New Precedent on Residual Discretion and Feasibility in Capacity Auctions

Introduction

This commentary examines the recent judgment in the twin actions, Kilshane Energy Ltd v EirGrid PLC & Others and Coolpowra Flex Gen Ltd & Others v EirGrid PLC & Others (recorded as [2024/…]), delivered by Mr. Justice Micheál O'Higgins in the context of capacity auction disputes. The proceedings involve challenges to qualification decisions made by the System Operators (“SOs”) and their subsequent approval by the Regulatory Authorities (“RAs”). Central to both proceedings are the issues regarding the scope of discretionary powers under the Capacity Market Code (CMC), the correct interpretation of “feasibility” and the exercise (or failure to exercise) of residual discretion, and whether fair procedures were observed throughout the multi-staged decision‑making process.

Background and Key Issues

The disputes arise from applications submitted by parties seeking qualification for participation in a Capacity Auction, a competitive process to secure capacity payments from the national grid. The main issues raised include:

The interpretation of the feasibility test under section E.7.2.1(f) of the CMC.
The requirement for a two‑step analysis in rejecting an application – a mandatory determination on technical feasibility followed by a residual discretionary assessment.
Whether the System Operators and the subsequent review bodies (the CMDRB and the SEM‑C) engaged in a proper, independent, and thorough reassessment of applications before final rejection.
If the decision‑making process was procedurally fair, including the timely and adequate exchange of evidence (such as detailed works schedules and updated project timelines), and whether the failure to consider such evidence undermined the overall fairness of the process.
The appropriate role of the final review stage (“curative effect” of the CRU review) in remedying earlier procedural and legal errors.

Summary of the Judgment

The court ultimately quashed the final decision of the second respondent (the CRU) in both cases and remitted the matters back to the SEM‑C for further reconsideration.

Key findings include:

The respondents, including EirGrid and the CRU, erroneously believed that once an application was found “not feasible” under the CMC’s provisions, they were automatically required to reject it. The court clarified that the Code envisages a two‑step process: the initial technical feasibility finding is only a preliminary stage that must be followed by a residual discretionary exercise regarding whether—despite non‑feasibility—the applicant should nonetheless be admitted.
The Court acknowledged that the misapplication of the feasibility test, especially as it had been interpreted by the CMDRB in the related Prime Power case (“more likely than not” standard), imposed an unduly high and inappropriate burden on the applicants.
Furthermore, the court found that there were significant procedural shortcomings, including inadequate engagement with detailed submissions (e.g., works schedules and master project timelines) by the System Operators at crucial stages of the process. This non‑engagement appeared to leave applicants at a disadvantage, undermining the fairness of the decision‑making process.
While the final review stage by the CRU was intended to have a “curative effect” by rectifying any earlier defects, the evidence showed that the CRU review was limited to a “plainly wrong” standard of review, which the Court found inadequate to remedy the foundational errors in applying the two‑step discretion process.
In balancing the competing interests – including the practical constraints on the timing of the Capacity Auction and the fundamental rights of the applicants – the Court directed that further reconsideration be undertaken by the SEM‑C under a broader mandate that examines applications on their merits, consistent with the proper interpretation of the CMC.

Analysis

Precedents and Interpretation of the CMC

The judgment places significant reliance on the earlier Northern Ireland decision in Prime Power and the associated reasoning of Scoffield J. The court adopted the following central legal principles from the precedent:

Residual Discretion: The CMC does not require the SOs to automatically reject an application once the non‑feasibility condition is met. Instead, after establishing that the delivery is not feasible in a technical or temporal sense, the decision‑maker must still exercise residual discretion to decide whether the applicant might, nevertheless, be qualified.
Test for “Feasibility”: Scoffield J. in the Northern Ireland context explained that “feasible” should be understood as “reasonably practicable” or “reasonably achievable.” The Court criticized the CMDRB for effectively imposing a “more likely than not” threshold, which is a far higher standard, thereby mischaracterising the intended modest burden on applicants.
Fettering of Discretion: Reliance on legal precedents such as Sherwin v. Minister for the Environment and In Re Duff, the judgment underscores that a public decision‑maker’s failure to consider alternative or mitigating circumstances (i.e., failing to exercise residual discretion) constitutes a failure to properly exercise discretion – an error of law that is sufficient to vitiate the decision.

Legal Reasoning and the Two‑Step Process

The Court’s analysis centers on the critical distinction embedded in the CMC between mandatory rejection grounds (section E.7.5.1) and discretionary grounds (section E.7.2.1). The following points illustrate the Court’s reasoning:

Two‑Step Test Requirement: The legal framework mandates an initial feasibility assessment followed by a separate exercise of residual discretion. The failure to perform this secondary discretion step means that decision‑makers effectively “fettered” their discretion by treating the initial feasibility finding as automatically dispositive.
Misapplication of the Feasibility Test: The CMDRB’s adoption of a “more likely than not” standard deviated from the textual and contextual reading of the CMC. This misapplication unfairly raised the bar for applicants, making it more difficult for them to demonstrate that their project was “reasonably practicable” within the required timeframe.
Implications for Fair Procedures: Not only was there a misapplication of legal standards but also procedural deficiencies were identified. For instance, the failure to timely respond or engage with key submissions (such as the H&MV Engineering schedule) meant that applicants were not given a fair opportunity to counter adverse findings. This contributed to the overall procedural injustice that the Court sought to remedy.

Impact on Future Cases

The decision is likely to have far‑reaching consequences in the field of capacity market regulation and administrative decision‑making within the energy sector:

Clarification of Discretionary Powers: Public bodies involved in capacity auctions will now be required to observe the two‑step process—first making a technical feasibility determination and subsequently assessing, through a residual discretion, whether an application may yet be admitted. This clarification removes the ambiguity regarding mandatory versus discretionary rejections.
Lowering the Burden on Applicants: By reaffirming that the test for “feasibility” must be understood in its ordinary, “reasonably practicable” meaning rather than a stringent “probability” test, the judgment may increase the number of projects that qualify for auction participation.
Enhanced Procedural Fairness: Decision‑makers will need to improve the transparency of their processes by providing detailed written reasons, engaging substantively with all submissions, and ensuring that pertinent documents are considered at every stage, including the final review.
Potential Remittal Reforms: The decision emphasizes that the final review stage must be empowered to “cure” earlier procedural defects by undertaking a broader merits‑based evaluation. Future disputes may see remittals directed to a review stage (e.g., SEM‑C) that is specifically instructed to disregard the flawed “plainly wrong” standard.

Complex Concepts Simplified

Residual Discretion: This is a power given to decision‑makers to make an independent assessment after an initial, often formulaic, determination. In this case, even if a project appears technically unfeasible, the decision‑maker must ask, “Is it still reasonable to admit the project passage into the auction?”

Fettering of Discretion: When a public authority acts as if it does not have a choice—that is, automatically rejecting an application because of one preliminary finding—this is known as fettering discretion. The judgment makes clear that such a rigid approach is unlawful.

The “Feasibility” Test: The issue turned on whether “feasible” should be measured by a strict likelihood (i.e., more likely than not) or by a more moderate standard (i.e., reasonably practicable). The Court sided with the latter interpretation because it better reflects the balance between technical possibility and regulatory judgment.

Conclusion

In conclusion, the judgment delivers an important precedent that refines the legal framework governing capacity auctions. The Court emphasized that once an initial determination of non‑feasibility is made, decision‑makers are still required to exercise a residual discretion to consider all available evidence before excluding an applicant. This two‑step process not only ensures that administrative decisions are made fairly and transparently, but also protects applicants from rigid procedural errors that could have significant repercussions on the security of supply and market competition in the energy sector.

The decision also serves as a reminder that judicial review in administrative law is primarily supervisory. Courts should not substitute their expertise for that of specialist decision‑makers but must ensure that fundamental procedural and legal requirements are met. The remittal of the applications to the SEM‑C for a fresh, merits‑based review reinforces the role of the judiciary in safeguarding fairness without overstepping into technical evaluations. This precedent is expected to influence future challenges to regulatory decisions in the energy market and beyond, ensuring that decisions are not only substantively sound but also procedurally just.

Signed: Micheál O'Higgins