectif bien défini. Elle vise à remédier à la nature et aux causes du 
problème et, en particulier , à la défaillanc e du march é qui emp êche celui-ci de fournir le niveau de capacit é requis. Le 
Royaume-Uni a envisag é d’autres solutions pour remédier au problème, afin d’éviter de manquer l’objectif d’élimination 
progressive des subventions préjudiciables à l’environnement. Par conséquent, la Commission conclut à titre préliminaire 
que le marché de capacit é du Royaume-Uni contr ibue à la réalisation d’un objectif d’inté rêt commun et qu’il est nécessaire.
3.3.2. Caractère approprié de l’aide
Le choix de l’instr ument est cohérent avec d’autres mesures visant à remédier à la même défa illance du marché, et l’aide 
rétribue uniquement le service que constitue la mise à disposition de la capacité. Toutefois, la Commission cherc he à obte nir 
des éclaircissements sur la question de savoir si la mesure est suffisamment ouver te à tous les fournisseurs de capacit é 
concer nés, notamment aux opérat eurs de gestion de la demande, en raison des différences dans la durée des contrats 
applicable, de la garantie limit ée s’agissant du volume de capacit é réser vé pour les mises aux enchères ayant lieu une année 
avant l’éché ance et du niveau de capacité minimal requis pour participer à ces dernières. La Commission émet également 
des dout es quant à la participation de la capacit é interconnect ée, qui est actuellement limit ée par l’utilisation d’un modèle 
fondé sur les interconnexions.
3.3.3. Effet incitatif
Les estimations de l’adéquation des capacités de production présent ées par le Royaume-Uni en 2014 montrent qu’en 
l’absence de la mesure, cette adéquation aurait atteint des niveaux critiques à comp ter de 2018/2019. Les estimations les 
plus récentes, fournies par le Royaume-Uni en décembre 2018, démontrent que des problèmes d’adéquation des capacit és 
de production subsiste nt et que ces dernières pour raient atteindre des niveaux critiques au cours de la prochaine décennie. 
Sans la mesure, les fournisseurs de capacité ne mettraient pas à disposition les capacit és nécessaires pour respecter la norme 
de fiabilité fixée par le Royaume-Uni en matière de fourniture d’énergie pendant les périodes de tension sur le réseau. La 
Commission conclut donc à titre préliminaire que la mesure a un effet incitatif.
3.3.4. Propor tionnalité
La Commission cherche à obtenir des éclaircissements sur le caractère propor tionné de la mesure en raison de diffé rences 
potent iellement discr iminatoires dans le trait ement des opérateurs de gestion de la demande par rappor t à celui des 
producteu rs d’électr icité en ce qui concer ne la durée des contrats de capacité. Comme l’a indiqué le Tribunal dans son arrêt, 
les dout es de la Commission devraient également concer ner la méthode de recouvrement des coûts, qui pour rait ne pas 
incit er suffisamment les consommat eurs à réduire leur consommation pendant les pics de demande et ne permet donc pas 
de limiter le montant total de l’aide au montant minimal nécessaire.
3.3.5. Prévention des effets négatifs sur la concur rence et les échanges
Conf ormément aux LDAEE, la mesure ne réduit pas les incitations à investir dans les capacités d’int erconnexion et ne 
comprome t pas le couplag e des march és. De plus, elle ne nuit pas aux décisions d’inve stissement antéri eures à l’introduction 
de la mesure. Elle accorde par ailleurs comme il se doit la préférence aux technologies émettant peu de carbone, à 
paramètres techniques et économiques équivalents. Cela étant, la Commission cherc he à obtenir des éclaircissements sur la 
question de savoir si la mesure permet d’éviter des effets négatifs sur la concur rence et les échang es, étant donné que les 
contrats à long term e sont réser vés aux unités de production, ce qui limit e l’ouver ture de la mesure, et que la participation 
directe de fournisseurs de capacité étrangers n’est actuellement pas autorisée dans le mécanisme de capacité du Royaume- 
Uni.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/5
(2) Communication sur la détermination des règles applicables à l’appréciation des aides d’État illégales (JO C 119 du 22.5.2002, p. 22).
(3) JO C 200 du 28.6.2014, p. 1.
3.3.6. Respect des articles 30 et 110 du TFUE
Comme indiqué au point 29 des LDAEE, si une aide d’État ou les modalité s dont elle est assor tie, notamment son mode de 
financ ement, lorsqu’il fait partie intégrant e de l’aide, entraînent de manière indissociable une violation du droit de l’Union, 
l’aide ne saurait être déclarée com patible avec le marché intérieur. Dans le domaine de l’énergie, tout prélèvement destiné à 
financ er une mesure d’aide d’État doit respecter en particulier les articles 30 et 110 du TFUE. La Commission conclut à titre 
préliminaire que le mécanisme de financement des mesures d’aide notifiées n’introduit aucune restr iction susceptible 
d’enfreindre l’article 30 ou l’article 110 du TFUE.
Conf ormément à l’article 16 du règlement (UE) 2015/1589 du Conseil (4), toute aide illégale peut faire l’objet d’une 
récupération auprès de son bénéficiaire.C 109/6 FR Jour nal officiel de l'Union européenne 22.3.2019
(4) JO L 248 du 24.9.2015, p. 9.
TEXTE DE LA LETTRE
The Commission wishes to inform the Unit ed Kingdom that, following the Judgement of the General Cour t of the European 
Union of 15 November 2018 in case T-793/14 — Tempus Energy and Temp us Energy Technology v Commission (‘the GC 
judg ement ’), it has re-examined the information supplied by your author ities on the measure referred to above
After re-examination of the notific ation, the Commission has decided to initiate the procedure laid down in Article 108(2) 
of the Treaty on the Functioning of the European Union (TFEU).
1PROCEDURE
(1) Follo wing pre-notification contacts, the UK author ities notified to the Commission on 23 June 2014, in accordance 
with Article 108(3) of the Treaty on the Functioning of the European Union (TFEU), a measure to suppor t capacity 
provid ers in the electr icity mark et in Great Britain (1) (‘the measure’).
(2) In the course of the pre-notifica tion contacts and the notif ication process the Commission received several 
submissions alleging the incom patibility of the measure with Article 107(3)(c).
(3) On 23 July 2014, the Commission decided not to raise objections to the aid scheme establishing the measure, on the 
ground that that scheme was compatible with the Union rules on State aid (2).
(4) On 15 November 2018, in the GC judg ement, the General Cour t annulled the Commission decision mentioned in 
recital (3) above . In summar y, the General Cour t considered that based on the length and circumstances of the pre- 
notif ication phase and the lack of appropr iate investigation by the Commission at the preliminar y examination stage 
with regard to some aspects of the capacity marke t, more specif ically , with regard to the role and treatment of 
demand side response in the notif ied capacity mechanism, the Commission should have had doubts as to the 
compatibility of the measure with the inter nal marke t, which should have led it to initiate the formal investigation 
procedure in accordance with Article 108(2) TFEU, and thus allow interest ed parties to submit their obser vations 
and to put at its disposal the relevant information in order to better assess the comp atibility of the planned capacity 
marke t.
(5) Follo wing the annulment of the Commission decision, the Commission registered the file under a NN reference, 
since the measure has been in force since 2014 (3). Additional information was received from the UK on 
20 December 2018. In order to comp ly with the GC judg ement, the Commission re-examined the notified measure 
and decided to initiate the formal invest igation proceedings under Article 108(2) TFEU.
(6) Since the United Kingdom notified on 29 Marc h 2017 its intent ion to leave the European Union, pursuant to 
Article 50 of the Treaty on European Union, the Treaties will cease to apply to the United Kingdom from the date of 
entr y into force of the withdra wal agreement or, failing that, two years after the notification, unless the European 
Council in agreement with the Unit ed Kingdom decides to extend this period. As a consequence, and without 
prejudice to any provisions of the withdrawal agreement, the present decision only applies if (i) the Unit ed Kingdom 
is still a Member State on the first day of the period for which the notified scheme is approve d, and (ii) to individual 
aid granted under the notif ied scheme until the Unit ed Kingdom ceases to be a Member State.
2DESCRIPTION OF THE MEASURE
2.1 Overview of the measure
(7) In 2014, the Unit ed Kingdom (UK) estimated that the electr icity mark et in Great Britain (GB) would reach critical 
levels of generation adequacy around 2017/2018. The UK theref ore designed the measure as a capacity marke t 
where the Syst em Operat or organises centrally-manag ed auctions to procure the level of capacity required to ensure 
generation adequacy .
(8) The auctions were initially open to existing and new generato rs, demand side response (DSR) operators and storag e 
operato rs. Participation of interconnectors was enabled as of the second auction in 2015. Successful bidders receive 
a steady payment during the duration of the capacity agreement in retur n for a commitment to deliver electr icity at 
times of system stress called on by the Syst em Operat or. Financial penalties apply if benefi ciaries do not deliver the 
amount of energy according to their capacity obliga tion. The measure is financ ed through a levy on electr icity 
supplies.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/7
(1) Nor ther n Ireland is not in the scope of the proposed measure as it has separat e electr icity marke t arrangements.
(2) Commission Decision C(2014) 5083 final of 23 July 2014 not to raise objections to the aid scheme for the ‘capacity market’ 
proposed by the UK (State aid SA.35980 (2014/N-2)) (OJ 2014 C 348, p. 5)
(3) The first auction under the capacity market took place on 16-18 December 2014 for the deliver y of capacity four years later .
(9) The first auction was organised in 2014 for the deliver y of the capacity in 2018, followed by three further four-year 
ahead (‘T-4’) auctions (in 2015, 2016 and 2017), one year-ahead (‘T-1’) auction (in 2017), and two transitional 
auctions (‘TA’, in 2016 and 2017) as discussed in recital (61).
(10) The measure was suspended on 15 November 2018 follo wing the GC judg ement, mentioned in recital (4) (and 
currently under appeal). The UK conf irmed that no further aid under the Capacity Market (also abbreviate d as ‘CM’) 
would be grante d through auctions and that the payments for the aid grante d under the auctions that had already 
take n place had been halted until a State aid approval by the Commission.
2.2 Legal basis, duration, budget and governance arrangements
(11) The lega l basis for the measure is the Energy Act 2013. Secondar y legislation in the form of Electr icity Capacity 
Regulations 2014, the Electr icity Capacity (Supplier Payments etc.) Regulations 2014 and the Capacity Marke t Rules 
govern the implementation of the measure.
(12) The Energy Act does not contain an end date for the Capacity Market. The State aid clearance is howe ver valid for a 
period of 10 years starting from the date of the first implementation of the measure in 2014 (4).
(13) Table 1 below presents a summar y of the outcome of the various capacity marke t auctions which have taken place 
since 2014, including the transitional auctions (TA).
Table 1
Summar y of Capacity Marke t Auction Outcomes
AuctionAuction acquired capacity
GWClear ing Price
GBP/kWTotal budget for Capacity 
committed at auction (5)
GBP millions
T-4 2014 49.3 19.40 1,734
T-4 2015 46.4 18.00 1,082
T-4 2016 52.4 22.50 2,012
T-4 2017 50.4 8.40 500
T-1 2017 5.8 6.00 35
TA 2016 0.8 27.50 22
TA 2017 0.3 45.00 14
(14) The UK regularly reviews the CM mec hanism in the light of feedbac k of each auction process, and has conducte d a 
number of public consultation exercises to make incremental improvements to the regulato ry detail of certain 
specific features of the scheme. Ofge m also annually gathers stak eholder views on pote ntial changes to the 
operational and administrative features of the scheme and mak es amendments to the rules. In addition, a more 
formal and comp rehensive review is sche duled to take place ever y five years (6), involving both the gove rnment and 
Ofge m, to assess the exte nt to which the Capacity Market effectively delivers on its objectives and to which it remains 
the most effective form of intervention to address those objectives, which include consider ing underlying marke t 
failures. In essence, the review consists of the following two stage s:
a.Ofgem carries out five-year reviews of those areas of the Capacity Marke t design that are covered in the Capacity 
Marke t Rules, looking at the effectiveness of the scheme and whether its existing arrangements are fit for purpose.C 109/8 FR Jour nal officiel de l'Union européenne 22.3.2019
(4) The date of implementation is considered to be 16 December 2014 when the first auction under the capacity market took place.
(5) The CM regist ers are regularly updated to reflect capacity that no longer has an agreement. The total presented here represents the 
amount committed in the auction. It has not been adjusted for capacity that has dropped out since the auction whic h is no longer 
eligible for capacity payments. The values have not been adjusted for inflation.
(6) In December 2018, the UK informed the Commission that the first review of the capacity mechanism was ongoing.
b.the Gove rnment assesses the Capacity Market and its objectives from a more high-level perspective and addresses 
the question of whether the Capacity Marke t is still needed in the future or should be phased out and the exte nt to 
which the objectives of the Capacity Market could be achi eved in way that imposes less regulation. This is 
informed by the Gove rnment’s annual internal consideration of whether to run the Capacity Market auction as 
well as the findi ngs of Ofge m’s first stage review . The Gover nment carries out public consultations as part of this 
review process.
(15) The UK Gove rnment has initiate d the first 5-year review process by publishing a Call for Evidence in August 2018, 
thus inviting views and evidence at a high level on issues such as whether there is a continuing need for the CM, and 
the identification of any priority areas where change s should be made. In Sept ember 2018, Ofgem published an 
Open Lette r asking for views and evidence on whether the Rules continue to meet their objectives.
(16) The measure is implemented by the Gove rnment, the energy regulato r (Ofgem), the Deliver y Body (National Grid — 
‘NG’), the Settlement Body (a new institution create d under the Energy Act 2013, subject to gove rnment direction 
and oversight) and the settlement service provider (Elex on). A brief high-level descr iption of their roles and 
responsibilities is set out below .
The Gover nment
(17) The Gover nment is responsible for the strategic oversight of the Capacity Market and for changes to the Regulations 
governing the scheme and to ensure continued accountability for key aspects of the Capacity Marke t design. The 
Regulations include for exam ple general eligibility criteria for entr y to Capacity Market auctions, functions of the 
Syste m Operat or for deliver y of the Capacity Market, and the settlement of payments.
Ofgem
(18) The Gover nment designed the Rules for the Capacity Marke t, but the marke t regulato r Ofgem is responsible for 
imp lementing them (both the Gover nment and Ofge m may amend the Rules). The Capacity Market Rules include 
technical rules and procedures concer ning pre-qualification and capacity auctions, the cont ents of capacity 
agreements and the obliga tions of capacity agreement holders. When consider ing chang es to the Rules, Ofgem is 
bound by a set of objectives enshr ined in the Regulations and the Rules, which ensures transparency and conf idence 
in the gover nance of the Capacity Marke t. Ofgem is also responsible for the resolution of disputes raised by 
applicants about the outcome of pre-qualification.
National Grid (also abbr eviated ‘NG’)
(19) The Syste m Operator is the National Grid. It under take s the deliver y role for the Capacity Market, including: 
provid ing advice to Ministers on the secur ity of supply outlook and recommending the amount of capacity to 
auction in order to meet the reliability standard; pre-qualifying auction participants, administer ing the capacity 
auctions and issuing the contracts (so-called ‘capacity agreements’) with the successful bidders; developing and 
administering new suppor ting procedures such as the provision of Capacity Marke t warnings.
(20) The Gover nment sets out the deliver y functions of the Syste m Operat or in secondar y legislation, which are ‘relevant 
requirements’ enforceable by Ofgem. This gives the Gove rnment certainty about what will be delivered and a clear 
basis for Ofge m to manage NG’s perf ormance in its deliver y role. A panel of technical exper ts provides independent 
scrutiny of NG’s advice on the recommended amount of capacity to auction.
The Settlement Body
The Gove rnment set up the Capacity Marke t Settlement Body to provid e ultimate accountability , governance and 
control of the settlement process and payments disbursed under capacity agreements. The Settlement Body is a 
private comp any limit ed by shares owned by the Governm ent as the sole shareholder . It is responsible for setting its 
own inter nal gove rnance so that it is able to meet its obliga tions, but the Gove rnment has retained overall control 
over it.
The settlement service provider
(21) The Gover nment announced the decision to contract functions out to Elex on Ltd. through the Official Jour nal of the 
European Union in Febr uary 2013. Elex on operates as the settlement service provider , with responsibilities for 
carrying out calculations and determi nations of capacity payments. Elex on’s role as settlement service provid er is 
similar but more limited than the role it currently has under the Balancing and Settlement Code. A contract between 
the Settlement Body and Elex on outlines the details of the service to be delivered, the cost of that service and 
perfo rmance monito ring arrang ements.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/9
2.3 Benef iciar ies
Eligibility
(22) Capacity providers participate in the Capacity Marke t on the basis of ‘Capacity Marke t Units’ (CMUs). It is at CMU 
level at which pre-qualifica tion applications are made, capacity agreements are held, obligati ons that apply in times 
of system stress are specif ied and penalties/over -deliver y payments are calculate d. Generation capacity (both existing 
and new), interconnect ors, storag e and DSR are able to participate . The eligibility criteria are set out in recitals (23) to 
(27).
(23) Generating units (defined with reference to: provid ing electr icity , being capable of independent control, net output 
measured by half hourly meter(s), connection capacity in excess of 2MW) may participate individually as a CMU or 
aggregat e with other eligible generating units under the following conditions:
—The units all form part of the same Trading Unit (i.e. power station); or
—All the units are connected to the syste m at the same Boundar y Point ; that is the same site, but the Trading Unit 
concep t does not apply ; or
—The aggrega te capacity of all the units is between the minimum (2MW) threshold and 50MW (effectively 
embedded generation spread across several sites);
(24) DSR CMUs are defined with reference to a commitment to reduce demand with the DSR provid er being (i) an 
electr icity custome r directly ; (ii) an entity owning the electr icity customer; or (iii) an entity having contractual DSR 
control over the electr icity customer . Such commitment should cause the electr icity custome r to reduce the imp ort 
of electr icity (as measured by half hourly meters) and/or expor t electr icity generat ed by on-sit e gene rating units 
which are owned by the electr icity customer . In addition, each compo nent should be connect ed to a half hourly 
meter and the provider ’s total DSR capacity should be between 2MW and 50MW . Table 2 below shows the results of 
DSR perfo rmance in the auctions held until November 2018:
Table 2
DSR perf ormance in the capacity auctions held to date
Enter ed auction (MW) Won agreements (MW)
2014 T-4 603 174
2015 T-4 673 456
2016 T-4 1,798 1,411
2017 T-4 2,246 1,206
2018 T-4 (7) (susp.) 2,618 N/A
2017 T-1 1,283 443
2018 T-1 (susp.) 2,124 N/A
2015 TA 619 475
2016 TA 373 312C 109/10 FR Jour nal officiel de l'Union européenne 22.3.2019
(7) The 2018 T-1 and 2018 T-4 auctions have been suspended following the General Cour t’s judgement in Case T-793/14. Capacity 
recorded as ‘Entered auction’ is the amount of capacity that has initially prequalified for these future auctions (some may drop out 
ahead of the auction itself), see refere nce to ‘susp.’ in the text.
(25) The Capacity Marke t excludes capacity provid ers already in receipt of suppor t from other measures. The following 
resources are not eligible to participate in the Capacity Marke t:
—Low -carbon generating plants receiving suppor t through the Contracts for Difference (CfD) or small scale Feed- 
In-Tariff.
—Renewable generat ors receiving suppor t through the Renewables Obligation (RO), unless they choose to forego 
receiving RO payments (they are allowed to participate once their RO contracts expire).
—Plants in receipt of the Renewable Heat Incentive (RHI) — this is because the RHI has been designed to 
com plement the RO and the CfD for renewables.
—Plants in receipt of funding from the UK Carbon Capture and Storage (CCS) Commercialisation Comp etition — 
because the CfD for CCS has been designed to provide them with the additional suppor t needed to be 
commercially viable.
—Technologies in receipt of funding from the EU New Entrants Reser ve 300, which aims to suppor t emerging low 
carbon technologies such as CCS and tidal energy as they are also eligible to receive suppor t under the CfD.
—Plants which were awarded 15 year contracts by NG to form part of the Shor t-Term Operating Reser ve 
immediate ly prior to the initial Electr icity Market Reform (EMR) policy proposals in 2010, and which chose to 
maintain them.
(26) Compan ies who have participate d in the Enterprise Investment Sche me (EIS) and Venture Capital Trust (VCT) 
sche mes are not precluded from participation in the CM, but are subject to a test to ensure they do not receive 
‘double subsidy’ (in order to avoid cumulation of State aid).
(27) While the direct participation of foreign capacities is not allowed, interconnectors have been eligible for the 
participation in the capacity market as from the second auction in 2015, as CMUs, on an equal basis with GB-based 
generators and DSR resources, subject to essentially the same regime of rewards and penalties, and de-rated to reflect 
their contr ibution to secur ity of supply (8). Table 3 below presents the results of the interconnect ors’ (‘IC CMUs ’) 
participation in the auctions to date:
Table 3
Inter connector participation in CM auctions to date
Auction type T-4 T-1
Auction Year 2015 2016 2017 2018 (susp.) 2018 (susp.)
Deliv ery Year 19/20 20/21 21/22 22/23 19/20
Number of IC CMUs pre-qualif ied 3 5 6 8 3
Number of IC CMUs successful 2 4 6 NA NA
Of which new build 0 0 3 NA NA
Of which existing 2 4 3 NA NA
Capacity of IC CMUs successful 
(GW)1.86 2.34 4.56 NA NA22.3.2019 FR Jour nal officiel de l'Union européenne C 109/11
(8) De-rating factors are determined individually for each interconnect or by the Secretar y of State based on an assessment of technical 
reliability and analysis of likely countr y flows at times of system stress.
(28) In the 2014 decision, an excep tion to the participation of the interconnect ed capacity was granted for the first 
auction (December 2014) due to the following constraints:
—Capacity to procure: A new methodology to de-rat e the interconnect or contr ibution in the auction was needed. 
Closer cooperation with other Member States on assessing generation adequacy was needed to eliminate 
pote ntial free riding where countr ies had different reliability standards.
—Prequalification: At that point in time, it was not possible for the Deliver y Body to independently complet e the 
prequalification stage for a foreign capacity . Cooperation with foreign TSOs on measurement and verificati on, 
dispatc h for testing and data-shar ing platf orms would have been needed.
—Auction: The auction would have been open to gaming if foreign capacity had been allowed to participate . A new 
methodology would have been needed to limit the amount of foreign capacity up to the de-rated capacity of the 
interconnector . Further more the price-tak er threshold was likely to be diffe rent in another mark et, meaning that 
the auction clear ing price set in GB might not have been appropr iate for capacity in another market and a zonal 
auction might have been necessar y.
—Deliver y: The oblig ation to deliver entails that generat ors must generate when a 4-hour capacity marke t warning 
is called. In another mark et, this could have result ed in out of mer it dispatch , causing marke t distor tion (9). This 
would have not rendered an additional secur ity of supply benefit to the UK in a world where marke t coupling is 
fully implement ed with electr icity flows already responding to scarcity pricing.
(29) For 2014 only , in the absence of direct participation by interco nnected capacity , the expected contr ibution from 
interconnect ion at times of GB syste m stress was reflecte d in the amount of capacity auctioned. For exam ple, if 
1 GW of imports were expecte d to be available at times of GB syste m stress, the amount of capacity auctioned in the 
Capacity Market would be reduced by 1 GW . The contr ibution of non-CM interco nnection was initially assessed by 
NG at zero (float) when recommending the T-4 target for the deliver y year 2018/19, but this was subsequently 
revised to a net contr ibution of 2.1 GW for the T-1 auction (cf. recital (143)).
Pre-qualif ication process
(30) Participation in the Capacity Market is not mandat ory. However , it is mandat ory for all licenced, eligible capacity to 
participate in the pre-qualifica tion process, even if it does not intend to bid. The purpose of the pre-qualifica tion is to 
ensure participants in the auction can deliver the capacity they offer, and the Syst em Operator is able to adjust the 
amount of capacity to auction based on the volume of capacity opting out of the auction.
(31) Any eligible capacity that opts out of the capacity auction is not exposed to Capacity Market penalties for non- 
deliver y, nor are they eligible for any payment for over -deliver y. Such capacity is able to opt back into subsequent 
auctions and can participate in the secondar y marke t. As with ineligible plants, the amount auctioned is reduced to 
account for the amount of capacity of plants opting out.
(32) To ensure reliable capacity is ready for the deliver y year , the System Operat or under take s pre-qualification chec ks 
ahead of the auction to confir m the eligibility and bidding status of all potent ial capacity . Pre-qualification 
requirements vary for different types of capacity (e.g. for generation and DSR).
(33) As part of their pre-qualifica tion application, applicants have to meet both gener ic and specif ic pre-qualification 
requirements, which vary depending on whether the unit is an existing or prospective generating unit, or a DSR unit. 
The gener ic requirements include basic administrative detail (contact details, licence status, corporate structure, 
location and various Directo rs’ declarations), whilst existing generation units have to also demonstrat e their histor ic 
perfo rmance. Prospective units have to provid e evidence of planning consent and connection agreement, a detailed 
constr uction plan and details of their expecte d capital expenditure relative to the duration of the capacity agreement 
being sought. They are also required to lodg e credit suppor t (i.e. collate ral, or ‘bid bond’) as an indication of their 
seriousness to participate in the auction and to deliver an operational unit by the start of the deliver y year .C 109/12 FR Jour nal officiel de l'Union européenne 22.3.2019
(9) An obligation to provide capacity (i.e. a risk of penalty) under the Capacity Mark et may incentivise a foreign power plant to sell 
electr icity in the UK market rather than in its national mark et even at less than its marginal cost. This is contrar y to the mer it order 
in whic h market participants would sell their electr icity based solely on the marginal costs.
(34) New generation and unpro ven DSR (as opposed to proven DSR (10)) are required to submit a bid bond of GBP 5,000 
(around EUR 5,650) per mega watt for four-year ahead and one year-ahead auctions and of GBP 500 (around 
EUR 565) per mega watt for transitional auctions. Concer ning DSR, the measure provides that the bid bond is 
forfeit ed pro rata to the volume of capacity that was not actually supplied by the DSR operat ors, provided that they 
provid e at least 90 % of the volume of capacity that they had committ ed to. While DSR operato rs can aggregat e 
several sites in order to reac h the 2 MW minimum threshold, it should be noted that they are liable to pay a bid bond 
on the whole of the 2 MW , if even only a small propor tion of that volume is unp roven DSR capacity . According to 
the UK, a CMU can only be prove n as a sing le unit, prove n on the same day in the same settlement period. This 
requirement to prove as a unit should minimize gaming risk. Other wise, applicants could prove at different times 
and put together a unit which might not be able to perform together during a stress event, with resulting secur ity of 
supply risk.
(35) Follo wing consultation in March 2016, the UK Gove rnment raised the pre-auction bid bond for new build 
generation to GBP 10,000/MW to help fully secure exposure to the increased termination fee liability , as well as to 
help to deter speculative applications by requir ing a greater level of pre-auction commitment. The level of pre- 
auction bid bond for unpro ven DSR, however , was left at GBP 5,000/MW following feedbac k from stakeholders 
during the consultation that it is comparatively more expensive for DSR aggrega tors to secure credit cover from 
lenders.
(36) The Syste m Operat or publishes technology specif ic de-rating factors in advance of the pre-qualification window . For 
the majority of technology classes, these factors are based on class type histo ric perf ormance over the previous seven 
years and represent the average expected contr ibution of plants at times of system stress on a technology specif ic 
basis. A diffe rent methodology is used for some classes where histor ic evidence is either lacking or is less relevant as 
a robust guide to future perf ormance (e.g. interconnect ors or inno vative technologies such as battery storage ). The 
relevant factors apply to all plants of a specif ic technology , irrespective of their age or status. Capacity provider s 
which are successful in the capacity auction receive payments (at the auction clear ing price) propor tionate to their 
de-rating factor multiplied by their connection capacity (volume which their physica l grid connection permits them 
to expor t onto the syste m). One of the purposes of the penalty regime is to fine tune the level of payments from this 
estimated perf ormance level to the actual perf ormance level of individual plants.
2.4 The Auctioning process
Establishing the amount of capacity to auction
(37) The decision whether to run the capacity auctions is taken annually and is informed by an independent electr icity 
capacity assessment carried out by the Syste m Operat or. Looking 15 years ahead, NG assesses the likely evolution of 
future capacity margins, the contr ibution of interconnect ed capacity and DSR, and recommends the amount of 
capacity needed to deliver the endur ing reliability standard. In this manner , the Gove rnment is able to annually assess 
whether a capacity auction is needed.
(38) The decision on how much capacity to contract in each capacity auction is informed by an endur ing reliability 
standard. A reliability standard is an objective level of secur ity of electr icity supply , and is the basis for establishing a 
demand curve in advance of each capacity auction.
(39) The UK notes that no electr icity syste m can ever be 100 % reliable, and there is alwa ys some trade-off between the 
cost of providing additional back up capacity and the level of reliability achieved. Establishing a reliability standard 
allows this trade-off to be made as it identifies the point at which additional secur ity benef its are outweighed by the 
costs of provid ing capacity . It aims to give investors and market participants clarity over the Gove rnment’s long-term 
secur ity of supply objectives and to help reduce costs to consumers. It also aims to ensure that the Gover nment 
cannot contract more than the economically efficient level of capacity , which prevents over -procurement of GB 
capacity .
(40) The Govern ment has set an endur ing reliability standard for the GB electr icity marke t equal to a loss of load 
expectation of 3 hours/y ear. This translates as a syste m secur ity level of 99.97 %. The loss of load expectation is the 
number of hours/per iods per annum in which , over the long term, it is statistically expecte d that supply will not 
meet demand, and which reflects the economically effici ent level of capacity . The reliability standard has been 
established on an endur ing basis, but there will be an oppor tunity for the Gover nment to review it should it prove 
necessar y.
(41) Each year, the Syst em Operator sets out how much capacity is needed to meet the reliability standard and provides 
advice to the Govern ment by 30 May in an Electr icity Capacity Repor t (ECR). The recommendation on the amount 
of capacity to contract in the capacity auctions to meet the reliability standard is based on NG’s assessment of 
diffe rent scenar ios for the level of electr icity demand and the amount of capacity provided by power plants which are 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/13
(10) Proven DSR differs from the unp roven DSR in that its capacity has been proven by a DSR Test Certificate issued for that DSR CMU 
by the Deliver y Body (National Grid).
not eligible for capacity payments, e.g. low carbon generation, and thus sets out NG’s recommendation on whether , 
and how muc h, capacity needs to be secured for the deliver y year in question through the CM. NG’s repor t is 
scrutinised by an independent Panel of Technical Exper ts (PTE) who provid e advice to Gover nment on the robustness 
of the analysis and recommendations.
(42) The Syste m Operat or uses a rang e of demand scenar ios as well as sensitivities to account for uncer tainties in weather , 
plant availability , interconnect or flows and levels of embedded generation. The Syste m Operat or then nets off 
capacity that is not able to participate in the auction (for exam ple low carbon plant receiving other suppor t) and the 
capacity that has ongoing capacity agreements (e.g. in cases when a capacity provider has a multi-year agreement 
covering the relevant deliver y year).
(43) The Syste m Operat or then uses a ‘robust optimisation’ methodology which minimises the worst possible outcome in 
terms of cost of capacity and unser ved demand across the scenar ios and sensitivities. The modelling results in a set of 
opti ons for a sing le amount to procure and a recommendation.
(44) In the notif ication of 2014 the UK provid ed the prediction depicted in Figure 1 for a rang e in capacity to procure 
that could be required in the period 2018 to 2030. Figure 2 show s an update d prediction from December 2018.
Figure 1
2014 Estimates of the capacity to procure under different scenar ios (GW)
Figure 2
2018 Estimates of the capacity to procure under different scenar ios (GW)
C 109/14 FR Jour nal officiel de l'Union européenne 22.3.2019
(45) The Gove rnment take s the final decision over how much capacity to procure in each auction on the basis of a 
demand curve, which is derived according to the methodology set out in the recitals below .
(46) The demand curve gives the Gover nment some flexibility on the amount of capacity to contract from year to year 
depending on cost. The sloping demand curve allows a trade-off to be made between reliability and cost, so that less 
capacity is procured in a given year if the price is very high. It also helps to mitigat e gaming risks because it provides 
an auction price cap, and flexibility to procure less capacity if the price is high — both of which reduce 
oppor tunities for participants to push up prices by exercising market power.
(47) The Gove rnment publishes the demand curve in advance of each capacity auction. The demand curve gives the 
relationship between the price of capacity and the amount of capacity in the auction demanded by the System 
Operat or. Each demand curve is constr ucted around the targe t capacity level required to meet the reliability standard 
indicated by the Syste m Operat or and an estimate of the reasonable cost of new capacity (the net cost of new entr y 
or ‘net-CONE’). The intersection of these target capacity and net-CONE fixes one point in the demand curve. Figure 3 
below presents an exam ple of the capacity demand curve.
Figure 3
Illustrativ e capacity demand curve. Source: UK author ities
(48) Net-CONE is determ ined based on the expecte d clear ing price of capacity in the auction and is revised if necessar y 
for each auction, for instance based on new engineer ing cost estimates for new build and on information gained in 
previous auctions. The cost of new entr y is based on estimat es of the capital cost of new built capacity provid ed by a 
repor t (11) commissioned by the UK author ities assuming a 7.5 % hurdle rate and a 25 year payback period.
(49) Alongside the targe t capacity level and the net-CONE, other key parameter s of the demand curve are: the auction 
price cap (the maximum price at which Gover nment is willing to procure capacity), the price taker threshold (the 
maximum price at which existing plants can offer capacity in the auction (12)) and the minimum level of supply 
needed to hold the auction (a minimum comp etition requirement). The Gover nment confi rms the final auction 
parameter s for each capacity auction just before the relevant pre-qualification window opens.
(50) The auction price cap determines the top of the demand curve — i.e. the price at which no more capacity will be 
auctioned. The purpose of a price cap is to prot ect British consumers from unforeseen problems with the auction, 
such as a lack of competition or abuse of marke t powe r by participants. However , according to the UK author ities, 
setting the auction price cap too low could put off bidders and reduce competition, so it is important that the price 
cap is set at a level that encourage s competition in the capacity auction, and allows the mark et to set an efficient 
price for new capacity based on participants’ judg ement of the risks and potent ial retur ns in the electr icity and 
capacity mark ets. Getting the level of the price cap right depends on an assessment of the degree of uncer tainty 
around the central estimate of net-CO NE.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/15
(11) Electr icity generation cost model. 2013 update of non-renewable technologies. Apr il 2013. Prepared by Parsons Brinckerhoff for the 
Depar tment of Energy and Climate Change. PIMS Number : 3512649A
(12) See recitals (63) and (64)
(51) In 2014, the UK Gove rnment set the price cap at the level of GBP 75/kW . The UK explained that this price cap is 
above the modelled clear ing price in the auction under a rang e of credible scenar ios, yet not so high as to allow 
plants to exercise significant mark et powe r if there is limited new build participating. It also acts to ensure that new 
build cannot seek to recover all its fixed costs in its auction bid — it must take at least some account of energy 
marke t revenues and capacity marke t payments beyond the initial contract length for the project to be viable.
(52) The Gover nment also has a further oppor tunity ahead of the auction to satisfy itself that there is suffi cient 
competition in the auction. Parties that have prequalifie d to participate in the auction must commit two week s ahead 
of the auction if they will offer capacity into the auction. The Govern ment can then review the list of capacity units 
that will be participating in the auction — consider ing for instance the volume of supply offered, the mix of 
technologies, and the ownership of units being offered — and can cancel the auction if it is not satisf ied that the 
process would be sufficiently competitive to achieve value for consumers.
Auction frequency and forma t
(53) The capacity auction is held ever y year for deliver y in four years ’ time: e.g. the 2014 auction was for deliver y in 
2018/19, with the deliver y year running from 1 October 2018 to 30 Sept ember 2019. Since the implementation of 
the measure in 2014, four four-year ahead auctions have take n place: in 2014, 2015, 2016 and 2017. The four-year 
ahead auction sche duled for 2018 with the deliver y in 2022 was halted by the UK following the annulment of 2014 
Commission decision by the GC judgement. To secure the supply in 2022, the UK author ities submitted that, as part 
of the notif ied measure, they may excep tionally organise a three-year ahead auction in 2019.
(54) A further year-ahead auction is held in the year immediately prior to the deliver y year of the main auction. The 
process for setting the demand curve for this auction is the same as that for the main (four-year ahead) auction — 
with the final decision take n by the Gove rnment based on an analysis provid ed by the System Operator . The one year 
ahead auction ensures the right amount of capacity is procured when more accurat e demand forecasts are available 
and is important for enabling DSR capacity (whic h find s it difficult to participate in an auction four years ahead of 
deliver y) to actively participate in the mechanism. Since the implementation of the measure in 2014, one year-ahead 
auction took place in early 2018 (13).
(55) Some capacity is held back from the four-year ahead auction and ‘reser ved’ for the year ahead auction. In 2014 and 
2015, the amount of reser ved capacity was based on an assessment of the amount of the cost-eff ective DSR that 
could participate in an auction, and was made public when the demand curve for the four-year ahead auction was 
published (2.5 GW). A review of the methodology used to determ ine the T-1 set-aside was carried out by the UK 
Governm ent in Marc h 2016. Following the review a new ‘set-aside’ methodology based on the application of a 95 % 
confi dence inter val around National Grid’s annual T-4 capacity recommendation set out in the ECR was agreed and 
has been used since 2016. When modelling the Least Worst Regrets (LWR) process in the ECR, National Grid derives 
a 95 % confi dence interval around the capacity recommendation. Table 4 below presents the volume set-aside for T- 
1 auctions.
Table 4
T-1 set aside and the Capacity to Procur e at T-1
Deliv ery YearTarget to Procure at  
T-4 auction
(GW)Capacity set aside for 
T-1
(GW)Target to Procure at  
T-1
(GW)Amount Procured at  
T-1 auction
(GW)
2018/19 48.6 2.5 4.9 5.79
2019/20 45.4 2.5 4.6 (14) N/A
2020/21 51.7 0.6 N/A N/A
2021/22 49.2 0.4 N/A N/AC 109/16 FR Jour nal officiel de l'Union européenne 22.3.2019
(13) The UK in addition introduced a supplementar y capacity auction in Januar y 2017 to contract capacity for deliver y from 1 October 
2017 to 30 Sept ember 2018. This supplementar y auction was approv ed by a Commission State aid decision C(2016) 7757 final on 
SA.44475 (2016/N).
(14) National Grid’s recommendation ECR 2018
(56) If demand falls between the four-year ahead and year ahead auctions, the amount of capacity auctioned in the year 
ahead auction is reduced. However , because the year ahead auctions provide a better rout e to marke t for DSR, the 
Governm ent committed to procure in the year ahead auctions at least 50 % of the capacity reser ved four years 
earlier . To date only one T-1 has take n place and in that auction more than double the capacity reser ved four years 
earlier was procured (4.9 GW compared to 2.5 GW originally envisag ed). The proposed targe t for the next T-1 
auction, which has been postponed as a result of the GC judg ement, aims to secure over 180 % of the capacity 
reser ved four years earlier . Though the UK author ities indicate d that they did not foresee any difficulty in continuing 
to honour the commitment to secure in the T-1 auctions at least 50 % of the capacity set-aside four years earlier , 
flexibility will be retained to remove this guarante e if DSR does not prove cost-effective in the long run or if the DSR 
industr y is considered sufficient ly mature.
(57) The Gover nment expects to run T-4 and T-1 capacity auctions ever y year , but it is only once prequalification for an 
auction is comp leted, when the Gover nment is able to make a final decision about whether to hold a capacity 
auction.
(58) The Gover nment has discretion to cancel or postpone the auction at any point up to the start of the first round of 
the auction. If the Gove rnment does not choose to cancel the auction, the auction will automatically proceed. Once 
the auction has started, the Gove rnment only has discretion to reject the result of the auction if there are reasonable 
grounds to suspect that NG, as deliver y body , has not run the auction in accordance with the Regulations and the 
Rules. If the Gover nment does not choose to cancel the auction, the auction is automa tically validat ed. Once an 
auction has commenced, the Gove rnment does not have any discretion to influence its outcome.
(59) Each Capacity Marke t auction is a descending-clock, pay-as-clear auction in which all successful participants are paid 
the last-accept ed bid. The auction is run on the basis of pre-defined rules. The auctioneer announces a high price at 
the beginning of the auction and eligible participants submit bids to indicate how much capacity they are willing to 
supply at that price. This process is repeated in successive rounds according to a pre-dete rmined sche dule until the 
auction discovers the lowest price at which demand equals supply . All successful participants are paid the same 
clear ing price (pay-as-clear model). In addition, there exist a number of measures aimed at minimising gaming risks 
and ensur ing an efficient outcome.
(60) When deciding how muc h capacity to provide at any given capacity price, participants are expecte d to factor in the 
possibility of earning revenues on the energy marke t. Expected energy marke t revenues vary by provider depending 
on their expected load factor s, wholesale prices and fuel and carbon costs.
(61) In 2014, ‘turn-down’ DSR, generation-der ived DSR and embedded (or distr ibution-connect ed) generation (up to 
50 MW) were rega rded by the UK as nascent sectors in need of additional suppor t to help them prepare for 
competition in the main CM auctions. As a result, two transitional auctions (TA) were held for 2016 and 2017 to 
suppor t them. While the first transitional auction was indeed open to the three cate gories of capacity descr ibed 
above, the level of success of embedded (or distr ibution-connecte d) generation and generation-der ived DSR in the 
first TA auction, and in the T-4 auctions in 2014 and 2015, let the UK consider that these participants were mature 
enough to compet e successfully in the main CM auctions against other types of capacity without further ring-fenced 
suppor t. The UK theref ore excluded these resources from the second (and final ) TA auction so only ‘turn down’ DSR 
could participate . Further more, for the second TA, the UK indicates that it decided to test whether a lower 
participation threshold (i.e. 500kW instead of 2MW) could be a benef icial amendment to the endur ing Capacity 
Market regime for all participants. Table 5 below present the results of the TA.
Table 5
Capacity (de-r ated, MW) secur ing agreements through the Transitional Arrangements auctions
1st TA Auction 2nd TA Auction
Distr ibution-connected generation 328 n/a
Total DSR, of which: 475 312
—Generation-der ived DSR 322 n/a
—Turn-down DSR:
—Including capacity < 2MW153
—n/a312
—8.5 (repr esenting 8 CMUs)
Total 803 31222.3.2019 FR Jour nal officiel de l'Union européenne C 109/17
(62) Table 6 below presents, for each auction held since 2014, NG’s recommended amount to be procured, the targe t 
volume approved by the Secretar y of State and the amount eventually procured at the T-4 and T-1 auctions.
Table 6
Capacity Requir ements
National Grid’s 
Recommended 
amount to procure in 
ECR
(GW)National Grid 
Adjusted 
recommendation of 
amount to procure at 
auction follo wing 
prequalif ication
(GW)Amount to procure
Target volume 
appro ved by 
Secret ary of State
(GW)Amount procured at 
auction
(GW)
T-4 2014 53.3 48.6 48.6 49.3 (15)
T-4 2015 47.9 44.7 45.4 46.4
T-4 2016 49.7 51.1 51.7 52.4
T-4 2017 50.5 49.2 49.2 50.4
T-1 2017 6.3 4.9 4.9 5.79
Price takers and price makers
(63) To mitigat e marke t power in the auction, pote ntial capacity providers who have successfully pre-qualified are 
classif ied as either ‘price take rs’ (who cannot bid above a relatively low threshold) or ‘price mak ers’ (who can). 
Existing capacity provid ers are price take rs by defaul t. New entrants and DSR resources are classif ied as price mak ers, 
and are free to bid up to the overall auction price cap. According to the UK, this distinction reinf orces incentives for 
participants to bid at true value of their capacity and mitiga tes the risk that existing plants with lower costs may seek 
to set a high price in years where new entr y is not needed. The UK argues that the price take r threshold should be set 
at a level that captu res the majorit y of existing plants, while being at a price low enough to mitiga te gaming risk. The 
price taker threshold has been set at GBP 25/kW (50 % net CONE). This is high enough to captu re the majorit y of 
existing plants. In 2014, the UK's modelling suggest ed that this would capt ure around 80 % of existing plants. Table 
7 belo w show s that in reality , around 60 % of existing plants were captured by the price take r threshold. GBP 25/kW 
is also signifi cantly below the expected cost of new entr y. As a result, a price take r threshold of GBP 25/kW also 
mitiga tes gaming risk.
Table 7
Existing Plants captur ed by Price Taker Threshold since 2014
AuctionExis ting Plant captured by Price taker threshold
Capacity (MW) % Clear ing Price (GBP/kw)
2014 T-4 25,007 67 % 19.40
2015 T-4 39,286 80 % 18.00
2016 T-4 29,548 56 % 22.50
2017 T-4 31,099 57 % 8.40
2017 T-1 2,306 29 % (16) 6.00C 109/18 FR Jour nal officiel de l'Union européenne 22.3.2019
(15) After terminations as at Febr uary 2018 the capacity is 47.53GW .
(16) The high propor tion of existing capacity participating as Price Makers in the T-1 auction (cf. recital (64)) is likely due to the fact that 
much of this existing capacity comes from the oldest, most marginal plant, unable to commit, through the T-4 auctions, to 
remaining open that far ahead of the deliver y year .
(64) Existing plants with particularly high costs can be allowed to participate as price mak ers (and bid higher than the 
price taker threshold), but they have to provid e a justification for needing a higher level of payment (for exam ple a 
board certificate and business plan present ed to the provider ’s board). This justificati on must be provided to Ofge m, 
and may be used as part of any invest igation into abuse of mark et power.
(65) Any existing providers that bid at a price above the ‘price maker ’ threshold and do not receive a capacity agreement 
in the auction, but continue to operate in the deliver y year, are likely to be invest igated by Ofgem, which may use the 
information provided alongside the price setting auction bid.
(66) New entrants are able to set a price without justifying their bid, though if it were perceived that they were seeking to 
exercise market power this could be also subject to investigation by Ofge m as part of its normal enforcement role. 
The level of bid is in any case capped by the price cap set in the demand curve provid ed in advance of the auction.
Capacity Agreement duration
(67) If successful at the auction, capacity providers are awarded a capacity agreement at the clear ing price. The length of 
available capacity agreements varies to ensure a level playing field between capacity provid ers.
(68) Most existing capacity providers have access to one year agreements; generation capacity provid ers under taking 
capital expenditure above an original GBP 125/kW threshold (refurbishing plants) are eligible for capacity 
agreements of up to a maximum of 3 years; generation capacity provider s under taking capital expenditure above 
originally GBP 250/kW (new plants) are eligible for capacity agreements up to a maximum of 15 years. These 
thresholds are reviewed each year and have been subject to slight increases over time, standing at GBP 135/kW and 
GBP 270/kW respectively in December 2018. Agreements longe r than 1 year are only availa ble to participants in the 
four-year ahead auction.
(69) To ensure regulatory certainty and foster investors’ confidence in the mec hanisms, the key terms of a capacity 
agreement are ‘grandfa thered (17)’ (subject to any future regulation to the contrar y, although no such chang es have 
been made so far). These key term s are:
—agreement length;
—capacity price and entitlement to payment ;
—capacity obligation and de-rating figure;
—com pletion milestones and termination fees applicable;
—maximum liability for penalties.
(70) The UK argues that the rationale for longer -term contracts for new entrants is to help promot e comp etitive new 
entr y into the market. Allo wing new entrants to receive a long-t erm contract enables new entrants to secure lower - 
cost financing for their invest ment. The UK believes that this can help mitiga te barriers to entr y for independent 
firms who cannot finance investment in new capacity on the back of revenues from other plant in their portfolio. By 
encouraging comp etition in the market, longer -term contracts can theref ore help lowering costs for consumers in 
both the energy and capacity marke ts. Longe r-term contracts should also, according to the UK author ities, reduce the 
risk that participants with high invest ment or refurbishment costs load all of these costs into a sing le year agreement.
2.5 Secondar y mark et (trading)
(71) Between auction and deliver y and in the deliver y year/s, participants are able to adjust their position through trading, 
e.g. by taking on a great er or lesser obliga tion, or finding alternative capacity to meet temporar y shor tfalls. 
Secondar y trading is an impor tant tool for parties to manage their risk of exposure to penalties within the Capacity 
Market. There are different forms of secondar y trading allowed under the Capacity Market: financ ial trading, volume 
reallocation and obligation trading.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/19
(17) A grandfather clause is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to 
all future cases.
2.6 Deliv ery
(72) The Capacity Marke t follo ws a ‘delivered energy’ model: capacity providers are obliged to deliver energy whenever 
needed to ensure secur ity of supply , i.e. in real system stress situations. They face penalties if they fail to do so. The 
model also includes additional physical testing of capacity . Failure to demonstrat e capacity to the required level on 
the requisit e number of occasions results in capacity payments being forfeited until successfully demonstrat ed.
The capacity agreement oblig ation
(73) Und er the capacity agreement obligation, syste m stress events are defined as any half hour settlement periods in 
which either voltag e control or controlled load shedding are exper ienced at any point on the system for 15 minute s 
or longe r. Provi ders are required to determi ne their own response at such times, and avoid breach ing any existing 
code or licence conditions. To date, there have been no Capacity Marke t Notices issued by the syste m operator . The 
winter (2018/19) was to be the first year of the measure’s operation in full.
(74) To ensure participants are able to adequat ely manage the risk of exposure to penalties, e.g. the risk that a number of 
plants simultaneously trip, the System Operat or has published a notice of syste m stress via a ‘Capacity Marke t 
warning’, based on the methodology set out in the Capacity Market Rules (8.4.6) (18). Unless this warning has been 
issued, a scarcity event will not trigger Capacity Marke t penalties or ‘over-deliver y’ payments.
(75) Capacity agreements oblige participants to deliver a specified quantity of electr icity . A provider ’s obliga tion at the 
time of stress events is calculated from their oblig ations they entered through the four-year and year-ahead auctions, 
plus any secondar y traded obliga tions they entered for the specif ic settlement periods in which a stress event occurs.
(76) In stress periods preceded by a Capacity Market warning of at least four hours ’ notice, provid ers’ obliga tions are ‘load 
follo wing’. That means they are only required to be gene rating electr icity or reducing demand up to the total level of 
their obligati on if all capacity , for which capacity agreements have been concluded in the marke t, is necessar y to 
meet demand. In a stress event where only 70 % of such total capacity is necessar y to meet demand, each provider is 
only required to generate electr icity or reduce demand up to 70 % of their full capacity obliga tion.
(77) According to the UK author ities, load follo wing oblig ations are appropr iate to ensure generators have incentives to 
operate efficiently in the marke t, and are propor tionate to the harm caused to consumers by any lost load. If ever y 
participant risked being penalised for their full total capacity obligation whenever there was system stress, the 
Capacity Marke t would create signals for plants to run warm even when it was economically ineff icient for them to 
do so — increasing both emissions and consumer bills.
Penalties
(78) The penalty regime aims to provide capacity providers with incentives to deliver energy when needed. Units which 
perfo rm below the expecte d level of perfo rmance are penalised, while those that exceed the expect ed level receive 
over-deliver y payments, so that at the end of the year each unit ’s capacity payments broadly reflects their 
perfo rmance. The penalty regime consists of three main elements:
—a monthly liability cap of 200 % of a provid er’s monthly capacity revenues, which , given the weighting of 
monthly payments according to system demand, may expose provid ers to a penalty liability of up to 20 % of 
their annual revenue in any one month.
—an overarc hing annual cap of 100 % of annual revenues.
—a penalty rate set at 1/24th of a provider ’s annual capacity payments.C 109/20 FR Jour nal officiel de l'Union européenne 22.3.2019
(18) https://www .ofgem.go v.uk/electr icity/wholesale-market/mark et-efficiency-review-and-reform/electr icity-mark et-ref orm/capacity- 
mark et-cm-r ules
Testing regime
(79) The penalty regime is complement ed by a rigorous system of performance demonstrations to ensure capacity 
provid ers are able to deliver energy when needed and only receive capacity payments if reliable. This is especially 
imp ortant for those deliver y years with no stress events in which testing provid ers’ perf ormance ensures that 
provid ers are phys ically capable of deliver ing as per their capacity obliga tions.
2.7 Financing of the measure and payment flows
(80) The costs of the Capacity Market (i.e. those incur red to fund capacity payments to provid ers) are paid by all licensed 
suppliers according to the following process:
—Payments are profiled according to system demand — so capacity provider s receive a higher propor tion of their 
payments during months of high demand (i.e. over the wint er) and a lower propor tion in periods of low 
demand.
—Three months before the start of the deliver y year suppliers forecast their demand over the period 4pm-7pm on 
all weekda ys from the start of November to the end of Febr uary and notify these estimat es to the settlement 
body .
—Supplier charges are determined based on their forecast marke t share and monthly charg es are levied upon 
licensed suppliers in order to match the payment profil e to capacity providers. Supplier charges are calculated 
based on demand between 4-7pm on winter weekda ys in order to incentivise suppliers to reduce their custo mers ’ 
electr icity demand at the times when demand is typically highest. This should reduce the amount of capacity that 
is needed, and theref ore will reduce the cost of the Capacity Market.
—Supplier charges are update d to reflect actual data on marke t share once it becomes available as with the existing 
Balancing and Settlement Code (BSC) reconciliation process. This reconciliation process continues for 14 months 
as revised demand data is received.
(81) All payment flows associated with the Capacity Market, for all participants, are calculate d and administered by the 
settlement body , assisted by a settlement service provider (Elex on). The role and responsibilities of the Settlement 
Body and Elex on are outlined in section 2.2 above.
(82) Capacity payments are determined by the amounts set out in each provider ’s capacity agreement following the 
outcome of the relevant auction for each deliver y year: capacity payments equal the amount of capacity that 
successful capacity provid ers have bid in the capacity auction, multiplied by the clear ing price.
(83) Funds received by the settlement body are held in a non-interest bear ing Govern ment Banking Service bank account. 
The settlement body is also responsible for collecting, holding and (where necessar y) retur ning any collate ral that has 
been post ed by new-build generat ors or DSR provider s as part of the pre-qualifica tion process in advance of each 
capacity auction.
(84) The principal financ ial flows to and from the settlement body are as follo ws:
—Suppliers are oblige d to pay to the settlement body the so-called ‘settlement body charges’ on a monthly basis 
beginning from the financial year 2015/2016. The ‘settlement body charg e’ covers the administrative costs of 
maintaining the Capacity Market settlement function incur red by the settlement body (and its agent). The 
collection of these payments happens according to the Apr il-March UK financ ial year , so to a separate timetable 
to other capacity market payment flows which runs according to the Octob er-Sep tember capacity year.
—Suppliers are oblige d to provide a credit cover before the start of each month in the deliver y year. This cover 
must equal 110 % of their supplier monthly char ge and is intended to ensure that payment flows to the capacity 
provider can continue to be made in the event that a supplier defa ults.
—Suppliers are obliged to pay a ‘supplier monthly charg e’ to the settlement body no later than 24 work ing days 
after the end of each month in the deliver y year . The supplier monthly charge is an obliga tion on suppliers (via a 
condition in their supply licence) to fund the Capacity Marke t.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/21
—In the event of any under -perfo rmance against their capacity obligations during a stress event occur ring in the 
deliver y year, capacity providers are oblige d to pay to the settlement body a ‘penalty charge’. This must be paid by 
no later than 24 working days after the end of the month.
—The settlement body pays provid ers a ‘capacity payment’. This is an amount determined according to their 
capacity oblig ation (the amount set in the capacity auction) within 29 days after the end of each month within 
the deliver y year. All payments to provid ers are funded by the revenue from the charges levied upon licenced 
suppliers. In the event that a capacity provider has failed to pay its penalty charge, the provid er’s payment is 
withheld until the necessar y penalty charge has been reco vered. Actual payments to providers take account of 
any obligati on trading that has take n place between the auction and the deliver y period.
—In the event that capacity providers over-deliver against their capacity obligations during a stress event occur ring 
in the deliver y year, the settlement body pays an ‘over-deliver y payment’. Over -deliver y payments due to each 
capacity provid er are calculated at the end of the capacity year , and are paid using the funds that have been 
collect ed as penalties over the course of the year. This does not increase the overall level of capacity payment in a 
given year — as payments for over-deliver y offset the penalties collected for non-deliver y.
—If applicable, the settlement body retur ns to suppliers a ‘penalty residual supplier amount ’. This is the revenue 
remaining after over-deliver y payments that have accumulated over the year have been paid at the necessar y rate.
2.8 Generation adequacy in Great Britain
The electr icity market in Great Britain
(85) On 1 Apr il 2005, the UK introduced in Great Britain a sing le set of wholesale electr icity trading and transmission 
arrangements kno wn as BETT A (British Electr icity Trading and Transmission Arrangements). BETT A is based on 
bilat eral trading between generators, suppliers, custo mers and traders, and participants self-dispatch rather than 
being dispatch ed centrally .
(86) Und er BETT A, contracts for electr icity are agreed in forwards and futures marke ts from several years up to 24 hours 
ahead of a given half hour deliver y period. Shor t-term power exchang es and energy brokers give participants the 
oppor tunity to fine tune their contract positions from 1 to 24 hours before deliver y. All the deals are bilat eral, and 
are settled at the price regist ered on the power exchang e or agreed bilat erally or through a brok er.
(87) Und er BETT A, the wholesale electr icity price rewards generato rs for their electr icity and capacity , and invest ors must 
decide to invest based on their expectation of reco vering the costs of this invest ment through selling electr icity in the 
wholesale electr icity marke t.
(88) Closer to deliver y, there is a balancing mechanism through which the Syst em Operat or accep ts offers and bids for 
electr icity close to real time. This enables the Syste m Operat or to balance supply and demand. At ‘gate closure ’, 1 
hour before each half hour deliver y period, generato rs are required to inform the System Operat or of the energy they 
are contracted to deliver and the expected output from each plant. Suppliers (retailers) must declare the amount they 
have contracted to buy, which should be the amount they expect their custome rs to consume. Finally , an imbalance 
settlement process makes payments to and from those marke t participants whose contracted positions do not match 
their actual metered electr icity production or consump tion. It also settles other costs of balancing the syste m. 
Participants face a relatively penal ‘cash-out ’ price if their contracted positions do not match their actual 
consump tion or production. Theref ore the imbalance settlement or cash-out price incentivises participants to help 
balance the syste m in real time.
(89) At the end of December 2017, the UK had a total of 81.3GW of electr icity generating capacity . In addition, the UK 
has four interconnect ors allowing trade with Europe: England-France (2 GW capacity), England-Netherlands (1 GW), 
Nor ther n Ireland-Ireland (0.6 GW) and Wales-Ireland (0.5 GW) (19). The NEMO interco nnector between England and 
Belgium (1 GW) will be going live in early 2019.C 109/22 FR Jour nal officiel de l'Union européenne 22.3.2019
(19) These figures are taken from the Diges t of Unit ed Kingdom Energy Statistics 2018
https://www .gov .uk/governm ent/statistics/dig est-of-uk -energy-statistics-dukes-2018-main-repor t
Gener ation adequacy problems
(90) The Reliability standard is expressed in terms of a Loss of Load Expectation (LOLE). This involves setting a standard, 
which sets out the averag e number of hours per year in which demand is not expecte d to be met by supply in a 
typical year. LOLE represents the number of hours per annum in which, over the long-term, it is statistically expected 
that supply will not meet demand. This is a probabilistic approach — that is, the actual amount will vary depending 
on the circumstances in a particular year, for exam ple how cold the winter is; whether or not an unusually large 
number of power plants fail to work on a given occasion; the power output from wind generation at peak demand; 
and, all the other factors which affect the balance of electr icity supply and demand. How ever , it is impor tant to note 
when interpreting this metr ic that a certain level of loss of load is not equivalent to the same amount of black outs; in 
most cases, loss of load would be manag ed without significant impacts on consumers. The critical level established 
by the UK is a LOLE of great er than three hours.
(91) The Gover nment notes that, regard less of the modelling approac h chosen, the future outlook for electr icity secur ity 
of supply is very difficult to project with full confidence due to the sensitivity to key assump tions including 
electr icity demand, retirement decisions, new build, the contr ibution of interco nnection, and the availa bility factor s 
of diffe rent technologies.
(92) At the time of the notif ication of the measure in 2014, the UK stated that in Ofge m’s 2013 Electr icity Capacity 
Assessment, LOLE were shown to rise to up to 9 hours in 2015/16 (although noting that there was little imp act in 
the Conve ntional Generation High Availability case), they would then recover before rising again in 2018/19. At the 
time, the UK considered that the range of scenar ios demonstrated the uncer tainty with the high end of the range 
rising above 3 hours in 2018/19 making, according to the UK, a strong case for intervention. Ofgem's reference 
scenar io assumed 0.75GW of net expor ts in the wint er season.
Figure 4
Loss of load expect ation and reliability standard, as supplied by the UK in its notif ication of 2014. Source: 
Ofgem, DECC analysis
(93) The UK also stated that the UK Depar tment of Energy and Climate Chang e (DECC) had also carried out simulations 
of investment in generation up to 2030. DECC's Base Case scenar io without a capacity mark et presented a similar 
trend to the Ofge m analysis up to 2016/17. Beyond 2016/17, DECC's Base Case scenar io saw a down ward trend in 
capacity margins continuing into the early 2020s. DECC's modelling assumed an additional 2.9GW of 
interconnect ion coming forward by 2030 and assumed that interconnectors were, on a net basis (i.e. taking all 
interconnect ion capacity together), neither impor ting nor expor ting at times of peak demand.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/23
Figure 5
Long-ter m estimates of de-rated capacity margins, as supplied by the UK in its notif ication of 2014. Source: 
Ofgem 2013, DECC analysis 2013
(94) The UK estimates that analysis under take n by the UK Gover nment, as well as a separate analysis provid ed by 
National Grid, demonstrate the ongoing need for the CM in order to ensure that the Reliability Standard of 3 hours 
LOLE is met. When the CM is excluded from the modelling, the reliability standard is likely to be breached in ever y 
year included in the modelling.
(95) NG produces a 5-year EMR Base Case as part of the Future Energy Scenar ios (20) to assess the capacity to secure in 
the capacity mark et auctions. In December 2018, NG set out a revised set of assump tions to assess the pote ntial 
imp act on the Base Case if there was no CM in the UK. NG’s assessment is that LOLE would rang e between 3 and 7 
hours LOLE between 2019/20 and 2023/24 without the capacity mark et.
(96) The UK Depar tment of Business, Energy , and Industr ial Strate gy (BEIS) under took an analysis independently from 
National Grid, using the most recent ECR recommendations from National Grid (ECR2018) in conjunction with 
BEIS commercial insights and BEIS assessment of plant economics. This analysis concludes that the expecte d LOLE 
rang e breach es the 3 hours LOLE reliability standard in all years to 2030 (between 3 and 345 hours LOLE between 
2019/20 and 2029/30).
The reasons behind the gener ation adequacy problems
(97) The UK submits that two main market failures explain the generation adequacy problem descr ibed above .
(98) The first market failure is that reliability is a public good. Customers cannot choose their desired level of reliability , 
since the System Operat or cannot selectively disconnect them, and consumers do not respond to real-time change s 
in the wholesale price. It can theref ore be expecte d that capacity provid ers will not provid e the socially optimal level 
of reliability in the absence of inter vention. This may also lead to high costs to society as a result of having an 
unreliable electr icity supply . These would be exte rnal costs if they are not charg ed to generators .
(99) The second market failure is the ‘missing mone y’ problem. The concept has been identifie d and descr ibed in 
academic literature and affects energy-only marke ts (21). In theor y the inability of consumers to select their desired 
level of reliability could be addressed in an energy-only mark et by allowing prices to rise to a level reflecting the 
average value of lost load, that is the price at which consumers would no longe r be willing to pay for energy and C 109/24 FR Jour nal officiel de l'Union européenne 22.3.2019
(20) http://f es.nationalgr id.com/
(21) Cramt on and Stoft (2006): ‘The Converg ence of Mark et Designs for Adequa te Generating Capacity’; Josk ow (2006): ‘Competitive 
Energy Mark ets and Investment in New Generating Capacity’; Cramt on, Ock enfels and Stof t (2013): ‘Capacity Mark et Fundamentals’
allowi ng generators to receive scarcity rents. However , in practice an energy-only marke t may fail to send the correct 
marke t signals to ensure optimal secur ity of supply and to enable invest ors to obtain project finance for building new 
capacity . This means that energy marke t revenues alone may fail to bring forward sufficient invest ments in capacity 
due to ‘missing money’ . The reasons why this may happen are twof old:
—Inability of prices to reflect scarcity: Current wholesale energy prices do not rise high enough to reflect the value 
of additional capacity at times of scarcity . This is due to the fact that charg es to generators who are out of balance 
in the balancing mechanism (cash-out) do not reflect the full cost of the balancing actions take n by the Syst em 
Operat or (suc h as voltage reduction).
—Lack of certainty that prices will rise, even if they can: At times when the wholesale energy market prices should 
peak to high levels, invest ors are concer ned that the Governm ent/mark et regulato r will act on a perceived abuse 
of mark et power, for example through the introduction of a price cap. They are also concer ned that prices simply 
will not rise — for exam ple, if wind capacity perf orms better than expecte d, reducing the oppor tunities for more 
expensive dispatchable capacity to run.
(100) The UK submits that ‘missing money’ is not a theoretical problem. Hist orically , GB cash-out prices had not exceeded 
GBP 938/MWh. The UK submits that evidence from recent scarcity situations in the GB market also indicates that 
prices have not risen to the levels that would have been expect ed. The Gove rnment and Ofgem commissioned an 
independent study to estimate the value of lost load (VoLL), which has concluded that the avera ge value to 
consumers of preventing disconnections at times of syste m peak is around GBP 17,000/MWh (22).
(101) The UK submits that the market failures are aggrava ted in the shor t and medium term by the very rapid closure plans 
of existing capacity: according to NG’s central scenar io, if CM revenues were not available any more, up to 8GW of 
the in 2018/2019 available coal and gas plants could close in 2019/2020.
Additional measures to ensur e generation adequacy
(102) In addition to the notif ied measure, the UK has under take n and is still under taking a rang e of actions in the GB 
electr icity market that could help address the marke t failures listed above. The three main initiatives from the UK’s 
notif ication are listed below .
(103) The first measure quot ed by the UK aimed at reducing overall electr icity requirements and increasing the 
responsiveness of consumer demand. The UK stated that it was taking steps to reduce overall electr icity 
requirements, for example through the Green Deal and Energy Compan y Obligation. The UK also pursues 
oppor tunities to encourage both lasting reductions in demand, (whic h the Gover nment terms Electr icity Demand 
Reduction or EDR) and shor t term reductions in demand like peak shaving / shifting (whic h the Gove rnment terms 
demand side response or DSR). In particular , the UK is committed to ensur ing that ever y home and small business in 
the countr y is offered a smar t meter by the end of 2020 (23). Smar t meters are an enabler of time-of-use (ToU) tariffs 
which have lower energy prices at off-peak times. The first static ToU tariff in the UK was introduced by Green 
Energy in early 2017, offer ing its smar t meter customers a much cheaper rate of electr icity during weekda y nights. 
How ever , this does not reflect actual wholesale costs which would allow consumers to respond in real time (24). 
What is more, following preceding work and a call for evidence, in July 2017, the UK Gove rnment and Ofgem jointly 
published a Smar t Syste ms & Flexibility Plan (25). This plan outlines the underlying principles of the UK’s approach 
to enable the transition to a smar t and flexible syste m, followe d by 29 actions for the Gover nment, Ofge m and/or 
industr y.
(104) The second measure is the reform of cash-out arrang ements. Imbalance or cash-out prices provid e marke t 
participants with incentives to ensure that the volumes of electr icity they sell or consume match the volumes they 
have contracted to sell or consume. The UK argues that a reform of the way the market operated helps to ensure 
secur ity of supply .22.3.2019 FR Jour nal officiel de l'Union européenne C 109/25
(22) London Economics ‘The Value of Lost Load (VoLL) for Electr icity in Great Britain’ (2013).
(23) The number of domestic electr icity smar t meters operated by the large energy suppliers has been multiplied by 26 between Q2- 
2014 and Q3-2018. The number of electr icity advanced- and smar t-type meters operated by the large energy suppliers, in smaller 
non-domestic sites has increased by 12 % between Q2-2014 and Q3-2018. How ever , in Q3-2018, smar t mete rs and smar t-type 
meters (operating in smar t mode) represented less than 30 % of the total number of domestic electr icity meters operated by the large 
energy suppliers. Source: https://www .gov .uk/governm ent/statistics/statistical-release-and-data-smar t-meters-g reat-br itain-quar ter-3- 
2018
(24) In December 2018, there was only one dynamic ToU tariff, launch ed by Octopus Energy in Febr uary 2018 which provides 
consumers with half-hourly price updates that reflect actual wholesale energy costs.
(25) https://assets.publishing.ser vice.gov .uk/governm ent/uploads/syst em/uploads/attachment_data/file/633442/upgrading-our -energy- 
system-july-2017.pdf
(105) Ofge m launched the Electr icity Balancing Significa nt Code Review (EBSCR) in 2012 (26) to address several long- 
standing concer ns about factor s that have dam pened cash-out prices. Ofge m adop ted and published their final policy 
decision in May 2014 (27). The imp lemented reforms to cash out are as follows:
—Cash-out prices have been made ‘marginal’ by calculating them using the most expensive action the System 
operat or (SO) take s to balance the syste m. This was introduced in steps, the first step was that prices would be 
calculate d using an average of the top 50MWh of SO actions (rather than 500MWh) from November 2015. 
Since November 2018, prices have been calculate d using the top 1MWh.
—A cost for disconnections and voltag e reduction has been included into the cash-out price calculations based on 
the Value of Lost Load (VoLL) to consumers. This cost was introduced in steps starting at GBP 3,000/MWh from 
November 2015 and at GBP 6,000/MWh from November 2018.
—The way reser ve costs are priced has been imp roved by reflecting the value reser ve provides to consumers at 
times of syste m stress. To achieve this, a Reser ve Scarcity Pricing function has been introduced which prices 
reser ve when it is used based on the prevailing scarcity on the syste m (28).
—A move has been introduced to a sing le cash-out price for each settlement period to simplify the arrangements 
and reduce imbalance costs, in particular for smaller parties.
(106) Ofge m has published a review of the first phase of the EBSCR (29). Since the implementation of the first phase, the 
average Imbalance Price (cash out price) has fallen. The majorit y of Imbalance Prices now lie within the rang e of GBP 
20-30/MWh, rather than GBP 30-40/MWh as previously obser ved. The Imbalance Price has, however , become more 
volatile. The maximum price in the two years preceding the reform was GBP 429,10/MWh whereas after the reform 
it was GBP 1 528,72/MWh.
(107) The Gove rnment believes that the Capacity Marke t and cash-out reform have distinct but complement ary roles in 
seeking to ensure secur ity of electr icity supply . It is better to pursue the Capacity Market as well as suppor ting reform 
of the cash-out arrang ements, rather than simply to rely on the cash-out reform for the following reasons:
—While cash-out reform should strengthen energy market investment incentives in the long term, it is expected to 
have a more limit ed imp act on overall levels of invest ment in the shor t and medium term (30). This is because 
generato rs sell almost all their energy in forward marke ts. Howeve r, over time the cash-out reform will lead 
prices in forward marke ts to rise as generators exploit arbitrage oppor tunities between forward markets and the 
price in the balancing mechanis m;
—Cash-out reform cannot address the increased riskiness of investment in ther mal capacity as the power sector 
decarbonises: ther mal capacity will increasing ly run as backu p and will have to reco ver its fixed costs through 
earning high prices on the few occasions where there is scarcity and prices spike;
—In practice, investments may be dependent on a liquid marke t for ‘reliability options’ trading around a real-time 
price — whereby suppliers pay generat ors a fixed price in exchang e for an opti on to buy energy at a strike price. 
This is unlikely to emerg e under Ofgem’s reform of cash-out arrang ements as the market even after the current 
cash out reforms remains a quasi-marke t with cash out determined through comp lex administrative procedures, 
but could develop if a balancing electr icity marke t is introduced that can act as a robust reference market for 
options trading (31).
—It is unclear whether investors will have confi dence that any new arrang ements would be maintained. This is 
because when prices are allowed to peak to high levels, it becomes increasing ly difficult for the regulator to assess 
whether very high prices are efficient market operation or prof iteering. This means that generat ors may be averse 
to offer ing energy at a high price (for fear of invest igation for abuse of mark et), or that they may expect public 
intervention in the future to mitiga te more frequent price spike s.C 109/26 FR Jour nal officiel de l'Union européenne 22.3.2019
(26) https://www .ofgem.go v.uk/publications-and-update s/electr icity-balancing-scr -launch-stat ement
(27) https://www .ofgem.go v.uk/publications-and-update s/electr icity-balancing-significant-code-review-f inal-policy-decision
(28) Using the Loss of Load Probability (LOLP) and the Value of Lost Load (VoLL)
(29) https://www .ofgem.go v.uk/publications-and-update s/review-first-pha se-electr icity-balancing-significant-code-review
(30) Note however that cash out reform will provide signif icantly impro ved shor t term price signals for deliver y, and theref ore improved 
signals for investment in flexible capacity .
(31) Under the current pay-as-bid balancing mechanism arrangements, parties can only earn scarcity rents if they successfully offer 
energy at this price ahead of gate closure (in whic h case they risk not being taken if a stress event does not mater ialise), or if they are 
out of balance (in which case they risk the price being below their shor t run marginal cost if a stress event does not mater ialise). It 
would be necessar y for the balancing mec hanism to become a pay-as-clear market, in whic h all genera tors are paid the reference 
price, for a liquid market in options traded against the balancing market price to develop.
—In the event that cash-out reforms are put in place and work well to address market failures, shar per cash-out 
prices have the pote ntial to reduce the cost of procur ing capacity through the Capacity Marke t, so that the price 
paid for capacity should fall to zero in the auction.
—Although cash out reform could, once complet ed, lead to higher prices during times of scarcity , the inherently 
high level of uncer tainty regard ing scarcity events makes relying on high scarcity rents alone a risky strategy for 
investors in large new build projects. The CM provid es a stable, regular payment for up to 15 years for new build 
projects which reduces risks to investors and encourages investment in new and existing capacity .
(108) The third measure quot ed by the UK is comp leting the inter nal energy marke t and suppor ting greater levels of 
interconnect ion. The UK has imp lemented the Third Energy Packag e into national legislation and submitted that it 
was contr ibuting to the development of netwo rk codes. In particular , the marke t-related EU network codes, which 
harmonise the timeframes in which capacity is allocated and traded, will introduce a standard set of marke t rules 
across Europe and promote the implementation of a competitive pan-European energy mark et. The UK submits that 
these changes have the potential to improve the case for interconnect or investment through more efficient utilisation 
of the assets. The UK also notes that in GB, the level of interco nnection has increased from 4 % in 2014 to 6 % of 
total installed capacity in 2019, notably as the NEMO interco nnector went live on 31st Januar y 2019, and has the 
potent ial to rise to 9 % by 2021 (32).
(109) The UK also submitted that it was actively participating in the EU process for identifying priority cross-border 
projects ever y two years as set out in the ‘TEN-E Regulation’. These priority projects received ‘Projects of Common 
Intere st’ (PCI) status enabling them to benef it from pote ntially faster planning and permitting procedures, pote ntial 
regulator y incentives, and possible access to financial suppor t from the Connecting Europe Facility .
(110) Ofge m’s Integrat ed Transmission Planning and Regulation (ITPR) project concluded in 2015 (33). It established the 
Netw ork Options Assessment process and publishing of annual NOA repor ts. The Syste m Operat or’s analysis 
provid es imp roved information to interconnect or developers, including locations where new interconnection 
capacity can most easily be accommodated. The new role also includes the consideration of specific interconnect or 
proposals and provid e Ofge m with assessments of their impacts.
2.9 Submissions receiv ed in 2014
2.9.1 The submission by a balancing services operator
(111) The Commission received letters from a provider of balancing services to the System Operat or, on 30 May 2014 and 
on 26 June 2014, alleging the Capacity Mechanism would be incom patible with the EEA G. In particular , the operator 
alleg es the exclusion of generators with long-t erm ‘Shor t-term operating reser ve’ (STOR) contracts (see recital (25) 
above) would be discr iminat ory and would under mine investment decisions on generation that preceded the 
introduction of the Capacity Mechanism.
(112) The arguments of the operat or are as follows:
—that, according to EEA G, generation adequacy measures ‘…should be designed in a way so as to make it possible 
for any capacity which can effectively contr ibut e to addressing the generation adequacy problem to participate in 
the measure’, that measures should be ‘…delivered through a mechanism which allows for potent ially different 
lead times, corresponding to the time needed to realise new investments by new generato rs using diffe rent 
technologies’ and that ‘… restr iction on participation can only be justified on the basis of insuff icient technical 
perf ormance required to address the generation adequacy problem’;
—that a STOR holder operator is not in a diffe rent situation to any other plant with a commercial power purc hase 
agreement (‘PPA’) (34)
—that the operator currently receives an inter nal rate of retur n lower than the rate the UK Gove rnment claims is 
necessar y to secure invest ment in new plant, and would not receive windfall profits as a result of participating in 
the Capacity Mech anism; and22.3.2019 FR Jour nal officiel de l'Union européenne C 109/27
(32) These figures assume UK electr icity generating capacity remains constant at 81.3GW .
(33) https://www .ofgem.go v.uk/publications-and-update s/integrat ed-transmission-planning-and-regulation-itpr -project-final-conclusions
(34) Typically , a long-term contract to provide electr icity at an agreed price.
—that, as a consequence and contrar y to the EEA G, the exclusion of generat ors with long-t erm STOR contracts 
would ‘…under mine invest ment decisions on generation which preceded the measure…“.
2.9.2 The submission by an operator owning existing plants
(113) On 25 June 2014 and on 3 July 2014 the Commission received lette rs from an operato r that has acquired existing 
powe r plants. The operat or claimed that the difference in treatment between existing and new plants (restr icting 
existing plants to one year capacity agreements and imposing on them “price taker” status) raised serious concer ns 
regard ing the comp atibility of the Capacity Mech anism proposals.
(114) In particular , the operato r submitted that such diffe rentiation between existing and new plant :
—was without objective basis (for example, it is not based on technical character istics);
—was liable to result in more than the minimum aid required to meet the policy objective of ensur ing secur ity of 
supply , since it risks accelerating the closure of existing plant, increasing the requirement for new plant ;
—was inconsistent with point (226) of the EEA G which states that “[t]he measure should be open to and provide 
adequat e incentives to both existing and future generat ors…“;
—Unne cessar ily restr icted competition (contradict ory to points (80) and (232)(c) of the EEA G) by denying 
consumers the possibility to express preferences as to contract length and by restr icting the bids of all existing 
plants, irrespective of the mark et power of the generator .
(115) The operat or submitted numer ical exam ples relating to both a gener ic plant and a specif ic plant show ing that, under 
certain assump tions, existing Combined Cycle Gas Turbines (CCGT s) could provid e capacity at a lower price than a 
new entrant CCGT for any given contract duration. How ever , existing CCGT s could lose out in an auction agains t 
new entrant CCGT s based on the proposed Capacity Mech anism design. This would be because existing CCGT s 
would not have access to a contract duration longer than 1 year (or 3 years in the case of existing plant requir ing 
significant refurbishment), which would enable them to lower their bids, as a result of the increased revenue 
certainty provided by a longer contract.
2.9.3 The submission by operators in the Demand Response market
(116) On 9 June 2014 the Commission received a submission from a group of aggrega tors of the electr icity consump tion 
of industr ial and commercial custo mers who provid e certain ancillar y services to the System Operat or.
(117) In particular , the operato rs submitted that:
—Offering one year capacity agreements to DSR would mak e the business case for DSR less favourable while 
locking in fossil fuel generation by offer ing 15 year agreements to generation is discr iminat ory and incom patible 
with points (220) and (227) of the EEA G;
—DSR would be discourag ed from participating in the main auctions four years ahead, since DSR provid ers who 
hold a capacity agreement for the endur ing regime would not be permitted to enter the transitional auctions;
—The costs of the Capacity Marke t was targe ted at all wint er peak demand periods rather than the specific hours in 
which it is used, thereby blunting the economic signal to consumers to shift their demand away from peak times 
and discouraging DSR, inconsistent with point (224)(b) of the EEA G;
—The Capacity Market did not recognise the benefits of DSR comp ared to generation in avoiding transmission and 
distr ibution losses; and
—Contrar y to point (233)(d) of the EEA G, the treatment of DSR strengthened the dominance of fossil fuel 
generation.C 109/28 FR Jour nal officiel de l'Union européenne 22.3.2019
2.9.4 Obser vations by the UK author ities to the 2014 third parties” submissions (see sections 2.9.1 to 2.9.3)
(118) The UK does not cont est that the suppor t granted under the scheme constitutes State aid within the meaning of 
Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU). However , the UK submits that the 
Capacity Market is compatible with the internal mark et pursuant to Article 107 (3)(c) TFEU as it leads to an increased 
contr ibution to the EU objective of ensur ing secur ity of energy supply without adversely affecting trade and 
competition in the intern al energy marke t to an extent contrar y to the common interest.
(119) In particular , the UK submits that the Capacity Market meets the common principles applicable to the assessment of 
compatibility under the Guidelines on State aid for environmental protect ion and energy 2014-2020. According to 
the UK, the Capacity Market (i) contr ibut es to an objective of common interest (secur ity of electr icity supply); (ii) 
remedies well-def ined marke t failures; (iii) is an appropr iate instr ument to address the objective; (iv) will have an 
incentive effect on participants; (v) will provid e propor tionate suppor t by limiting aid to the minimum necessar y; 
and (vi) seeks to avoid any major undue effects on competition and trade between EU Member States.
(120) Regarding the submission by the STOR operato r, the UK noted that:
—Commercial PPAs were diffe rent to contracts with the TSO, as these were the contracts that consumers ultimately 
have to fund directly .
—Long-t erm STOR providers tended to mak e use of project finance. The UK’s advice from a range of professionals 
from various types of financ e and inter nally within the UK Gove rnment was that project financ e was not 
available to a project exposed to merch ant risk. The UK also noted that the technologies used by STOR provider s 
(Open Cycle Gas Turbines, diesel) had high shor t-run marginal costs (in the rang e of GBP 70-200/MWh), 
meaning such projects could not expect to run with a load factor higher than 1-2 %. As such, the project financ e 
case was likely to have “banke d” only long-t erm STOR revenues and little or limit ed wholesale market revenues, 
so that long-term STOR revenues should be considered to fully remunerate the investment cost. The UK 
theref ore considered that the imp act of the Capacity Marke t on energy marke t revenues would have no imp act on 
the business case for the project. Taking a combination of annual (i.e. shor t-ter m) STOR payments and capacity 
payments as the counterfac tual, then, due to the higher lega cy price of the existing long-term STOR contracts, 
participation of long-t erm STOR providers in the capacity marke t could lead to overpayment of up to GBP 
[…] (*) million per annum (2018 prices).
—Long-t erm STOR provid ers were not per se excluded from the Capacity Market — effectively , they were given a 
choice as to whether to give up their long-t erm STOR contract (without any fear of penalty from the System 
Operat or) and enter both the Capacity Market and the annual STOR tender process; or to choose to retain their 
long-t erm STOR contract and remain outside of the Capacity Marke t. The UK acknowledg ed that the long-t erm 
STOR contract might be an inherent part of provid ers” financ ing and that, as such, relinquishing the long-t erm 
STOR contract might have required re-financing. However , the UK noted that if long-t erm STOR providers saw a 
commercial case for relinquishing their long-term STOR contract and participating in the capacity mec hanism, 
they might have made the case to their lenders and sought new financing terms. Long-t erm STOR provider s 
would not be required to relinquish their STOR contract unless they were successful in the capacity auction i.e. 
there was no circumstance where they would be left with neither a long-term STOR contract nor capacity 
agreement.
—The same concer ns regard ing over-compensation would not be present in the annual STOR auctions. Since the 
STOR auctions for annual contracts would occur after the Capacity Market auction had take n place, provider s 
would be able to factor in their Capacity Market revenues before bidding in the annual STOR auctions, resulting 
in no overcompensation.
(121) Regarding the submission by the existing operator , the UK noted that:
—Different capacity providers were in almost all ways treate d equally in the Capacity Mech anism, except most 
significantly in terms of the agreement length on offer .
—Based on feedbac k from its Octob er 2013 consultation, 15 years was the minimum agreement length necessar y 
to enable new investment by independent gene rators requir ing project finance. According to the UK, 15 years 
was also the minimum term which would allow an efficient commercial debt structure for a project. Commercial 
debt tenors were typically 7 years post constr uction and a 15 year capacity agreement allowed debt to be 
structured over two such periods with refinancing mid-t erm (at, for exam ple, year 7). Lenders for the initial 7 
year debt term would size the debt as if it were over a 13 or 14 year term since they would be able to assume the 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/29
(*) Confidential information
debt can be refinanced in the middle of the capacity agreement term, due to the certainty of revenues provided by 
the longer capacity agreement. This allowed an optimum period to amor tise costs and debt service payments 
would theref ore be lower, allowi ng lower bids. The participation of independent generation was required to 
ensure effective comp etition in capacity auctions.
—In contrast to new plants, long-term contracts were unnecessar y for existing generation as they did not need to 
secure finance. One year contracts were other wise benef icial since they ensured that annual auctions were liquid 
and reduced the risks to consumers of locking in high prices for capacity .
—As descr ibed in paragraphs (63) to (66) above, the distinction between price mak ers and price take rs was 
intended to reinf orce incentives for participants to bid at their true valuation of capacity and to mitig ate marke t 
power. Existing generation might have obtained “price mak er” status if they provided a justifi cation for doing so. 
The UK submitted that there was nothing to prevent companies from making provision in such a justification for 
a rate of retur n deemed necessar y to continue operating (i.e. a rate above mere coverin g of operating costs). Such 
a justification would not need validation prior to participation in the auction — it could only be requested as 
part of any invest igation by Ofgem into possible marke t manipulation. The UK argued that companies that had 
made honest declarations should not be concer ned by such an investig ation. The UK noted that companies 
would in any case be carrying out their own analysis of the price they might be willing to accep t in an auction, 
and that provid ing a justifi cation for price maker status should entail little additional administrative burden.
—That the assump tions used by the operato r might have over-stated the likelihood of existing plant losing out to 
new plants in auctions, in particular by:
—Assuming the same relationship between the Weighted Average Cost of Capital (WACC) and contract length 
regard less of project type and source of finance, whereas the WACC for new build could be higher than for 
existing plant ; and
—Assuming amor tisation of new plant capital expenditure over the full plant life, rather than within the 
duration of the capacity marke t agreement, the latte r being more likely to apply to new build project-f inanced 
CCGT s.
—In the gener ic exam ple, the capex estimate for retur ning plant from mothball appeared extremely high 
(almost as high as possible without causing the plant to be reclassified as “new”) and was inconsiste nt with 
evidence from the UK on actual mothball plants.
—In the plant-specific example, using an exam ple with a particularly high-cost existing plant which was 
relatively unlikely to be successful in the auction in any case and adop ting a disadvantageous investment 
sche dule which did not enable the plant to access the three-y ear refurbishment contract, which would , 
according to the calculations submitted by the operat or, enable it to win the auction.
—The UK had simulate d in their own model the generi c plant example submitted by the operat or, making the 
follo wing amendments:
—For the existing mothballed plant, assuming required capex equal to GBP 100/kW .
—For the new plant :
—A scenar io using the same assump tions as the operato r.
—A scenar io with revised financing assump tions, namely assuming a debt:equity ratio of 65:35, that 
this debt is amor tised in 14 years (i.e. within the 15 year contract period) and assuming capacity 
payments need to be equal to at least the debt service costs (plus a [4-7 %] margin) of GBP 50/kW/ 
year, since lenders are assumed not to take merch ant risk.
—The UK's simulations show ed that the existing CCGT would be able to bid lower than the new build CCGT .C 109/30 FR Jour nal officiel de l'Union européenne 22.3.2019
—The UK's simulation of an auction show ed that, in most cases, existing plants would be able to bid lower than 
new build, except for a few relatively old and low efficiency plants which appear to be uncompet itive. The 
analysis by the operato r assumed that all existing plants bid for one-year contracts; it did not take into account 
any further benefits existing plant might secure from bidding for three-y ear refurbishment contracts.
—The UK also explained that, with increased interconnection and demand-side response, capacity prices were 
expect ed to decline over time. The UK concluded that granting existing plant access to longer contracts increased 
the risk of over-compensation by locking in capacity at high initial prices and would reduce the UK's ability to 
rever t to an energy-only marke t when conditions allow .
(122) With regards to the DSR submission, the UK noted that:
—15-y ear capacity agreements were only available to new build generation which requires greater certainty given 
high up-front capital invest ment, not required by existing generation and DSR. As noted above in response to the 
new entrant's submission, the UK's view was that shor ter agreements promoted comp etition, while longer 
agreements reduced the costs of procur ing new plant.
—The transitional auctions for DSR (cf. recital (61)) were specifically designed to grow the DSR sector by helping 
new DSR provid ers that were not yet mature enough to compet e against generation in the main auctions. As 
such, safegua rds were needed to ensure funds for the transitional arrangements were being used to develop the 
sector and not to provid e revenue for mature DSR provid ers.
—Cost allocation: The cost reco very methodology reduced uncer tainty for suppliers over their likely share of costs 
and safegua rds the associate d risk premium being passed on to consumers, while retaining the incentive to 
reduce demand since costs were still target ed on the overall period when demand was highest (4pm-7pm on 
wint er weekda ys).
—The Capacity Marke t ensured there was sufficient capacity on the syste m and it was not intended to reward other 
benefits, such as reduced transmission losses.
3ASSESSMENT OF THE MEASURE
3.1 Existence of aid
(123) Article 107(1) TFEU defines State aid as “any aid grant ed by a Member State or through State resources in any form 
whatsoever which distor ts or threat ens to distor t comp etition by favouring certain under takings or the production 
of certain goods […], in so far as it affects trade between Member States”.
3.1.1 Imputability to the state and financing through state resources
(124) As held by the Cour t, State resources encom pass both advantages which are granted directly by the State and those 
grante d by a public or private body designated or established by the State (35). The Commission considers that the 
capacity payment constitutes a resource that is under the control of the State for the reasons laid down in recitals 
(125) and (126).
(125) The Capacity Market was put in place by the UK Secretar y of State for Energy and Climate Change under the powers 
confe rred to him by the Energy Act 2013. Secondar y legislation in the form of Electr icity Capacity Regulations and 
Capacity Market Rules was adop ted by Parliament on 1 Augu st 2014 and has gove rned the implementation of the 
Capacity Market. The State is responsible for issues such as approvi ng the amount of capacity to auction, the pre- 
qualific ation procedures, the cont ents of the capacity agreements, and the obliga tions of the capacity holders.
(126) The UK set up a Settlement body to provide accountability , gove rnance and control of the settlement process and 
payments disbursed. The Settlement body is State-owned and the UK author ities stated that the gover nment will 
retain overall control over it. The measure is financ ed through a surc harge (levy) on all licensed suppliers which is 
collected by the Settlement body . The Settlement body then orders the payments to the capacity provid ers.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/31
(35) Case 76/78 Steinike & Weinlig v Germany [1977] ECR 595, paragraph 21; Case C-379/98 PreussenElektra [2001] ECR I-2099, 
paragraph 58.
3.1.2 Economic advantage confer red on certain under takings or the produ ction of certain goods (selective advantag e)
(127) An advantage, within the meaning of Article 107(1) TFEU, is any economic benef it which an under taking would not 
have obtained under normal mark et conditions, i.e. in the absence of State intervention.
The Commission notes that the successful bidders receive through the mec hanism a remuneration they would not 
receive if they continued to operat e in the electr icity marke t on normal economic conditions selling electr icity and 
ancillar y services only (BETT A — descr ibed in section 2.8 above). The notified measure will thus confe r an economic 
advantage to under takings that are in a comp arable factual and legal situation to other electr icity producers.
(128) Moreove r, the measure confe rs an advantage also to only certain under takings able to help tack le the identifie d 
adequacy problem because capacities smaller than 2MW (see recitals (23) and (24)) and foreign capacities (see recital 
(27)) are excluded from participating directly to the mecha nism.
(129) The Commission theref ore find s that the measure confe rs a selective advantage on its benefi ciaries.
3.1.3 Distor tion of competition and trade within the EU
(130) The measure risks distor ting competition and affecting trade within the internal marke t. Electr icity generation as well 
as electr icity wholesale and retail mark ets are activities open to comp etition throughout the EU. Theref ore it would 
normally be assumed that any advantage from State resources to any under taking in that sector has the potential to 
affect intra-Union trade and to distor t comp etition.
3.1.4 Conclusion on the assessment of existence of aid
(131) In the light of the above assessment, the Commission concludes that the measure constitutes State aid within the 
meaning of Article 107(1) TFEU.
3.2 Lawfulness of aid
(132) Although the Capacity Market was notified by the UK author ities before being put into effect, the 2014 Commission 
decision author ising the scheme was annulled by the General Cour t. In light of the GC judg ement annulling the 
2014 Commission decision, the imp lementation of the aid in question must be rega rded as unlawful (36).
3.3 Compatibility with the inter nal market
(133) As mentioned in recital (132) above, the result of the annulment of the Commission decision is that the aid must be 
deemed unla wful. In accordance with the Commission notice on determi nation of the applicable rules for the 
assessment of unla wful State aid (37), the Commission has assessed the comp atibility of the measure with the internal 
marke t, from 2014 until November 2018 and for the future, on the basis of the conditions established in Section 3.9 
of the Environmental and Energy Aid Guidelines (EEA G) (38), which set specific conditions for aid to generation 
adequacy and have been applicable since 1 July 2014.
(134) The procedure for adop ting a new decision may be resumed at the very point at which the illegality occur red (39).C 109/32 FR Jour nal officiel de l'Union européenne 22.3.2019
(36) See Case C-199/06 CELF , ECLI:EU:C:2008:79, paragraphs 61 and 64
(37) Commission notice on deter mination of the applicable rules for the assessment of unlawful State aid, OJ C 119 of 22.5.2002, p. 22
(38) OJ C 200/1 of 28 June 2014.
(39) Case 34/86 Council v Parliament [1986] ECR 2155, paragraph 47; Case C-415/96 Spain v Commission [1998] ECR I-6993, 
paragraph 31; and Case C-458/98 P Industr ie des poudres sphér iques v Council [2000] ECR I-8147, paragraph 82.
(135) In the light of the General Cour t’s conclusions (cf. recital (4) above) that the Commission should have had doubts as 
to the compatibility with the internal marke t of certain aspects of the notif ied measure, the Commission revised its 
assessment and decided to initiate the formal investig ation procedure. Theref ore, the Commission invites the UK 
author ities and any intere sted parties to provid e all relevant information for verifying the compatibility of the 
capacity mechanism with the inter nal market on the basis of the conditions established in Section 3.9 of the EEA G.
3.3.1 Objective of common inter est and necessity of the aid
(136) In order to be considered necessar y and contr ibuting to an objective of common interest, the measure should meet 
several conditions of Sections 3.9.1 and 3.9.2 EEA G; i) the gene ration adequacy concer ns must be identifie d through 
a quantifiable indicator and the findi ngs must be consiste nt with the analysis carried out by the European Netw ork of 
Transmission System Operat ors for electr icity (ENTSO-E); ii) the measure must pursue a well-defi ned objective; iii) 
the measure must address the nature and causes of the problem and in particular the marke t failure that prevents the 
marke t from deliver ing the required level of capacity ; iv) the Member State must have considered alter native options 
to address the problem to avoid missing the objective of phasing out environmentally harmful subsidies.
Identif ication of the generation adequacy concer n — 2014 to November 2018
(137) In 2014, the UK put in place a methodology to identify the gene ration adequacy concer n based on a model using the 
endur ing reliability adequacy standard as an indicator for generation adequacy . In its 2014 notification, the UK 
demonstrated that the endur ing reliability adequacy standard could reach critical levels four years later, i.e. as of 
2018/2019. Those findings were broadly consist ent with the ones published by ENTSO-E in, at the time, the most 
recent syste m adequacy repor t (40). In 2014, ENTSO-E estimated that in Scenar io A for Great Britain (which saw only 
the generation capacity developments that were considered secure) after 2016 remaining capacity might have been 
insuffic ient to cover an adequacy reference margin in the absence of interconnector imports. The UK submitted that, 
at least in the shor t- to medium-ter m, there was insuff icient evidence to sugg est that interconnect ors would alwa ys 
flow to GB when needed and that coincident stress events in neighbour ing countr ies were possible. The UK cited 
analysis commissioned for Ofgem (41), which showed that interconnect or flows had helped to reduce the number of 
GB low capacity margin hours in a year . However , for the hours of highest GB syste m stress (i.e. where capacity 
margins were below 10 %) interconnection flows had not consistently helped and had sometimes worsened capacity 
margins in GB.
(138) The 2014 NG's Electr icity Capacity Repor t (ECR) (42) was examined by an independent Panel of Technical Exper ts 
(“PTE”) appointed by DECC. On 30 June 2014, the DECC published the PTE's repor t on the analysis under pinning 
NG's recommendations on the amount of capacity to procure for the first auction. PTE concluded that NG's overall 
Scenar io and model-based approac h was in principle sound, and NG had sought to take account of evidence and 
stak eholders” views. However , PTE's consensus view was that NG tended to take an overly conser vative view on a few 
key assump tions, most notably interconnector flows which would have over-estimated the amount of capacity to 
procure. PTE also noted that less conser vative assump tions could have been enough to avoid the need for procur ing 
new gene ration capacity .
(139) The UK author ities explained that they had taken into account both NG's advice and PTE's repor t and had considered 
carefully the differences in their respective analyses. For the first T-4 auction that took place in December 2014, NG's 
modelling took stock of the evidence available: expor ts to Ireland (0.75GW) and 0.75GW (out of 3GW) of impor ts 
from the continental interconnect ors render ing a total of 1.5 GW of cross-border trade — so the net position was 
zero. NG's modelling covered a rang e of scenar ios and, in the UK's view , corresponded more closely to obser ved 
marke t behavi our. Uncer tainties had been taken into account through NG’s Robust Optim isation methodology . NG 
had present ed evidence on histor ical continental interconnector flows on days with high GB demand. This show ed 
that on the majorit y of days with high GB demand there had been net interconnect or impor ts, but this was not 
alwa ys the case and sometimes GB was expor ting at times of high demand. NG had also presented evidence on the 
flow to Ireland which show ed that GB was generally expor ting to Ireland. The UK had explained that, based on the 
evidence present ed, Minist ers had decided to follo w the advice of NG as system operator . The UK viewed NG's 
recommendation as cautious but reasonable because even though the UK expect ed signifi cant improvements in 
interconnect ion capacity in coming years, a cautious approac h was prudent for the first auction. As per the PTE’s 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/33
(40) ENTSO-E (2014), “Scenar io Outlook and Adequacy Forecast 2014-2030”, 2 June 2014
(41) Pöyry Management Consulting (2013) “Analysis of the correlation of stress periods in the electr icity markets in GB and its 
interconnected systems”
(42) See recitals (42) and (43) for a descr iption of NG's genera tion adequacy assessment methodology .
recommendation, the UK underlined that it continued to work with NG to gather further evidence on the likely flows 
as information and exper ience was gained with the operation of the Day-Ahead and future Intra-Da y marke t 
coupling at the time. The UK also indicated that it would monitor developments on future key interconnect or 
projects. In addition, the UK expressed suppor t to PTE’s recommendation to commission further research and 
statistical analysis of the deliverability of UK-Continent interconnect ors during GB stress hours and committed to 
work with NG to assess ways in which the Robust Optimisation methodology could be improved.
(140) In December 2018, the UK submitted that National Grid’s modelling of the behavi our of interconnect or flows and 
the wider European electr icity market more generally had become significantly more sophisticat ed with the use of 
BID3 — a pan-European model used to map likely interco nnector flows across Europe. In 2018 ECR (43), National 
Grid introduced the further imp rovement of use of European scenar ios as input s to their BID3 modelling. In 
addition, from 2015 onw ards, interconnectors have been able to participate in the main auctions (cf. recital (27)) and 
the analysis of their actual flows has determined the de-rating factor s for the individual interconnectors. Each year 
National Grid makes recommendations on interconnector de-rating factors — generally expressed as rang es — 
which the PTE scrutinises in their advice. According to the UK, the Secretar y of State mak es the final decision, 
adjusting National Grid’s recommendations if deemed necessar y to ensure secur ity of supply and value for money for 
consumers. In almost ever y case, the Secretar y of State has determined de-rating factor s which are consiste nt with 
the advice of the PTE.
(141) As for the contr ibution of DSR, the PTE’s 2014 repor t also raised concer ns rega rding the lack of information and 
understanding. The Panel recommended a programme to investig ate this area further so that oppor tunities are 
captu red in the future. In 2014, the UK indicate d that NG estimat ed that DSR could provide around 3 GW of 
capacity in 2018/19. Further more, the UK submitted that holding the first auction (December 2014) would be key to 
revealing information about DSR and DSR potent ial (cf. recital (24)). In response to the PTE's 2014 repor t, the Power 
Responsive programme (44) was launc hed in Januar y 2015 as a stakeholder -led programme (with participation from 
the Energy Netw orks Association), facilitated by National Grid, to stimulate increased participation in the different 
forms of flexible technology such as DSR and storage. It brings together industr y and energy users, to work together 
in a co-ordinat ed way. Its goal is to achieve a DSR share of 30-50 % of balancing capability by 2020. According to 
the UK, preliminar y results indicate this targe t could be met in 2018, two years ahead of schedul e (45). In addition the 
UK developed transitional auction arrangements to suppor t the growth of DSR in 2016 and 2017 (46) and a GBP 
20 million Electr icity Demand Reduction pilot. Finally , the UK explained that it carried out evaluations of data 
coming from the first T-4 auction that took place in 2014 and ensured demand curves were adjuste d appropr iately , 
which fed into NG’s Future Energy Scenar io process for Electr icity Capacity Repor ts ahead of subsequent auctions. 
Finally , National Grid has under take n an additional project to understand the technologies and capacity connected at 
the level of distr ibution netwo rks. National Grid obtained half hourly data from Electralink on output from all 
distr ibution netw ork connect ed sites in mid-2018. This data predominantly covers small scale generation 
technologies connected to the distr ibution netwo rks but also includes data on DSR sites.
(142) Regarding the availability assump tions for power plants, NG commissioned in 2014 further evidence on plant 
availability from an exte rnal consultant and, as a result, adjusted upwards some of the plant availability assump tions 
for the analysis. How ever , NG was reluctant to use availability figures higher than ever seen before in the UK. The UK 
author ities recall that the availability assump tions are reviewed and update d each year and need to be agreed with 
both Ofgem and NG, to ensure consiste ncy across all adequacy work.
(143) The Commission takes note of the UK’s initiatives to address the recommendations from the PTE. The Commission 
considers that some of the issues identifie d by PTE in 2014 were serious; in particular the appreciation of an overly 
conser vative estimate that interconnect ors would render a zero-net contr ibution during stress events. The 
Commission notes that the diffe rence at stak e between the estimations by NG and the PTE was 0.75 GW or 1.5 % of 
the amount of capacity to be contracted in the first auction. The Commission considers that the UK claims that at the 
time there was no robust evidence of how interconnect or flows would operat e under the new model and historical 
evidence sugg ested that flows into GB from the continent would not be as high as the PTE had estimated are 
plausible. In addition, the Commission takes note that the amount of capacity to procure in the T-1 auction was C 109/34 FR Jour nal officiel de l'Union européenne 22.3.2019
(43) https://www .emrdeliver ybody .com/Lists/Latest%20News/A ttachments/189/Electrici ty%20Capacity%20Repor t%202018_Final.pdf
(44) http://pow erresponsive.com/
(45) https://theenergyst.com/national-gr id-hits-dsr -target-tw o-years-early-w orks-to-open-ultimate-balancing-mark et/
(46) See recital (61)
adjusted in 2017, assuming that 2.1GW of interco nnection capacity would be available at peak times outside the 
capacity mechanism (47). In this respect, the Commission further notes that the UK indicated that it would:
—continue to ensure that the capacity to be procured is based on the expecte d availability of conventional 
generation during high demand situations and not on annual or seasonal averag es.
—work with the Commission to develop standards used for generation adequacy assessment to ensure adherence 
to European best practice.
(144) The Commission considers that the measures provided by the UK address the methodological concer ns over the 
contr ibution of interconnect ors during stress events.
Identif ication of the generation adequacy concer n — after November 2018
(145) According to the latest ENTSO-E’s find ings in its Mid-te rm Adequacy Forecast 2018 (MAF 2018) (48), the LOLE level 
(hours/year) for the UK in the base case scenar io is estimated to be 1.29 in 2020 and 1.30 in 2025, well below the 
targe t LOLE of 3 hours set by the UK as descr ibed in recital (90). The MAF 2018 indicate s that “improv ed MAF 2018 
results may also be attributed to existing capacity mechanisms”. As a matt er of fact, the MAF 2018 was published on 
3 Octo ber 2018, i.e. before the GC judgement annulling the 2014 Commission decision. The MAF 2018 calculation 
theref ore took into account the effects of the existence of the capacity mechanism in the UK. Indeed, in Appendix 2 
of the MAF 2018, the UK indicate s that “Grea t Britain has established a Capacity Mark et (CM) to ensure that we have 
sufficient available capacity to meet our Reliability Standar d of 3 hours/ye ar loss of load expectation (LOLE). The results for the 
MAF are in line with these expectations and so we are not anticipating adequacy concer ns in Great Britain.”
(146) The identification of a persistent need for a capacity mec hanism for the future has to be based on counte rfactual 
scenar ios, assuming that no capacity mechanism exists in the UK. As descr ibed in recitals (94) to (96), and in line 
with point 222 of the EEA G, the analyses show that when the CM is excluded from the modelling, the reliability 
standard (LOLE) is likely to be breach ed in ever y year included in the modelling.
(147) In particular , NG’s analysis descr ibed in recital (95) is based on the EMR base case used in NG’s Future Energy 
Scenar ios. The Future Energy Scenar ios are also the basis of the assump tions used in the MAF 2018 for the UK. 
Theref ore, in line with point 221 of the EEA G, the Commission estimat es that NG’s analysis is consistent with the 
analysis carried out by the European Netw ork of Transmission Syste m Operat ors for electr icity (ENTSO-E).
Objective
(148) The measure aims at procur ing the necessar y amount of capacity to meet the reliability standard. The measure 
theref ore has a well-def ined objective. In exchang e for receiving capacity payments, capacity provid ers commit to 
deliver energy at times of syste m stress. The methodology to establish the amount of capacity to tender is informed 
by an annual secur ity of supply assessment by the Syst em Operator .
Mark et failur es
(149) As descr ibed in recitals (97) to (101), the UK has identifie d two market failures that prevent the mark et from 
bringing the necessar y capacity to meet the established generation adequacy standard. The table belo w explains how 
the measure addresses each marke t failure.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/35
(47) In their 2017 ECR, National Grid recommended that the 2.5GW whic h was “set-aside” for the T-1 auction be increased to 6.3GW to 
account for (a) increases in their assessment of peak demand and (b) capacity whic h was contracted at the T-4 stage failing to deliver . 
This increase would have been even higher , but for the fact that National Grid updated their interconnector assump tions — their 
recommendation assumes that 2.1GW of interconnection capacity will deliver outside of the CM at peak. Intern al UK Governm ent 
analysis in light of PTE comments on National Grid’s initial recommendation for this T-1 auction resulted in the Secretar y of State 
deciding to auction 6.0GW of capacity . After pre-qualification was complet e, National Grid recommended a 1.1GW reduction to the 
targ et (for other reasons), resulting in a final T-1 target of 4.9GW : https://www .emrdeliver ybody .com/Lists/Late st%20News/ 
Attachments/162/CM_Updat e_to_Demand_Cur ve_T -1_201819_Dec17.pdf
(48) https://www .entsoe.eu/outlook s/midte rm/
Table 8
How the measur e addr esses the identified market failur es
Market Failure How the Capacity Market addresses the market failure
Reliability 
is a public goodRather than depending on the energy marke t to derive the optimal 
level of capacity (whic h is sensitive to how the value of lost load is 
determined in the market), the UK has set an endur ing reliability 
standard (a loss of load expectation of 3 hours/year). The annual 
capacity auctions procure the level of capacity that delivers that 
standard. The Capacity Marke t also promotes a more active voluntar y 
demand side response — with parties receiving capacity payments for 
reducing energy use at times of scarcity — to reduce the need for 
invol untar y disconnections.
The Commission accep ts that as long as individual real time metering 
is not availa ble (49), that reliability displa ys many of the character istics 
of a public good. How ever , in the future with the roll out of smar t 
technology this will become less important as consumers will be able 
to manag e their consump tion in response to scarcity signals from the 
marke ts.
Missing money The Capacity Marke t addresses the “missing money” problem by 
giving capacity provid ers certainty on a part of their revenues. In 
effect, they exchang e the possibility of part of their scarcity rents for a 
capacity payment. In retur n, they guarantee to provide capacity when 
needed, or face penalties. This mimics the action of a perfectly 
functioning electr icity marke t. However , the Commission reite rates 
that the implementation of a capacity mark et cannot come at the 
expense of well-functioning shor t run marke ts. The Commission 
notes in particular the potential for a robust reference marke t for 
opti ons trading developing under the cash out reform repor ted in 
recitals (103) to (105).
Alter nativ e measure s
(150) The measure may result in suppor t to fossil fuel generation. However as repor ted in recitals (102) to (110), the UK 
has already imp lemented, is consider ing or is imp lementing additional measures to address the identifie d marke t 
failures. These measures aim at imp roving DSR, reforming the cash-out arrang ements and promoting increased 
levels of interconnection. The Commission considers that these alternative measures should theref ore lead to a 
reduction of the amounts of capacity to procure under the Capacity Marke t. In addition, the Commission notes that 
the UK is bringing forward ad-hoc measures to suppor t low-carbon generation (e.g. Contracts for Differences) and 
has passed stringent emission perfo rmance standards to prevent commissioning high carbon intens ive generation. 
The UK repor ts that this has resulte d in a shar p decline in the numbers of new build diesel generat ors winning 
capacity agreements since 2014 (50). As a result, the Commission considers that the UK has explored suffi ciently 
means of mitigating the negati ve imp acts that the measure may have on the objective of phasing out 
envir onmentally harmful subsidies. Further more the Commission notes that the generation adequacy assessment — 
conducted on an annual basis — take s into account the amount of generation, the contr ibution of interconnectors 
while being open to all types of capacity providers, including demand side manag ement operat ors.
Conclusion
(151) In the light of the assessment above, the Commission reaches the preliminar y conclusion that the UK Capacity 
Market contr ibutes to an objective of common interest and is necessar y.C 109/36 FR Jour nal officiel de l'Union européenne 22.3.2019
(49) Cf. recital (103). According to the UK, less than a third of UK consumers currently use smar t meters, and dynamic time-of-use tariffs 
are in very early stages.
(50) According to the UK, more than 500MW of new build diesel won capacity agreements in 2015 (mainly small peaking plant, with 36 
total CMUs identified). This amount dropped to only 5MW (1 CMU) by the 2017 auction. The UK repor ts that the existing diesel 
generation could be expected to see a signif icant decline in the 2019 T-4 auction, as the emissions controls for existing plants come 
into force for existing plants in Januar y 2024 (for plants between 5-50MW).
3.3.2 Appropriaten ess of the aid
(152) The Commission will assess whether the measure is appropr iate based on Section 3.9.3 EEA G. According to EEA G, 
the measure should meet several conditions: i) the choice of the instr ument must be coherent with other measures 
aimed at the same marke t failure; ii) aid must only comp ensate the service of availability of capacity ; iii) the measure 
should be open to all relevant capacity providers, allow sufficient lead times for new investments and iv) take into 
account the extent to which interconnect ed capacity can contr ibute to remedy the generation adequacy concer ns.
Choice of instr ument
(153) The Commission notes that the measure aims to address the identified market failures as shown in Table 8. 
Further more, the measure has been designed to suppor t and complement ongoing developments in the marke t and 
to be consist ent with the internal energy market and EU energy policies: i.e. the development of an active demand 
response, increased competition and investment in interconnected capacity .
—According to the UK author ities, the Capacity Marke t aims to suppor t the development of an active demand side. 
Demand side resources is able to receive capacity payments, and there are specific measures to help build the 
capability of this industr y. The Capacity Market increases liquidity and competition (in both the capacity and 
electr icity marke ts).
—By centrally contracting capacity from capacity provid ers on behalf of electr icity suppliers, the Capacity Marke t 
aims to ensure that small generators, demand side participants and suppliers have a clear route to marke t, and 
receive a fair value for the capacity they provide.
—The Capacity Market aims to avoid restr ictions on cross-border trade, and EU rules rega rding the internal energy 
mark et gove rn the imp ort and expor t of electr icity between neighbour ing markets so that electr icity continues to 
flow from areas with lower prices to areas with higher prices.
—The Capacity Marke t has been designed to be consist ent with the reform of the electr icity cash-out arrang ements. 
This provid es additional stronger incentives for investment in interconnection and is the focus of further work 
across the EU to increase the efficiency of the price signals that determine impor ts and expor ts between 
countr ies. Ensur ing that cash-out prices accurat ely signal scarcity has helped the energy market reward capacity 
providers who are available at times of scarcity . More cost-ref lective imbalance prices have also provid ed strong er 
incentives for demand side response, interconnection and investment in storag e. In particular , cash-out reform 
has increased the likelihood that GB is imp orting electr icity at times of syste m scarcity , theref ore reducing the 
need to build additional national capacity . The UK has estimated that removing the implicit price cap in the GB 
mark et caused by current cash-out arrangements could significantly increase the contr ibution of current 
interconnection to secur ity of supply because GB could rely more on imports at key periods.
Remunerat ion solely for the service of pure availab ility of capacity
(154) Benefi ciaries receive a comp ensation for the units of capacity that they make available (GBP/MW) and not for the 
energy delivered (GBP/MWh), in line with point 225 EEA G. That said, the Commission notes that the Capacity 
Market follows a “delivered energy” model (see Section 2.6 above ), whereby capacity provid ers may face penalties in 
case they fail to actually phys ically deliver energy during system stress events regard less of the signals provided by 
the wholesale market. The Commission considers it is primar ily the role of mark et coupling (both day-ahead and 
intrada y) and balancing markets to ensure the efficient use of the resources available to the system, including across 
interconnect ors. A delivered energy model has the pote ntial to under mine this, since it may lead to capacity 
provid ers dispatch ing even if it was not prof itable based on marke t prices alone, in order to avoid penalties. 
Sufficient conditions for a delivered energy model to have no impact on the effici ent allocation of resources are that 
syste m stress events relate only to a general shor tage of capacity across the system (as opposed to local 
circumstances) and that they apply only when the mark et has reac hed its limits in directing the efficient allocation of 
resources. In that regard, the Commission notes that:
—involuntar y demand disconnections by the System Operat or to resolve locational issues are not classed as system 
stress events;
—the need for the Syste m Operator to initiate voltag e reduction or involuntar y demand reduction (i.e. system stress 
events) by definition occur when available supply is inadequat e to meet demand. In an imp ending shor tage, 
prices rise, motivating owners of supply to deliver energy in response. In this manner , all available supply delivers 
its energy until exhausted by its phys ical capacity or, in the case of imp orts over interconnect ors, reaches the 
maximum impor t limit. Only when all available supply sources are exhausted could an actual shor tage occur , 
requir ing the Syste m operat or to initiate rationing. As such, declar ing a syste m stress event and requir ing 
capacity provid ers to actually deliver energy merely comp lements the incentives in the energy market. In 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/37
addition, as explained in recital (108), in GB, the 2019 level of interconnection is 6 % of total installed capacity as 
the NEMO interconnect or went live on 31st Januar y 2019, and has the pote ntial to rise to 9 % by 2021 (51);
—In certain, mainly excep tional, circumstances the Syst em Operat or may need to take actions that will involve the 
involuntar y reduction of generation or demand before all valid offers of balancing energy have been accep ted, in 
accordance with the Balancing Principles Statement (BPS). The circumstances are set out in the BPS and limited to 
unexpect ed emerge ncy scenar ios How ever , the UK states that the System Operat or would ordinar ily instr uct 
commercially negotiated balancing power prior to instigating involuntar y voltag e reduction.
(155) The Commission notes that as a result, distor tions to dispatch are highly unlikely to occur in practice, given that 
syste m stress events are defined with reference to actions that would usually be take n as a last resor t by the System 
Operat or, once the market has failed to deliver secur ity of supply . Theref ore, the Commission take s the preliminar y 
view that the UK measure remunerate s the service of pure availability of capacity .
Openness of the measur e to all relevant capacity providers
(156) The Commission notes that the measure is open to existing and new generators, to storage operat ors, DSR operat ors 
and interconnected capacity . The auctioning process has been designed to consider diffe rent lead times to mak e 
capacity available. Capacity provid ers can bid for lead-times of one or four years ahead, which should cater for the 
needs of new generation plants and for the refurbishment of existing plants. As mentioned in recital (53) above , in 
2019 the UK would excep tionally organise an additional three-y ear ahead auction to cate r for potent ial risks in 
secur ity of supply in 2022, follo wing the cancellation of the 2018 T-4 auction due to the GC judgement.
(157) How ever , on the basis of the GC judgement, the Commission seek s clarification whether certain aspects of the 
measure provide adequat e incentives to allow DSR to participate effectively in the Capacity Market or whether they 
might disadvantage DSR operato rs in the Capacity Market comp ared to generating CMUs.
(158) First, with regard to the submission by the DSR operato rs received in 2014, the Commission notes the UK's view that 
15-ye ar capacity agreements may be justifi ed for new generation capacity while existing capacity and DSR, in view of 
their lower capital cost requirements (indicating a reduced imp ortance of secur ing financ ing), may not benef it from 
the availability of longe r contracts (see recital (121) above). The Commission also take s note of the UK’s view that 
shor ter contracts would not seem to put existing plants and DSR at a disadvantage to new generation.
(159) In this rega rd, the Commission would like to point to the fact that the secondar y objective of the measure of 
incentivising suffi cient investment in new capacity is aimed at both gene ration capacity and other capacity , such as 
DSR. The Commission agrees with the UK that the capacity contracts longe r than one year help in cases of high 
capital expenditure and difficulties in secur ing financing, thus promoting competitive new entr y into the marke t. The 
Commission also take s note of the UK’s arguments that new DSR operato rs do not necessar ily have the same capital 
expenditure as generato rs building new plants. According to the UK, the DSR secto r has not provid ed information in 
response to previous requests and past studies commissioned by the UK Gover nment into DSR costs demonstrating 
significant capital costs.
(160) That being said, the Commission would like to clarify whether new DSR capacity like new generating capacity might 
have capital expenditure and financing diffic ulties that could justify capacity contracts longer than one year in order 
to allow them to participate fully in the capacity mark et. According to the GC judgement (52), the difference in the 
contracts lengths offered to DSR operat ors and to generato rs may indicate that there are doubts as to the 
compatibility of the measure with the internal marke t. The Commission must theref ore examine whether the 
absence of longe r term capacity contracts for DSR operato rs reduces their chances to contr ibute to solving the UK 
capacity adequacy problem.
(161) Second, the Commission notes that the T-1 auctions are particularly impor tant for DSR operato rs due to those 
operato rs’ lead times. The process used to ‘set aside’ capacity for the T-1 auctions is descr ibed in recital (55). 
Follo wing the GC judg ement (53), the Commission notes that there is no legally binding guarantee that the UK will 
organise a T-1 auction or that it will procure through the T-1 auction at least 50 % of the volume initially reser ved 
for that auction.C 109/38 FR Jour nal officiel de l'Union européenne 22.3.2019
(51) These figures assume UK electr icity generating capacity remains constant at 81.3GW
(52) Cf. case T-793/14, points 184, 192-193.
(53) Cf. case T-793/14, points 242 and 243.
(162) While Regulations 7(4)(b), 10 and 26 of the Electr icity Capacity Regulations 2014, read together , mean that the 
Secretar y of State may decide not to organise T-1 auctions, the text is silent on the guarante e to auction at least 50 % 
of the volume of capacity initially reser ved for those auctions. The Commission notes however that since the 
imp lementation of the Capacity Marke t in 2014, and as descr ibed in recital (56), the target capacity to be secured and 
the amount actually secured at the T-1 auction has alwa ys exceeded the capacity originally ‘set aside’ at the T-4 stage.
(163) Never theless, in the light of the assessment above and based on the GC judg ement, the Commission seeks 
clarification about the legal situation, the practical imp lementation and the incentive effect of the T-1 auctions in 
particular with respect to the DSR CMUs.
(164) Finally , the Commission notes the minimum threshold of 2MW as a requirement for the participation in the Capacity 
Market for both generating and DSR units, as descr ibed in paragraphs (23)-(24) above . The Commission also notes 
the UK arguments that the threshold is low. Further more, as explained in recital (61) above, the UK tested a lower 
participation threshold for the second transitional auction. Since only 8 CMUs below 2 MW qualified, provid ing less 
than 3 % of the overall capacity secured in this auction, the UK indicated that the original rationale for establishing 
the minimum threshold at 2 MW was sound. According to the UK, projects below 2 MW are making a trivial 
contr ibution to secur ity of supply and so policing the comp liance could be dispropor tionately costly , and there 
appears to be limited demand to lower the threshold in practice, presumably given smaller sites can be aggregat ed.
(165) Never theless, in light of the GC judg ement (54), the Commission considers it appropr iate to seek clarification 
whether this minimum threshold might present a barrier to entr y to the capacity marke t for new DSR operators. In 
particular , while it is possible for DSR operat ors to aggregat e several sites in order to reach the 2 MW minimum 
threshold (as descr ibed in paragraphs (23)-(24) above), it should be noted that they are liable to pay a bid bond on 
the whole of the 2 MW , if even only a propor tion of that volume is unpro ven DSR capacity (as detailed in recital (34) 
above). According to the GC judgement (55), the amount of the bid bond might constitute a barrier to entr y for new 
DSR operato rs in particular as all participants in the capacity mark et had to commit to covering open-ended capacity 
events while DSR operators might have more diffic ulty than generat ors in coverin g an ongoing capacity event. Due 
to the higher perceived default risk of DSR operators, they might have more diffic ulties in financing the amount of 
the bid bond.
(166) Consequently , on the basis of the GC judgement, the Commission seeks clarificati on with regard to the technology 
neutrality of the measure and, in particular , whether the measure provides adequat e incentives to allow DSR 
operato rs to participate effectively in the Capacity Market. It is theref ore necessar y to examine in great er detail the 
effectiveness of the participation of all types of capacity providers in the Capacity Market before reac hing a 
conclusion that the measure is compatible with the inter nal market.
(167) The Commission invites views from the UK author ities and interested parties on all issues descr ibed above.
Participation of foreign capacity
(168) In 2014, the UK submitted evidence that at that stage it was not possible to include foreign capacity without 
imp lementing additional cross-border arrang ements. The amount of interconnect ed capacity was however 
considered in the calculation of the amount of capacity to procure. Moreover , the UK enabled interconnected 
capacity to directly participate in the Capacity Marke t as of the second auction in 2015, in particular by allowing 
new interconnect ors to bid and comp ete for Capacity Payments against other capacity providers.
(169) The UK explained that due to the specif icities of interco nnectors capacity and differences between such capacity and 
generators it was necessar y to develop new features in the design to allow new interconnect ors to bid directly , as if 
they were generators. In particular , an adequate duration for the capacity payment needed to be defined, as well as 
the operational rules for monitoring, deliver y and the penalty regime. Ultimat ely, the UK modified the design of the 
measure to enable new interconnectors to directly participate starting from the second auction in 2015.
(170) In December 2018, the UK indicated that it regard ed the interconnector participation as an inter im solution until a 
common EU approach for the direct participation of cross-border capacity is introduced.22.3.2019 FR Jour nal officiel de l'Union européenne C 109/39
(54) Cf. case T-793/14, point 118.
(55) Cf. case T-793/14, point 257.
(171) How ever , the Commission notes that interconnect or operato rs are also by definition transmission system operators, 
and that capacity on interconnect ors is allocated in accordance with internal electr icity marke t legislation, and in 
particular market coupling. The Commission reite rates the imp ortance of not under mining the operation of marke t 
coupling, including intra-da y and balancing markets. Further more, the Commission recalls that the EEA G require 
sche mes to be adjusted in the event that common arrang ements are adop ted to facilitate cross-border participation in 
such schemes (56).
(172) Further more, the Commission notes that other Member States have since 2014 implemented marke t-wide capacity 
mechanisms with the prospect of allowing direct participation of foreign capacity . For exam ple, in Ireland and 
France, two Member States to which the UK is already connected via interconnectors, the marke t-wide capacity 
mechanisms were approve d by the Commission under State aid rules in 2016 and in 2017 with commitments by 
both countr ies to endeav our to implement direct participation of foreign capacity after a three-y ear transition (57). 
Theref ore, as for France and Ireland, while the Commission accepts the UK’s arguments for excluding the direct 
participation of foreign capacity for the past and for using an ‘inter connector led’ model since 2015 instead, it has 
doubts whether cross-border participation in the UK capacity mechanis m should continue to be limit ed to 
interconnect ors in the future.
(173) The Commission invites views from the UK and interest ed parties on this question.
Concer ns raised in the third parties’ submissions
(174) Regarding the submission by the long-term STOR provid er, the Commission does not consider the exclusion of 
long-term STOR provider s as discr iminat ory. The Commission notes that such plants may in fact participate in the 
Capacity Mech anism provided that, if successful in the auction, they relinquish their long-t erm contract with the 
Syste m Operat or. While this may require a renegotiation of financing terms, the Commission considers, based on the 
UK's explanation that no penalties would apply , that this is a feasible option for long-term STOR providers.
(175) Regarding the submission by the existing operat or that the measure would unduly discr iminat e against existing 
generators, the Commission:
—Agrees with the UK that diffe rentiation between new and existing capacities may be justified since, in contrast to 
existing capacities, new capacities are likely to need to secure financing for capital expenditure and since one-year 
capacity agreements have other benef its;
—Finds the UK's analysis that existing capacities (apar t from uncompet itive ones) should generally tend to bid 
lower than new capacities in auctions plausible, and theref ore would expect the vast majo rity of successful bids 
to come from existing, and not new , capacities. Indeed, in the past auctions, this expectation was verified: in all 
four T-4 auctions, existing capacities represented between 66 % and 94 % of the total capacity auctioned, and 
they represented between 53 % and 70 % of the total number of CMU benef iciar ies and
—Note s that the requirement for existing capacities to justify price mak er status is intended to mitiga te marke t 
power, and as such considers that the restr iction on bidding behavi our can be justifi ed with reference to the 
policy objective. The Commission further notes that the requirement to price-maker status entails little additional 
administrative burden in practice and that, even in the event that existing capacities set the clear ing price in an 
auction, existing capacities are not prevent ed from earning a rate of retur n deemed necessar y, since this may be 
included in their justificati on of price-tak er status.
(176) Regarding the submission by DSR provid ers, the Commission notes that the exclusion of DSR providers holding a 
capacity agreement for the endur ing regime from participating in the transitional auctions for DSR is in fact intended 
to promote the development of the DSR sector , as confi rmed by the General Cour t in its judg ement (58). In addition, 
in light of the objective pursued by the scheme, the Commission finds the lack of additional remuneration for the 
savings in transmission and distr ibution losses from DSR justifiable, as confir med by the General Cour t in its 
judg ement (59).C 109/40 FR Jour nal officiel de l'Union européenne 22.3.2019
(56) See footnot e 97 in EEA G. Also note that as descr ibed in SWD 2013 (438) Generation Ade quacy in the inter nal electr icity market — 
guidance on public interventions of 5 November 2013, while it may be necessar y as an inter im measure to allocate the contr ibution 
of interc onnectors towards secur ity of supply to interconnect or operators, the aim should be to facilitat e full cross border 
participation by capacity providers
(57) See Commission decision C(2016) 7086 final from 8.11.2016 (SA.39621 2015/C (ex 2015/NN)) and Commission decision 
C(2017)7789 final from 24.11.2017 (SA. 44464 (2017/N))
(58) Cf. case T-793/14, points 230-235
(59) Cf. case T-793/14, points 260-266
3.3.3 Incentive effect
(177) The Commission will assess whether the measure has an incentive effect as required by Section 3.9.4 of the EEA G 
and by cross-reference, to points (49) to (52) of the EEA G. An incentive effect occurs when the aid induces the 
benefi ciary to change its behavio ur to impro ve the functioning of a secure, affordable and sustainable energy mark et, 
a change in behaviour which it would not under take without the aid.
(178) In its notification of 2014, the UK provid ed generation adequacy estimat es showing that in a counte rfactual scenar io 
without the measure, generation adequacy would have reache d critical levels as of 2018/2019, as shown in recital 
(92) and Figure 4. The UK theref ore argued that without the measure the capacity provid ers would not have made 
available the necessar y capacity to meet the reliability standard set by the UK to deliver energy at times of stress.
(179) The UK maintains its position regarding the future and, as discussed in paragraphs (94) to (96), it argues that the 
generation adequacy problem remains: without the capacity market, the expected LOLE range would breach the 
3 hours LOLE reliability standard in all years to 2030.
(180) As the aid is granted on the basis of a comp etitive bidding process, the measure is also assumed to meet the 
conditions set out in points (50) and (51) of the EEA G.
(181) The Commission theref ore reac hes the preliminar y conclusion that the measure has an incentive effect, as required 
by EEA G.
3.3.4 Propor tionality
(182) According to section 3.9.5 EEA G, a measure is considered propor tional when it meets the follo wing conditions: i) 
the compensation allows beneficiar ies to earn a reasonable rate of retur n. When the measure is designed as a 
competitive bidding process on the basis of clear , transparent and non-discr iminatory criteria, it will be considered as 
leading to reasonable rates of retur n under normal circumstances; ii) The measure should also have built-in 
mechanisms to ensure that windfall profits cannot arise.
(183) First, the UK argues that the measure is a market-wide, technology-neutral capacity mechanism where all eligible 
capacity providers compet e in a sing le capacity auction to discove r the lowest sustainable price at which the 
necessar y capacity can be brought forward. The comp etitive nature of the auction should drive prices to zero if there 
is sufficient supply to meet demand. The UK claims that the process is subject to transparent non-discr iminat ory 
criteria including the eligibility criteria and the duration of the contract agreements. The main reason for ineligibility 
is when capacity provid ers benef it from long-term suppor t measures that would lead to cumulation and eventual 
overcompensation. As for the duration of the contracts, most capacity providers are only eligible to one-year 
capacity agreements. New and refurbished capacity -which involves intens ive invest ment capital costs- are eligible to 
longer capacity agreements to allow these invest ors secure the necessar y financing. Table 9 below presents the T-4 
auction outcomes, by length of the contract agreement.
Table 9
Summar y of Capacity Marke t Auction Outcomes by length of agreement
Auction acquired capacity (GW)
2014 49.3
1 year 43.7
3 year 3.1 (60)
14 year 0.03222.3.2019 FR Jour nal officiel de l'Union européenne C 109/41
(60) Almost all of this capacity (3,082 MW) subsequently rever ted to 1 year agreements.
Auction acquired capacity (GW)
15 year 2.4 (61)
2015 46.4
1 year 45.4
14 year 0.013
15 year 0.970
2016 52.4
1 year 49.78
12 year 0.033
15 year 2.6
2017 50.4
1 year 49.8
3 year 0.01
14 year 0.01
15 year 0.64
2017 T-1 5.80
(184) Further more, the Commission points to the fact that unlike generating units, DSR operato rs cannot bid for capacity 
contracts longer than one year, as discussed in recital (160) above . According to the GC judgement (62), this 
diffe rence in treatment between different capacity providers in terms of the length of the capacity contracts offered 
to DSR operators and generating capacity could be considered a disadvantage of DSR provid ers and reduce their 
potent ial role in the mechanis m. According to the GC judgement, this provision may give rise to doubts on the 
propor tionality of the mechanism because it may influence the total amount of capacity to be auctioned and the 
total amount of aid necessar y for the Capacity Market.
(185) With regard to the second requirement, a marke t-wide capacity market design mirrors the likely outcome produced 
by a perfectly efficient energy mark et. The auction follows a pay-as-clear descending cloc k design where successful 
bidders are paid the clear ing price. Paying the clear ing price is one of the designs specif ically mentioned in the 
definition of ‘com petitive bidding process ’ in point (43) of the EEA G and hence presumed to have built-in features to 
minimise the risks of windfall profits. Further more, the following features are deemed to contr ibut e to minimising 
the risk of windf all profits: an overall price cap of GBP 75/kW , a bidding limit on price-takers of GBP 25/ kW, and a 
shor t-ter m duration of the contract agreement for most catego ries of capacity provider s.
(186) With regard to the existing operator's submission that the lower contract duration for existing generators could 
result in more aid being paid than necessar y by increasing the requirement for new plants, the Commission finds it 
likely that (as noted in recital (175) above ) competitive existing plants are likely to bid lower prices than new plants 
in the majorit y of cases and as such, the number of new plants should be limit ed to the minimum necessar y, in turn 
limiting the aid to the minimum necessar y.C 109/42 FR Jour nal officiel de l'Union européenne 22.3.2019
(61) 1,656 MW of this new build generation capacity subsequently had its agreement terminate d.
(62) Cf. case T-793/14, points 184, 192-193.
(187) According to the GC judg ement (63), the cost recovery method may influence the volume of capacity of the Capacity 
Market. For example, linking the charges to financ e the Capacity Marke t to the consump tion of electr icity during 
demand peaks could be seen as an incentive for the parties concer ned to reduce their consump tion during demand 
peak, leading to a reduced need for capacity to be auctioned. The UK, before the national public consultation on the 
capacity mechanism, initially envisag ed that the amount of the charg es would be calculated on the basis of the 
electr icity suppliers ’ marke t share in the electr icity demand register ed during the so-called ‘triad’ periods, that is to 
say the three half-hour periods regist ering the highest annual electr icity consump tion in the UK during the period 
from November to Febr uary. In this regard and based on points 27 (e) and 69 of the EEA G, the General Cour t 
estimates that the Commission should have doubts as to whether the cost reco very, final ly implemented by the UK, 
based on electr icity consump tion between 16.00 and 19.00 each weekda y in winter is the most appropr iate solution 
to ensure that the amount of aid is propor tional and that DSR operat ors are not disadvantage d. In particular , 
according to the GC judg ement, the Commission should have examined whether such a method might mak e it 
diffic ult for consumers not to contr ibut e to Capacity Marke t costs by reducing their consump tion, that is to say their 
demand, at the relevant time, taking into account the fact that that consump tion is inevitable for businesses and 
families. That might be particularly the case given that small businesses and residential consumers could not avoid 
capacity marke t costs through DSR due to the fact that, in the UK, they would be categor ised according to their 
profil e and not according to the settlement of their consump tion, which is divided up into half-hour periods. When 
assessing this issue, the Commission will also take into account point 25 of the EEA G, stating that the compatibility 
of the measure should be solely assessed on the basis of the criteria laid down in section 3.9.5 of the EEA G, which 
does not entail any reference to the financing of generation adequacy measures.
(188) Consequently , the Commission seeks clarificati on whether the measure at issue is propor tionate and, consequently , 
as to whether it is comp atible with the intern al marke t due to diffe rences in the treatment of DSR operat ors from the 
generating capacity with regard to the length of capacity contracts, which might alleg edly breach the non- 
discr iminat ory criteria, and due to the cost recovery method selected, which might fail to sufficient ly incentivise 
consumers to reduce their consump tion during demand peaks and theref ore does not allow the total amount of aid 
to be limited to the minimum amount necessar y.
3.3.5 Avoidance of negative effects on competition and trade
(189) The measure must meet the follo wing conditions of section 3.9.6 EEA G for it to be considered as not resulting in 
undue distor tion of competition and trade: i) when technically and physica lly possible, be open to all capacity 
provid ers subject to meeting the propor tionality principle; i) not reduce the incentives to invest in interconnectors 
and not under mine marke t coupling; ii) not under mine investment decisions that preceded the introduction of the 
measure; iii) not unduly strengthen market dominance and iv) give pref erence to low-carbon technologies in case of 
equivalent technical and economic parameters.
(190) First, the Commission notes that the measure is meant to be technology neutral and open to all existing and new 
generators, DSR and storage operat ors subject to the eligibility requirements listed in recitals (22) to (25). The UK is 
suppor ting marke t integration in particular through participating in the development of the EU network codes. 
How ever , for the reasons discussed in paragraphs (156)-(166) above , and on the basis of the General Cour t’s 
judg ement, the Commission seek s clarificati on whether with regard to the technology neutrality of the measure.
(191) As explained in recital (27), the UK enabled the participation of interconnect ors as of 2015. However , as explained in 
recital (172), the Commission has doubts whether for the future cross-border participation in the UK capacity 
mechanism should still be limited to interconnectors.
(192) Second, according to the modelling submitt ed by the UK, the introduction of the capacity marke t will over time tend 
to depress electr icity prices in the energy marke t. The fact that existing generators — which took the investment 
decisions based on project ed wholesale energy prices — have access to the Capacity Marke t theref ore imp lies that 
their invest ment decisions are not be under mined on average. Further more, plants that began constr uction between 
May 2012 and the first auction in 2014 were considered as new plants to acknowledg e the intensive capital 
invest ment under take n.
(193) As in any chang e in marke t design, it can be expected that some of the existing plants may be impact ed more 
substantially than others. In particular those plants which have been built more recently but before May 2012, hence 
not in a position to qualify as new under the Capacity Marke t, can be expected to be impact ed more from the 
introduction of the measure. How ever any potent ial negati ve imp act should be limited by the fact that any plant can 
access the Capacity Marke t, and should be offset by the substantial benef its which the measure should bring to the 
electr icity syste m, also in light of the clear price signal which the Capacity Market should provide in relation to 
capacity — a price signal which would not exist without the measure and would need to be gauged indirectly , 
through the price of electr icity .22.3.2019 FR Jour nal officiel de l'Union européenne C 109/43
(63) Cf. paragraphs 194 to 213 of the GC judgement.
(194) Third, the Commission notes that suffi ciently long term duration of capacity contracts for new investments allows 
new entrants secure the necessar y financ ing hence counter ing the risk of mark et dominance. Moreove r, the strong 
price-discover y feature in a pay-as-clear , descending clock design reduces the risk of exer cising market power in the 
auction. However , as already discussed in paragraphs (157)-(160), the Commission notes that long term contracts 
are reser ved for generating units. According to the GC judg ement, the absence of long term contracts for DSR 
operato rs raises doubts as to the potent ial discr iminat ory treatment of DSR capacity over generating capacity . The 
Commission will theref ore further investig ate whether such treatment may unduly distor t comp etition.
(195) Four th, the Commission considers that the measure gives preference to low- carbon generators in case of equivalent 
technical and economic parameter s, consist ent with point 233(e) of the EEA G:
—The measure is open to low-carbon generators. However , to prevent the cumulation of aid and the resulting 
overcompensation, generators must not be recipients of other suppor t measures as descr ibed in recitals (25) and 
(26).
—The competitive bidding nature of the mec hanism leaves participants exposed to carbon prices when selling their 
electr icity on the market. Given equivalent technical character istics, and higher carbon costs will theref ore lower 
expect ed energy marke t revenues and increase the capacity price that high-carbon bidders will ask for in the 
auction (see recital (60) above), reducing their probability of success in an auction (64).
—While the Commission considers that carbon costs associate d with the EU ETS represent economic parameter s 
for the purposes of point 233(e) of the EEA G and are theref ore insufficient to demonstrate that a measure gives 
pref erence to low-carbon generat ors, the Commission notes that the UK introduced a Carbon Price Floor (CPF) in 
2013, fixed at GBP 18/tCO2 for 2018/2019 and 2019/2020, which results in a higher carbon price faced by 
electr icity generato rs than the EU ETS alone. In the Commission's view , theref ore, the interaction of the CPF with 
the auction mec hanism descr ibed above has an equivalent effect to secondar y selection criteria (for example, in a 
tender process using other criteria than price) that would give preference to low-carbon generators in case of 
equivalent technical and economic paramet ers.
(196) With regard to the STOR operator's submission that the exclusion of long-t erm STOR provid ers is not based on 
objective technical criteria, inconsistent with point (232)(a) of the EEA G, the Commission notes that this point is 
without prejudice to point (228) of the EEA G, which states that the ‘…calculation of the overall amount of aid 
should result in benefi ciaries earning a rate of retur n, which can be considered reasonable’. The UK has provid ed 
evidence to show that participation of long-term STOR providers in the Capacity Marke t would result in windf all 
profits, i.e. a rate of retur n in excess of what might be considered reasonable, while exclusion would not under mine 
the original business case. Further , should they be able to persuade their lenders of an additional commercial 
oppor tunity of doing so, these operato rs could participate in the Capacity Marke t and in the annual auctions for 
shor t term STOR contracts, and subsequently (if successful in the Capacity Market auctions) exit their long-t erm 
STOR contracts with no penalty .
(197) With regard to the existing operato r's submission that the imp osition of price taker status on existing plants unduly 
restr icts competition, the Commission notes that the restr iction may be justified to ensure propor tionality and that, 
in any case, existing plant are given the oppor tunity to justify being a price mak er. With regard to the operator's 
argument that limiting existing plants to one-year capacity agreements would restr ict consumer choice, the 
Commission's view is that such a restr iction can be justifi ed by the UK's argument that longe r capacity agreements 
for existing plant would increase the risk of overcom pensation and would decrease liquidity in the auctions.
3.3.6 Compliance with Article 30 and 110 TFEU
(198) As indicated in point 29 of the EEA G, if a State aid measure or the conditions attac hed to it (including its financ ing 
method when it forms an integral part of it) entail a non-severable violation of Union law, the aid cannot be declared 
compatible with the inter nal marke t. In the field of energy , any levy that has the aim of financing a State aid measure 
needs to comp ly in particular with Articles 30 and 110 TFEU. The Commission has theref ore verified if the financ ing 
mechanism of the notif ied aid measures complie s with Articles 30 and 110 TFEU.
(199) As explained in recital (80) above, the payments are financ ed by a levy imposed on electr icity suppliers (the ‘supplier 
obliga tion’). The settlement service provider calculates and collects the payments under the supplier obliga tion. The 
UK explains that the supplier obligation is imposed on all licensed suppliers in relation to their market share based 
on electr icity volumes sold. The Commission considers however that the tax is very similar to a tax on the electr icity 
consumed.C 109/44 FR Jour nal officiel de l'Union européenne 22.3.2019
(64) Alternatively , the UK argues that if two projects, differi ng in their carbon intensit y, submit equal bids, this can only be explained by 
different technical and other economic charact eristics
(200) With regard to Article 30 and 110 TFEU, it is settled case-law that in its present state of development, Union law 
does not restr ict the freedom of each Member State to establish a tax system which differentiat es between certain 
products, even products which are similar within the meaning of the first paragraph of Article 110 TFEU, on the 
basis of objective criteria, such as the nature of the raw materials used or the production processes emp loyed. Such 
diffe rentiation is comp atible with Union law, however , only if it pursues objectives which are themselves compatible 
with the requirements of Union law, and if the detailed rules are such as to avoid any form of discr imination, direct 
or indirect, against imp orts from other Member States or any form of protection of competing domestic 
products (65).
(201) A discr iminat ory treatment against impor ts from other Member States presupposes that similar situations are treated 
diffe rently , so that one needs to determine if impor ts are in a similar situation to the national production. The 
Commission notes that the UK has included interconnect ors since 2015.
(202) In the light of the above , the Commission reac hes the preliminar y conclusion that the financing mecha nism of the 
notif ied aid measures does not introduce any restr ictions that would infringe Article 30 or Article 110 TFEU.
3.3.7 Duration
(203) Subject to the outcome of the formal invest igation procedure, the Commission would author ise the aid scheme for a 
maximum period of 10 years starting from the date of the first imp lementation of the measure in 2014 (following 
the adop tion of the 2014 Commission decision) (66).
4SUMMAR Y CONCL USION
(204) On the basis of the currently available information and the elements descr ibed above, the Commission seeks 
clarification and solicits comments, in particular , concer ning the following elements:
—Appropr iaten ess of the measure: whether the measure is suffi ciently open to all relevant capacity providers, 
especially to DSR providers because of differences in the applicable contract lengths, limited guarantee for the 
volume in the T-1 auction, and the minimum level of participation; whether the participation of interconnected 
capacity should continue to be limited by the use of an interconnect or-led model.
—Propor tionality of the measure: whether the measure is propor tionate due to pote ntially discr iminat ory 
differences in the treatment of DSR operato rs comp ared to generators in the form of contract duration; whether 
the cost recovery method fails to sufficiently incentivise consumers to reduce their consump tion during demand 
peaks and theref ore does not minimise the total amount of aid;
—Avoidance on negative effects on comp etition and trade: whether the measure avoids such effects since long term 
contracts are reser ved for generating units, limiting the openness of the measure, and since the direct 
participation of foreign capacity is currently not permitte d in the UK capacity mechanism.
In the light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) 
of the Treaty on the Functioning of the European Union, requests the United Kingdom to submit its comments and 
to provid e all such information as may help to assess the measure, within one month of the date of receipt of this 
lette r. It requests your author ities to forward a copy of this letter to the potential recipient of the aid immediate ly.
The Commission wishes to remind the United Kingdom that Article 108(3) of the Treaty on the Functioning of the 
European Union has suspensor y effect, and would draw your attention to Article 16 of Council Regulation (EU) 
2015/1589, which provid es that all unla wful aid may be reco vered from the recipient.
The Commission warns the United Kingdom that it will inform interested parties by publishing this lette r and a 
meaningful summar y of it in the Offi cial Jour nal of the European Union. It will also inform interest ed parties in the 
EFTA countr ies which are signat ories to the EEA Agreement, by publication of a notice in the EEA Supplement to the 
Offi cial Jour nal of the European Union and will inform the EFTA Surveillance Author ity by sending a copy of this 
lette r. All such interested parties will be invit ed to submit their comments within one month of the date of such 
publication. 22.3.2019 FR Jour nal officiel de l'Union européenne C 109/45
(65) Case C-213/96 Outokumpu [1998] I-1777, paragraph 30.
(66) The date of implementation is considered to be 16 December 2014 when the first auction under the capacity market took place.