RISK GOVERNANCE IN ELECTRICITY MARKET REFORM

1. Meaning and Purpose

Risk governance in electricity market reform refers to the legal, regulatory and institutional mechanisms used to identify, allocate, monitor and control risks arising when electricity systems move from traditional vertically integrated structures toward competitive, low-carbon and decentralised markets. Electricity reform creates interconnected risks involving security of supply, volatile wholesale prices, inadequate generation investment, network congestion, decarbonisation, market power, technology uncertainty and consumer affordability.

The United Kingdom provides an important example through the Energy Act 2013 and Electricity Market Reform (“EMR”). Its principal mechanisms include Contracts for Difference (CfDs), the Capacity Market, the Emissions Performance Standard and measures relating to electricity demand reduction. Government reporting continues to identify CfDs and the Capacity Market as central mechanisms intended to encourage infrastructure investment while maintaining reliable and lower-carbon electricity supplies at reasonable consumer cost.

2. Allocation of Investment and Price Risk

A central objective of risk governance is determining which risks should remain with generators and which should be transferred, shared or mitigated through regulatory mechanisms.

Under a CfD, an eligible low-carbon generator receives protection against fluctuations in wholesale electricity prices through comparison between a contractual strike price and a market reference price. When the reference price falls below the strike price, support is generally payable to the generator; when it exceeds the strike price, the generator normally pays back the difference. This reduces revenue uncertainty and financing risk while limiting excessive consumer exposure to high market prices.

The Capacity Market addresses a different risk: resource adequacy. Capacity providers are remunerated for committing generation capacity or demand-side response resources that can contribute during periods of system stress.

3. Core Principles of Risk Governance

Effective electricity-market reform requires transparent risk allocation, regulatory predictability, technology neutrality, proportionality, competition, monitoring and accountability. Reform should avoid transferring excessive commercial risk to consumers while also preventing regulatory uncertainty from discouraging long-term investment.

Regulators must additionally manage systemic risks because decisions affecting generation incentives, capacity procurement, network charging or renewable support can alter investment across the entire electricity system.

4. Case Law

Tempus Energy Ltd and Tempus Energy Technology Ltd v Commission (Case T-793/14)

Facts: Tempus challenged the European Commission’s approval of the UK Capacity Market under EU State-aid rules, questioning aspects of the treatment of demand-side response compared with generation.

Legal Issue: Whether the Commission could approve the capacity mechanism without opening a formal investigation into doubts concerning its compatibility with State-aid requirements.

Judgment: In 2018, the General Court annulled the Commission decision, holding that the circumstances should have led to a formal investigation.

Legal Principle/Ratio: Complex electricity-market interventions require sufficiently rigorous regulatory examination where serious doubts concerning competition or aid compatibility exist.

Significance: The case demonstrates that security-of-supply risk cannot justify abandoning procedural scrutiny, competition safeguards or equal consideration of alternative technologies.

Commission v Tempus Energy Ltd (Case C-57/19 P)

Facts: The Commission appealed the General Court's judgment concerning approval of the UK Capacity Market.

Legal Issue: Whether the General Court had applied the correct legal standard for determining when the Commission must initiate a formal State-aid investigation.

Judgment: In 2021, the Court of Justice allowed the Commission's appeal and set aside the General Court judgment.

Legal Principle/Ratio: The existence of a complex or extensive preliminary examination does not automatically establish doubts requiring formal investigation; the applicable evidential standard must be satisfied.

Significance: The judgment illustrates the balance between effective regulatory oversight and allowing public authorities sufficient discretion to design sophisticated electricity-market risk mechanisms.

Current EMR Dispute Governance

The risk-governance framework also contains specialised administrative review. Ofgem determines certain disputes concerning CfD and Capacity Market eligibility after initial Delivery Body review. Its published 2025–2026 determinations show continuing regulatory supervision of whether relevant rules and allocation requirements have been correctly applied.

5. Conclusion

Risk governance is therefore fundamental to electricity market reform. It determines how price, investment, capacity, regulatory, competition and consumer risks are distributed between government, regulators, generators, networks and consumers. A legally robust reform framework combines investment incentives with transparent procedures, judicial review, competitive neutrality and continuing regulatory supervision. The Tempus litigation particularly demonstrates that electricity-market reform is not merely economic redesign: it is a system of public-law accountability governing how society allocates the risks associated with reliability, affordability and decarbonisation.