Ofgem has rejected a proposal to introduce an interim charge on suppliers to cover the costs of the capacity market during its ongoing suspension.

The regulator says it is unable to approve the modification to the balancing and settlement code (BSC) because it does not have the legal power to levy the charge.

The modification, named P378, was submitted to the BSC panel in December.

The month before the capacity market was brought to standstill by an EU court ruling that rendered the scheme illegal under state aid rules. As a result of the judgement, all auctions and payments were halted indefinitely.

The Department for Business, Energy and Industrial Strategy (BEIS) nevertheless instructed capacity providers to continue meeting their obligations while it seeks reapproval for the scheme from the European Commission.

P378 would have allowed the BSC code administrator Elexon to temporarily collect capacity market charges from suppliers during the freeze.

The money would be held in a newly created fund until there is more clarity over the fate of scheme. If the capacity market was reinstated before the end of September 2020, the fund would be transferred to the Electricity Settlement Company and used to make deferred payments to capacity providers. If not, the money would be returned to suppliers.

The company which proposed the modification, VPI Immingham, said the stopgap measure would prevent suppliers, and by extension their customers, from facing a large one-off bill if the capacity market is reapproved.

According to its submission, customers may otherwise be driven into debt or fuel poverty, while suppliers may go bust, with the risk of a “domino effect” due the numerous various mutualisation mechanisms in place within the energy industry.

VPI Immingham said putting the money to one side would also “shore up” the confidence of capacity providers’ investors: “This may help companies convince financiers and shareholders to go on supporting their businesses for longer than is likely to be the case when they can see no planning for repayment.”

The proposal was rejected by Ofgem despite being unanimously approved by the BSC panel at a meeting in February.

Explaining its decision, the regulator said: “Ofgem does not consider that it has the power to approve a modification, that is designed to compel suppliers to pay (a proxy for) the capacity market supplier charge in light of the fact that parliament has established a specific and bespoke statutory regime for regulating the capacity market.”

“This regime includes technical provisions, which set out how the supplier charge is to be calculated and collected, and it is through this regime that suppliers should be required to pay the supplier charge,” it added.

“The approval of the modification to provide for the collection of supplier charges under the BSC, on reliance of our general statutory powers… would not in our view be lawful.”

BEIS announced its intention in January to resume collecting capacity market charges from suppliers, either under the existing arrangements or those proposed by VPI Immingham. The department said suppliers would be “sensible” to bill their customers accordingly.

The following month Ofgem confirmed the new level of the price cap on default tariffs and said it would continue to include a “full allowance” for capacity market costs.

What to read next