Energy generators to get £1bn windfall as power subsidy set to restart

British electricity generators can expect a £1 billion windfall after a European Commission decision that could restart a controversial subsidy scheme which was accused of favouring fossil fuels.

The programme was designed to prevent blackouts but, in a case funded by Greenpeace, a European court last year blocked payments to generators which had been in place since 2014.

The commission had been ordered by the EU General Court to reassess if the so-called capacity market broke state aid rules.

On Thursday it completed the investigation and allowed the programme to continue after the UK committed to changes.

The scheme is designed to ensure new generation kicks in when demand for electricity outstrips supply.

It provides a steady payment to businesses that can switch on generators at short notice when demand peaks. They are usually turned off at other times, so need to be supported, officials argue.

The Government sees the contracts as an important tool to ensure Britain’s energy supply is secure as wind and solar become a bigger part of the energy mix. Renewable generation is prone to fluctuate when, for example, wind speeds change.

However, critics say the payments extend the lifespans of old, dirty gas turbines which would not be financially viable without the subsidy.

The decision from the EC will release around £1 billion in deferred payments which have been building for the last year. Listed player Drax said it was expecting £75 million.

The Government is still waiting for the commission’s full decision, but expects to start paying out in January.

Lawrence Slade, head of trade body Energy UK, said the suspension had “threatened serious consequences”.

“The (capacity market) can now continue to do the job it has done successfully for a number of years, ensuring security of supply at the lowest cost to customers in times of high demand,” he said.

But critics said the scheme unfairly benefits fossil fuel generation by making it difficult for others to bid for contracts.

Tempus Energy, which challenged the scheme in European court, tackles peak demand by lowering consumption. It uses artificial intelligence to switch off household or industrial appliances, such as freezers, for short times when demand peaks and electricity prices rise.

In a statement on Thursday, Tempus boss Sara Bell accused the commission of having “caved to industry pressure”. The company will study the judgment to determine what to do, she added.

Jonathan Marshall at the Energy and Climate Change Intelligence Unit said there are still “serious questions” about whether Britain should have a capacity market.

“There remains little evidence that it is needed to keep British lights on, there are major doubts if it is the right tool to deliver low-carbon electricity during the 2020s, and it continues to shut out innovative and disruptive technologies that are vital in the transition to a smarter, cleaner and cheaper electricity system,” he said.

The Government will consult on how to improve the scheme to help new types of capacity, Business Secretary Andrea Leadsom said.

She added that the commission had found that demand-side responses, like Tempus, are not disadvantaged by the scheme.