Legal challenge to Government’s £2.5bn subsidy scheme for fossil fuel industry

Legal challenge to Government’s £2.5bn subsidy scheme for fossil fuel industry
The Government may be forced to suspend a £2.5bn annual subsidy scheme designed to keep the lights on as cheaply and as greenly as possible following a legal challenge in the European Court of Justice, which claims it amounts to an “unlawful subsidy” for the fossil fuel industry.


Energy minister Matthew Hancock was warned that the government's scheme risked increasing greenhouse gas emissions (Getty Images/Ben A.Pruchnie)

The legal challenge follows a warning to energy minister Matthew Hancock by the Government’s official climate change adviser that the consumer-funded subsidy scheme contained “design faults” that risked increasing greenhouse gas emissions and pushing up the UK’s collective household bill by as much as £359m in the first year alone.
With Britain set to generate increasing amounts of electricity from intermittent renewable sources such as wind, the new subsidy scheme aims to prevent blackouts by paying fossil fuel stations to be on standby in case energy supplies falter.
The scheme, which is known as the “capacity market” and due to launch in 2018, also aims to maintain electricity supplies by paying companies and households to reduce their energy use at peak times.
But it violates state aid rules because it gives fossil fuel generators much better terms than households and companies, whose contribution to keeping the lights on is actually much more environmentally friendly because it involves reducing energy use, according to the lawsuit, filed by Tempus Energy, a new electricity supplier.


“It’s the equivalent of the US government in 1876 turning a blind eye to the first transatlantic telephone call and instead diverting its investment into improving the postal service,” said Tempus Energy UK chief executive Sara Bell.
While power stations will be able to sign contracts guaranteeing them an income for 15 years, the greener alternatives to keeping the lights on – known as “demand side” – are eligible only for one-year contracts.
This means that the fossil fuel power stations can make huge investments safe in the knowledge that they have 15 years of guaranteed income. Meanwhile, those companies and households considering installing expensive equipment to enable them to reduce their energy use will think twice because they have only one year of guaranteed income, said Ms Bell.
As a result of the bias, fossil fuel companies will account for more than 99 per cent of the bidders when the Government puts the first round of subsidy contracts up for auction later this month – with the “demand side” comprising less than 1 per cent.
The bias towards fossil fuel plants will also have the knock-on effect of increasing the UK’s carbon emissions and discouraging investment in key new energy-saving technologies, such as battery storage, claims Ms Bell.
Ms Bell says she is confident that the European Court will rule Britain’s state aid to be illegal because it priorities fossil fuels. Such a ruling will result in an 18-month EU Commission inquiry, during which the scheme would be suspended and which could, ultimately force the UK government to completely rewrite the terms.
ClientEarth, the environmental law firm, said: “In its current form, the UK capacity mechanism breaches EU state aid rules. On this basis we think Tempus has a very good case. There is a strong possibility it will be overturned. If that happens, generators who accept payments made through the auction run the risk of having them recovered.”
A spokesman for the Department for Energy and Climate Change said: “We are fully confident in this auction. The European Commission has concluded that the capacity market is within the European state aid rules. This challenge will have no impact on the running of the capacity auction in December.”
Tempus Energy’s case argues that the original ruling did not properly consider the discrepancy between the fossil fuel and demand side contracts but says it will now be forced to by its appeal.
This is only the latest in a series of complaints made about the Government’s capacity market. In September, Tim Yeo, the MP who chairs the Government’s independent Energy and Climate Change Committee, wrote to Mr Hancock expressing concerns that the scheme “could encourage the construction of expensive new power stations which are not actually required. The result of this will be to lock-in unnecessary high-carbon generation capacity instead of innovative demand-side solutions, leading to higher bills for electricity consumers”.
In October, the boss of British Gas’s parent company criticised the Government for allowing “old, dirty coal stations” to participate alongside cleaner gas stations.