Investing in EU Energy Security: On the Market Based Pat To Adequ (Energy and Environmental Law & Policy Series, 11) 9041131183, 9789041131188

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Energy and Environmental Law & Policy Series

Investing in EU Energy Security

Exploring the Regulatory Approach to Tomorrow’s Electricity Production

By Henrik Bjørnebye

Investing in EU Energy Security

Energy and Environmental Law & Policy Series Supranational and Comparative Aspects VOLUME 11 Editor Kurt Deketelaere Professor of Law, University of Leuven, Belgium, Honorary Chief of Staff, Flemish Government Honorary Professor of Law, University of Dundee, UK Secretary – General, League of European Research Universities (LERU), Belgium Editorial Board Professor Philip Andrews-Speed, University of Dundee Professor Michael Faure, University of Maastricht Professor Gunther Ha¨ndl, Tulane University, New Orleans Professor Andres Nollkaemper, University of Amsterdam Professor Oran Young, University of California The aim of the Editor and the Editorial Board of this series is to publish works of excellent quality that focus on the study of energy and environmental law and policy. Through this series the Editor and Editorial Board hope: – to contribute to the improvement of the quality of energy/environmental law and policy in general and environmental quality and energy efficiency in particular; – to increase the access to environmental and energy information for students, academics, non-governmental organizations, government institutions, and business; – to facilitate cooperation between academic and non-academic communities in the field of energy and environmental law and policy throughout the world.

Investing in EU Energy Security Exploring the Regulatory Approach to Tomorrow’s Electricity Production

Henrik Bjørnebye

Law & Business AUSTIN

BOSTON

CHICAGO

NEW YORK

THE NETHERLANDS

Published by: Kluwer Law International PO Box 316 2400 AH Alphen aan den Rijn The Netherlands Website: www.kluwerlaw.com Sold and distributed in North, Central and South America by: Aspen Publishers, Inc. 7201 McKinney Circle Frederick, MD 21704 United States of America Email: [email protected] Sold and distributed in all other countries by: Turpin Distribution Services Ltd. Stratton Business Park Pegasus Drive, Biggleswade Bedfordshire SG18 8TQ United Kingdom Email: [email protected]

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Printed in Great Britain.

Summary of Contents

Preface

xix

Abbreviations

xxi

Part I Introduction

1

Chapter 1 On the Market-Based Path to Optimal Investments

3

Part II Background: Investment Challenges and Regulatory Objectives

19

Chapter 2 Introduction

21

Chapter 3 The Internal Electricity Market at a Glance

23

Chapter 4 The Challenges of Energy Import Dependency and Climate Change

29

Chapter 5 The Market Challenges Involved in Attracting Adequate Investments

41

Summary of Contents Chapter 6 Defining the Regulatory Objectives

53

Part III The Treaty Context

59

Chapter 7 Introduction

61

Chapter 8 The Relationship between Security of Supply Objectives and the Fundamental Objectives of the TFEU

65

Chapter 9 Justification for Measures Restricting the Free Movement of Electricity

75

Chapter 10 Security of Supply Obligations in the General Economic Interest

115

Chapter 11 Establishment of the Internal Electricity Market

129

Chapter 12 Concluding Remarks

159

Part IV Market Facilitation of Investments

163

Chapter 13 Introduction

165

Chapter 14 Defining Roles and Responsibilities in Electricity Generation Investment Decisions

169

Chapter 15 The Authorization Procedure for the Construction of New Electricity Generating Capacity

197

Chapter 16 The Facilitation of a Stable Investment Climate

223

Chapter 17 Concluding Remarks

241

vi

Summary of Contents Part V Public Intervention

245

Chapter 18 Introduction

247

Chapter 19 Electricity Generation Tenders in the Security of Supply Interest

251

Chapter 20 Tenders in the Environmental Interest

291

Chapter 21 Electricity Generation Investments as a Service of General Economic Interest

299

Chapter 22 Exemptions from the Electricity Directive in the General Economic Interest

317

Chapter 23 Concluding Remarks

335

Part VI State Aid to Electricity Generation Investments

339

Chapter 24 Introduction

341

Chapter 25 Overview of the TFEU State Aid Regime

343

Chapter 26 The Boundaries of Article 107(1) TFEU

347

Chapter 27 State Aid Declared Compatible with the Internal Market under Article 107(3) TFEU

369

Chapter 28 The Application of the TFEU to Investments in Coal and Nuclear Power

375

vii

Summary of Contents Part VII Conclusion

387

Chapter 29 Towards Sustainable Energy Security Investments

389

Bibliography

401

Table of Cases (In Chronological Order)

413

Table of Community Legislation

425

Community Documents (In Chronological Order)

433

Other Documents

441

Index

445

viii

Table of Contents

Preface

xix

Abbreviations

xxi

Part I Introduction

1

Chapter 1 On the Market-Based Path to Optimal Investments 1.1. Topic 1.2. Exploring the Regulatory Approach to the Twin Dimensions of Electricity Production 1.3. The Primary Research Object: Internal Electricity Market Legislation 1.4. The Relationship to the Provisions of the TFEU 1.5. Methodological Questions 1.6. Context and Scope 1.7. Reading Guide

7 9 9 11 15

Part II Background: Investment Challenges and Regulatory Objectives

19

Chapter 2 Introduction

21

Chapter 3 The Internal Electricity Market at a Glance

23

3 3 5

Table of Contents Chapter 4 The Challenges of Energy Import Dependency and Climate Change 4.1. The 1973–1974 Oil Crisis: The Geopolitical Challenges Revealed 4.2. The Re-emergence of Import Dependency Concerns 4.3. The Growing Acknowledgement of the Climate Challenge 4.4. EU Policy Priorities: On the Path to Sustainable Energy Security Chapter 5 The Market Challenges Involved in Attracting Adequate Investments 5.1. Electricity Market Liberalization: From Central Planning to Competition 5.2. Ensuring Optimal Investments in a Competitive Electricity Market 5.2.1. The Problem: Defining the Role of Regulation 5.2.2. The Particular Attributes of Electricity Markets 5.3. The Complexity of Investment Regulation

29 29 32 33 36

41 41 43 43 46 50

Chapter 6 Defining the Regulatory Objectives

53

Part III The Treaty Context

59

Chapter 7 Introduction

61

Chapter 8 The Relationship between Security of Supply Objectives and the Fundamental Objectives of the TFEU 8.1. Introduction 8.2. Security of Supply and Competitiveness 8.3. Security of Supply and Environmental Protection 8.4. Security of Supply, Integration and Member State Solidarity 8.5. Conclusions

65 65 67 68 71 73

Chapter 9 Justification for Measures Restricting the Free Movement of Electricity 9.1. Introduction 9.2. The Starting Point: Campus Oil 9.3. Relationship with Existing EU Measures

75 75 78 80

x

Table of Contents 9.4.

9.5. 9.6. 9.7. 9.8.

Security of Supply as a Ground for Exemption on the Basis of Public Security 9.4.1. The Campus Oil Approach: Defining the Relationship between Security of Petroleum Supplies and Public Security 9.4.2. Subsequent Case Law: Extending the Scope of the Concept of Public Security to New Energy Products – and New Situations? An Alternative Approach: Security of Supply as a Public Health Interest Proportionality and Review Intensity The Relationship to Justifications in the Environmental Interest Legal Implications of the Choice of Ground for Justifying Exemption: A Comparison of Environmental and Security of Supply Interests

Chapter 10 Security of Supply Obligations in the General Economic Interest 10.1. Introduction 10.2. An Introduction to Article 106(2) TFEU 10.3. Security of Supply and Environmental Tasks as Services of General Economic Interest 10.4. The Application of Article 106(2) TFEU as an Exemption Ground for Free Movement Restrictions Chapter 11 Establishment of the Internal Electricity Market 11.1. Introduction 11.2. The EU’s Competence to Adopt Electricity Market Measures 11.2.1. The Principle of Conferral of Powers and the Different Legal Bases 11.2.2. Article 114 TFEU: Establishment of an Internal Electricity Market 11.2.2.1. The Boundaries of Article 114(1) TFEU 11.2.2.2. Article 114(1) TFEU as Legal Basis for the Adoption of Security of Electricity Supply Measures 11.2.2.3. Subsidiarity and Proportionality 11.2.3. Article 192 TFEU: Environmental Measures 11.2.4. The New Energy Provision in Article 194 TFEU: Plugging a Hole in the Dam? 11.3. EU Internal Electricity Market Measures 11.3.1. The First Steps towards Establishing an Internal Electricity Market 11.3.2. The Electricity Directive

83 83 87 93 96 103 110 115 115 116 120 126 129 129 130 130 132 132 135 137 138 142 146 146 149 xi

Table of Contents 11.3.3. The Relationship to the Electricity Regulation 11.3.4. The Security of Electricity Supply Directive 11.4. Environmental Measures: The Promotion of Renewable Energy Sources and Cogeneration

154 155 156

Chapter 12 Concluding Remarks

159

Part IV Market Facilitation of Investments

163

Chapter 13 Introduction

165

Chapter 14 Defining Roles and Responsibilities in Electricity Generation Investment Decisions 14.1. Introduction 14.2. The Role of the State: The Independent Regulator and Its Relationship to Other Regulatory Authorities 14.2.1. The Principal Functions of the Member State in Generation Capacity Investment Decisions 14.2.2. The Independence of the National Regulatory Authority 14.2.3. The Objectives and Tasks of the Regulatory Authority 14.2.4. Is There a Need for Politically Independent Regulatory Authorities? 14.3. The Role of Producers and Suppliers 14.4. The Role of TSOs 14.4.1. Introduction 14.4.2. The Security of Supply Obligations of TSOs 14.3.3. The Environmental Obligations of the TSOs 14.4.4. The TSOs Responsibility for Balancing and Ensuring an Appropriate Level of Reserve Generation Capacity 14.4.4.1. Balancing Services 14.4.4.2. Reserve Capacity Margins 14.5. The Obligation to Define Roles and Responsibilities in the Security of Electricity Supply Directive 14.6. Concluding Remarks Chapter 15 The Authorization Procedure for the Construction of New Electricity Generating Capacity 15.1. Introduction 15.2. Facilitation of and Barriers to Market Access xii

169 169 171 171 173 175 177 178 180 180 181 183 186 186 187 191 193

197 197 199

Table of Contents

15.3. 15.4.

15.5. 15.6.

15.2.1. The Economic Rationale for the Promotion of Market Access 15.2.2. The Approach under EU Law 15.2.3. Discourse: Is an Open Market Rationale Realistic in the Electricity Sector? The Procedure under Article 7 of the Directive The Principle of Non-discrimination and the Choice of Primary Energy Sources 15.4.1. Introduction 15.4.2. A Brief Introduction to the Substance of the Non-discrimination Requirement 15.4.3. The Choice of Primary Energy Sources in Electricity Generation 15.4.3.1. The Situation 15.4.3.2. The VEMW Decision 15.4.3.3. The Comparability of Authorization Procedures at Different Points in Time Facilitation of Renewable Energy Sources and Cogeneration in the Environmental Interest Conclusions

Chapter 16 The Facilitation of a Stable Investment Climate 16.1. Introduction 16.2. The Concept of a Stable Investment Climate: Promotion of Investor Certainty 16.3. The Establishment of Liquid Wholesale Markets 16.3.1. Overview 16.3.2. Electricity Wholesale Markets: Physical and Financial Trade 16.3.3. The Requirements Imposed on Member States 16.4. Transparent and Stable Regulatory Framework 16.5. Is the Stable Investment Climate Obligation Suitable for the Promotion of Internal Electricity Market Functioning?

199 200 202 204 208 208 209 211 211 213 215 219 220 223 223 224 227 227 228 232 234 238

Chapter 17 Concluding Remarks

241

Part V Public Intervention

245

Chapter 18 Introduction

247

xiii

Table of Contents Chapter 19 Electricity Generation Tenders in the Security of Supply Interest 19.1. Introduction 19.2. The Internal Market Effects of Launching Tendering Procedures 19.3. The Concept of Security of Supply in Article 8 of the Electricity Directive 19.3.1. Uninterrupted Electricity Supplies to Customers 19.3.2. Supply Interruptions and Electricity Prices 19.4. Market-Based Measures Not Sufficient to Ensure Security of Supply 19.4.1. Introduction 19.4.2. Public Intervention to Reduce the Impact of Interruptions in Primary Fuel Supplies 19.4.2.1. Overview 19.4.2.2. The Necessity of a Diversified Energy Mix 19.4.2.3. The Necessity of Launching a Tendering Procedure 19.4.3. Public Intervention to Avoid Risks of Inadequate Electricity Generation Capacity 19.4.4. Public Intervention to Ensure Sufficient Reserve Capacity Margins 19.4.4.1. Introduction 19.4.4.2. The Distinction between ‘Normal’ Capacity and Reserve Capacity 19.4.4.3. The Relationship to Equivalent Procedures 19.4.4.4. The TSOs as Reserve Electricity Producers? 19.5. The Relationship to Electricity Imports and Interconnector Investments 19.5.1. Export Restrictions and the Reliance on Electricity Imports 19.5.2. The Relationship with Interconnector Investments 19.6. Appraisal and Concluding Remarks Chapter 20 Tenders in the Environmental Interest 20.1. Introduction 20.2. Article 8(2) of the Electricity Directive: Tenders in the Environmental Interest 20.3. The Lack of Sustainable Investment Requirements in Internal Electricity Market Legislation

xiv

251 251 254 256 256 260 261 261 262 262 263 268 268 271 271 272 276 279 281 281 285 286 291 291 292 296

Table of Contents Chapter 21 Electricity Generation Investments as a Service of General Economic Interest 21.1. Introduction 21.2. Restrictions on the Member States’ Rights to Impose Public Service Obligations 21.3. The Concept of Public Service Obligations in the General Economic Interest 21.3.1. Introduction 21.3.2. Public Service Obligations and Services of General Economic Interest: One or Two Concepts? 21.3.3. Defining the General Economic Interest: Security of Electricity Supply – At Reasonable Prices? 21.3.4. Defining the Public Service Obligation: Investments in New Electricity Generation Capacity 21.3.5. A brief Look at the Non-discrimination Principle as a Basis for the Imposition of Public Service Obligations 21.4. Conclusions Chapter 22 Exemptions from the Electricity Directive in the General Economic Interest 22.1. Introduction 22.2. The Relationship between the Exemption Grounds in Article 3(14) of the Electricity Directive and Those in Article 106(2) TFEU 22.3. The Principle of Proportionality Inherent in Article 3(14) 22.3.1. The Problem: Are Exemptions from the Directive Necessary to Pursue Public Service Means or Public Service Ends? 22.3.2. The Commission’s Approach – Irish CADA 22.3.3. The Necessity of Exemptions from the Directive for the Performance of Security of Supply Obligations 22.3.4. The Criterion Concerning the Development of Trade and the Interests of the Union 22.3.4.1. The Criterion as a Separate Proportionality Requirement 22.3.4.2. Development of Trade 22.3.4.3. Interests of the Union 22.4. The Relationship between Public Service Obligation Procedures and Tendering Procedures 22.5. Conclusions

299 299 300 303 303 303 305 309 313 314

317 317 319 321 321 323 325 326 326 327 329 331 332

xv

Table of Contents Chapter 23 Concluding Remarks

335

Part VI State Aid to Electricity Generation Investments

339

Chapter 24 Introduction

341

Chapter 25 Overview of the TFEU State Aid Regime 25.1. A Brief Introduction to the TFEU State Aid Regime 25.2. The Relationship between the State Aid Provisions of the Treaty and the Internal Electricity Market Legislation Chapter 26 The Boundaries of Article 107(1) TFEU 26.1. Introduction 26.2. Aid Granted by a Member State or through State Resources in Any Form Whatsoever 26.2.1. The Concept of Aid 26.2.2. Granted by a Member State or through State Resources 26.2.2.1. Introduction 26.2.2.2. Investment Subsidies Induced by State Conduct 26.2.2.3. Advantages Granted by TSOs: State Resources and Imputability 26.2.3. Concluding Remarks: The Relationship of State Aid to the Requirements of the Electricity Directive 26.3. Compensation for the Performance of Public Service Obligations 26.3.1. Overview of the Altmark Criteria 26.3.2. The Relationship between the Altmark Criteria and the Requirements in the Electricity Directive 26.3.3. The Relationship with Article 106(2) TFEU 26.3.4. Four Legal Bases: A Single Legal test? Chapter 27 State Aid Declared Compatible with the Internal Market under Article 107(3) TFEU

xvi

343 343 345 347 347 350 350 351 351 352 356 361 362 362 364 366 368

369

Table of Contents Chapter 28 The Application of the TFEU to Investments in Coal and Nuclear Power 28.1. Introduction 28.2. TFEU State Aid Provisions Applied to Coal Power Investments 28.3. The Relationship between the Provisions of the TFEU and the Euratom Treaty 28.3.1. Background 28.3.2. The Applicability of EU State Aid Provisions to Investments in Nuclear Power 28.3.3. The Relationship between the Euratom Treaty and Internal Electricity Market Legislation Part VII Conclusion Chapter 29 Towards Sustainable Energy Security Investments 29.1. The Fundamentals 29.2. Market Facilitation: The Wrong Approach to the Right Ideas 29.3. Market Intervention: Defining the Indefinable to Avoid the Inevitable 29.4. Off the Beaten Path: Towards Sustainable Energy Security

375 375 376 378 378 380 385 387 389 389 391 394 397

Bibliography

401

Table of Cases (In Chronological Order)

413

Table of Community Legislation

425

Community Documents (In Chronological Order)

433

Other Documents

441

Index

445

xvii

Preface

This book is based on the doctoral thesis written during my research fellowship at the Scandinavian Institute of Maritime Law, University of Oslo, from 2004 to 2008. The thesis was evaluated by Professor Emeritus Erling Selvig, Professor PeterChristian Mu¨ller-Graff and Professor Leigh Hancher. I am very grateful for their careful and thorough adjudication, their learned advice and an informative and enjoyable thesis defence. The period since the commencement of my research fellowship has been characterised by an ever-increasing focus on energy law and policy at EU level that has resulted in the adoption of an enormous quantity of legislative texts. I am truly grateful for the valuable assistance of all my highly competent colleagues at the University’s Department of Petroleum and Energy Law and Centre for European Law in my attempts to handle this material. I found much inspiration and encouragement during the writing process in the working environment at the University, which combined a friendly atmosphere with professional expertise. When writing a doctoral thesis, one may suffer periodically from the delusion that the work produced is entirely the result of one’s own efforts. Needless to say, this is very far from true. A number of colleagues and contacts, both within and outside the University, have made significant contributions to the project and all deserve heartfelt thanks. My supervisors, Professors Hans Petter Graver and Ulf Hammer, deserve particular thanks for their inspiring and always encouraging advice and support, as well as for their careful reading of countless draft texts throughout my term as a research fellow. I also benefited greatly from discussions with Professor Ola Mestad and his many insightful comments and ideas, particularly during the later stages of the project. Chief librarian Inger M. Hamre’s never-ending helpfulness and extraordinary ability to obtain in next to no time any legal text, no matter how

Preface obscure, was a crucial factor in the conclusion of the thesis project. Research assistants Ellen Karina Sødal and Karen Mellingen provided great help with their thorough checking of sources and quotes, while copy editor Caroline Glicksman worked wonders with her vetting of all my broken English. I have also benefited greatly from contacts with researchers at other universities throughout Europe and owe much to the efforts in building and expanding the Energy Law Research Forum of editor Michae¨l Hunt, research fellow Bram Delvaux and Dr. Kim Talus. Kim Talus and Bram Delvaux both also reviewed draft versions of the thesis and I am forever grateful for their comments and all our interesting discussions. My employer both before and after my research fellowship, Norwegian law firm Arntzen de Besche, and my colleagues there, deserve special thanks for their interest in and contributions to the project, in particular by providing me with the necessary flexibility and time to finalise the book manuscript. My warmest thanks, however, go to my dear wife Kjersti and our wonderful children, Maria and Jesper, for their love and support, as well as the immense inspiration that their presence always provides. They have patiently lived with this book project for most of our time together as a family and I dedicate this book to them. Henrik Bjørnebye Jeløya, July 2010

xx

Abbreviations

AJIL CHP CMLR CRNI EC ECLR ECR EEC EEELR EELR ELR EStAL EU GHG JEL JENRL JONI LIEI NYR OGEL

American Journal of International Law Combined heat and power Common Market Law Review Competition and Regulation in Network Industries (previously Journal of Network Industries) European Community European Competition Law Review European Court Reports European Economic Community European Energy and Environmental Law Review (previously European Environmental Law Review [EELR]) European Environmental Law Review (now European Energy and Environmental Law Review (EEELR) European Law Review European State Aid Law Quarterly European Union Greenhouse Gas Journal of Environmental Law Journal of Energy & Natural Resources Law Journal of Network Industries (now Competition and Regulation in Network Industries) Legal Issues of Economic Integration Not yet reported in European Court Reports Oil, Gas & Energy Law Intelligence

Abbreviations SIMPLY TfR TEU TFEU YEEL

xxii

Scandinavian Institute of Maritime Law Yearbook Tidsskrift for Rettsvitenskap Treaty on European Union Treaty on the Functioning of the European Union Yearbook of European Environmental Law

Part I

Introduction

Chapter 1

On the Market-Based Path to Optimal Investments

1.1.

TOPIC

The European Union’s legal framework for investments in electricity production builds on a simple idea: competitive electricity markets provide the necessary signals for investment, thereby ensuring security of supply in the most costefficient manner.1 But is codification of this market-based approach the best way to tackle the enormous investment challenges faced by the EU over the coming decades? Will internal electricity market legislation contribute to ensure that sufficient investments are made to meet demand in the longer term? And will it help ensure the making of the right investments: those whose technologies and primary energy sources will help mitigate climate change and reduce European energy import dependency? The overall objective of this book is to analyse to what extent EU regulation of electricity generation investments addresses today’s security of supply challenges, which require a wider balancing of security, competitiveness and sustainability interests. A substantial part of this legislation has as its aim to promote marketbased investments; either by requiring Member States to facilitate the functioning of the competitive electricity market or by restricting their rights to have recourse to instruments of market intervention. A central research objective is to establish whether this approach provides a suitable basis for the regulation of the competitive market to ensure optimal investments. The idea of introducing market-based investments was conceived during the 1980s, a period characterized by electricity generation overcapacity, inexpensive 1. Commission Communication: Inquiry pursuant to Art. 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report), COM (2006) 851 final, 10.1.2007, 4.

Chapter 1 primary energy fuels and underdeveloped concerns about global climate change. This era has certainly come to an end.2 This book advances the hypothesis that the supranational codification of the original reform ideas fails to address the investment challenges facing the EU today. If this hypothesis is correct, the question inevitably arises whether the focus of internal electricity market legislation needs to be reconsidered. Ensuring new investments, and the right investments, in electricity generation is now one of Europe’s most pressing energy policy challenges. This is a major reason for the choice in this study to focus on the particular security of supply challenges concerning electricity production. Projected electricity generation investment needs in EU-27 in the period 2005–2030 total almost EUR 900 billion, equivalent to approximately EUR 1800 per inhabitant or almost eight times the budgeted total expenditure of the Union in 2007.3 Shutdowns of ageing facilities, in particular nuclear and coal power plants, are coming at a time when demand is still increasing.4 The EU’s indigenous gas resources are declining while reliance on gas in electricity generation is increasing, raising import dependency concerns at a time when many Member States are fully dependent on a single third-country supplier for all their gas needs.5 The means to overcome fossil fuel import dependency concerns are closely related to the means to mitigate climate change, and this has resulted in ambitious EU investment goals: the current aim of having renewable energies account for 20% of overall EU energy consumption by 2020 entails massive investments in electricity generation from renewable energy sources.6 As stated by Helm, it is a fortunate coincidence that the present point of the investment cycle offers a unique opportunity to invest in non-carbon sources.7 2. D. Helm, ‘European Energy Policy: Meeting the Security of Supply and Climate Change Challenges’, European Investment Bank Papers 12 (2007): 9–13. 3. Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 17–19. The budget for total expenditure for the EU, that is the European Community and the European Atomic Energy Community, for the financial year 2007 was set at EUR 115.5 billion, see Final adoption of the general budget of the European Union for the financial year 2007 (2007/143/EC, Euratom), OJ L77/I/1, 16.3.2007. 4. From 2000 to 2005, electricity consumption in the EU increased on average by 1.8% per annum. The forecasted need for new electricity generation investments in the EU in the period 2005– 2020, based on two different scenarios, is estimated at 360–415 GW and expected to cost around EUR 370–445 billion. Approximately half of this capacity is necessary to replace existing ageing capacities and the other half is necessary to meet increased future demand, see further Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 38–43. 5. Commission Communication: Second Strategic Energy Review. An EU energy security and solidarity action plan, 13.11.2008, 3–4. 6. Council of the European Union, Presidency Conclusions from the Brussels European Council 8/9 Mar. 2007, 2.5.2007, 20–21 and Commission Communication: 20 20 by 2020 – Europe’s climate change opportunity, COM (2008) 30 final, 23.1.2008, in particular at 7–8. See also Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 48–52. 7. D. Helm, European Energy Policy: Securing Supplies and Meeting the Challenge of Climate Change (2005), 3. and D. Helm, ‘European Energy Policy: Meeting the Security of Supply and Climate Change Challenges’, European Investment Bank Papers 12 (2007): 12.

4

On the Market-Based Path to Optimal Investments The hypothesis that codification of the ideas originally underlying the reform of the electricity market fails to address today’s investment challenges will be investigated through a legal analysis based on three recurrent research themes. These themes examine investments in the security of supply interest and their relationship to competitiveness and environmental sustainability interests from different perspectives, and will be explored on the basis of both primary and secondary EU law throughout the book. The first research theme concerns an analysis of what the legal concept of security of supply entails in relation to investments in electricity generation capacity. Clarification of this multi-faceted concept is important in order to understand the rationale of provisions adopted in the security of supply interest and in order to define under what circumstances a Member State is permitted to intervene in the market to ensure security of supply. Defining the term as a legal concept is therefore also an important intermediate aim of this study. The second research theme concerns the requirements imposed by EU law on Member States for ensuring cost-efficient investments in European supply security. This subject is approached through an analysis of the rationale behind the EU’s regulation of electricity generation investments and of how those measures influence and restrict the policies of Member States. The third research theme concerns the relationship between investments in the security of supply interest and investments in the interest of environmental protection under EU law. This relationship is approached by analysing how the EU’s regulation of investments in the security of supply interest relates to the corresponding regulation of investments in the interest of environmental protection. 1.2.

EXPLORING THE REGULATORY APPROACH TO THE TWIN DIMENSIONS OF ELECTRICITY PRODUCTION

There are two dimensions to electricity production: capacity and energy. Each dimension raises specific challenges for investment regulation due to the particular attributes of electricity markets. The relationship between them can in general terms be described through the metaphor of a car engine. Just as the performance of a combustion engine relies on both installed horsepower (capacity) and the provision of sufficient amounts of petrol (energy), the performance of an electricity production facility relies on both the installed generation capacity (measured in watts)8 and a 8. The production capacity of electricity generators is usually measured in megawatts (MW, equal to 1 million watts). The total electricity capacity installed in EU-27 in 2005 amounted to 753,941 MW (or approximately 753.9 gigawatts (GW)), see Eurostat, European Electricity Market Indicators of the Liberalisation Process 2005–2006 (Statistics in focus, Environment and energy, 88/2007), 4. The electricity actually generated by this production capacity over any given period is measured in megawatt hours (MWh, that is, the product of effect and time) or gigawatt hours (GWh). In 2005, total EU-27 gross electricity generation at plant level (i.e., the amount of electricity output from main transformers) was 3,310,000 GWh, see Eurostat yearbook 2008, Europe in Figures, 444.

5

Chapter 1 supply of sufficient primary energy sources to be converted into electricity through the generation process. In other words, adequate generation capacity and supplies of primary energy are both necessary to produce and supply sufficient amounts of electricity to meet demand.9 With respect to capacity, there is no consensus in academic literature on whether competitive electricity markets can be expected continuously to deliver adequate investments in generation capacity.10 There are essentially two schools of thought on this issue. Some argue that neo-classical economic theory also applies to electricity generation, with the result that an unregulated electricity spot market can lead to a socially optimal level of investment.11 Others maintain that so-called energy-only markets, that is, markets in which the price for electric energy is the only source of revenue for recovering investments in generation capacity, are unlikely to produce sufficient investments if left unregulated, given the particular physical, technical and economic attributes of electricity markets.12 These attributes will be described in more detail below.13 As regards energy, electricity can be generated using a variety of different technologies and primary energy sources. This means that different power plants have different cost structures and this, in turn, affects price setting in electricity markets.14 More fundamentally, however, choices regarding technology and primary energy sources affect both the overall level of greenhouse gas emissions from electricity production and the EU’s dependency on primary energy sources. Power plants have long construction lead times and life spans. Today’s investment decisions determine the technologies and primary energy sources that will dominate electricity production in Europe during the coming decades. Consequently, in addition to securing sufficient investments in generation capacity, it is also of vital importance to ensure that investments are made in the right type of capacity.

9. Several authors uses the term adequacy solely to describe the existence of sufficient generation capacity, thus excluding the issue of security of fuel input, see for example International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 157. This author applies a wider definition of adequacy as a term describing the ability of the system to meet the aggregate power and energy requirements of all consumers at all times (i.e., also in situations where there is a primary energy source curtailment), see along these lines S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 388. 10. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 57. 11. For an overview of some of the proponents of this view, see ibid., 63 and 66–67. See also International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 160, where this view is advocated. 12. See L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 13 on the definition of an energy-only market and 57–105 for a thorough discussion of the ability of energy-only markets to deliver optimal capacity investments. 13. Chapter 5 below. 14. DG Competition Report on Energy Sector Inquiry, SEC (2006) 1724, 10.1.2007, 113.

6

On the Market-Based Path to Optimal Investments This book discusses electricity production investment as it affects the twin dimensions of capacity and energy. These two dimensions raise different regulatory challenges for EU law. EU regulation of generation capacity adequacy will inevitably involve decision-making within a field in which there is presently no consensus on how to regulate or, indeed, whether to regulate at all. On the other hand, compliance with a Union policy preference for the application of certain energy sources, such as non-fossil fuels, will obviously require regulation. Views on which sources to prioritize, to what extent and by what means may, however, differ, and EU regulation is to some extent restrained by the broad political agreement that EU law shall respect the Member States’ choice of energy mix.15 Nevertheless, what the challenges relating to both dimensions of electricity production have in common is firstly that they need to be solved within the context of a competitive internal electricity market and secondly that they are subject to many of the same internal electricity market provisions. These latter provisions are the primary research objects of this study. 1.3.

THE PRIMARY RESEARCH OBJECT: INTERNAL ELECTRICITY MARKET LEGISLATION

The Union regulation of the EU’s internal electricity market and the relationship between these secondary law measures and the primary provisions of the Treaty on the Functioning of the European Union (TFEU)16 constitute the research objects of this book. The internal electricity market can in general terms be described as an electricity market without internal frontiers: a market in which free movement is ensured in accordance with the provisions of TFEU.17 Competition and market opening are central vehicles for the promotion of trade and integration within a sector of the economy which traditionally has been subject to monopoly regulation and where there has only been modest cross-border activity.18 The introduction of competition in those parts of the electricity sector where competition is possible, in

15. See, inter alia, Presidency Conclusions 24 Mar. 2006 from the European Council meeting on 23 and 24 Mar. 2006 on establishing an energy policy for Europe (7775/06), 16 and Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, 9. 16. The Treaty on the Functioning of the European Union amended the EC Treaty with effect from 1 Dec. 2009. A consolidated of the TFEU is published in OJ C115/47, 9.5.2008. For the sake of simplicity, all Treaty provisions are in the following referred to with their present TFEU numbering even if the discussion concerns decisions, case law, and so forth, adopted on the basis of the former EC Treaty. 17. Article 26(2) TFEU. 18. Electricity markets where competition has been introduced for generation and supply activities are often generally referred to as ‘liberalized markets’ or ‘competitive markets’. Although both of these terms can be criticized for being imprecise, they are frequently applied in practice and will, for the sake of convenience, also be applied in the following.

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Chapter 1 practice generation and supply activities, is therefore a key factor for realizing the concept of the internal market. The introduction of competition in electricity generation and supply also has its basis in an aim to promote cost efficiency and, ultimately, EU competitiveness.19 This rationale for the market reform is important for the understanding of the regulatory regime for electricity generation investments. The concept of a competitive electricity market is founded upon theories which advance that electricity spot markets not only contribute to short-term economic efficiency, but also to a socially optimal level of investments in the longer term.20 These theories suggest that investment decisions should be left to the market participants to be made on the basis of price signals in functioning electricity markets in order to promote cost efficiency. The internal electricity market measures of specific relevance to the capacityand energy-related challenges that need to be met through generation investments are mainly to be found in the new Electricity Directive and in the Security of Electricity Supply Directive.21 The overall objective of the Electricity Directive is to improve the operation of the internal electricity market.22 In order to achieve this aim it establishes ‘common rules for the generation, transmission, distribution and supply of electricity, together with consumer protection provisions’, and thus represents the backbone of current EU electricity market regulation.23 The relatively few provisions in the Electricity Directive that directly concern generation investments are supplemented by the provisions of the Security of Electricity Supply Directive, which applies a narrower approach to internal electricity market regulation. The latter Directive establishes measures aimed at safeguarding security of electricity supply, so as to ensure the functioning of the internal electricity market and, inter alia, an adequate level of electricity generation capacity and an adequate balance between supply and demand.24 The provisions concerning electricity generation in both of these Directives flow from the regulatory point of departure that investments should be market-based. These provisions can for practical purposes be divided in two groups: measures requiring Member States to facilitate the functioning of the electricity market in order to attract market-based investments, and measures restricting the Member States’ 19. Commission Communication: Completing the internal energy market, COM (2001) 125 final, 13.3.2001, 2. 20. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 66–67. 21. Directive 2009/72/EC of the European Parliament and of the Council of 13 Jul. 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55, 14.8.2009, and Directive 2005/89/EC of the European Parliament and of the Council of 18 Jan. 2006 concerning measures to safeguard security of electricity supply and infrastructure investment, OJ L33/22, 4.2.2006. 22. Article 1 of the Directive. See also similarly the Court of Justice’s statements regarding Electricity Directive 2003/54/EC in Case C-439/06, Citiworks, [2008] ECR I-3913, para. 38 and Case C-239/07, Julius Sabatauskas and Others, [2008] ECR I-7523, para. 31. 23. Article 1 of the Directive. 24. Article 1(1) of the Directive.

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On the Market-Based Path to Optimal Investments rights to have recourse to instruments of market intervention. The structure of this book builds on this distinction and internal electricity market measures concerning market facilitation and market intervention are analysed in Parts IV and V, respectively. 1.4.

THE RELATIONSHIP TO THE PROVISIONS OF THE TFEU

An EU law analysis of investment regulation in internal electricity market legislation also requires recourse to be made to the primary provisions of the TFEU. There are essentially four reasons for the importance to the present topic of the relationship between the primary and secondary provisions of EU law.25 First, the directive provisions analysed in this book are supplemented by, and must be viewed in conjunction with, a number of the substantive provisions of the TFEU. Second, the primary provisions of the TFEU provide an interpretive source for the understanding of the secondary legislation. Third, the scope and validity of secondary law must be assessed in the light of the EU competences conferred by the legal basis for the adoption of the measures. As far as the analyses in this book are concerned, this essentially means the competences conferred by Article 114 TFEU. And, last, the Court of Justice’s approach under the TFEU provisions, and in particular under the free movement provisions, to Member State interventions in energy markets provides a basis for comparison, and a perspective, for the interpretation and functioning of secondary law regulation of public interventions. The TFEU objectives, free movement provisions and legal bases are discussed in Part III to provide context for the subsequent analyses of secondary law in Parts IV and V. The application of the State aid provisions of the Treaty are closely related to the instruments of public intervention discussed in Part V, and will therefore be analysed separately against that background in Part VI. 1.5.

METHODOLOGICAL QUESTIONS

The methodological point of departure for our analyses of primary and secondary provisions of EU law is based on the Court of Justice’s approach to interpretation.26 In principle, the Court applies the same approach to the interpretation of provisions of primary and secondary EU law, although typical differences between these 25. In the following, we will refer to binding regulations, directives and decisions adopted by Community institutions, as provided in Art. 288 TFEU, on the basis of the TFEU as secondary law, while the provisions of the TFEU are referred to as primary law. 26. This approach has been the subject of more general studies elsewhere and will only be briefly outlined here. For a general overview of the Court’s approach to interpretation, see, inter alia, A. Arnull, The European Union and Its Court of Justice, 2nd edn (Oxford: Oxford University Press, 2006), 607–621 and L.N. Brown & T. Kennedy, The Court of Justice of the European Communities, 5th edn (London: Sweet & Maxwell, 2000), 321–344.

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Chapter 1 categories of legislation, such as the level of detail and the technical nature of the texts involved, are likely to influence the process in practice.27 This approach is based on the characteristic features of EU law: the existence of several equally authentic language versions of a legal text; the use of terminology peculiar to EU law; and the process whereby every provision of EU law must be placed in its context and interpreted in the light of the provisions of EU law as a whole, regard being had to their objectives and state of evolution.28 These features of EU law entail that the wording of a provision, which is the natural point of departure for any interpretative process, is not always the sole factor to determine its understanding.29 As emphasized by the Court of Justice in its interpretation of the former Electricity Directive 2003/54/EC, wording used in one authentic language version cannot serve as the sole basis for the interpretation of a provision or override other language versions.30 Where there is a divergence between versions in various languages, the provision in question ‘must be interpreted by reference to the purpose and general scheme of the rules which it forms part’.31 Although the Court’s approach to interpretational methods may not be entirely consistent, and a fixed hierarchy among the methods available to it may not exist, there is little doubt that this latter teleological and contextual method is an essential component in its approach.32 This has also been demonstrated more generally by the Court in relation to the interpretation of provisions in Electricity Directive 2003/54/EC, which must be interpreted ‘in the light of the objectives of that directive and of its provisions’.33 The legal material analysed in this study differs widely in nature and interpretational value. Within the areas of law discussed here where case law exists, which in practice means within the areas of primary law discussed, the decisions of the Court of Justice and, to a lesser extent, the Court of First Instance, are obviously significant sources of interpretation.34 The presence of authoritative sources is 27. See further A. Arnull, The European Union and Its Court of Justice, 2nd edn (Oxford: Oxford University Press, 2006), 615–620. 28. Case 283/81, Srl CILFIT and Lanificio di Gavardo SpA v. Ministry of Health, [1982] ECR 3415, paras 17–20. 29. See further L.N. Brown & T. Kennedy, The Court of Justice of the European Communities, 5th edn (London: Sweet & Maxwell, 2000), 324–330 and A. Arnull, The European Union and Its Court of Justice, 2nd edn (Oxford: Oxford University Press, 2006), 608–611. 30. Case C-239/07, Julius Sabatauskas and Others, [2008] ECR I-7523, para. 38. 31. Ibid., para. 39. See also, for another example, Case C-36/98, Spain v. Council, [2001] ECR I-779, para. 49. 32. A. Arnull, The European Union and Its Court of Justice, 2nd edn (Oxford: Oxford University Press, 2006), 607–621, and in particular at 612–613 with respect to the teleological and contextual method. 33. Case C-439/06, Citiworks AG, [2008] ECR I-3913, para. 37. 34. With respect to the Court of Justice, this follows quite simply from the fact that its decisions cannot be appealed, see A.-K. Nesdam. Although the Court of Justice is not bound by its own decisions, and obviously not bound by the decisions of the Court of First Instance, it does not often depart from them in practice, see A. Arnull, The European Union and Its Court of Justice, 2nd edn (Oxford: Oxford University Press, 2006), 627.

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On the Market-Based Path to Optimal Investments more limited within the areas of secondary law we discuss. Consequently, for the purposes of determining the understanding of a provision in the light of the objectives of the legal measure and its provisions, we have been primarily confined to studying the wording of EU provisions and preambles. In addition, and despite their less authoritative interpretational value, other sources such as legal literature and Union documents, typically in the form of reports, preparatory works and working papers, can, however, also assist in shedding light on the objectives and context of measures of which a provision forms a part, and have been extensively used for that purpose throughout the study. Moreover, as suggested above, the provisions of the TFEU may also contribute to the interpretation of a secondary law provision from a teleological and contextual perspective, and have been applied to that effect. The overall objective of this book opens the way for an appraisal of EU measures within an area of law which is heavily inspired by economic theory. Some areas of academic debate based on these theories, such as the question of whether an unregulated electricity spot market can ever lead to a socially optimal level of investments, are in this author’s view beyond the scope of legal analysis. The latter debate is important for the understanding of the prevailing legislation, and will be given due consideration, but this is not a multi-disciplinary study and it is not our aim to contribute to the economic debate. From a legal perspective, the lack of consensus among economists, even at a theoretical level, on how these challenges should be met does, however, recommend a cautious approach to EU regulation of the issue. Any appraisal of a legal framework will inevitably be influenced by the personal views of those who evaluate the law. These views cannot be disregarded, but they can be disclosed. This author firmly believes that for ‘all their power and vitality, markets are only tools. They make a good servant but a bad master and a worse religion’.35 This perspective, although by no means revolutionary, does remind us that the important question is not whether investments should be market-based or not, but whether a market-based scheme is the most efficient instrument to pursue more fundamental policy aims. 1.6.

CONTEXT AND SCOPE

This book focuses on a selection of the most important EU law instruments governing electricity generation investments. Power plant investment decisions are, however, influenced by a number of different factors, and it is beyond the scope of this study to give an exhaustive account of all the primary and secondary EU law instruments which directly or indirectly may affect such investment decisions. The number of Union measures affecting the internal electricity market has increased rapidly over the past decade. A bird’s-eye view of the current situation 35. P. Hawken, A. Lovins & L.H. Lovins, Natural Capitalism. Creating the Next Industrial Revolution (London: Little, Brown and Company, 1999), 261.

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Chapter 1 suggests a pragmatic and fragmented legislative process that has been undertaken with the intention of achieving the EU’s overall energy policy objective: the establishment of a competitive, secure and environmentally sustainable energy market.36 The recent adoption of the third internal energy market package and the new Renewables Directive as part of a more comprehensive climate package illustrate that this process is far from completed.37 Many of these EU measures may in principle affect electricity generation investments in some way. Consensusbased EU forums such as the Electricity Regulatory Forum of Florence,38 the European Regulators’ Group for Electricity and Gas (ERGEG)39 and the Agency for the Cooperation of Energy Regulators (ACER),40 may, at least potentially, have a role in promoting investments through cooperation. However, their present role in promoting investments appears to be modest, and their functions will therefore not be discussed further in the following. Moreover, the application of other areas of primary EU law than those discussed in this book, such as EU antitrust41 and 36. See, inter alia, Presidency Conclusions from the Brussels European Council 8/9 Mar. 2007, 2.5.2007, 11; the Commission’s Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006; Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 3; and Council Resolution of 23 Nov. 1995 on the Green Paper For a European Union Energy Policy, OJ C327/3, 7.12.1995, para. 3 at 3. These objectives are also highlighted in Art. 3(1) of the Electricity Directive and the parallel provision in Art. 3(1) of Directive 2009/73/EC of the European Parliament and of the Council of 13 Jul. 2009 concerning common rules for the internal market in natural gas and repealing Directive 203/55/EC, OJ L211/94, 14.8.2009 (‘Gas Directive’). 37. Directive 2009/28/EC of the European Parliament and of the Council of 23 Apr. 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L140/16, 5.6.2009 (‘RES Directive’). 38. The Electricity Regulatory Forum of Florence (‘the Florence Forum’) was set up in 1998 to discuss the creation of a functioning internal electricity market. The participants include Member States, regulatory authorities and the Commission, as well as market participants such as TSOs, traders, consumers and power exchanges. The Forum usually convenes once or twice a year to discuss a wide range of issues, see further on (last visited 18 Aug. 2009). The Florence Forum process is discussed in more detail by B. Eberlein, ‘Regulation by Cooperation: The ‘‘Third Way’’ in Making Rules for the Internal Energy Market’, in Legal Aspects of EU Energy Regulation, ed. P. Cameron (Oxford: Oxford University Press, 2005). 39. Established by Decision 2003/796/EC: Commission Decision of 11 Nov. 2003 on establishing the European Regulators’ Group for Electricity and Gas, OJ L296/34, 14.11.2003. ERGEG consists of the heads of the national regulatory authorities or their representatives and was established to advise and assist the Commission in consolidating the internal energy market by facilitating consultation, coordination and cooperation between national regulatory authorities, see Arts 2(1) and 1(2) respectively of Commission Decision 2003/796/EC. 40. See Regulation (EC) No. 713/2009 of the European Parliament and of the Council of 13 Jul. 2009 establishing an Agency for the Cooperation of Energy Regulators, OJ L211/1, 14.8.2009. 41. See, for example, the formal proceedings initiated by the Commission against Electrabel and EDF for suspected foreclosure of the Belgian and French electricity markets through the introduction of long-term exclusive purchase obligations in violation of Art. 102 TFEU, see press release MEMO/07/313, 26.7.2007, and the case concerning the alleged infringements by E.ON in the German electricity wholesale and balancing markets, where E.ON has offered a number of commitments to bring the infringement proceeding to an end, see MEMO/08/132, 28.2.2008, MEMO/08/396, 12.6.2008 and OJ C146/34, 12.6.2008 (summary of offered commitments).

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On the Market-Based Path to Optimal Investments merger42 regulation and the Trans-European Networks provisions,43 may also affect investments, but are nevertheless beyond the scope of the study. Finally, it should be emphasized that this book focuses on EU law from the perspective of its influence on the regulatory functions of Member States. The relationship between EU law and the exercise by Member States of ownership functions in publicly owned electricity undertakings is not considered specifically.44 Two categories of EU measures are particularly close related to our topic and their relationship to the present study therefore requires more careful attention. These are, first, measures regulating the operation and development of electricity transportation grids and, second, environmental measures of particular relevance to generation investments. The regulatory means for introducing functioning competition in the internal electricity market entails distinguishing between, on the one hand, the functions of production and supply, where competition between market participants can be introduced and, on the other, transportation grid functions, which for all practical purposes can be regarded as natural monopolies. Simply put, a natural monopoly means a situation where a single grid is able to transport electricity from location A to location B at a lower total cost than a collection of individual competing grids.45 Rather than seeking to establish grid-to-grid competition (which would be undesirable), Community regulators have sought to facilitate trading in the electricity market by requiring operators of transportation monopolies to offer grid users access to electricity transportation on objective, non-discriminatory and transparent terms. Experience has shown that, for a number of reasons, fulfilment 42. See, for example, the EDP/ENI/GDP case, where the Commission prohibited the proposed merger between EDP and GDP in Portugal by declaring the potential concentration to be incompatible with the common market, Case No. COMP/M.3440, COM (2004)4715 final, 9.12.2004 (an application for annulment of the Commission decision was subsequently dismissed by the Court of First Instance in Case T-87/05, EDP v. Commission, [2005] ECR II-3745). See also E.ON/MOL, Case No. COMP/M.3696, COM (2005) 5593 final, 21.12.2005 and Gaz de France/Suez, Case No. COMP/M.4180, COM (2006) 5419 final, 14.11.2006. The Commission declared the mergers compatible with the common market in both cases, but subject to strict remedies. 43. See Arts 170–172 TFEU, which have as their object to contribute at Community level to the establishment and development of trans-European networks, including electricity interconnectors. See also the appurtenant Guidelines on energy projects laid down in Decision No. 1364/ 2006/EC of the European Parliament and of the Council of 6 Sep. 2006, OJ L262/1, 22.9.2006. See further H. Bjørnebye, ‘Interconnecting the Internal Electricity Market: A Goal Without a Plan?’, CRNI 1, no. 3 (2006): 333–353, at 341–342. 44. However, as a general point of departure, the State, in its performance of ownership functions, is subject to the same limitations imposed by the TFEU and EU measures as in its performance of regulatory functions, although the former decisions are often less transparent by nature and may therefore de facto be more difficult to evaluate under EU law. 45. J.M. Griffin & S.L. Puller, ‘A Primer on Electricity and the Economics of Deregulation’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 1–28, at 2. Moreover, public interests are in any case likely to restrict the building of competing grids given their local (and unnecessary) environmental impact.

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Chapter 1 of this task requires extensive regulation of network monopolies.46 This is reflected in the Electricity Directive, which in large part focuses on the regulation of grid monopolies. The Electricity Regulation, which is more exclusively aimed at setting fair rules for cross-border electricity exchanges, also reflects the need to regulate the grid monopolies.47 There is a close relationship between the regulation of electricity generation and grid functions. The existence of a well-functioning electricity transportation regime is a precondition for the establishment of a functioning electricity market which delivers the right price signals for investments. Moreover, generation investments need to be coordinated with network development in order to ensure sufficient grid capacity and rational system utilization.48 On the other hand, the regulation of the grid functions is not in itself sufficient to solve the problems involved in attracting the necessary investments in electricity production, and Union coordination of generation investments and network development is currently not well developed.49 The facilitation of trading in the electricity market through EU regulation of transportation networks has already been the subject of comprehensive studies.50 EU regulation of the electricity grid functions will therefore not be discussed in detail in this book. Among the EU environmental measures affecting generation investments in the internal electricity market, the new Directive on the promotion of electricity produced from renewable energy sources (the RES Directive) and, to a lesser extent, the Directive on the promotion of cogeneration (the Cogeneration Directive) are of particular relevance.51 Essentially, the former Directive seeks to increase the 46. Of which the most important can be summarized as follows: (i) regulation is necessary in order to ensure that the monopoly grid operator, which essentially controls access to the market, does not abuse its dominant position to maximize its own profits; (ii) it is necessary to avoid abuse of the market to the advantage of affiliated undertakings involved in electricity production and supply; and (iii) it is necessary to harmonize national monopoly regulation in previously compartmentalized markets in order to ensure the free movement of electricity within the internal electricity market. 47. Regulation (EC) No. 714/2009 of the European Parliament and of the Council of 13 Jul. 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No. 1228/2003, OJ L211/15, 14.8.2009. 48. See further L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), in particular at 201–204. 49. See Commission Green Paper: Towards a secure, sustainable and competitive European energy network, COM (2008) 782 final, 13.11.2008, in particular at 4–8, for a discussion of the challenges concerning the development of European energy networks. 50. See, in particular, A.-K. Nesdam, Det indre transportmarkedet – en analyse av virkemiddelbruken i den fellesskapsrettslige energimarkedslovgivningen (Doctoral Thesis, University of Oslo, 2007). 51. Directive 2009/28/EC of the European Parliament and of the Council of 23 Apr. 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L140/16, 5.6.2009, and Directive 2004/8/EC of the European Parliament and of the Council of 11 Feb. 2004 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/ EEC, OJ L52/50, 21.2.2004.

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On the Market-Based Path to Optimal Investments proportion of electricity produced from renewable energy sources, while the latter seeks to promote the combined production of heat and power. The regulation of investments in the Electricity Directive and the Security of Electricity Supply Directive must to some extent be viewed in relation to these EU measures. Accordingly, although the RES Directive and the Cogeneration Directive are not primary research objects as such for the purposes of the following discussion, their contents and functions will be considered in relation to our analysis of internal electricity market measures. Other environmental measures are clearly also relevant to electricity generation investments, but will not be dealt with here, as they raise questions of a different nature than those addressed in this book. The EU emissions trading scheme as it evolves is likely to have an increasingly significant effect on the nature of investments, provided it can successfully contribute to internalizing the environmental costs of greenhouse gas emissions from carbon-based electricity production. An analysis of the emissions trading scheme is, however, given its complexity, beyond the scope of this study.52 Finally, the numerous EU measures adopted over recent years to promote energy efficiency and energy savings form an important part of EU energy policy, but will not be considered further given the focus of this study on supply-side investments.53 This brief outline of the myriad of existing EU measures within the field also illustrates the fragmented nature of current internal electricity market legislation, which is perhaps in danger of becoming too fragmented and too complex. This suggests a need for a disciplined approach to the adoption of new Union measures: legal provisions should only be adopted where they have legal substance, while political declarations of intent should be left to policy documents. As we shall see, Union legislators in such a highly politicized field as the energy sector have not always exercised such a disciplined approach to the drafting of legal texts. 1.7.

READING GUIDE

This book is in seven parts. Following this introduction, Part II discusses the concepts and policy considerations underlying the EU’s regulation of electricity generation investments as a background to the evaluation that follows. Part III establishes the Treaty context for the regulation of investments in the security of supply interest by discussing the topic from four different perspectives. First, we will analyse the concept of security of supply and its relationship with the EU objectives of competitiveness, environmental sustainability and integration 52. See C. Banet, ‘Legal Agenda for the Review of the EU Emissions Trading Scheme’, SIMPLY (2007) Marius No. 360, 347–377 for an overview of the emissions trading scheme. 53. A minor exception is Directive 2006/32/EC of the European Parliament and of the Council of 5 Apr. 2006 on energy end-use efficiency and energy services and repealing Council Directive 93/76/EC, OJ L114/64, 27.4.2006 (‘Energy Efficiency Directive’), which given its broad aim to improve energy end-use efficiency in general is the subject of some comments in the following.

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Chapter 1 enshrined in Article 3 of the Treaty on European Union (TEU). Second, we will discuss the Court of Justice’s interpretations of the concept of security of supply as a ground for justifying national measures restricting the free movement principles of the Treaty. We will also compare this case law to the Court’s decisions on restrictions on free movement in the environmental interest within the electricity sector. Third, we will look at the Court’s view on whether security of supply obligations serve the general economic interest under the case law that catalysed the adoption of the first Electricity Directive. And, fourth, we will scrutinize the competence conferred on the Union to adopt secondary law measures in the security of supply interest and briefly compare it with the competence to adopt environmental measures. We will then round off Part III by introducing the EU secondary legislation central to our analysis to prepare the ground for the evaluations in the following parts of the book. Part IV analyses the EU law provisions which have as their object the promotion of electricity generation investments through measures aimed at market facilitation. The provision of clear definitions of the roles and responsibilities of different categories of market participants and public institutions is often perceived as an important regulatory task to facilitate the functioning of competitive electricity markets. We will commence Part IV by discussing to what extent the EU regulation of roles and responsibilities affects electricity generation investments. A central consideration for any market participant desiring to invest in a new electricity production facility is obviously whether it will be granted a permit to construct its planned power plant. We will approach this subject by analysing the authorization procedure established in Article 6 of the Electricity Directive, with particular focus on the extent to which the provision permits Member States to use authorization procedures as an instrument to promote national energy policy objectives. Finally, we will discuss EU measures, primarily found in the Security of Electricity Supply Directive, which more generally require Member States to facilitate the establishment and functioning of electricity markets in order to attract necessary investments. Member States may for several reasons wish to intervene in electricity markets in order to promote investments in the security of supply or the environmental interest. In Part V we will analyse the two principal instruments of intervention envisaged by the Electricity Directive (and, to some extent, complemented by the Security of Electricity Supply Directive): the Member States’ right to launch tendering procedures for new generation capacity and their right to impose public service obligations in the general economic interest on certain undertakings. We particularly focus on the extent to which EU measures permit Member States to intervene in order to promote investments in the security of supply interest, and then compare this to Member States’ rights to rely on similar instruments of intervention in the environmental interest. The instruments of intervention discussed in Part V will, in most cases, involve some sort of public incentives to promote the investments in question, and the procedures involved are therefore in practice closely related to the State aid provisions of the TFEU. In Part VI of the book we will therefore revisit the primary 16

On the Market-Based Path to Optimal Investments Treaty provisions and ask to what extent the State aid provisions supplement the secondary law regulation of Member State interventions. Reversing our perspective also allows us to ask what new developments the secondary law regulation of electricity market interventions brings to the table, apart from the substantive regulation already provided for by the State aid provisions of the Treaty. Finally, we round off Part VI by addressing in brief an old and unresolved, but nonetheless important, debate on the relationship between the provisions of the TFEU and those of the Euratom Treaty in relation to investments in nuclear power generation. The book concludes with Part VII. We will return to our overall question of to what extent EU regulation of electricity generation investments addresses today’s security of supply challenges and reconsider the hypothesis advanced in the introduction. Against that background, we will round off the book by asking how the focus of internal electricity market legislation could be reconsidered to enable the present challenges to be properly addressed.

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Part II

Background: Investment Challenges and Regulatory Objectives

Chapter 2

Introduction

The objective of this Part is to establish a background to and an understanding of the security of supply concept as a regulatory objective in internal electricity market investment legislation. This also requires that we view the concept in relation to a wider balancing of the overall EU energy policy aims of environmental sustainability, competitiveness and energy security. Attaining these aims give rise to a multiplicity and complexity of challenges in the area of energy regulation which can be described as ‘a multi-faceted, multigenerational energy/ environment/geopolitical problem’.54 The EU’s overall policy considerations in relation to electricity generation investments must be seen against the background of two areas of concern that to some extent have developed independently, but are nevertheless closely related. On the one hand, there are concerns about primary energy sources, both in relation to the climate effects of greenhouse gas emissions from fossil fuel sources and the EU’s dependency on natural gas imports. On the other hand, there are market-based concerns about the difficulties involved in designing a competitive market which will attract the necessary investments. These two areas of concern are independent of each other in the sense that Europe would have been confronted with the former challenges irrespective of legal regime – historical choices have made them more or less inevitable – while the latter challenges are the result of the choice to establish an internal electricity market based on competition. At the same time, the two areas of concern are inseparable, since challenges of the former type will inevitably have to be solved within the context of the market-based regime. The next chapter commences with a short introduction to the internal electricity market. We then discuss challenges relating to primary energy sources 54. T.L. Friedman, 9/11 and 4/11 (opinion article published in New York Times, 20.7.2008).

Chapter 2 below in Chapter 4 before discussing the market-based challenges in more detail in Chapter 5. On the basis of these observations, we conclude this Part by providing a set of working definitions for the understanding of the overall EU energy policy objectives as they are applied to the regulatory challenges discussed in this book.

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Chapter 3

The Internal Electricity Market at a Glance

We described above the internal electricity market as an electricity market without internal frontiers in which free movement is ensured in accordance with the provisions of the TFEU.55 What does this mean in practice? The electricity resource chain consists of at least five activities. These are separable in principle, but in practice require close coordination: (i) the generation of electricity (production);56 (ii) the transport of electricity on high-voltage transmission grids (transmission);57 (iii) its transport on lower voltage distribution grids (distribution);58 (iv) the selling and buying of electricity on wholesale markets (trading activities);59 and (v) the selling of electricity to end-users (supply activities).60 Several other activities are also sometimes mentioned as part of this chain, such as metering and trade in financial power markets.61 In addition, the electricity sector relies on functioning upstream markets for trade in primary energy sources, where the internal gas market is particularly important from the perspective of internal energy market legislation.62 55. 56. 57. 58. 59.

Chapter 1.3 above. See the definition of ‘generation’ in Art. 2(1) of the Electricity Directive. See the definition of ‘transmission’, ibid., Art. 2(3). See the definition of ‘distribution’, ibid., Art. 2(5). Which formally qualifies as a supply activity according to the wording of the Electricity Directive, see the definition in Art. 2(19) read in conjunction with Arts 2(7)–(9). 60. Which comprise both household and non-household customers, see ibid., the definitions in Arts 2(9)–2(11). 61. See DG Competition Report on Energy Sector Inquiry, SEC (2006) 1724, 10.1.2007, 112, for a corresponding listing of the main sector activities. 62. The EU’s internal gas market legislation is largely parallel to the internal electricity market legislation in terms of regulatory techniques. See the Gas Directive, Regulation (EC) No. 715/ 2009 of the European Parliament and of the Council of 13 Jul. 2009 on conditions for access to

Chapter 3 Strictly speaking, the electricity market is the market for the selling and buying of electricity and comprises the electricity wholesale and retail markets, that is, physical trading and supply activities. In practice, however, the operation of all electricity market functions from production to end-user supply requires close coordination. Since the electricity market is network-bound, transmission and distribution grids must be constructed and operated to ensure access for the electricity supplied and demanded at all times. Moreover, electricity will, because of the laws of physics, always flow towards the area of least resistance within a synchronized network, that is, the area with the greatest deficiency of electricity. Since the contractual path from producer to final customer does not correspond to the physical flow of electricity, it is necessary to reconcile the physical and financial contractual positions.63 These factors are just a few of the reasons for the interdependency of the different functions of the electricity resource chain, and contribute to explaining the need for a coordinated approach.64 Geographically, the internal electricity market consists of the EU’s twentyseven Member States in addition to the European Free Trade Association (EFTA) States – Norway, Iceland and Liechtenstein – which participate in their capacity as EEA Member States.65 Moreover, the Energy Community Treaty anticipates the gradual extension of the principal parts of EU’s energy acquis, consisting of both TFEU and secondary law provisions, to seven more non-EU Member States in Eastern Europe.66 For the sake of simplicity, we will refer to the internal electricity

63. 64. 65.

66.

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the natural gas transmission networks and repealing Regulation (EC) No. 1775/2005, OJ L211/ 36, 14.8.2009, and, the arguably less significant, Council Directive 2004/67/EC of 26 Apr. 2004 concerning measures to safeguard security of natural gas supply, OJ L127/92, 29.4.2004. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 147–149. For a study of the various forms of interdependency, see H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008). The Agreement on the European Economic Area, OJ L1/3, 3.1.1994 (EEA Agreement), was signed in Oporto on 2 May 1992, and entered into force on 1 Jan. 1994. It is supplemented by the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, OJ L344/1, 31.12.1994, the Agreement on a Standing Committee of the EFTA States and the Agreement on a Committee of Members of Parliament of the EFTA States, which all entered into force on the same date (although they were subsequently subject to some amendments) and together lay the foundations of the institutional arrangements needed to keep the EEA Agreement operational. The European Community and the individual EU Member States are parties to the EEA Agreement, as well as Norway, Iceland and Lichtenstein. Generally speaking, the Agreement includes provisions corresponding to the fundamental internal market provisions of the TFEU, and it includes procedures for the incorporation of internal market secondary legislation. Consequently, the bulk of the internal electricity market secondary legislation has been or will be incorporated into the EEA Agreement as amendments to the Annexes of the Agreement. This secondary legislation includes the Electricity Directive, the Electricity Regulation and the Security of Electricity Supply Directive. As a result, Norway, Iceland and Lichtenstein are, for all practical purposes, participants in the internal electricity market. For a general introduction to the EEA Agreement, see F. Sejersted et al., EØS-rett, 2nd edn (Oslo: Universitetsforlaget, 2004). The parties to the Treaty, which entered into force on 1 Jul. 2006, are, on the one hand, the European Union and, on the other, Albania, Bosnia & Herzegovina, Croatia, the former

The Internal Electricity Market at a Glance market as an EU market, although this market arguably also includes some non-EU Member States. At present, an EU-wide internal electricity market without internal frontiers is more of a theoretical concept than a reality. The free movement of electricity across Member State borders presupposes the ability of electricity producers and suppliers in one Member State to sell their electricity to wholesale or retail customers in others.67 A customer on the Iberian Peninsula who tries to purchase electricity from a supplier established in Scandinavia will soon enough discover a number of practical hurdles to the reality of a pan-European market. There are several reasons for these difficulties. Traditionally, most European electricity markets and electricity grids have been constructed to ensure sufficient supplies of electricity to national end-users, although the idea of building cross-border transmission lines has existed for over fifty years.68 The internal electricity market at its present stage of evolution is therefore characterized by a lack of interconnectors, that is, transmission lines linking electricity systems.69 The modest goal set at the Barcelona Summit in 2002, that all Member States should achieve a level of electricity interconnection equivalent to at least 10% of their installed generation capacity, has yet to be fully achieved, and is in any case insufficient to ensure satisfactory trade at every cross-border point.70 In addition to these investment challenges come the regulatory challenges involved in facilitating

67.

68. 69. 70.

Yugoslav Republic of Macedonia, Montenegro, Serbia and the United Nations Interim Administration Mission in Kosovo. The signing on behalf of the Community was approved by Council Decision 2005/905/EC 17 Oct. 2005, OJ L329/30, 16.12.2005. Individual EU Member States may also obtain status as participants and, as of December 2007, fourteen Member States had opted to do so. In addition, Georgia, Moldova, Norway, Turkey and Ukraine have obtained status as observers under the Treaty. For further information, see the Energy Community’s web site (last visited 24 Mar. 2010). Obviously, given the physical characteristics of electricity flows, attainment of this objective would not mean that electricity consumed by a final customer in Member State A would necessarily originate from that customer’s supplier in Member State B, or from any supplier in Member State B for that matter. The physical feed-in of electricity to the transportation system by the supplier and the off-take by the final customer constitutes the basis for a financial settlement between the parties, typically coordinated by TSOs. Since electricity will always flow towards the point of least resistance, the net electricity imports/exports between Member States A and B will be finally determined by the total production and consumption in those countries (as well as imports/exports to other countries). Those net imports and exports, in turn, rely on the existence of sufficient cross-border transmission capacity and a proper operative framework that facilitates cross-border trade. This relationship between electricity production and consumption is sometimes described by employing the metaphor of a water tank, where the transportation system is the tank and electricity producers pour water in and final customers drain water out. C.F. Zimmermann, ‘Interconnectors in the European Electric Network’, OGEL I, no. 3 (2003): 1. See the definition in Art. 2(13) of the Electricity Directive. It should be noted that this definition is wider than the definition provided in Art. 2(1) of the Electricity Regulation, which limits the application of the term interconnector to cross-border lines. DG Competition Report on Energy Sector Inquiry, SEC (2006) 1724, 10.1.2007, 175. See H. Bjørnebye, ‘Interconnecting the Internal Electricity Market: A Goal Without a Plan?’, CRNI 1, no. 3 (2006): 333–353, for a discussion of the challenges involved in promoting necessary new interconnector investments at EU level.

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Chapter 3 non-discriminatory, objective, transparent and efficient access to existing transportation capacity, typically owned and operated by a subsidiary of a national incumbent with a dominant market position. Moreover, the physical interconnection of previously national markets raises a need for proper harmonization of standards to allow the operation of interdependent electricity systems. Finally, the recent energy sector inquiry conducted by the Commission also revealed a number of other obstacles to the establishment of a functioning internal electricity market, including high level of market concentration in electricity generation activities, vertical foreclosure of grid and supply activities and a lack of transparent data relating to grid availability and price formation.71 It is not the intention of this author to speculate on whether these challenges will ever be sufficiently overcome to enable the achievement of a true internal EU electricity market. In the present context, it is sufficient to note that the current trend in the European electricity market is towards the development of regional markets with the intention of some day integrating them to form an EU-wide market.72 Seven (partially overlapping) regional electricity markets have been designated to this effect, and many challenges still have to be overcome before each of these markets can become regionally integrated.73 In other words, a fully integrated and functioning EU-wide internal electricity market should not be expected any time soon – if ever. Imports of electricity from third countries into the EU are modest, but, as we shall return to in the next chapter below, imports of primary energy sources used for electricity production are more significant. Of the total EU-27 gross electricity generation of approximately 3.3 million GWh in 2005, the largest share was generated by nuclear power stations, which accounted for 30% of production.74 Gas was the second largest fuel source for EU-27 electricity generation in 2005, 71. Communication from the Commission: Inquiry pursuant to Art. 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report), COM (2006) 851 final, 10.1.2007, 5–9. 72. For an overview of some of the challenges raised by, and the advantages of, this integration process, see C. Vandenborre, ‘Regional Integration of Electricity Markets: Conceptual and Practical Considerations’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 63–71. 73. ERGEG, The Regional Initiatives – Europe’s Key to Energy Market Integration (ERGEG Regional Initiatives Annual Report – February 2008, Brussels). These seven regions consist of the Baltic region (Estonia, Latvia, Lithuania); the Central-East region (Austria, Czech Republic, Germany, Hungary, Poland, Slovakia and Slovenia); the Central-South region (Austria, France, Germany, Greece, Italy and Slovenia); the Central-West region (Belgium, France, Germany, Luxembourg and the Netherlands); the Northern region (Denmark, Finland, Germany, Norway, Poland and Sweden); the South-West region (France, Portugal and Spain); and the France-UK-Ireland region (France, Ireland, United Kingdom). None of these regions are fully integrated today, and should not therefore be confused with the synchronized networks that already exist within the EU, such as the Continental UCTE network and the Nordic Nordel network. Not all EU and EEA Member States are included in the regional initiatives. Malta, Cyprus and Iceland (for obvious geographical reasons) are not included, as well as Bulgaria, Romania and Liechtenstein. 74. Eurostat yearbook 2008, Europe in Figures, 442.

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The Internal Electricity Market at a Glance accounting for a 20% share of total production, with coal a close third with a 19% share.75 Among other fossil fuels, lignite and oil have a more modest role in EU electricity production, respectively accounting for 9% and 4% of production in 2005. Renewables (primarily hydropower) accounted for a total of 14% of EU electricity generation relative to gross electricity consumption in 2005.76 The primary energy sources used for electricity generation differ widely between EU Member States. To take as examples the two largest electricity producing Member States, nuclear sources account for 79% of total electricity generated in France, while Germany has a more diverse energy mix, with coal still the predominant fuel source and nuclear sources a distant second.77 Some Member States use a considerably higher share of renewables in electricity generation, primarily due to the existence of hydropower resources in these countries, and, to a lesser extent, the application of biomass.78 Denmark is a special case, with wind power being the main contributor to the country’s relatively high share (28%) of electricity generation from renewables.79 All in all, the term ‘internal electricity market’ is certainly not one at present that describes a single homogeneous electricity market with uniform market traits. It is today more accurate to view the term as a label for a diverse set of markets which are more or less integrated, which are based on different market structures and which rely on different technologies and primary energy sources. What these markets have in common, however, is that they are all subject to an increasingly comprehensive set of Union measures which have as their ultimate objective the creation of a single environmentally sustainable, secure and competitive EU-wide electricity market.

75. Ibid., 442. 76. Ibid., 443. Art. 2(30) of the Electricity Directive defines renewable energy sources as ‘renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases)’. This definition corresponds to the definition applied by the Commission in its new Community Guidelines on State aid for Environmental protection, C 82/1, 1.4.2008, para. 70 item 5), and will also be applied in the following. Unlike the definition in the former State aid environmental guidelines, OJ C37/3, 3.2.2001, para. 6, the latter definition now covers all hydroelectric installations, regardless of size. Art. 2(a) of the RES Directive appears to apply a slightly broader definition of ‘energy from renewable sources’ as meaning ‘energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases’. 77. Based on data from 2006, see Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, Part B, Statistical Annex, 17 (Germany) and 27 (France). 78. Eurostat yearbook 2008, Europe in Figures, 442. If the non-EU Member States of the EEA are also taken into account, Norway represents a special case, with hydropower resources accounting for approximately 96% of domestic electricity generation, see the Norwegian Ministry of Petroleum and Energy, Facts 2008. Energy and Water Resources in Norway (Oslo: 2008), 19. 79. Eurostat yearbook 2008, Europe in Figures, 442.

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Chapter 4

The Challenges of Energy Import Dependency and Climate Change

4.1.

THE 1973–1974 OIL CRISIS: THE GEOPOLITICAL CHALLENGES REVEALED

The concept of security of supply can only be properly understood when viewed in the context of the particular challenges faced by energy policy. These challenges are bound to vary from region to region, from time to time and from situation to situation. The availability of sufficient and reliable energy sources is no more than a Utopian vision for the 2 billion people on earth who lack access to electricity.80 Different parts of the industrialized world, even different EU Member States, also face different security of supply challenges. A country that is a net importer of energy faces different challenges from a net exporting country. Access to different energy resources leads to differences in the energy mix used in electricity generation, which again gives rise to different operational, environmental and geopolitical challenges. Risks of natural disasters and threats of terrorist attacks affecting energy supplies vary from region to region. Moreover, the nature of the different electricity market challenges calls for distinctive solutions which, in turn, provide different contexts for the understanding of the concept. The long-term challenges of investment adequacy discussed in this book obviously raise different security of supply challenges than the short-term challenges involved in establishing well-functioning operational rules for the day-to-day administration of electricity grids.81 80. United Nations Development Programme, World Energy Assessment, 2004 Update (New York: UNDP, 2004), 34. 81. The distinction between long-term and short-term security of supply challenges is applied, inter alia, by L. Hancher & S. Jansen, ‘Shared Competences and Multi-Faceted Concepts – European Legal Framework for Security of Supply’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004),

Chapter 4 There is, however, little doubt that the challenge which has attracted most attention at EU level, and which was primarily responsible for sparking the EU security of supply debate of the last decade, relates to the EU’s increasing dependence on energy imports and the geopolitical implications of this dependency. Overall, the EU’s net imports of fossil fuels are increasing, gradually increasing the Union’s dependence on third-country exporters. This makes the EU more vulnerable to price fluctuations in world energy markets and, in the worst case, to supply shortages beyond its control. As a result, there has been enormous focus on political and regulatory means to remedy the situation, both in terms of the EU’s external relations to third countries and through the development of the internal market legislation. The strategic importance of energy was first felt by Community Member States during the oil crisis of 1973–74.82 The crisis arose because of restrictions imposed by Arab oil-producing countries on oil supplies to apply political pressure on Western countries during the Arab-Israeli conflict.83 The boom in Western economies and the switch to oil as the main source of energy supply had contributed to a situation where indigenous oil production could not satisfy the growing demand for oil anywhere in the Western world at the time. Meanwhile, the Arab countries were enjoying a strong global position as suppliers, accounting for 32.8% of world oil production in 1973. While the oil market had previously experienced disruptions in 1956 and 1967, the dependency of Western countries on Arab oil had increased significantly by 1973.84 The Arab decision in October 1973 to cut oil production and impose embargoes on oil exports was primarily directed at the United States, due to its support for Israel. The embargoes were, however, also extended to other countries regarded as hostile, with the Netherlands being the EEC member that was most affected.85 Given the importance of Rotterdam as an oil distribution centre, the effects of the oil shortfall were spread fairly evenly throughout Europe. Supply deficits ranged from 9% to 25% in European countries in the last quarter of 1973. Following political events in the last quarter of 1973 and in 1974, oil production was gradually resumed until the embargo against the Netherlands was finally lifted on 10 July 1974.86

82.

83. 84. 85. 86.

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85–119, at 88 and U. Hammer, ‘Norway: Security of Supply in Liberalized Energy Sectors: A New Role for Regulation’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 307, at 307–336. A few years earlier, in 1967, the blocking of the Suez Canal during the Arab-Israeli Six-Day War had also resulted in oil export embargoes targeted at countries considered hostile to the Arab side of the conflict, but the results of these embargoes were not critical for European markets, see S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 51, and on 37–64 for a general historical overview of external energy security issues in Europe. See the International Institute for Strategic Studies, Energy and Security (Farnborough: GOWER and ALLANHELD, 1980) for a more detailed discussion of the conflict. Ibid., 4–5. S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 56. The International Institute for Strategic Studies, Energy and Security (Farnborough: GOWER and ALLANHELD, 1980), 8–9.

The Challenges of Energy Import Dependency and Climate Change The oil crisis clearly illustrated the geopolitical dimension of energy security concerns for net importing regions. Although the crisis did not lead to a real shortage of petroleum in European markets, prices increased substantially during the crisis, with the price of imported oil quadrupling.87 For the EEC, it also highlighted a potential conflict between national interests and European solidarity. The Netherlands, as the main European target of the embargo, requested other Member States to initiate oil sharing. This request was not met by the Organisation for Economic Co-operation and Development (OECD) oil committee, allegedly due to the opposition of France and Britain, who were afraid of harming their friendly relations with Arab countries.88 The subsequent decision to establish the International Energy Agency, in order to guard against supply disruptions by introducing oil stockpiling and emergency sharing obligations,89 as well as the decisions at Community level to reduce energy consumption in the event of petroleum supply difficulties,90 should be viewed against this background.91 Similarly, these events serve to explain the objectives set by the European Council in 1986 to aim at ‘greater integration, free from barriers to trade, of the internal energy market with a view to improving security of supply, reducing costs and improving economic competitiveness’,92 as well as to diversify sources of energy consumption and limit oil imports.93

87. S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 54. 88. Ibid., 57, with further references, and The International Institute for Strategic Studies, Energy and Security (Farnborough: GOWER and ALLANHELD, 1980), 11. 89. See C. Redgwell, ‘International Energy Security’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 18–46, at 28–34 and A. Konoplyanik, ‘International Energy Markets’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 47–84, at 72–75 for an overview of the establishment of the IEA. 90. Council Decision 77/706/EEC of 7 Nov. 1977 on the setting of a Community target for a reduction in the consumption of primary sources of energy in the event of difficulties in the supply of crude oil and petroleum products, OJ L292/9, 16.11.1977. 91. See also D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, at 32–36 for an overview of the Community measures introduced in the wake of the oil crisis. 92. Council Resolution of 16 Sep. 1986 concerning new Community energy policy objectives for 1995 and convergence of the policies of the Member States, OJ C241/1, 25.9.86, 2. 93. Ibid., 3, which set forth as an aim to limit net imports of oil to a reasonable level by replacing oil with other energy sources. The goal set for 1995 was for energy produced from oil to account for not more than 40% of total energy consumption in the Community and for net imports of oil to account for no more than one-third of total energy consumption. The issue of diversity of energy resources was first raised by the Commission shortly after the oil crisis in a Communication to the Council on 5 Jun. 1974 entitled ‘Towards a New Energy Policy Strategy for the Community’, see S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 58–59.

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Chapter 4 4.2.

THE RE-EMERGENCE OF IMPORT DEPENDENCY CONCERNS

Given the steady increase in gas consumption within the EU over the past decades, both as an input for electricity production and for other purposes, it is not surprising that the concerns about security of supply that were raised first in relation to oil import dependency have subsequently spread to natural gas. The Union viewed as a whole is a substantial net importer of gas and cannot realistically achieve independence from other regions for supplies of energy, even in the longer term.94 While the problem of import dependency had been addressed on many occasions,95 the European debate did not seriously gain momentum until the Commission launched its Green Paper on security of energy supply in 2000.96 In the Green Paper, the Commission estimated that the EU’s net energy import needs would increase from 50% of total energy consumption in 1999 to 70% of energy consumption within the next twenty to thirty years.97 Roughly similar estimates have been repeated on several subsequent occasions and also in more recent papers on the subject.98 Due to oil’s modest role as fuel source in EU electricity generation, Europe’s still substantial indigenous coal resources as well as the relatively easy access to coal and nuclear fuels on world markets, natural gas is the only fuel used for largescale electricity generation that raises serious import dependency concerns.99 Natural gas is expected to be one of the preferred fuels for new electricity generation investments over the coming decades.100 Meanwhile, EU indigenous 94. Denmark, the United Kingdom and the Netherlands are the only countries in the EU currently not dependent on gas imports, and European gas production is expected to decline, see S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 10 with further references. For an overview of the origins of natural gas for EU-27 in 2004, see Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 11. 95. See, inter alia, Commission Working Document: The internal energy market, COM (88) 238 final, 2.5.1988, 8 and Commission White Paper: An energy policy for the European Union, COM (95) 682 final, 13.12.1995, 14. 96. Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000. 97. Ibid., 19. According to Commission estimates, neither the EU enlargement nor the possible future inclusion of energy exporters such as Norway would be sufficient to alter this situation radically, see the Green Paper, 12–19. 98. See, inter alia, Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, 3. In the Communication from the Commission to the European Council and the European Parliament: An energy policy for Europe, COM (2007) 1 final, 10.1.2007, 3, the expected reliance on imported energy in 2030 is reduced to 65% of energy consumption. 99. See Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 12 for an overview of the origins of hard coal in EU-27 in 2004, and 15 for an overview of the origins of natural uranium in 2005. See also Commission Communication: Second Strategic Energy Review. An EU energy security and solidarity action plan, 13.11.2008, 14–15. 100. Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 17, estimates that natural gas investments will account for the third largest category of electricity generation investments by energy source over the coming decades, after renewables and coal.

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The Challenges of Energy Import Dependency and Climate Change production continues to decline and the percentage of EU gas imports to gross inland consumption is expected to increase to 73% by 2020 compared to 61% today.101 Natural gas import dependency concerns are further amplified by the fact that the EU relies on few supply sources, where Russia is by far the most important, and that a number of individual Member States are fully dependent on one single supplier for all of their gas needs.102 Consequently, a long-standing energy concern, first felt by the Community during the oil crisis of the 1970s, has re-emerged as a question of how to ensure security of electricity supply in the longer term in the face of increasing gas import dependency. The current concerns share several traits with the concerns that arose during the oil crisis, and the gas sales dispute between Gazprom and Ukraine’s Naftogaz at the turn of 2005–2006 served to remind Europe of its vulnerability to supply disruption.103 Moreover, the effects of natural gas price increases on European competitiveness should not be underestimated in the context of the security of supply debate. In recent years, we have once again witnessed a steep rise in oil prices and, given that oil price indexation still prevails in most European gas sales agreements, natural gas prices have been similarly affected.104 Despite the recent and sharp decline in petroleum prices following the financial crisis, concern that future price increases may have adverse effects on the general economy is an important policy driver in the energy security debate, although this debate, on the face of it, primarily revolves around the question of supply disruptions rather than market prices. Unlike that of the 1970s, however, the present debate has now been extended to embrace the more fundamental challenge of mitigating climate change. 4.3.

THE GROWING ACKNOWLEDGEMENT OF THE CLIMATE CHALLENGE

The concept of environmental protection is far-reaching and encompasses a number of different challenges that arise in the wake of energy sector activities.105 101. Commission Communication: Second Strategic Energy Review. An EU energy security and solidarity action plan, 13.11.2008, 4. 102. Ibid., 3–4, which provides that 42% of EU gas imports come from Russia, 24% from Norway, 18% from Algeria, and the remaining 16% from other countries. 103. For a very brief overview of the Gazprom-Naftogaz incident, see EU Energy Commissioner Andris Piebalgs, Speaking Notes welcoming the agreement between Gazprom and Naftogaz, 4.1.2006 (SPEECH 06/01). 104. C. Robinson, ‘The Economics of Energy Security: Is Import Dependence a Problem?’, CRNI 8, no. 4 (2007): 425–451, at 449–450. 105. As emphasized by L. Kra¨mer, EC Environmental Law, 6th edn (London: Sweet & Maxwell, 2007), 1, the categories of environmental interests listed in the environmental title of the TFEU cover practically all areas of the environment, including human beings, natural resources, land use, town-and-country planning, waste, water and climate. Investments in different types of electricity production facility raise a multitude of different challenges in relation to the protection of these environmental interests. See, for example, Directive 2001/80/EC of the European Parliament and of the Council of 23 Oct. 2001 on the limitation of emissions of

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Chapter 4 However, the one overarching challenge, which characterizes present energy policy discussions both globally and at European level, is the need to mitigate climate change by reducing anthropogenic emissions of greenhouse gases.106 Climate change, within the context of the present environmental debate, generally refers to a change of climate that is directly or indirectly attributable to human activity altering the composition of the global atmosphere and which cannot be accounted for by natural variations in climate observed over time.107 The Fourth Assessment Report of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) firmly emphasizes the scale and seriousness of the problem.108 The Synthesis Report concludes that warming of the climate system is unequivocal, and that most of the observed increase in globally-averaged temperatures over the last fifty years is very likely due to the increase in anthropogenic greenhouse gas concentrations in the atmosphere.109 Among the greenhouse gases, the substantial increase in atmospheric CO2 concentrations compared to pre-industrial levels is the main cause of current global warming, and the rate of increase has accelerated over recent decades.110 Globally, annual emissions of CO2 grew by 80% in the period 1970–2004.111 In Europe,

106.

107. 108. 109. 110.

111.

34

certain pollutants into the air from large combustion plants, OJ L309/1, 27.11.2001 (replacing the now repealed Directive 88/609/EEC), which seeks to reduce atmospheric emissions of SO2 and NOx from large combustion plants in order to mitigate the environmental hazards of smog and acid rain. For a brief discussion of the Directive, see L. Kra¨mer, EC Environmental Law, 6th edn (London: Sweet & Maxwell, 2007), 323–324. See, for example, the Communication from the Commission to the European Council and the European Parliament: An energy policy for Europe, COM (2007) 1 final, 10.1.2007, 3, which focuses exclusively on this issue under its description of the sustainability challenges. The incompleteness of these statements has prompted the ironic comment by Kra¨mer that ‘[a]part from the fact that the contribution of energy to acidification, tropospheric ozone building, waste generation, soil degradation, marine and coastal zone problems, technical hazards and threats to nature and biodiversity are not mentioned in this summary, nothing has to be added to [the Commission’s observation]’, see L. Kra¨mer, ‘Sustainable Development in EC Law’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 375–396, at 386. See similarly the definition of climate change in Art. 1(2) of the United Nations Framework Convention on Climate Change, signed in New York on 9 May 1992. Information about the IPCC, including its mandate, representation and reports are available at the Panel’s website (last visited 24 Mar. 2010). IPCC, Climate Change 2007: Synthesis Report (Fourth Assessment Report, 2007), 39. Four principal greenhouse gases (GHG) are generated by human activity: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and the halocarbons. These long-lived gases accumulate in the atmosphere, causing concentrations to increase over time. By altering incoming solar radiation and outgoing infrared radiation, these concentrations have a warming effect on the climate which greatly exceeds that due to natural processes. See IPCC, Climate Change 2007: The Physical Science Basis (Fourth Assessment Report, 2007), 135–137. IPCC, Climate Change 2007: Synthesis Report (Fourth Assessment Report, 2007), 36. Concentrations have increased from approximately 275–285 ppm (i.e., the number of CO2 molecules per million air molecules) in the pre-industrial era (until 1750) to 379 ppm in 2005, where half the increase (50 ppm) has occurred since 1970, see IPCC, Climate Change 2007: The Physical Science Basis (Fourth Assessment Report, 2007), 137 and IPCC, Climate Change 2007: Mitigation of Climate Change (Fourth Assessment Report, 2007), 102.

The Challenges of Energy Import Dependency and Climate Change approximately 94% of anthropogenic CO2 emissions are attributable to the energy sector, with electricity generation and steam raising responsible for more than a third of the emissions.112 Global average temperatures rose by 0.6 C, and mean temperatures in Europe by more than 0.9 C, during the twentieth century.113 In the absence of mitigating measures, global temperatures are expected to increase by 1.4–5.8 C, and European temperatures by 2.0–6.3 C, by the year 2100, compared to 1990 temperatures.114 The expected global environmental consequences of these temperature increases are severe, including more frequent and destructive extreme weather such as droughts, floods and hurricanes, glacier melting and substantially rising sea levels, the extinction of species and decreased food productivity.115 Nearly all European regions are expected to be directly affected by some or all of these consequences of climate change, in addition to indirect effects stemming from the impact of climate change on other parts of the world, such as migration and resource scarcity.116 In short, as emphasized by Voigt, the cumulative impact of these effects will have incalculable human and social, environmental and economic costs.117 The environmental impact of climate change is likely to become more severe the higher mean temperatures rise above pre-industrial levels, and current research suggests that climate feedback effects may lead to self-sustaining, accelerated climate change once certain temperature thresholds have been passed.118 The mean temperatures at which these thresholds will be passed are still scientifically uncertain, but current research seems to suggest a tipping point of a temperature increase of around 2 C compared to pre-industrial levels.119 The EU Council of Ministers endorsed as early as 1996 the goal that the rise in global average temperatures should not exceed 2 C above pre-industrial levels. This aim has subsequently been reaffirmed by the Council and the Commission has sought to translate it into more specific policy objectives.120 112. Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000, particularly at 53. See also Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 33. 113. Commission Communication: Winning the Battle Against Global Climate Change, COM (2005) 35 final, 9.2.2005, 3. 114. Ibid. 115. For an overview of these consequences, see ibid., 12–13 and the Summary for Policymakers in IPCC, Climate Change 2007: Impacts, Adaptation and Vulnerability (Fourth Assessment Report, 2007), 7–22. 116. IPCC, Climate Change 2007: Impacts, Adaptation and Vulnerability (Fourth Assessment Report, 2007), 14. 117. C. Voigt, ‘Climate Change and the Mandate of Sustainable Development: Observations from a Legal Perspective’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 545–572, at 550. 118. Commission Communication: Winning the Battle Against Global Climate Change, COM (2005) 35 final, 9.2.2005, 13. 119. Ibid. 120. Ibid., 3. See also Council of the European Union, Presidency Conclusions from the Brussels European Council 8/9 Mar. 2007, 2.5.2007, 10, where the 2 C target is reaffirmed.

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Chapter 4 The 2 C target can be converted into a limit on atmospheric concentrations of greenhouse gases.121 To stabilize greenhouse gas (GHG) concentrations below this limit, drastic reductions in emissions are required, estimated at as much as 70% of global CO2 emissions compared to 1990 levels.122 Achieving this goal requires both close international cooperation and internal measures.123 In the latter respect, the European Council in March 2007 made an independent commitment to achieve at least a 20% reduction in GHG emissions by 2020 compared to 1990 levels.124 To achieve that commitment, the Council adopted an action plan which, inter alia, requires a 20% saving in EU energy consumption through energy efficiency measures and requires renewable energies to account for 20% of overall EU energy consumption by 2020.125 These targets have, in turn, been followed up by the Commission in its 20 20 by 2020 Communication126 and further codified in the RES Directive. The Commission’s (and the general public’s) perception of what is at stake has undeniably changed since the adoption of its working document twenty years earlier, where reductions in energy costs to industry and consumers were emphasized as the primary rationale for establishing the internal energy market.127 4.4.

EU POLICY PRIORITIES: ON THE PATH TO SUSTAINABLE ENERGY SECURITY

While the nature of the security of supply and environmental challenges discussed above are very different, the means for overcoming them largely coincide. The economic, geopolitical and existential concerns which these challenges together represent coincide to form a forceful policy basis for the promotion of at least

121. The concentration limit has been estimated at 450 ppm CO2 equivalents (where a CO2 equivalent is a quantity that converts the effects of any given greenhouse gas into the amount of CO2 that would have the same global warming potential), see C. Voigt, ‘Climate Change and the Mandate of Sustainable Development: Observations from a Legal Perspective’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 545–572, at 552–553 with further references. 122. Ibid. 123. For a recent discussion of the issue with particular focus on the international measures, see Paper from the High Representative and the European Commission to the European Council: Climate change and international security, S113/08, 14.3.2008. 124. Moreover, the Council indicated a willingness to increase this target to a 30% reduction, provided that the international community followed up with corresponding reductions, and also indicated a long-term vision of 60%–80% reductions for developed countries by 2050, see Council of the European Union, Presidency Conclusions from the Brussels European Council 8/9 Mar. 2007, 2.5.2007, 12. 125. Ibid., 20–21. 126. Commission Communication: 20 20 by 2020 – Europe’s climate change opportunity, COM (2008) 30 final, 23.1.2008. 127. Commission Working Document: The internal energy market, COM (88) 238 final, 2.5.1988, 5–7.

36

The Challenges of Energy Import Dependency and Climate Change three categories of internal electricity market measures: energy efficiency and conservation; electricity production from renewable energy sources; and the development of technology to reduce GHG emissions from the combustion of indigenous energy sources. With respect to supply-side measures, the development of renewable energy is not only suitable to reduce GHG emissions, but is also the EU’s greatest potential source of indigenous energy.128 The general EU goal of renewable energies accounting for 20% of overall EU energy consumption by 2020 entails massive investments in electricity production from renewable energy sources. These investments will have to be made primarily in other renewable sources than the (often) profitable field of hydropower, since the potential for developing new European hydropower projects is limited due to lack of resources and local environmental preservation interests.129 This means that the necessary investments will have to be made in forms of renewable energy which generally speaking, although the different sources exhibit different cost structures, are not yet competitive with conventional energy sources in the absence of public incentives.130 The role of coal as an important fuel source in European electricity generation should not be overlooked. In fact, there are indications that coal is not only holding its own as a source in EU electricity generation, but perhaps even gaining ground.131 Proved reserves of indigenous coal in the EU are substantial, and coal is also easily accessible at world markets.132 Given the enormous GHG emissions that result from coal combustion (approximately twice those resulting from gas combustion), these investments have the potential to split EU sustainability and energy security policies.133 This dilemma underscores the importance of

128. Commission Communication: Second Strategic Energy Review. An EU energy security and solidarity action plan, 13.11.2008, 13. 129. Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000, 47–49. 130. For an overview of estimated investment costs for electricity generation from different energy sources, see Commission staff working document: EU energy policy data, SEC (2007) 12, 10.10.2007, 39. 131. According to the New York Times, European countries are expected to put into operation about fifty coal-fired plants over the next five years, see Elisabeth Rosenthal, ‘Europe Turns Back to Coal, Raising Climate Fears’, New York Times 23 April 2008. For an earlier report on the subject, see also Mark Landler, ‘Europe’s Image Clashes With Reliance on Coal’, New York Times, 20 June 2006. See also M. Newbery, ‘CCS and Clean Coal: Legal Barriers to Development’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 149–168, at 150. For a more optimistic approach, see the Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 16, where three different future coal scenarios are projected based on the development of sustainable coal technologies (i.e., CCS, on which subject see below). 132. Commission Communication: Second Strategic Energy Review. An EU energy security and solidarity action plan, 13.11.2008, 14 and Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 32. 133. Commission staff working document, EU energy policy data, SEC (2007) 12, 10.10.2007, 39.

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Chapter 4 developing technology to reduce GHG emissions from the combustion of fossil fuels. This essentially means the development of so-called carbon capture and storage (CCS), which is a process whereby CO2 is separated from industrial and energy-related sources, transported to a storage location and isolated in the long-term from the atmosphere.134 These technologies are not yet fully developed, and commercial application is likely to require large-scale public subsidies and facilitation in some form.135 Although this book focuses on supply-side investments, it is important to emphasize that the avoidance of energy consumption through energy efficiency initiatives constitute a key category of measures to mitigate EU energy dependency and climate change.136 Energy efficiency is primarily a matter of controlling and reducing demand, particularly with respect to electricity in the residential and commercial buildings sector, but there is also significant potential for improving energy efficiency in electricity generation and transport by reducing losses during transformation.137 The Commission has repeatedly stated that, although largescale energy efficiency measures also require significant investments, the value they add to the EU economy is greater than that of traditional supply-side investments and their implementation is the most cost-efficient and quickest way of achieving a sustainable energy future.138 A variety of EU measures have been

134. The separated and captured CO2 can in principle be stored in geological formations, in the ocean or in mineral carbonates, or it can be used in industrial processes (although this latter alternative does not contribute much to the goal of reducing overall CO2 emissions), see IPCC, Carbon Dioxide Capture and Storage (2005), 3. See also for a brief description of the different stages in the process M. Newbery, ‘CCS and Clean Coal: Legal Barriers to Development’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 149–168, at 152. 135. See further below in Ch. 20.2. 136. Communication from the Commission: Action Plan for Energy Efficiency: Realising the Potential, COM (2006) 545 final, 19.10.2006, 5. Energy efficiency can be defined as a ratio between an output of performance, service, goods or energy, and an input of energy, while energy savings, or conservation, refers to a measurement for the energy saved by implementing energy efficiency improvement measures, see the Energy Efficiency Directive, Arts 3(b) and (d) respectively. See also Commission Communication: On a first assessment of national energy efficiency action plans as required by Directive 2006/32/EC on energy end-use efficiency and energy services. Moving forward together on energy efficiency, COM (2008) 11 final, 23.1.2008 and Commission Green Paper: Energy Efficiency or Doing More with Less, COM (2005) 265 final, 22.6.2005. 137. Commission Communication: Action Plan for Energy Efficiency. Realising the Potential, COM (2006) 545 final, 19.10.2006, see particularly 5–14. 138. The executive summary of Commission staff working document accompanying the Communication from the Commission Action plan for energy efficiency: Realising the Potential – Impact Assessment, SEC (2006) 1174, 19.10.2006.

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The Challenges of Energy Import Dependency and Climate Change adopted to pursue these energy efficiency aims, particularly on the demand side.139 As we will return to later, there are, however, few examples of Union measures that require Member States to have recourse to energy efficiency measures before relying on more traditional supply-side investments.

139. See A. Boute, ‘Energy Efficiency in the European Union – The Policy Framework’, in European Energy Law Report IV, ed. M.M. Roggenkamp & U. Hammer (Antwerpen: Intersentia, 2007), 135–170 for an overview of Community measures and EU policy approaches within the field of energy efficiency. A characteristic of many of these Directives is that they set out energy efficiency requirements for energy consuming products, see Directive 96/57/EC of the European Parliament and of the Council of 3 Sep. 1996 on energy efficiency requirements for household electric refrigerators, freezers and combinations thereof, OJ L236/36, 18.9.1996, Directive 2000/55/EC of the European Parliament and of the Council of 18 Sep. 2000 on energy efficiency requirements for ballasts for fluorescent lighting, OJ L279/33, 1.11.2000 and Directive 2005/32/EC of the European Parliament and of the Council of 6 Jul. 2005 establishing a framework for the setting of ecodesign requirements for energy-using products and amending Council Directive 92/42/EEC and Directives 96/57/EC and 2000/55/ EC of the European Parliament and of the Council, OJ L191/29, 22.7.2005. In addition, Directive 2002/91/EC of the European Parliament and of the Council of 16 Dec. 2002 on the energy performance of buildings, OJ L1/65, 4.1.2003 sets requirements for the energy performance of buildings, and the Energy Efficiency Directive has as its aim to improve energy end-use efficiency in general.

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Chapter 5

The Market Challenges Involved in Attracting Adequate Investments

5.1.

ELECTRICITY MARKET LIBERALIZATION: FROM CENTRAL PLANNING TO COMPETITION

Electricity markets in Europe and in other parts of the world were, for most of the twentieth century, characterized by central planning and vertically integrated monopolies.140 Given the energy sector’s political significance, the idea of introducing competition in electricity production and supply was for a long time hardly even discussed. European electricity markets were typically characterized by the existence of large, vertically integrated state-owned undertakings with de facto – and sometimes also de jure – exclusive supply rights, often complemented by supply obligations.141 In the absence of competition, many of the functions now left to markets had to be coordinated at a central level, such as the setting of electricity prices and investment decisions. These characteristics of a planned economic sector made central coordination and planning an easier task than would have been the case in a competitive market.

140. P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 31–39. 141. See, for example, D. Helm, Energy, the State and the Market – British Energy Policy since 1979 (Oxford: Oxford University Press, 2003), 14–43 for an overview of the British precompetitive energy market regimes and the report SOU 2005:4, Liberalisering, regler och marknader, 157–161 for a short overview of the Swedish electricity market before the introduction of competition. See also U. Hammer, Tilrettelegging av kraftmarkedet: en studie i reguleringen av nettets koordinerende funksjoner (Oslo: Cappelen, 1999), 62 et seq. for a detailed overview of the Norwegian electricity system prior to the introduction of competition.

Chapter 5 The pre-competitive electricity market regimes have, however, been much criticized for their lack of efficiency. Although a planned regime may in theory deliver optimal investment, in practice the result tends to be over-investment. The description of the Swedish pre-competitive electricity market in a 2005 report to the Swedish government offers a telling example: in the 1970s, after a period of strained balance between supply and demand, the future increase in demand was overestimated, electricity trading possibilities with other Scandinavian countries were overlooked, and the producers’ capital costs were set artificially low. In addition, expensive generation capacity projects were commissioned that were primarily motivated by a desire to boost regional employment. The result was over-investment in electricity generation capacity.142 The situation was similar in the United Kingdom143 and, indeed, in most European countries.144 Consequently, the process of market reform that has come to be known as liberalization was, in many countries and regions, including Europe, commenced at a period characterized by excess electricity generation capacity. This helps explain the focus on cost efficiency, rather than new investment, during the early phases of the liberalization process.145 The term ‘market liberalization’ is far from self-explanatory, and can be criticized as inaccurate.146 According to the International Energy Agency, the term ‘refers to the worldwide trend which aims to improve the economic efficiency of electricity supply industries by introducing elements of competition and moving towards market-based pricing’.147 Improving economic efficiency is, in turn, assumed to benefit consumers and improve the international competitiveness of domestic industry and utilities by reducing electricity prices.148 The word liberalization is also frequently applied at European level as a generic term for the underlying process of market reform initiated to establish an internal electricity market.149 The introduction of competition in electricity 142. SOU 2005:4, Liberalisering, regler och marknader, 159–160. 143. D. Helm, Energy, the State and the Market – British Energy Policy since 1979 (Oxford: Oxford University Press, 2003), 14–43. 144. D. Helm, European Energy Policy: Securing Supplies and Meeting the Challenge of Climate Change (2005), 9–11. 145. With the introduction of market-based regimes, capacity utilization is likely to increase and the overcapacity established under the pre-competitive regimes is therefore often gradually reduced, see International Energy Agency, Electricity Reform, Power Generation Costs and Investment (Paris: OECD/IEA, 1999), 29. 146. S. Beder, Power Play (London: The New Press, 2003), 1, argues that the term ‘liberalization’ is in itself not only inaccurate, but even misleading, as it downplays the role of the change in ownership and control from public to private hands that often results from the reform process. 147. International Energy Agency, Electricity Reform, Power Generation Costs and Investment (Paris: OECD/IEA, 1999), 17. 148. Ibid. 149. The wording used by the European Council at its Lisbon summit in 2000 provides an example in this respect. At this meeting, the European Council requested the Commission, the Council and the Member States ‘to speed up liberalization in areas such as gas, electricity, postal services and transport’ with the aim ‘to achieve a fully operational internal market in these areas’, see the Presidency Conclusions from the Lisbon European Council meeting held on 23 and 24 Mar. 2000, 24.3.2000, para. 17 at 5–6.

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The Market Challenges Involved in Attracting Adequate Investments production and supply stands at the centre of this liberalization process. The EU decision to introduce competition in European electricity markets was essentially based on two factors. First, the pre-liberalization monopoly structures in European electricity markets constituted an absolute barrier to the establishment of an internal electricity market based on the free movement of electricity between Member States. Given that customers, whether distributors or end-users, had no choice but to purchase electricity from their monopoly supplier, the potential for cross-border trade was modest. Second, the introduction of competition was, in accordance with economic theory, seen as a means of improving the efficiency of the electricity sector and consequently benefiting consumers and European competitiveness more generally.150 At the same time, transition to a competitive regime also involves new regulatory challenges to ensuring adequate generation investments, which will be further considered below. 5.2.

ENSURING OPTIMAL INVESTMENTS IN A COMPETITIVE ELECTRICITY MARKET

5.2.1.

THE PROBLEM: DEFINING

THE

ROLE

OF

REGULATION

The assumption that the introduction of competition in electricity markets improves efficiency, and ultimately EU competitiveness, can at a very general level be explained by the growing consensus that markets generally deliver better outcomes than state planning, and the process of competition is central to the idea of a market.151 At the beginning of the European electricity market liberalization process, this assumption was also applied to electricity generation activities, which were perceived as ordinary competitive activities. The operation of electricity grids, on the other hand, was from the start considered to constitute a monopoly

150. See, inter alia, Proposal for a Council Directive concerning common rules for the internal market in electricity and common rules for the internal market in natural gas, COM (1991) 548 final, 14.3.1992, 4, and Commission Communication: Completing the internal energy market, COM (2001) 125 final, 13.3.2001, 2. 151. See along these lines (from a more general perspective) R. Whish, Competition Law, 6th edn (Oxford: Oxford University Press, 2009), 3. This assumption is also reflected in the TFEU. For example, Art. 120 TFEU on economic policy, last sentence, sets forth that ‘The Member States and the Community shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.’ The economic concept of efficiency can be described as a situation where the maximum value of outputs is obtained from a given set of inputs, see O. Kolstad, ‘Konkurranseloven som virkemiddel til a˚ fremme ‘‘forbrukernes interesser’’ ’, TfR (2005): 1–94, at 20 with further references. The assumption that the establishment of the internal electricity market promotes efficiency gains throughout the electricity sector resource chain is also reflected in internal market legislation, see para. 4 of the preamble to the first Electricity Directive 96/92/EC, para. 2 of the preamble to Electricity Directive 2003/54/EC, and para. 1 of the preamble to the new Electricity Directive.

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Chapter 5 activity which required regulation in order to ensure equal access to the network and to prevent grid operators from abusing their monopoly positions.152 The idea of introducing competition in electricity markets is based on economic theories of electricity spot-market pricing, developed in the early 1980s.153 These theories advanced that electricity spot markets would not only lead to the efficient operation of electricity generation facilities and efficient trade in the short term, but would also lead to an optimal level of investments in the longer term.154 Essentially, neo-classical economic theory on the long-term market equilibrium of supply and demand was applied to the electricity market.155 The expectation was that electricity price fluctuations due to shifts in electricity demand and supply would eventually lead to long-term demandside and supply-side adjustments that would contribute towards bringing prices back to historic levels.156 Broadly speaking, higher electricity prices were supposed to provide incentives for electricity producers to invest in the necessary new electricity generation capacity and for end-users to reduce demand.157 A market-based regime for investments was thus supposed to contribute to optimal resource allocation. To employ the metaphor used by the International Energy Agency, price signals are the glue that binds the necessary decisions of different categories of market participants.158 It is not possible, or at least not economically feasible, to realize an electricity supply system which guarantees complete continuity of supply at all times. Some minor interruptions will always occur. The question is therefore how to ensure an optimal level of investment which balances the costs involved in improving reliability against customers’ demand for a reliable supply.159 There is no consensus in academic literature on whether a competitive market where the electricity prices charged to customers are the only source of revenue for electricity producers (energy-only markets) can be expected to deliver adequate, or optimal, investments 152. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 2. 153. Ibid., 66. 154. Ibid. A ‘spot market’ can be defined as a market for immediate delivery, which can be distinguished from future or forward markets where delivery of the goods traded is due at an agreed future date, see J. Black, A Dictionary of Economics (Oxford: Oxford University Press, 2002), consulted via Oxford Reference Online. 155. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 66–67. 156. See J.E. Stiglitz & C.E. Walsh, Principles of Microeconomics, 4th edn (London: W.W. Norton & Company, 2006), 77–87 for a general introduction to the relationship between short-run and long-run supply and demand curves. 157. See further S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 392. 158. International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/ IEA, 2005), 71. 159. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 11.

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The Market Challenges Involved in Attracting Adequate Investments in generation capacity.160 Since competitive electricity markets are a relatively new idea, empirical evidence on the ability of well-functioning markets to provide the necessary investments is lacking.161 Many competitive markets are subject to specific measures regulating generation capacity, which makes it difficult to determine whether investments are purely market-based or not.162 Given that many countries have entered the era of liberalization with electricity generation overcapacity, there are currently few examples of supply shortages due to underinvestment.163 The most spectacular example is the California electricity crisis of 2000 and 2001, where a shortage of electricity in the market led to rolling blackouts and sharp price increases following market liberalization. However, although it has been argued that a lack of sufficient incentives for generation

160. This topic has been subjected to thorough academic debate over the last decade, see for example L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414; P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97; L. De Vries & R.A. Hakvoort, ‘The Question of Generation Adequacy in Liberalised Electricity Markets’, INDES Working Paper No. 5/March 2004 and E.S. Amundsen & L. Bergman, ‘Provision of Operating Reserve Capacity: Principles and Practices on the Nordic Electricity Market’, CRNI 2, no. 1 (2007): 73–98. For a recent suggestion on how to resolve these issues at European level, see D. Helm, ‘European Energy Policy: Meeting the Security of Supply and Climate Change Challenges’, European Investment Bank Papers 12 (2007). At national level, a report by Econ Po¨yry, Vilka˚r for ny kraftproduksjon [trans. Conditions for New Electricity Generation]) (report No. 2007-097) provides an illustrative study of challenges faced by Norway concerning electricity generation investments. See also O.-H. B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), who discusses the topic in relation to the question of the socio-economic function of financial power markets, see in particular at 140–149 with further references to literature. 161. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 17–18. 162. Ibid. 163. Since the introduction of competition in most European electricity markets is still relatively recent, there is still some overcapacity in most European countries, see Eurelectric, Can the Electricity Sector Attract Adequate Investment? A European Perspective (2004), 2. The emergency situation in Spain in 2001, which nearly resulted in blackouts, is one of only a few possible examples of shortages (partially) due to under-investment. In this case, unusually cold weather had led to historically high demand while, at the same time, a period of drought had led to a shortage of hydropower, thermal power plants were partly unavailable due to market-induced changes to the operational regime and, in addition, electricity generation capacity had not been upgraded to reflect increasing demand during the preceding the years. The situation was, however, remedied – although the system only barely avoided collapse – after a period during which emergency conditions were imposed, see M. Schla¨pfer & H. Glavitsch, ‘Learning from the Past – Electric Power Blackouts and Near Misses in Europe’, in Critical Infrastructures at Risk. Securing the European Electric Power System, ed. A.V. Gheorghe et al. (Dordrecht: Springer, 2006), 163–194, at 187–188.

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Chapter 5 investments was a significant factor in the California crisis, several authors emphasize that the crisis could also be attributed to a number of other causes.164 The crucial question on which opinions differ is whether the original theories concerning spot-market pricing and investment apply in practice, given the particular attributes of electricity markets. Some argue that there is no reason to believe that competitive electricity markets cannot provide the necessary incentives for investments, and that market participants are currently investing in liberalized markets without additional public measures.165 These authors typically emphasize the minimization of regulatory uncertainty and the avoidance of undue public intervention as key factors in ensuring sufficient and timely investments.166 Others are more sceptical, emphasizing that the specific attributes of electricity markets entail that energy-only markets are likely to require regulation in order to guarantee an optimal level of investment.167 In the following we will provide a brief and simplified overview of this complex debate with emphasis on the main attributes that distinguish electricity markets from other commodity markets.168 5.2.2.

THE PARTICULAR ATTRIBUTES

OF

ELECTRICITY MARKETS

The aggregate off-take of electricity from an electricity network at any given time is generally referred to as ‘load’, and can be divided into base, medium and peak load depending on the aggregate capacity utilization. The ability of electricity generation facilities to serve different load segments depends on their technical and economic characteristics. Investment in different electricity generation facilities entails different fixed and variable costs, which in turn determine the number of hours each year that a plant is able to generate electricity at a profit (‘load factor’).169 164. For a detailed discussion of the California electricity crisis, see, inter alia, F.A. Wolak, ‘Lessons from the California Electricity Crisis’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 145–181 and L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 39–56. 165. International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/ IEA, 2005), 160. 166. Ibid., 25 and 160. 167. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 57–105; P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, in particular at 72–86 and S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 392–395. 168. For more complete studies on the topic, the reader is referred to the literature cited in the following footnotes. 169. C. Harris, Electricity Markets. Pricing, Structures and Economics (Chichester: John Wiley & Sons, 2006), 29–30.

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The Market Challenges Involved in Attracting Adequate Investments Some plants have high fixed costs due to high investment costs, while their variable costs and, consequently, the marginal cost of production are low. These plants are often referred to as ‘base-load’ or ‘round-the-clock’ plants, since they are able to recover costs under most operating conditions and therefore ideally run continuously all year round with a steady load. Nuclear plants are typical examples of base-load plants.170 Other plants have low investment costs, but high variable costs, in practice due to higher primary energy fuel costs. These plants will only be able to recover the marginal cost of production during the periods each year when electricity prices are high due to high demand. Such plants are therefore more rarely in operation, and only at irregular intervals, and are generally referred to as ‘peaking plants’ or ‘peak-load plants’. Open-cycle gas turbines are an example of this type of plant.171 Those plants which due to their cost structure or technical characteristics operate between base-load and peak-load are generally referred to as ‘medium-load’ plants.172 Since electricity cannot be economically stored, sufficient generation capacity must be installed to produce the amounts of electricity demanded at all times. Given the vital importance of electricity to the general economy, demand-side rationing is generally not a preferred option. Accordingly, an electricity system must have sufficient generation capacity to meet even the periods of highest demand. In addition to base-load and medium-load plants, a share of peak-load plants is therefore also required in order to ensure continuity of supply in extraordinary situations, for example during extremely cold weather. This means that a large proportion of the generating capacity that is available to meet peak demand will supply only a small amount of electricity each year.173 A shortage of electricity generation capacity will increase electricity prices, creating scarcity rents. Generally speaking, economic theory suggests that scarcity rents will attract the necessary supply-side investments, including sufficient investments in peak-load capacity, as well as inducing energy saving on the demand side. Consequently, a competitive energy-only market can, in theory, provide the necessary incentives to bring about investments in an optimal mix of base-load, medium-load and peak-load plants on the supply side, and the necessary incentives for reduced consumption on the demand side.174 This perception is also the basis of 170. Ibid. 171. Ibid., 30–31. 172. The distinctions between base-load, medium-load and peak-load plants can be difficult to draw in practice, but this categorization provides a general idea of the different capacity functions of different power plants, and is therefore also applied in the following. 173. P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 74, which also provides an example from the US: in the New England area in 2001, 93% of electricity was supplied by 55% of the installed generation capacity, while the remaining 45% of capacity supplied only about 7%. 174. S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 392.

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Chapter 5 the regulatory point of departure that investment in new electricity generation capacity should be carried out by market participants on market terms, since reliance on market-based investment in theory contributes to optimal resource allocation which ultimately promotes EU competitiveness. In practice, any market is to some extent subject to market failures which reduce its ability to produce efficient outcomes.175 However, few, if any, markets are characterized by such a coincidence of particular market attributes and major market failures as electricity markets.176 This situation gives rise to some wellfounded concerns as to whether the economic theories that suggest energy-only markets can deliver optimal investments in the absence of further regulation apply in practice. These concerns are particularly pronounced with respect to investments in peak-load capacity. One significant trait of electricity markets is that the short-term price elasticity of demand in practice is extremely low.177 There are several reasons why the shortterm behaviour of final customers is not sensitive to electricity price increases. Most final customers do not have access to real-time electricity meters, which means there is an absence of real-time pricing.178 Many customers have limited 175. For an overview of the basic categories of market failures, see J.E. Stiglitz, Economics of the Public Sector, 3rd edn (London: W.W. Norton & Company, 2000), 76–85. See also the Commission guidelines on State aid and risk capital, OJ C235/3, 21.8.2001, paras VI.2 and VI.3, where a market failure is described as ‘a situation in which economic efficiency is not achieved owing to imperfections in the market mechanism. A market failure may manifest itself either in the inability of the system to produce goods which are wanted [. . .], or by a misallocation of resources, which could be improved in such a way that some consumers would be better off and none worse off [i.e., Pareto efficiency] [. . .] As economic theory predicts that markets will usually fail in some sense except under conditions of perfect competition, the term market failure is reserved for cases where it is believed that a serious misallocation of resources has occurred’. 176. D. Helm, Energy, the State and the Market – British Energy Policy since 1979 (Oxford: Oxford University Press, 2003), 407 and P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 40–42. 177. J.M. Griffin & S.L. Puller, ‘A Primer on Electricity and the Economics of Deregulation’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 14–16, at 14–16 and P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 40–41; L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 67–68; and International Energy Agency, Electricity Reform, Power Generation Costs and Investment (Paris: OECD/IEA, 1999), 63–64. The price elasticity of demand can be defined as the percentage change in the quantity demanded divided by the percentage change in price, see J.E. Stiglitz & C.E. Walsh, Principles of Microeconomics, 4th edn (London: W.W. Norton & Company, 2006), 78. If the change in quantity demanded decreases less than the amount by which the price increases, demand for the product is said to be low, or inelastic, implying that substitution is difficult for end-users. 178. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 67–68. International Energy Agency, Electricity Reform, Power Generation Costs and Investment

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The Market Challenges Involved in Attracting Adequate Investments possibilities to reduce electricity consumption significantly through energy savings or by switching to other alternatives in the short term. Moreover, large customer groups are supplied in accordance with fixed-price contracts. Consequently, most customers do not have any incentive, or are unable, to reduce demand during brief periods of peak-load and high electricity spot prices. The consequences of this price inelasticity are exacerbated by a corresponding short-term price inelasticity of supply when aggregate production approaches the capacity limits of existing generation facilitates.179 This situation increases the potential for abrupt price increases in peak-load situations and generally contributes to the extreme price volatility of electricity markets. The lack of demand-side response also increases the risk that the market will not be able to clear, resulting in supply interruptions.180 Electricity market price volatility makes investments in peak-load capacity particularly risky for market participants, since these facilities need to recover costs during those short and irregular periods when prices spike.181 Customers in a competitive market cannot distinguish between the reliability of different electricity producing companies. An electricity producer is therefore not remunerated for keeping generation capacity reserves available to guard against supply disruptions unless the market is specifically designed to reward such measures.182 Moreover, since electricity price spikes in peak-load situations may result in prices exceeding a level that is generally considered reasonable or affordable for customers, potential electricity generation investors may fear that regulators will intervene by imposing price caps in these situations. Such price caps are likely to prevent peak-load investors from recovering costs. Concern that regulators may

179. 180.

181. 182.

(Paris: OECD/IEA, 1999), 64, expects electricity demand to become more price sensitive with the introduction of time-of-use or peak-load pricing schemes as a result of a competitive retail market. Whether such real-time pricing will ever become a reality is, however, an open question, the answer to which partly depends on technological advances with respect to the implementation of two-way communication fuses and partly on end-users’ willingness to expose themselves to real-time pricing rather than to hedge risk by entering into longer-term contracts. P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 40–41. See further L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 67–68 and J.M. Griffin & S.L. Puller, ‘A Primer on Electricity and the Economics of Deregulation’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 1–28, at 14–16. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 68. Ibid., 68–70, where the public good character of generation capacity is emphasized. A public good is characterized by the fact that it costs nothing for an additional individual to enjoy its benefits, and it is difficult or impossible to exclude individuals from the enjoyment of it, see J.E. Stiglitz, Economics of the Public Sector, 3rd edn (London: W.W. Norton & Company, 2000), 79–80. It is, however, open to discussion whether electricity generation adequacy can be described as a public good, see S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 390, who argues that adequacy can potentially be treated as a private good.

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Chapter 5 intervene on pricing may therefore potentially increase investor uncertainty and lead to the adoption of risk averse investment strategies.183 The latter risk of price interventions is further sustained by the supply-side concentration in European electricity markets, which generally consist of relatively few, large electricity producers which together (and in some cases alone) exercise extensive market power.184 Since electricity cannot be stored, and the price sensitivity of electricity demand is inelastic in the short-term, individual suppliers are likely to be able to exercise more market power than their market share alone would suggest.185 This situation may be further exacerbated by a lack of transmission capacity caused by the transportation infrastructure, which may lead to bottlenecks and temporarily smaller geographical markets.186 These market traits, in addition to the very high investment costs involved for potential new producers considering entry into the market, mean there is a significant risk that producers will exercise their market power.187 This may result in producers exhibiting strategic behaviour such as the withholding of production capacity in periods of shortage, which contributes to further price increases to the detriment of customers.188 Thus, regulators may be faced with the difficult task of distinguishing between situations where prices are high due to normal market behaviour during periods of peak demand and situations where prices are high due to market abuse.189 5.3.

THE COMPLEXITY OF INVESTMENT REGULATION

The combination of specific market traits and market failures referred to above creates a situation where there is considerable uncertainty as to whether 183. See along these lines S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 394 and L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 77. 184. See Eurostat, European Electricity Market Indicators of the Liberalisation Process 2005– 2006 (Statistics in focus, Environment and energy, 88/2007), 2–3 for an overview of the number of electricity generation companies and market shares in EU Member States. 185. P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 54. 186. Ibid. 187. R. Pierce, M. Trebilcock & E. Thomas, ‘Regional Electricity Market Integration. A Comparative Perspective’, CRNI 8, no. 2 (2007): 215–252, at 220–221. As argued by the authors, greater integration of electricity markets (which is one of the objectives of the EU’s establishment of an internal electricity market) may to some extent reduce the impact of market power through the establishment of larger markets with more market participants, but these potential benefits of greater integration may in turn be overwhelmed by other factors, see 222–224. 188. L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 98–99. 189. J.M. Griffin & S.L. Puller, ‘A Primer on Electricity and the Economics of Deregulation’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 1–28, at 16–20.

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The Market Challenges Involved in Attracting Adequate Investments an energy-only market will attract the necessary investments in generation capacity. Potential investors may be concerned that they will not be able to recover costs through electricity sales alone, particularly in the case of investments in peakload capacity, and these concerns are likely to be exacerbated by any suspicion that regulators may impose price caps. This may lead to under-investment. Due to the vital importance of electricity to society, public authorities are therefore likely to take steps to ensure investments are made. Fear of supply disruptions may, however, lead to publicly induced over-investment, which was often the case in the pre-liberalized regimes where centrally planned investments prevailed. As held by Oren, ‘there is considerable diversity in reliance on market-based approaches, and the debate over which is the correct way of ensuring generation adequacy is still raging’.190 In addition to the capacity-related challenges discussed above come the challenges concerning the externalities involved in the production of electricity from certain energy sources.191 As discussed in Chapter 4 above, both energy securityrelated import dependency concerns and climate-related CO2 emission concerns support a prioritization of renewable energy sources over fossil fuels in electricity generation. Nevertheless, the climate costs of CO2 emissions from fossilbased electricity generation currently represent a huge negative externality, since the environmental costs are primarily borne by the public. Correspondingly, the potential long-term costs of increased energy dependency are currently not reflected in gas prices. Reducing dependency on fossil fuels in electricity generation therefore obviously requires public regulation, but opinions on the best way to regulate are likely to differ. Taken together, the current investment challenges consequently form a highly complex background to investment regulation, with plenty of room for academic and political disagreement on to what extent and how markets should be regulated. As a starting point, it will therefore be useful to establish an understanding of the concept of security of supply as a regulatory objective, as well as its relationship to the EU’s other overarching objectives, as applied to the challenges discussed in this book. This background part of the study therefore concludes below by establishing a set of working definitions of the concepts of security of supply, environmental sustainability and competitiveness, as these terms are generally used in this book.

190. S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 389. 191. An externality is present whenever an individual or a firm can take an action that directly affects others without paying for a harmful outcome (negative externality) or being paid for a beneficial one (positive externality), see J.E. Stiglitz & C.E. Walsh, Principles of Microeconomics, 4th edn (London: W.W. Norton & Company, 2006), 252.

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Chapter 6

Defining the Regulatory Objectives

The overall objective of this background part has been to establish an understanding of the security of supply concept as a regulatory objective in internal electricity market investment legislation. This requires that the concept, and its relationship to the concepts of environmental sustainability and competitiveness, is defined in the face of the particular challenges discussed above. Security of supply, or energy security, is a multi-faceted term.192 Numerous academics, policy reports and expert opinions have sought to define the term more or less generally.193 The only explicit legal definition provided at EU level follows from the rather nondescript attempt in the Security of Electricity Supply Directive to define ‘security of electricity supply’ as meaning ‘the ability of an electricity 192. This is by no means a new observation. Examples of other authors who have submitted similar observations include K. Talus, ‘Security of Supply – An Increasingly Political Notion’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 125–150, at 127–128; S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 13 et seq.; B. Barton et al., ‘Introduction’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 3–13, at 5 and L. Hancher & S. Jansen, ‘Shared Competences and Multi-Faceted Concepts – European Legal Framework for Security of Supply’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 85–119, at 87–88. In this author’s opinion, the terms ‘energy security’ and ‘security of energy supply’ do not differ in meaning and will be applied synonymously in the following. The term ‘security of electricity supply’, however, can strictly speaking be distinguished from both the former terms in that it specifically refers to the security of one source of energy in particular. 193. See K. Talus, ‘Security of Supply – An Increasingly Political Notion’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 125–150, in particular at 127–130, with further references for a recent overview of different attempts to define the notion in literature.

Chapter 6 system to supply final customers with electricity, as provided for under this Directive’.194 Although different authors use slightly different terms and definitions to describe the phenomenon, the core of the concept of energy security applied as a policy objective is usually described in broadly similar terms.195 One example is provided by the Commission in its Green Paper on security of energy supply from 2000, which stated that: The European Union’s long-term strategy for energy supply security must be geared to ensuring, for the well-being of its citizens and the proper functioning of the economy, the uninterrupted physical availability of energy products on the market, at a price which is affordable for all consumers (private and industrial), while respecting environmental concerns and looking towards sustainable development, as enshrined in Articles 2 and 6 of the Treaty on European Union.196 This statement on regional EU security of supply strategies contains broadly the same elements as those applied at international level by the United Nations Development Programme, which defines energy security as ‘a term that applies to the availability of energy at all times in various forms, in sufficient quantities, and at affordable prices, without unacceptable or irreversible impact on the environment’.197 All of the elements mentioned in the citations above evidently qualify as fundamental policy objectives for energy regulation. Viewed in relation to the specific challenges of promoting optimal electricity generation investments, it is, however, not obvious that they should all be included in a definition of security of supply. 194. Article 2(b) of the Directive. 195. The concept may evidently also be applied to describe other phenomena than objectives, for example to describe a risk factor in risk management or risk governance strategies. The latter approach seems to be favoured by the International Energy Agency, Security of Supply in Electricity Markets – Evidence and Policy Issues (Paris: OECD/IEA, 2002), in note 1, at 9, which states that ‘[s]ecurity of supply refers to the likelihood that energy will be supplied without disruptions’ (emphasis added). In this respect, the term may be applied as a tool to measure the likelihood of supply disruptions on the one hand against the costs of avoiding potential disruptions on the other, see C. Egenhofer et al., ‘Market-Based Options for Security of Energy Supply’, INDES Working Paper No. 1/March 2004, 2 et seq. for an example of security of energy supply terminology applied in the context of risk management procedures. 196. Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000, 2. 197. United Nations Development Programme, World Energy Assessment, 2004 Update (New York: UNDP, 2004), 42. In the original World Energy Assessment, the term is described as follows: ‘Energy security – the continuous availability of energy in varied forms, in sufficient quantities, and at reasonable prices – has several aspects. It means limited vulnerability to transient or longer disruptions of imported supplies. It also means the availability of local and imported resources to meet growing demand over time and at reasonable prices,’ see Hisham Khatib et al., ‘Energy Security’, in United Nations Development Programme, World Energy Assessment, Energy and the Challenges of Sustainability (New York: UNDP, 2000), 111–131, at 113.

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Defining the Regulatory Objectives Few would disagree that the uninterrupted physical availability of energy or, more specifically in relation to the topic of this study, the uninterrupted availability of electricity, qualifies as a security of supply objective. The availability of electricity may be viewed from various perspectives, those of regions, countries, different categories of market participants and, ultimately, final customers. The ultimate objective of policies concerned with security of supply will, however, always be to secure the physical availability of electricity to final customers. As a working definition in this study, we will apply a narrow understanding of the security of electricity supply concept as the objective of ensuring the uninterrupted availability of sufficient electricity supplies to final customers at all times. From the perspective of EU electricity generation investments, the overall challenges that must be overcome in order to attain this objective fall into two categories. First, that of promoting investments in generation capacity using other primary energy sources than natural gas in order to hedge against potential disruptions to natural gas supplies from third States. Second, obtaining investments in sufficient electricity generation capacity to ensure uninterrupted supplies in situations of both ordinary and peak load. Unlike the definitions from the Commission and the United Nations Development Programme cited above, environmental concerns are excluded from our working definition of security of supply. Arguably, the aim to promote environmental protection can, from a long-term perspective, by perceived as an intermediate security of supply objective, since one of the many potential effects of environmental destruction may be disruption in the availability of electricity supplies to final customers. Moreover, we showed above how environmental objectives and the dimension of security of supply objectives that relates to primary energy sources can be pursued through similar means, notably the promotion of energy efficiency, renewable electricity production and CCS technologies.198 The overall regulatory objectives of environmental protection and security of supply are therefore closely related, and must be viewed together in the regulation of the energy dimensions of electricity generation investments. The policy objectives as such, however, ultimately pursue aims of a very different nature, although their attainment may be sought through similar means. Furthermore, as we shall see, environmental objectives and security of supply objectives are treated as separate concepts both at TFEU level and within internal electricity market legislation. For the purposes of providing working definitions of the concepts, it is therefore useful to distinguish between security of supply and environmental objectives in order to analyse the way in which they interrelate.199 198. Chapter 4.4 above. 199. For an example of a similar approach, see B. Barton et al., ‘Introduction’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 3–13, at 5, who define ‘energy security’ as ‘a condition in which a nation and all, or most, of its citizens and businesses have access to sufficient energy resources at reasonable prices for the foreseeable future free from serious risk of major disruption of services’.

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Chapter 6 The environmental challenges dealt with in this book relate to the issue of climate change. For the sake of convenience, we will therefore in general apply the term environmental objectives to refer to the aim of mitigating climate change through the reduction of anthropogenic GHG emissions, although environmental objectives obviously also encompass a number of other aims in the area of environmental protection.200 In this context, we have already frequently referred to sustainable investments, environmental sustainability and sustainable development. This terminology merits a few separate remarks. Sustainable development is enshrined as one of the Treaty objectives in Article 2 TEU, and the term also appears in the principle of environmental integration codified in Article 11 TFEU. Although the concept was conceived earlier,201 it became well-known through frequent references to the definition provided in the 1987 Brundtland report Our Common future.202 This definition therefore provides a natural starting point for the understanding of the notion.203 It states that: ‘Sustainable development is development that meets the need of the present without compromising the ability of future generations to meet their own needs.’204 The core of this concept can be described as a requirement that measures to improve the welfare of the population must be within the capacity of the ecosystem to maintain natural assets and their biological diversity for the benefit of present and future generations.205 Given the general nature of the definition, it is no surprise that it has been criticized for vagueness, but that has not hindered its, arguably excessively broad, application by EU institutions.206 It is not our intention in this study to contribute to the general discussion about the meaning and appropriateness of the notion of sustainability.207 However, given that the notion is 200. See, as an example, the Commission’s more far-reaching definition of the concept of ‘environmental protection’ in its Community guidelines on State aid for environmental protection, OJ C82/1, 1.4.2008, para. (70) 1). 201. L. Kra¨mer, ‘Sustainable Development in EC Law’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 375–396, at 377. 202. World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1990). 203. See similarly C. Voigt, ‘Climate Change and the Mandate of Sustainable Development: Observations from a Legal Perspective’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 545–572, at 547–548 and B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), 218–220. 204. World Commission on Environment and Development, Our Common Future (Oxford: Oxford University Press, 1990), 43. 205. See on this the definition in Regulation (EC) No. 2494/2000 of the European Parliament and of the Council of 7 Nov. 2000 on measures to promote the conservation and sustainable management of tropical forests and other forests in developing countries, OJ L288/6, 15.11.2000, Art. 2(4). 206. L. Kra¨mer, EC Environmental Law, 6th edn (London: Sweet & Maxwell, 2007), 9–12. 207. For a presentation of and general background to the Brundtland report and the concept of sustainability, see H.C. Bugge, ‘1987–2007: "Our Common Future" Revisited’, in Sustainable

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Defining the Regulatory Objectives referred to as one of the overarching energy policy objectives of the Union, it is essential to establish an understanding of the term as it is applied within that context.208 EU energy policy documents clearly reflect the application of the notion of sustainability to refer to the attainment of environmental objectives in general and to encompass the mitigation of climate change in particular.209 From this perspective, sustainable development requires investments in electricity production to respect and protect the preconditions for human activity and welfare in the future.210 Drawing the line between sustainable and unsustainable development is, however, not without complications. As stated above, current research indicates that a temperature increase of around 2 C compared to pre-industrial levels could result in self-sustaining, accelerated climate change with devastating consequences.211 Consequently, one possible approach to the sustainable development objective as applied to our present topic is to translate it into an aim to reduce anthropogenic GHG emissions to a point at which atmospheric concentrations are stabilized below the level required to avoid a 2 C temperature increase.212 Since drastically reduced emissions are required to stabilize GHG concentrations below this limit, this essentially means that, at least for the foreseeable future, any measures likely to reduce anthropogenic GHG emissions will contribute to the achievement of the sustainable development objective. Whether we refer to this objective as aiming to promote sustainable development, sustainable investments, environmental sustainability, or simply as aiming to promote environmental objectives is, from that perspective, of lesser importance.213 The aim of ensuring electricity supplies at affordable prices is also excluded from our working definition of security of supply as advanced above, although this

208.

209. 210.

211. 212. 213.

Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 1–21. See also B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), in particular at 217– 229, for a thorough discussion of the concept as it is applied within a TFEU context. See, inter alia, Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, 5; Commission Communication: An energy policy for Europe, COM (2007) 1 final, 10.1.2007, 3; and Commission Communication: 20 20 by 2020 Europe’s climate change opportunity, COM (2008) 30 final, 23.1.2008, 2. Ibid. See C. Voigt, ‘Climate Change and the Mandate of Sustainable Development: Observations from a Legal Perspective’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 545–572, at 548–549, where this point is advanced at a more general level. Chapter 4.3 above. C. Voigt, ‘Climate Change and the Mandate of Sustainable Development: Observations from a Legal Perspective’, in Sustainable Development in International and National Law, ed. H.C. Bugge & C. Voigt (Groningen: Europa Law Publishing, 2008), 545–572, at 552–553. Based on the discussion above, one might, terminologically speaking, question the appropriateness of the term environmental sustainability, which is arguably a tautology. Nevertheless, the term is regularly applied in practice, and it also appears in Art. 3(1) of he Electricity Directive (by reference to an ‘environmentally sustainable market’). It is therefore not excluded in the following.

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Chapter 6 objective is clearly a fundamental EU energy policy objective.214 From the perspective of electricity generation investments in a competitive market, the overall means to contribute to affordable electricity prices is to avoid overinvestments where the additional costs are ultimately passed on to customers. In this author’s opinion, it is therefore more appropriate to view the aim of affordable electricity prices as an intermediate goal to achieve the overall aim of promoting EU competitiveness.215 In the latter respect, we will, as a working definition, understand the aim of promoting competitiveness as an objective to promote the competitiveness of EU industry and consumers and, ultimately, of the EU as a whole through the promotion of cost-efficient investments, which are expected to lead to lower electricity prices.216 Public regulation of electricity price levels, on the other hand, is primarily motivated by a need to redistribute welfare, whether between electricity producers and customers, or between different customer groups. Such regulation in the interest of affordable electricity prices is therefore in reality likely to be based on other overall policy objectives than security of supply or competitiveness, such as for example the need to ensure consumer protection. Price interventions do, however, affect security of supply by increasing investor uncertainty and thereby create additional challenges for investment regulation. This consideration further supports the decision not to include affordable electricity prices as an aspect of security of supply in the working definition advanced above. Consequently, although we have applied a narrow interpretation above to the notion of security of supply, any investment regulation which seeks to ensure the future uninterrupted availability of sufficient electricity supplies to EU final customers must ultimately also take into account the investments’ effect on sustainability and competitiveness. This wider balancing of the overall regulatory objectives provides an important background to the following analysis of to what extent EU regulation of electricity generation investments addresses today’s security of supply challenges.

214. This aim has been emphasized from the very start of the internal energy market process, see, inter alia, Council Resolution of 16 Sep. 1986 concerning new Community energy policy objectives for 1995 and convergence of the policies of the Member States, OJ C241/1, 25.9.86, 2, where it is held that ‘the aim of any energy policy is to enable consumers to have adequate and secure supplies of energy under satisfactory economic conditions, which is one of the prerequisites for competitive structures and satisfactory economic growth’ (emphasis added). 215. The definitions and functions of the International Energy Agency can be applied as an example of a similar approach. The aim of contributing to energy supplies at affordable prices falls within the organization’s main objectives, see C. Redgwell, ‘International Energy Security’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 18–46 at 29 with further references. Nevertheless, the Agency’s definition of security of supply excludes variables related to price levels and price volatility, see International Energy Agency, Security of Supply in Electricity Markets – Evidence and Policy Issues (Paris: OECD/IEA, 2002), note 1, at 9. 216. See along these lines Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, 7.

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Part III

The Treaty Context

Chapter 7

Introduction

The aim of this part of the book is to establish a Treaty context for the understanding and application of the concept of security of supply and its relationship with the EU’s other overall electricity market objectives. This entails a wider approach than one simply focused on electricity generation investments, although we will particularly focus on the latter area in the following. Energy policies, and energy security concerns in particular, have been an important factor in European cooperation throughout the post-war period. The signing of the Treaty establishing the European Coal and Steel Community (ECSC) in 1951 was primarily motivated by the idea that a common market in coal and steel would prevent a resurgence of the German war machine and reinforce Western European integration.217 However, the Treaty also had an important function in securing the supply of coal to the common market.218 Western European cooperation in the area of energy supply was further reinforced by the signing of the Treaty establishing a European Atomic Energy Community (Euratom) in 1957, which had as its object to ‘contribute to the raising of the standard of living in the Member States and to the development of relations with the other countries by creating the conditions necessary for the speedy establishment and growth of nuclear industries’.219 The Treaty establishing the European Economic Community (EEC) was signed at the same time as the sector-specific Euratom Treaty.220 The EEC Treaty,

217. K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 4–5. The Treaty was signed to last for fifty years and expired on 23 Jul. 2002, see Art. 97 ECSC. 218. Article 3(a) ECSC. 219. Article 1 Euratom. 220. Signed in Rome on 25 Mar. 1957.

Chapter 7 which subsequently became the Treaty establishing the European Community (EC) and, now, the TFEU, has – understandably – received much more attention than the other founding treaties given its broad and horizontal approach to the challenges of European integration.221 Although the horizontal nature of the TFEU means that it includes few energy-specific provisions, there is no doubt that the energy sector falls within the scope of the Treaty as an area of shared competence between the EU and the Member States.222 The following analysis of the legal concept of security of supply and its relationship with the EU’s other policy objectives will be discussed from three perspectives, ranging from general to specific EU law: its relationship to the fundamental objectives of the TFEU; its relationship to the substantive principles of the Treaty; and its relationship to the legal bases for the adoption of EU measures within the field. The overall objectives of EU energy policy can be described as existing in two layers. Objectives in the first layer relate to the integration of national markets. As is the case with the creation of an internal market in other sectors of the economy, the removal of restrictions on the free movement of energy products is a prerequisite for the economic integration of national energy markets. The second layer consists of the sector-specific policy objectives of the internal energy market, concerning the creation of a competitive, secure and environmentally sustainable energy market. Albeit security of supply is the only one of these objectives not explicitly mentioned in the Treaty as a fundamental objective, there is little doubt that the concept amounts to an intermediate goal, or a means, for attaining the principal objectives of the Treaty. The main purpose of discussing the concept in relation to the principal Treaty objectives is therefore to establish the context provided by these overall objectives for the understanding of security of supply. This relationship is discussed in Chapter 8 below. The Court of Justice of the European Union have on several occasions emphasized that national security of supply interests can amount to legitimate concerns when evaluated under the substantive principles in Part Three of the TFEU. First, the Court has accepted that the protection of security of supply interests – and ultimately public security interests – in principle can justify national measures contrary to the fundamental free movement principles of the Treaty. Second, obligations to ensure security of electricity supply have consistently been held to qualify as services of general economic interest. The Court’s discussions on security of supply, and the way these relate to its approach to environmental interests under the free movement provisions of the Treaty, are discussed in Chapters 9 and 10.

221. Article 8 of the original EU Treaty of 7 Feb. 1992 amended the Treaty establishing the European Economic Community (EEC) to become the Treaty establishing the European Community (EC). 222. Article 4(2)(i) TFEU.

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Introduction Finally, the legal basis for adopting internal market legislation in the security of supply interest is discussed in Chapter 11, where this basis is also briefly compared with the explicit Treaty basis for the adoption of environmental measures. We will conclude the latter chapter and this part of the book by providing a general introduction to the content of the secondary legislation central to our subsequent analysis, thereby preparing the ground for the evaluations in the following parts of the book.

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Chapter 8

The Relationship between Security of Supply Objectives and the Fundamental Objectives of the TFEU

8.1.

INTRODUCTION

Article 2 of the former EC Treaty in effect set forth the tasks of the Community, the objectives of the Treaty and its principal instruments.223 According to its wording: The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 4, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States. The objectives formerly enshrined in Article 2 EC are now replaced in substance by Article 3 TEU, which includes similar objectives, although with a different wording. The promotion of security of supply amounts to one of a number of sector-specific means to promote the overarching objectives of Article 2 TEU. The objectives of 223. As pointed out by B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), at 173, the wording of the provision does not directly refer to the objectives of the Treaty. Rather, the objectives can be inferred from the statement of the Community’s task and the means by which this task is to be achieved.

Chapter 8 environmental protection, competitiveness and the integration of Member States are – unlike the more sector-specific security of supply aim – explicitly recognized by the provision. The purpose of the following chapter is to give an overview of the relationship between security of supply as a means for attaining – or as an intermediate goal towards attaining – these overarching Treaty objectives. The Treaty objectives set forth in Article 3 TEU are not as such liable to impose legal obligations on Member States or confer rights on individuals.224 In this respect, the objectives must be viewed in relation to the more specific tasks and instruments established by the Treaty.225 Although the references to objectives in Article 3 TEU are not as such liable to impose legal obligations on Member States or confer rights on individuals, the provisions may, in principle, limit the powers of the EU. The principle of conferral of powers enshrined in Article 5(2) TEU entails that the EU must act within the limits of the powers conferred upon it by the Treaty and of the objectives assigned to it therein. However, since the Treaty objectives set forth in Article 3 TEU are far-reaching by nature, it is difficult to see how questions of whether the EU has gone beyond the limits of the objectives assigned to it could be of much practical significance.226 Of more practical importance are questions of whether the Union has gone beyond its competences under the more specific legal bases for adopting new pieces of legislation. Within the present context, the most important legal function of the mentioning of Treaty objectives in Article 3 TEU is therefore in most cases to provide a basis for the interpretation of the substantive provisions of the Treaties and of provisions adopted in accordance with the provisions of the TFEU. The Court of Justice has on a number of occasions applied the objectives and instruments mentioned in former Articles 2 and 3 EC as an interpretative aid in this respect.227 This interpretational value of the provision is also of interest to our present topic. 224. This point of departure for assessing the legal relevance of the Treaty objectives has been emphasized by the Court of Justice on several occasions. See, for example, with respect to the objective of promoting raised standards of living in former Art. 2 EC and the then prevailing Art. 117 EC on social policy, Case 126/86, Fernando Roberto Gime´nez Zaera v. Institut Nacional de la Seguridad Social and Tesorerı´a General de la Seguridad Social, [1987] ECR 3697, para. 11. See also joined Cases C-72/91 and C-73/91, Firma Sloman Neptun Schiffahrts AG v. See betriebsrat Bodo Ziesemer der Sloman Neptun Schiffahrts AG, [1993] ECR I-887, paras 23–29, in particular at para. 28, where the social objectives referred to in the preamble of the former EC Treaty are also mentioned. See also K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 82 with further references. 225. Case C-293/03, Gregorio My v. Office national des pensions (ONP), [2004] ECR I-12013, para. 29. 226. See similarly B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), 182. The question may, however, be of some practical importance in situations where the EU lacks the specific competence to act within a certain field, basing its competence on the need to act in order to attain the overall EU objectives, see K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 87. 227. See B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer

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The Relationship between Security of Supply Objectives 8.2.

SECURITY OF SUPPLY AND COMPETITIVENESS

Interruptions in the supply of electricity to end-users may have a number of direct and indirect effects to the detriment of the promotion of the objectives in Article 3 TEU. Electricity interruptions – whether planned or unplanned – carry high economic costs due to the vital role of electricity in the economy. Interruptions may cause the economy to suffer not only because of the resulting reduction in enterprises’ productivity, but also because they may reduce demand, as interruptions may prevent consumers from acquiring goods or services. In other words, the value of lost load is high.228 There can therefore be little doubt that ensuring security of electricity supply is one of many intermediate (and sector-specific) objectives which serves to promote the objectives relating to economic development emphasized by Article 3 TEU. Due to the importance of electricity as an input for the production of goods and services, electricity interruptions may arguably threaten the promotion of ‘balanced economic growth and price stability’ as well as ‘a highly competitive social market economy’. A deep analysis of the objectives set forth in Article 3 TEU is not necessary in order to establish that security of supply can be perceived as an intermediate goal for promoting the overall Treaty objectives. What makes the relationship between the sector-specific security of supply objectives and the overall Treaty objectives exceptional is the fundamental role played by electricity as an input in the general economy.229 Simply put, in today’s society, it is difficult to envisage the achievement of the overarching Treaty objectives in the absence of a stable electricity supply. The relationship outlined above between security of supply objectives and the fundamental Treaty objectives is – whether directly or indirectly – essentially of an Law International, 2009), 173–179 for an overview of the case law relating to the interpretative value of the objectives set forth in Art. 2 EC. 228. The value of lost load (VoLL) can be defined as the estimated amount that customers receiving electricity under firm contracts would be willing to pay to avoid disruption to their electricity service, see P. Vassilopoulos, Models for the Identification of Market Power in Wholesale Electricity Markets (2003), 46–47. Given the wide range of direct and indirect cost factors which might be attributed to an interruption to electricity supplies, it is not possible to estimate the costs that would be incurred exactly. V. Ajodhia, ‘Costs of Power Infrastructure Malfunctioning’, in Critical Infrastructures at Risk. Securing the European Electric Power System, ed. A.V. Gheorghe et al. (Dordrecht: Springer, 2006), 331–342, at 331–332, does, however, provide some examples of estimates to give an idea of the magnitude of the problem: The cost of the major power outage in parts of the north-eastern USA and in Canada on 14 Aug. 2003, which affected 50 million people, was estimated at USD 6 billion. According to newspaper reports, during the Italian power outage on 28 Sep. 2003, which affected 57 million people and left parts of the country without electricity for up to eighteen hours, perished foods and lost retail earnings alone caused losses amounting to EUR 120 million. 229. This point has also been emphasized by the Council with respect to energy in general in its statement that ‘energy is a decisive long-term factor for the improvement of the competitiveness of European economies on which economic growth within the European Union is closely dependent’, see Council Resolution of 23 Nov. 1995 on the Green Paper For a European Union Energy Policy, OJ C327/3, 7.12.1995, 4.

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Chapter 8 economic nature: electricity interruptions carry high costs that directly affect the economy of enterprises and indirectly affect the economy of consumers and the economic and social development of Member States. Supply interruptions may evidently also threaten other fundamental interests, such as public health. And, ultimately, it is at least theoretically possible to envisage a situation where longterm electricity interruptions could threaten the security of Member States. The protection of these interests is, however, still primarily a Member State task. Consequently, one may conclude that, within the context of the overall Treaty objectives, security of electricity supply is an intermediate goal the promotion of which has a (directly) beneficial effect on the ultimate economic development objectives of the Treaty as well as (a more indirectly) positive effect on its social development objectives. On the other hand, attaining the economic objectives of the Treaties also imply that over-investment should be avoided. Over-investment entails extra costs to society which eventually may affect competitiveness, whether the additional costs are passed on directly to customers or are subsidized through public resources and ultimately borne by tax payers. Consequently, the economic Treaty objectives also provide a background for the balancing involved in seeking to achieve an optimal level of investment: an investment policy which on the one hand ensures security of supply, and ultimately competitiveness, while on the other does not result in costly over-investment (to the detriment of competitiveness). 8.3.

SECURITY OF SUPPLY AND ENVIRONMENTAL PROTECTION

Environmental protection was not explicitly recognized as a Treaty objective in the original EEC Treaty of 1957, but has gained firm acceptance as a fundamental Treaty principle following the adoption of the Single European Act in 1987 and the subsequent Treaties of Maastricht, Amsterdam and Nice.230 Former Article 2 EC explicitly recognized the objective of environmental protection by establishing that the Community shall promote ‘a high level of protection and improvement of the quality of the environment’ and by emphasizing the importance of sustainable development.231 The objective of environmental protection is today also acknowledged in Article 3 TEU. Furthermore, the development has been further reinforced by the adoption, and later strengthening, of the principle of environmental integration through the Treaty amendments made by the Single European Act, the Maastricht and the Amsterdam Treaties. The principle as it stands today in 230. F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 185–187 and B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), 204–206. 231. The Community shall promote ‘a harmonious, balanced and sustainable development of economic activities’ and a ‘sustainable and non-inflationary growth’ (emphasis added).

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The Relationship between Security of Supply Objectives Article 11 TFEU sets forth that ‘[e]nvironmental protection requirements must be integrated into the definition and implementation of the Union policies and activities, in particular with a view to promoting sustainable development’. Essentially, this provision imposes an obligation on EU institutions to contribute to the pursuit of environmental objectives through their incorporation – or integration – into all areas of Union policy.232 There is little doubt that the Treaties’ environmental principles and objectives provide a firm basis for the promotion at Union level of sustainable electricity generation investments. The importance of these EU objectives to energy sector regulation in general, as well as in relation to the promotion of investments in renewable energy sources in particular, has been emphasized by the Court of Justice on several occasions. The Court’s early recognition of environmental protection as ‘one of the Community’s essential objectives’, in the ADBHU case, has subsequently been upheld and has also been applied more specifically to electricity market activities.233 Consequently, in Outokumpu, which concerned the validity under Articles 28, 30 and 110 TFEU of an excise duty charged on electricity at differentiated rates according to its method of production, the Court emphasized that ‘compatibility with the environment, particularly of methods of producing electrical energy, is an important objective of the Community’s energy policy’.234 This view was further refined in PreussenElektra, where the Court scrutinized the compatibility with the Treaty of a German feed-in tariff scheme for the promotion of investments in electricity production from renewable energy sources.235 The Court emphasized that the use of renewable energy sources in electricity production pursues the objective of environmental protection by contributing to a reduction of greenhouse gas emissions, referring to the Community’s Kyoto 232. The scope of this obligation, and more generally the interpretation of Art. 11 TFEU, is however still a disputed issue which will not be pursued further here. See further B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), in particular at 206–215. 233. Case 240/83, Procureur de la Re´publique v. Association de de´fense des bruˆleurs d’huiles usages, [1985] ECR 531, para. 13 (concerning the compatibility of a Community Directive on the disposal of waste oils with the free movement and competition provisions of the Treaty). F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 187, describes this early acknowledgment of environmental objectives, which preceded their incorporation into the EC Treaty as ‘a process of judicial anticipation’. See also Case 302/86, Commission v. Denmark, [1988] ECR 4607, paras 8 and 9, where this essential Community objective was held to amount to a mandatory requirement under the free movement of goods provisions. 234. Case C-213/96, Outokumpu, [1998] ECR I-1777, paras 32–33. However, the Court still found that the excise duty was contrary to (current) Art. 110(1) TFEU, since a fixed duty was levied on all imported electricity, regardless of means of production. The rationale for having a fixed levy on imports was, according to the Finnish authorities, based on the difficulties of establishing the origins of imported electricity. On this basis, the Court found that the unequal treatment of domestic and imported electricity was based on practical difficulties rather than environmental objectives, and as such could not be upheld under Art. 110(1) TFEU, see paras 34–41. 235. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Chapter 8 protocol commitments236 as well as Article 11 TFEU and the preamble to the then prevailing Electricity Directive 96/92/EC.237 Consequently, the environmental objectives and principles of the Treaty lend strong support to the idea of promoting sustainable energy security investments. The parallels that exist between the attainment of security of supply and environmental objectives are also well illustrated by several electricity market Directives adopted in accordance with the environmental provision contained in (now) Article 192(1) TFEU. While primarily motivated by environmental objectives, the first preambles of both the RES Directive and the Cogeneration Directive respectively emphasize the security of supply benefits from promoting electricity production from renewable energy sources and combined heat and power production. The relationship is even more clearly underlined in the preamble to the Energy Services Directive, which, despite the fact that the Directive is adopted in accordance with Article 192(1) TFEU, commences by recalling that: In the Community there is a need for improved energy end-use efficiency, managed demand for energy and promotion of the production of renewable energy, as there is relatively limited scope for any other influence on energy supply and distribution conditions in the short to medium term, either through the building of new capacity or through the improvement of transmission and distribution. This Directive thus contributes to improved security of supply.238 On the other hand, policies promoting environmental and security of supply objectives may in practice also pull in opposite directions, as is the case with investments in power plants using indigenous coal resources without CCS technologies. The relationship between intermediate security of supply goals and ultimate economic objectives also contributes to illustrate how these colliding interests in reality often concerns a balancing of economic and environmental interests. More specifically, energy policy involves a balancing between, on the one hand, the shorter-term economic interests of end-users (and society) in acquiring electricity at low costs and, on the other hand, the longer-term environmental interests of society in internalizing the environmental costs of electricity generation. Internalization of these costs is, at least in the shorter term, likely to be reflected in 236. By entering into the Kyoto protocol, the Community as such has committed itself to reducing climate gas emissions by 8% compared to 1990 levels by 2012, see Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000, 53 and Council decision of 25 Apr. 2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder, OJ L130/1, 15.5.2002, where the Kyoto Protocol is attached as Annex I. 237. Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 73–77. For a more general discussion of the Court’s case law on environmental protection, see further F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205 and B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), 204–2015 and 217–229. 238. The first preamble of Directive 2006/32/EC.

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The Relationship between Security of Supply Objectives increased electricity prices. This entails, in turn, that in order to attain the overall economic and environmental objectives of the TFEU, Union energy policy must seek to ensure that electricity prices reflect actual costs, including environmental costs, rather than aim at ensuring low prices as such. 8.4.

SECURITY OF SUPPLY, INTEGRATION AND MEMBER STATE SOLIDARITY

Integration is one of the fundamental energy sector objectives.239 The promotion of market integration both poses challenges to and assists in the attainment of a functioning electricity market in general and the promotion of the security of electricity supply objective in particular. The challenges involved relate particularly to the size and complexity of an integrated internal electricity market, compared to national markets.240 From an economic perspective, increased interdependence between previously isolated electricity systems may contribute to increasing the complexity of issues to be assessed when making investment decisions, while, from a legal perspective, there is an increased need for a harmonized regulatory approach. Integration also, however, brings security of supply advantages. The Commission has viewed these advantages as one of the reasons for establishing an internal energy market since the launch of its 1988 Working Paper, which held that greater interconnection ‘would make it possible to increase both the solidarity between Member States and the flexibility of the industry. It would therefore increase the emergency resources available in the event of a crisis and create the possibility of additional trading’.241 Consequently, the security of supply advantages of market integration are particularly linked to the idea that an integrated market provides previously isolated regions with an increased number of supply alternatives. Increasing the number of supply options means, firstly, that reserve capacity for peak-load situations can be shared between Member States.242 While from an 239. The Commission voiced concerns as early as 1968 that barriers to trade in energy products and, consequently, the lack of a common energy market, would compromise the degree of integration that could be achieved in the energy sector, see Commission Working Document: The internal energy market, COM (88) 238 final, 2.5.1988, 2, with reference to a Communication from the Commission to the Council of 1968. See also, inter alia, Commission White Paper: An energy policy for the European Union, COM (95) 682 final, 13.12.1995, 3 and Commission Communication: Completing the internal energy market, COM (2001) 125 final, 13.3.2001, 9. 240. See the conclusions of L. De Vries et al., ‘Liberalisation and Internationalisation of the European Electricity Supply System’, in Learning from Critical Infrastructures at Risk – Securing the European Electric Power System, ed. A.V. Gheorghe et al. (Dordrecht: Springer, 2006), 37–83, at 82–83. 241. Commission Working Document: The internal energy market, COM (88) 238 final, 2.5.1988, 6. 242. The Commission’s Explanatory Memorandum to its Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment, COM (2003) 740 final, 10.12.2003, 5.

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Chapter 8 economic perspective there is considerable merit to the idea of sharing expensive reserve generation capacity between Member States, it is debatable whether this advantage should be defined as a security of supply benefit. Most Member States have traditionally measured generation capacity reserves on a national basis, due to the limited amount of integration between systems. Arguably, the advantages of sharing reserve generation capacity are therefore primarily economic, since integration reduces each Member State’s need to invest in capacity to cover its domestic peak-load scenarios. Strictly speaking, reserve capacity sharing should therefore be viewed more precisely as a measure that contributes to reducing the costs of ensuring security of supply, rather than a measure which ensures security of supply as such. Whether or not we view reserve capacity sharing as a security of supply advantage, however, it is clear that such sharing does contribute to promoting the overall economic objectives of the Treaty, which, as we have seen, also form the principal basis for the attainment of intermediate security of supply objectives.243 In addition to reserve capacity sharing, the interconnection of electricity systems may also be mutually beneficial for previously isolated markets dominated by different technologies and primary energy sources. For example, the interconnection of the Norwegian market, which is dominated by hydropower generation, and Continental markets dominated by thermal generation capacity may bring about security of supply advantages for both systems. As a thermal power plant operates most cost-efficiently when utilized at full capacity, surplus production capacity can be exported to the hydropower system in dry years, reducing the risks associated with periods of low precipitation. Conversely, the hydropower system will be able to export production capacity in wet years, and will be generally better suited to meeting reserve capacity and balancing requirements than thermal systems.244 These latter benefits are, arguably, more directly related to security of supply considerations, although it is, in principle, possible to envisage these benefits being pursued through the promotion (more expensively) of energy mix diversification at national level. Finally, the assumption that an integrated electricity market will lead to security of supply advantages presupposes a degree of trust and solidarity between Member States. Sharing of reserve capacity will not work if Member States refuse to share their capacity in peak-load situations, or if Member States simply fear their 243. Integration of national markets is also assumed to have more direct beneficial economic effects, see Commission Working Document: The internal energy market, COM (88) 238 final, 2.5.1988, 5, which appears to assume that the integration of national energy markets should in itself also contribute to reducing energy costs. See also R. Pierce, M. Trebilcock & E. Thomas, ‘Regional Electricity Market Integration. A Comparative Perspective’, CRNI 8, no. 2 (2007): 215–257 for a recent analysis of the economic impact of, and main obstacles to, electricity market integration in different regional markets, including the EU internal electricity market. 244. See similarly U. Hammer, ‘Norway: Security of Supply in Liberalized Energy Sectors: A New Role for Regulation’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 307–336, at 321.

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The Relationship between Security of Supply Objectives neighbours might refuse to do so. Other problems may also arise. Since investing in reserve capacity can be expensive, one Member State may be suspected by other Member States of free-riding, that is, under-investing because it is secure in the knowledge that capacity will be shared in peak-load situations. These concerns inevitably raise the question of the scope of the principle of Union solidarity, which has been held by the Court of Justice to represent ‘one of the foundations of the Community’.245 Although the internal electricity market measures do not fully resolve the challenges of integration and solidarity at present, recent measures do nonetheless lay the foundations for an increased level of solidarity in these areas, as we shall see later.246 8.5.

CONCLUSIONS

We have seen in this chapter that, although the sector-specific security of supply objective is, for understandable reasons, not explicitly reflected in Article 3 TEU, attainment of this objective clearly amounts to an intermediate goal that contributes to the promotion of other, overarching Treaty objectives. In the context of these latter objectives, the reasons for adopting security of supply legislation at Union level are primarily economic: secure electricity supplies are a precondition for the EU’s economic development. The intermediate goal of security of supply also partly overlaps the other overarching objectives of internal energy market policy, which, unlike the former goal, have explicit bases in the text of TEU. Within the context of electricity generation investments, the environmental objectives of the EU Treaties provide a strong case for sustainable energy security investments, such as those including electricity generation from renewable energy sources, energy efficiency measures and development of CCS technologies. Finally, the security of supply objective must be viewed in relation to the objective of market integration, which both helps and hinders the attainment of the former objective. The relationship between these objectives is likely to raise the issue of the scope of the principle of EU solidarity since, ultimately, a Member State may be confronted with a choice of whether to priorities national security of supply though domestic (and possibly even protectionistic) measures or through measures promoting Union trade. In the next chapter, we will look more closely at how the Court of Justice has dealt with national security of supply interests as grounds justifying exemption from the free movement provisions of the TFEU. In this respect, we will also examine the extent to which it has accepted that security of supply interests constitute justifiable grounds as compared to environmental interests.

245. Case 77/77, Benzine en Petroleum Handelsmaatschappij BV and Others v. Commission, [1978] ECR 1513, para. 15. 246. Chapter 19.5.1 below.

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Chapter 9

Justification for Measures Restricting the Free Movement of Electricity

9.1.

INTRODUCTION

This chapter discusses security of supply as a justification for national measures restricting the free movement of electricity and its relationship to environmental protection as an alternative exemption ground. The application of security of supply as a ground justifying exemptions from the fundamental free movement provisions of the TFEU provides a widely different context to the interpretation of the concept compared to the Treaty objectives discussed above. The objective of environmental protection is, as we shall see, less affected by the Treaty context in which it is interpreted, as the Court of Justice has generally taken a more favourable attitude to its use as a ground justifying exemption from the provisions of the Treaty. Electricity, like natural gas and other petroleum products, has long been regarded as constituting ‘goods’ within the meaning of the TFEU.247 Consequently, the TFEU prohibitions on national measures having equivalent effect to quantitative import and export restrictions apply to energy products in the same manner as to 247. With regard to electricity, the Court unequivocally declared that electricity is to be regarded as ‘goods’ within the meaning of (current) Art. 34 TFEU in Case C-393/92, Almelo, [1994] ECR I-1477, para. 28. By way of substantiating this finding, the Court, in addition to referring to the Community’s tariff nomenclature, noted that it had already accepted that electricity might fall within the scope of (current) Art. 37 TFEU in Case 6/64, Flaminio Costa v. E.N.E.L, [1964] ECR 585 (although the extent to which the Treaty provisions applied to electricity had not been made completely clear in the latter judgment). The Court has also in subsequent decisions confirmed that electricity constitutes a product for the purposes of the provisions of the TFEU, see Case C-158/94, Commission v. Italy, [1997] ECR I-5789, paras 14–20 and Case C-206/06, Essent, [2008] ECR I-5497, para. 43.

Chapter 9 other products. Arguments brought before the Court of Justice that these prohibitions contain an unwritten derogation in respect of petroleum products, due to such products’ vital national importance, have been sharply rejected.248 The same would clearly be the case with electricity. On the other hand, the assessment of derogations from the free movement provisions of the Treaty in the security of supply interest nevertheless raises some particular issues, primarily due to the difficulties involved in defining the latter interest. Before analysing these derogations, a brief overview of the relevant TFEU provisions on the free movement of goods and their application to the topic of this book will be provided as context for the subsequent discussion. Article 34 TFEU provides that quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.249 The Court of Justice has traditionally applied a far-reaching interpretation of this provision based on the well-known Dassonville formula, that is, the provision covers any measure which is capable of hindering, directly or indirectly, actually or potentially, intra-Union trade,250 although this provision has more recently been moderated by the equally well-known Keck distinction.251 A corresponding provision concerning export restrictions is included in Article 35 TFEU, although the Court of Justice has not been willing to subjugate the wording of this provision to the same wide interpretation as that which has been applied to Article 34 TFEU. Article 36 TFEU offers an exhaustive list of derogations from Articles 34 and 35 TFEU for measures pursuing the legitimate interests set forth in that provision. These include measures justified on the grounds of public policy, public security and the protection of health and the life of humans, animals and plants. The Court of Justice has consistently held that Article 36 TFEU, as an exception to a fundamental principle of the Treaty, must be interpreted strictly.252 The interests specifically mentioned in Article 36 TFEU are supplemented by a non-exhaustive list of so-called mandatory requirements developed by the Court of Justice, which include other legitimate interests such as protecting the environment and consumer protection.253 Unlike the interests mentioned in Article 36 TFEU, the mandatory 248. Case 72/83, Campus Oil, [1984] ECR 2727, paras 14 and 17. 249. For more thorough introductions to the topic, see, inter alia, P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003) and C. Barnard, The Substantive Law of the EU. The Four Freedoms, 2nd edn (Oxford: Oxford University Press, 2007), 27–172. 250. Case 8/74, Procureur du Roi v. Benoıˆt and Gustave Dassonville, [1974] ECR 837, para. 5. See also in particular Case 120/78, Cassis de Dijon, [1979] ECR 649, which may be read as confirming the wide approach drawn up by the Court in the Dassonville formula. 251. Joined Cases C-267/91 and C-268/91, Criminal Proceedings against Bernard Keck and Daniel Mithouard, [1993] ECR I-6097, paras 14–17. 252. See, inter alia, Case 46/76, W. J. G. Bauhuis v. The Netherlands State, [1977] ECR 5, para. 12 (which refers to (current) Art. 36 TFEU as a derogation from ‘the basic rule’ on the free movement of goods) and Case 72/83, Campus Oil, [1984] ECR 2727, para. 37. 253. The idea of mandatory requirements was first introduced by the Court in Case 120/78, Cassis de Dijon, [1979] ECR 649 (concerning public health interests), and the non-exhaustive list of mandatory requirements has been extended gradually in subsequent case law.

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Justification for Measures Restricting the Free Movement of Electricity requirements established by case law are – according to the traditional view – only applicable to national measures that apply to domestic and imported products without distinction.254 In addition, the application of the derogation grounds provided by the Treaty, as well as of the mandatory requirements provided by case law, requires that the national measures in question should be proportionate to the objectives pursued, as will be discussed further below.255 The case law of the Court of Justice relevant to the security of supply debate has been concerned with measures having equivalent effect to quantitative import restrictions. The two most important cases in this respect, Campus Oil256 and PreussenElektra,257 both essentially concerned national obligations to ‘buy local’ in order, respectively, to ensure the operation of a domestic oil refinery and sufficient investments in domestic electricity generation from renewable energy sources. As a general point of departure, such ‘buy local’ obligations are clearly contrary to Article 34 TFEU, as confirmed by the Campus Oil case, although the Court’s approach in PreussenElektra gives rise to some confusion on this point and raises the question of whether a reservation has to be made with respect to environmental objectives.258 The question of in what situations these restrictive measures can be justified on the basis of the grounds provided in Article 36 TFEU or on the basis of the mandatory requirements evolved in case law raises more difficult questions. The Campus Oil decision introduced the concept of a relationship between security of energy supply objectives and the public-security grounds contained in Article 36 TFEU. The criteria established by the Court in this case have proved remarkably resilient, especially given that some commentators have referred to the case as exceptional and as having been decided on the basis of exceptional circumstances.259 The following analysis of these criteria and their evolution in subsequent case law has two objectives. First, it seeks to establish the extent to which security of electricity supply objectives may be relied on today as grounds for exemption from the provisions on free movement of goods. However, the following analysis also has a second and more abstract objective: namely, to discuss the origin and content of the legal concept of security of supply within the 254. The Court of Justice’s approach in this respect has attracted some – in this author’s view wellfounded – criticism. For a discussion on this issue, with particular emphasis on the Court’s decision in Case C-379/98, PreussenElektra, [2001] ECR I-2099, see F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 187–194. 255. See s. 9.6 below. Furthermore, Art. 36 TFEU, last sentence, requires that the restriction must not constitute a means of arbitrary discrimination or a disguised restriction between Member States. This safety valve, intended in particular to avoid circumvention by the Member States of the fundamental Treaty principles, will not be commented on in the following. 256. Case 72/83, Campus Oil, [1984] ECR 2727. 257. Case C-379/98, PreussenElektra, [2001] ECR I-2099. 258. See further s. 9.7 below. 259. Opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 209 and S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 87.

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Chapter 9 internal market in order to shed light on the understanding of the term as it has later been applied in EU secondary legislation. The PreussenElektra decision raises the question of the status of environmental objectives as grounds for justifying free movement restrictions that promote new investments in electricity production from renewable energy sources. As we shall see, the Court has gone to great lengths to accept such measures, in this author’s view correctly. This, in essence, raises the question of whether environmental objectives enjoy a particular status in EU law, taking precedence over security of supply objectives. We will revert to this question at the end of the chapter. 9.2.

THE STARTING POINT: CAMPUS OIL

The Court of Justice handed down its Campus Oil judgment in 1984. At that time, the 1973–1974 oil crisis was still casting a shadow over European energy policy and the application of the Treaty principles to the energy market was still, to some extent, controversial. The judgment was also the first decision to indicate the extent to which a Member State may rely on public security to justify restrictions on trade between Member States that benefit a domestic industry.260 In addition, the Court’s reasoning provided the first concrete example of a balancing between the exceptions provided in (current) Article 36 TFEU and matters of an economic nature.261 Not surprisingly, the decision attracted a good deal of attention from academic lawyers – not only within the field of energy law.262 The case came before the Court of Justice as a preliminary reference from the High Court of Ireland. It essentially concerned Irish measures that required importers of refined petroleum products to purchase a certain proportion of their supplies at fixed prices from the then State-owned refinery at Whitegate, County Cork. This was, and still is, Ireland’s only refinery. Five traders in petroleum products objected to the purchase obligation, claiming, inter alia, that it amounted to an import restriction contrary to (current) Article 34 TFEU. The Irish authorities, however, contended that the measures did not breach Article 34 TFEU, and that, in any case, the purchase obligation was justified according to (current) Article 36 260. Editorial Comments on Campus Oil, ECLR (1984): 245–255, at 245. 261. K. Mortelmans, ‘Case Note to Campus Oil’, CMLR (1984): 687–713, at 699. 262. See K. Mortelmans, ‘Case Note to Campus Oil’, CMLR (1984): 687–713; P. Oliver, ‘A Review of the Case Law of the Court of Justice on Articles 30 to 36 EEC in 1984’, CMLR (1985): 301–328, at 307–312; Editorial Comments on Campus Oil, ECLR (1984): 245–255; D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54; J. Minor, ‘Refining the Concept of Public Security’, ELR (1984): 340–344 and, from a different perspective, D. O’Keefe, ‘Appeals against and Order to Refer under Article 177 of the EEC Treaty’, ELR (1984): 87–104. For a more recent discussion of the case, see S.S. Haghighi, Energy Security – The External Legal Relations of the European Union with Major Oil- and Gas-Supplying Countries (Oxford: Hart Publishing, 2007), 85–87.

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Justification for Measures Restricting the Free Movement of Electricity TFEU, since the measure ensured the operation of Ireland’s only refinery, which was necessary to secure Irish petroleum supplies.263 The background to the Irish authorities’ introduction of the purchase obligation was quite distinctive and, unsurprisingly, given the often political nature of energy policy decisions, opinions differ as to the Irish authorities’ actual motivation. What is clear is that the measures were introduced in a period when the European oil refinery industry was characterized by overcapacity,264 a situation that, in 1981, had motivated the four major oil companies who were the original owners of the Irish Refining Company Limited (which owned the Whitegate refinery), to seek to cease activities at the refinery permanently. Closing the only refinery in Ireland would have meant that all suppliers of refined petroleum products to the Irish market would have had to obtain their supplies from other countries, in particular the UK, which accounted for approximately 80% of supplies at the time. Accordingly, citing security of supply interests, the Irish government acquired the total share capital of the Irish Refining Company Limited (following unsuccessful negotiations with the original owners regarding their continued operation of the refinery).265 One commentator has, however, suggested (albeit without further substantiation) that another motivating factor behind the Irish government’s efforts to continue operations at Whitegate was high unemployment in County Cork at the time and a general interest in securing votes.266 Having acquired the refinery, however, the Irish government discovered that neither the oil companies nor domestic Irish companies wanted to buy the refinery’s products at the price of output, which was apparently above the market price.267 According to the Irish authorities, some oil companies even stated they were unwilling to buy products from the refinery at any price.268 Consequently, an obligation for importers to purchase a proportion of their supplies (limited to a maximum of 35% of each importer’s requirement for petroleum products) from the Whitegate refinery at fixed prices, was eventually introduced as a temporary measure by the Irish government to ensure the refinery’s continued operation.269 The Irish authorities argued that, especially in view of Ireland’s high dependency on refined petroleum products from the UK, Ireland needed to maintain a substantial degree of independence with regard to crude oil purchases and refining capacity in the interests of public policy and public security.270

263. In addition, the Court was invited by the Greek government in its observations to consider the relationship of the measures to (current) Art. 86(2) EC. The Court responded by discussing the issue very briefly, see Case 72/83, Campus Oil, [1984] ECR 2727, paras 18–19. 264. Editorial Comments on Campus Oil, ECLR (1984): 245–255, at 245. 265. Case 72/83, Campus Oil, [1984] ECR 2727, 2732. 266. Editorial Comments on Campus Oil, ECLR (1984): 245–255, at 246. 267. Ibid. 268. Case 72/83, Campus Oil, [1984] ECR 2727, 2737–2738. 269. Opinion of AG Sir Gordon Slynn in Case 72/83, Campus Oil, [1984] ECR 2727, 2759. 270. Case 72/83, Campus Oil, [1984] ECR 2727, 2737.

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Chapter 9 Neither the Advocate General nor the Court expressed any doubts as to whether the Irish measures amounted to a restriction under Article 34 TFEU. The Court reiterated the Dassonville formula before pointing out that an obligation on importers to purchase a certain proportion of their supplies from a national supplier limited their possibilities for importing the same product.271 Consequently, the measures had a protective effect, as they favoured a national producer to the detriment of producers in other Member States. The measures therefore had equivalent effect to a quantitative restriction on imports.272 In other words, the purchase obligation was directly discriminatory.273 9.3.

RELATIONSHIP WITH EXISTING EU MEASURES

By the time the Campus Oil case came before the Court, the 1973–1974 oil crisis had already caused the Community to adopt a comprehensive set of oil market measures. Before examining the scope of the grounds for exemption contained in Article 36 TFEU in more detail, the Court therefore found it appropriate, in the light of the Commission’s submission in the case, to discuss whether the national measures could in any event be justified on the basis of existing Community rules on the security of oil supply.274 This question is equally relevant to the assessment of internal electricity market measures given the wide range of Community legislation adopted in this sector over the past decade. The issue of the relationship between Community and Member State measures had first been addressed by the Court in Simmentahl. This case considered whether Italian provisions on compulsory veterinary and public health inspections were justified following the adoption of several Community Directives harmonizing health laws.275 As the Court emphasized in that case, Article 36 TFEU only permits national measures to derogate from Articles 34 and 35 TFEU to the extent that such derogation ‘is and continues to be justified for the attainment of the objectives’ relied upon.276 This view was later reiterated by the Court in its better known Tedeschi judgment, where the non-performing party under a contract for the supply

271. Ibid., paras 15–16. 272. Ibid., paras 16–20. See also the reasoning of AG Sir Gordon Slynn in his opinion to the Court at 2760–2761. D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, at 38, perceives the Irish measure as ‘an outright quantitative restriction on imports’. P. Oliver, ‘A Review of the Case Law of the Court of Justice on Articles 30 to 36 EEC in 1984’, CMLR (1985): 307–312, at 308, on the other hand, refers to the measure as having equivalent effect to a quantitative import restriction, thus following the approach of the Court. 273. See similarly D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, at 38, and J. Minor, ‘Refining the Concept of Public Security’, ELR (1984): 340–344, at 341. 274. Case 72/83, Campus Oil, [1984] ECR 2727, paras 25–31. 275. Case 35/76, Simmenthal SpA v. Ministero delle Finanze italiano, [1976] ECR 1871, paras 9–20. 276. Ibid., para. 14. Emphasis added.

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Justification for Measures Restricting the Free Movement of Electricity of feedstuff had argued that its default was due to a border restriction imposed by the Italian health authorities contrary to Community law.277 As the Court held in the latter decision, where Community directives provide for the harmonization of measures necessary to ensure the protection of one of the interests included in Article 36 TFEU and establish Community procedures to check that the measures are being observed, recourse to Article 36 TFEU is no longer justified.278 In Campus Oil, the Court elaborated this view further by emphasizing that: Recourse to [now Article 36 TFEU] is no longer justified if Community rules provide for the necessary measures to ensure protection of the interests set out in that article. National measures such as those provided for in the 1982 Order cannot therefore be justified unless supplies of petroleum products to the Member State concerned are not sufficiently guaranteed by the measures taken for that purpose by the Community institutions.279 The Court then went on to discuss whether the existing Community oil market measures, as well as measures adopted within the context of the International Energy Agency, were adequate to guarantee sufficient supplies of petroleum products to the Member States.280 In making this assessment, the Court appears to have been very careful not to overstate the guarantees offered by these Community measures. In particular, even though a Council Decision had been adopted to govern the regime for oil export licenses between Member States, the Court emphasized that exporting Member States could still be authorized by the Community to take protective measures by restricting exports in crisis situations.281 Consequently, the Community measures provided Member States that were wholly or almost wholly dependent on supplies from other countries with ‘certain guarantees’ as to supplies from other Member States, although they did not provide ‘an unconditional assurance’ that a level of supplies to meet minimum needs would be maintained ‘in any event’. The possibility that a Member State could rely on Article 36 TFEU to justify ‘appropriate complementary measures’ at national level could therefore not be excluded.282 The Court’s surprisingly strict view of the limitations of Community measures is even more striking given that Ireland had apparently not even complied with its obligations under Community law to maintain oil stocks in the security of supply interest.283 As emphasized by Vandermeersch, the Court seems to take a more rigid approach towards Community measures than in previous cases, 277. 278. 279. 280.

Case 5/77, Carlo Tedeschi v. Denkavit Commerciale s.r.l., [1977] ECR 1555. Ibid., paras 34–35. Case 72/83, Campus Oil, [1984] ECR 2727, para. 27. Emphasis added. Ibid., paras 28–31. The applicable measures at the time are further described by D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL. 5, no. 1 (1987): 31–54, in particular at 32–36. 281. Case 72/83, Campus Oil, [1984] ECR 2727, para. 30. 282. Ibid., para. 31. Emphasis added. 283. Opinion of AG Sir Gordon Slynn in Case 72/83, Campus Oil, [1984] ECR 2727, 2765 and Editorial Comments on Campus Oil, ECLR (1984): 245–255, at 248–249.

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Chapter 9 including Simmenthal.284 The Court also seems to apply a less rigorous test to determine the adequacy of Community legislation in subsequent decisions where Campus Oil is referred to.285 In fact, it is appropriate to ask whether Community measures will ever provide ‘an unconditional assurance’ that the interests included in Article 36 TFEU will ‘in any event’ not be endangered.286 This question is highly relevant to energy security, given not only the uncertainties surrounding the definition of the concept as such, but also the political and economic uncertainties involved in securing future supplies. A particular feature of the assessment made by the Court in Campus Oil is its consideration of a body of Community legislation and its ability to prevent oil shortages in a Member State on the one hand and that legislation’s relationship with more specific Member State measures adopted in pursuance of the same objective on the other.287 Accordingly, the question is not whether one piece of Community legislation requires the harmonization of Member State measures aimed at ensuring supplies of energy, but rather whether a number of different Community instruments – mostly of a general nature – together provide an unconditional guarantee for Member States that their minimum supplies will not be interrupted. As illustrated by the Court’s subsequent decision in Commission v. Italy, regarding Italian product requirements for appliances burning gaseous fuels, recourse to Article 36 TFEU by Member States is not available in cases where existing Community legislation requires the full harmonization of national laws.288 284. D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, in particular at 41–42. 285. See Case C-124/95, The Queen, ex parte Centro-Com Srl v. HM Treasury and Bank of England, [1997] ECR I-81, regarding the external relations of Member States and the Community within the field of foreign and security policy, where the Court held in para. 46 that ‘a Member State’s recourse to Article 11 of the Export Regulation ceases to be justified if Community rules provide for the necessary measures to ensure protection of the interests enumerated in that article’ (i.e., excluding the words ‘sufficiently guaranteed’) with explicit reference to Case 72/83, Campus Oil, [1984] ECR 2727, para. 27. See also P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), who points out at 234 that the ‘unconditional assurance’ test set forth in Campus Oil is at variance with the Court’s other case law on (current) Art. 36 TFEU. 286. See similarly D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, in particular at 42. 287. K. Mortelmans, ‘Case Note on Campus Oil’, CMLR (1984): 687–713, at 705. 288. Case C-112/97, Commission v. Italy, [1999] ECR I-1821. The Court found that the Community legislation within the field in question required the full harmonization of national laws, see para. 32. Thus, based on the contention by Italy that the judgment in Case 72/83, Campus Oil, [1984] ECR 2727 applied, the Court noted, with reference to Case 5/77, Tedeschi, [1977] ECR 1555, that ‘where Community directives provide for the harmonisation of the measures necessary to ensure the protection of animal and human health and establish Community procedures to check that they are observed, recourse to Article 36 is no longer justified and the appropriate checks must be carried out and the measures of protection adopted within the framework outlined by the harmonising directive’, see para. 54. As held by AG Alber in his

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Justification for Measures Restricting the Free Movement of Electricity A corresponding assessment to the one made by the Court in Campus Oil is also relevant with respect to electricity supply and the promotion of generation investments in the internal electricity market. Today’s internal electricity market, like the Community oil market in the 1980s, is characterized by the existence of a large body of EU legislation which, inter alia, seeks to ensure security of electricity supply and environmental protection. The evaluation of whether this legislation is, in fact, likely to ensure an uninterrupted supply of electricity in Member States or is, in principle, likely to ensure an adequate level of environmental protection requires a detailed assessment of the scope, content and effect of the EU measures in force.289 In this respect, the actual situation at hand, that is, the need for new electricity generation capacity, would have to be assessed in detail, including an assessment of the situation in each Member State in question.290 As will become evident from our analysis of internal electricity market legislation in subsequent parts of this book, however, it is doubtful whether the existing measures can be said to guarantee security of supply to Member States.291 Even if the strict condition laid down by the Court in Campus Oil, that the interests in question must be ‘sufficiently guaranteed’, should not be taken literally, there is good reason to argue that the existing electricity market measures do not fully prevent recourse to the grounds for exemption contained in the Treaty. 9.4.

SECURITY OF SUPPLY AS A GROUND FOR EXEMPTION ON THE BASIS OF PUBLIC SECURITY

9.4.1.

THE CAMPUS OIL APPROACH: DEFINING THE RELATIONSHIP BETWEEN SECURITY OF PETROLEUM SUPPLIES AND PUBLIC SECURITY

With respect to the scope of the grounds for exemption in Article 36 TFEU, in Campus Oil, the Irish government had argued that the purchase obligation was justified on the grounds of public policy and public-security interests, which are both explicitly referred to in Article 36 TFEU as possible grounds for derogation.292 Advocate General Sir Gordon Slynn took the view that the maintenance of essential oil supplies could be categorized as a ‘public security’ interest ‘in that it is vital to the stability of and cohesion of the life of the modern State’.293 At the same time, the Advocate General revealed the pragmatic view that, in his opinion,

289. 290. 291. 292. 293.

opinion in Case C-112/97, Commission v. Italy, [1999] ECR I-1821, para. 56, the Community measures discussed in Campus Oil ‘did not have the object of harmonising laws, much less full harmonisation. Therefore it cannot be inferred from that judgment that the settled case law which has been developed in relation to full harmonisation should not apply in the present case’. K. Mortelmans, ‘Case Note on Campus Oil’, CMLR (1984): 687–713, at 702. Ibid., at 702–703. Parts V and VI of this book. Case 72/83, Campus Oil, [1984] ECR 2727, 2737 and paras 21–22 of the judgment. Opinion of AG Sir Gordon Slynn in Case 72/83, Campus Oil, [1984] ECR 2727, 2764.

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Chapter 9 the more general category of ‘public policy’ would have applied if he had come to a different conclusion with respect to ‘public security’.294 The Court, on the other hand, without further explanation brushed aside public policy interests as ‘not pertinent’ before moving on to public-security interests.295 Several authors have suggested this was because the Court considers the public policy exception to be a general exception of last resort where no other more specific grounds justifying exemption can be applied.296 With respect to public-security interests, the Court then noted that: It should be stated in this connection that petroleum products, because of their exceptional importance as an energy source in the modern economy, are of fundamental importance for a country’s existence since not only its economy but above all its institutions, its essential public services and even the survival of its inhabitants depend upon them. An interruption of supplies of petroleum products, with the resultant dangers for the country’s existence, could therefore seriously affect the public security that Article 36 [now Article 36 TFEU] allows States to protect.297 The Court thus provided in its own words a definition of the concept of public security under Article 36 TFEU, although it is perhaps more appropriate to refer to the Court’s statement as an explanation of the causal relationship between security of supply and public security.298 The Court did not agree with the Commission that the Irish measure was primarily aimed at protecting economic interests. On the contrary, the Court pointed to the fact that, even though Article 36 TFEU protects interests of a non-economic nature, ‘in the light of the seriousness of the consequences that an interruption in supplies of petroleum products may have for a country’s existence, the aim of ensuring a minimum supply of petroleum products at all times is to be regarded as transcending purely economic considerations and thus as capable of constituting an objective covered by the concept of public security’.299 As a result, the Court established two precedents which are still applicable in EU law: firstly, an interruption to a minimum supply of petroleum products is liable to compromise public security within the meaning of Article 36 TFEU; and, secondly, the mere fact that a measure pursuing legitimate interests also has an economic effect does not preclude the application of that Article. The latter finding on the relevance of economic considerations is, at least when viewed in isolation, fairly straightforward. The Court has always held that only restrictive measures motivated by non-economic interests can be justified 294. Ibid., 2764. 295. Case 72/83, Campus Oil, [1984] ECR 2727, para. 33. 296. K. Mortelmans, ‘Case Note on Campus Oil’, CMLR (1984): 687–713, at 705 and P. Oliver, ‘A Review of the Case Law of the Court of Justice on Articles 30 to 36 EEC in 1984’, CMLR (1985): 301–328, at 310 and P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 247. 297. Case 72/83, Campus Oil, [1984] ECR 2727, para. 34. 298. Ibid., para. 47, which refers to a State’s ‘public security, as defined above [. . .]’. 299. Ibid., para. 35. Emphasis added.

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Justification for Measures Restricting the Free Movement of Electricity under Article 36 TFEU or under mandatory requirements in the general interest.300 The importance of the Campus Oil decision in this respect was that the Court had to apply this approach to a situation where the effects of the measure in question were, arguably, primarily economic in nature.301 Given the essential importance of energy to the general economy of Member States, it is almost unthinkable that the effects of measures aimed at ensuring supplies of energy will be exclusively non-economic. The theoretical approach to this problem, as established by the Court in Campus Oil, is that the economic effects of a national measure are irrelevant provided that the objectives the Member State is seeking to pursue transcend purely economic considerations and are based on a legitimate ground for exemption under the Treaty.302 Later judgments by the Court seem to confirm this approach.303 Drawing this distinction between economic and non-economic interests may be relatively easy in cases where the real motivation for adopting national measures is the protection of the energy undertakings to which the measures are addressed.304 Such measures will never be justified. In practice, the distinction may be more difficult to draw, as although the measures in question may appear suspiciously likely to be primarily motivated by economic considerations (e.g., increasing local employment or protecting industry and/or consumers by contributing to low energy prices), the Member State may argue that the principle motivation is the promotion of more fundamental public-security interests. In such situations, the test will ultimately be whether the national measures are likely to address a real threat to public security. If this is the case, the measures will not contravene the provisions of the Treaty solely because they also have an economic effect. Whether the measures are proportionate to the legitimate objectives being pursued is, however, a different matter.305 The issue of the relationship between security of supply and public security, as raised by the Court’s arguments cited above, is more abstract and requires careful analysis. The statement about the exceptional importance of petroleum products as an energy source in the modern economy is also a fitting description of the place of electricity in today’s economy. The statement of the Court with respect to the 300. This view was first expressed by the Court in Case 7/61, Commission v. Italy, [1961] ECR 317, at 329 in relation to (current) Art. 36 TFEU, and it has been repeated in different modes by the Court in numerous cases since. See, inter alia, Case 238/82, Duphar BV and Others v. The Netherlands State, [1984] ECR 523, para. 23. 301. D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, 44 argues further along these lines by claiming that ‘it is clear that the first objective’ of the national measures was to maintain refining capacity in order to ‘avoid the primarily economic disruption’ that would follow from a supply disruption. 302. See, along the same lines, Editorial Comments to Campus Oil, ECLR (1984): 245–255, at 250–251. 303. Case 118/86, Openbaar Ministerie v. Nertsvoederfabriek Nederland BV, [1987] ECR 3883, para. 15. 304. As an example, see Case C-398/98, Commission v. Greece, [2001] ECR I-7915, paras 21 and 30, and para. 43 of the opinion of AG Colomer to the Court. 305. See further in s. 9.6 below.

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Chapter 9 reference to public-security interests in Article 36 TFEU, however, goes far beyond aims of an economic nature. Petroleum products are, according to the Court, of fundamental importance to a country’s existence, ‘since not only its economy but above all its institutions, its essential public services and even the survival of its inhabitants depend upon them’. This is a much more fundamental approach to the role of energy security than its relationship to economic considerations in general and EU competitiveness in particular. On the basis of the predominantly economic effects of energy security discussed in relation to the Treaty objectives above, one might wonder how realistic it is to assume that disruptions to a country’s minimum supply of energy could threaten its very existence. With respect to petroleum supplies, it can be argued that ensuring sufficient minimum supplies to keep a country’s armed forces in operation in case of a military intervention or other similar threat to security constitutes a public-security objective. One might possibly accord the same importance to ensuring a minimum supply of electricity in order to counter security threats, although this view is perhaps more debatable. One commentator maintained at the time the Campus Oil judgment was delivered that it was highly unlikely that the Court would extend the scope of the decision to other products than oil.306 On the other hand, the Court’s reasoning shows that the concept of public security referred to in Article 36 TFEU is not limited to a country’s military security, but also extends to the functioning of ‘its institutions, its essential public services and even the survival of its inhabitants’, which depend on a minimum supply of petroleum.307 From that perspective, the link between the securing of a minimum supply of electricity and ensuring public security becomes more pertinent.

306. Editorial Comments to Campus Oil, ECLR (1984): 245–255, at 255. 307. Case 72/83, Campus Oil, [1984] ECR 2727, para. 34. AG Sir Gordon Slynn, elaborating on the relationship between Art. 36 and the security provisions in (current) Arts 346–348 TFEU, also emphasized that ‘public security’ within the meaning of Art. 36 TFEU, in his opinion, was not limited to external military security or internal security in the sense of the maintenance of law and order, though it might include these considerations, see Campus Oil at 2764. Thus, both the Advocate General and the Court made it clear that the concept of public security as referred to in Art. 36 TFEU went beyond such matters of external and internal security, to which the concept was apparently thought to be limited at the time, see D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, 43. For a general introduction to Arts 296–297 EC, see P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 400–408. Neither electricity nor petroleum products fall within the ambit of Art. 346 TFEU. It is also unlikely that the derogation contained in Art. 347 TFEU will be of much relevance to restrictions on free movement in relation to energy products, although the relevance of the latter provision to national energy policy choices seems to have been of some concern under the negotiation of the new energy provision in the Lisbon Treaty. In this respect, a separate declaration on the new energy provision was included in point 35 of the Final Act to the Treaty of Lisbon, OJ C306/231, 17.12.2007 (at OJ C306/261), setting forth that ‘The Conference believes that Article 176 A does not affect the right of the Member States to take the necessary measures to ensure their energy supply under the conditions provided for in [current Article 347 TFEU].’

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Justification for Measures Restricting the Free Movement of Electricity The wording used by the Court in Campus Oil leaves little doubt that Ireland’s geopolitical situation influenced its decision, at least with regard to the fact that the country had only one refinery, no indigenous oil reserves and high dependency on imports from the United Kingdom, which had, after all, only a decade earlier failed to show solidarity towards the Netherlands during the oil crisis.308 Particular mention is made of Ireland’s import dependency in the concluding paragraph of the judgment, as well as in the conclusion itself.309 It is worth asking, however, whether this emphasis on the particular merits of the Campus Oil case has been replaced in subsequent case law by a more general dogma that security of supply concerns qualify as public-security concerns. As we will revert to shortly, this subsequent case law has also proved wrong the prediction that the Court would not extend the scope of Campus Oil to products other than oil. 9.4.2.

SUBSEQUENT CASE LAW: EXTENDING THE SCOPE OF OF PUBLIC SECURITY TO NEW ENERGY PRODUCTS – NEW SITUATIONS?

THE

CONCEPT

AND

The Court’s first chance to elaborate on the relationship between energy security and public security came in Commission v. Greece, another case concerning oil refining in a country dependent on oil imports.310 The Commission had brought an enforcement action against Greek measures which partially maintained exclusive importation and marketing rights for petroleum products in Greece as well as, among other things, requiring advance public approval for procurement programmes for petroleum products. In the light of Greece’s contention that the measures were necessary to ensure petroleum supplies and, consequently, public security, the Court acknowledged its finding in Campus Oil, but nevertheless concluded that the security of supply interests could have been secured by less restrictive means.311 The Court therefore found that the national measures contravened (current) Articles 34, 35 and 37 TFEU. Greece’s import dependency and general supply situation were not much discussed, perhaps primarily because the

308. See similarly Editorial comments to Campus Oil, ECLR [1984], 245–255, at 255, stating that ‘it can hardly be doubted that the Court was influenced by the exceptional position occupied by Ireland in the Community’. Whether the fact that Ireland was not a member of NATO was of any relevance to the decision, as submitted by the Irish National Petroleum Corporation as a further security issue in Case 72/83, Campus Oil, [1984] ECR 2727 at 2738, is, however, in this author’s opinion, more doubtful. 309. Case 72/83, Campus Oil, [1984] ECR 2727, para. 51 and the second paragraph of the Court’s conclusion at 2756–2757. 310. Case C-347/88, Commission v. Greece, [1990] ECR I-4747. 311. Ibid., paras 47–50 and 57–61. As stated by AG Tesauro in his opinion to the Court, private refineries in Greece were in a position to guarantee production in excess of the country’s essential energy requirements even in the absence of the disputed Greek measures. Accordingly, these measures could hardly be seen as necessary in the interests of public security, see paras 26–27 of the opinion.

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Chapter 9 national measures in any case failed to fulfil the proportionality requirements of Article 36 TFEU.312 A decade later, another case involving Commission infringement proceedings against Greece came before the Court. At issue this time were measures concerning the stockpiling of emergency supplies of petroleum at national refineries and a related obligation on distributors to buy petroleum products from those refineries.313 The Court ruled in favour of the Commission that the Greek measures constituted restrictions contrary to Article 34 TFEU before turning to the Greek authorities’ claim that the objective of the measures was to maintain a stock of petroleum products on Greek territory for reasons of public security.314 On this latter point, the Court held, with reference to paragraph 35 in Campus Oil, that ‘[i]t is true that the maintenance on national territory of a stock of petroleum products allowing continuity of supplies to be guaranteed constitutes a public security objective’ within the meaning of Article 36 TFEU, without having recourse to considerations of energy import dependency.315 However, the Court went on to emphasize that the arguments put forward by Greece in favour of the measures were, in reality, purely economic and did not raise public-security concerns that could be firm grounds for justification under Article 36 TFEU.316 The measures were therefore found to contravene Articles 34 and 35 TFEU. The absence of discussion about the geopolitical position of Greece in the Court’s statements on public security in the above-mentioned cases does not, in itself, provide sufficient basis for suggesting that import dependency considerations no longer play an important role in the application of public-security exemptions to measures concerning petroleum supplies. The more recent rulings in the Golden Shares cases, however, can be read not only as extending the scope of exemptions on the grounds of public security to new energy products, but also as

312. The Court’s references in Case C-347/88, Commission v. Greece, [1990] ECR I-4747 to its earlier statements in Case 72/83, Campus Oil, [1984] ECR 2727 are also to a certain extent inconsistent and indicate a somewhat more relaxed approach to these issues. In its discussion of the legality of the rights asserted by Greece with regard to the importation and marketing of petroleum products, the Court referred to its conclusion in para. 51 of the Campus Oil judgment that ‘a Member State which is totally or almost totally dependent on imports for its supplies of petroleum products may rely on grounds of public security’ (para. 48, emphasis added). On the other hand, the Court, in its discussion of the Greek system of marketing quotas and annual procurement programmes, referred to para. 35 of Campus Oil, which does not refer to the import dependency of the Member State in question (para. 58). 313. Case C-398/98, Commission v. Greece, [2001] ECR I-7915. 314. Ibid., paras 27–30. 315. Ibid., para. 29. 316. Ibid., para. 30. Greece had, inter alia, argued that its national refineries’ ‘fundamental right to economic freedom would be excessively restricted’ in the absence of the measures in question, see para. 21 of the judgment. As laconically put by AG Colomer in his opinion to the Court in the case, ‘[t]he economic freedom of refineries or of undertakings in general is not among the grounds listed in Article [36] of the Treaty and, for that reason, it must be rejected as such’, see para. 43 of the opinion.

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Justification for Measures Restricting the Free Movement of Electricity extending the concept more generally.317 This line of cases, which started with the Court’s decisions in the first three cases on 2 June 2002, concerns the free movement of capital, but the Court’s assessment of possible exemptions from these free movement provisions is also relevant to the similar discussion relating to the provisions on the free movement of goods.318 In essence, the cases concern various national schemes reserving to Member States a right to intervene in decisions relating to the ownership structure and the management of newly privatized companies in strategically important sectors. In all cases the Court has found that the Member States’ rights of intervention in company decision-making restricted the free movement of capital, thus contravening (current) Article 63 TFEU. Of more interest to our present topic, however, is the Court’s discussion of possible justifications for the restrictions in the four cases that related to undertakings in the energy sector.319 Of these cases, the most important is the Court’s decision in Commission v. Belgium, which is the only Golden Shares case in which the Court upheld the restrictive measures as being justified.320 In this case, the Commission alleged that national provisions vesting in the State golden shares (to which were attached certain special powers) in Socie´te´ nationale de transport par canalisations (SNTC) and Distrigaz were contrary to the Treaty provisions on freedom of establishment and the free movement of capital. The powers attached to the shares included rights to receive advance notices of, and 317. The Court has decided a number of cases relating to special holdings or rights held by Member States in different forms of strategic undertakings, starting with the three cases decided on 2 Jun. 2002: Case C-367/98, Commission v. Portugal, [2002] ECR I-4731; Case C-483/99, Commission v. France, [2002] ECR I-4781 and Case C-503/99, Commission v. Belgium, [2002] ECR I-4809. Then, on 13 May 2003, decisions were handed down in Case C-463/ 00, Commission v. Spain, [2003] ECR I-4581 and Case C-98/01, Commission v. United Kingdom, [2003] ECR I-4641, followed by Case C-174/04, Commission v. Italy, [2005] ECR I-4933 on 2 Jun. 2005, joined Cases C-282/04 and C-283/04, Commission of the European Communities v. Kingdom of the Netherlands, [2006] ECR I-9141 on 28 Sep. 2006 and Case C-112/05, Commission v. Germany, [2007] ECR I-8995 on 23 Oct. 2007. The closely related preliminary rulings in joined Cases C-463/04 and C-464/04, Federconsumatori and Others (C-463/04) and Associazione Azionariato Diffuso dell’AEM SpA and Others (C-464/04) v. Comune di Milano, [2007] ECR I-10419, decided on 6 Dec. 2007 also deserve mention in this respect. 318. Although we will not linger on this discussion here, there appears to be sufficient evidence in existing case law to conclude that the Court is moving towards a ‘single justification theory’, which would mean that all exemptions from Treaty freedoms should be interpreted in the same manner, see V. Hatzopoulos, ‘Comment to Case C-423/98, Alfredo Albore, [2000] ECR I-5965’, CMLR (2001): 455–469, in particular at 458–462. See also H. Bull, Det indre marked for tjenester og capital: Import av finansielle tjenester (2002), at 591, who argues that the case law of the Court seems to imply that the contents and nature of, in particular, the proportionality assessment are identical for the purposes of assessing all exemptions from the various free movement provisions of the Treaty. Case 72/83, Campus Oil, [1984] ECR 2727, is also explicitly referred to in the Golden Shares decisions, as we will revert to shortly. 319. Case C-483/99, Commission v. France, [2002] ECR I-4781; Case C-503/99, Commission v. Belgium, [2002] ECR I-4809; Case C-463/00, Commission v. Spain, [2003] ECR I-4581 and Case C-174/04, Commission v. Italy, [2005] ECR I-4933. 320. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809.

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Chapter 9 oppose transactions relating to, the capital of the companies and their strategic assets, as well as the right to appoint members of the boards of the companies in question. Both companies were regarded by the Belgian State as strategically important in the energy sector. SNTC owned and operated a system of lines and conduits that constituted a major part of the infrastructure for the domestic conveyance of energy products, including oil, industrial gases and products from the chemical and petrochemical industry.321 Distrigaz owned and operated infrastructure for the domestic conveyance and storage of natural gas. Belgium did not deny that the measures in question were caught by the Treaty provisions on the free movement of capital, and the principal questions before the Court were therefore whether, and under what circumstances, the restrictions could be justified.322 The Court acknowledged that certain concerns might justify the retention by Member States of a degree of influence in previously public undertakings that were being privatized and that were strategically important or provided services in the public interest.323 However, contrary to the opinion of the Advocate General, the Court did not find the measures capable of justification under (current) Article 345 TFEU.324 On the other hand, on the basis of arguments put forward by Belgium, the Court found that security of supply interests could, in principle, give legitimate grounds for justification, stating that: In the present case, the objective pursued by the legislation at issue, namely the safeguarding of energy supplies in the event of a crisis, falls undeniably within the ambit of a legitimate public interest. Indeed, the Court has previously recognised that the public-security considerations which may justify an obstacle to the free movement of goods include the objective of ensuring a minimum supply of petroleum products at all times (Campus Oil, cited above, paragraphs 34 and 35). The same reasoning applies to obstacles to the free movement of capital, inasmuch as public security is also one of the grounds of justification referred to in Article 73d(1)(b) [now 65(1)(b)] of the Treaty.325

321. SNTC operated a monopoly in this respect on the basis of (then) Art. 7 of the Belgian Royal Degree of 23 Jul. 1983. These exclusive rights were later abolished by the adoption of a Belgian law of 12 Aug. 2003 (Loi de 12 Aout 2003 visant a` modifier l’article 15/5 de la loi du 12 avril 1965 relative au transport de produits gazeux et autres par canalizations). 322. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, paras 40–42. 323. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 43. See similar statements in Case C-483/99, Commission v. France, [2002] ECR I-4781, para. 43; Case C-367/98, Commission v. Portugal, [2002] ECR I-4731, para. 47 and Case C-463/00, Commission v. Spain, [2003] ECR I-4581, para. 66. 324. This issue was discussed at great length by AG Colomer in his joined opinion to the Court in Cases C-367/98, C-483/99 and C-503/99, at paras 39–91, but was promptly dismissed by the Court (para. 44 of the judgment in Case C-503/99, Commission v. Belgium, [2002] ECR I-4809). 325. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 46 (emphasis added). The same view was repeated in Case C-483/99, Commission v. France, [2002] ECR I-4781, para. 47, and similar reasoning was applied by the Court in Case C-463/00, Commission v. Spain, [2003] ECR I-4581, para. 72.

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Justification for Measures Restricting the Free Movement of Electricity At the same time, with reference to its decision in Scientologie,326 the Court was careful to emphasize that: However, the Court has also held that the requirements of public security, as a derogation from the fundamental principle of free movement of capital, must be interpreted strictly, so that their scope cannot be determined unilaterally by each Member State without any control by the Community institutions. Thus, public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society327 As indicated above, the Belgian legislation concerned undertakings operating within both the oil and gas sectors. Accordingly, the case extended the scope of the Court’s views on public security and oil supplies to encompass gas supplies as well. Identical views were expressed by the Court in its decision on the same day in Commission v. France, which involved undertakings active in the petroleum sector.328 One year later, in Commission v. Spain, the Court removed any possible doubt as to whether similar reasoning would apply in respect of the electricity sector in a decision that dealt with legislation granting the Spanish authorities special control rights in, inter alia, Endesa SA (an undertaking involved in both the petroleum and electricity sectors).329 With reference to Endesa, as well as to two undertakings involved in the telecommunications sector, the Court held: As regards the three other undertakings concerned, which are active in the petroleum, telecommunications and electricity sectors, it is undeniable that the objective of safeguarding supplies of such products or the provision of such services within the Member State concerned in the event of a crisis may constitute a public-security reason (see, for similar situations, Commission v. France, paragraph 47, and Commission v Belgium, paragraph 46) and therefore may justify an obstacle to the free movement of capital.330 Again, the Court was careful to repeat the requirement of a genuine and sufficiently serious threat to a fundamental interest of society, as cited in the Commission v. Belgium decision above.331

326. 327. 328. 329. 330.

Case C-54/99, Scientologie, [2000] ECR I-1335, see in particular at para. 17. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 47 (emphasis added). Case C-483/99, Commission v. France, [2002] ECR I-4781, paras 47–48. Case C-463/00, Commission v. Spain, [2003] ECR I-4581. Ibid., para. 71. A similar view had also been put forward by AG Cosmas in para. 71 of his joined opinion in the Energy Monopoly Cases (Cases C-157/94, C-158/94, C-159/94 and C-160/94, [1997] ECR I-5699 et seq.). 331. Case C-463/00, Commission v. Spain, [2003] ECR I-4581, para. 72. The views expressed in the infringement proceedings against Belgium, France and Spain, referred to above, were also subsequently confirmed in Case C-174/04, Commission v. Italy, [2005] ECR I-4933, concerning national measures securing control over undertakings operating in the electricity and gas markets. With reference to Case 72/83, Campus Oil, [1984] ECR 2727 and Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, the Court briefly acknowledged that ‘the need to safeguard energy supplies may, under certain conditions, justify restrictions of

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Chapter 9 In this author’s view, the Golden Shares decisions have three important implications for the application of public-security exemptions to security of electricity supply concerns. First, and most obviously, it is clear that the scope of the public-security exemption introduced by the Court in Campus Oil can be extended to apply to other energy products such as electricity and also, indeed, as held in Commission v. Spain, to service sectors such as telecommunications. Second, the Court seems to be moving further towards generally acknowledging that the threat of interruptions to energy supplies is a priori a legitimate publicsecurity concern, without the need to enter into an in-depth analysis of the supply situation of the Member State in question. The import dependency and supply situation of individual Member States – an issue carefully addressed by the Court in Campus Oil – received less consideration in the subsequent Commission infringement proceedings against Greece, and was all but been lost sight of in the Golden Shares cases. In fact, concerns about security of supply in the latter cases related to challenges of quite a different nature than the issues relating to import dependency that were discussed in Campus Oil. Given the nature of the business of the undertakings involved in Commission v. Belgium and Commission v. Spain, the main security of supply concern was that for some reason the regulation and/or operation of the domestic infrastructure for the transportation of energy might fail, resulting in disruptions to energy supplies, which might ultimately threaten public security.332 The reasoning of the Court at this point emphasizes the fact that failures at any point in the energy resource chain from production to consumption may disrupt energy supplies. Consequently, measures aimed at ensuring security of supply can, in principle, be justified on public-security grounds irrespective of whether they are intended to ensure the availability of sufficient sources of primary energy, to ensure sufficient investments in electricity production and transportation facilities, or to ensure a secure operational regime for energy transportation.333 Third, a slight move towards a relaxation of the very strict public-security requirements introduced in Campus Oil can be detected in the statements of the Court. The wording of the Golden Shares decisions suggests that the very existence of a country may not have to be at stake in order to invoke the public-security exemption, although the measures in question must be intended to safeguard energy supplies ‘in the event of a crisis’ and there must be ‘a genuine and sufficiently serious threat to a fundamental interest of society’. This wording signals a less rigorous approach than the relationship established in Campus Oil between the threat posed by supply disruptions to a State’s ‘institutions, its essential public fundamental freedoms under the Treaty’, before concluding that the measures at issue were not necessary for the attainment of that goal, see paras 40–41 of the decision. 332. See, in particular, Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 52. 333. For a different view on the subject, see M. Trybus, European Union Law and Defence Integration (Oxford: Hart Publishing, 2005), 135–137, who argues that the potential for exemptions opened up by the Court in Campus Oil must still, to a large extent, be considered on the basis of the particular merits of the case at hand, and that the ruling can only apply to certain Member States based on their geopolitical and security situations.

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Justification for Measures Restricting the Free Movement of Electricity services and even the survival of its inhabitants’ and that State’s existence. Admittedly, the more relaxed approach suggested by the Golden Shares decisions could also be attributed to the fact that the national measures in question were nondiscriminatory, meaning that the Court could possibly have relied on security of supply as a mandatory requirement instead of relying on the grounds for exemption provided for in the Treaty. On the other hand, the Court explicitly refers to the public-security grounds provided for in the Treaty with reference to Campus Oil. The reasoning of the Court in the Golden Shares decisions should therefore, in this author’s opinion, be interpreted analogously as relevant to the understanding of public security as a ground for exemption from the free movement provisions of the Treaty. A question which arises in the wake of the Golden Shares decisions, however, is why the Court still relies on the public-security exemption in matters relating to security of supply. Other grounds such as public policy interests, the health and life of people and animals or other mandatory requirements in the general economic interest do not seem to have been considered. This question will be discussed further below. 9.5.

AN ALTERNATIVE APPROACH: SECURITY OF SUPPLY AS A PUBLIC HEALTH INTEREST

An objection to the Court’s consistent application of public security as a ground for exemption in security of supply issues is that it is notoriously difficult to determine in what situation a potential disruption to energy supplies would constitute a crisis posing a sufficiently serious threat to a fundamental interest of society. While it is, in principle, possible to define the concept of a ‘fundamental interest of society’, although no unambiguous definition exists at present, it is virtually impossible to define generally the point at which a supply disruption, on the basis of its duration and magnitude, would constitute a crisis threatening a fundamental interest of society. This objection to the application of the public-security exemption applies correspondingly to the possible application of the public policy exemption. In fact, the Court’s requirement that there must exist ‘a genuine and sufficiently serious threat to a fundamental interest of society’ draws inspiration from the early Court cases on the application of public policy as a ground for exemption. In Bouchereau, the Court held, with reference to the public policy exemption to the Treaty provisions on the free movement of workers, that recourse to the concept presupposes that there exists ‘a genuine and sufficiently serious threat to the requirements of public policy affecting one of the fundamental interests of society’.334 In Thompson, the Court concluded that an export ban on United Kingdom silver alloy coins that were no longer legal tender was justified under 334. Case 30/77, Regina v. Pierre Bouchereau, [1977] ECR 1999, para. 35.

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Chapter 9 (current) Article 36 TFEU ‘because it stems from the need to protect the right to mint coinage which is traditionally regarded as involving the fundamental interests of the State’.335 Finally, the decision in Scientologie, from which the Court explicitly draws inspiration in the Golden Shares cases, states that ‘public policy and public security may be relied on only if there is a genuine and sufficiently serious threat to a fundamental interest of society’.336 Consequently, the Court does not seem to accord much importance to defining the differences between the two grounds for exemption. In this author’s opinion, public health concerns constitute a more realistic and appropriate ground for exemption when assessing the applicability of security of supply concerns under Article 36 TFEU. Although, as illustrated by the oil crisis of 1973–1974, the effects of energy supply interruptions will, in many cases, be primarily economic, such interruptions may also affect other fundamental interests of society. Some examples from recent blackouts help illustrate the point that, apart from purely economic effects, public health concerns constitute perhaps the most realistic threat to society in the case of interruptions to the supply of electricity. A blackout in South London in August 2003 disconnected half-a-million customers for almost one hour during the evening rush hour, causing transportation chaos. Underground stations and trains had to be evacuated and there was chaos on the roads as traffic lights failed, but no serious accidents were reported. Critical services such as hospitals remained operational by switching to back-up power generators.337 The most severe power outage in the Nordic system for twenty years occurred in Southern Sweden and Eastern Denmark (including Copenhagen) in September 2003, following problems at a large nuclear power plant and a shortcircuit at a substation. The outage affected 4 million people and it took more than six hours to fully restore the system. This blackout also had a significant impact on the transportation infrastructure: people were stuck in elevators, trains stopped, the subway in Copenhagen had to be evacuated, traffic jams occurred in major cities as traffic lights failed and Copenhagen’s airport was closed. Hospitals, on the other hand, continued to operate by switching to back-up generators, and no serious accidents seem to have been reported.338 The Italian blackout in September 2003, which affected 56 million people for almost eighteen hours, and the power breakdown in Athens and Southern Greece in July 2004, which affected 5 million people and lasted for almost four hours, follow the same pattern: thousands of people were stuck in trains, subways and elevators, but health services continued to operate, due to the availability of back-up generators, and no severe accidents were reported.339 Finally, Knops et al provide more local examples of complaints following an electricity disruption lasting two days in the Dutch town 335. Case 7/78, Regina v. Ernest George Thompson et al., [1978] ECR 2247, para. 34. 336. Case C-54/99, Scientologie, [2000] ECR I-1335, para. 17 (emphasis added). 337. M. Schla¨pfer & H. Glavitsch, ‘Learning from the Past – Electric Power Blackouts and Near Misses in Europe’, in Critical Infrastructures at Risk. Securing the European Electric Power System, ed. A.V. Gheorghe et al. (Dordrecht: Springer, 2006), at 164 and 166. 338. Ibid., 168–171. 339. Ibid., 173–176 and 182–184.

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Justification for Measures Restricting the Free Movement of Electricity of Haaksbergen in 2005. For example, a farmer could not milk his cows, which became painfully ‘overloaded’ as a result, and one responded that he was exhausted after two days without heating or the use of a refrigerator, computer, television or radio.340 These examples show that disruptions to electricity supplies do not necessarily in any way affect what we might describe as the fundamental interests of society – excluding economic interests – and, in particular, the effects are far from being so significant that they threaten the public security of Member States. On the other hand, the threat to public health is more immediate. If a disruption in electricity supplies were to coincide with a failure of back-up power generation, hospitals could be severely affected. Little imagination is required to appreciate that a rushhour power failure in a major city might compromise life and health, although this was not the case in London in August 2003. One might, however, wonder what would have happened in Athens in 2004 if the blackout had happened four weeks later, after the commencement of the Olympic Games. The health of the cows in Haaksbergen was arguably compromised because the milking machines stopped working. Consequently, it is impossible to rule out the argument that measures to avoid interruptions to electricity supplies are capable of promoting the protection of health and life of humans and animals within the meaning of Article 36 TFEU. Such measures may also, of course, ultimately promote public security. Although it has not happened yet, in principle it is impossible to exclude the possibility that disruptions in the supply of electricity – or energy in general – could compromise the functioning of essential transport and communications infrastructures, health facilities, law and order, and so forth to such an extent as ultimately to threaten public security. However, it is difficult to see why it is necessary to invoke such a distant – even unrealistic – scenario in order to justify an exemption on the grounds of public security when it is possible to invoke more immediate threats to health and life.341 Exemptions on the grounds of public health, whether under Article 36 TFEU or in the form of a mandatory requirement, have been discussed by the Court of Justice on numerous occasions. The cases have typically concerned import bans, product requirements or selling arrangements for products considered by an individual Member State to give rise to public health concerns.342 The situation 340. H.P.A. Knops, V.S. Ajodhia & Y.C. Wijnia, ‘Quality Regulation of Electricity Distribution Companies: Is Everything Under Control?’, in European Energy Law Report III, ed. U. Hammer & M.M. Roggenkamp (Antwerpen: Intersentia, 2006), 73–109, at 73 with further references. In addition, a department store owner reported the loss of two days’ turnover and the overall economic damage caused to businesses by the interruption was reported to amount to approximately EUR 1 million. 341. The fact that the protection of human health and life is one of the fundamental aspects of protecting a country’s existence is also mentioned by the Court in Case 72/83, Campus Oil, [1984] ECR 2727, para. 34, but the connection with the grounds for exemption relating to human life and health in Art. 36 TFEU is not further dealt with. 342. See P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 255–279 for a thorough discussion of the case law of the Community Courts in this area.

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Chapter 9 under discussion here is very different, concerning as it does restrictions imposed on the free movement of goods in order to ensure investments in, or the continued operation of, domestic electricity production facilities, which, in turn, may contribute to security of supply and the protection of public health. This situation raises particular questions in relation to proportionality, but this does not mean that the measures in question are in principle disqualified from justification on public health grounds. In this author’s opinion, the choice of public-security grounds as the legal battlefield when attempting to justify security of supply measures that restrict the free movement of goods only contributes to increasing the distance between the most likely effects of energy disruptions (economic losses and health concerns) and the effects raised in argument (threats to public security).343 This tends to make arguments about security of supply more abstract than is strictly necessary.

9.6.

PROPORTIONALITY AND REVIEW INTENSITY

It is settled case law that a national measure amounting to a restriction under Article 34 TFEU can only be justified, either by applying one or more of the grounds for exemption provided for in Article 36 TFEU or by applying other mandatory requirements, to the extent that the measure is proportionate to the aims pursued. The proportionality test, as it has been applied by the Court of Justice in relation to different areas of EU law, requires the satisfaction of three criteria: (i) the measure must be suitable to protect the interests requiring protection; (ii) the measure must be necessary for the attainment of the objective(s) pursued; and (iii) the restriction caused by the measure on intra-Union trade must not be disproportionate to its intended or actual result.344 These criteria are commonly

343. One might also argue, as the Court did in Kohll, that both public security and public health interests are ultimately concerned with the survival of the population, see Case C-158/96, Raymond Kohll v. Union des caisses de maladie, [1998] ECR I-1931, para. 51. From that perspective, the main question is whether security of supply problems are more likely to raise concerns about the survival of the population because of threats to public security or to public health. In this author’s opinion, the latter approach is more realistic. 344. J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 240–241. See similarly N. Emiliou, The Principle of Proportionality in European Law: A Comparative Study (London: Kluwer Law International, 1996), 171–194; G. Davies, Nationality Discrimination in the European Internal Market (The Hague: Kluwer Law International, 2003), 34–36; J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), 194–212 and J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 301. See also J. Schwarze, European Administrative Law, revised 1st edn (London: Sweet & Maxwell, 2006), 708–864, for a thorough discussion of the principle as it is applied in Community law.

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Justification for Measures Restricting the Free Movement of Electricity referred to as the suitability, necessity and proportionality sensu stricto (or sometimes ‘true proportionality’)345 tests, respectively.346 A rigorous application of the latter proportionality sensu stricto test could, potentially, lead to a radical review of Member State measures, since the test essentially requires an individual Member State’s interest in upholding a restriction, which it has adopted in order to promote a legitimate objective, to be balanced against the EU’s interests in promoting intra-Union trade. The Court of Justice has, however, been extremely cautious in applying this test when assessing exemptions from the free movement provisions of the Treaty, giving the impression that such a review will only be carried out in exceptional cases.347 The Court primarily focuses on the suitability and necessity tests in its case law under the free movement provisions, where the necessity test is in practice by far the most important one. The Court has, for example, described the application of the proportionality principle to its assessment of restrictions on the free movement of goods in the following terms in several recent cases: However, in order for such rules to comply with the principle of proportionality, it must be ascertained not only whether the means which they employ are suitable for the purpose of attaining the desired objectives but also whether those means do not go beyond what is necessary for that purpose.348 345. See, inter alia, J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), in particular at 200–212. 346. J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 241. 347. Ibid., 248–249. The Court has emphasized on several occasions that individual Member States are, in principle, free to determine the necessary level of protection required to protect a legitimate interest. See, for example, Joined Cases C-158/04 and C-159/04, Alfa Vita, [2006] ECR I-8135, para. 21. See also P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 227–228 and J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 249–252. This means there is very limited potential for an assessment of proportionality sensu stricto, since the clear point of departure is that the level of protection chosen by the individual Member State will be acceptable irrespective of the effects it has on intra-Community trade (provided, of course, that the suitability and necessity tests are satisfied). It should also be emphasized that the approach taken above to distinguishing between the assessment of necessity and proportionality sensu stricto may be more subtle in practice. For example, G. Davies, Nationality Discrimination in the European Internal Market (The Hague: Kluwer Law International, 2003), 35 argues that it is likely that a more general proportionality sensu stricto balancing of interests is indeed performed and disguised by the suitability and necessity assessments carried out by the Court. 348. Joined Cases C-158/04 and C-159/04, Alfa Vita, [2006] ECR I-8135, para. 22; Case C-463/01, Commission v. Germany, [2004] ECR I-11705 (Grand Chamber), para. 78 and Case C-309/02, Radlberger Getra¨nkegesellschaft mbH & Co. and S. Spitz KG v. Land Baden-Wu¨rttemberg, [2004] ECR I-11763 (Grand Chamber), para. 79, all of which refer to the similar statements in Case C-284/95, Safety Hi-Tech Srl v. S. & T. Srl., [1998] ECR I-4301, para. 57. Although not explicitly stated in this quote, it is clear that this necessity test is not fulfilled if the legitimate interests in question can be effectively protected by measures less restrictive on intracommunity trade than those chosen by the Member State, see Case 104/75, Adriaan de Peijper, Managing Director of Centrafarm BV, [1976] ECR 613, para. 17.

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Chapter 9 As fulfilment of the suitability test only requires the existence of a causal relationship between the measure in question and its intended result or objective, this test rarely causes any problems in practice.349 The necessity test, on the other hand, is often rigorously applied by the Court of Justice. A frequent result is that restrictive measures adopted in pursuit of legitimate objectives are deemed incompatible with the Treaty, since their effect on Union trade is more restrictive than strictly necessary for the attainment of the objectives pursued. The proportionality assessment will, of course, have to be carried out in light of the particular merits of the case at hand. In the following, we do not aim to provide a complete account of questions that might arise during this evaluation. Instead we will focus on an issue that was important for the outcome of Campus Oil,350 Commission v. Belgium351 and, as we shall see below, PreussenElektra,352 namely, the level of intensity applied when reviewing the measures’ proportionality. The intensity of the review undertaken or, in the case of PreussenElektra, the decision on whether to undertake a proportionality assessment at all, has important implications for reliance on security of supply and environmental objectives in free movement cases. General observations that the intensity of the Court’s review varies from case to case are by no means new.353 Nor are the related observations that the proportionality test is relative and not necessarily objective.354 In the following analysis we will therefore focus primarily on the sector-specific implications of these issues for the promotion of energy security. The Campus Oil case was referred to the Court of Justice for a preliminary ruling before the High Court of Ireland had heard the parties’ evidence or full arguments. On that basis, AG Sir Gordon Slynn took the view that it was not possible to give a complete answer to the High Court’s question on whether the national measures could be exempted from (current) Article 36 TFEU without 349. J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 240. The insignificance of the suitability test can also be explained by the fact that it will, in most cases, be subsumed by the more far-reaching necessity test. If a Member State is unable to demonstrate any causal relationship between a national measure and the objective that the measure is contended to pursue, it is hardly likely to be possible to argue that the measure in question is necessary for the promotion of the stated objective. 350. Case 72/83, Campus Oil, [1984] ECR 2727. 351. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809. 352. Case C-379/98, PreussenElektra, [2001] ECR I-2099. 353. See, for example, J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), 212–217 with further references and J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, in particular his conclusions on 263–264. 354. This relativity is well illustrated by J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), 212–217, who, inter alia, argues that the ground of justification involved (212–213), as well as the prevailing practice in the majority of Member States (215), has an impact on the intensity of the review. See also G. Davies, Nationality Discrimination in the European Internal Market (The Hague: Kluwer Law International, 2003), 35, who argues that there is still room for the Court to balance the divisive effects of a measure against its benefits (and, accordingly, that the assessment can hardly be described as objective).

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Justification for Measures Restricting the Free Movement of Electricity further guidance on the considerations to be taken into account. The Advocate General therefore chose to set out criteria of a more general nature for the proportionality assessment.355 The Court of Justice, on the other hand, chose to adopt a more concrete approach, subjecting the national measures to an intense review.356 First, the Court considered the contention of the plaintiffs and the Commission that the existence of national refinery capacity would not help ensure petroleum supplies in the event of a crisis, since a crisis would primarily give rise to a shortage of crude oil, which would leave the refinery inoperable in any case.357 The Court did not accept this argument, reasoning that the existence of national refinery capacity enabled Ireland to enter into long-term contracts for the purchase of crude oil from third countries, as well as constituting a guarantee against the additional risk of an interruption in deliveries of refined petroleum products.358 Contemporary commentators disagreed widely as to whether the Court adopted the correct approach to this question.359 In this author’s opinion, the Court was correct in its acknowledgment that improving security of supply security in one part of the resource chain (petroleum refining) was also likely to improve overall security of supply. With the benefit of hindsight, the Court was clearly correct: while the Campus Oil decision was handed down at a time when the European refining industry was characterized by overcapacity, the threat posed by insufficient refining capacity to the security of petroleum supplies and fuel prices has again come to the fore in the past decade.360 The Court then turned to the more specific question of whether a temporary obligation to buy refined petroleum products at fixed purchase prices was necessary to ensure a minimum supply of petroleum products. The reasoning of the Court at this point is interesting: such an obligation would only be necessary if the major buyers of refined petroleum products were going to refuse to buy products from the Whitegate refinery (as contended by the Irish authorities), even at competitive prices. If it would not be possible for the refinery ‘by means of industrial and commercial measures’ to charge competitive market prices without incurring financial losses, then ‘those losses must be borne by the Member State 355. Opinion of AG Sir Gordon Slynn in Case 72/83, Campus Oil, [1984] ECR 2727, 2764–2767. 356. The approach of the Court at this point is also at some variance with the point made by J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), 212–213, that the Court generally appears to review proportionality less intensively when confronted with exemption grounds such as public morality, public policy and public security. 357. Case 72/83, Campus Oil, [1984] ECR 2727, para. 38. 358. Ibid., paras 38–41. 359. D. Vandermeersch, ‘Restrictions on the Movement of Oil In and Out of the European Community: The Campus Oil and Bulk Oil Cases’, JENRL 5, no. 1 (1987): 31–54, at 45–46 expresses scepticism about the approach of the Court, while Editorial Comments to Campus Oil, ECLR (1984): 245–255, at 251–252, express a clear preference for the Court’s approach, arguing that the Commission in its contention ‘appears to miss the point’. 360. P. Krugman, Reckonings; The Unrefined Truth (opinion in New York Times, 9.5.2001) with respect to the situation in USA and A. Porter, Global Refinery Shortage Shifts Power Balance (article on the BBC News website, 2.10.2005).

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Chapter 9 concerned, subject to the application of [current Articles 107 and 108] of the Treaty’.361 In other words, the Court would not permit the application of a purchase obligation at fixed prices in order to ensure that the refinery could be operated without incurring a loss, but only in order to ensure off-take from the refinery, provided that it offered its products at competitive market prices. On the other hand, any operating subsidies potentially required because the refinery, if it were to charge competitive market prices, would inevitably incur a loss, would have to be borne by the Member State, subject to the application of the State aid provisions of the Treaty. This application of the proportionality principle narrowed the possible scope of the public-security exemption considerably. The Court also set out strict requirements concerning the quantity of petroleum to which the purchase obligation scheme could apply: namely, the minimum amount required to ensure public security, such amount not to exceed the quantity required for technical reasons to ensure the continued operation of the refinery and the processing of crude oil covered by long-term contracts already entered into by Ireland.362 Consequently the Court, through its strict application of the proportionality principle, effectively reduced the already limited scope for exemptions in the public-security interest from the provisions concerning the free movement of goods.363 Against this background, although the Irish measures were ultimately accepted by the Court, this author finds it hard to agree with Oliver’s characterization that the Campus Oil judgment might be regarded ‘as a serious blow to the prospects for creating a common energy policy’.364 In this author’s view, it is more correct to view the Court’s reasoning as a carefully considered step opening the way to a very limited exception from the free movement provisions of the Treaty.365 This exception has been extended rather than curtailed by subsequent case law.

361. Case 72/83, Campus Oil, [1984] ECR 2727, para. 46. 362. Ibid., paras 47–49. 363. The approach of the Court is interesting when viewed in relation to its application of the proportionality principle in other preliminary rulings where sensitive questions of national policy have been at stake. For example, in Case C-405/98, Gourmet, [2001] ECR I-1795, the Court showed great caution in considering whether a restriction on the free movement of goods and on the freedom to provide services in the form of a ban on advertising for alcoholic beverages was proportionate to the public health objectives pursued, see paras 26–34 and 40–41. This approach was in clear contrast to that taken by AG Jacobs, who, in his opinion to the Court, provided a careful – and critical – analysis of the proportionality of the national advertising ban, see paras 43–63 of the opinion. The Swedish appeal Court, however, chose to apply an intense proportionality review with the ultimate result that the Swedish legislation was held to contravene Community law, see Marknadsdomstolens dom 2003:5 (Dnr B 1/02), Konsumentombundsmannen v. Gourmet International Products Aktiebolag, 5.2.2003. 364. P. Oliver, ‘A Review of the Case Law of the Court of Justice on Articles 30 to 36 EEC in 1984’, CMLR (1985): 301–328, at 312, also repeated in P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 251, which also refers to other critical commentators about the judgment. 365. For a similar view on Case 72/83, Campus Oil, [1984] ECR 2727, see also AG Cosma’s joined opinion to the Court in Cases C-157-160/94, the Energy Monopoly Cases, [1997] ECR I-5699 et seq., at I-5746.

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Justification for Measures Restricting the Free Movement of Electricity We have already concluded that the Court widened the scope of the publicsecurity exemption in relation to the application of security of supply concerns through its judgments in some of the Golden Shares cases, in particular Commission v. Belgium. The proportionality test established by the Court in the latter case was of a conventional nature: Furthermore, in order to be so justified, the national legislation must be suitable for securing the objective which it pursues and must not go beyond what is necessary in order to attain it, so as to accord with the principle of proportionality [. . .] It is necessary, therefore, to ascertain whether the legislation in issue enables the Member State concerned to ensure a minimum level of energy supplies in the event of a genuine and serious threat, and whether or not it goes beyond what is necessary for that purpose366 Just prior to establishing the proportionality test, the Court had acknowledged, with reference to the Commission’s Communication on intra-EU investments of 1997, that: certain concerns may justify the retention by Member States of a degree of influence within undertakings that were initially public and subsequently privatised, where those undertakings are active in fields involving the provision of services in the public interest or strategic services.367 The Communication referred to does not, however, elaborate on the causal relationship between State influence within the undertakings concerned and the fulfilment of the particular tasks assigned to those undertakings.368 A demonstration of the suitability and necessity of Member State control in strategic undertakings for the purposes of attaining the legitimate objectives pursued by the national legislation is also absent from the proportionality assessment conducted by the Court. In this respect, the Court merely seems to presuppose that public control over the strategic undertakings is likely to help guarantee ‘the effective availability of the lines and conduits providing the main infrastructures for the domestic conveyance of energy products, as well as other infrastructures for the domestic conveyance and storage of gas’ and, consequently, to ensure a minimum level of energy supplies in the event of a crisis.369 Thus the Court’s 366. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, paras 45 and 48. See also similar statements in Case C-483/99, Commission v. France, [2002] ECR I-4781, paras 45 and 49; Case C-367/98, Commission v. Portugal, [2002] ECR I-4731, para. 49 and Case C-463/00, Commission v. Spain, [2003] ECR I-4581, paras 68 and 73. 367. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 43. 368. Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C220/15, 19.7.1997. 369. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, para. 52. The only indication that the Court considered the necessity of public control over strategic undertakings is to be found in para. 53, where the Court, based on the contentions of the Commission, established that the Commission had not shown that less restrictive measures could have been taken in order to attain the objectives pursued.

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Chapter 9 main focus is on ensuring that the national control measures do not go further than what is strictly necessary to secure adequate public control for the attainment of that objective. The Court found that the national measures fulfilled that necessity test and were therefore justified.370 The proportionality assessment undertaken in Commission v. Belgium was very different to that in Campus Oil with respect to the necessity of the overall measures taken to ensure public security. Although Commission v. Belgium came before the Court in the form of an infringement proceeding, which meant the Court was ultimately left to its own devices and could have carried out a full proportionality assessment, the Court chose to carry out a less intensive review than the one undertaken in the preliminary Campus Oil decision (where the Court, in principle, could have left more of the business of assessing proportionality to the referring Irish Court).371 Commission v. Belgium was based on an assumption that some degree of control over strategic undertakings in the energy sector would be likely to ensure a minimum supply of energy, thus ensuring public security, whereas Campus Oil scrutinized in detail a concrete measure’s suitability and necessity for ensuring a minimum supply of petroleum products. This difference in the intensity of the reviews carried out can be partly explained by the different natures of the measures in question. Campus Oil raised the question of the validity of discriminatory measures that contributed to protecting a national undertaking to the detriment of competitors from other Member States. Commission v. Belgium, on the other hand, dealt with public control measures providing the State with residual competence through ownership control in cases where the primary instruments, such as, for example, concession requirements, and so forth, had failed. A more intense scrutiny of the necessity of such control mechanisms would ultimately have led the Court down the path of discussing the suitability of public ownership control for pursuing legitimate interests within strategically important sectors, a path that leads to few clear answers and many strong policy opinions.372

370. Ibid., paras 49–55. In the parallel Case C-483/99, Commission v. France, [2002] ECR I-4781, on the other hand, the proportionality requirements were not fulfilled. The national measures were, according to the Court, contrary to the principle of legal certainty, as they left wide discretionary powers to the authorities and were based on a system of opposition after the event rather than on a system of prior authorization, see paras 50–53. 371. Current Arts 258 and 260(1) TFEU (infringement proceedings), and 267 TFEU (preliminary rulings). See J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 255–259 for a discussion of the relationship between the Court of Justice and the national referring court in the application of the proportionality principle in preliminary rulings. 372. Consequently, the Court’s approach in Case C-503/99, Commission v. Belgium, [2002] ECR I-4809 conforms to the Court’s general tendency to review measures less intensively if it is unfamiliar with the issue and/or there is little scientific or Member State consensus on preferred solutions, see J. Snell, Goods and Services in EC Law. A Study of the Relationship between the Freedoms (Oxford: Oxford University Press, 2002), 212–213 and 215, or if the issues involved are primarily a matter for national consideration (such as choices of public and private ownership), see J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 264.

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Justification for Measures Restricting the Free Movement of Electricity Nevertheless, the decisions show that the intensity with which the Court carries out its proportionality assessments provides an important parameter, perhaps the most important parameter, for determining the margin of discretion available to Member States when addressing national security of supply concerns. In this respect, it is not surprising that downright discriminatory measures, such as those at issue in Campus Oil, are subjected to intense scrutiny through the necessity test applied by the Court. After all, such measures are in direct opposition to the solution contemplated by the establishment of the internal market: instead of facilitating integration and Member State solidarity in order to ensure security of supply for every EU Member State, national security of supply is ensured by the introduction of discriminatory free movement restrictions. Consequently, one might assume that the right of Member States to employ such discriminatory measures to benefit national investments or operating conditions would be extremely limited within the present, increasingly integrated, internal electricity market. The Court’s acceptance, however, of the German feed-in tariff scheme in PreussenElektra, which will be discussed in the next section, casts doubt on this assumption.373 In that case, discriminatory measures providing national investment incentives were accepted as justifiable on environmental grounds, and the Court avoided the issue of proportionality altogether. The case therefore raises the question of the extent to which reliance on environmental objectives provides Member States with wider opportunities to adopt restrictive measures in order to attract investments than the traditional arguments based on security of supply. 9.7.

THE RELATIONSHIP TO JUSTIFICATIONS IN THE ENVIRONMENTAL INTEREST

PreussenElektra is the only case where the Court of Justice has been invited to consider restrictions on the free movement of goods, the purpose of which are to incentivize investment in the building of new domestic electricity generation capacity.374 Like the Campus Oil decision, this decision has not gone unremarked upon by academic commentators.375 Not only did the decision help clarify the

373. Case C-379/98, PreussenElektra, [2001] ECR I-2099. 374. Ibid. 375. See, inter alia, A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, in particular at 131–137; F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, particularly at 190–193; B. Delvaux, ‘The EC State Aid Regime Regarding Renewables: Opportunities and Pitfalls’, EELR (2003): 103–112, at 111–112 (on the State aid issues raised by the decision); D. Thieme & B. Rudolf, ‘PreussenElektra AG v. Schleswag AG. Case C-379/98’, AJIL 96 (2002): 225–230 and B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), 210–213 (in relation to former Art. 6 EC (current Art. 11 TFEU)).

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Chapter 9 scope of the State aid provisions of the Treaty, as will be further discussed later in the book, but it also helped consolidate the status of environmental objectives as a ground for exemption from the free movement provisions of the Treaty. The dispute concerned measures in the German Stromeinspeisungsgesetz (StrEG), as amended in 1998, which essentially obliged electricity supply undertakings, or distributors, to buy electricity at fixed prices from local electricity producers using renewable energy sources in order to support this type of production, that is, a so-called feed-in tariff scheme.376 The German scheme had originally been introduced with the adoption of the StrEG in 1990, which had been notified to, and subsequently approved by, the Commission under the State aid provisions of the Treaty. After several legislative modifications, about which the Commission had also voiced concern, a set of more comprehensive amendments were made to the StrEG in 1998, following the implementation of the first Electricity Directive in German law. Among the more important amendments was the introduction of a new hardship compensation mechanism, which entitled the distributors to reimbursement of a proportion of the supplementary feed-in costs from the upstream network operators. The local distribution and supply undertaking Schleswag obtained electricity for its customers in Schleswig-Holstein almost exclusively from the upstream producer and transmission grid operator PreussenElektra. However, due to the favourable conditions for wind power production in that area, the proportion of (mandatory) local wind power supplied to cover Schleswag’s portfolio had increased substantially during the 1990s, in turn triggering claims for reimbursement from PreussenElektra in accordance with the hardship compensation mechanism. Following an assertion by PreussenElektra that its payments to Schleswag lacked any legal basis, and hence that it was entitled to repayment, the case was brought before the Landgericht Kiel. The question of whether arrangements such as those provided for in the StrEG amounted to State aid or constituted a restriction 376. The background to the case, including the German legislation in question, is thoroughly described by AG Jacobs in his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 5–62, and will only briefly be revisited here. See also A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 131–133. Since feed-in tariffs can be, and currently are being, applied in many different forms in different countries, it is difficult to provide a precise definition of the scheme. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 29 (and, similarly, Commission Communication: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005, 4), describes feed-in tariffs in general as ‘systems characterised by a specific price, normally set for a period of around several year[s], that must be paid by electricity companies, usually distributors, to domestic producers of green electricity. The additional costs of these schemes are paid by suppliers in proportion to their sales volume and are passed on to electricity consumers by way of a premium on the kWh end-user price’. (Although the option to pass on additional costs to final customers did not appear to be an option under the German legislation at issue in PreussenElektra, see the opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 53).

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Justification for Measures Restricting the Free Movement of Electricity on the free movement of goods was referred to the Court of Justice for a preliminary ruling. The Court found that neither the obligation to purchase electricity nor the financial allocation imposed by the reimbursement scheme amounted to State aid within the meaning of Article 107(1) TFEU, as the obligations did not involve any direct or indirect transfer of State resources.377 With respect to Article 34 TFEU, the Court once again reiterated the Dassonville formula, before recalling its earlier reasoning in Campus Oil.378 It then went on to point out that the German legislation expressly stated that the purchase obligation imposed on electricity supply undertakings only applied to electricity produced from renewable energy sources within the scope of that statute and within the respective supply area of each undertaking concerned. Consequently, the measures were, according to the Court, ‘capable, at least potentially, of hindering intra-Community trade’.379 This is an understatement. The measures in question not only potentially hindered intra-Community trade, they were directly discriminatory in that they in effect established a ‘buy-local’ obligation to the detriment of electricity producers in other Member States.380 Although the effects of the German feed-in tariff scheme on electricity imports were, perhaps, unclear, both Schleswag and PreussenElektra had argued that the measures restricted their ability to import electricity from Scandinavia, and the application of Article 34 TFEU thus appeared quite clear.381 Characterizing the national measures as directly discriminatory would have confronted the Court with an obvious dilemma: how to reconcile, on the one hand, the well-established position in case law that mandatory requirements cannot be relied upon to justify directly discriminatory measures with, on the other, the need to promote environmental objectives. Article 36 TFEU does not explicitly mention environmental objectives, and earlier case law from the Court had established that environmental objectives fell within the category of mandatory requirements established by Cassis de Dijon.382 Those mandatory requirements would not, as a starting point, apply to discriminatory measures such as the German measures in question. Environmental protection had, however, not only been described by the 377. See further Ch. 26.2.2.2 below. 378. Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 69–70, which also refers to the Court’s reasoning in Case C-21/88, Du Pont de Nemours Italiana SpA v. Unita` sanitaria locale N* 2 di Carrara, [1990] ECR I-889, para. 11. 379. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 71. 380. See similarly F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 190–191. The nature of the legislation in question was also emphasized by Jacobs in his capacity as Advocate General in the case, see paras 220–221 of his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099. See also A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 132, who on the basis of the prevailing German legislation at the time emphasize that it was clear that the purchase obligation only applied to electricity that had been generated in Germany. 381. Opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 200–205. 382. Case 302/86, Danish Bottle, [1988] ECR 4607, para. 9.

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Chapter 9 Court as ‘one of the Community’s essential objectives’,383 but had also been firmly incorporated into other areas of the Treaty over the past decades.384 The Court had been confronted with similar difficulties concerning the relationship between discriminatory measures and environmental objectives in several earlier cases, but each time had managed to avoid the problem either by regarding the measure in question as non-discriminatory or by avoiding a discussion of the measure’s possibly discriminatory nature.385 On this basis, Advocate General Jacobs invited the Court to reconsider the approach adopted in earlier case law, that is, that the mandatory requirements only applied to measures equally applicable to domestic and imported products, indicating that existing case law provided some arguments to the effect that this approach was already in decline.386 He also put forward two specific reasons that could be invoked in favour of taking a more flexible approach, in particular to the mandatory requirement of environmental protection: first, the legal obligations imposed on the Community by Article 6 EC; and second, the principle that environmental damage should be rectified at source.387 Despite the arguments of the Advocate General, which have been supported by other academics,388 the Court adopted a different approach, neatly side-stepping 383. Case 240/83, ADBHU, [1985] ECR 531, para. 13. 384. Chapter 8.3 above. 385. In Case C-2/90, Commission v. Belgium, [1992] ECR I-4431 the Court expressly concluded, despite indications to the contrary, that a Belgian prohibition on the storage, tipping or dumping of waste in Wallonia from other Member States was not discriminatory, see paras 33–36 of the decision. In the subsequent Case C-203/96, Chemische Afvalstoffen Dusseldorp BV and Others v. Minister van Volkshuisvesting, Ruimtelijke Ordening en Milieubeheer, [1998] ECR I-4075, the Court appeared in principle to accept environmental protection as a ground for derogation without discussing the possibly discriminatory nature of Dutch waste export restrictions, but nevertheless found that the aims of the measure were in fact economic, see paras 39–44. Similarly, in Case C-389/96, Aher-Waggon GmbH v. Bundesrepublik Deutschland, [1998] ECR I-4473, the Court did not discuss the possibly discriminatory nature of the disputed German aircraft noise standards before concluding that the measures could be justified by considerations of public health and environmental protection, see in particular paras 14–19. See further F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 189–190 and the opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 222–227. 386. AG Jacobs’ opinion to the Court in Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 220–233. 387. Ibid., paras 231–233. 388. See, inter alia, P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 216–220, which also emphasizes that the Court in practice seems to be moving towards a softening of the traditional distinction between the application of Treaty exemptions and of mandatory requirements, although the Court has yet to state this expressly. On the other hand, L.W. Gormley, ‘The Genesis of the Rule of Reason in the Free Movement of Goods’, in Rule of Reason. Rethinking Another Classic of European Legal Doctrine (Groningen: Europa Law Publishing, 2005), 21–33, at 30–32, argues that a firm distinction should be maintained between Treatybased grounds for exemption and those based on case law, with a possible exception in the case of environmental objectives.

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Justification for Measures Restricting the Free Movement of Electricity the problem of indistinctly applicable measures and weaving its way through Directive and Treaty provisions only to arrive at – in this author’s opinion – clearly the right conclusion.389 After having found that the national measures might be capable of hindering intra-Community trade, the Court went on to emphasize that, in order to determine whether the measures were nevertheless compatible with (current) Article 34 TFEU, account must be taken of the aim of the measures in question and the particular features of the electricity market.390 Against this background, the Court noted the obvious link between the promotion of renewable energy sources in electricity production and environmental objectives, as well as the fact that increasing the share of electricity produced from renewable sources is one of the priority objectives of the Community.391 The Court also submitted, in an observation which might be regarded as a sweeping statement designed to cover all eventualities, that the Community’s environmental policy is also designed to protect ‘the health and life of humans, animals and plants’, thus implicitly referring to the exemption grounds contained in (current) Article 36 TFEU. Furthermore, the Court noted how the obligations imposed by (current) Article 11 TFEU and the Community’s environmental objectives related to the scope of the former Electricity Directive, as expressed in the preamble to that Directive.392 Finally, the Court took note of the nature of electricity, particularly with regard to the fact that it is difficult to determine its origin and the primary energy source from which it was produced once it has been fed into the transmission and distribution system. In this regard, the Court also referred to the system for certificates of origin contained in the, at that time, yet-to-be-adopted RES Directive.393 The latter observation on the nature of electricity was particularly surprising given that the Court, only three years earlier, had promptly dismissed a similar contention, put forward by Finland in Outokumpu, by ruling that practical difficulties could not justify the application of an internal tax that discriminated against products from other Member States under (current) Article 110(1) TFEU.394 389. The Court’s approach to the traditional doctrine on the application of mandatory requirements to indistinctly applicable measures is comprehensively examined by F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 187–194 and A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 131–137. In the following we will highlight the main arguments more briefly. 390. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 72. 391. Ibid., paras 73–74. This approach to the relationship between the use of renewables and environmental objectives has also been subsequently applied in Case C-448/01, EVN AG and ¨ sterreich, [2003] ECR I-14527, concerning the use of criteria Wienstrom GmbH v. Republik O giving preference to electricity produced from renewable energy sources under the now repealed Council Directive 93/36/EEC of 14 Jun. 1993 coordinating procedures for the award of public supply contracts, OJ L199/1, 9.8.1993, see paras 30–43 on the approach to environmental criteria in tendering decisions in general and paras 40–41 on how this relates to the prioritization of renewables in particular. 392. Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 76–78. 393. Ibid., paras 79–80. 394. Case C-213/96, Outokumpu, [1998] ECR I-1777, paras 37–38. See in this respect A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’,

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Chapter 9 On the basis of this smorgasbord of arguments and considerations, the Court concluded that ‘in the current State of Community law concerning the electricity market, legislation such as the [national measures] is not incompatible with [now Article 34] of the Treaty’.395 The Court provided no further explanation as to the relationship between Article 34 TFEU and the application of environmental objectives as a ground for exemption and there was no proportionality assessment. From a logical point of view, the decision is open to criticism for confusing the questions of the grounds available to justify a restrictive measure and the appropriateness of the objectives that the measure pursues.396 Whether the exemption grounds contained in Article 36 TFEU can be supplemented with the mandatory requirements developed through case law depends, according to the traditional approach of the Court, on whether the disputed measure applies without distinction to domestic and imported goods. The objective pursued by the measure is only relevant for assessing whether the measure is legitimate and fulfils the proportionality requirements of the Court. In the latter respect, the PreussenElektra decision also evades the difficult question of whether measures such as the German feed-in tariff scheme, which only benefited domestic electricity production from renewable energy sources, are proportionate to the aims pursued. Despite the inconsistency of the Court’s reasoning, there is much merit in the conclusion reached in PreussenElektra, which arguably contributes to strengthening the environmental policies of Member States and, ultimately, the EU.397 As stated by AG Jacobs in his opinion to the Court, the German measure under scrutiny ‘undoubtedly pursues environmental objectives of considerable importance’.398 In practice, feed-in tariffs have proved to be very efficient national instruments for promoting investments in electricity production from renewable energy sources, and the approach has gradually gained ground internationally as

395. 396.

397.

398.

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EEELR 17, no. 3 (2008): 126–145, at 135–136, who argues that the apparent contradictions between the Court’s approaches in Outokumpu and Case C-379/98, PreussenElektra, [2001] ECR I-2099 are capable of logical explanation and that the statements in the former Case have not necessarily been overridden by the latter. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 81. See, similarly, F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 192, as well as his critique of the Court’s similar reasoning in Case C-2/90, Commission v. Belgium, [1992] ECR I-4431 in his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 225. This critique is, however, not supported by G. Davies, Nationality Discrimination in the European Internal Market (The Hague: Kluwer Law International, 2003), 22–27, who argues that a distinction should be drawn between measures that are formally discriminatory and measures that are substantively discriminatory, since formally discriminatory measures such as those at issue in PreussenElektra are not, in practice, discriminatory at all as they are prima facie justified, see in particular note 15 at 23–24 of the book. See, along the same lines, D. Thieme & B. Rudolf, ‘PreussenElektra AG v. Schleswag AG. Case C-379/98’, AJIL 96 (2002): 225–230, at 230, who conclude that ‘the decision may be regarded as an important contribution to strengthening environmental policies under the EC Treaty and to promoting the implementation of multilateral environmental agreements’. Opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 217.

Justification for Measures Restricting the Free Movement of Electricity well as within the EU.399 The Commission had also adopted a favourable attitude to feed-in tariff schemes even before the PreussenElektra decision was handed down.400 This positive view has subsequently been reasserted on several occasions, despite the challenges to the internal market and harmonization raised by the existence of these national schemes.401 Overall, the ruling is perhaps best explained by Jacobs’ observation that the Court ‘can only be found to have environmental friendly credentials but have failed to provide an adequate conceptual basis for its approach’.402 A similar view has been expressed by Gormley.403 On this basis, it is possible to argue that the Treaty’s environmental objectives, the EU’s international climate obligations and 399. M. Mendonc¸a, Feed-in Tariffs. Accelerating the Deployment of Renewable Energy (London: Earthscan, 2007), who argues strongly in favour of the application of feed-in tariff schemes as the best means of promoting renewable energy deployment, holding that such schemes (in various forms) are currently in place in forty-one countries, see 8–9. The effectiveness of the mechanism for attracting renewable investments in Germany has also been substantiated by the Commission and was acknowledged by AG Jacobs during the PreussenElektra proceedings, see his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 20 and 217. Feed-in tariffs in one form or another currently exist in most Member States, see L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 29 and the overview of major electricity support schemes in Europe at 31–37. 400. Only a few months before AG Jacobs delivered his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099, the Commission had submitted its Proposal for a Directive of the European Parliament and of the Council on the promotion of electricity from renewable energy sources in the internal electricity market, COM (2000) 279 final, 10.5.2000. In its Explanatory Memorandum to the proposal, the Commission highlighted the success of feed-in tariff schemes (referred to as ‘fixed price schemes’) in bringing about ‘a substantial increase of the share of [renewable energy sources] in the Community’s electricity production’, see 6 of the proposal. 401. In its Explanatory Memorandum to the Proposal for a Directive of the European Parliament and of the Council on the promotion of electricity from renewable energy sources in the internal electricity market, COM (2000) 279 final, 10.5.2000, 6–8, the Commission had concluded that there was not yet sufficient basis for proposing a Community-wide support scheme, partly because opening national feed-in schemes to producers in other Member States could lead to market distortions and partly because there was only limited experience with different support schemes at the time the proposal was launched. The subsequent Commission Communication: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005, issued in accordance with Art. 4 of the RES Directive five years later, revealed that all Member States with a higher-than-average ability to deliver investments in wind power used feed-in tariffs, and that feed-in tariffs (as well as green certificate schemes) generally performed well for investments in electricity production from biomass, see 6. However, on the basis of a number of advantages and disadvantages identified, the Commission concluded once again that the time was not yet right to put forward a harmonized European support system, see 11–12 and 16. Nor has a harmonized support scheme been introduced by the new RES Directive. 402. F. Jacobs, ‘The Role of the European Court of Justice in the Protection of the Environment’, JEL 18, no. 2 (2006): 185–205, at 194. 403. L.W. Gormley, ‘The Genesis of the Rule of Reason in the Free Movement of Goods’, in Rule of Reason. Rethinking Another Classic of European Legal Doctrine (Groningen: Europa Law Publishing, 2005), 21–33, at 31–32.

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Chapter 9 the fact that public health, animal and plant protection are recognized as justifiable interests under Article 36 TFEU, together provide a particular basis for the reliance on environmental objectives as grounds for exemption.404 Although this line of reasoning is not, perhaps, very elegant in its logic, it would seem absurd to rule that feed-in tariffs per se are incompatible with EU law on the basis of a traditional doctrine that environmental objectives cannot be invoked to justify discriminatory measures, given the status currently attributed to environmental objectives under the Treaty. The more difficult task, in this author’s opinion, is explaining the Court’s decision not to treat the feed-in scheme as a justifiable restriction, which allowed it to avoid scrutinizing the scheme’s proportionality. We will revert to this relationship between feed-in tariffs and proportionality in the next and final section of this chapter below. 9.8.

LEGAL IMPLICATIONS OF THE CHOICE OF GROUND FOR JUSTIFYING EXEMPTION: A COMPARISON OF ENVIRONMENTAL AND SECURITY OF SUPPLY INTERESTS

So far in this chapter we have analysed the reasoning of the Court of Justice in the most prominent cases where security of supply and environmental protection interests have been cited to justify free movement restrictions within the energy sector. What, then, are the principal differences in the legal implications of relying on each of these two interests as grounds for justifying measures that restrict free movement in order to promote electricity generation investments? In this final section of the chapter, we will attempt to draw out the strands of the Court’s reasoning with respect to security of supply and environmental interests and compare these different lines of reasoning from an investment perspective. In pursuit of this aim, we will raise the question, in the abstract, whether it is conceivable that not only environmental interests, but also security of supply interests, could successfully be relied upon as a ground to justify the use of national feed-in tariffs.405 404. For a recent, and in this author’s opinion well-founded, approach to this effect, see A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 134–137. 405. This question was also considered by AG Jacobs in his opinion in Case C-379/98, PreussenElektra, [2001] ECR I-2099, based on arguments advanced by the Commission and the German government, but the idea was promptly rejected by the Advocate General, inter alia with reference to the fact that the measures were not primarily motivated by security of supply interests, see paras 193 and 207–210. The prevailing German legislation, which succeeded the StrEG, however, helps illustrate the close links between the attainment of security of supply and environmental aims. Erneuerbare-Energien Gesetz, BGBl. I-1918 et seq., 21.7.2004 (EEG) § 1(1) provides that ‘Zweck dieses Gesetzes ist es, insbesondere im Interesse des Klima-, Natur- und Umweltschutzes eine nachhaltige Entwicklung der Energieversorgung zu ermo¨glichen, die volkswirtschaftlichen Kosten der Energieversorgung auch durch die Einbeziehung langfristiger externer Effekte zu verringern, Natur und Umwelt zu schu¨tzen, einen Beitrag zur Vermeidung von Konflikten um fossile Energieressourcen zu leisten und die

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Justification for Measures Restricting the Free Movement of Electricity Our analysis of the case law where security of supply interests have been applied to justify exemption from the provisions of the Treaty has shown that Campus Oil was, in most respects, less exceptional than some commentators have suggested. To recap briefly, we have seen that the carefully phrased ground for exemption, on the basis of security of supply considerations, provided by the Court in that decision has subsequently been extended to apply to other energy products, including electricity, and other energy security challenges. Moreover, a slight move towards relaxing the very strict public security-related conditions set forth in Campus Oil may be detected in the Golden Shares decisions, although the Court has not yet been willing to rely on the – in this author’s opinion – more realistic ground of public health in relation to energy security. Nevertheless, the exemption ground still has to be interpreted restrictively, applying only for the purposes of ensuring a minimum level of energy supplies in the event of a genuine and sufficiently serious threat to a fundamental interest of society.406 On the face of it, this narrowly worded ground for exemption does not seem to permit restrictions that promote new electricity generation investments in order to ensure the uninterrupted availability of sufficient electricity supplies to final customers. Arguably, the exemption only appears to cover the protection of essential services and facilities, such as hospitals, military operations, law enforcement institutions, and so forth, all of which can alternatively be protected through the provision of back-up generators and extra fuel storage, rather than through largescale electricity market investments undertaken in order to deal with a potential crisis situation. However, both Campus Oil407 and Commission v. Belgium408 also illustrate the practical difficulties often involved in assessing potential threats to energy security. In the latter case, the threat was not expressed in concrete terms at all. The existence of public control within companies operating essential energy infrastructures was simply seen as a way of ensuring public security, seemingly as a safeguard in case other control options should fail. Correspondingly, although insufficient levels of electricity generation capacity will primarily be liable to affect the economy of the Member State concerned, we cannot rule out the possibility that under-investment may also threaten other fundamental societal interests, such as public health and, ultimately, public security. This uncertainty may possibly contribute to a situation where the Court of Justice will continue to be cautious in refusing recourse to contended energy security measures, unless they are purely economic in nature. Consequently, it is in principle possible to envisage that the adoption of national feed-in tariffs may also rely upon security of supply interests, on the basis of the public-security exemption ground in Article 36 TFEU. Two important points Weiterentwicklung von Technologien zur Erzeugung von Strom aus Erneuerbaren Energien zu fo¨rdern’. (An unofficial English translation of the provision is available at (last visited 24 Mar. 2010)). 406. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, paras 46–48. 407. Case 72/83, Campus Oil, [1984] ECR 2727. 408. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809.

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Chapter 9 should, however, be made regarding this assertion. First, we have seen how the Court, in PreussenElektra,409 showed little reluctance to accept feed-in tariffs in the environmental interest, while similar measures in the security of supply interest are likely, as demonstrated in particular by Campus Oil,410 to be carefully scrutinized on their merits. Second, and more importantly, while the Court found that feed-in tariffs in the environmental interest did not in any way amount to a restrictive measure under Article 34 TFEU, it is inconceivable that the same approach would be applied to energy security measures so that they would avoid scrutiny under the proportionality principle.411 Having regard to the nature of existing feed-in tariff schemes, with their prioritization of domestic electricity generation investments, it is highly doubtful whether a scheme based on the promotion of energy security interests could ever be deemed proportionate. The proportionality of a measure prioritizing national production to the detriment of imports, in order to ensure sufficient supplies in a market where integration is a key concern, is likely to be subjected to intense scrutiny. The salient point would be whether the feed-in tariff scheme could be deemed necessary to ensure security of supply, or whether that interest could be effectively protected by measures that did not restrict intra-Union trade to the same extent. On the one hand, such schemes could, by guaranteeing reliable rates of return, contribute to the realization of necessary projects which would not otherwise be viable on market terms. On the other hand, there is, in this author’s opinion, little reason to accept a scheme because it is the least restrictive alternative for intra-Union trade, unless producers from other Member States are permitted to participate. The possibility of relying on supply sources from other Member States has, after all, repeatedly been highlighted as an advantage, for security of supply, of an integrated internal electricity market.412 Existing feed-in tariff schemes are national in scope and there are various reasons why it is difficult to open them up to producers from other Member States.413 One of several important reasons is that Member States, and ultimately their final customers, are likely to be reluctant to pay additional feed-in costs if these will contribute to investments in other Member States. Although electricity imports enabled by such feed-in tariffs would contribute to security of supply, the local benefits of investment, such as employment, rural development and security 409. Case C-379/98, PreussenElektra, [2001] ECR I-2099. 410. Case 72/83, Campus Oil, [1984] ECR 2727. 411. See, however, A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 137–139, where it is argued that feed-in tariffs, depending on their design, may not always amount to trading rules that in any way fall within the scope of Art. 34 TFEU. Although the question will not be pursued further here, in this author’s opinion it is doubtful whether a feed-in scheme could possibly be regarded by the Community Courts as beyond the scope of Art. 34 TFEU, given the broad interpretation accorded to the provision in existing case law. 412. Chapter 8.4 above. 413. See further Commission Communication: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005, 11–12.

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Justification for Measures Restricting the Free Movement of Electricity of indigenous energy supplies, would not be felt in the importing Member State.414 Such objections to cross-border schemes would, however, be primarily of a national economic nature, and would not necessarily constitute a legitimate argument for the purposes of assessing proportionality. This author therefore submits that it is difficult to envisage a national feed-in tariff scheme being deemed proportionate to the security of supply interests pursued. The difficulties outlined above in defending the proportionality of a feed-in scheme imposed in the security of supply interest applies correspondingly to a scheme imposed in the environmental interest. Arguably, as contended by the Commission in PreussenElektra, the principle that environmental damage should be rectified at source does provide some support (albeit limited) for the justification of a purely national scheme.415 On the other hand, as AG Jacobs objected, it is difficult to see why the promotion of electricity production from renewable energy sources in other Member States (and corresponding electricity imports) would not contribute to the same reduction of GHG emissions in Germany as domestic investments.416 Moreover, the challenges involved in identifying the origin of electricity produced in other Member States have been reduced following the introduction of a requirement for Member States to implement a system of guarantees of origin in the former as well as the new RES Directive.417 These proportionality-based objections to a support scheme which is extensively applied within the EU, and which has proved to be an effective tool for promoting EU environmental objectives, help highlight the advantages of the Court’s pragmatic approach in PreussenElektra. Although the Court could have circumvented the issue of proportionality by undertaking a non-intensive review, restricted to establishing the basic proportionality criteria, this would only have passed the problem on to the referring German Court. Such an approach could, in time, have led to a situation where different national Courts were arriving at different solutions to the conundrum, resulting in an unacceptable situation for the EU law status of national feed-in schemes.418 Although we can only speculate about the Court’s motivation for applying the rather inventive approach seen in PreussenElektra, this author would submit that the most plausible explanation is that the Court acknowledged the importance of 414. Ibid., 12. 415. Article 191(2) TFEU. See the opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 235. 416. Opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 236. In addition, we might add that, since the reduction of anthropogenic GHG emissions is a global challenge requiring global solutions, the argument does not appear to carry much weight. 417. Article 15 of the new RES Directive and Art. 5 of the former Directive 2001/77/EC. 418. See in this respect N. Fenger & M.P. Broberg, Præjudicielle forelæggelser for EF-Domstolen (København:, Jurist- og Økonomforbudets Forlag, 2008), 304, who argue that it is likely that the Court, when deciding the appropriate level of precision to adopt in preliminary rulings, seeks to strike a balance between the need to promote harmonized solutions in all Member States and the need to leave the specific assessment of national laws to national Courts.

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Chapter 9 the national measures in contributing to the attainment of a fundamental Treaty objective, and that these benefits outweighed the obvious free movement difficulties involved. Such an acknowledgement would, in turn, suggest that measures adopted in pursuit of environmental objectives may possibly, in accordance with the overall Treaty objectives, be accorded a particular status that is not shared by security of supply objectives. Consequently, although both energy security and environmental interests can, in principle, help justify restrictions on the free movement guaranteed by the Treaty, the choice of interest relied on is likely to affect the outcome. As we shall see in subsequent parts of the book, similar observations can be made in relation to the prevailing EU internal electricity market measures.

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Chapter 10

Security of Supply Obligations in the General Economic Interest

10.1.

INTRODUCTION

Article 106 TFEU governs the Member States’ relationships with public undertakings and undertakings to which they have granted special or exclusive rights. Article 106(2) TFEU, on which we will focus in the following, provides for the possibility of exemption from other Treaty provisions insofar as such exemption is necessary for the performance of ‘services of general economic interest’ and is not contrary to Union interests. This chapter aims to demonstrate how the security of supply concept has been identified by the Court of Justice as a general economic interest within the meaning of Article 106(2) TFEU. As we shall see, this brings yet another legal dimension to the concept and its relationship with the other overall EU energy policy interests.419 At a general level, the development of the services of general economic interest notion must be seen in relation to the increasing EU commitment to the definition and regulation of services of general interest.420 Services of general 419. Article 106 TFEU has traditionally been regarded as one of the most complex provisions of the Treaty and raises a number of questions of which discussion would be beyond the scope of this book. For a thorough general analysis of the provision, see J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), at 271–360 for an analysis of (curren) Art. 106(2) TFEU in particular. See also F. Blum & A. Logue, State Monopolies under EC Law (Chichester: John Wiley & Sons, 1998). 420. See in particular Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003; Commission Communication: White Paper on services of general interest, COM (2004) 374 final, 12.5.2004; and Commission Communication: Services of general interest, including social services of general interest: a new European commitment, COM (2007) 725 final, 20.11.2007. See also G. Napolitano, ‘Towards a European Legal Order for Services of General Economic Interest’, European Public Law 11, no. 4 (2005): 565–581.

Chapter 10 economic interest have traditionally played an important role in European energy markets.421 Correspondingly, the exemption ground provided for in Article 106(2) TFEU has been subjected to more comprehensive internal electricity market harmonization through the adoption of EU measures than has been the case with the exemption grounds in Article 36 TFEU. The concept of services of general economic interest cannot therefore be viewed in isolation from secondary legislation within the context of today’s internal electricity market. We will revert to this sector-specific concept in more detail in Part V of the book. In this chapter, we will concentrate on decisions of the Court of Justice handed down in pre-liberalized European energy markets in order to illustrate the traditional view of security of supply as a general economic interest. As we shall also see, environmental interests obviously also qualify as general economic interests. As these decisions today are of mainly historical interest in relation to the internal energy market, we will only consider them briefly in the following in order to provide a background to the understanding of today’s regulatory regime. Below we will first provide an introduction to Article 106(2) TFEU in section 10.2, before discussing the energy specific cases decided by the Court of Justice in section 10.3. The relationship between the exemption provided for in Article 106(2) TFEU and the exemptions contained in Article 36 TFEU to the free movement provisions is briefly discussed in the final section 10.4. 10.2.

AN INTRODUCTION TO ARTICLE 106(2) TFEU

Article 106 TFEU has three sections. Article 106(1) prohibits Member States from adopting measures which infringe the Treaty provisions in respect of ‘public undertakings and undertakings to which Member States grant special or exclusive rights’. Article 106(2) provides for possible exceptions in respect of undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly. Finally, Article 106(3) gives the Commission powers to adopt directives or decisions where necessary to ensure the application of the provisions of Article 106. Article 106(2) reads as follows: Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be 421. L. Hancher & S. Jansen, ‘Shared Competences and Multi-Faceted Concepts – European Legal Framework for Security of Supply’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 85–119, at 113–116, who conclude at 116 that ‘it may be expected that continued and often successful reliance will be placed on Article 106(2) TFEU to justify a wide variety of restrictions on both free movement and competition in the name of security of supply in the energy sector’. See also, more generally, P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 461–491, in particular at 476–491, and E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 271–276.

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Security of Supply Obligations in the General Economic Interest subject to the rules contained in this [the] Treaty [Treaties], in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Community [Union]. The provision ‘seeks to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Community’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the Common Market’.422 In the wording of the Court in Corbeau, the provision permits Member States ‘to confer on undertakings to which they entrust the operation of services of general economic interest, exclusive rights which may hinder the application of the rules of the Treaty on competition in so far as restrictions on competition, or even the exclusion of all competition, by other economic operators are necessary to ensure the performance of the particular tasks assigned to the undertakings possessed of the exclusive rights’.423 As we shall see, the Court has subsequently also applied this exception to exclusive rights contrary to Article 37 TFEU, thus extending the scope of the provision also to embrace exemptions from the free movement provisions.424 The notion of an undertaking entrusted with the operation of services of general economic interest is a Union concept whose interpretation is subject to the control of the Court of Justice.425 Not surprisingly, the Court has traditionally held that the wording of Article 106(2) TFEU must be interpreted strictly, since the provision in certain circumstances permits derogation from the rules of the Treaty.426 Consequently, the exemption only applies to undertakings which have been entrusted with a specific task to provide services of general economic interest by an act of public authority.427 On the other hand, the Member States have 422. Case C-202/88, France v. Commission, [1991] ECR I-1223. para. 12. 423. Case C-320/91, Corbeau, [1993] ECR I-2533, para. 14. 424. See, inter alia, Case C-159/94, Commission of the European Communities v. the France, [1997] ECR I-5815, which will be commented upon in more detail below. 425. See similarly J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 279–283 and F. Blum & A. Logue, State Monopolies under EC Law (Chichester: John Wiley & Sons, 1998), 21–24. 426. Case 127/73, Belgische Radio en Televisie v. SV SABAM and NV Fonior (BRT II), [1974] ECR 313, para. 19. 427. See, inter alia, Case 127/73, Belgische Radio en Televisie v. SV SABAM and NV Fonior (BRT II), [1974] ECR 313, para. 20, where the Court held that the undertakings in question ‘must be entrusted with the operation of services of general economic interest by an act of the public authority’. It is clear that the tasks may also be entrusted through the grant of a concession governed by public law, see Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815, paras 65–66. J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), argues on 284–286 that the use of the word ‘entrusted’ establishes a requirement that public authorities or entities must grant a specific task to a specific undertaking by exercising their functions as public authorities.

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Chapter 10 traditionally enjoyed wide discretion in defining their services of general economic interest in the absence of sector-specific EU legislation on the matter.428 Services recognized by the Court as being of general economic interest include responsibility for ensuring the navigability of a Member State’s most important waterway,429 responsibility for radio and television broadcasts,430 a monopoly on the establishment and operation of a public telecommunications network intended to make a public telephone network available to users,431 and a national postal service, insofar as the monopoly was limited to the exclusive right (and obligation) to collect, carry and distribute mail on behalf of all users throughout the territory of the Member State concerned.432 The discretion of Member States to define services of general economic interest is arguably also supported by the inclusion of (current) Article 14 TFEU by the Treaty of Amsterdam,433 although the exact scope of this provision is not completely clear.434 Furthermore, Court decisions relating to services of general economic interest in energy markets, discussed further below, confirm that the meaning of the term services, as applied in Article 106(2), is wider than the definition of services in Article 57 TFEU, and that the former provision also include tasks that relate to the free movement of goods.435 The Member States’ wide margin of discretion is also emphasized by the Commission in its 2001 Communication on services of general interests in Europe, which sets forth that: Member States are primarily responsible for defining what they regard as services of general economic interest on the basis of the specific features of the activities. This definition can only be subject to control for manifest error. They may grant special or exclusive rights that are necessary to the undertakings entrusted with their operation, regulate their activities and, where appropriate, fund them. In areas that are not specifically covered by Community regulation Member States enjoy a wide margin for shaping their policies, 428. This view has been particularly emphasized by the Court of First Instance on several occasions, see Case T-106/95, FFSA, [1997] ECR II-229, para. 99; Case T-17/02, Fred Olsen v. Commission, 2005 ECR II-2031, para. 216 and Case T-442/03, SIC v. Commission, [2008] ECR II-1161, para. 195. This point of departure is also expressed in the Protocol to the Lisbon Treaty on services of general interest, OJ C306/158, 17.12.2007, Art. 1. 429. Case 10/71, Ministe`re public luxembourgeois v. Madeleine Muller, Veuve J.P. Hein and Others, [1971] ECR 723, para. 11. 430. Case 155/73, Giuseppe Sacchi, [1974] ECR 409, paras 14–15. 431. Case C-18/88, Re´gie des te´le´graphes et des te´le´phones v. GB-Inno-BM SA, [1991] ECR I-5941, paras 15–16. 432. Case C-320/91, Corbeau, [1993] ECR I-2533, para. 15. 433. Treaty of Amsterdam amending the Treaty on European Union, the Treaties establishing the European Communities and related acts, signed in Amsterdam 2 Oct. 1997, OJ C340/1, 10.11.1997. See also Case T-442/03, SIC v. Commission, [2008] ECR II-1161, para. 196 with further references. 434. For a discussion of the legal significance of the provision, see M. Ross, ‘Article 16 E.C. and Services of General Interest: From Derogation to Obligation’, ELR (2000): 22–38. 435. Case C-393/92, Almelo, [1994] ECR I-1477 and the Energy Monopoly Cases, commented upon further below.

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Security of Supply Obligations in the General Economic Interest which can only be subject to control for manifest error. Whether a service is to be regarded as a service of general economic interest and how it should be operated are issues that are first and foremost decided locally. The role of the Commission is to ensure that the means employed are compatible with Community law.436 This point of departure leaves limited room for EU control of national definitions of services of general economic interest. However, for an undertaking to be considered as being entrusted with the operation of services of general economic interest, the operation of the services in question must be necessary for reasons of general interest.437 Thus, in Porto di Genova, the Court held that dock work consisting of loading, unloading, transhipment, storage and general movement of goods or materials did not appear to be ‘of a general economic interest exhibiting special characteristics as compared with the general economic interest of other economic activities’.438 In his opinion to the Court in Porto di Genova, AG Van Gerven suggested that only activities of direct benefit to the public fall within the concept.439 The Commission has, in the Communication cited above, sought to explain this distinction by stating that: Services of general economic interest are different from ordinary services in that public authorities consider that they need to be provided even where the market may not have sufficient incentives to do so. This is not to deny that in many cases the market will be the best mechanism for providing such services. [. . .] However, if the public authorities consider that certain services are in the general interest and market forces may not result in a satisfactory provision, they can lay down a number of specific service provisions to meet these needs in the form of service of general interest obligations.440 This approach corresponds to that adopted in several EU Regulations relating to the transport sector. For example, Regulation (EC) No. 1370/2007 on public passenger transport services by rail and by road defines a public service obligation as ‘a requirement defined or determined by a competent authority in order to ensure public passenger transport services in the general interest that an operator, if it were considering its own commercial interests, would not assume or would not assume 436. Communication from the Commission: Services of general interests in Europe, OJ C17/4, 19.1.2001, para. 22 on 8. 437. Case 66/86, Ahmed Saeed Flugreisen and Silver Line Reisebu¨ro GmbH v. Zentrale zur Beka¨mpfung unlauteren Wettbewerbs e.V., [1989] ECR 803, para. 55. 438. Case C-179/90, Merci convenzionali porto di Genova SpA v. Siderurgica Gabrielli SpA, [1991] ECR I-5889, para. 27 (emphasis added). See also AG Van Gerven’s opinion to the Court in Case C-179/90, para. 56. The view of the Court in Porto di Genova is also repeated in Case C-242/95, GT-Link A/S v. De Danske Statsbaner (DSB), [1997] ECR I-4449, para. 53. 439. The opinion of AG Van Gerven in Case C-179/90, Porto di Genova, [1991] ECR I-5889, para. 27. This view is also shared by AG Darmon in para. 137 of his opinion to the Court in Case C-393/92, Almelo, [1994] ECR I-1477. 440. Communication from the Commission: Services of general interests in Europe, OJ C17/4, 19.1.2001, para. 14.

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Chapter 10 to the same extent or under the same conditions without reward’.441 This approach has also been endorsed by the Commission in its interpretative note on the application of public service obligations under the Electricity and Gas Directives adopted in 2003, where explicit reference is made to the corresponding definition in a preceding Regulation repealed by Regulation (EC) No. 1370/2007.442 Furthermore, Union control in respect of services of general economic interest is closely linked to the application of the principle of proportionality inherent in Article 106(2) TFEU. Exemptions from the provisions of the Treaty may only be justified insofar as they are necessary for the performance of the particular tasks whose performance is required in the general economic interest and provided that the development of trade is not affected to such an extent that the interests of the Union are compromised. These proportionality criteria, which are largely identical to those applied when assessing whether restrictions are justified under Article 36 TFEU, will be discussed in more detail on the basis of the provisions of the Electricity Directive in Part V of the book.443 10.3.

SECURITY OF SUPPLY AND ENVIRONMENTAL TASKS AS SERVICES OF GENERAL ECONOMIC INTEREST

The view that the task of ensuring the supply of electricity could amount to a service of general economic interest was first expressed by the Court of Justice in Almelo.444 This preliminary ruling was referred to the Court by a Regional Court of Appeal in the Netherlands and concerned contractually based exclusive supply rights enjoyed by the regional electricity distributor Energiebedrijf IJsselmij NV (IJM) within the territory to which IJM had been granted a non-exclusive concession to distribute electricity. IJM supplied electricity to local distributors, including the Municipality of Almelo, as well as supplying consumers in rural areas directly. 441. Regulation (EC) No. 1370/2007 of the European Parliament and of the Council of 23 Oct. 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L315/1, 3.12.2007, Art. 2(e) (emphasis added). 442. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Public service obligations, 16.1.2004, 2. See Regulation (EEC) No. 1191/69 of the Council of 26 Jun. 1969 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway, OJ L156/1, 28.6.1969, Art. 2 (1), where public service obligations were defined as ‘obligations which the transport undertaking in question, if it were considering its own commercial interests, would not assume or would not assume to the same extent or under the same conditions’ (repealed by Regulation (EC) No. 1370/2007 of the European Parliament and of the Council of 23 Oct. 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L315/1, 3.12.2007, Art. 10(1)). See also Council Regulation (EEC) No. 3577/92 of 7 Dec. 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L364/7, 12.12.1992, where a corresponding definition is applied in Art. 2(4). 443. Chapter 22.3 below. 444. Case C-393/92, Almelo, [1994] ECR I-1477, paras 46–50.

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Security of Supply Obligations in the General Economic Interest Given the higher costs incurred by IJM in supplying electricity directly to consumers in rural areas, compared to the costs incurred by local distributors in supplying electricity in urban areas, IJM decided to impose a surcharge on local distributors to equalize supply costs. Against this background, the electricity distributors disputed the Dutch contractual arrangements which, by imposing import bans and exclusive supply rights, in effect required them to purchase electricity exclusively from IJM. The Court of Justice found that the contractual arrangements could be in contravention of (current) Articles 101 and 102 TFEU before turning to Article 106(2) EC.445 In respect of the latter provision, the Court noted that IJM had ‘been given the task, through the grant of a non-exclusive concession governed by public law, of ensuring the supply of electricity in part of the national territory’.446 It then observed that, within the territory for which the concession was granted, IJM had to ensure that ‘all consumers, whether local distributors or end-users, receive uninterrupted supplies of electricity in sufficient quantities to meet demand at any given time, at uniform tariff rates and on terms which may not vary save in accordance with objective criteria applicable to all customers’.447 On that basis, the Court found that restrictions on competition from other economic operators were permissible, in so far as they were necessary to enable IJM to perform the tasks of general economic interest entrusted to it.448 This conclusion was in line with the opinion of AG Darmon, although the Advocate General proposed a slightly more detailed approach to the question of proportionality than the one finally adopted by the Court.449 The question of the application of Article 106(2) TFEU to services of general economic interest within the energy market came before the Court again in the well-known Energy Monopoly cases. At the beginning of the 1990s, the Commission initiated infringement proceedings against eight Member States claiming, in essence, that their existing electricity and natural gas import and export monopolies were contrary to (current) Articles 34, 36 and 37 TFEU. As some of the Member States concerned were willing to adapt their national legislation, four cases were eventually tried before the Court: the Commission v. Netherlands, Italy, France and Spain.450 The Commission did not dispute that the undertakings in question performed services of general economic interest, but claimed that the undertakings’ monopoly rights were not necessary for the performance of the services they were required to provide. In the Spanish case, the Court found that the Commission had not been able to prove the existence of the alleged Spanish 445. 446. 447. 448. 449. 450.

Ibid., paras 34–45. Ibid., para. 47. Ibid., para. 48. Ibid., para. 49. Opinion of AG Darmon in Case C-393/92, Almelo, [1994] ECR I-1477, paras 136–172. Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699; Case C-158/94, Commission of the European Communities v. Italy, [1997] ECR I-5789; Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815 and Case C-160/94, Commission of the European Communities v. Spain, [1997] ECR I-5851, jointly referred to as ‘the Energy Monopoly Cases’ in the following.

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Chapter 10 monopoly rights, and therefore dismissed the application.451 In the other three cases, the Court found that the monopoly rights were contrary to (current) Article 37 TFEU, but imposed a strict burden of proof on the Commission to demonstrate that such monopoly rights were not necessary for the fulfilment of services of general economic interest in accordance with Article 106(2) TFEU.452 Today these decisions are of mostly historical interest, as their effect was to convince the Member States to accelerate the, until then, slow process of adopting legislation aimed at the establishment of an internal energy market.453 Nevertheless, the nature of the services of general economic interest required of the undertakings is of a certain level of interest for the understanding of the security of supply concept in the light of Article 106(2) TFEU. The national legislation at issue in Commission v. Netherlands conferred on NV Samenwerkende Elektriciteitsproduktiebedrijven (SEP) exclusive import rights for electricity intended for public distribution (except for imports of electricity under 500 V).454 The Dutch legislation further provided that SEP, and undertakings holding licenses for the construction or operation of generation facilities producing electricity for public distribution, had ‘a duty in common to ensure the efficient operation of the national public electricity supply at costs which are as low as possible and in a socially responsible fashion’.455 Neither the Commission, the Advocate General nor the Court were in any doubt that these duties conferred upon SEP an obligation to perform services of general economic interest.456 451. Case C-160/94, Commission of the European Communities v. Spain, [1997] ECR I-5851. 452. Against this background, the Court found in all three cases that the Commission had not been able to substantiate that it would be possible for the undertakings concerned to perform their tasks in the absence of the disputed rights. Furthermore, the Commission had, in the Court’s opinion, failed to demonstrate that the rights in question affected the development of trade to an extent contrary to the interests of the Community. The Commission’s proceedings were therefore dismissed, see the arguments of the Court in Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699, paras 34–71, which was followed by similar arguments in Case C-158/94, Commission of the European Communities v. Italy, [1997] ECR I-5789 and Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815. 453. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 1–3. 454. Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699. 455. Joined opinion of AG Cosmas in the Energy Monopoly Cases, para. 91 at I-5751. 456. Ibid., paras 91–92, at I-5751-5752. The Court merely referred to the fact that the Commission had not denied that SEP was entrusted with the operation of services of general economic interest, see para. 34 of the judgment. The Commission had also previously reached the same conclusion with respect to the tasks of SEP and the participating generators in Commission Decision 91/50/EEC of 16 Jan. 1991, which related to proceedings under Art. 85 (current 101 TFEU) of the EEC Treaty (IV/32.732 – IJsselcentrale and others), OJ L28/32, 2.2.1991, para. 40. See also Commission Decision 93/126/EEC of 22 Dec. 1992, relating to proceedings under Art. 85 (current 101 TFEU) of the Treaty and Art. 65 of the ECSC Treaty (IV/33.151 – ‘Jahrhundertvertrag’) (IV/33.997 – VIK-GVSt), OJ L50/14, 2.3.1993, para. 28, where it was assumed by the Commission that German public electricity supply companies fell within the scope of (current) Art. 106 TFEU ‘in so far as they provide basic supplies of electricity’.

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Security of Supply Obligations in the General Economic Interest The Advocate General even remarked that ‘electricity is so important for the normal functioning of a modern State and economy and for the daily needs of its entire population that certain powers, such as those granted to SEP by the [national legislation], must be regarded as the most typical case of a service the efficient operation of which concerns not only a particular category of individuals but also the entire population’.457 The decision in Commission v. Italy concerned Italian legislation conferring on Ente Nazionale per l’Energia Elettrica (ENEL) the task of providing within Italy services covering the production, import and export, transmission, transformation, distribution and sale of electricity of whatever origin. Other undertakings were prohibited from importing, exporting or trading in electricity or transmitting electricity on behalf of third parties.458 Again, neither the Commission, the Advocate General nor the Court questioned whether ENEL’s tasks amounted to the operation of services of general economic interest.459 The decision in Commission v. France concerned legislation which entrusted to E´lectricite´ de France (EDF) and Gaz de France (GDF) the management of the nationalized electricity and gas undertakings respectively. In effect, this resulted, by way of a concession system, in an import and export monopoly for EDF with respect to electricity and for GDF with respect to gas. EDF also enjoyed a monopoly on electricity transmission, while it acquired a dominant, but not exclusive, position in respect of electricity generation and distribution. GDF, while not being a gas producer, was the principal concessionaire for domestic gas transmission and distribution.460 The obligations imposed on EDF, through a concession to supply all customers, to ensure continuity of supply and to treat all customers equally were held to qualify as tasks entrusted in the general economic interest.461 Similarly, the Court also accepted that the obligations of GDF, to ensure continuity, supply and equal treatment of customers, amounted to services entrusted in the general economic interest.462 The Court had, in its decision in Almelo, already acknowledged that the environmental requirements to which an undertaking performing public service obligations is subject should be taken into account when assessing the necessity of exemptions from the provisions of the Treaty.463 In Commission v. France, the Court was also invited to consider whether environmental tasks as such could qualify as services of general economic interest, based on the French authorities’ contention that EDF and GDF contributed to national environmental and regional 457. Joined opinion of AG Cosmas in the Energy Monopoly Cases, para. 91 at I-5752. 458. Case C-158/94, Commission of the European Communities v. Italy, [1997] ECR I-5789, paras 2–3. 459. Joined opinion of AG Cosmas in the Energy Monopoly Cases, para. 100 at I-5756. The question was not explicitly dealt with by the Court. 460. Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815, paras 2–6. 461. Ibid., para. 72. 462. Ibid., paras 84–88. 463. Case C-393/92, Almelo, [1994] ECR I-1477, para. 49.

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Chapter 10 policies.464 Given the far-reaching nature of the concept of services of general economic interest, and the status of environmental objectives within the Treaty, there can be no doubt that environmental tasks in principle qualify as public service obligations.465 Similarly, the Court did not question whether the alleged tasks could, in principle, qualify as services of general economic interest, but nevertheless concluded that they failed to do so in the case in hand, since no specific environmental obligations had been imposed on EDF and GDF.466 At any rate, the view that tasks imposed in the environmental interest can, in principle, qualify as services of general economic interests was unequivocally confirmed by the Court in its subsequent decision in Sydhavnens Sten & Grus, concerning the management of building waste.467 It appears to make little difference to the concept of environmental protection whether it is applied within the context of Article 106(2) TFEU or in relation to the free movement of goods provisions discussed in Chapter 9 above. The security of supply notion, on the other hand, takes on a very different meaning when viewed from the broader perspective of services of general economic interest, as referred to in Article 106(2) TFEU, compared to the narrow perspective of public security under Article 30 EC. First, the task of ensuring uninterrupted supplies (explicitly recognized in Almelo468 and Commission v. France469) is not restricted to the guaranteeing of minimum supplies in crisis situations in order to ensure public security, but rather involves the ensuring of continuity of supply at all times in the general economic interest. Second, the task not only covers security of supply interests, but also other general economic interests pertaining to electricity supply. This includes the obligation to treat all customers equally (again, explicitly recognized in Almelo and Commission v. France) and to ensure the efficient operation of public electricity supply at low cost and in a socially responsible fashion (Commission v. Netherlands470). Generally speaking, the interests pursued by the disputed national measures in Almelo and the Energy Monopoly cases are little different from the interests pursued by today’s internal electricity market legislation.471 The guaranteeing of a secure and reliable electricity supply, as well as the attainment of environmental objectives, can undoubtedly also constitute services of general economic interest within today’s liberalized market regime.472 The differences between pre- and 464. Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815, paras 69–70. 465. This is also explicitly recognized in Art. 3(2) of the Electricity Directive. 466. Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815, paras 68–70. 467. Case C-209/98, Sydhavnens Sten & Grus, [2000] ECR I-3743, para. 75. 468. Case C-393/92, Almelo, [1994] ECR I-1477. 469. Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815. 470. Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699. 471. Excluding, of course, the aim of integration pursued by the latter legislation. 472. See Art. 3(2) of the Electricity Directive. See also the Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning

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Security of Supply Obligations in the General Economic Interest post-liberalized regimes lies in the question of the necessity of the instruments adopted in order to attain those aims. This question of necessity must be reconsidered in the light of the roles and responsibilities of the various market participants within the context of competitive electricity markets. Essentially, this raises the issue of whether the services in question are likely to be satisfactorily performed by market participants on the basis of ordinary market terms, in which case the granting of exemptions from the provisions of the Treaty will not be necessary to promote the general economic interest. Although the attainment of many of the traditional general economic interests may possibly be met through the establishment of effective competition, this is not the case for all.473 Since the attainment of environmental objectives, through the internalization of environmental costs, obviously, in many cases, requires public involvement and regulation, services of general economic interest may still have a part to play. Moreover, transmission and distribution system operators generally perform many regulated tasks relating to matters such as continuity of supply and consumer protection within liberalized regimes, although many of these tasks are subject to more specific harmonized measures at EU level. Whether there is much room to impose tasks in the security of supply interest on electricity producers, on the other hand, is a more complicated question. These producers are unlikely to have any obligations to supply certain customer groups in a liberalized market. Essentially, the legitimacy of such tasks would depend on whether the obligations performed by those undertakings were of direct benefit to the public, and would not be performed by other undertakings under ordinary market conditions. This means that tasks relating to investments in new electricity generation capacity may possibly qualify as services of general economic interest, given that those investments are necessary for meeting future demand and that the investments, for various reasons, are unlikely to be carried out by other undertakings under ordinary market conditions. Consequently, the narrow interpretation offered by the Court in relation to the exemption on the grounds of public security, that is, that the measures in question must be intended to safeguard energy supplies ‘in the event of a crisis’ and that there must be ‘a genuine and sufficiently serious threat to a fundamental interest of society’, does not apply under Article 106(2) TFEU. The latter provision merely requires a balance to be struck between tasks that the market is capable of performing on a voluntary basis under ordinary market conditions and tasks that require public intervention in order for them to be fulfilled.474 These differences in the approach to the security of supply concept are common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 21, where the Commission even held that ‘continued secure supplies of electricity is probably the most important public service objective’. 473. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 224 goes relatively far in this direction by providing that ‘it is reasonable to assume that most if not all of these requirements would in any event be met through effective competition’. 474. The wording of para. 13 of the preamble to the former Electricity Directive 96/92/EC is illustrative in this respect, setting forth that ‘for some Member States the imposition of public

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Chapter 10 particularly interesting given that Article 106(2) TFEU may very likely also be applied as a ground to justify exemption for free movement restrictions, as we shall see below. 10.4.

THE APPLICATION OF ARTICLE 106(2) TFEU AS AN EXEMPTION GROUND FOR FREE MOVEMENT RESTRICTIONS

Whether Article 106(2) TFEU could be applied to justify restrictions on the free movement of goods was for a long time unclear. The wording of the provision in principle allows for such an application, emphasizing as it does that it applies in particular – but not necessarily exclusively – to the rules on competition. The Court of Justice had, however, adopted a restrictive view on the issue, expressed inter alia in Campus Oil, where an argument by Greece to the effect that Article 106(2) TFEU applied was firmly rejected.475 The Energy Monopoly cases brought about a shift in direction, however, as the Court acknowledged that Article 106(2) TFEU could be applied as ground to justify exemption for measures contrary to the free movement provision in Article 37 TFEU. Although no case law currently exists where Article 106(2) TFEU has been applied to justify exemption from Articles 34 and 35 TFEU, it has been argued in the literature that Article 106(2) TFEU must apply to these provisions following the Energy Monopoly decisions.476 Buendia Sierra, on the other hand, circumvents the problem by stating that: The co-existence of different exceptions applicable to the same State measure can, in theory, create problems. For example, if a State measure is contrary to [current Article 34 TFEU] must the analysis in the light of [current Article 106(2) TFEU] substitute, come before or follow the analysis in the light of [current Article 36 TFEU]? In fact no real problem exists because the Court of Justice uses these different expressions to mean almost exactly the same thing. A task of general interest under [Article 106(2)] could equally be one of the ‘reasons’ under [Article 36]. In addition, the analysis of proportionality is carried out in a very similar manner in both fields. In fact, the Court subsumes the different exceptions in [Article 106(2)] under one global exception, as the above example service obligations may be necessary to ensure security of supply and consumer and environmental protection, which, in their view, free competition, left to itself, cannot necessarily guarantee’. 475. Case 72/83, Campus Oil, [1984] ECR 2727, paras 18–19. It is therefore not correct, as stated by E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 276, that current Art. 106(2) TFEU was applied in Campus Oil. 476. P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 390.

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Security of Supply Obligations in the General Economic Interest from RTT shows [case C-18/88, Re´gie des te´le´graphes et des te´le´phones v. GB-Inno-BM SA, [1991] ECR I-5941, paras 21, 22 and 36].477 The analysis we carried out above shows that this latter assumption is not necessarily correct. The different legal bases may, in fact, give rise to quite different approaches to the concept of security of supply. On the other hand, this author agree with Oliver that it is difficult to see why Article 106(2) TFEU should not, in principle, also be applicable to Articles 34 and 35 TFEU in the wake of the Energy Monopoly cases.478 Consequently, the notion of services of general economic interests also potentially forms a context for the definition of security of supply as an exemption ground from the free movement provisions of the Treaty. More importantly, however, the Court’s approach to security of supply as a service of general economic interest constitutes an important background for the definition of the concept under internal electricity market legislation.479 Before turning to this secondary legislation in more detail, we will in the next chapter discuss the Treaty basis for the adoption of electricity market measures and provide a brief overview of the relevant legislation as an introduction to the evaluations in the subsequent parts of the book.

477. J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 358. 478. P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 390. See, however, for an opposing view, T. Bekkedal, Frihet, Likhet og fellesskap (Bergen: Fagbokforlaget, 2008), 249–251. 479. See in particular Ch. 21 below.

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Chapter 11

Establishment of the Internal Electricity Market

11.1.

INTRODUCTION

Although the enforcement of substantive Treaty provisions may have contributed to paving the way for energy sector liberalization, as seen in the Energy Monopoly decisions, it is obvious that reliance on the general Treaty provisions is not sufficient for the establishment of a functioning internal electricity market. The accelerated pace at which EU electricity market measures have been adopted over the past decade clearly demonstrates the perception within the EU that a broad array of sector-specific measures is necessary in order to establish (and ensure the continued functioning of) a sustainable, secure and competitive internal electricity market. In this chapter we will discuss the competences conferred on the Union to adopt internal electricity market measures and then give a brief overall description of the legislation most relevant to our present topic. Consequently, the objective of this chapter is twofold. First, our discussion of the competences of the EU provides a background to the understanding of the secondary legislation analysed in the following parts of the book. The principle of conferral of powers, on which the TFEU is based, entails limits on the competences of Union institutions to adopt new internal electricity market legislation. These limits are not only relevant for the assessment of the legality of secondary legislation, but also for its interpretation, where ‘preference should be given to the interpretation which renders the provision consistent with the Treaty rather than the interpretation which leads to its being incompatible with the Treaty’.480 The competences conferred on the EU in 480. Case 218/82, Commission v. Council, [1983] ECR 4063, para. 15. Similar statements have been relied upon by the Court in several subsequent cases, see, inter alia, joined Cases 201/85 and 202/85, Marthe Klensch and Others v. Secre´taire d’E´tat a` l’Agriculture et a` la Viticulture,

Chapter 11 this respect are further discussed below in section 11.2. Second, as a transition to the subsequent parts of the book, sections 11.3–11.5 presents an overview of the most relevant internal electricity market legislation to provide a context for the analysis of individual EU measures in Parts IV and V. 11.2.

THE EU’S COMPETENCE TO ADOPT ELECTRICITY MARKET MEASURES

11.2.1.

THE PRINCIPLE LEGAL BASES

OF

CONFERRAL

OF

POWERS

AND THE

DIFFERENT

The principle of conferral of powers is now enshrined in Article 5 TEU. The principle entails that ‘The Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein.’481 A logical implication of this principle is that the EU only has those powers to legislate which have been conferred on it, explicitly or implicitly.482 Power to legislate is conferred on the EU through a wide range of provisions in the Treaty, ranging from specific competences (e.g., Article 168 TFEU on health policy, Articles 191–192 TFEU on the environment and Article 194 TFEU on energy), to competences to legislate in certain situations (e.g., Article 122 TFEU, which applies in case of severe economic difficulties), to more general competences to ensure the establishment and functioning of the internal market (Articles 114 and 115 TFEU), to the even more general provision of residual competence in Article 352 TFEU. Determining whether, to what extent, and under what provisions, competences have been conferred on the EU to legislate within a given field raises a number of complex questions beyond the scope of this book.483 In the present context, it [1986] ECR 3477, paras 20–24 and, for a more recent example, Case C-305/05, Ordre des barreaux francophones et germanophone and Others v. Conseil des ministres, [2007] ECR I-5305 (Grand Chamber), para. 28. 481. Article 5(2) TEU. The principle is also expressed in Art. 13(2) TEU, which sets forth that ‘Each institution shall act within the limits of the powers conferred upon it in the Treaties.’ The principle is also commonly referred to as the principle of attribution of powers, conferral of competences or enumerated competences, see B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29, at 10. 482. Opinion 2/94, Opinion pursuant to Article 228(6) of the EC Treaty, [1996] ECR I-1759, paras 23 and 25. Academic views on the significance of the principle vary widely. For an overview of the extensive literature on the subject, see B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29, at 11–12, notes 13–17. 483. For a general introduction to these questions, see K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 86–100. A number

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Establishment of the Internal Electricity Market suffices to note that these choices have constitutional implications, since the Court of Justice may declare an EU act void due to lack of competence or infringement of an essential procedural requirement.484 In this respect, the ‘appropriate legal basis on which an act must be adopted should be determined according to its content and main object’.485 Article 296 TFEU requires the Union institutions to state reasons for the adoption of legislation, including a clear reference to the legal basis upon which the legislation was adopted.486 The adoption of a specific energy provision has been a topic for discussion at several Intergovernmental Conferences.487 Such provision was finally adopted in Article 194 TFEU. The former lack in the EC Treaty of a specific legal basis for the adoption of legislation within the field of energy has not, however, prevented Union legislators from adopting measures within the sphere of energy on the basis of a range of other provisions in the former EC Treaty, including Articles 93, 95, 100, 156, 175 and 308 EC.488 The legal bases now enshrined in Articles 114 TFEU (former Article 95 EC) and 192 TFEU (former Article 175 EC), concerning the internal market and the environment, respectively, have arguably proved the most valuable to the process of establishing a sustainable, secure and competitive internal electricity market. However, as we shall see below, a logical implication of the principle of conferral of powers is that there are limits to the competences conferred by these provisions. These limits have been of particular significance for the adoption of measures in the security of supply interest, which, due to the former absence of more specific competences, have been based on the general internal

484. 485. 486.

487.

488.

of more specific studies relating to the individual legal bases also exist, of which studies relating to the internal market provision contained in former Art. 95 EC are of particular relevance to this book, see in this respect S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60 and B. de Witte, ‘Non-market Values in Internal Market Legislation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 61–86 respectively. For a discussion on conferral of powers within the energy sector, see B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29. Articles 263 and 264 TFEU. Case C-436/03, Parliament v. Council, [2006] ECR I-3733 (Grand Chamber), para. 35. See Case 45/86, Commission v. Council, [1987] ECR 1493, para. 9, where the Court held that ‘failure to refer to a precise provision of the Treaty need not necessarily constitute an infringement of essential procedural requirements when the legal basis for the measure may be determined from other parts of the measure. However, such explicit reference is indispensable where, in its absence, the parties concerned and the Court are left uncertain as to the precise legal basis’ (emphasis added). B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29, at 27. Ibid., at 26–27, with references to examples of legislation adopted in note 82.

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Chapter 11 market provision. We will therefore focus primarily on the relationship between security of supply measures and current Article 114 TFEU in the following, in section 11.2.2. The difficulties potentially arising from this possible lack of competence are, however, to a large extent remedied by the specific environmental competences contained in current Article 192 TFEU, which will be briefly commented upon in section 11.2.3. We will then conclude our discussion of competences by making some comments on the new energy provision in Article 194 TFEU in section 11.2.4 below. 11.2.2.

ARTICLE 114 TFEU: ESTABLISHMENT ELECTRICITY MARKET

11.2.2.1.

The Boundaries of Article 114(1) TFEU

OF AN INTERNAL

Former Article 95 EC was originally introduced by the Single European Act in 1987 (as Article 100a) in order to accelerate the law-making process in order to pursue the ambitious aim of establishing the internal market by the end of 1992.489 Until then, Article 94 EC (originally Article 100) had only conferred on the Union competence to adopt legislation on the basis of Council unanimity for the approximation of national measures directly affecting the establishment or functioning of the common market. Following the momentum generated by the Commission’s White Paper of 1985 on Completing the internal market,490 the new legal basis made an important contribution to internal market development by introducing the possibility of adopting legislation on the basis of a qualified majority in the Council.491 The aim of completing the internal market by the end of 1992 was not achieved, but Article 95 EC has continued to form the most important legal basis for continued efforts to reach that goal. This is also apparent within the energy sector, where former Article 94 EC arguably lost its practical significance, despite the fact that Article 95(1) EC was worded as a derogation from Article 94 EC. Consequently, Member States may, in principle, be outvoted and find themselves bound by legislation with which they do not agree, although this situation does not often arise in practice.492 Former Article 95 EC has now been replaced by Article 114 TFEU. For the sake of simplicity, the latter provision will be referred 489. As set forth in former Art. 14 EC (see current Art. 26 TFEU), also adopted by the Single European Act, originally as Art. 8A (renumbered Art. 7A by the Maastricht Treaty in 1992, before it was renumbered again by the Amsterdam Treaty). 490. Competing the internal market: White Paper from the Commission to the European Council (Milan 28–29 Jun. 1985), COM (1985) 310 final, 14.6.1985. 491. See L.W. Gormley, ‘The Internal Market: History and Evolution’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 14–28 for an account of the events leading up to the adoption of these provisions. 492. S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60, at 32.

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Establishment of the Internal Electricity Market to in the following, although the internal electricity market legislation so far adopted by the EU has formally been adopted on the basis of the former EC Treaty provision. Article 114(1) TFEU sets forth that the European Parliament and the Council, acting in accordance with the ordinary legislative procedure in Article 294 TFEU, may adopt measures for the approximation of national legislation ‘which have as their object the establishment and functioning of the internal market’. When this provision is read in conjunction with Article 26(2) TFEU, the measures must accordingly have as their object the establishment and functioning of a market without internal frontiers in which the free movement of goods, persons, services and capital are ensured in accordance with the provisions of the Treaty. The boundaries of current Article 114(1) TFEU were highlighted by the Court of Justice in its landmark decision in Tobacco Advertising, which annulled Directive 98/43493 on the advertising of tobacco products.494 The Directive had primarily been adopted on the basis of former Article 95 EC, but was largely inspired by public health policy considerations and prohibited, amongst other things, tobacco advertising on posters, parasols, ashtrays and other articles used in hotels, restaurants and cafe´s.495 The Court, on the basis of the characteristics of the internal market provided by former Articles 3(1)(c) and 14(2) EC, stated that the measures referred to in Article 95(1) EC ‘are intended to improve the conditions for the establishment and functioning of the internal market’.496 On the other hand, that provision could not be interpreted as vesting in the Union legislature a general power to regulate the internal market.497 In the Court’s opinion, a measure adopted on the basis of Article 95 EC (current Article 114 TFEU) ‘must genuinely have as its object the improvement of the conditions for the establishment and functioning of the internal market’.498 Against this background, the Court investigated whether the Directive in question contributed to ensuring the free movement of goods or eliminating appreciable distortions of competition.499 Since the Directive could not be considered to improve the conditions for the internal market in this respect, it was annulled in its entirety.500 The decision in Tobacco Advertising confirms that the competence to harmonize the internal market has its limits, and that these limits will be carefully reviewed by the Court when it is called upon to do so. However, as argued by Weatherill, it is difficult, even in the wake of the judgment, to determine with any 493. Directive 98/43/EC of the European Parliament and of the Council of 6 Jul. 1998 on the approximation of the laws, regulations and administrative provisions of the Member States relating to the advertising and sponsorship of tobacco products, OJ L213/9, 30.7.1998. 494. Case C-376/98, Germany v. Parliament and Council, [2000] ECR I-8419. 495. Ibid., para. 99. 496. Ibid., paras 82–83. 497. Ibid., para. 83. 498. Ibid., para. 84 (emphasis added). 499. Ibid., see in particular paras 96–114. 500. Ibid., see in particular para. 118.

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Chapter 11 precision the scope of the competence provided in current Article 114(1) TFEU.501 The threshold introduced by the Court – that the EU measures must genuinely have as their object the improvement of the internal market – leaves considerable room for additional assessment and since subsequent cases have not resulted in further annulments, they provide limited guidance as to how the threshold should be applied.502 Furthermore, in a subsequent case the Court has held that the wording ‘measures for the approximation’ in current Article 114(1) TFEU signals that discretion is conferred on the Community legislature ‘depending on the general context and the specific circumstances of the matter to be harmonised, as regards the method of approximation most appropriate for achieving the desired result, in particular in fields with complex technical features’.503 Finally, it is impossible completely to rule out the possibility that the particular legal background to the questions at issue played a part in the Tobacco Advertising decision. The Treaty provides separate legal bases for the adoption of public health as well as consumer protection measures, but none of those provisions confer on the EU the competence to adopt bans on advertising of the type in question.504 501. S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60, in particular at 34–37. See also along these lines G. Davies, ‘Subsidiarity: The Wrong Idea, in the Wrong Place, at the Wrong Time’, CMLR 43 (2006): 63–84, at 66 and 68. 502. S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60, in particular at 36. See also the sequels to Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453 (referred to by Weatherill), which was decided after Weatherill’s article was published: Case C-210/03, The Queen, on the Application of: Swedish Match AB and Swedish Match UK Ltd v. Secretary of State for Health, [2004] ECR I-11893 (Grand Chamber), paras 27–42 and Case C-434/02, Arnold Andre´ GmbH & Co. KG v. Landrat des Kreises Herford, [2004] ECR I-11825 (Grand Chamber), paras 29–42. Case C-436/03, Parliament v. Council, [2006] ECR I-3733 (Grand Chamber), is of some interest in this respect. In that case, the European Parliament sought the annulment of Council Regulation (EC) No. 1435/2003 of 22 Jul. 2003 on the Statute for a European Cooperative Society (SCE), OJ L207/1, 18.8.2003, which aimed to introduce a new form of European legal entity in addition to the national forms of cooperative societies. The Parliament contended that the Regulation was wrongly based on former Art. 308 EC, and that Art. 95 EC was the appropriate legal basis. The Court found that Art. 308 EC was the appropriate legal basis since the Regulation, by creating a new form of cooperative society, left unchanged the various national laws already in existence, and therefore could not be regarded as approximating the laws of the Member States within the meaning of Art. 95 EC. This decision seems to imply that the establishment of new structures, even though they may have a function in overcoming the territorial barriers of national legal orders, cannot be adopted on the basis of current Art. 114 TFEU unless they also seek the concrete approximation of those barriers represented by different national legal orders. 503. Case C-380/03, Germany v. Parliament and Council, [2006] ECR I-11573 (Grand Chamber), para. 42. 504. See in particular former Arts 152(4)(c) and 153(3)(b) EC and S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60, at 34 and 37.

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Establishment of the Internal Electricity Market Thus, one could argue that permitting the application of former Article 95 EC would, in reality, have amounted to a circumvention of the other sector-specific legal bases. On the other hand, the Court has attached little importance in a later case to this argument, which supports the view that the thresholds established in Germany v. Parliament and Council are equally relevant within other areas such as the energy sector.505 11.2.2.2.

Article 114(1) TFEU as Legal Basis for the Adoption of Security of Electricity Supply Measures

There is no doubt that Article 114 TFEU confers on the EU competences to adopt measures intended to improve the conditions for the establishment and functioning of the internal electricity market, since electricity constitutes goods within the meaning of the Treaty. These measures must, however, genuinely have as their object the improvement of the conditions for the establishment and functioning of the internal market. The boundaries of the competences conferred under Article 114 TFEU may be explored by the Court both in relation to a piece of legislation as such and in relation to individual provisions adopted under that legislation.506 Consequently, a measure which has as its object the promotion of security of electricity supply within the internal market cannot be based on Article 114 TFEU simply because it pursues a legitimate electricity market interest. On the other hand, the EU legislature is not prevented from relying on that legal basis on the grounds that security of supply interests, which ultimately may be based on other legitimate interests such as public health, are a decisive factor in the choices to be made.507 Measures adopted by individual Member States to improve security of supply will typically entail added costs of some nature for market participants or end-users. Different measures adopted in different Member States may therefore lead to differences in cost levels within the internal market which may hinder intra-EU trade in electricity and/or lead to distortions of competition. The approximation of national security of supply legislation at Union level is therefore in many cases likely to improve the conditions for the 505. Case C-380/03, Germany v. Parliament and Council, [2006] ECR I-11573 (Grand Chamber), paras 92–98. 506. Thus, on the basis of the contentions brought before the Court, in Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453, the Court considered the validity as such of Directive 2001/37/EC on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco products, OJ L194/26, 18.7.2001, while primarily Art. 8 only of that Directive was considered in the two following cases (Case C-210/03, The Queen, on the Application of: Swedish Match AB and Swedish Match UK Ltd v. Secretary of State for Health, [2004] ECR I-11893 (Grand Chamber) and Case C-434/02, Arnold Andre´ GmbH & Co. KG v. Landrat des Kreises Herford, [2004] ECR I-11825 (Grand Chamber)). 507. See similarly Case C-376/98, Germany v. Parliament and Council, [2000] ECR I-8419, in particular at para. 88 and Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453, para. 62.

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Chapter 11 establishment and functioning of the internal electricity market by contributing to a level playing field for market participants through the harmonization of security of supply policies. In this respect, recourse to Article 114 TFEU is justified, provided the measure’s aim is to prevent the emergence of obstacles to trade in the future due to differing developments in national legislation. It is, of course, a prerequisite that the emergence of such obstacles is likely and the EU measure in question is designed to prevent them.508 These points of departure for evaluating the threshold for adopting legislation under Article 114 TFEU mean that the Union has broad competences to adopt security of supply measures as a part of the internal market programme, provided that a causal link can be demonstrated between the adoption of the measures and the object of improving the establishment and functioning of the internal market. It is, however, also possible to envisage Article 114 as imposing limits on the adoption of security of supply measures. For example, a Union measure requiring Member States to ensure that a minimum share of domestic electricity production was based on indigenous Union energy resources could, in principle, promote EU energy security. One could possibly argue that such measures would also bring about improvements for the functioning of the internal market by contributing to an approximation of the means of electricity production and thereby cost levels between Member States, but these potential effects would be, in this author’s opinion, clearly too abstract and indirect to justify recourse to Article 114 TFEU.509 On the other hand, a measure requiring Member States to ensure that a minimum share of domestic electricity production was based on renewable energy sources in the environmental interest (which, incidentally, would also promote energy security, since renewable energy sources are by nature indigenous), could be based on Article 192 TFEU, as we shall see below. The adoption of the Security of Gas Supply Directive provides another example from the energy sector of the difficulties involved in the choice of legal basis.510 The Directive was eventually adopted on the basis of former Article 100 EC, although the Commission had originally opted for former Article 95 EC in its initial Directive proposal, which was launched together with a proposal for a Directive concerning the alignment of measures with regard to security of supply for petroleum products.511 The initial Directive proposal included a number of

508. Case C-436/03, Parliament v. Council, [2006] ECR I-3733 (Grand Chamber), para. 39 and Case C-380/03, Germany v. Parliament and Council, [2006] ECR I-11573 (Grand Chamber), para. 41. 509. As observed by the Court in Case C-376/98, Germany v. Parliament and Council, [2000] ECR I-8419, para. 84, ‘If a mere finding of disparities between national rules and of the abstract risk of obstacles to the exercise of fundamental freedoms or of distortions of competition liable to result therefrom were sufficient to justify the choice of Article [114] as a legal basis, judicial review of compliance with the proper legal basis might be rendered nugatory.’ 510. Council Directive 2004/67/EC of 26 Apr. 2004 concerning measures to safeguard security of natural gas supply, OJ L127/92, 29.4.2004. 511. Proposal for a Directive of the European Parliament and the Council concerning measures to safeguard security of natural gas supply and Proposal for a Directive of the European Parliament and the Council concerning the alignment of measures with regard to security of supply for petroleum products, both proposals published in COM (2002) 488 final, 11.9.2002.

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Establishment of the Internal Electricity Market ambitious instruments particularly inspired by concerns of future EU gas import interruptions.512 The adopted Council Directive, on the other hand, is not only adopted pursuant to a different legal basis than originally envisaged, but also contains few of the interventionist mechanisms proposed by the Commission in order to attain the Directive objective of safeguarding ‘an adequate level for the security of gas supply’.513 Consequently, the adopted Directive is much vaguer than the Commission’s initial proposal, both in respect of Member States’ obligations to secure internal supplies and in respect of Member State solidarity in extraordinary situations. The amendments made during the legislative process illustrate that EU energy solidarity is still a vexed issue, thirty years after the oil crisis of the 1970s. The legislative process also contributed to illustrating the limits of current Article 114 TFEU as legal basis for security of supply measures intended to protect the EU and Member States from third-state supply disruptions. In this author’s view, the change of legal basis was correct. The Directive’s role in the improvement of the conditions for the establishment and functioning of the internal energy market is at best very abstract. Recourse to current Article 122 TFEU, on the other hand, may be justified in precisely those situations which the Directive has as its objective to regulate. 11.2.2.3.

Subsidiarity and Proportionality

The scope of the Union’s competence to adopt legislation is restricted by the principles of subsidiarity and proportionality as set forth in Articles 5(3) and 5(4) TEU respectively. The principle of subsidiarity entails that ‘in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level’.514 Article 4(2)(i) TFEU codifies the established understanding that the energy sector is an area of shared competence between the Union and Member States, which means that the subsidiarity principle applies. Furthermore, Article 4(2)(a) TFEU codifies what

The latter proposal had as its main object to align Member State provisions with regard to oil stocks and crisis measures and ensure coordinated action between the Member States in the event of a supply crisis. The proposal was heavily criticized at the time and was never adopted, see A. Konoplyanik, ‘International Energy Markets’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 47–84, at 74. See also, however, the subsequent Council Directive 2006/67/EC of 24 Jul. 2006, imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products, OJ L217/8, 8.8.2006. 512. See, inter alia, the Directive proposal’s Arts 4 (Member State obligations to ensure supplies), 8(3) (specific solidarity measures and extended Commission powers) and 10 (establishment of a European Observation System to monitor gas supplies). 513. Article 1 of the Directive. 514. Article 5(3) TEU.

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Chapter 11 was already settled case law that Article 114 TFEU does not, in itself, confer on the Union exclusive competence to regulate economic activity in the internal market.515 The Court has, however, adopted an approach to the subsidiarity test which, in the words of Weatherill, has made it hard to imagine circumstances in which a harmonization measure would fall foul of the demands of subsidiarity.516 If the objective of a Union measure is to eliminate barriers raised by differences in Member State legislation (which is a likely objective of any harmonization measure), then that objective (apparently) cannot be sufficiently achieved by the Member States acting individually and calls for action at EU level.517 Consequently, it is difficult to see that the principle of subsidiarity will be of much practical relevance as a restriction on Union competence for the adoption of security of supply measures which genuinely have as their object the improvement of the functioning of the internal electricity market.518 The principle of proportionality requires ‘the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties’.519 The Union legislature is, however, allowed broad discretion by the Court in its judicial review of proportionality requirements in areas which involve complex assessments of a political, economic and social nature. The Court will only contest the legality of a measure adopted within such areas if a measure is manifestly inappropriate having regard to the objectives pursued by the Union institutions.520 As we shall see during our discussion of actual EU electricity market measures later in this book, complex assessments of a political, economic and social nature typically underlie the adoption of these provisions, making it unlikely that the Court will contest their legality. 11.2.3.

ARTICLE 192 TFEU: ENVIRONMENTAL MEASURES

Title XX on the environment in the TFEU provides a legal basis for the adoption of EU measures within that field. The Title consists of Articles 191–193 TFEU, 515. Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453, para. 179. 516. S. Weatherill, ‘Supply of and Demand for Internal Market Regulation: Strategies, Preferences and Interpretation’, in Regulating the Internal Market, ed. N.N. Shuibhne (Cheltenham: Edward Elgar, 2006), 29–60, at 37–38. 517. Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453, paras 180–183. 518. See further G. Davies, ‘Subsidiarity: The Wrong Idea, in the Wrong Place, at the Wrong Time’, CMLR 43 (2006): 63–84 for a critical evaluation of the appropriateness and functions of the subsidiarity principle under Community law. For a different view, see P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), who claims at 55 that the subsidiarity principle has had particular significance for the energy sector. 519. See Art. 5(4) TEU and Case C-380/03, Germany v. Parliament and Council, [2006] ECR I-11573 (Grand Chamber), para. 144 with reference to further case law. 520. Case C-380/03, Germany v. Parliament and Council, [2006] ECR I-11573 (Grand Chamber), para. 145 with reference to further case law.

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Establishment of the Internal Electricity Market replacing the former Articles 174–176 EC, which set forth Union environmental policy aims, Union competences and Member States’ rights to adopt more stringent protective measures.521 Article 191(1) TFEU provides that Union policy on the environment shall contribute to the pursuit of four objectives: (i) preserving, protecting and improving the quality of the environment; (ii) protecting human health; (iii) prudent and rational utilization of natural resources; and (iv) promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change. The environmental protection measures discussed in this study can, in principle, be subsumed within several of these broadly defined aims. The promotion of electricity generation from renewable energy sources arguably contributes to the pursuit of the first above-mentioned objective on environmental protection through its contribution to reducing anthropogenic GHG emissions.522 From a broader perspective, such measures also contribute to promoting similar measures at international level to deal with the global challenges of climate change (objective (iv) above).523 Energy savings and efficiency measures contribute to pursuing the prudent and rational utilization of natural resources,524 as well as the first – and possibly also the fourth – objective above.525 Finally, the promotion of CCS technologies is likely to pursue both objective (i) and, in the longer term, objective (iv) above, through its contribution to global innovation and climate change mitigation. While Article 191 TFEU defines the objectives to be pursued in the context of environmental policy, Article 192 TFEU constitutes the legal basis on which EU measures are adopted.526 Article 192(1) TFEU confers on the Union a general 521. In the following we will only briefly discuss these provisions in order to highlight the relationship between Arts 114 and 192 TFEU as legal bases for the adoption of supply-side measures within the internal electricity market. For a more thorough account of these provisions as formerly enshrined in the EC Treaty, see L. Kra¨mer, EC Environmental Law, 6th edn (London: Sweet & Maxwell, 2007), 5–9, 12–16, 79–95 and 126–132l J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 26–50, 53–70 (particularly at 53–58 and 68–70) and 103–111, and B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29, at 23–25. 522. As stated by J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 26, this first objective of current Art. 191(1) is fairly general and indeterminate. 523. See also the references in the first preamble to the RES Directive and the fifth preamble of the Cogeneration Directive. 524. See similarly B. Delvaux & A. Guimaraes-Purokoski, ‘Vertical Division of Competences between the European Community and its Member States in the Energy Field – Some Remarks on the Evolution of Community Energy Law and Policy’, in EU Energy Law and Policy Issues, ed. B. Delvaux, M. Hunt & K. Talus (Rixensart: Euroconfidentiel, 2008), 9–29, at 23. 525. See also along the same lines the second preamble to the Energy Services Directive. 526. Case C-379/92, Criminal Proceedings against Matteo Peralta, [1994] ECR I-3453. para. 57; Case C-284/95, Safety Hi-Tech Srl v. S. & T. Srl., [1998] ECR I-4301, para. 43 and opinion 2/00, Opinion of the Court of 6 December 2001, [2001] ECR I-9713, para. 43.

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Chapter 11 competence to adopt measures to achieve the objectives set forth in Article 191 TFEU.527 The adoption of measures under Article 192(1) TFEU follows the ordinary legislative procedure established in Article 294 TFEU, which means that electricity market measures adopted under the environmental Title of the Treaty essentially follow the same legislative procedure as measures adopted under Article 114(1) TFEU.528 Consequently, the Union may adopt in the environmental interest electricity market measures that incidentally also contribute to security of supply. Measures which promote security of supply but lack an environmental objective, on the other hand, can only be adopted by means of a corresponding procedure under Article 114(1) TFEU, provided that the measures genuinely have as their object the improved functioning and establishment of the internal electricity market. The adoption of each of the RES Directive, the Cogeneration Directive and the Energy Services Directive serves to emphasize the importance of the environmental legal basis for the adoption of electricity market measures that also contribute to security of supply.529 Since the aims and contents of these measures are predominantly of an environmental nature, while their effects on the establishment and functioning of the internal electricity market are more indirect, Article 192(1) TFEU constitutes the correct legal basis for their adoption.530 The ultimate choice of whether to rely on Article 192(1) or 114(1) TFEU has obvious legal implications.531

527. See along these lines also AG Le´ger’s opinion in Case C-36/98, Spain v. Council, [2001] ECR I-779, para. 71. 528. With the minor exception that the Council, when adopting measures under Art. 192(1), is required to consult the Committee of the Regions in addition to the Economic and Social Committee, see Arts 114(1) and 192(1) TFEU. 529. As stated above in Ch. 8.3, all these Directives were adopted on the basis of former Art. 175(1) EC, and their preambles also clearly highlight the Directives’ beneficial effects for security of supply. 530. It is settled case law that the choice of legal basis rests on objective factors which include, in particular, the aim(s) and contents of the measure, see, inter alia, Case C-300/89, Titanium Dioxide, [1991] ECR I-2867, para. 10; Case C-211/01, Commission v. Council, [2003] ECR I-8913, para. 38 and Case C-338/01, Commission v. Council, [2004] ECR I-4829, para. 54. Moreover, measures pursuing a dual purpose must be based on the legal basis required by the main or predominant purpose or component, provided that it can be identified, see, inter alia, Case C-211/01, Commission v. Council, [2003] ECR I-8913, para. 39 and Case C-338/01, Commission v. Council, [2004] ECR I-4829, para. 55. 531. An important point in this regard is that measures adopted on the basis of Art. 192(1) TFEU must not prevent Member States from maintaining or introducing more stringent protective measures, see Art. 193 TFEU. This approach differs from that applied under Art. 114 TFEU, which by its nature seeks to approximate Member State laws and therefore cannot in general permit Member States to exercise similar broad competences to adopt individual measures (see, however, the alternative and more elaborate procedure in Art. 114(4)-(9) TFEU). This difference is perhaps one of the reasons why the Commission, in its initial proposal for an RES Directive, opted for former Art. 95 EC as the legal basis, but, since the Parliament apparently insisted on the application of former Art. 175(1) EC, this latter legal basis was ultimately relied upon, see L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 16–18.

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Establishment of the Internal Electricity Market Nevertheless, these implications are, arguably, less fundamental than the corresponding challenges arising in relation to the adoption of security of supply measures, which, unless they fall within the ambit of Articles 114(1) or 194 TFEU, may well be beyond the competence conferred on the EU.532 This essentially means that broader competences are conferred on the Union to adopt measures promoting electricity generation from renewable sources than those promoting production from nonrenewable indigenous energy sources. The possible interference of Union activities in national policies to exploit energy resources has always been a Member State concern. This concern was also reflected by the Intergovernmental Conference in a declaration to the adoption of the Single European Act, which noted with reference to then Article 130r EEC (now Article 191 TFEU) that the ‘Conference confirms that the Community’s activities in the sphere of the environment may not interfere with national policies regarding the exploitation of energy resources.’533 The Maastricht Treaty subsequently sought to incorporate the concerns voiced in this statement into the Treaty text, introducing a modification to the Community’s powers to adopt environmental measures inter alia within the area of energy on the basis of a qualified Council majority.534 This modification has been retained in the prevailing Treaty text, where Article 192(2)(c) TFEU requires that ‘measures significantly affecting a Member State’s choice between different energy sources and the general structure of its energy supply’ shall be adopted unanimously by the Council. Article 192(2)(c) TFEU is in line with statements repeatedly made by the Commission, as well as the European Council, both of which have been careful to stress that the choice of energy mix should be left to the discretion of each Member State.535 This position also corresponds with a more general tendency in international law not to impose direct constraints on national choices of energy mix.536 Nevertheless, the fact that the provision permits the adoption of measures which may significantly influence Member State energy source and supply policies confirms the fact that

532. 533. 534. 535.

536.

See also J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 68–70 on the relationship between former Arts 95 and 175 EC and, more specifically, 101–111 on the relationship between choice of legal basis and harmonization requirements. Provided that the measures cannot be based on other legal bases, such as Art. 122 TFEU and the more general Art. 352 TFEU. Declaration on Art. 130r of the EEC Treaty, OJ L169/25, 29.6.1987 and, more precisely, on the aim of that provision to ensure prudent and rational utilization of natural resources (current Art. 191(1) third indent TFEU). See the amendments made to (then) Art. 130S(2) EEC, in Title II, Art. G, point 38 of the Maastricht Treaty. See, inter alia, the Commission’s Green Paper ‘A European Strategy for Sustainable, Competitive and Secure Energy, 8.3.2006, COM (2006) 105 final, 9 and the European Council at its meeting on 23 and 24 Mar. 2006 in respect of establishing an energy policy for Europe, see the Presidency Conclusions 24 Mar. 2006, 7775/06, 16. See along these lines C. Redgwell, ‘International Energy Security’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 18–46, at 46.

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Chapter 11 these matters are not beyond the legislative powers of the EU. Such measures are merely subjected to a stricter adoption procedure through the requirement for Council unanimity.537 From the perspective of the Member States, the requirement for unanimity is, of course, far from immaterial, since it means that each Member State in principle retains a national veto and cannot be forced to accept measures that it has voted against in the Council. Finally, the presence of Article 192(2)(c) TFEU raises the question whether measures that significantly influence Member State energy source and supply policies could possibly be adopted on the basis of Article 114(1) TFEU. The latter provision does not include a reservation similar to that in Article 192 TFEU, which is understandable given the broad, sector-neutral approach of the internal market provision. On the other hand, EU institutions have, as emphasized above, on many occasions stressed that these energy policy choices fall within the sovereign rights of Member States. From a strictly legal viewpoint, however, this author submits that the adoption of such measures is not beyond the competence conferred on the EU by virtue of Article 114 TFEU simply because they significantly affect energy policy choices. The fundamental test under the latter provision is whether the measure at issue genuinely has as its object the improvement of the establishment and functioning of the internal electricity market. If the predominant purpose or component of the measure at issue is to contribute to the establishment and functioning of the internal electricity market by ensuring free movement of goods or eliminating appreciable distortions of competition, interference by the measure with national energy policies cannot rule out its adoption under Article 114(1) TFEU. The fact, however, that a measure which significantly affects a Member State’s energy mix is unlikely primarily to pursue internal electricity market aims and thereby satisfy the conditions for reliance on Article 114(1) TFEU as a legal basis, is a different matter. 11.2.4.

THE NEW ENERGY PROVISION IN ARTICLE 194 TFEU: PLUGGING A HOLE IN THE DAM?

The former absence of a separate legal basis for the adoption of energy measures in the Treaty of Rome may possibly be explained by the fact that the two most important energy sources envisaged at the time the Treaty was adopted – coal and nuclear material – were primarily governed by the ECSC and Euratom Treaties. Nevertheless, as times and the characteristics of the energy sector changed, the view that a separate energy provision was needed in the EC Treaty gradually gained ground. In 1992, the Maastricht Treaty introduced ‘measures in the sphere [. . .] of energy’ as one of the activities of the Community in (former) Article 3(u) 537. See also further L. Kra¨mer, EC Environmental Law, 6th edn (London: Sweet & Maxwell, 2007), 91–92 on the unanimity requirement in Art. 175(2)(c) EC. A different matter of interpretation, which will not be pursued further here, concerns the meaning of the words ‘significantly affecting’, see J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 56–57.

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Establishment of the Internal Electricity Market EC and, more importantly, the provisions on trans-European networks in (former) Title XV, Articles 154–156 EC. In a Declaration to the Final Act of the Maastricht Treaty, on civil protection, energy and tourism, it was noted that separate Treaty titles relating to, inter alia, the area of energy should be further considered on the basis of a report to be submitted by the Commission by the end of 1996.538 The subsequent report prepared by the Commission made as its primary recommendation the consolidation, within the energy area, of the EC Treaty, the ECSC Treaty and the Euratom Treaty or, as an alternative (secondary) solution, the adoption of a new energy title in the EC Treaty setting forth the Community’s objectives and legal bases within the area of energy.539 Almost a decade later, an energy provision drafted in accordance with this alternative solution was set forth in Article III-256 in the proposal for the now-abandoned Treaty Establishing a Constitution for Europe.540 Notwithstanding the fate of the Constitutional Treaty, which was sealed by other concerns than those relating to the energy area in particular, a broadly similar energy provision was adopted by the Lisbon Treaty and is now included in Article 194 TFEU under a new Title XXI on energy. The provision reads as follows: 1. In the context of the establishment and functioning of the internal market and with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to: (a) ensure the functioning of the energy market; (b) ensure security of energy supply in the Union; and (c) promote energy efficiency and energy saving and the development of new and renewable forms of energy; and (d) promote the interconnection of energy networks. 2. Without prejudice to the application of other provisions of the Treaties, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, shall establish the measures necessary to achieve the objectives in paragraph 1. Such measures shall be adopted after consultation of the Economic and Social Committee and the Committee of the Regions. 538. Declaration on civil protection, energy and tourism, in the Final Act to the Treaty of the European Union, OJ C191/97, 29.7.1992. 539. L. Hancher, ‘The New EC Constitution and the European Energy Market’, in European Energy Law Report II, ed. M.M. Roggenkamp & U. Hammer (Antwerpen: Intersentia, 2005), 3–14, at 5 at note 3. 540. Treaty establishing a Constitution for Europe, OJ C310/1, 16.12.2004. See L. Hancher, ‘The New EC Constitution and the European Energy Market’, in European Energy Law Report II, ed. M.M. Roggenkamp & U. Hammer (Antwerpen: Intersentia, 2005), 3–14; G. Rashbrooke, ‘Clarification or Complication? The New Energy Title in the Draft Constitution for Europe’, JENRL. 22, no. 3 (2004): 373–387 and T. Wa¨lde, ‘Energy in the Draft EU Constitutional Treaty’, OGEL1, no. 5 (December 2003): 2–4 for further comments on the energy title in the Constitutional Treaty.

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Chapter 11 Such measures shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c). 3. By way of derogation from paragraph 2, the Council, acting in accordance with a special legislative procedure, shall unanimously and after consulting the European Parliament, establish the measures referred to therein when they are primarily of a fiscal nature. Article 194 TFEU essentially deviates from the proposed energy Article in the Constitutional Treaty on two points, both contained in the first paragraph. First, the provision sets forth that Union policy on energy shall aim, ‘in a spirit of solidarity between Member States’, to ensure certain interests, and, second, those interests, unlike those specified in the Constitutional Treaty, also include the promotion of interconnection of energy networks. A particular interesting question with respect to the new energy provision is how to draw the line between the competences conferred on the Union by this new legal basis and the other more general bases that already exist, in particular Article 114 TFEU. The wording of Article 194(1) complicates this question with its unnecessarily ambiguous reference to ‘the establishment and functioning of the internal market’. Commenting on the similar wording in the energy provision of the Constitutional Treaty, Wa¨lde indicated that that provision might not have provided the EU with competences beyond the powers to adopt measures pursuing internal energy market integration.541 This author agrees, however, with Rashbrooke that this interpretation is too reductionistic, since it would deprive the provision of much of its effect as a legal basis.542 At the same time, the aims provided in Article 194(1) might also be criticized for being too specific. The wording of the provision indicates that the list of aims provided in litra (a)–(d) is exhaustive. Measures such as the promotion of CCS technology, for example, do not appear to fit into any of these categories, despite the environmental advantages associated with such technology. This might not amount to a significant problem in practice, whether it were to be solved by applying a wide interpretation of the aims in the light of the mention of the ‘need to preserve and improve the environment’ in the first sentence of the provision or, alternatively, through recourse to Article 192 TFEU. The provision would, however, have benefitted from clearer wording at this point. Article 194(2) first subparagraph confers competence on the EU to adopt measures necessary to achieve the objectives enshrined in the first paragraph by the ordinary legislative procedure. Read in conjunction with first paragraph litra (b), the provision consequently provides a separate legal basis for the adoption of security of supply measures which does not require that the measures have as their objective the improvement of the establishment or functioning of the internal 541. T. Wa¨lde, ‘Energy in the Draft EU Constitutional Treaty’, OGEL 1, no. 5 (December 2003): 4. 542. G. Rashbrooke, ‘Clarification or Complication? The New Energy Title in the Draft Constitution for Europe’, JENRL 22, no. 3 (2004): 373–387, at 380–381.

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Establishment of the Internal Electricity Market electricity market. The scope of this competence is, however, restricted by the second subparagraph of Article 194(2), which prohibits the adoption of measures which ‘affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply’. Consequently, such measures could still only be adopted on the basis of other, non-energy-specific, provisions. The most obvious example, as also referred to in Article 194, would be the adoption of measures by unanimous decision of the Council in accordance with Article 192(2)(c) TFEU, which requires the measures in question to be based on the environmental objectives in Article 191 TFEU, not primarily on security of supply objectives. As we saw above, another possible alternative would be reliance on Article 114(1) TFEU, provided that the measures at issue primarily sought to promote the establishment and functioning of the internal electricity market. The qualification in Article 194(2) second subparagraph also means that the scope of the Community’s competence to adopt measures under the new energy provision would be more limited than the competence to adopt measures on the basis of the normal legislative procedure under Article 192 TFEU. The former provision requires that EU measures ‘shall not affect’ certain matters of national energy policy while Article 192(2)(c) requires Council unanimity for the adoption of measures ‘significantly affecting’ such interests.543 In other words, the competence to adopt measures in the security of supply interest by the ordinary legislative procedure under Article 194 would be more limited than the competence to adopt environmental measures under Article 192(1) TFEU. Nevertheless, the new energy provision may provide a clearer legal basis for the adoption of security of supply measures which have less radical effects on national energy policy while at the same time lacking a clear internal market rationale. The Security of Electricity Supply Directive, which will be discussed in more detail in subsequent parts of the book, is a case in point. Finally, the explicit emphasis on energy sector objectives in Article 194(1) may also be of interpretational value for the understanding of EU measures adopted in accordance with the provision. Environmental objectives are already thoroughly emphasized elsewhere in the Treaty, and the contribution of the new energy article may be limited in this sphere. The references to solidarity between Member States, the Union’s security of supply and the interconnection of networks, on the other hand, arguably provide a new and stronger basis for interpreting internal electricity market provisions in the light of Member State solidarity and the need to ensure security of supply at EU level. In conclusion, the new energy provision does represent a certain development in the direction of extending the Union’s competence to adopt energy measures in general and security of supply measures in particular. Although the provision does have its shortcomings, and the drafting may not be elegant in all respects, Rashbrooke’s conclusion that the mostly identical provision in the Constitutional Treaty

543. Emphasis added.

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Chapter 11 was ‘seriously flawed’ appears, in this author’s view, to be an overstatement. Whether the adoption of a separate energy title in the Treaty is essential in order to build a functioning internal electricity market is a different matter. The legislative impetus witnessed on the basis of the former EC Treaty competences suggests that it is not. 11.3.

EU INTERNAL ELECTRICITY MARKET MEASURES

11.3.1.

THE FIRST STEPS TOWARDS ESTABLISHING ELECTRICITY MARKET

AN INTERNAL

The traditional structure of most European electricity markets – consisting of large, vertically integrated public utilities, frequently enjoying exclusive regional supply rights – made the establishment of an internal electricity market impossible. The Commission’s launch in 1988 of its working document on the internal energy market was one of the early steps taken towards altering this situation.544 However, apart from the adoption of the largely insignificant Council Directive on the transit of electricity through transmission grids in 1990, little progress was made during the 1980s and early 1990s in building an internal electricity market.545 The previously slow progress towards integration was accelerated by the infringement proceedings in the Energy Monopoly cases.546 Even though the applications of the Commission were dismissed, the Court’s decisions made it clear to Member States that monopoly rights conferred on national energy undertakings were not necessarily beyond the reach of EU law. This recognition paved the way for the adoption of the first Electricity Directive in 1996,547 which laid the foundations for a progressive liberalization of the electricity market.548 544. Commission working document: The internal energy market, COM (88) 238 final, 2.5.1988. 545. Council Directive 90/547/EEC of 29 Oct. 1990 on the transit of electricity through transmission grids, OJ L313/30, 13.11.1990. The Directive acknowledged the need for greater integration of European energy markets, but contained few instruments suited to the active pursuit of the establishment of an internal electricity market. In essence, it stated that Member States should take measures to facilitate transit of electricity between transmission grids on nondiscriminatory and fair terms. The contrast in the level of detail between this Directive and the new Electricity Regulation adopted in 2009 serves to illustrate the acceleration in the legislative development of the internal electricity market over recent decades. See E.D. Cross, L. Hancher & P.J. Slot, ‘EC Energy Law’, in Energy Law in Europe. National, EU and International Law and Institutions, ed. M.M. Roggenkamp et al., 1st edn (Oxford: Oxford University Press, 2001), 213–320, at 282–284 for a brief presentation of the Transit Directive, which was repealed on 1 Jul. 2004 (see Art. 29 of Electricity Directive 2003/54/EC, and the corresponding (and also repealed) Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids, OJ L147/37, 12.6.1991. 546. Discussed above in Ch. 10. 547. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 3. 548. Directive 96/92/EC of the European Parliament and of the Council of 19 Dec. 1996 concerning common rules for the internal market in electricity, OJ L27/20, 30.1.1997, repealed with effect

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Establishment of the Internal Electricity Market The first Electricity Directive required Member States to pursue a policy of gradually introducing competition, with an emphasis on opening up national electricity grids to third-party access on transparent, objective and non-discriminatory terms. Consequently, the Directive drew a regulatory distinction between, on the one hand, electricity grids, which due to their nature as natural monopolies needed to be subjected to regulation and, on the other hand, the production and supply of electricity which were gradually to be subjected to competition.549 This regulatory distinction is a fundamental point of departure for the introduction of competition within most network-bound energy markets – in practice the electricity and natural gas markets – and is not peculiar to the EU’s regulatory approach.550 The approach entails, essentially, directing regulatory focus towards the promotion of objective and non-discriminatory access to essential transportation infrastructure in order to facilitate a well-functioning electricity market where market participants may compete on equal terms.551 The production and supply functions, on the other hand, were, in accordance with the regulatory point of departure described above, made subject to less intensive regulation by the Directive.552 Although the first Electricity Directive represented an important step forward in the establishment of an internal electricity market, the Directive also suffered from several limitations and shortcomings due to Member State compromises.553 The European Council statements made during the Lisbon summit in 2000 provided new impetus for the development of the internal electricity market by requesting the Commission, the Council and the Member States ‘to speed up liberalization in areas such as gas, electricity, postal services and transport’ with

549.

550.

551. 552. 553.

from 1 Jul. 2004, see Art. 29 of Electricity Directive 2003/54/EC. The first Electricity Directive was followed by the adoption of the largely parallel first Gas Directive, Directive 98/30/EC of the European Parliament and of the Council of 22 Jun. 1998 concerning common rules for the internal market in natural gas, OJ L204/1, 21.7.1998 (also repealed with effect from 1 Jul. 2004, see Art. 32 of Gas Directive 2003/55/EC). For a more detailed account of the first Electricity Directive, see E.D. Cross, L. Hancher & P.J. Slot, ‘EC Energy Law’, in Energy Law in Europe. National, EU and International Law and Institutions, ed. M.M. Roggenkamp et al., 1st edn (Oxford: Oxford University Press, 2001), 213–320, at 301–308. See, inter alia, U. Hammer, Tilrettelegging av kraftmarkedet: en studie i reguleringen av nettets koordinerende funksjoner (Oslo: Cappelen, 1999), 113 et seq. for a thorough analysis of the regulatory approach adopted regarding the early introduction of competition in the Norwegian electricity market. See also I. Falch, Rett til nett. Konkurranse i nettbundne sektorer (Oslo: Universitetsforlaget, 2004), who illustrates how similar approaches have also been applied in other network-bound sectors and who shows that the network markets are typically subject to monopoly regulation while the commodity markets are usually subject to regulation to encourage competition (at 180). This focus becomes apparent when reading the Directive, where the question of access to the grid forms an important part of the background to Chs IV–VII, Arts 7–22, of the Directive. See in particular Ch. III, Arts 4–6 of the first Electricity Directive with respect to electricity generation (which corresponds to Ch. III in the new Electricity Directive). E.D. Cross, L. Hancher & P.J. Slot, ‘EC Energy Law’, in Energy Law in Europe. National, EU and International Law and Institutions, ed. M.M. Roggenkamp et al., 1st edn (Oxford: Oxford University Press, 2001), 213–320, 301–302.

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Chapter 11 the aim ‘to achieve a fully operational internal market in these areas’.554 This led the Commission to publish a Communication on completing the internal energy market together with a proposal for a Directive amending the first Electricity and Gas Directives in 2001.555 Following a number of proposed changes by the Parliament and Council, the Commission adopted an amended proposal in 2002,556 which finally (and following many amendments) led in 2003 to the adoption of Electricity Directive 2003/54/EC and Gas Directive 2003/55/EC, as well as Electricity Regulation No. 1228/2003. The internal electricity market legislation was complemented by the adoption of the Security of Electricity Supply Directive in 2006. Although the second generation of EU electricity market measures has arguably contributed to bring the internal electricity market a major step forward, The Commission’s Sector Inquiry into competition in electricity and gas markets, initiated in 2005, revealed a number of shortcomings and market failures. The final report from the inquiry thus identified a number of obstacles to the establishment of a functioning internal electricity market, such as a high level of market concentration in electricity generation activities, vertical foreclosure of grid and supply activities and a lack of transparent data relating to grid availability and price formation.557 This forms an important background for the Commission’s proposal in 2007 for a ‘third legislative package’, which included proposals for, inter alia, amending the then prevailing electricity market and gas market directives and regulations.558 After a number of 554. Presidency Conclusions from the Lisbon European Council meeting held on 23 and 24 Mar. 2000, 24.3.2000 (100/1/00), para. 17 at 5–6. 555. Commission Communication: Completing the internal energy market and Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, both documents published as COM (2001) 125 final, 13.3.2001. 556. Amended proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning rules for the internal markets in electricity and natural gas and Amended proposal for a Regulation of the European Parliament and of the Council on conditions for access to the network for cross-border exchanges in electricity, COM (2002) 304 final, 7.6.2002. 557. Communication from the Commission: Inquiry pursuant to Art. 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report), COM (2006) 851 final, 10.1.2007, 5–9. 558. Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity, COM (2007) 528 final, 19.9.2007, Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EC) No. 1228/2003 of the European Parliament and of the Council of 26 Jun. 2003 on conditions for access to the network for cross-border exchanges in electricity, COM (2007) 531 final, 19.9.2007 and Proposal for a Regulation of the European Parliament and of the Council establishing an Agency for the Cooperation of Energy Regulators, COM (2007) 530 final, 19.9.2007. See also the corresponding proposals for internal gas market amendments, Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC of the European Parliament and of the Council of 26 Jun. 2003 concerning common rules for the internal market in natural gas, COM (2007) 529 final, 19.9.2007 and Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No. 1775/2005 on conditions for access to the natural gas transmission networks, COM (2007) 532 final, 19.9.2007.

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Establishment of the Internal Electricity Market amendments being made to the proposals throughout the legislative process, a third generation of internal electricity market measures, including a new Electricity Directive and a new Electricity Regulation, was adopted on 13 July 2009. Given the findings in the Sector Inquiry that new market entrants lacked access to electricity grids, an effort to adopt stricter unbundling requirements for TSOs and stricter requirements for the independent organization of, and tasks imposed, on national energy regulators was made a priority by the Commission in the new legislative package.559 A new Regulation for the establishment of an EU ACER was also proposed. The former part of the proposal, relating to ownership unbundling for TSOs, gave rise to a fierce debate at EU level which eventually led to a less ambitious, and arguably more confusing, unbundling regime being adopted as part of the final adoption of the third energy package in 2009.560 At the same time, the proposed amendment Directives and Regulations ended up being adopted as entirely new pieces of legislation and this also lead to the adoption of a number of smaller amendments to the individual provisions of the former directives. With a few exceptions, however, none of these amendments directly concerned electricity generation investments. Consequently, as we shall see, most of the provisions concerning electricity generation investments in Electricity Directive 2003/54/EC have been left unaltered by the new Electricity Directive from 2009. 11.3.2.

THE ELECTRICITY DIRECTIVE

The new Electricity Directive 2009/72/EC adopted on 13 July 2009 was – like the Directive it replaces – adopted on the basis of former Article 95 EC (current Article 114 TFEU).561 Member States are required to incorporate the Directive into national law by 3 March 2011, and Electricity Directive 2003/54/EC is repealed from the same date.562 The Directive has as its overall objective to improve and integrate competitive electricity markets in the Union.563 Consequently, it pursues the same overall objectives as Electricity Directive 2003/54/EC, which had as its aim the improvement of the operation of the internal electricity market.564 The latter Directive has 559. See S. Goldberg, ‘The Third Energy Package of the European Union’, in European Energy Review 2010, ed. M. Newbery & S. Goldberg (London: Herbert Smith LLP, 2010), 3–9 for an overview of the policy background and the contents of the third legislative package. 560. For a recent overview of the Commission’s proposal and an assessment of its legality under Community law, see S. Praduroux & K. Talus, ‘The Third Legislative Package and Ownership Unbundling in the Light of the European Fundamental Rights Discourse’, CRNI 9, no. 1 (2008): 3–28. 561. It is also in part based on former Arts 47(2) and 55 EC (current Arts 53 and 62 TFEU, respectively) which open up for Community coordination of national measures which may impair the freedom of establishment and free movement of services respectively. 562. Electricity Directive Arts 49 and 48, respectively. 563. Electricity Directive Art. 1. 564. Case C-439/06, Citiworks, [2008] ECR I-3913, para. 38 and Case C-239/07, Julius Sabatauskas and Others, [2008] ECR I-7523, para. 31.

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Chapter 11 arguably succeeded in taking the establishment of the internal energy market a major step forward compared to the situation under its predecessor.565 The new Directive is likely to continue this process. In the following we will provide a brief overview of the new Electricity Directive’s structure and its most relevant provisions as a background to our discussion in subsequent parts of the book. The more energy-specific aims of the Directive emerge indirectly from the general requirement imposed on Member States in Article 3(1) to ensure: on the basis of their institutional organisation and with due regard to the principle of subsidiarity, that, without prejudice to paragraph 2, electricity undertakings are operated in accordance with the principles of this Directive with a view to achieving a competitive, secure and environmentally sustainable market in electricity, and shall not discriminate between these undertakings as regards either rights or obligations.566 In line with this broad statement of objectives, the scope of the Directive is also widely defined. By establishing ‘common rules for the generation, transmission, distribution and supply of electricity, together with consumer protection provisions’, the Directive will, as its predecessor Directive 2003/54/EC, represent the regulatory backbone of the internal electricity market.567 The establishment of a functioning electricity market based on competition requires customers to be free to purchase electricity from the suppliers of their choice, that is, it requires full opening of the market. Electricity Directive 2003/54/ EC at least in theory completed the gradual process of market opening, initiated by the first Electricity Directive 96/92/EC, by requiring Member States to ensure that all customers (both household and non-household) were free to choose their supplier with effect from 1 July 2007.568 This obligation for Member States to ensure full market opening follows correspondingly from Article 33 of the new Electricity Directive. The new Electricity Directive builds on the same structure and regulatory point of departure as the first and second Electricity Directives with respect to the ensuring of a level playing field among competing producers and suppliers for the purposes of attracting customers who now (in principle) may choose their supplier. Consequently, the facilitation of functioning electricity markets, through the ensuring of non-discriminatory, objective and transparent network access, forms an important part of the background to substantial portions of the Directive’s 565. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 3 and E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 356. The time limit for the national implementation of the Electricity Directive was 1 Jul. 2004, see Art. 29 of the Directive. 566. Emphasis added. See also the similar wording in Art. 3(1) of the Gas Directive. 567. Article 1 of the Electricity Directive. 568. Articles 2(12) and 21(1)(c) of Directive 2003/54/EC. Whether this opening of the market has been realized in practice is, however, a different question, with the situation in different Member States appearing to vary widely.

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Establishment of the Internal Electricity Market text.569 The generation and supply functions are, also in accordance with the regulatory point of departure that the performance of these functions is based on competition, subjected to less intensive regulation. Following on from Chapter I, which establishes the Directive’s subject matter, scope and definitions, Chapter II lays down a set of general organizational rules for the sector, of which arguably the most important are the public service obligations and customer protection provision in Article 3. Apart from the general obligations imposed on Member States in Article 3(1), cited above, Article 3(2) read in conjunction with Article 3(14) is particularly important to our present topic in that it provides a Directive-specific exemption ground for the performance of public service obligations in the general economic interest. Electricity generation is dealt with in Chapter III of the Directive, consisting of Articles 7 and 8. These provisions are, with the exception of some smaller modifications, identical to the corresponding provisions in Articles 6 and 7 in Electricity Directive 2003/54/EC. Article 7 establishes an authorization procedure for the construction of new generating capacity, while Article 8 establishes a tendering procedure for the promotion of new generation investments in the security of supply or environmental interest. Although the provisions contain no express statement to this effect, it is clear that they are based on the regulatory idea that investments as a general rule should be market-driven and that market intervention (in the form of tenders) should only be allowed in exceptional circumstances when necessary for security of supply or environmental reasons. Apart from the tendering derogation in Article 8, Member States may also, in principle, rely on the general public service exemption in Article 3 in matters concerning electricity generation. These provisions are thoroughly discussed in Parts IV and V of the book below. Chapters IV and V of the Directive concern transmission system operation, that is the operation of the extra high-voltage and high-voltage electricity grids.570 The entities responsible for the operation of this network are commonly referred to as transmission system operators or TSOs.571 The Directive requires Member States to impose a number of tasks and responsibilities on the TSOs.572 The nature and scope of these tasks clearly illustrate the position of TSOs as the central vehicles for the coordination of the functioning of the electricity system.573 A large part of the TSOs’ role therefore concerns the performance of activities which may be referred to as services of general economic interest (as specifically defined by the Directive), rather than traditional market-based activities. These activities include tasks in the security of supply interest as well as (possibly) in the 569. This background is emphasized, inter alia, in para. 4 of the preamble to the Electricity Directive, which sets forth that ‘there are obstacles to the sale of electricity on equal terms and without discrimination or disadvantages in the Community. In particular, non-discriminatory network access and an equally effective level of regulatory supervision in each Member State do not yet exist’. 570. See the definition of ‘transmission’ in Art. 2(3) of the Electricity Directive. 571. See the definition of ‘transmission system operator’ in Art. 2(4) of the Electricity Directive. 572. Articles 12 and 15 of the Directive. 573. See also further below in Ch. 14.4.

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Chapter 11 environmental interest.574 The tasks of TSOs do not, however, include responsibility for ensuring sufficient electricity generation investments. On the contrary, the Directive requires TSO entities to be independent of undertakings engaged in competitive electricity generation and supply activities in order to avoid crosssubsidization and preferential treatment of integrated business activities (so-called unbundling). Chapters IV and V of the Directive include a number of amended and new provisions related to unbundling of TSOs compared to the TSO provisions in Directive 2003/54/EC. The latter Directive required TSO entities to be functionally and legally independent of undertakings engaged in competitive electricity generation and supply activities.575 Following the results of the Sector Inquiry, the Commission proposed as a central instrument in the third legislative package to take unbundling one step further by introducing ownership unbundling, that is that ownership to TSOs should be separated from ownership to entities involved in competitive supply and generation activities. The ownership unbundling approach originally opted for by the Commission in its proposal for a third legislative package eventually ended up in a political compromise including three models for transmission system operation: full ownership unbundling, an independent system operator (ISO) model, and an independent transmission operator (ITO) model. The ownership unbundling approach entails, in essence, that the TSO which owns and operates the transmission system shall not be part of a company group which is also involved in competitive supply and production activities. In other words, the ownership to the TSO company must, with some exceptions for minority share holdings, be unbundled from ownership to companies involved in competitive electricity market activities. This approach is considered by the Commission to promote security of supply by ensuring the necessary investments in new transmission infrastructure, as the TSO will not have any incentives to deter investments to the benefit of an affiliated undertaking which already has access to the existing system capacity. The main ownership unbundling requirements are set out in Article 9 of the Electricity Directive. The ISO model, on the other hand, permits that vertically integrated companies still retain their ownership interests in companies owning transmission systems, but requires that the transmission system is operated by a separate ownership unbundled ISO which performs all the functions of a network operator. In order to ensure a functioning ISO model, the Directive sets forth a number of additional requirements for this option, such as for example obligations for the transmission grid owner to finance the transmission grid investment decisions made by the ISO. The main ISO requirements are set forth in Article 13 of the Directive. Finally, introduced as a political compromise, the third ITO model still allows for integrated companies to hold ownership interests in companies involved in TSO activities as well as in companies involved in competitive activities. Such 574. Articles 12 and 15 include a number of security of supply-related tasks, see for example Art. 12 litras (a), (c) and (d) and Art. 15(4). Fewer environmental obligations are imposed on TSOs, with Art. 15(3) being an exception. 575. Article 10 of Directive 2003/54/EC.

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Establishment of the Internal Electricity Market integrated companies must, however, comply with a number of new and stricter conditions compared to the requirements in Directive 2003/54/EC in order to pursue the aim of independent system operation. As suggested by Goldberg, this alternative may therefore be described as the ‘status-quo-plus’ model.576 The ITO model is dealt with separately in Chapter V of the Electricity Directive. Chapter VI of the Directive concerns the tasks and activities of distribution system operators (DSOs) with responsibility for electricity grids at lower voltage levels.577 These provisions are to some extent parallel to the regulation of TSO tasks and responsibilities in Chapter IV, although at the same time reflecting the more local role of DSOs within the electricity system. Chapter VII contains provisions on public access to and transparency of accounts in order to ensure that unbundling requirements are complied with. The regulation of third-party access to the transmission and distribution grids operated by TSOs and DSOs, respectively, is provided for in Chapter VIII, in particular in Article 32. This latter provision requires Member States to ensure the implementation of a regulated third-party access regime, where customers have access to the grid based on published, objective and non-discriminatory tariffs (transportation prices). Chapter IX concerning national regulatory authorities is, together with the transmission unbundling requirements, the part of the new Electricity Directive which contains the most comprehensive changes compared to the former Electricity Directive 2003/54/EC. To monitor the functioning of the electricity market, and particularly the grid-access regime, Directive 2003/54/EC required Member States to designate regulatory authorities which were independent from the interests of the electricity industry, and which should have a minimum set of regulatory responsibilities.578 The new Directive sets forth stricter requirements for the organization and independence of the national regulatory authorities, and the minimum set of responsibilities to be performed by these regulators is significantly extended. In essence, Member States shall now designate one single regulatory authority at national level which shall be independent from both electricity industry interests and political bodies. These independent regulators shall be responsible for grid access issues as well as issues related to, inter alia, investment plans and market development. Moreover, the national regulatory authorities are also to take into account the EU dimension of market development in their decision-making, and the regulator shall cooperate closely with ACER, thus establishing an important connection between the Electricity Directive and the Regulation for the establishment of ACER.579 Chapter X contains a new provision aimed at facilitating the emergence of well functioning and transparent electricity retail markets. Finally, Chapter XI 576. S. Goldberg, ‘The Third Energy Package of the European Union’, in European Energy Review 2010, ed. M. Newbery & S. Goldberg (London: Herbert Smith LLP, 2010), 3–9, at 5. 577. Articles 24–29 of the Directive. See also the definitions of ‘distribution’ and ‘distribution system operator’ in Arts 2(5) and (6), respectively. 578. Article 23 of Electricity Directive 2003/54/EC. 579. See Regulation (EC) No. 713/2009 of the European Parliament and of the Council of 13 Jul. 2009 establishing an Agency for the Cooperation of Energy Regulators, OJ L211/1, 14.8.2009.

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Chapter 11 contains a set of final provisions, including a (marginal) derogation option, monitoring, reporting and review obligations, as well as, of some interest to our present topic, a safeguard clause in Article 42 which permits temporary safeguarding measures in the case of a crisis in the energy market. 11.3.3.

THE RELATIONSHIP

TO THE

ELECTRICITY REGULATION

The new Electricity Regulation (EC) No. 714/2009 was adopted on the basis of former Article 95 EC on the same day as the Electricity Directive. The Regulation becomes applicable to Member States on 3 March 2011, and Electricity Regulation No. 1228/2003 which it replaces is repealed from the same date.580 The Regulation has as its overall aims to enhance internal market competition by setting fair rules for cross-border exchanges in electricity and to facilitate the emergence of a wellfunctioning and transparent wholesale market with a high level of security of supply.581 The Regulation itself contains a set of general rules that are subject to more detailed provisions in binding Guidelines adopted in accordance with the comitology procedure.582 An important aspect of the Regulation is also that it contributes to formalize and to strengthen the cooperation between national TSO by establishing the European Network for Transmission System Operators for Electricity (ENTSO-E). ENTSO-E shall, inter alia, contribute to the establishment of EU network codes in cooperation with ACER and the Commission.583 Such network codes, when established, are likely to have significant influence on crossborder trade by eliminating the obstacles to trade represented by different operational procedures and criteria for different national TSOs. Increased cross-border trade may arguably contribute indirectly to the promotion of electricity generation investments through its contribution to reducing the market power of incumbents and thus improving the potential for providing accurate market price signals for new investments.584 As emphasized in the introduction to this book, we will not explore these indirect effects on generation investments further in this study.585 Moreover, neither the Regulation itself nor the appurtenant Guidelines contain particular EU incentive mechanisms to encourage generation investments, such as the introduction of so-called locational signals at European level. Consequently, despite the theoretically close connections between the regulation of network and generation activities and the promotion 580. Articles 26 and 25 of the Regulation, respectively. 581. Article 1 of the Regulation. 582. See in particular Arts 18 and 23 of the Electricity Regulation. The more detailed comitology procedure is set forth in Council Decision 1999/468/EC of June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission, OJ L184/23, 17.7.1999, as subsequently amended. 583. See Arts 5–9 of the Electricity Regulation. 584. R. Pierce, M. Trebilcock & E. Thomas, ‘Regional Electricity Market Integration. A Comparative Perspective’, CRNI 8, no. 2 (2007): 215–257, at 222–224. 585. Chapter 1.6 above.

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Establishment of the Internal Electricity Market of investments in the latter, the Regulation in its current form does not include specific means to this effect and will therefore not be dealt with in any detail in the following.586 11.3.4.

THE SECURITY

OF

ELECTRICITY SUPPLY DIRECTIVE

The Security of electricity supply and infrastructure Directive (Security of Electricity Supply Directive) was adopted in 2006 on the basis of former Article 95 EC, establishing the third arm of internal electricity market legislation, together with the Electricity Directive and the Electricity Regulation. Unlike the other two legislative measures, the Security of Electricity Supply Directive has, however, not been subject to any revision in the process of adopting the third legislative package. The Directive ‘establishes measures aimed at safeguarding security of electricity supply so as to ensure the proper functioning of the internal market for electricity and to ensure’ an adequate level of generation capacity and balance between supply and demand and an appropriate level of interconnection between Member States.587 This approach raises some concerns as to the reliance on current Article 114 TFEU as the legal basis, since it is not obvious that measures to ensure security of supply genuinely have as their object the improvement of the conditions for the establishment and functioning of the internal market.588 Those parts of the Directive which seek to promote the Directive’s aims of ensuring an adequate level of generation capacity and an adequate supply-demand balance are central study objects in the following. Article 1(2) underscores the Directive’s market-based approach to the attainment of these aims by setting forth that the Directive ‘establishes a framework within which Member States are to define transparent, stable and non-discriminatory policies on security of electricity supply compatible with the requirements of a competitive internal market for electricity’. Article 3 of the Directive sets forth its general approach by requiring Member States to ensure a high level of security of supply by facilitating a stable investment climate and defining the roles and responsibilities of market participants and regulatory authorities. These general obligations are supplemented by more specific provisions relating to operational security (Article 4), network investments (Article 6) and, of more interest to our present topic, requirements to maintain a balance between supply and demand (Article 5). In addition, the Directive sets forth a number of reporting obligations for Member States in security of supply matters.589

586. The Regulation does, on the other hand, have a more direct influence on electricity grid investments in general and on interconnector investments in particular, see also further H. Bjørnebye, ‘Interconnecting the Internal Electricity Market: A Goal Without a Plan?’, CRNI 1, no. 3 (2006): 333–353 in relation to Electricity Regulation 1228/2003. 587. Article 1(1) of the Directive. 588. See further Part IV below. 589. Article 7 of the Directive.

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Chapter 11 The Directive also marks the first attempt at Union level to provide a formal definition of the security of electricity supply concept, which it defines as ‘the availability of an electricity system to supply final customers with electricity, as provided for under this Directive’.590 This definition is unfortunately not very informative. Not only is it subject to criticism for providing a circular definition, but the adoption of a ‘final customer perspective’ is also inconsistent with the more ‘general customer perspective’ adopted by the Electricity Directive.591 The definition is therefore better suited to serve as an illustration of the difficulties involved in providing a general definition of the notion than as a description of its content.592 11.4.

ENVIRONMENTAL MEASURES: THE PROMOTION OF RENEWABLE ENERGY SOURCES AND COGENERATION

Although not formally part of the internal market legislation, the Directive on the promotion of electricity produced from renewable energy sources (RES Directive) and the Directive on the promotion of cogeneration (Cogeneration Directive), both adopted on the basis of former Article 175(1) EC, are clearly of relevance to internal electricity market investments. The Directives have as their main function the promotion of the increased use of certain electricity generation processes within the EU, primarily in the environmental interest, but also to the benefit of security of supply.593 The new RES Directive was adopted on 23 April 2009. Member States are under an obligation to transpose the Directive into national law by 5 December 2010.594 The first RES Directive 2001/77/EC is repealed from 1 January 2012.595 The objective of RES Directive 2001/77/EC was to promote an increase in the contribution of renewable energy sources to electricity production in the internal electricity market and to create a basis for a future Community framework thereof.596 It provides that Member States shall set national indicative targets for future consumption of electricity produced from renewable energy sources.597 Furthermore, the Directive provides that Member States shall guarantee the origin of electricity produced from renewable energy sources,598 evaluate their administrative authorization procedures pertaining to such production plants599 and guarantee network 590. Ibid., Art. 2(b). 591. Chapter 19.3.1 below. 592. It is worth noting that no similar definition was proposed by the Commission in its initial proposal for the Directive, COM (2003) 740, 10.12.2003. 593. The security of supply benefits are emphasized in the first preamble of both Directives. 594. Article 27 of the RES Directive. 595. Article 26 of the RES Directive. 596. Article 1 of Directive 2001/77/EC. See L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 15–68 for a more thorough discussion of the Directive. 597. Article 3 of Directive 2001/77/EC. 598. Ibid., Art. 5. 599. Ibid., Art. 6.

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Establishment of the Internal Electricity Market access for electricity produced from renewable energy sources, as well as possibly prioritizing access.600 The new RES Directive is broader in scope and includes a much more ambitious approach to the promotion of renewables than Directive 2001/77/EC. The new RES Directive has as its aim to increase the share of energy from renewable sources in final consumption more generally, and not just limited to electricity production and consumption. More importantly from the perspective of electricity generation investments, the Directive establishes mandatory national overall targets for the share of renewable energy in final consumption, providing a much firmer approach than the indicative targets in Directive 2001/77/EC.601 In order to reach the 20 20 by 2020 targets of the EU, a mandatory target for the national share of energy from renewable sources in gross final consumption of energy in 2020 is imposed on each Member State. These national targets are consistent with the target of at least 20% share of renewable energy in the Union’s aggregate gross final consumption of energy in 2020.602 The Directive also provides a set of interim targets towards the final 2020 targets. In addition, the Directive also includes provisions on, inter alia, calculation of renewable energy shares, national action plans to achieve the targets, joint projects between Member States (and with nonEU States), administrative procedures, guarantees of origin, and rules on preferential grid access for electricity from renewable energy sources. The RES Directive does not establish a harmonized Union framework with regard to support schemes for electricity produced from renewable energy sources, and different national support schemes are still permitted and are in practice widely used.603 This is in line with the approach under RES Directive 2001/77/EC, which placed an obligation on the Commission to evaluate Member State support mechanisms and present a well-documented report on experiences gained, possibly accompanied by a proposal for a Community support scheme framework.604 The Commission has not yet, however, found it appropriate to propose a Communitywide support scheme to this effect.605 The RES Directive is not a primary study object in this book. Nevertheless, it provides an interesting context to the internal market measures discussed in the following, in that it applies a centrally planned approach to the issue of promoting electricity generation from certain categories of primary energy, that is, renewable energy. Consequently, EU law provides, on the one hand, a centralized approach to the issue of overall national targets for certain categories of energy production while, on the other hand, promoting that the instrument for achieving those targets should be a competitive market where investments are triggered by the price signals of a functioning market with a limited degree of public intervention. 600. 601. 602. 603. 604. 605.

Ibid., Art. 7. Article 3 of the RES Directive. Ibid. See Art. 3(3) of the RES Directive. Article 4 of RES Directive 2001/77/EC. See further Ch. 9.7, at note 185 above.

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Chapter 11 Thus, in light of the obligations in the RES Directive, one may ask how much reality there is to the latter idea of relying on market-driven investments, at least if that means investments made in absence of any public subsidy scheme. The objective of the, arguably less important, Cogeneration Directive is to ‘increase energy efficiency and improve security of supply by creating a framework for promotion and development of high-efficiency cogeneration of heat and power based on useful heat demand and primary energy savings in the internal energy market’.606 As this aim suggests, cogeneration can be described as the production of electricity and heat by means of a single process.607 Since a large part of the energy applied in conventional combustion processes is lost to heat energy, cogeneration contributes to energy efficiency provided that the generated heat can be usefully applied for industrial purposes or building heating.608 Cogeneration can be applied to the combustion of all kinds of fuels and is therefore not limited to one specific technology or one specific primary energy source.609 Consequently, it is not the choice of input fuel for electricity generation which is regarded as socially desirable in itself, but the energy efficiency represented by the dual heat/electricity generation process.610 Member State obligations under the Directive include duties to guarantee the origin of electricity produced from highefficiency cogeneration,611 to establish an analysis of the national potential for the application of high-efficiency cogeneration,612 to evaluate administrative authorization procedures613 and to guarantee grid access,614 as well as reporting obligations.615 The Directive also places evaluation and reporting obligations on the Commission, which, inter alia, is under an obligation to evaluate Member State support mechanisms and issue a report on experiences gained.616

606. Article 1 of the Directive. The Directive is thoroughly discussed in L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 93–146. 607. Article 3(a) of the Directive defines ‘Cogeneration’ as ‘the simultaneous generation in one process of thermal energy and electrical and/or mechanical energy’. 608. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 93. 609. See Annex I to the Directive and L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 93. 610. The concepts of ‘high efficiency cogeneration’, further defined in Annex III to the Directive, and ‘useful heat demand’, see Arts 3(b) and (c), are therefore important to the functioning of the Directive by helping identify the cogeneration projects which in fact contribute to energy efficiency, see L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 94–96, 101–102, 107–109, 125–127 and 139–144. 611. Article 5 of the Directive. 612. Ibid., Art. 6. 613. Ibid., Art. 9. 614. Ibid., Art. 8. 615. Ibid., Art. 10. 616. Ibid., Arts 7(2)-(3) and 11.

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Chapter 12

Concluding Remarks

In this part of the book we have analysed the interpretation and application of the security of supply concept and its relationship with the other general objectives of the EU electricity market, and in particular environmental objectives, on the basis of the primary provisions of the TFEU. This analysis has revealed two general tendencies. First, as was also indicated in Part II of the book, security of supply is a multi-faceted concept which requires a multi-faceted approach. Interpreted on the basis of the primary Treaty provisions, the concept inevitably only amounts to an intermediate goal, whose attainment is required for the achievement of more fundamental objectives, which have a significant bearing on the meaning of the concept. Second, when compared to the concept of environmental protection, it is clear that the latter notion enjoys a broader and more fundamental basis in the Treaty and, given its status as an ultimate Treaty objective, is not exposed to the relativity problems associated with security of supply. Moreover, and more importantly, the Court of Justice seems to be prepared to go to considerable lengths to accept measures promoting the environmental aims of the Treaty, even if they may restrict the functioning of the internal market. In this author’s opinion, it is doubtful whether the Court will be prepared to accept restrictive security of supply measures to the same extent as it has accepted restrictive environmental measures. Viewed in relation to the overall objectives of the Treaties, we have seen that the attainment of the intermediate sector policy goal of security of supply is primarily relevant to the promotion of their economic aims. From that perspective, the vital role of electricity in the general economy also contributes to emphasizing the relationship between security of supply and the promotion of EU competitiveness. The Union’s environmental objectives, on the other hand, have a separate basis in the Treaty, and although the two policy objectives can, to a large extent, be attained through the application of the same means, the objectives as such are clearly separable.

Chapter 12 Analysis of the public-security exemption ground under the free movement provisions of the Treaty provided us with a different context for considering the concept of energy security. Even though the Court of Justice has moved towards relaxing the strict approach applied in Campus Oil,617 security of supply measures only qualify as a public-security interest to the extent that they are intended to safeguard energy supplies ‘in the event of a crisis’ and where there is ‘a genuine and sufficiently serious threat to a fundamental interest of society’. Taken literally, it is difficult to envisage an electricity supply interruption resulting from underinvestment threatening the fundamental interests referred to by case law. Despite its careful wording quoted above, however, the Court appears to have been careful not to exclude the possibility that security of supply concerns might, in principle, although it is not very likely, threaten public security, as illustrated by the decisions in Campus Oil and Commission v. Belgium.618 Moreover, we have also seen that obligations to ensure security of supply have traditionally been regarded as services of general economic interest within the meaning of the Treaty. This view still prevails within the context of the present competitive electricity markets, and provides yet another context for the understanding of the concept. From the latter perspective, any measure which has as its objective the ensuring of the availability of uninterrupted and adequate electricity supplies to final customers may, in principle, qualify as a service of general economic interest, irrespective of its effects on public security. The scope of the environmental protection objective, on the other hand, does not appear to differ significantly whether it is applied within the context of the fundamental Treaty objectives, as a ground justifying exemption from the free movement provisions, or as a general economic interest under Article 106(2) TFEU. Nevertheless, the crucial question when relying on security of supply interests to justify exemption from the provisions of the TFEU is, in most cases, likely to be whether the national measures at issue fulfil the proportionality requirements of the Court. The level of intensity applied by the Court of Justice for the purposes of the proportionality assessment may provide some flexibility, and the nature of the security of supply measures at issue may also be taken into account. In this respect, the PreussenElektra619 decision demonstrates that, in the case of environmental interests, a proportionality assessment may not be called for at all. The approach of the Court here is important, since the national feed-in scheme at issue in PreussenElektra would probably not have survived a proportionality review, despite its obvious environmental benefits. The Court’s ruling is perhaps best explained as an acknowledgment of the central status of environmental protection as a Union interest and as demonstrating that effective Member State promotion of that interest should not be hindered by the possibility of restrictive effects on trade. The Court would not be likely to, and in this author’s opinion should not, adopt a similar approach in relation to security of supply measures. It is submitted that the 617. Case 72/83, Campus Oil, [1984] ECR 2727. 618. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809. 619. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Concluding Remarks Court’s approach in the case law referred to above strikes a reasonable balance between the needs to promote environmental interests, security of supply interests and market integration, although the Court’s reasoning is perhaps not elegant in all respects. Finally, our discussion of the competences conferred on the Union also helps illustrate the differences between security of supply, which is an intermediate objective lacking a separate basis in the Treaty, and environmental protection, which is an overarching objective with an explicit legal basis. In absence of an explicit legal basis for the adoption of EU measures within the field of energy, security of supply measures have primarily been adopted on the basis of former Articles 95 and 175(1) EC (current Articles 114 and 192(1) TFEU). The former provision requires the measures to have as their genuine object the improvement of the conditions for the establishment and functioning of the internal market by ensuring the free movement of goods and eliminating appreciable distortions of competition. The latter provision requires the overall objective of the measure to be the promotion environmental interests, which incidentally also may contribute to security of supply. In the next Parts of the book we will look more closely at the ways in which the Union has applied this present Treaty basis, in particular current Article 114 TFEU, to adopt measures promoting electricity generation investments in the security of supply interest, and how those measures interact with EU sustainability and competitiveness objectives.

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Part IV

Market Facilitation of Investments

Chapter 13

Introduction

In Part III above we saw how security of supply and environmental interests have been applied as legitimate grounds for the justification of Member State interventions that restrict the free movement guaranteed by the Treaty. The internal electricity market measures discussed in this and the following part of the study apply a more complex approach to the issue of electricity generation investments. For the purposes of the following analysis, these EU measures can, broadly speaking, be divided into two categories. First there are a number of provisions that seek to encourage EU investments by introducing various instruments promoting market facilitation. These provisions have the common feature of requiring Member States to adopt measures to facilitate the functioning of the electricity market in order to attract market-based investments. The objective of this present part of the book is to analyse the role of these measures in attracting investments in the security of supply interest and their relationship to the EU’s sustainability and competitiveness aims. The second category consists of EU electricity market measures which also, to some extent, restrict Member States’ rights to have recourse to more traditional market intervention instruments in order to attract the necessary investments. We will revert to this latter category in Part V of the book.620 620. The distinction applied in the following between market facilitation and market intervention measures is purely for academic purposes and it should be emphasized that the distinction as such does not have any direct significance in EU law. The concepts of ‘intervention’ or of ‘intervening in the market’ do not have precise legal meanings and may be criticized for ambiguity, making them perhaps better suited to the arousing of political sympathies or antipathies than to the distinguishing of different legal phenomena. Nevertheless, the terms are often used in academic literature, including legal literature, to describe the relationship between market-based and publicly influenced conduct, see, for example, P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 524; E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 349; and Eurelectric, Security of

Chapter 13 In the following we will focus on three types of EU measures within the first category mentioned above which are particularly important for attracting sufficient market-based investments. Measures of the first type perform a regulatory function often considered vital for the functioning of competitive electricity markets, namely the provision of clear definitions of the roles and responsibilities of public authorities and market participants.621 Such clarifications are perhaps most important with respect to grid security, where there is a need to impose security of supply tasks concerning the management of electricity flows in the short term, and the extension of, and new investment in, the network in the longer term. This is also the area where EU regulation of security of supply roles and responsibilities is currently most developed.622 The issue of roles and responsibilities also, however, arises with respect to investments in electricity generation capacity. Market participants generally need to be able to establish which public bodies to relate to and what influence such bodies are likely to exert on investment decisions. More importantly, they need to know whether some categories of market participants have been designated to perform electricity generation tasks in the security of supply interest which may affect the profitability of their own (planned) investments. Consequently, the definition of roles and responsibilities constitutes a natural starting point for the discussion of the role of regulation in facilitating market-based electricity generation investments. This issue is dealt with in Chapter 14 below. Measures of the second type reflect the fact that, given the public interests involved in power plant construction, Member States are likely to require the building and operation of electricity generation plants to be subject to authorization procedures. Member States’ authorization procedures are governed by Article 7 of the Electricity Directive, which will be further discussed in Chapter 15 below. As we shall see in that chapter, some economists have argued that open market access (which implies open access to authorizations) is particularly important in competitive regimes in order to expose the market to potential competition, and Electricity Supply – Roles, Responsibilities and Experiences within the EU (2006), 38. In the following we will employ the terms to describe public activity intended to promote specific political objectives by exerting influence on market participants through regulation. Measures concerned with intervention are thus distinguished from measures which (albeit as a result of public activity) promote market functioning more generally. Admittedly, this distinction is not watertight, and some measures, such as authorization procedures, may possibly fall into both categories, but it is sufficiently clear for academic purposes. 621. See para. 3 of the preamble to the Security of Electricity Supply Directive, which emphasize that the definition of clear roles and responsibilities is ‘crucial in safeguarding security of electricity supply and the proper functioning of the internal market’. Another example is provided by Eurelectric, Can the Electricity Sector Attract Adequate Investment? A European Perspective (2004), 15, which states that ‘[i]t is of utmost importance to determine and clarify future roles and responsibilities of the different actors in the electricity supply chain’. 622. See in particular the tasks which Member States are required to impose on TSOs under Arts 12 and 15 of the Electricity Directive, and, to a lesser extent, the corresponding tasks of DSOs under Art. 25 of the Directive.

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Introduction thereby promote economic efficiency.623 This aspect of the regulation of authorization procedures is, however, scarcely discussed in EU documents. When analysing this provision, an underlying consideration is accordingly whether it should be interpreted as a measure aimed at promoting market access and, ultimately, efficiency, or whether it should be construed as promoting more conventional Union free movement guarantees, such as non-discrimination and transparency. Measures of the third type are intended to promote a stable investment climate in order to help ensure investor certainty which will, in turn, contribute to the achievement of a sufficient level of market-based investments.624 To this effect, the Security of Electricity Supply Directive includes a set of general EU measures aimed at facilitating a stable investment climate and the establishment of functioning marketplaces. These measures are discussed further in Chapter 16 below before we conclude this part of the book in Chapter 17.

623. See along these lines J. Bjørndalen et al., Markedsbasert kraftomsetning i Norge (transl. ‘Market-based electricity trading in Norway’, Senter for anvendt forskning, Norges Handelshøyskole, rapport nr. 7/1989), 94 and International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 25. Both sources are discussed in more detail below. 624. See, inter alia, Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 8–9 and International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 25.

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Chapter 14

Defining Roles and Responsibilities in Electricity Generation Investment Decisions

14.1.

INTRODUCTION

The monopoly supply rights often enjoyed by integrated undertakings in precompetitive European electricity markets were usually combined with the duty to supply customers within the undertakings’ dedicated supply areas. Consequently, each undertaking not only enjoyed privileged supply rights, but was also under an obligation to ensure that sufficient supplies were available for its customers. Given the often integrated nature of these energy undertakings, the supply obligations imposed on them a duty to take precautions in respect of security of supply throughout their various areas of business activity: from the procurement of primary fuels and electricity generation, through to electricity transportation and end-user supply.625 In a competitive electricity market where customers are free to choose their supplier, the allocation of roles and responsibilities in relation to security of supply is generally less clear. Since undertakings involved in electricity generation should, in principle, no longer enjoy monopoly rights to supply dedicated customer groups, they will consequently, in most cases, be under no obligation to do so.626 Electricity is generally traded in the market at market prices, whether by way of bilateral agreements or through organized marketplaces, and electricity producers are, generally speaking, not under any obligation to supply the market with more 625. The public service obligations scrutinized by the Court of Justice in the Energy Monopoly decisions are cases in point, see above in Ch. 10. 626. With a possible exception for undertakings designated as suppliers of last resort, see Art. 3(3) of the Electricity Directive.

Chapter 14 electricity than the volumes to which they are committed under prevailing supply agreements. This means that, in an energy-only market, decisions to invest will essentially depend on whether estimated future electricity demand and prices are sufficiently high to ensure a proper rate of return on the investment. As discussed in Part II above, such market systems, left unregulated, are unlikely to induce market participants to make the investments needed to promote a desirable energy mix in the environmental and security of supply interests and are also unlikely to promote sufficient investments in capacity to ensure supply in peak-load situations.627 These market failures may necessitate regulatory action that will affect the roles and responsibilities of the various market participants. In this respect clear definitions of the responsibilities of different groups of market participants are important in order to avoid investor uncertainty, which is likely to deter investors from making the necessary market-based investments. This is a particularly important issue with respect to attracting sufficient reserve generation capacity for peak-load situations. Electricity producers are unlikely to invest in already risky peak-load capacity if they suspect that dedicated market participants will be designated with the task of ensuring sufficient capacity in the security of supply interest, which ultimately will affect the profitability of their own investments. Roles and responsibilities as they relate to security of supply therefore need to be further defined in the regulatory framework.628 The definitions of the roles and responsibilities of electricity market actors are governed by two different categories of EU measures. Firstly, Article 3(1) of the Security of Electricity Supply Directive requires Member States to define ‘the roles and responsibilities of competent authorities, including regulatory authorities where relevant, and all relevant market actors and publish[ing] information thereon’. It follows from the wording of the provision that fulfilment of this requirement is one of several means of fulfilling the more general Member State obligation ‘to ensure a high level of security of electricity supply’. The provision is consequently also one of the Directive’s principal instruments for ensuring the proper functioning of the internal electricity market.629 Nevertheless, the provision leaves the question of how those roles and responsibilities should be defined to the discretion of the Member States. This discretion is, however, strictly confined by

627. Chapters 4 and 5 above. 628. The terms ‘roles’ and ‘responsibilities’ are, in practice, closely related in this respect, and, arguably, to some extent synonymous. Nevertheless, the terms are, as we shall see, often applied jointly in internal electricity market legislation and literature, and we will therefore adopt the same approach here. In theory, one could argue that the definition of roles requires the identification of the areas within the electricity supply chain within which each participant plays a part (e.g., the TSO’s role in electricity transmission), while the definition of responsibilities requires the identification of the specific functions for which these participants are required to assume responsibility (e.g., the TSO’s responsibility for necessary ancillary services, Art. 12(d) of the Electricity Directive). However, since the terms are to some extent interchangeable in practice, and since the distinction has no legal consequences, we will not attempt to separate between them in the following. 629. Article 1(1) of the Directive. See also para. 3 of the preamble to the Directive.

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Defining Roles and Responsibilities the provisions of the Electricity Directive and also, to a certain extent, by other provisions of the Security of Electricity Supply Directive. Secondly, the Electricity Directive restricts the Member States’ freedom to determine the roles and responsibilities of both public authorities and market participants. As regards public authorities, it restricts a Member State’s margin of discretion when determining its institutional organization by requiring the establishment of an independent regulatory authority vested with a set of minimum competences. As regards market participants and, more importantly, the definition of the roles of different market participants in generation capacity investments, Member States’ freedoms are restricted by, on the one hand, the unbundling requirements of the Directive and, on the other hand, the particular security of supply responsibilities of TSOs and DSOs. The provisions of the Electricity Directive that affect Member States’ margin of appreciation when defining roles and responsibilities were motivated by the need to establish a market structure that facilitated the introduction of competition in electricity production and supply. Requirements that regulatory authorities and monopoly grid service providers should be independent from other industry interests were intended to contribute to reducing the potential for cross-subsidization and preferential treatment of connected undertakings. The primary object of the provisions is consequently the improvement of the functioning of the internal electricity market, although the provisions may also incidentally promote security of supply interests. The reasoning behind the relevant provisions of the Security of Electricity Supply Directive, on the other hand, was based on the opposite approach. EU measures were introduced to ensure a high level of security of electricity supply which, in turn, was assumed to ensure the proper functioning of the internal electricity market. As we shall see below, the relevant provisions of the Electricity Directive are, arguably, of greater practical significance than the relevant provisions of the Security of Electricity Supply Directive. In the following, the role of the Member States in electricity generation investment decisions will be discussed in more detail in section 14.2, the role of producers and suppliers in section 14.3 and the role of TSOs in section 14.4. The question of the significance of Article 3(1) of the Security of Electricity Supply Directive is discussed in the light of the obligations in the Electricity Directive in section 14.5. Finally, section 14.6 concludes the chapter. 14.2.

THE ROLE OF THE STATE: THE INDEPENDENT REGULATOR AND ITS RELATIONSHIP TO OTHER REGULATORY AUTHORITIES

14.2.1.

THE PRINCIPAL FUNCTIONS OF THE MEMBER STATE IN GENERATION CAPACITY INVESTMENT DECISIONS

In the electricity market, as in other markets, the Member States can, in principle, perform two functions: those of regulator and/or owner. The ownership function, 171

Chapter 14 whether organized in the form of the ownership of shares in undertakings or the direct ownership of resources by the State, raises several distinct questions relating to public intervention through ownership decisions. Although ownership control mechanisms are an important regulatory tool in the energy sectors of many Member States, an analysis of these questions would go beyond the scope of this study. Generation capacity decisions made by Member States in their capacity as regulatory authorities will typically fall into one of two categories. The first consists of decisions made by the regulatory authorities acting in a defensive, or negative, capacity when deciding whether to grant or refuse authorizations for the building of new electricity generation capacity, or other necessary permits as the case may be.630 The second consists of decisions made by the regulatory authorities when adopting a more proactive approach in promoting necessary investments through subsidies or other instruments of intervention. Article 3(1) of the Electricity Directive requires Member States to ensure ‘on the basis of their institutional organization’ that electricity undertakings are operated in accordance with the principles and objectives of the Directive. Read literally, this provision suggests that the Member States enjoy a wide margin of discretion in determining the institutional nature and responsibilities of public bodies performing the regulatory functions outlined above.631 Regulatory competence could, in principle, be conferred on one or more public bodies of more or less sector-specific natures, ranging from general competition authorities to sectorspecific energy regulators, at different levels of the Government hierarchy, from Ministries to independent agencies. Each Member State’s institutional freedom to organize its regulatory activities is, however, restricted by the obligation set forth in the Electricity Directive to establish an independent energy regulator which must be vested with a minimum set of market responsibilities. Consequently, the Member States’ full institutional freedom is, in reality, confined to those areas of energy regulation that do not fall under the required competence of the independent regulatory authority. Article 35 of the Electricity Directive requires Member States to designate a single national regulatory authority which is legally distinct and functionally independent from any other public or private entity. A number of general objectives and duties and powers of the regulatory authority are further specified in Articles 36 and 37 of the Directive. For our present purposes, these provisions raise two questions of particular interest to the scope of the Member States’ institutional freedom in defining regulatory roles and responsibilities in respect of electricity 630. In this study we will concentrate on authorizations to construct new electricity generation capacity. It should, however, be emphasized that other necessary permits for the building and operation of power plants, such as emissions permits and area development plans, may also in principle come within the scope of Art. 7 of the Electricity Directive, see Arts 7(2) litra (c) and (d) respectively. 631. This point of departure also corresponds with the traditional approach whereby the Community has avoided intervention with regard to Member States’ administrative organizations, see G. Napolitano, ‘Towards a European Legal Order for Services of General Economic Interest’, European Public Law 11, no. 4 (2005): 565–581, at 575.

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Defining Roles and Responsibilities generation investment decisions.632 First, it raises the question of how the requirements for independence should be interpreted. Second, it raises the question of whether the tasks that the Directive requires Member States to impose on these independent regulatory authorities also involve responsibility for the function of electricity generation. 14.2.2.

THE INDEPENDENCE

OF THE

NATIONAL REGULATORY AUTHORITY

Electricity Directive 2003/54/EC required Member States to designate one or more competent bodies with the function of regulatory authorities, which should be ‘wholly independent from the interests of the electricity industry’.633 This independency requirement was based on the need to ensure decision-making neutrality.634 In light of the objective of the provision, the term ‘interests of the electricity industry’ was to be interpreted widely to mean any industry interest covered by the Directive, that is, generation, transmission, distribution and supply of electricity. The words ‘wholly independent’ – in French ‘totalement inde´pendantes’ and in German ‘vollkommen unabha¨ngig’ – implied that the regulatory authority was precluded from having any relationship with, or decision-making authority over, such interests, other than in the course of performing its regulatory functions.635 Consequently, a body that administers ownership functions on behalf of the State, for example by acting as shareholder in wholly or partially owned electricity generating, supply or grid undertakings, was prohibited from performing the regulatory functions set forth in Article 23 of Electricity Directive 2003/54/EC.636 This requirement is particularly important in view of the fact that significant Member State ownership shares in national incumbents are not unusual. The performance of joint ownership and regulatory functions could thus easily threaten decision-making neutrality to the benefit of a ‘national champion’. A more controversial question has been whether regulatory authorities should also be independent of Member State governments, thus acquiring political 632. For a broader overview of the contents of the provisions concerning national regulatory authorities in the Electricity Directive, see Commission Staff Working Paper, Interpretative note on Directives 2009/72/EC and 2009/73/EC: The regulatory authorities, 22.1.2010. 633. Article 23 of Electricity Directive 2003/54/EC. 634. A.-K. Nesdam, Det indre transportmarkedet – en analyse av virkemiddelbruken i den fellesskapsrettslige energimarkedslovgivningen (Doctoral Thesis, University of Oslo, 2007), 109–110. The requirement was introduced by the Commission in Art. 22 of its first proposal to amend the Electricity Directive 96/92/EC in 2001, as the first Electricity Directive did not include any provision on independent regulatory authorities, see Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 21. 635. See similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 113. 636. See along the same lines P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 144.

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Chapter 14 independence as well as independence from industry interests.637 The question of political independence was raised by the European Parliament during the legislative process that led to the adoption of Electricity Directive 2003/54/EC.638 The Parliament’s proposals were, however, not endorsed.639 The wording of Article 23 of Electricity Directive 2003/54/EC was therefore to be understood as not requiring such political independence for the regulatory authorities.640 Following up on country reviews which had revealed that the effectiveness of energy regulators was frequently constrained by a lack of independence from government and a lack of sufficient powers and discretion, the Commission in 2007 signalled its intention to propose strengthening the provisions of the Electricity Directive on this point.641 This approach was endorsed by the Brussels European Council which took place two months later.642 On this basis, the Commission, as a part of the third legislative package, proposed the inclusion of a new chapter in the 637. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 113. 638. The Commission’s Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 21, only required the independence of regulatory authorities from electricity industry interests. Following the first reading of the co-decision procedure, the European Parliament opted for a more far-reaching solution by proposing the inclusion of wording to the effect that the regulatory authorities ‘shall have the greatest possible degree of independence from the Governments of Member States’ as well as being independent from electricity industry interests, see European Parliament legislative resolution on the proposal for a European Parliament and Council directive amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, P5_TA(2002)0106, 13.3.2002, 24. 639. See Amended proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning rules for the internal market in electricity and natural gas, COM (2002) 304 final, 7.6.2002, 30 and Common position adopted by the Council with a view to the adoption of a Directive of the European Parliament and of the Council concerning rules for the internal market in electricity and repealing Directive 96/92/EC, Document 15528/02, 29.1.2003, 37. 640. See also along these lines C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 113; P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 144 and E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 354. For the sake of completeness, it should be emphasized that Art. 23(3) of the Electricity Directive applies a more restrictive approach to the competences of (politically dependent) Member State bodies to adopt substantive decisions on tariffs or tariff methodologies, by requiring that the latter bodies shall only be entitled to approve or reject a draft tariff decision submitted by the regulatory authority. This provision will not be discussed further here. 641. Commission Communication: Prospects for the internal gas and electricity market, COM (2006) 841 final, 10.1.2007, 12–13. 642. Presidency Conclusions from the Brussels European Council held on 8 and 9 Mar. 2007, 2.5.2007 (7224/1/07), Annex I, European Council Action Plan (2007–2009), Energy Policy for Europe (EPE), 16, where the Council agreed on the need for ‘further harmonization of the powers and strengthening of the independence of national energy regulators’.

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Defining Roles and Responsibilities Electricity Directive on national regulatory authorities which would significantly affect both the institutional organization and functions of these authorities.643 Unlike what was the case for the ownership unbundling provisions proposed by the Commission, the new Chapter on national regulatory authorities was adopted in the new Electricity Directive with surprisingly little political discussion and, correspondingly, with relatively few amendments being made to the original proposal. Article 35 of the Electricity Directive requires Member States to designate a national regulatory authority which shall be legally distinct and functionally independent from any other public or private entity, and which, inter alia, can take autonomous decisions independently from any political body and has budget autonomy.644 In essence, these requirements seem to entail that the regulatory authority shall not only be independent from electricity industry interests, but also from governmental and political influence.645 In this author’s opinion, this approach raises fundamental concerns as to democratic influence, and possibly a democratic deficit, in future regulatory decisions.646 A detailed analysis of the new independency requirements is beyond the scope of this study, For our present purposes, the question which arises is to what extent the Member States are required to confer regulatory responsibility for electricity generation investments on the independent regulatory authority, or, in the alternative, whether these tasks may freely be imposed on other government bodies. 14.2.3.

THE OBJECTIVES

AND

TASKS

OF THE

REGULATORY AUTHORITY

The wording of Article 23(1) in Electricity Directive 2003/54/EC at the outset appeared to entail far-reaching responsibilities for the independent regulatory authority, setting out that it should ‘be responsible for ensuring non-discrimination, effective competition and the efficient functioning of the market’. However, read in conjunction with the specific grid-related tasks appointed to the regulator under Article 23 of that Directive, a natural interpretation of the provision was that the authority should be responsible for ensuring non-discrimination and efficiency in the electricity transportation market in order to promote effective competition and the efficient functioning of the electricity market. This would mean that the Member States retained full institutional freedom to decide whether the independent regulatory authority or other public bodies should be responsible for electricity generation authorization procedures, as well as for possible subsidies

643. Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity, COM (2007) 528 final, 19.9.2007, point (12) (proposal for new Arts 22a-f). 644. Article 35(4)(a) and (5)(a) of the Electricity Directive. 645. Commission Staff Working Paper, Interpretative note on Directives 2009/72/EC and 2009/73/ EC: The regulatory authorities, 22.1.2010, 4–11. 646. See also C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), who raises similar concerns at 113.

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Chapter 14 and other more proactive instruments of intervention, under Electricity Directive 2003/54/EC.647 Articles 36 and 37 of the new Electricity Directive entail a considerable expansion of the objectives and functions of the independent regulatory authorities, as compared to the transportation system-oriented perspective applied by the Electricity Directive 2003/54/EC. The regulatory authority will, for example, be required to aim more generally to achieve the promotion of ‘a competitive, secure and environmentally sustainable internal market in electricity within the Community’, and to promote ‘system adequacy and, in line with general energy policy objectives, energy efficiency as well as the integration of large and small-scale production of electricity from renewable energy sources and distributed generation in both transmission and distribution networks’.648 An important consequence of the former objective is that the national regulatory authority will now also be required to adopt a European dimension in the pursuit of its energy policy objectives. This new approach is also clearly emphasized by the cooperation and relationship between the national regulatory authority and ACER as governed by Articles 38 and 39 of the Directive. The more general objectives of the regulatory authority are supplemented by a number of more specific duties and powers which shall be conferred on the authority by the Member State pursuant to Article 37 of the Electricity Directive. These duties include, inter alia, a duty for the regulatory authority to ensure compliance of ‘any electricity undertakings’ with their obligations under the Electricity Directive and other relevant EU legislation.649 This wording cannot, however, be taken literally, since it is clear that compliance with Union legislation such as for example competition law can still be left to competition authorities. Article 37 of the Directive also specifically deal with electricity generation issues, requiring at the outset that the regulatory authority shall monitor investment in generation capacities in relation to security of supply.650 Such monitoring tasks may, however, be carried out by other authorities than the energy regulatory authority.651 Consequently, there is no clear indication in Article 37 of the 647. With the exception of transportation system measures which indirectly influence generation investment decisions. See along the same lines P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 144 at note 72 and E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 355. See also Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: The role of the regulatory authorities, 14.1.2004, 3, which presupposes the same solution. Under the heading ‘Other Possible Duties for the Regulatory Authority’, ‘Issuing Authorizations and Licenses’ and ‘organization, Monitoring and Control of the Tendering Procedure for Generation’ are described as ‘Other Issues that Member States May Also Assign to the Regulator Authority, or a Different Competent Authority’. 648. Article 35(a) and (d) of the Electricity Directive, respectively. 649. Ibid., Art. 37(1)(b). 650. Ibid., Art. 37(1)(r). 651. Ibid., Art. 37(2).

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Defining Roles and Responsibilities Directive that the independent regulatory authority shall also be responsible for decisions concerning investments in new electricity generation, such as decisions concerning the granting of authorizations or investment subsidies. Article 36(4) of the Directive requires Member States to guarantee the independence of the regulatory authority ‘when carrying out the regulatory tasks conferred upon it by this Directive and related legislation’.652 This wording suggests that tasks may also be conferred on the independent regulatory authority pursuant to other provisions of the Electricity Directive (and in other legislation) than those contained in Chapter IX. However, the provisions in Chapter III of the Directive, concerning electricity generation, do not confer any specific duties upon the national regulatory authority. The authorization procedure provision in Article 7 does require that national regulatory authorities or other competent authorities shall review and may recommend amendments to the Member State’s guidelines for electricity generation permits,653 but the provision does not explicitly confer on the regulatory authority the task of issuing authorizations. Article 8 concerning tenders for new electricity generation capacity specifically states that Member States shall designate ‘an authority or a public or private body independent from electricity generation, transmission, distribution and supply activities, which may be a regulatory authority referred to in Article 35(1), to be responsible’ for the tender process.654 Consequently, in this author’s opinion, Member States are not required to delegate authorization or tendering procedure decision-making to the independent regulatory authority, although they are of course free to do so if desired. Correspondingly, no related legislation exists to this author’s knowledge which requires Member States to confer on the national regulatory authority responsibility for administering potential generation investment subsidy schemes or other instruments of intervention in this respect. In conclusion, this implies that the Member States still retain a large degree of institutional freedom to decide whether the independent regulatory authority or other public bodies, such as a Ministry, should be responsible for central regulatory decision-making in matters concerning new investments in electricity generation capacity, such as decisions to grant or deny building authorizations or to decide on subsidy schemes. 14.2.4.

IS THERE A NEED FOR POLITICALLY INDEPENDENT REGULATORY AUTHORITIES?

Looking beyond the question of investments in new electricity generation capacity, it is clear that the new chapter on national regulatory authorities in the Electricity Directive includes a number of elements which will contribute to expanding the competences and functions of the independent regulatory authority. Moreover, the provisions concerning enhanced EU cooperation between regulatory authorities 652. Emphasis added. 653. Article 7(3) second subparagraph of the Electricity Directive. 654. Ibid., Art. 8(5) (emphasis added).

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Chapter 14 and with the ACER will also expand the common Union functions and responsibilities of the authority significantly. In this author’s opinion, the combined effects of the requirements for political independence and extended powers of the regulatory authority raise serious concerns about the lack of influence of national governments, parliaments and, ultimately, EU citizens on the attainment of fundamental energy policy objectives. The political independence requirements essentially have two aims: to prevent the preferential treatment by regulatory authorities of national incumbents and to prevent decision-making being influenced by short-term political considerations.655 It is by no means obvious that the proposed measures do not go beyond what is necessary to achieve the first aim of ensuring decision-making neutrality, therefore raising questions about the proportionality of the adopted EU measures. The second aim raises a more fundamental question by identifying the influence of national legislators on national regulatory decisions as the source of regulatory failure. The question of the appropriateness of this approach raises issues concerning both the boundaries of EU competences under Article 114 TFEU and, more generally, of the functions and approach of EU law which deserve a more careful analysis than is possible within the scope of this book. 14.3.

THE ROLE OF PRODUCERS AND SUPPLIERS

A producer is defined in the Electricity Directive as ‘a natural or legal person generating electricity’.656 These entities will normally also be involved in supply activities in some way, either in the form of an integrated activity or through affiliated undertakings.657 The supply activities of producers (or their affiliated undertakings) will typically involve electricity sales to wholesale customers, either bilaterally or through a marketplace such as a power exchange, but may, in principle, also involve electricity sales to final customers.658 In addition to wholesale and retail supply activities, an electricity producer may also be involved 655. See similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 116, with respect to the corresponding motivation of Member States who have already chosen the model of political independence. See also along these lines the Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity, COM (2007) 528 final, 19.9.2007, 9 (Explanatory Memorandum). 656. Article 2(2) of the Directive. 657. The existence of natural persons as electricity producers is uncommon, at least within largescale electricity production. We will therefore refer to this group of participants as undertakings or entities in the following. 658. The definition of ‘supply’ in the Electricity Directive includes direct sales from producers as well as resales from wholesalers to both wholesale and final customers, see Art. 2(19) of the Directive and the definition of ‘customers’ in Art. 2(7). Wholesale customers are customers purchasing electricity for the purpose of resale, that is, distribution, while final customers purchase electricity for their own use, see the definitions in the Electricity Directive Arts 2(8) and 2(9) respectively.

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Defining Roles and Responsibilities in other sectors of the economy, such as the (closely affiliated) gas markets or the manufacturing of goods (which is particularly relevant in the case of powerintensive industries). EU law does not require electricity producers to assume particular responsibilities for new investments in electricity generation capacity. The regulatory point of departure here, as in other competitive commodity markets, is that the choice whether to invest is left to the market participants based on their assessment of future prices and demand. On the other hand, Union law does give Member States a right, subject to strict conditions, to launch tenders for investments or impose investment obligations in the form of public service obligations on specific undertakings, as we shall explore further in the next part of the book. The Electricity Directive imposes strict requirements as to the electricity sector activities in which a producer may be involved, apart from electricity generation and supply. The Directive’s provisions on this unbundling of activities distinguish between, on the one hand, electricity sector activities subject to competition (i.e., production and supply) and, on the other hand, monopoly activities (i.e., the operation of electricity transportation facilities). Undertakings involved in the former category of competitive activities may not be involved in the latter category of monopoly activities and vice versa. The aim of the provisions is to ensure the neutrality of TSOs and DSOs in order to avoid electricity transportation restrictions that distort electricity market competition.659 Unbundling requirements are among the principle means employed by the Electricity Directive to facilitate electricity market competition by ensuring a level playing field in this respect.660 Consequently, Article 9 of the Directive sets out as the main rule that the same persons cannot at the same time exercise control over entities involved in electricity generation or supply on the one hand and electricity transmission activities on the other hand. The alternative ISO and ITO models enshrined in Article 10 and Chapter V, respectively, also prohibits the same legal entity from carrying out both TSO activities and competitive generation and supply activities, although ownership unbundling is not required. The latter legal unbundling requirements also apply to distribution system oeprators (DSOs), where Article 26(1) require that a DSO which forms part of a vertically integrated undertaking ‘shall be independent at least in terms of its legal form, organisation and decision-making from other activities not relating to distribution’. The ‘other activities’ referred to

659. Consequently, the objective of neutrality does not suggest that TSO and DSO activities should necessarily be separated. Indeed, combined TSO and DSO entities are explicitly permitted by Art. 29 of the Electricity Directive. 660. See also, inter alia, paras 9–11 of the preamble to the Electricity Directive on the purposes of the unbundling provisions. For a general introduction to the background and contents of the unbundling provisions of Electricity Directive 2003/54/EC, see C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 69–108 and H.G. Aarseth, ‘Nye krav til skille mellom monopol- og konkurransebasert virksomhet i kraftsektoren’, Marius No. 327 (2005).

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Chapter 14 by the provision include the generation and supply of electricity.661 Thus the provisions require as a minimum (in absence of ownership unbundling for TSOs) both the legal separation of network activities from competitive activities and the functional separation of such activities in order to ensure that the operation of network activities is subject to independent decision-making. The unbundling provisions of the Electricity Directive have the effect that the legal entities responsible for electricity transmission and distribution are, as a clear point of departure, not permitted to assume the roles of electricity producer or supplier.662 Consequently, by excluding TSOs and DSOs as potential producers, the Directive to a large extent defines the relevant group of market participants that may take on a direct role in electricity generation investments. This distribution of roles is, however, not motivated by security of supply interests, but by the need to remove restrictions on trade and distortions on competition in the interest of the functioning of the internal electricity market. 14.4.

THE ROLE OF TSOs

14.4.1.

INTRODUCTION

The fact that the unbundling provisions of the Electricity Directive in general appear to prohibit TSOs and DSOs from participating as producers in the electricity market does not mean that these categories of electricity market participants cannot have roles and responsibilities that indirectly affect electricity generation investments. As will be discussed below, TSOs and, to a lesser extent, DSOs are, as far as market participants are concerned, the principal vehicles for ensuring security of electricity supply within the internal electricity market. For obvious reasons, these tasks primarily relate to activities to do with the transportation system. An important question in the present context concerns, however, the extent to which the performance of these tasks also has a bearing on the distribution of roles and responsibilities relating to electricity generation. As we shall see, this question is particularly relevant with respect to responsibility for ensuring sufficient reserve capacity margins for extraordinary peak-load situations. For the sake of simplicity, we will focus on the activities of the TSOs in the following, since these market participants are subject to more comprehensive obligations than DSOs, although the latter participants are to some extent subject to corresponding responsibilities.663 A general overview of TSOs’ security of 661. See Art. 26(2)(a) as well as the definition of ‘vertically integrated undertaking’ in Art. 2(21) of the Electricity Directive. 662. The Electricity Directive sets forth certain exemptions from the unbundling requirements, inter alia in the case of small distributors and in the case of small isolated electricity systems. These exceptions are not dealt with here. See C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 101–103 for a discussion of these grounds for exemption under Electricity Directive 2003/54/EC. 663. We will seek to refer to the corresponding obligations of the DSOs in footnotes in the following.

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Defining Roles and Responsibilities supply obligations, as well as their more limited environmental obligations, and their relevance to electricity generation investments, is provided below in sections 14.4.2 and 14.4.3, respectively. The issue of reserve generation capacity is then discussed in more detail in section 14.4.4. 14.4.2.

THE SECURITY

OF

SUPPLY OBLIGATIONS

OF

TSOS

The primary functions and responsibilities of TSOs are set forth in the Electricity Directive. Member States are required to designate one or more TSOs. Member States are also under an obligation to ensure that the TSOs act in accordance with the TSO requirements established in the Directive.664 These requirements include a number of tasks relating to the promotion of security of supply. TSOs are responsible for ensuring the long-term ability of the system to meet reasonable demands for electricity transmission, to ensure adequate means to meet service obligations and for contributing to security of supply through ensuring adequate transmission capacity and system reliability.665 More generally, the TSOs are responsible for managing energy flows on the system and, to that end, are responsible for ensuring that the electricity system is secure, reliable and efficient, a task which includes ensuring the availability of necessary ancillary services.666 The TSOs are also under an obligation to cooperate with operators of other interconnected systems in order to ensure secure and efficient operation, coordinated development and interoperability of the interconnected system.667 Consequently, a number of security of supply tasks relating to the operation of the transmission system, and to some extent also the development of and investments in the transmission system, are imposed on the TSOs.668 Fulfilment of these tasks is also likely to influence decisions about electricity generation investments, given production facilities’ dependence on access to the transmission system in order to reach the market. The development plans of TSOs in relation to issues such as capacity extensions, cable routing, tariff fees, etc. may therefore be instrumental for decisions on the development of new generation capacity.669 However, this 664. 665. 666. 667. 668.

See in particular Art. 8 of the Electricity Directive, and, correspondingly, Art. 25 for DSOs. Ibid., Arts 12 litra (a)-(c). Ibid., Art. 12(d). Ibid., Art. 12(e). Ibid., Arts 9 litras (a), (c) and (d), as well as Art. 15(5), all signify that the TSOs shall have a responsibility for the development of the transmission system, but the scope of this responsibility is not clearly defined. In particular, the provisions are not clear on whether they impose investment obligations on the TSOs in situations where the present transmission capacity is inadequate to meet demand. By contrast, Investment obligations are much clearer spelt out for the ITO option, as further governed by Art. 22 of the Directive. 669. The provision of so-called locational signals, that is, surcharges or rebates on entry point transportation tariffs in order to give producers an incentive to invest in areas with generation capacity deficits, is an important example in this respect. The ‘innmatingstariff’ (‘entry point tariff’) scheme introduced by the Norwegian TSO Statnett in response to political signals voiced in a Norwegian Parliamentary bill (St prp No. 1 (2002–2003) for the Budget Term

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Chapter 14 interdependence between transmission capacity planning and generation capacity planning does not mean that EU law requires TSOs to assume any role or responsibility in relation to investments in production facilities. The obligations imposed on TSOs under Article 9 of the Electricity Directive emphasize the TSOs’ responsibility for the system.670 This system responsibility is also highlighted in the Directive’s definition of TSOs.671 The extent of the TSOs’ obligations, and consequently their roles and responsibilities within the different parts of the electricity resource chain, are therefore determined by the scope of this term. A wide interpretation entails system responsibility covering responsibility for all the functions within the scope of the Electricity Directive, from generation to supply, while a narrow interpretation implies that term only refers to the particular transmission system under the operation of the designated TSO. This question is not merely of theoretical interest. A wide interpretation implies that TSOs are responsible for maintaining the balance between supply and demand, which also extends to ensuring that sufficient generation capacity is installed to meet demand at all times. In that case, the question arises whether this responsibility only encompasses an obligation to ensure a balance between supply and demand in the short term, or whether it also extends over longer periods. A narrow interpretation, on the other hand, implies that a TSO is only responsible for ensuring that the transmission system under its operation is able to transport sufficient electricity to meet reasonable demand at all times. The term ‘system’ as such is not defined by the Directive, but the wording of Article 12, as well as a number of the Directive’s other definitions, shed light on the understanding of the notion. The Directive’s definition of TSOs clearly supports a narrow interpretation of the term system. According to that definition, a transmission system operator means: a natural or legal person responsible for operating, ensuring the maintenance of and, if necessary, developing the transmission system in a given area and, 2003, Ministry of Oil and Energy, 87) illustrates a national approach to the issue. In order to provide-grid optimal locations for new electricity generation capacity at some locations, the energy component of the total tariff was set to NOK 0.001/kWh for electricity fed to the grid in these areas, compared to an ordinary tariff of NOK 0.0056/kWh. Consequently, the tariffs provide economic incentives to electricity producers to invest in generating capacity in deficit areas which, in turn, require minimum network investments. Art. 14(2) of the Electricity Regulation seeks to govern locational signals at European level, providing that ‘Where appropriate, the level of the tariffs applied to producers and/or consumers shall provide locational signals at Community level [. . .]’ (emphasis added). As the wording indicates, this provision does not require the establishment of locational signals at European level, which currently do not exist, see C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 169–173, who also points out that a functional scheme for congestion management of interconnector capacity in practice fulfils many of the same functions as would a separate scheme involving locational signals. Locational signals at European level are, however, envisaged to be included in the network code and guidelines to be adopted on the basis of the Electricity Regulation, see Arts 8(6)(k) and 18(2) of the Electricity Regulation. 670. See Arts 12 litras (a), (c), (d), (e) and (g). 671. Article 2(4) of the Electricity Directive.

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Defining Roles and Responsibilities where applicable, its interconnections with other systems, and for ensuring the long term ability of the system to meet reasonable demands for the transmission of electricity.672 The context in which the term is applied in Article 12(a) clearly suggests the same solution by referring to the system’s ability to meet demand for the transmission of electricity. In addition, the wording of the other provisions in Article 12,673 as well as the Directive’s definitions of transmission,674 distribution,675 interconnectors,676 interconnected systems677 and system users,678 all suggest that the term should be interpreted as referring to the electricity transportation system, excluding electricity generation facilities. Consequently, Article 12 of the Electricity Directive requires the TSOs to have responsibility for the ability of the extra high-voltage and high-voltage interconnected electricity grids to meet reasonable electricity demand. This does not include any responsibility for ensuring the ability of electricity generation facilities to meet reasonable electricity demand.679 14.3.3.

THE ENVIRONMENTAL OBLIGATIONS

OF THE

TSOS

The interpretation advanced above as to the scope of the TSOs’ system responsibilities also implies that the TSOs do not have direct responsibility for ensuring investment in sustainable electricity generation. On the other hand, the TSOs in their capacities as grid operators are, to some extent, required to promote environmental objectives by facilitating grid access for electricity produced from certain sources or by the application of certain technologies. Apart from the obligation in Article 12(a) to operate the transmission system ‘with due regard to the environment’, the environmental commitments imposed by the Electricity Directive on TSOs essentially follows from the Member State obligation in Article 15(3) to require TSOs to act in accordance with the RES Directive.

672. Ibid. (emphasis added). 673. The TSO obligations to contribute to security of supply, through the obligations in Arts 12(c) to ensure adequate transmission capacity and system reliability, point in this author’s view towards the imposition of an obligation on TSOs to ensure grid reliability. Similarly, the obligation in Art. 12(d) to manage electricity flows on the system must be understood as referring to the transmission system. The context in which the term is applied in Arts 9(e) and (g) suggests the same solution. 674. Article 2(3) of the Electricity Directive. 675. Ibid., Art. 2(5). 676. Ibid., Art. 2(13). 677. Ibid., Art. 2(14). 678. Ibid., Art. 2(18). 679. The same line of reasoning applies to DSOs. Although the wording of Art. 25 of the Directive, which sets forth the tasks of DSOs, differs from the wording of Art. 12, it is clear that the DSOs’ responsibility does not extend beyond the responsibilities of the TSOs in respect of electricity generation.

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Chapter 14 The latter Directive includes more specific TSO measures, as we will briefly revert to below. Article 15(3) of the Electricity Directive sets forth that a Member State ‘shall require system operators to act in accordance with Article 16 of [the RES Directive] when dispatching generating installations using renewable energy sources. They also may require the system operator to give priority when dispatching generating installations producing combined heat and power’.680 Article 16 of the RES Directive imposes a number of obligations on Member States concerning TSO requirements relating to access to and operation of the grid to the benefit of electricity production from renewable energy sources. Pursuant to Article 16(2)(a) and (b) of the RES Directive, Member States are required to ensure that TSOs (and DSOs) guarantee the transmission and distribution of electricity from renewables, and such electricity shall either be given priority access or guaranteed access to the grid. With respect to dispatching, Article 16(2)(c) of the Directive more specifically sets forth that: Member States shall ensure that when dispatching electricity generating installations, transmission system operators shall give priority to generating installations using renewable energy sources in so far as the secure operation of the national electricity system permits and based on transparent and nondiscriminatory criteria. Member States shall ensure that appropriate grid and market-related operational measures are taken in order to minimise the curtailment of electricity produced from renewable energy sources. If significant measures are taken to curtail the renewable energy sources in order to guarantee the security of the national electricity system and security of energy supply, Members States shall ensure that the responsible system operators report to the competent regulatory authority on those measures and indicate which corrective measures they intend to take in order to prevent inappropriate curtailments. A somewhat similar provision concerning priority dispatching in the security of supply interest is included in Article 15(4) of the Electricity Directive, allowing, but not requiring, Member States to require the giving of priority dispatch to installations using indigenous primary fuel sources up to a total of 15% of the primary energy sources applied in domestic electricity consumption. What the priority dispatching provisions in the RES Directive and the Electricity Directive have in common is that they are of limited practical application within a competitive electricity market. The Electricity Directive assumes that TSOs are responsible for the dispatching of generating installations, which in essence involves responsibility for deciding which generating facilities may feed electricity into the grid within a given operating period.681 The dispatching procedures must take into account the ranking of sources of electricity supply in accordance with economic criteria.682 Within an 680. See also the parallel obligations for DSOs in Art. 25(4) of the Electricity Directive. 681. Ibid., Art. 15(1), which imposes on TSOs a responsibility for dispatching generating installations in the area ‘where it has such a function’. 682. Ibid., Arts 15(2) and 2(16).

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Defining Roles and Responsibilities electricity market based on competition, this economic ranking is decisive for the order in which installations are dispatched, leaving little discretion in reality to the TSOs. Electricity producers bid electricity into the market on the basis of their marginal costs of production and, to the extent that their bids are matched by demand, nominate their generating facilities for dispatch in order to ensure transportation capacity for the contracted volumes. When the pre-defined time limit for submitting nominations has expired (‘gate closure’), the TSOs balance supply and demand and dispatch the nominated generating units (as adjusted in order to balance the network). However, apart from the balancing of nominated supply and demand after gate closure, the TSOs in reality have little discretion to dispatch generating units contrary to the nominations of electricity producers. If the marginal costs of production from a given generating unit cannot at the outset match the market price, producers have no interest in a priority dispatch. Consequently, priority dispatch in the environmental or security of supply interest, as provided for in Article 16 of the RES Directive and Article 15 of the Electricity Directive, does not in itself facilitate electricity production using certain energy sources or certain technologies.683 Article 16 of the RES Directive also imposes a number of other obligations on TSOs (and DSOs) aimed at facilitating grid access and reducing grid connection and tariff costs for generating units using renewable energy sources. To some extent the similar provisions in RES Directive 2001/77/EC Article 7 apply correspondingly to CHP (combined heat and power) plants, pursuant to Article 8 of the CHP Directive.684 Issues of grid access are particularly important for installations using renewable energy sources, both because their installed effect is often more limited than conventional plants and because their area of installation is often remote from the existing grid, necessitating substantial grid construction 683. See similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 33–36 with respect to the corresponding provisions in Electricity Directive 2003/54/EC, who also notes that it is, in principle, possible to apply the provisions in situations of network congestion or to apply them to a power exchange rather than to TSOs, but concludes that such applications are likely to be of little practical significance. See, on the other hand, P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 136–137, who appears to accord more practical significance to the corresponding provisions in Electricity Directive 2003/54/EC. 684. See also the curious, and in this author’s opinion superfluous, Art. 3(2)(e) of the Security of Electricity Supply Directive, which requires Member States to take into account the measures of the RES Directive and the CHP Directive insofar as their provisions are also related to security of electricity supply. It is difficult to see that this provision adds any substantive meaning to the measures already contained in the RES and CHP Directives. The Commission’s initial Directive proposal could have assisted in putting slightly more pressure on the Member States in relation to this point. Art. 3(2)(e) of the proposal set forth, in line with the RES Directive, that Member States should take the utmost account of ‘the need to promote the use of electricity generated from renewable energy sources’. Furthermore, the Directive proposal’s Art. 6(2)(a) required network investment decisions to take into account increased possibilities for connecting electricity production from renewable energy sources and from cogeneration plants to the grid, see COM (2003) final 740, 10.12.2003.

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Chapter 14 costs.685 Apart from the provision on priority dispatching in Article 16(2)(c) of the RES Directive, several of the provisions in Article 16 of the RES Directive may therefore be of practical significance for renewable, and CHP, electricity producers.686 It would, however, be beyond the scope of this study to discuss the facilitation of grid access for sustainable electricity generation in more detail in the following. It suffices to note that, while TSOs do not have an overall responsibility for the promotion of electricity generation investments in the environmental interest, the execution of their grid responsibilities may have a particularly important effect on these investments, given the impact of grid access and tariff issues on investment decisions. 14.4.4.

THE TSOS RESPONSIBILITY FOR BALANCING AND ENSURING APPROPRIATE LEVEL OF RESERVE GENERATION CAPACITY

14.4.4.1.

Balancing Services

AN

Under Article 12(d) of the Electricity Directive, the TSOs are under an obligation to ensure the availability of necessary ancillary services for the use of the transmission system. An important category of services in this respect comprises balancing services, which can be described as the provision of last-minute energy necessary to maintain the frequency of the current in the grid, that is, the ensuring of a real-time balance between electricity supply and demand. Imbalances may, for example, result from energy losses due to resistance in electricity cables or minor differences between nominated electricity volumes and the volumes that are eventually dispatched. It is generally recognized that there is a need to have centralized control over balancing services in competitive electricity markets in order to ensure a realtime balance between supply and demand.687 This is acknowledged in the Electricity Directive, which requires the rules adopted by the TSOs for balancing the electricity system to be objective, transparent and non-discriminatory and the tariffs applied for such services to be cost-reflective.688 In practice, the TSOs will in turn procure

685. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 56–57. See also A. McHarg & A. Rønne, ‘Reducing Carbon-Based Electricity Generation: Is the Answer Blowing in the Wind?’, in Beyond the Carbon Economy. Energy Law in Transition, ed. D.N. Zillman et al. (Oxford: Oxford University Press, 2008), 287–317, at 291 for an overview of the typical network cost issues that apply to wind power investments in particular. 686. See L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), who notes at 60 that Art. 7 in RES Directive 2001/77/EC, together with Art. 6, is the most frequent legal basis under the first RES Directive for complaints to the Commission from European citizens. 687. S.S. Oren, ‘Ensuring Generation Adequacy in Competitive Electricity Markets’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 388–414, at 389. 688. Article 15(7) of the Electricity Directive.

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Defining Roles and Responsibilities system services from electricity generators through long-term contracts or other market-based procedures.689 Strictly speaking, the provision of balancing services implies that the TSOs are responsible for more than the functioning of the transmission system in isolation, since these services are more generally important for ensuring a real-time balance between electricity supply and demand. One could possibly also argue that some balancing services amount to supply activities within the meaning of the Electricity Directive, rather than merely ancillary services. This question is, however, of only theoretical interest since the Directive clearly permits – and even requires – TSOs to perform these tasks notwithstanding the unbundling requirements of the Directive.690 14.4.4.2.

Reserve Capacity Margins

While the role of the TSOs in providing short-term balancing services appears to be largely accepted in most competitive electricity markets, regional approaches to securing a balance between electricity supply and demand in the longer term by ensuring sufficient capacity margins are more diverse. Capacity margins can generally be defined as the percentage excess of installed generation capacity (without regard to actual availability) over annual peak demand.691 In other words, these margins consist of the electricity generation capacity which is only exceptionally needed when demand exceeds projected peak-load, for example due to extreme meteorological conditions, or where other peak-load supply is curtailed, for example due to maintenance or repair.692 Capacity margins are often also described as ‘reserve capacity’. The latter terminology can be somewhat confusing, since the capacity margins do not necessarily consist of specific sets of generating units which are kept in reserve as opposed to ‘normal’ generation facilities.693 Nevertheless, the reserve capacity 689. The RKM (regulerkraftmarkedet) operated by the Nordic TSOs and, in particular, the RKOM (regulerkraftopsjonsmarkedet) operated by Norwegian TSO Statnett, are examples in this respect, see E.S. Amundsen & L. Bergman, ‘Provision of Operating Reserve Capacity: Principles and Practices on the Nordic Electricity Market’, CRNI 2, no. 1 (2007): 73–98, at 92–96 for an overview of these markets. 690. See Art. 12(d), which requires TSOs to ensure the availability of all necessary ancillary services in order to ensure a secure, reliable and efficient electricity system. See also para. 35 of the preamble to the Directive, which more generally emphasizes the importance of establishing the necessary balancing services. 691. Eirgrid plc, Generation Adequacy Report: 2008–2014 (2007), 44. A similar definition is applied by the Commission, see Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 43. 692. The need for electricity generation margins may also arise as a result of primary energy source curtailments rather than generation capacity curtailments. This is the case in Norway, where approximately 96% of electricity production stems from hydropower. In dry years, the lack of sufficient water in the hydro reservoirs, combined with peaking demand due to, for example, very cold weather, may lead to a lack of primary energy source for electricity production. 693. Along these lines L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische

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Chapter 14 terminology is applied within internal electricity market legislation, and will therefore also be applied in the following. Whichever terminology is applied to describe this generation capacity, the important point is that these generating units are only needed to ensure demand in the rare cases where projected peak-load is exceeded. This means that peak-load plants which due to their technical and economic characteristics belong to the capacity margin are likely to have a very limited operating time each year, and may in fact not operate at all during some years.694 Given the challenges involved in ensuring sufficient investments in peak-load plants in competitive energy-only electricity markets, it is highly questionable whether market participants can be expected to invest in the capacity margins which are only needed in exceptional peak-load situations.695 The question therefore arises whether the provision of sufficient capacity margins should be subject to some form of centralized control and regulation. This, in turn, raises the issue of the role of TSOs in decisions concerning reserve capacity margins. Article 15(6) of the Electricity Directive is based on an assumption that Member States may impose a responsibility for ensuring sufficient reserve capacity on TSOs, but the provision does not require them to do so. The provision covers two different situations by setting forth that: Transmission system operators shall procure the energy they use to cover energy losses and reserve capacity in their system according to transparent, non-discriminatory and market-based procedures, whenever they have this function.696 The first situation concerns the procurement of energy to cover energy losses in the transmission system. Transportation of electricity will always be subject to energy loss. Additional electricity therefore needs to be fed into the transportation system in order to replace the energy lost and thereby balance the system. To the extent that TSOs choose to cover this situation by acquiring the electricity needed for covering losses themselves, Article 15(6) sets forth that they shall procure energy according to transparent, non-discriminatory and market-based procedures.697 The second situation concerns the procurement of energy for reserve capacity purposes, and raises questions of a more fundamental nature in terms of defining the roles and responsibilities of the different market participants in electricity

694. 695. 696.

697.

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Universiteit Delft, 2004), 60–62, who states that ‘reserve units’ are simply regular peak-load facilities with a low number of expected operating hours, and therefore criticizes the ‘reserve’ terminology for being misleading. However, as we shall revert to in Ch. 19.4.4 below, a TSO responsibility for capacity margins may possibly be carried out by keeping specific units in reserve, which entails that the reserve capacity terminology is not always misleading. Ibid., 61. See further Ch. 5 above. Article 25(5) of the Directive includes a similar provision directed at DSOs. The only difference between the provisions relates to the fact that Art. 25(5) – unlike Art. 15(6) – provides a specific cut-off date, 1 Jan. 2002, for the conclusion of contracts not subject to the requirements of the provision. See similarly for DSOs in Art. 14(5) of the Directive.

Defining Roles and Responsibilities generation. The term ‘reserve capacity’ is not defined in the Electricity Directive or any other Union measure. As we have already seen, it can, in broad terms, be described as that electricity generation capacity, normally kept unused, which is only employed in the event of extraordinary levels of demand.698 As with the covering of energy losses, Article 15(6) of the Electricity Directive requires the TSOs to procure the energy they use to cover reserve capacity according to transparent, non-discriminatory and market-based procedures whenever they have this function. In other words, the Directive assumes that reserve capacity obligations may be imposed on the TSOs by the Member States. On the one hand, an obligation to ensure an appropriate level of reserve generation capacity can be seen as a continuation of the obligation to ensure necessary balancing services. Balancing services are intended to ensure a realtime balancing between electricity supply and demand, while the provision of sufficient reserve generation capacity is intended to ensure a balancing between supply and demand during the few hours each year of exceptionally high load. From this perspective, it could be argued that the provision of reserve generation capacity amounts to an ancillary service which the TSOs are required to offer in accordance with Article 12(d) of the Electricity Directive. On the other hand, generation reserve capacity obligations differ in principle from balancing services in that the former obligations involve electricity generation activities. Although the reserve capacity normally remains unused, its application during peak-load entails the generation of additional volumes of electricity in order to supply the market in exceptional circumstances. The keeping of reserve capacity is therefore at the outset an electricity production activity which, in principle, can be left to other market participants than TSOs. This may serve to explain why policy approaches to the role of TSOs in reserve capacity decisions have been more ambiguous than the approaches to their role in providing balancing services. Article 5(1)(b) of the Security of Electricity Supply Directive takes the distribution of roles in respect of reserve capacity responsibilities one step further than the Electricity Directive. This provision sets forth that Member States, in taking appropriate measures to maintain a balance between electricity demand and the availability of generation capacity, shall ‘require transmission system operators to ensure that an appropriate level of generation reserve capacity is available for balancing purposes and/or to adopt equivalent market-based measures’699 This provision at first sight appears to clarify the distribution of roles under EU law by requiring Member States to impose responsibility for reserve capacity on the TSOs. Unfortunately, the wording of the provision is unclear and gives rise to several interpretational problems. An initial question of interpretation raised by the wording of the provision is whether the Article relates to generation reserve capacity in the sense discussed 698. See similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), note 39, at 31. 699. See also Art. 3(2)(f) of the Directive, which requires Member States to take account of the need to ensure sufficient generation reserve capacity to enable stable operations.

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Chapter 14 above at all. One might argue that the requirement for TSOs to ensure that ‘generation reserve capacity is available for balancing purposes’ simply means that the TSOs must control the capacity needed to provide necessary real-time balancing services to ensure the stable operation of the system.700 Such an interpretation does not fit well with the context within which the provision is placed in the Security of Electricity Supply Directive. Article 5 of the Directive regulates the electricity supply-demand balance in general. If the object of the provision were to regulate balancing as an ancillary grid service, it would have belonged in Article 6 of the Directive on operational network security. Furthermore, the preamble to the Directive, by referring to instruments such as capacity obligations and capacity payments, which are typically applied to ensure sufficient peak-load generation capacity, clearly suggests that the provision concerns reserve capacity margins.701 The wording of the provision also gives rise to some confusion with respect to the means that TSOs may apply to maintain the balance between electricity supply and demand. The first part of the provision requires the Member States to impose on the TSOs a duty to fulfil an objective, namely to ensure that an appropriate level of generation reserve capacity is available for balancing purposes. The final part of the provision only refers to a choice of means: ‘and/or to adopt equivalent marketbased measures’. The wording of Article 5(1)(b) is less than technically elegant at this point. This author submits that the only understanding of the provision which does not meet any resistance in the wording is the following: in taking appropriate measures to ensure the balance between electricity supply and demand, Member States shall require TSOs to ensure that an appropriate level of generation reserve capacity is available for balancing purposes, and/or they shall require TSOs to adopt equivalent market-based measures.702 The practical significance of the latter residual category of measures relates to the application of demand-side measures by TSOs as an alternative approach to maintaining the supply-demand balance.703 The provision would have benefited from clearer wording at this point. 700. Emphasis added. 701. Paragraph 10 of the preamble to the Security of Electricity Supply Directive. 702. Alternatively, one could argue that the provision leaves the Member States with a choice either to delegate the reserve capacity responsibility to TSOs or to shoulder the responsibility themselves in their capacities as public authorities by adopting market-based measures. This interpretation would be well-founded but for the presence of ‘to’ in ‘and/or to adopt’. As presently worded, however, the provision must be construed as requiring Member States to impose responsibility for the supply-demand balance on the TSOs. This interpretation also has some support in paras 9 and 10 of the preamble to the Directive which, when read in continuation, seem to require the imposition of a particular responsibility on TSOs and DSOs. 703. This interpretation also fits well with the interpretation signalled in the original Commission Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment, COM (2003) 740 final, 10.12.2003. This proposal set forth in Art. 5(1) second subparagraph that ‘Member States shall require transmission system operators to ensure an appropriate level of reserve capacity or by adopting equivalent measures, for instance relating to the real-time control of peak demands’ (emphasis added). Although the text of the Commission’s initial Directive proposal has no direct legal relevance for the interpretation of the final text, it may, as in this case, assist in shedding light on its possible interpretation.

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Defining Roles and Responsibilities The reserve capacity responsibilities that Member States are required to impose on TSOs under the Security of Electricity Supply Directive mean that the tasks of these grid operators also extend to an activity that, formally speaking, concerns electricity generation. While the other TSO activities discussed above are distinct from generation activities, in that they concern the regulation of a different function in the electricity resource chain, that is, electricity transmission, the distinction between reserve capacity responsibilities and ‘normal’ generating capacity responsibilities is more nebulous. From a regulatory perspective, the distinction lies essentially in the fact that a functional, competitive electricity market is expected to ensure sufficient generating capacity for ordinary supply situations, while EU law now acknowledges that the provision of sufficient reserve capacity requires further regulation. From this perspective, this author submits that there is much merit to the Union approach of delegating reserve capacity responsibility to the TSOs, given the neutrality requirements and extensive security of supply obligations already imposed on these market participants. This delegation of responsibilities ultimately also raises the question of whether the TSOs may fulfil this responsibility by investing in their own reserve capacity margins, or whether EU law requires the TSOs to contract the necessary volumes from other electricity producers. We will revert to this question in the next part of the book.704 14.5.

THE OBLIGATION TO DEFINE ROLES AND RESPONSIBILITIES IN THE SECURITY OF ELECTRICITY SUPPLY DIRECTIVE

In addition to the Member State obligations discussed above, Article 3(1) of the Security of Electricity Supply Directive requires Member States to define ‘the roles and responsibilities of competent authorities, including regulatory authorities where relevant, and all relevant market actors and publish [. . .] information thereon’. The provision also underlines, in this author’s opinion unnecessarily, the fact that the market actors in question include TSOs and DSOs, electricity generators, suppliers and final customers. The obligation only requires Member States to define the roles and responsibilities and publish information thereon. It does not restrict the Member States’ discretion with regard to how to define those roles and responsibilities. As we have discussed above, however, the question of how these roles and responsibilities should be defined is already subject to comprehensive EU regulation in the Electricity Directive and in other parts of the Security of Electricity Supply Directive. A question which arises in the light of these other EU measures is whether the general obligation to define roles and responsibilities in Article 3(1) of the Security of Electricity Supply Directive retains any practical significance. Not least, this question is of some interest to an evaluation of the adequacy of the Directive as a

704. Chapter 19.4.4 below.

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Chapter 14 security of supply instrument, since the obligation to define roles and responsibilities is one of the principal means employed by the Directive to ensure that interest. The structural requirements set forth in the unbundling and reserve capacity provisions of the Electricity Directive and the Security of Electricity Supply Directive clearly reduce the practical significance of the obligation to define in Article 3(1) of the latter Directive. This does not mean that the provision is completely stripped of any significance. In particular, the provision may contribute to security of supply by requiring Member States to decide precisely how the TSOs’ responsibility for generation reserve capacity and/or other market-based measures should be defined and to publish information in this respect. This information may contribute to ensuring transparency and consequently promote investor certainty among electricity generators. The provision could, in principle, also contribute to enhancing transparency with respect to the definition and publication of existing public service obligations, but achievement of this aim has already to some extent been ensured by the obligation in the Electricity Directive to inform the Commission of all public service obligations.705 Furthermore, it is difficult to see that the provision will be of much relevance to the definition of the roles and responsibilities of public authorities, coming as it does in addition to the Electricity Directive’s requirements concerning the organization and tasks of the energy regulatory authorities. The approach chosen in the Security of Electricity Supply Directive also raises the question of the relationship between the adopted measures and their legal basis. The Directive is heavily influenced by the need to promote security of supply interests, but its recourse to the internal market provision in current Article 114 TFEU as legal basis inevitably means that its primary objective must be to ensure the proper functioning of the internal market. Thus, the safeguarding of security of supply amounts in effect to a means to promote the ultimate Directive aim of a functioning internal electricity market, as set forth in Article 1(1). This approach is further elaborated on in the preamble to the Directive, with its direct reference to the need to define the roles and responsibilities of the different market participants: A competitive single EU electricity market necessitates transparent and nondiscriminatory policies on security of electricity supply compatible with the requirements of such a market. The absence of such policies in individual Member States, or significant differences between the policies of the Member States would lead to distortions of competition. The definition of clear roles and responsibilities of the competent authorities, as well as of Member States themselves and all relevant market actors, is therefore crucial in safeguarding security of electricity supply and the proper functioning of the internal market while at the same time avoiding creating obstacles to market entrants, such as companies generating or supplying electricity in a Member State that have recently started their operations in that Member State, and avoiding creating distortions of the internal market for electricity or significant difficulties for 705. Article 3(15) of the Electricity Directive.

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Defining Roles and Responsibilities market actors, including companies with small market shares, such as generators or suppliers with a very small share in the relevant Community market.706 This approach places the obligations in Article 3(1) of the Directive in a peculiar light. Since the requirement to define roles and responsibilities does not include any harmonization of how the roles and responsibilities should be defined, the requirement as such does not contribute to harmonizing significant differences between the policies of Member States. The main risk in terms of trade and distortions of competition, the difference between Member State policies, is therefore left untouched by the requirement in Article 3(1). It is questionable whether a lack of definitions as such is liable to lead to distortions of competition to any significant extent. There may, however, be some merit to the idea that a lack of definitions creates barriers to market entry which particularly affect new market entrants, as they have yet to acquire significant market shares and an understanding of the customs of the market and its functioning and procedures. The obligation to define roles and responsibilities does not therefore go beyond the competence conferred on the EU in accordance with Article 114 TFEU. On the other hand, this internal market-oriented approach places the underlying concern with investor certainty, which was arguably the principal motivation behind the adoption of Article 3(1) of the Directive, firmly in the background. 14.6.

CONCLUDING REMARKS

We commenced this chapter by emphasizing that the need for investor certainty is the primary rationale for defining roles and responsibilities in electricity generation decisions. An absence of clear definitions of roles and responsibilities may reduce the reliability of assessments of the potential profitability of investments, possibly deterring necessary market-based investments. In EU law there are two principal categories of measures dealing with Member State definitions of roles and responsibilities in the internal electricity market, but neither is primarily based on the rationale described above. The structural requirements in the Electricity Directive concerning the organization and tasks of the energy regulatory authorities and the TSOs and DSOs are essentially based on the need to ensure the functioning of the internal electricity market by establishing a suitable institutional organization. At present, the institutional freedom of Member States to designate the regulatory bodies responsible for the function of electricity generation is considerably wider than their freedom to define the roles and responsibilities of market participants. In the latter respect, the unbundling requirements of EU law draw a clear distinction between production and supply activities on the one hand and electricity transportation activities on the other. We have seen that the TSOs (and, to a lesser extent, the DSOs) in their 706. Paragraph 3 of the preamble to the Directive.

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Chapter 14 capacities as grid operators are required to perform a number of security of supply tasks, but that the EU regulation of these tasks only concerns electricity generation investments to a limited extent. The reserve capacity responsibilities imposed by the Security of Electricity Supply Directive are an exception. Moreover, the RES Directive and the CHP Directive impose grid-related tasks on TSOs and DSOs in order to facilitate sustainable electricity generation investments but, again, these Directives do not extend the powers of TSOs (and DSOs) beyond matters concerning grid regulation. Consequently, the strict division in EU law between responsibilities for electricity generating activities and for network-bound activities may also incidentally contribute to investor certainty by clarifying that grid operators are neither under any obligation, nor have any right, to intervene in the electricity generation market in the security of supply interest. Article 3(1) of the Security of Electricity Supply Directive takes a different approach by generally requiring Member States to define roles and responsibilities, while leaving the content of the definitions to national discretion. Given the comprehensive set of provisions that, as indicated above, already governs the roles and responsibilities of public authorities and market participants, the practical significance of the obligation in the Security of Electricity Supply Directive is strictly limited. Consequently, although the possibility that the provision contributes to investor certainty cannot be ruled out, it is difficult to see that it will be of substantial significance for the promotion of market-based investments. Moreover, the Directive’s emphasis on the internal market as a rationale for adopting such measures in the security of supply interest also puts Article 3(1) in a curious light, since the provision’s function is not the harmonization of national laws. The most important contribution of the Security of Electricity Supply Directive to the definition of roles and responsibilities is, in this author’s opinion, the requirement in Article 5(1)(b). According to this provision, Member States must impose on TSOs an obligation to ensure appropriate levels of generation reserve capacity (or equivalent demand-side measures) in order to contribute to ensuring a balance between electricity supply and demand. In principle, this requirement extends the tasks of the TSOs beyond those directly connected with the functioning of the transmission network also to involve broader security of supply considerations relating to the longer-term balance between electricity supply and demand. Since promoting the availability of necessary levels of reserve capacity is liable to require some level of regulation and coordination in any case, there is, in this author’s opinion, much merit to the idea of appointing the TSOs as the vehicle for ensuring the execution of this task. This is partly because the TSOs should be in a better position to ensure neutrality in the application of reserve capacity than other market actors, such as undertakings involved in electricity generation and supply activities. The reasons for choosing the TSOs to perform this task also have an important operative dimension: the TSOs have a full overview of the supply and demand situation, as well as other operative conditions important for determining whether reserve capacity should be employed or not. The only difficulty with this approach is that the task of distinguishing between TSO-related monopoly activities and market-based generation and supply activities becomes more challenging, which ultimately may also affect investor certainty. 194

Defining Roles and Responsibilities A weakness in the Security of Electricity Supply Directive’s regulation of reserve capacity responsibility is its failure clearly to set out how the TSOs should fulfil their responsibility. The obligation on Member States to define and publish roles and responsibilities may assist in providing some level of transparency in this respect. Even though the obligation to define roles and responsibilities is general in scope, this author submits that it will be in relation to defining how the responsibility for reserve generation capacity should be fulfilled that the provision will retain its practical significance in respect of generation capacity investments.

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Chapter 15

The Authorization Procedure for the Construction of New Electricity Generating Capacity

15.1.

INTRODUCTION

Article 7 of the Electricity Directive requires Member States to adopt an objective, transparent and non-discriminatory authorization procedure for the construction of new electricity generating capacity.707 The provision requires Member States to determine and publish their criteria for granting authorizations and sets forth the issues to which these criteria may relate.708 Any refusal by a Member State to grant an authorization must be objective, non-discriminatory, well-founded and duly substantiated.709 The authorization procedure in the Electricity Directive seeks to facilitate the functioning of the internal electricity market by ensuring freedom of establishment for electricity producers. In other words, the Directive not only seeks to promote the free movement of electricity as goods, but also the free movement of producers. The more specific rationale behind the adoption of Article 7 of the Electricity Directive can essentially be interpreted in two ways.

707. Article 7(1) of the Directive. 708. Ibid., Arts 7(2)-(4). 709. Ibid., Art. 7(4). The requirement in the first Electricity Directive 96/92/EC for copies of refusals of authorization to be forwarded to the Commission has, however, been left out of Electricity Directive 2003/54/EC and the present Directive, since the administrative burden imposed by the requirement, particularly on local authorities, outweighed its benefits, see the Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 39.

Chapter 15 The first, and more reductionist, approach is to interpret the provision as an instrument for ensuring non-discriminatory freedom of establishment for electricity producers in order to create an internal electricity market where the free movement of persons and of capital are also guaranteed.710 Viewed in this context, the provision appears to be primarily motivated by a desire to integrate national electricity markets, rather than to facilitate market functioning from an economic perspective.711 This traditional approach, which focused on the establishment of the internal market, was central to the largely corresponding provision on authorization procedures in the first Electricity Directive.712 That Directive left it to Member States’ discretion whether to apply an authorization procedure or a more interventionist tendering procedure as the main procedure for the construction of new electricity generation capacity.713 Both types of procedure had to be conducted in accordance with objective, transparent and non-discriminatory criteria. Thus the principal difference between the procedures was that authorization procedures left investment decisions to market participants, while tendering procedures allowed Member States to estimate their needs for future generating capacity and invite tenders for that capacity accordingly. Since the former Electricity Directive left the choice of procedure to the Member States, the main function of the Directive at this point was to ensure that electricity producers enjoyed freedom of establishment on objective, transparent and non-discriminatory terms. Unlike the first Electricity Directive, Electricity Directive 2003/54/EC and, more recently, the present Directive requires Member States to adopt authorization procedures as their principal instruments for attracting new investments.714 Derogations from this procedure, by way of initiating tendering procedures or the carrying out of public service obligations, are only permitted exceptionally when necessary to pursue security of supply or environmental interests.715 This change can, to some extent, be perceived as resulting from an alteration in the perception of the underlying rationale for EU measures on new electricity generation investments. From an economic point of view, open market access is regarded as an important factor in the facilitation of necessary investments. Consequently, the decision to employ authorization procedures as the principal instrument for attracting investments can be seen not only as ensuring non-discriminatory access to the 710. See Art. 26(2) TFEU. 711. Leaving aside the benefits of market integration to market functioning, see further R. Pierce, M. Trebilcock & E. Thomas, ‘Regional Electricity Market Integration. A Comparative Perspective’, CRNI 8, no. 2 (2007): 215–257. 712. Article 5 of Directive 96/92/EC. 713. Ibid., Art. 4. 714. Whether the present Electricity Directive permits Member States to opt for systems allowing completely open access to power plant construction, that is, no authorization procedures at all, is open to discussion. Finland, for example, has adopted this approach by not requiring authorization for the building of new capacity in its Electricity Market Act (Sa¨hko¨markkinalaki (386/1995)) (with the exception of nuclear plants). The wording of Art. 7(1) – ‘shall adopt’ – signals that Member States are required to adopt authorization procedures, while the rationale behind the provision suggests that open-access regimes are permissible. 715. See further in Part V below.

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The Authorization Procedure for the Construction market, but possibly also as reflecting the transition from central planning to decentralized market-based investments in electricity markets. The extent to which Article 7 of the Electricity Directive may be viewed as an instrument to promote this transition may also be of relevance to the interpretation of the provision. This will be discussed in more detail immediately below in section 15.2. The rationale behind the provision is of particular importance in respect of Member States’ rights to apply the authorization criteria as a means to attain more general energy policy objectives. In the subsequent parts of this chapter, we will first briefly discuss the Member States’ application of authorization criteria from a general perspective in section 15.3. We will then, in section 15.4, turn to the more specific question of the Member States’ rights to promote a desired fuel mix in electricity generation through the adoption of authorization criteria which relate to the nature of the primary energy sources applied. Finally, we will comment more briefly on the facilitation of authorization procedures for investments made in the environmental interest in section 15.5, before section 15.6 concludes. 15.2. 15.2.1.

FACILITATION OF AND BARRIERS TO MARKET ACCESS THE ECONOMIC RATIONALE MARKET ACCESS

FOR THE

PROMOTION

OF

The building of new electricity generation capacity requires the electricity producer in question to obtain market access by receiving the necessary authorization to build and operate the power plant. From a Union perspective, non-discriminatory application of the authorization procedure is important for promoting cross-border establishment and, consequently, market integration. From a more general economic perspective, freedom of establishment is also important for exposing the market to potential competition. This potential competition will, in turn, discipline existing market participants to realize effective market solutions that they would be unlikely to pursue if they knew that barriers to market entry existed for new competitors.716 A barrier to entry can be defined as ‘[l]aws, institutions, or practices which make it difficult or impossible for new firms to enter some markets [. . .]’.717 While authorization requirements and procedures will not, in most cases, render entry to the market impossible, they may complicate market entry. As underlined 716. J. Bjørndalen et al., Markedsbasert kraftomsetning i Norge (1989), 94. This report significantly influenced the subsequent adoption of the Norwegian electricity market reform, see U. Hammer, Tilrettelegging av kraftmarkedet: en studie i reguleringen av nettets koordinerende funksjoner (Oslo: Cappelen, 1999), 26, who considers the report to constitute one of the preparatory works to the Norwegian Energy Act. 717. J. Black, A Dictionary of Economics (Oxford: Oxford University Press, 2002), consulted via Oxford Reference Online.

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Chapter 15 by the definition above, the need to facilitate the functioning and efficiency of the market by exposing it to potential competition does not necessarily mean that market access should be left entirely open and unregulated.718 Two factors have, however, been seen as decisive in economic literature for facilitating the functioning of the market system. First, the rules and procedures for establishment must not be exercised in a manner that discriminates between potential market participants. In the case of the electricity market in particular, established producers should not benefit from any preferential rights to install new electricity generation capacity. Second, regulatory authorities should only take account of technical conditions related to the project in question when assessing applications for authorization, and not restrict market access on the basis of overall energy market considerations.719 The first point raised above, on the need to ensure non-discriminatory access to production, is uncontroversial when viewed from an EU perspective, and there is no doubt that requirements to this effect follow from Article 7 of the Electricity Directive. The second point is arguably more difficult to reconcile with other legitimate energy policy interests and its application at EU level creates particular difficulties with respect to Member State discretion in energy policy decisions. Nevertheless, arguments based on this point are advanced in the general regulatory debate from time to time. The avoidance of lengthy and extensive authorization proceedings is, for example, regularly cited as an important factor in ensuring that investments are not deterred.720 15.2.2.

THE APPROACH

UNDER

EU LAW

Several authors seem to advocate the view that the aim of Article 7 of the Electricity Directive is to promote free market access. Cameron holds that the aim of the provision is: to completely open up investment in, and the construction and operation of, generating capacity to competition. The significance of this lies in the assumption that independent (or at least non-indigenous) generators will play an important part in stimulating competition in future years.721

718. See similarly J. Bjørndalen et al., Markedsbasert kraftomsetning i Norge (1989), 94. See also J. Black, A Dictionary of Economics (Oxford: Oxford University Press, 2002), consulted via Oxford Reference Online, ‘barriers to entry’, where a law which imposes ‘qualifications for licenses for new operators which are so obstructively administered as to make new entry difficult’ is mentioned as an example (emphasis added). 719. J. Bjørndalen et al., Markedsbasert kraftomsetning i Norge (1989), 94. 720. See, for example, International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 123, which states that ‘[s]mooth and transparent approval procedures for new generation plants and transmission lines are central to creating a framework that allows for adequate, timely and efficient investment’. 721. P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 132–133.

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The Authorization Procedure for the Construction In his opinion, the Directive restricts the procedures available to the Member States to authorization procedures in order to achieve this aim.722 Jones argues along the same lines, emphasizing that the choice of authorization procedures as the normal type of process for obtaining permission to install new generation capacity is a fundamental change, entailing, in principle, that the market is left to ensure that supply meets demand.723 In his opinion, the underlying objective of authorization procedures is to ensure that new competitors have the freedom to enter the market, with such freedom only limited by authorization criteria imposed to meet essential public service objectives.724 The views on the aim of Article 7 submitted by the authors mentioned above are in some contrast to the background to the provision as it is described in EU documents. The preamble to the Electricity Directive does not explicitly elaborate on the rationale behind the present regulatory approach, by which the principal procedure is that of authorization.725 The only mention of this matter in the preamble is to the effect that nearly all Member States have already chosen to ensure competition in the electricity generation market through the adoption of transparent authorization procedures.726 This is in line with the approach of the Commission in its initial proposal for a Directive replacing the first Electricity Directive. The proposal justified restrictions on the use of tendering procedures by referring to the need to update the first Directive, since certain provisions and options contained in the Directive had either become redundant or had not been taken up by Member States.727 The only reference to the objective of market facilitation in the proposal was to the effect that the tendering option under the first Directive was ‘generally accepted to be less likely to lead to the development of competitive markets than those [options] actually implemented [i.e., the authorisation procedure]’.728 There is little doubt that the requirement for Member States to apply authorization procedures as the principal instruments for attracting new investments signifies the adoption of a market-based approach to generation investments. A more difficult question concerns the extent to which Article 7 of the Electricity Directive seeks to guarantee market access for new entrants by restricting the Member States’ margin of appreciation in adopting authorization criteria.

722. Ibid. 723. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 14. 724. Ibid.,17. 725. With the possible exception of para. 57 of the preamble, which touches on the issue by emphasizing that ‘Promoting fair competition and easy access for different suppliers and fostering capacity for new electricity generation should be of the utmost importance for Member States in order to allow consumers to take full advantage of the opportunities of a liberalized internal market in electricity.’ 726. Paragraph 43 of the preamble to the Electricity Directive. 727. Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 34. 728. Ibid., 39.

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Chapter 15 Such underlying policy objectives, which seem to be asserted by Cameron and Jones, are at best significantly under-communicated by EU documents. The adoption of EU measures on the basis of aims relating to economic efficiency is not inconsistent with the economic objectives of the Treaties. On the other hand, measures adopted on the basis of current Article 114 TFEU, such as the provisions of the Electricity Directive, must genuinely have as their object the improvement of the conditions for the establishment and functioning of the internal market.729 Arguably, the widespread application of tendering procedures might potentially give rise to greater risks of discrimination in favour of incumbent electricity producers than application of authorization procedures. When applying tendering procedures, Member States might be encouraged to priorities large-scale projects where the financial and technical resources of incumbents would put them at a competitive advantage compared to new market entrants.730 Consequently, the regulation of market access also potentially affects internal market trade and competition, which means the question of whether the EU measures are beyond the competences conferred by Article 114 TFEU is not likely to arise. Nevertheless, the limits of the competences on which Article 7 is based are, in this author’s opinion, also of relevance for the understanding of the provision’s objective and, ultimately, its interpretation.731 Since the provision is based on Article 114 TFEU, its primary objective must be to ensure new market entrants the right to invest in new electricity generation capacity on the same terms as established market participants in order to avoid restrictions on intra-Union establishment and appreciable distortions of competition. The objective of promoting market efficiency as such, on the other hand, can only amount to an ancillary or secondary objective for measures legitimately adopted on the basis of Article 114 TFEU.732 15.2.3.

DISCOURSE: IS AN OPEN MARKET RATIONALE REALISTIC IN THE ELECTRICITY SECTOR?

The view that regulatory authorities should not restrict market access on the basis of overall energy market considerations has some merit from the perspective of 729. See further in Ch. 11.2.2 above. 730. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 15. 731. See along these lines the statements of the Court of Justice in Case 218/82, Commission v. Council, [1983] ECR 4063, para. 15; joined Cases 201/85 and 202/85, Marthe Klensch and Others v. Secre´taire d’E´tat a` l’Agriculture et a` la Viticulture, [1986] ECR 3477, paras 20–24; and Case C-305/05, Ordre des barreaux francophones et germanophone and Others v. Conseil des ministres, [2007] ECR I-5305 (Grand Chamber), para. 28. 732. This follows on logically from the requirement that measures pursuing a dual purpose must be based on the legal basis required by the main or predominant purpose or component, provided that it can be identified, see, inter alia, Case C-211/01, Commission v. Council, [2003] ECR I-8913, para. 39 and Case C-338/01, Commission v. Council, [2004] ECR I-4829, para. 55.

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The Authorization Procedure for the Construction promoting economic efficiency in the electricity market. Whether it is realistic to assume that the barriers to market entry created by extensive authorization procedures can ever be avoided in the electricity sector is a different matter. At a general level, it is important to acknowledge that decisions relating to the construction of power plants will very often be subject to justifiable public controversy, locally and/or regionally. Apart from concerns about global climate change, new generation facilities may also raise local environmental concerns. The construction of wind turbines may raise concerns about damage to the landscape or loss of grazing, as well as the risks posed to birds, or simply the ‘optical pollution’ suffered by neighbouring inhabitants who may lose their views. Concerns about the risk of accidents and their effect on public security and health may also arise, for example with respect to the building of nuclear power plants. Apart from such legitimate local public concerns, as well as the general ‘not in my back yard’ syndrome often associated with the siting of power plants, the technical characteristics of the electricity system must also be taken into consideration. New electricity generation plants have to be sited and designed to fit with the existing electricity transportation system with respect to existing transportation capacity and the supply-demand balance in different areas of the system. The public concerns described above will often give rise to rapidly changing authorization criteria and lengthy authorization procedures involving comprehensive rounds of public consultation and appeals. Although such processes are liable to delay, and possibly deter, market-based investments, it is also important to acknowledge that the careful review of investment proposals, including hearing rounds and, quite possibly, appeal procedures, is fundamental to the democratic process when dealing with building projects of the size and with the environmental impact associated with large-scale power production.733 Arguably, these barriers to entry may be reduced to some extent by streamlining authorization procedures.734 It is, however, in this author’s view unrealistic to assume that the barriers to entry represented by authorization procedures will ever be reduced significantly for new market participants.735

733. The need for public participation in the decision-making process is also clearly recognized and required by the new IPPC Directive, Directive 2008/1/EC of the European Parliament and of the Council of 15 Jan. 2008 concerning integrated pollution prevention and control, OJ L24/8, 29.1.2008, see Arts 15, 16 and Annex V. 734. See Commission Communication: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005, 12–14 and Annex 6 for an overview of administrative barriers identified in EU Member States as well as the Commission’s recommendations on how to reduce those barriers. 735. Consequently, this author is not convinced by claims that investments in liberalized markets will, in practice, always be ‘made ‘‘just in time’’, that is when there is a real need’, in part since these assertions seem to be based on an unrealistic presumption that there are smooth and transparent authorization procedures, see for example International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/IEA, 2005), 122. Similar concerns are raised by A.V. Gheorghe et al., Critical Infrastructures at Risk. Securing the European Electric Power System (Dordrecht: Springer, 2006), xiv.

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Chapter 15 15.3.

THE PROCEDURE UNDER ARTICLE 7 OF THE DIRECTIVE

Article 7(1) of the Electricity Directive sets forth the general requirement that Member States shall adopt an authorization procedure for the construction of new generating capacity which shall be conducted in accordance with objective, transparent and non-discriminatory criteria. Article 7(2) requires Member States to lay down the criteria for the granting of authorizations and sets forth a list of considerations which shall be considered in the determination of these criteria. The latter provision raises two particular questions of interpretation which will be dealt with in the following: (i) does the provision contain an exhaustive list of criteria on which the Member States may rely; and (ii) are Member States required to grant authorizations to entities which fulfil the chosen criteria? Article 7(2) explicitly permits Member States to lay down authorization criteria relating to the security of the electricity system, the protection of public health, environmental protection, land use and siting, the use of public ground, energy efficiency, the nature of the primary energy fuels applied, characteristics particular to the applicant, compliance with other public service obligations, as well as the contribution to meeting EU renewables targets and in reducing emissions. The wording of the provision – that ‘Member States shall consider’ – seems to indicate that the list of criteria is intended to be exhaustive.736 The preamble to the Directive does not provide any further interpretative guidance. In this author’s opinion, although the wording of the provision does not provide a clear answer, it does give some support to an interpretation of the list as being exhaustive. Moreover, reading the provision as containing a non-exhaustive list would reduce its effect to that of a measure including a number of minimum criteria to be considered, which would make it somehow less suited to pursuing the measure’s internal market objectives. From this perspective, the provision could have been more clearly worded if the intention were for the list to be non-exhaustive.737 Finally, the aims of the provision also support the interpretation that the list of criteria is exhaustive. The principal objective of the provision, the avoidance of restrictions on intra-Union establishment and appreciable distortions of competition, is likely to 736. The wording of the provision at this point is to some extent stricter than the corresponding wording in Electricity Directive 2003/54/EC, which set forth that ‘[t]hese criteria may relate to’. There were different views among authors on whether the wording of Directive 2003/54/ EC indicated an exhaustive list of criteria or not. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 16, concludes that the list of criteria is exhaustive without discussing the matter in more detail. The opposite solution is advocated by E.D. Cross et al., ‘EU Energy Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 348, who concludes that the list of criteria is nonexhaustive, also without discussing the matter further. 737. Article 5(2) of the Security of Electricity Supply Directive provides a good example in this respect by setting forth that ‘Member States may also take additional measures, including but not limited to the following [. . .]’.

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The Authorization Procedure for the Construction be pursued more effectively by requiring some harmonization of national authorization criteria. Such harmonization assists in levelling out the differences in authorization procedures between Member States and may consequently facilitate market entry and cross-border establishment. The ancillary objective of ensuring economic efficiency also supports this interpretation, since the presence of more diverse authorization criteria would be likely to lead to more comprehensive restrictions on market access, which in turn would reduce the potential for competition. Consequently, the criteria listed in Article 7(2) of the Directive must, in this author’s opinion, be read as providing an exhaustive list of considerations to which the authorization criteria laid down by Member States may relate. This means that the Member States are not permitted to lay down criteria relating to other considerations, such as, for example, a criterion requiring the applicant to demonstrate the existence of sufficient demand.738 Another, and in practice perhaps more important, example would be a criterion relating to local employment conditions, which are not included in Article 7(2). Nonetheless, the list of criteria offered by the provision is sufficiently broad to allow Member States to take into consideration a wide range of energy policy issues, including questions relating to environmental protection and the choice of energy mix.739 The next question that arises is whether Member States are required to grant authorizations to entities which fulfil the authorization criteria laid down in accordance with the exhaustive list in Article 7(2) of the Directive. The wording of Article 7 is not clear on this point. Article 7(2) only requires Member States to set forth authorization criteria. Article 7(4) requires that these criteria shall be made public, that an applicant shall be informed of the reasons – which must be objective, non-discriminatory, well founded and duly substantiated – for any refusal to grant a permit and, finally, that appeal procedures shall be available. The requirement that the grounds for refusing authorization must be objective, non-discriminatory and well-founded, viewed in tandem with the transparency requirement in Article 7(1) and the requirement to lay down authorization criteria in advance in Article 7(2), must be interpreted as prohibiting refusals on the basis of other considerations than those included in the pre-published authorization

738. P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 133. 739. Requirements relating to the public ownership of energy resources raise some particular questions with respect to the application of Art. 7, since the Directive in general does not address the issue of private versus public ownership. This approach corresponds with the general view that systems of property ownership are a matter for each Member State in ¨ steraccordance with current Art. 345 TFEU, see Case C-302/97, Klaus Konle v. Republik O reich, [1999] ECR I-3099, para. 38. The absence of ownership criteria in the list contained in Art. 7(2) of the Directive therefore does not necessarily mean that Member States are prohibited from taking ownership considerations into account under Art. 7, provided that the other fundamental requirements of the provision are respected. In this author’s opinion, Art. 7 of the Directive cannot therefore be read as prohibiting the right of Member States to require, for example, that the exploitation of energy resources for electricity production can only be carried out by publicly owned entities.

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Chapter 15 criteria.740 A more difficult question concerns the level of detail with which the authorization criteria must be laid down in advance and what margin of discretion Member States may retain in their subsequent assessment of whether the criteria are fulfilled in each specific case. Commenting on the corresponding provision in Article 6 of Electricity Directive 2003/54/EC, Jones and Cameron are both of the opinion that applications that fit the pre-published authorization criteria must be approved, which means that any undertaking fulfilling the criteria must be entitled to build and operate electricity generation capacity.741 However, this absolute view tends to conceal the fact that it can be a very challenging – and in some cases even an impossible – task to set out detailed criteria which require no further assessment during an individual authorization procedure. Some of the criteria listed in Article 7(2) can clearly be established in advance in a detailed and unequivocal manner. For example, it may be possible to establish standards for the protection of public health, energy efficiency requirements and conditions relating to the applicant’s technical and financial capabilities in a manner that allows the relevant authorities merely to ascertain whether or not the conditions are fulfilled, without leaving those authorities with any further margin of discretion. Other criteria, such as those relating to land use and siting, may be more difficult to establish in detail in advance. Many Member States have extensive legal regimes governing the use of land, often covering land use and making development plans subject to control at several government levels. In many cases, Member States are unlikely to be able to pre-design development plans to a level of detail that would make it possible for the competent regulatory authorities merely to authorize or reject a specific project without exercising some margin of appreciation.742 This would require detailed advance planning of every electricity plant required at every location, which would, in reality, leave little initiative to market participants. Moreover, it is likely to be difficult to make a final decision on criteria such as land use and siting without access to a detailed description of the proposed electricity plant. Considerations such as the size, number and noise level of wind turbines in a wind farm are, for example, not without relevance to the siting decision. These features will have to be considered on the basis of environmental impact assessments, which in many cases cannot be made in the absence of a specific project proposal from a market participant.743 Other authorization criteria 740. P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 133. 741. Ibid., 133 and C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 14. 742. See in this respect the requirement in Art. 7(3) third subparagraph of the Electricity Directive, which sets forth that Member States shall, where appropriate, include the construction of new generating capacity within the scope of land use permit procedures where such particular procedures which applies to major new infrastructure projects in generation capacity have been established. 743. It is also open to question whether a more general approach to the authorization assessment would be in compliance with the Member State obligations under Council Directive 85/337/ EEC of 27 Jun. 1985 on the assessment of the effects of certain public and private projects on

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The Authorization Procedure for the Construction may give rise to similar requirements. It is worth noting that the diverse nature of electricity generation investments – covering a variety of primary energy sources, plant sizes, environmental challenges, locations and so forth – entails a different approach to authorization issues than that applied to exploration and production relating to hydrocarbons. In the latter case, a solution whereby a Member State determines the areas to be made available for petroleum-related activities and then invites applications for prospecting, exploration and production in those areas, can be more easily pursued.744 Consequently, it is, in this author’s opinion, neither possible nor desirable to require Member States to adopt advance authorization criteria at a level of detail which prevents the exercise of any margin of discretion in the subsequent assessment of the merits of each application for a permit. The wording of Article 7 of the Directive does not preclude such assessments, provided the evaluation respects the fundamental requirements set forth in Article 7(1) and (4). Nor can the provision be interpreted as restricting the Member States’ rights to set out conditions for the exercise of the authorized activities in line with the pre-published authorization criteria. The central objective of the procedure is therefore, in this author’s opinion, as expressed correspondingly by the Directive on Services in the Internal Market, that the authorization scheme ‘shall be based on criteria which preclude the competent authorities from exercising their power of assessment in an arbitrary manner’.745 The retention by the the environment, OJ L175/40, 5.7.1985. The Directive also applies to electricity generation investments, see Art. 4 with further reference to Annex I para. 2 and Annex II para. 3 litra (a) and (j) of the Directive. The environmental impact assessment is, in accordance with the Directive, intended to identify, describe and assess ‘in the light of each individual case’ the environmental effects of the project, see Art. 3 (emphasis added). Furthermore, the Directive in general requires Member States to ensure that the relevant authorities, as well as the public, are given the opportunity to express their opinions on the project before it is initiated, see Art. 6. 744. Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons, OJ L164/3, 30.6.1994, see in particular Arts 2 and 3. See also F. Arnesen, Statlig styring og EØS-rettslige skranker. Illustrert ved en studie i EØS-rettens betydning for styringen av norsk petroleumsvirksomhet (Oslo: Universitetsforlaget, 1996), particularly at 85–220, for a detailed analysis of the Directive. 745. Directive 2006/123/EC of the European Parliament and of the Council of 12 Dec. 2006 on services in the internal market, OJ L376/36, 27.12.2006, Art. 10(1) (emphasis added). The electricity sector is not as such excluded from the scope of the Directive, but the general lex specialis provision in Art. 3(1), and the more specific provision in Art. 9(3), in my view mean that Art. 7 of the Electricity Directive prevails over the more general provisions of the Services Directive. It is difficult to see that the Electricity Directive leaves much scope for any complementary application of the provisions of the Services Directive at this point. Moreover, it is open to question whether electricity generation is in any event an activity falling within the scope of the Directive, but this question will not be pursued here, see P. Oliver, Free Movement of Goods in the European Community under Articles 28 to 30 of the EC Treaty, 4th edn (London: Sweet & Maxwell, 2003), 37 with further references to case law on the general distinction between the production of goods and the provision of services/establishment (which is also relevant for the application of the Directive, see Art. 4(1)). Art. 10(1) of the Services Directive is therefore not directly applicable to electricity generation investments, but merely functions as an example in the present context.

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Chapter 15 competent authorities of some margin of appreciation per se during the assessment of specific projects is, on the other hand, not precluded by Article 7 of the Electricity Directive. This means, in turn, that Article 7 does not have direct effect on the relationship between an applicant and a Member State in cases where the provision has been wrongly implemented, since the effective implementation of the provision under national law requires the Member States to exercise some margin of discretion.746 15.4.

THE PRINCIPLE OF NON-DISCRIMINATION AND THE CHOICE OF PRIMARY ENERGY SOURCES

15.4.1.

INTRODUCTION

The general nature of the considerations listed in Article 7(2) of the Directive means that the Member States in general enjoy a wide margin of discretion when determining their authorization criteria, provided those criteria respect the fundamental requirements of objectivity, transparency and non-discrimination set forth in Article 7(1). These latter requirements restrict Member States’ margin of discretion in the shaping of their authorization criteria by establishing a minimum standard. The question to be discussed in this section is whether these fundamental requirements in practice amount to something more than a minimum standard, placing more comprehensive restrictions on the Member States’ discretion to determine their energy policies. In this respect, the scope of the requirement of non-discrimination is of particular interest and will be the focus of the following discussion. The non-discrimination requirement contained in Article 7 is a sector-specific application of the principle of equal treatment, which is a general principle of EU law.747 The application of this principle in EU law has been the subject of 746. It follows from the Court of Justice’s landmark decision in Case 26/62, NV Algemene Transport- en Expeditie Onderneming van Gend & Loos v. Netherlands Inland Revenue Administration, [1963] ECR 1 and subsequent case law that individuals may derive rights directly from Community law. Despite the wording of Art. 288 TFEU, it is also settled case law that this applies to secondary law in the form of Directives, which may have vertical direct effect (i.e., provisions giving individuals a right towards the State), see, inter alia, Case 9/70, Franz Grad v. Finanzamt Traunstein, [1970] ECR 825, paras 5–6, where the Court noted that the question must be assessed on the basis of ‘whether the nature, background and wording of the provision in question [is] capable of producing direct effects in the legal relationship between the addressee of the act and third parties’. This test will only be fulfilled if the measure is clear and unconditional and does not require any further implementation involving a margin of discretion by Member States, see K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 700–701 with further references to case law. See also S. Prechal, Directives in EC Law, 2nd edn (Oxford: Oxford University Press, 2005), 216–270 for a thorough analysis of the doctrine of the direct effect of Directives in general, and in particular at 247–249 on the relationship between Member State discretion and direct effect. 747. Case C-17/03, VEMW, [2005] ECR I-4983, para. 47, and K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 123.

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The Authorization Procedure for the Construction numerous Court cases and has been thoroughly analysed in legal literature.748 The aim of the following analysis is therefore confined to discussing the sectorspecific application of the principle as it is employed in Article 7 of the Electricity Directive. In this respect, the possibility cannot be ruled out that a specific prohibition of discrimination set forth in EU secondary legislation may be subject to specific requirements regarding its interpretation and application compared with the general principle of non-discrimination.749 In the following, we will first make some general remarks about the principle of non-discrimination to provide a background for the understanding of the prohibition in the Electricity Directive. We will then approach the subject from a more specific angle by discussing Member States’ choices regarding primary energy sources in electricity production in order to illustrate the scope of the nondiscrimination requirement. As that analysis will further reveal, the interpretation of the scope of the prohibition is closely connected to the choice of regulatory aims that Article 7 of the Electricity Directive can be stated to pursue. 15.4.2.

A BRIEF INTRODUCTION TO THE SUBSTANCE THE NON-DISCRIMINATION REQUIREMENT

OF

The point of departure for the application of the non-discrimination principle is that the prohibition of discrimination requires that ‘comparable situations must not be treated differently and different situations must not be treated in the same way unless such treatment is objectively justified’.750 It is settled case law that the principle encompasses both overt (direct) and covert (indirect) discrimination.751 For example, authorization criteria that in effect favour some undertakings – typically national 748. See, for example, T. Tridimas, The General Principles of EU Law, 2nd edn (Oxford: Oxford University Press, 2006), 59–135; F. Arnesen, Statlig styring og EØS-rettslige skranker. Illustrert ved en studie i EØS-rettens betydning for styringen av norsk petroleumsvirksomhet (Oslo: Universitetsforlaget, 1996), 87–108, and K. Lenaerts & P. van Nuffel, Constitutional Law of the European Union, 2nd edn (London: Sweet & Maxwell, 2005), 123–138. 749. Opinion of AG Jacobs in Case C-422/02 P, Europe Chemi-Con (Deutschland) GmbH v. Council, [2005] ECR I-791, para. 37. 750. Case 106/83, Sermide SpA v. Cassa Conguaglio Zucchero and Others, [1984] ECR 4209, para. 28 in relation to the prohibition in (now) Art. 40(2) TFEU. It is settled case law that this requirement follows from the general principle of equal treatment, and is not only confined to the area of agricultural policy (which is the subject of Art. 40 TFEU), see Case C-137/00, The Queen v. The Competition Commission, Secretary of State for Trade and Industry and The Director General of Fair Trading, [2003] ECR I-7975, para. 126. For an example of a decision where a similar point of departure has been applied within a different area of Community law, see Case C-106/01, The Queen, on the application of Novartis Pharmaceuticals UK Ltd v. The Licensing Authority Established by the Medicines Act 1968, [2004] ECR I-4403, para. 69 (concerning marketing authorizations for medicinal products). 751. F. Arnesen, Statlig styring og EØS-rettslige skranker. Illustrert ved en studie i EØS-rettens betydning for styringen av norsk petroleumsvirksomhet (Oslo: Universitetsforlaget, 1996), 100–102. For one of numerous examples from case law, see Case C-3/88, Commission v. Italy, [1989] ECR 4035, para. 8 (concerning the freedom of establishment).

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Chapter 15 incumbents – to the detriment of others in a comparable situation – typically new market entrants from other Member States – are prohibited irrespective of whether or not the criteria explicitly provide for differential treatment.752 The passage from case law quoted above illustrates that, in principle, an assessment in relation to non-discrimination falls into two parts: comparability and objective justification, although the Court in practice does not always distinguish clearly between the criteria.753 This means that a measure which, on the face of it, treats comparable situations differently may nevertheless be upheld if the difference in treatment is justified on objective grounds.754 For example, a requirement for new coal or gas plants to have CCS technology installed may benefit the national incumbent if that undertaking is the only market participant to have successfully developed the technology needed for the relevant geographical area. The difference in treatment which this criterion in effect gives rise to between the incumbent and other market participants results, however, from the need to promote environmental objectives. Such a criterion is therefore likely to be deemed objectively justified. In theory, this means that the measure is, as a matter of definition, not discriminatory. In practice, the assessment of objective justification is largely parallel to the assessment of grounds justifying exemption from the free movement provisions.755

752. The non-discrimination requirements set forth in Art. 7(1) and in other provisions of the Electricity Directive address discrimination between undertakings in general, and are not limited to discrimination on the basis of the nationality of the undertakings in question. Thus, the application of the principle does not presuppose the existence of an actual link with free movement between Member States, unlike the application of the non-discrimination principle as it is applied under the fundamental free movement provisions of the Treaty. Recourse to Art. 114 TFEU does not require establishment of such a link in every situation referred to by Community measures adopted on that legal basis, see joined Cases C-465/00, C-138/01 and ¨ sterreichischer Rundfunk, [2003] ECR I-4989, paras 41–42. C-139/01, O 753. See similarly T. Tridimas, The General Principles of EU Law, 2nd edn (Oxford: Oxford University Press, 2006), 78–79 in respect of the application of the principle under current Art. 40(2) TFEU. 754. As held by C. Gulmann & K. Hagel-Sørensen, EU-ret, 3rd edn (København: Jurist- og Økonomforbundets Forlag, 1995),67, at note 6, a definition of non-discrimination that seeks to distinguish between the assessment of comparability on the one hand and the assessment of objective justification on the other can be criticized as illogical. See similarly F. Arnesen, Statlig styring og EØS-rettslige skranker. Illustrert ved en studie i EØS-rettens betydning for styringen av norsk petroleumsvirksomhet (Oslo: Universitetsforlaget, 1996), 88 with reference to C. Gulmann & K. Hagel-Sørensen referred to above. The latter authors are, however, still of the opinion that the definition of the Community Courts serves as a good starting point from a practical and academic point of view, see 67 at note 6 referred to above. 755. See in particular the Court of Justice’s approach to equal treatment requirements in secondary law within the area of free movement of workers and social contributions in Case C-237/94, John O’Flynn v. Adjudication Officer, [1996] ECR I-2617, paras 17–20; Case C-57/96, H. Meints and Minister van Landbouw, Natuurbeheer en Visserij, [1997] ECR I-6689, paras 44–45 and Case C-213/05, Wendy Geven v. Land Nordrhein-Westfalen, [2007] ECR I-6347 (Grand Chamber), para. 18.

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THE CHOICE OF PRIMARY ENERGY SOURCES IN ELECTRICITY GENERATION

15.4.3.1.

The Situation

The Member States’ right to establish authorization criteria relating to the choice of primary energy sources in electricity production is explicitly recognized in Article 7(2)(g) of the Directive. This is an important national prerogative given the potential geopolitical, environmental and economic impact of the Member States’ choices of energy mix. The strategic significance of these decisions serves to explain the general EU consensus that the choice of energy mix should be left to the discretion of each Member State, although, as we have also seen, EU regulation of the matter is not as such beyond the competences conferred on the Union.756 It is evident that Article 7(1) of the Directive prohibits the establishment of criteria which directly or indirectly give rise to a situation where two applicants in the same situation are treated differently with respect to primary energy source requirements.757 A more difficult question is whether the non-discrimination requirement also restricts the Member States’ discretion to alter their primary energy source criteria over time. The energy mix preferences of Member States may change for a number of policy reasons of varying degrees of legitimacy. Scientific evidence on the climate effects of anthropogenic GHG emissions may lead to restrictions or prohibitions on the application of some carbon-based fuel sources, such as coal.758 Correspondingly, energy dependency concerns may, for example, lead to temporary restrictions on the building of new gas plants.759

756. Chapter 11.2.3 above. 757. A recent example in this respect is the Greek legislation scrutinized by the Commission in its decision of 5 Mar. 2008 on the granting or maintaining in force by the Hellenic Republic of rights in favour of Public Power Corporation S.A. (PPC) for the extraction of lignite, Case COMP/B-1/38.700. In essence, the Commission found that the incumbent, PPC, had been granted privileged rights to lignite exploitation, and consequently lignite-based electricity production (lignite is an important electricity fuel source in Greece), through Greek legislation which granted to PPC a general electricity production authorization which also covered future power plant replacements, while other potential market participants were subject to a stricter authorization regime. The Commission found that these measures contravened (now) Arts 102 and 106(1) TFEU by granting and maintaining in force quasi-monopolistic privileged rights for PPC, thereby excluding or hindering market access for potential market entrants. In this author’s opinion, the Greek arrangement would also clearly be contrary to Art. 6 of Electricity Directive 2003/54/EC (Art. 7 of the new Electricity Directive), as it discriminated between market participants, although this provision was not specifically dealt with by the Commission. 758. Article 7(2)(k) of the new Electricity Directive also explicitly recognizes the Member States’ rights to take into account the contribution of generating capacity to reducing emissions. 759. The UK gas moratorium introduced in the late 1990s as a reaction to the growth of natural gas as an energy source in electricity generation, referred to as ‘the dash for gas’, provides an example. The UK government de facto imposed a moratorium on new electricity generation

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Chapter 15 Member States may also possibly impose less absolute, but economically very burdensome, criteria, such as requirements that new coal and gas plants (unlike existing plants) shall be equipped with CCS technology. Research and development may also lead to new requirements regarding best available techniques being imposed in respect of new generation facilities, where such techniques could not possibly be incorporated into plants already in operation without imposing excessive costs.760 Moreover, changing political views on controversial energy policy issues, such as the role of nuclear power production, are likely to lead to the altering of authorization criteria over time.761 On the basis of the corresponding provision in Article 6 of Electricity Directive 2003/54/EC, Jones argues that, under normal circumstances, it is not open to Member States to prescribe which primary energy sources should be applied in the production process by a new electricity generator. He argues in this respect that such an approach would be likely to amount to discrimination, as existing generators would not have been constrained in the same manner, and that such constraints would also be contrary to the underlying objective of the authorization procedure, which in his view is freedom for new competitors to enter markets.762 In essence, the question is whether different treatment accorded to applicants for new electricity generation projects on the one hand and existing electricity generators on the other can amount to a difference in treatment of comparable situations contrary to the prohibition on discrimination. This question will be explored in more detail in the following sections.

from gas, which moratorium was said to have been motivated by the need to ensure energy source diversification and security of supply. Several authors have, however, suggested that the real reasons for the moratorium lay elsewhere, and that the government was primarily concerned with rescuing the UK’s ailing national coal industry and saving coal industry jobs, see C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 18 and the vivid description of the politics of the coal crisis by D. Helm, Energy, the State and the Market – British Energy Policy since 1979 (Oxford: Oxford University Press, 2003), 294–305. See also Gas power stations halted to help coal industry (BBC News, 3.12.1997, author not identified), for a news report on the situation some months prior to the introduction of the moratorium. C. Robinson, ‘The Economics of Energy Security: Is Import Dependence a Problem?’, CRNI 8, no. 4 (2007): 425–451, at 433, at 434–435, also points out that the British preference for indigenous coal resources in fact led to greater energy insecurity rather than energy security. 760. See Directive 2008/1/EC of the European Parliament and of the Council of 15 Jan. 2008 concerning integrated pollution prevention and control, OJ L24/8, 29.1.2008, in particular Art. 13. 761. Changing perceptions in this area are also well illustrated by the changing perceptions at Community level over the years, from the focus on restricting oil consumption during the 1970s and 1980s, to the concerns about external gas dependency and, finally, to the focus on restricting the use of carbon sources in general in the environmental interest, see further above in Ch. 4. 762. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 17.

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The VEMW Decision

The Court of Justice’s decisions in VEMW763 and, to a lesser extent, AEM764 provide some guidance as to the interpretation of the non-discrimination principle as it is applied in the Electricity Directive. In VEMW, the question of preferential access to cross-border electricity networks in accordance with the first Electricity Directive765 was scrutinized by the Court of Justice. The case concerned preferential cross-border transportation capacity rights conferred by the Dutch regulator so that an undertaking would be able to fulfil its long-term electricity supply contracts concluded prior to the adoption of the Directive.766 The three long-term supply contracts in question were entered into by the former Samenwerkende Elektriciteits Produktiebedrijven NV (SEP) in 1989 and 1990 to fulfil the statutory public service tasks of ensuring the reliable and efficient public distribution of electricity at reasonable cost. The SEP also operated the highvoltage electricity grid at the time. Following the adoption of the former Electricity Directive in Dutch law in 1999, the SEP transferred the operation of the highvoltage grid to the now state-owned TenneT BV, which was obliged to ensure the reliability and security of the electricity system, as well as non-discriminatory access to the network. The rights of the SEP were assumed by Nederlands Elektriciteit Aministratiekantoor BV (NEA) in 2001. The supply contracts, which were concluded with EDF, PreussenElektra and Vereinigte Elektrizita¨tswerke Westfalen, expired in 2009, 2005 and 2003 respectively. In order for the SEP (and NEA, from 2001) to fulfil the supply contracts following the market reform, the undertaking’s transportation capacity rights were secured by the Dutch regulator DTE in its system code for 2000 and through a Dutch transitional law for subsequent years. These preferential capacity rights restricted the capacity available for cross-border electricity transmission, although

763. Case C-17/03, VEMW, [2005] ECR I-4983 (judgment of the Full Court). This landmark case has received wide attention and been commented upon by several academics, see the case note of L. Hancher, ‘Case C-17/03, VEMW, APX en Eneco N.v. v. DTE, Judgment of the Full Court of 7 June 2005, nyr’ (case note), CMLR 43 (2006): 1125–1144; K. Talus, ‘First Interpretation of Energy Market Directives by the European Court of Justice – Case C-17/03, Vereniging voor Energie’, JENRL 24, no. 1 (2006): 39–52 and A.-K. Nesdam, Det indre transportmarkedet – en analyse av virkemiddelbruken i den fellesskapsrettslige energimarkedslovgivningen (Doctoral Thesis, University of Oslo, 2007), 208–231. See also Commission staff working document on the decision Case C-17/03 of 7 Jun. 2005 of the Court of Justice of the European Communities: Preferential Access to Transport Networks under the Electricity and Gas Internal Market Directives, 26.4.2006, SEC (2006) 547. 764. Joined Cases C-128/03 and C-129/03, AEM, [2005] ECR I-2861. 765. Directive 96/92/EC. 766. See Case C-17/03, VEMW, [2005] ECR I-4983, paras 11–31 and L. Hancher, ‘Case C-17/03, VEMW, APX en Eneco N.v. v. DTE, Judgment of the Full Court of 7 June 2005, nyr’ (case note), CMLR 43 (2006): 1125–1144, at 1125–1128 for an overview of the background to the case and the national legislation at issue, as briefly recounted below. See also 1128–1130 of the latter article for an overview of AG Stix Hackl’s opinion to the Court, which will not be further discussed in the following.

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Chapter 15 they did not take up all international transmission capacity. Three Dutch undertakings initially lodged an administrative objection regarding the preferential rights adopted in the system code. This objection was dismissed by the DTE. The DTE acknowledged that the preferential rights did seriously restrict the possibilities for importing electricity and thereby restricted trade in electricity for other market operators.767 The DTE, however, justified the dismissal on the basis of the fact that the supply contracts had been concluded in order to fulfil services of general economic interests at the time, and that interrupting the still valid contracts would amount to unacceptable interference with the legal certainty of the contracting parties and cause a significant financial loss.768 The claimants appealed the decision of the DTE to the College van Beroep voor het Bedrijftsleven, which referred questions regarding compatibility with (current) Article 106 TFEU and the first Electricity Directive to the Court of Justice for a preliminary ruling. The Court analysed the preferential capacity rights in the system code and the transitional law in accordance with Articles 7(5) and 16 of the first Electricity Directive, which required non-discriminatory conduct by system operators and Member States, respectively.769 Having established that those provisions were not limited to technical rules, the Court moved on to point out, with reference to previous case law, that ‘the provisions of the Directive, which require that the action of the system operator and that of the State in creating access to the system should not be discriminatory, are specific expressions of the general principle of equality’770 It then reiterated that the prohibition of discrimination, as one of the fundamental principles of EU law, requires comparable situations not to be treated differently unless such difference in treatment is objectively justified.771 The Court found that the preferential access granted to SEP and later NEA did amount to differential treatment of system users.772 The fact that the SEP was the owner of the network at the time the supply contracts were entered into and the fact that the contracts had been concluded in order to perform public service obligations existing at the time were not sufficient to alter this view.773 The difference in treatment therefore had to be justified in the light of the Directive if it were to be upheld.774 In this respect, the Court focused in particular on the existence of the exemption provided in Article 24 of the first Electricity Directive. This provision opened up the possibility that Member States could apply for permission to operate 767. Case C-17/03, VEMW, [2005] ECR I-4983, para. 28. 768. Ibid., para. 29. 769. Article 7(5) provided that the system operator ‘shall not discriminate between system users or classes of system users, particularly in favour of its subsidiaries or shareholders’, while Art. 16 provided that national authorities could choose between a negotiated or regulated access regime to be operated ‘in accordance with objective, transparent and non-discriminatory criteria’. 770. Case C-17/03, VEMW, [2005] ECR I-4983, para. 47. 771. Ibid., para. 48. 772. Ibid., paras 49–50. 773. Ibid., paras 51–53. 774. Ibid., para. 54.

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The Authorization Procedure for the Construction a time-limited transitional regime in order to overcome difficulties caused by conflicts between market opening requirements and pre-liberalization commitments. As the Dutch government had not made such an application within the given time limits, the Court found that the Netherlands could not rely on any exemption from the prohibition of discrimination.775 The preferential treatment was therefore precluded by the Directive, irrespective of whether the measures derived from the system operator, the controller of system management or the legislature.776 The general statements in VEMW on the scope of the non-discrimination requirement do not provide much new insight into the sector-specific application of the principle under the Electricity Directive. The same holds true of the Court’s approach in AEM, where it was also noted in very general terms that Articles 7 and 16 of the first Electricity Directive ‘like the general principle of non-discrimination of which they are specific applications, preclude different treatment of comparable situations and like treatment of different situations’.777 The question which arises is therefore whether the particular merits of the case may provide some further guidance as to the understanding of the sector-specific application of the principle.778 15.4.3.3.

The Comparability of Authorization Procedures at Different Points in Time

The applicability of the prohibition on discrimination to authorization criteria that alter over time will depend on whether the situations at different points in time are comparable, even though the situations to be compared may vary considerably. At one end of the scale, existing electricity generation may be based on investments carried out prior to any market liberalization at national or Union level, perhaps even prior to the adoption of the former EC Treaty by the Member State in 775. 776. 777. 778.

Ibid., paras 54–71. Ibid., para. 2 of the Court’s conclusion. Joined Cases C-128/03 and C-129/03, AEM, [2005] ECR I-2861, para. 58. One could ask whether the Court’s reference to the general principle of equality in Case C-17/03, VEMW, [2005] ECR I-4983 indicates any difference in substance from the reference to the general principle of non-discrimination in Joined Cases C-128/03 and C-129/03, AEM, [2005] ECR I-2861. Some authors appear to draw a distinction between the concepts of nondiscrimination and equality, see T. Tridimas, The General Principles of EU Law, 2nd edn (Oxford: Oxford University Press, 2006), 64 with further references. The latter approach is, however, not followed by the Court. In Case C-422/02 P, Europe Chemi-Con (Deutschland) GmbH v. Council, [2005] ECR I-791 (concerning anti-dumping), para. 33, the Court held that the principles of equal treatment and non-discrimination ‘are simply two labels for a single general principle of Community law, which prohibits both treating similar situations differently and treating different situations in the same way unless there are objective reasons for such treatment’. Similar statements have been made by the Court with respect to other areas of Community law than anti-dumping, see for example Case C-442/00, A´ngel Rodrı´guez Caballero v. Fondo de Garantı´a Salarial (Fogasa), [2002] ECR I-11915, para. 32 (concerning social policy and the protection of employees).

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Chapter 15 question. At the other end of the scale are situations where some existing generators may recently have been granted authorizations under a regime open to competition, but subject to liberal energy mix criteria which have later been restricted to the detriment of new applicants. It is evident that the situation with regard to pre-liberalization investments is not comparable with the situation concerning present authorization procedures. The comparability of the latter, more recent, situations is at least open to discussion. Although the Electricity Directive provisions under scrutiny in VEMW and AEM related to access to the electricity grid, rather than access to the construction of new electricity generation capacity, the question relating to the scope of the nondiscrimination principle in these two situations in terms of market access is in general terms comparable. In both situations the question concerns the scope of the principle in the light of the granting of access to the electricity market, either indirectly through the granting of access to the grid for undertakings already involved in electricity generation or directly by allowing undertakings access to compete on the electricity market through gaining authorization to build new generation capacity. In VEMW the Court ruled that transportation capacity rights established under a different legal regime and coupled with delivery obligations were comparable with transportation capacity rights acquired under the present regime where competition had been introduced. In principle, one might argue along the same lines in respect of the granting of authorizations to build electricity generation facilities. Viewed from the perspective of a market participant, stricter conditions relating to authorizations for the building of generation facilities will tend to have a more negative effect on the competitive situation of new entrants compared to the existing generators, who will have based their activities on less strict authorizations granted under a different legal regime. On the other hand, there are also, in this author’s view, fundamental differences between the transportation rights discussed in VEMW and the rights to construct electricity generation capacity. The question in VEMW was in essence whether a market participant in the future should be able to rely on grandfathered priority rights that no longer complied with the present regulatory regime and where the justification for such priority rights had ceased to exist.779 The objective justification in VEMW related to the public service obligations of SEP under the pre-competitive regulatory regime. Although the long-term electricity contracts entered into by SEP at that time were still valid, the nature of these contracts as a vehicle for performing public service obligations had changed. The question of comparability arises in a different context in respect of authorizations for the 779. Hence, although not explicitly stated by the Court, the result in Case C-17/03, VEMW, [2005] ECR I-4983 could in part also be explained by the fact that a difference in treatment will no longer be justified where the objective justification ceases to exist, see T. Tridimas, The General Principles of EU Law, 2nd edn (Oxford: Oxford University Press, 2006), 84 (who argues in favour of this view on a general basis, without reference to the Court’s decision in VEMW).

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The Authorization Procedure for the Construction building of new electricity generation capacity. The question is not whether existing generators should be required to adapt to new authorization criteria, which in many cases would be impossible, but whether future investors should be able to rely on criteria identical to those historically provided to existing market participants. A positive answer to that question would necessitate an intense EU review of Member States’ decisions to adapt their regulatory frameworks in order to meet new challenges of a technical, environmental and political nature, since the changes would have to be objectively justified under the non-discrimination principle. The Court’s decision in Germany v. Council, which is also explicitly referred to in VEMW, provides some support for the view that situations arising at different points in time under different prevailing market conditions are not comparable.780 One of the questions which came before the Court in that case was whether a Council Regulation which introduced a tariff quota for the import of third-country bananas was contrary to the prohibition on discrimination in current Article 40(2) TFEU (former Article 34(2) EC).781 Prior to the adoption of the Council Regulation, there were two categories of banana traders within the Community. On the one hand, there were traders operating in banana-producing Member States protected from third-country imports, except for traditional imports of bananas from ACP countries in accordance with the Fourth Lome´ Convention. These traders were able to sell Community-produced bananas and traditional ACP bananas at higher prices than those which would have been possible in an open market. On the other hand, there were traders operating in markets in nonproducing Member States who were able freely to obtain third-country bananas and sell them at market prices below the prices prevailing in protected markets. The common tariff quota allowed traders in previously protected markets to gain an advantage through being able to import specified quantities of third-country bananas, while traders in previously open markets had limits imposed on their previously unrestricted import possibilities. The question before the Court was therefore whether the Regulation’s different effects on different traders amounted to discrimination contrary to the second subparagraph of Article 40(2) TFEU. The Court found that the situations of the different categories of banana traders before the Regulation was adopted were not comparable.782 The two categories of traders had been affected differently by the quota scheme, but this difference was viewed as being ‘inherent in the objective of integrating previously compartmentalized markets, bearing in mind the different situations of the various categories of economic operators before the establishment of the common organization of the 780. Case C-280/93, Germany v. Council, [1994] ECR I-4973. 781. Article 40 TFEU sets forth that a common organization of agricultural markets shall be established in order to attain the common agricultural policy objectives enshrined in Art. 39 TFEU. The second subparagraph of Art. 40(2) TFEU provides that the common organization shall be limited to the pursuit of the objectives set forth in Art. 39, and ‘shall exclude any discrimination between producers or consumers within the Union’. 782. Case C-280/93, Germany v. Council, [1994] ECR I-4973, para. 72.

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Chapter 15 market’.783 The contention as to the breach of the non-discrimination principle was therefore rejected.784 The Court’s reasoning with respect to the different situations of the various market participants before the common organization of the market could be applied correspondingly to the situation under Article 7 of the Electricity Directive. Arguably, the reasoning of the Court on the principle of equality as applied to EU measures may differ from the approach applied in the evaluation of national measures. As pointed out by Tridimas, the Court may be observed to focus more on the objectives of EU measures at issue, while focusing more on the effects of national measures that affect the fundamental Treaty freedoms, since the principle of equality also functions as an instrument of integration.785 Nevertheless, it is difficult to see how authorizations granted at different times and under legal regimes that may differ fundamentally can be viewed as constituting comparable situations, even given the application of a wide understanding of the non-discrimination principle as a means of integration.786 An even wider interpretation could only be justified if it were possible to view the prohibition as a means of promoting economic efficiency by ensuring market access. In this author’s opinion, however, this cannot be attributed to be the primary objective of the provision.787 In this author’s opinion, assessments made under authorization procedures at different points of time, and which are therefore based on different authorization criteria due to regulatory dynamics, are as a matter of principle not comparable within the meaning of the non-discrimination principle. Although the Court of Justice has made the non-discrimination principle subject to a wide interpretation, this author submits that the EU concept of equality is essentially intended to prevent arbitrary discrimination.788 In this respect, one of the primary aims of any 783. Ibid., paras 73–74. 784. Ibid., para. 75. 785. T. Tridimas, The General Principles of EU Law, 2nd edn (Oxford: Oxford University Press, 2006), 76. 786. The Court of Justice’s decision in Case C-106/01, The Queen, on the application of Novartis Pharmaceuticals UK Ltd v. The Licensing Authority established by the Medicines Act 1968, [2004] ECR I-4403, paras 68–72 also provides some support for this view. One of the questions before the Court was whether the UK had acted in breach of the principle of nondiscrimination as codified in the now repealed Council Directive 65/65/EEC of 26 Jan. 1965 on the approximation of provisions laid down by Law, Regulation or Administrative Action relating to proprietary medicinal products, OJ 22/369, 9.2.1965. The Court concluded that the UK had not breached the principle of non-discrimination by requiring extensive product data as a precondition for the granting of a marketing authorization for one medicinal product, and, having established that the product was safe, not requiring the same product data for the subsequent authorization of another product with the same characteristics. According to the Court, the situation of the two products was not comparable, since the authorities were already assured of the safety and efficacy of the latter product when its authorization was applied for, because of the controls carried out in respect of the former product, see para. 70. 787. Section 15.2.2 above. 788. See similarly M. Herdegen, ‘The Relation between the Principles of Equality and Proportionality’, CMLR (1985): 683–696, in particular at 684–685, and F. Arnesen, Statlig styring og EØS-rettslige skranker. Illustrert ved en studie i EØS-rettens betydning for styringen av norsk petroleumsvirksomhet (Oslo: Universitetsforlaget, 1996), 100.

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The Authorization Procedure for the Construction authorization procedure which requires the ex ante establishment of objective, transparent and non-discriminatory criteria is to avoid the exercise of the national authorities’ discretion in order to ensure that it is not used arbitrarily.789 Consequently, the prohibition on discrimination in Article 7 of the Electricity Directive imposes a strict requirement on Member States to ensure equality between market participants in comparable situations, but it cannot be interpreted as restricting the Member States’ rights to alter their authorization criteria over time. The above conclusion means that it is unnecessary to assess whether a difference in treatment is objectively justified in order to conclude whether an amendment of authorization criteria per se is non-discriminatory.790 Consequently, Article 7 of the Electricity Directive does not require a Member State to substantiate why it is seeking to achieve a given energy mix through the setting of authorization criteria. Neither does it require the Member State to substantiate that its choice of authorization criteria offers the least restrictive approach to trade and competition reasonably possible to achieve its underlying objectives. Accordingly, the differences when relying on security of supply and environmental objectives as justification grounds under the free movement provisions of the Treaty, as discussed in Part III above, do not apply correspondingly under Article 7 of the Electricity Directive.791 15.5.

FACILITATION OF RENEWABLE ENERGY SOURCES AND COGENERATION IN THE ENVIRONMENTAL INTEREST

Although the Member States enjoy a wide margin of discretion in determining their authorization criteria, some brief reservations should be made regarding the conclusion advanced above. Article 7(3) of the Electricity Directive requires Member States to ensure that authorization procedures exist for small and/or distributed 789. See similarly the reasoning of the Court of Justice in Case C-205/99, Asociacio´n Profesional de Empresas Navieras de Lı´neas Regulares (Analir) and Others v. Administracio´n General del Estado, [2001] ECR I-1271, paras 37–38. See also Proposal for a Directive of the European Parliament and of the Council on the use of energy from renewable sources, COM (2008) 19 final, 23.1.2008, 28 for an example of an authorization procedure proposal (for the transfer of guarantees of origin) which explicitly states that a ‘system of prior authorization shall not constitute a means of arbitrary discrimination’ (proposal for Art. 9(2) last subparagraph). G. Napolitano, ‘Towards a European Legal Order for Services of General Economic Interest’, European Public Law 11, no. 4 (2005): 565–581, at 570, on the other hand, appears to emphasize a more general development towards the position that authorizations may not be made subject to discretionary evaluations as such. 790. The opposite solution is advocated by C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 17–18, who argues that Member State constraints on the primary energy sources permitted in electricity generation are only compatible with Electricity Directive 2003/54/EC if the measures in question are proportionate to the objectives whose attainment is being sought and represent the least restrictive approach to trade and competition reasonably possible for the achievement of those objectives. 791. Chapter 9.8 above.

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Chapter 15 generation which take into account such plants’ limited size and potential impact.792 The reasoning behind this requirement is that the authorization procedure should not create an administrative burden disproportionate to the size and potential impact of electricity producers.793 Excessively burdensome procedures are likely to increase both project uncertainty and investment planning costs for potential new generators and these are particularly likely to affect the execution of smaller projects. Since small and/or distributed generation is typically based on renewable energy sources or cogeneration technology, the provision is primarily intended to facilitate investments in the environmental interest. The facilitation of these latter categories of investments is further addressed by Article 13 of the RES Directive and, to a more limited extent, by Article 9 of the Cogeneration Directive. The former provision requires Member States to ensure that authorization procedures in place for renewable energy projects are necessary and proportional, and sets forth a number of requirements in this respect. The latter provision provides that Member States shall seek to streamline their authorization procedures in order to promote high-efficiency cogeneration. In addition to the fact that the projects in question, in particular renewable energy projects, are often of a relatively small size, such projects may also be disadvantaged by the fact that national authorization procedures were originally adopted to deal with conventional, largescale power plant investments.794 The provisions therefore aim to take into account the specific structures of the renewable energy and cogeneration sectors in reviewing of national authorization procedures.795 Consequently, based on an understanding of the non-discrimination principle as requiring that comparable situations must not be treated differently and different situations must not be treated in the same way (unless objectively justified), it is possible to argue that these provisions merely ensure nondiscrimination. Since the renewable energy and cogeneration sectors on the one hand and conventional electricity production on the other raise different investment challenges, they arguably amount to different situations which should not necessarily be subject to the same authorization requirements. Nevertheless, these provisions may also to some extent be applied as a basis for requiring Member States to adapt their authorization procedures and criteria to a greater extent than that required by the prohibition on discrimination. 15.6.

CONCLUSIONS

We commenced this chapter by emphasizing that the rationale behind the promotion of the freedom of establishment for electricity producers as set forth in 792. ‘Distributed generation’ means electricity generation plants which, typically due to their limited capacity, are connected directly to the distribution system, see also the definition in Art. 2(31) of the Electricity Directive. 793. Paragraph 31 of the preamble to the Electricity Directive. 794. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 52. 795. Paragraph 41 of the preamble to the RES Directive and para. 29 of the preamble to the Cogeneration Directive, respectively.

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The Authorization Procedure for the Construction Article 7 of the Electricity Directive can essentially be understood in two ways. From a traditional internal market perspective, the provision may be perceived as an instrument for excluding arbitrary discrimination from Member State decisions to grant authorizations to electricity producers for the construction of new generation capacity. If, on the other hand, one chooses to see the provision as a reflection of the need to promote economic efficiency, the rationale appears to be more generally to ensure potential competition by promoting free market access for new entrants as far as possible. Viewed in relation to the fundamental objectives of the Treaties, the aim of an EU measure may well be to promote economic efficiency. At the same time, recourse to Article 114 TFEU as the legal basis for the adoption of the provision requires it genuinely to have as its object the improvement of the conditions for the establishment and functioning of the internal market by ensuring the freedom of establishment or eliminating appreciable distortions of competition. Since the promotion of the functioning of the internal market is clearly one of the objectives of Article 7 of the Directive, the provision does not go beyond the competence conferred on the EU. Nevertheless, the nature of the provision as an internal market measure also suggests that it should primarily be regarded as an instrument for ensuring intra-Union freedom of establishment and the elimination of distortions to competition, and not as a means for promoting economic efficiency per se. This approach also has some support in the preamble to the Directive and, although this is of less legal significance, in the original proposal for a Directive 2003/54/EC, which does not indicate any fundamental change of approach from the first Electricity Directive. The different possible understandings of the rationale behind the authorization procedure and the different possible interpretations of the provision discussed above illustrate the clash of interests involved in regulating access to electricity generation investments at EU level. First, this raises the question of how to balance, on the one hand, the need to promote economic efficiency by removing barriers to market entry and, on the other hand, the need to safeguard other fundamental energy policy interests. Second, this raises questions concerning the role and intensity of Union review of Member State measures that seek to safeguard these fundamental energy policy interests. The determination of national energy mix for electricity production is a case in point. In a situation where primary energy source criteria in effect mean that two potential electricity producers in a comparable situation are being treated differently, a Union review of whether the difference in treatment is objectively justifiable is well founded from an internal market perspective. If EU institutions were to have the same right to review changes in primary energy source criteria over time, however, the burden of demonstrating objective justification would in reality be imposed on the Member State, primarily because the Member State’s measure could reduce efficiency by raising the existing barriers to market access. It is difficult to see that such approach could be justified from an internal market perspective. Consequently, Article 7 has three primary functions. First, it codifies the obvious need to avoid arbitrary discrimination in decisions concerning access to 221

Chapter 15 investments in new electricity generation capacity. Second, the requirement for new investments to undergo an authorization procedure underlines the regulatory point of departure that investments should be made by market participants on the basis of price signals in the electricity market. Third, the provision – and in particular the exhaustive list of possible authorization criteria – provides for a minimum level of harmonization of national authorization procedures, which may to some extent contribute to freedom of establishment and the free movement of capital within the electricity generation market. Although the list of authorization criteria set forth in Article 7(2) is exhaustive, the list is widely drafted. The provision therefore allows Member States a wide margin of discretion to pursue national energy policy considerations through the setting of authorization criteria, provided that the procedures are conducted in accordance with the fundamental requirements in Articles 7(1) and 7(4).

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Chapter 16

The Facilitation of a Stable Investment Climate

16.1.

INTRODUCTION

While the Electricity Directive is implicitly based on the assumption that electricity generation investments should be market-based, the Security of Electricity Supply Directive is more explicit in its emphasis on the relationship between functioning markets and security of supply.796 In accordance with Article 3(1) of the latter Directive, Member States are under an obligation to ‘ensure a high level of security of electricity supply by taking the necessary measures to facilitate a stable investment climate’. This requirement, together with the requirement to define roles and responsibilities discussed in Chapter 14 above, constitutes the general means employed by the Directive to safeguard security of electricity supply in order to ensure the proper functioning of the internal market.797 The purpose of this chapter is to discuss the content of the Member States’ obligation to facilitate a stable investment climate. An initial question that arises with respect to the obligation in Article 3(1) of the Security of Electricity Supply Directive concerns the definition of a ‘stable investment climate’. This question is dealt with in section 16.2 below. To a certain extent the Directive also seeks to put this general obligation into operation by requiring Member States to take into account more specific considerations intended to facilitate a stable investment climate. Of particular interest in this respect is the adoption of measures aimed at encouraging the establishment of a

796. This already follows from the explicit aims and scope of the Security of Electricity Supply Directive, as set forth in Arts 1(1) and 1(2). 797. Article 1(1) of the Directive.

Chapter 16 liquid wholesale market and at ensuring a transparent and stable regulatory framework. These measures are discussed below in sections 16.3 and 16.4 respectively. As we shall see in the following, the market rationale behind the provisions discussed in this chapter is well-founded and hardly controversial. A more pertinent question is whether, and to what extent, the generally phrased requirements of the Security of Electricity Supply Directive impose any legal obligations on Member States, and, consequently, whether they are suitable for attaining the provisions’ underlying aims. We will revert to these questions in the concluding section 16.5 of the chapter. 16.2.

THE CONCEPT OF A STABLE INVESTMENT CLIMATE: PROMOTION OF INVESTOR CERTAINTY

The Security of Electricity Supply Directive does not provide any significant guidance as to the meaning of the term ‘a stable investment climate’. The context within which the notion is referred to indicates that the aim of the provision is the promotion of predictable market conditions that contribute to investor certainty and, ultimately, the promotion of necessary market-based investments. Legal instruments relating to investor protection and investor certainty are commonly applied in bilateral investment treaties and also appear in multilateral treaties within the energy sector, most notably in the Energy Charter Treaty.798 Within the EU’s internal market regulation, however, the concept of a stable investment climate applied as a Member State obligation is something of an extraneous matter. One reason for this difference in approach lies in the generally much greater extent of economic and political integration between the EU Member States compared to signatories to other bilateral and multilateral investment treaties. Other international agreements, such as the Energy Charter Treaty, aim to ensure national treatment or most-favoured nation treatment for investors from other contracting parties that are not necessarily closely economically integrated with the host State. The TFEU, however, sets forth substantive provisions and institutional arrangements to promote an internal market where equal treatment of Member State investors is one of many fundamental pillars. Within a legal regime that already adheres to the principle of equal treatment by other means, the questions that arise are: what additional requirements may be deduced from a Member State obligation to facilitate a stable investment climate; and, in that respect, how should the notion of a stable investment climate be defined?

798. See A. Konoplyanik, ‘International Energy Markets’, in Energy Security, Managing Risk in a Dynamic Legal and Regulatory Framework, ed. B. Barton et al. (Oxford: Oxford University Press, 2004), 47–84, in particular at 75–83. See also in particular Part III of the Energy Charter Treaty, now ratified by all EU Member States. According to Art. 10(1) of the latter Treaty, ‘Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.’

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The Facilitation of a Stable Investment Climate According to Newbery, the problem of investor certainty may be stated in the form of the following question: ‘What would be needed to persuade investors to sink their money into an asset that cannot be moved and that may not pay for itself for many years?’799 This question was considerably easier to answer under the precompetitive regimes, where electricity undertakings operating as integrated monopolies were ultimately able to pass on the investment costs to consumers. This meant that investment decisions carried minimum market risk and investments could be financed through low equity shares and loans at favourable interest rates.800 The situation is different under a competitive regime. Electricity producers no longer have carte blanche to pass on investment costs to consumers. The investment risk is consequently shifted from consumers to electricity producers, and the cost of capital will more accurately reflect the project risks involved. Electricity generation capacity investments are capital intensive and lead times are normally long for the building projects involved.801 Investment expenditures cannot be recovered once they have been made, that is, the capital costs are sunk. In addition, electricity prices are extremely volatile. These specific market attributes imply that the attainment of stable market conditions and investor certainty are particularly important regulatory objectives within the electricity sector. Consequently, an essential role of regulation in inducing market participants to undertake socio-economically beneficial investments, whether in the security of supply or environmental interest, is the promotion of investor certainty. Potential electricity generation investors face a number of different risk factors, such as fuel price and fuel availability risks, electricity price and volume risks, risks relating to electricity demand, financial risks, regulatory and political risks, in addition to other more company-specific risks.802 As in other markets, the role of public authorities is limited in relieving inherent market risk factors such as the costs of capital and labour and future product demand. Public subsidization of inputs (or the extraction of inputs) in the form of primary energy sources is, however, not unusual in the energy sector. State aids for the extraction of indigenous coal resources and for wind turbine investments constitute two practical examples of subsidies in the security of supply and environmental interest, respectively.803 Consequently, to the extent that Member States provide incentive

799. D.M. Newbery, Privatization, Restructuring, and Regulation of Network Utilities (Cambridge: MIT Press, 1999), 28–29. 800. International Energy Agency, Power Generation Investments in Electricity Markets (Paris: OECD/IEA, 2003), 27. 801. While combined-cycle gas turbines can be manufactured and installed in less than two years, typical lead times for coal-fired plants are around five years, and for nuclear plants approximately seven years, see International Energy Agency, Electricity Reform, Power Generation Costs and Investment (Paris: OECD/IEA, 1999), 63–64. 802. See further International Energy Agency, Power Generation Investment in Electricity Markets (Paris: OECD/IEA, 2003),27 et seq. for a thorough overview of the investor risks involved in electricity generation investments. 803. See further below in Part VI.

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Chapter 16 schemes for certain inputs or technologies, the promotion of investor certainty requires these schemes to be stable and not subject to rapid change. A Member State obligation to facilitate a stable investment climate also relates to the reduction of other non-commercial investment risks. Regulation may potentially influence investor certainty either (deliberately) by contributing to well-functioning market structures that increase predictability and facilitate investments, or (unintentionally) by intervening in the market in a manner which has the (unintended) adverse effect of creating investor uncertainty and deterring investments. The International Energy Agency describes the relationship between regulation and investor certainty as follows: Some amount of regulatory uncertainty is a fact in a changing world, but governments can take a number of measures to credibly minimise this uncertainty for investors. Investors in new generation capacity, particularly small market players, need access to market information, a well-established marketplace and regulated access to this marketplace. An investor will also require a transparent and clear procedure for applying for new investments, in terms of both siting and choice of technology. Any signal of government willingness to intervene in the market, including possible future support and possible price capping, will add uncertainty and deter investment.804 In the following we will focus on two ways, as illustrated by the above statement, in which regulatory authorities can contribute to investor certainty and a stable investment climate: first by adopting measures to facilitate market functioning; and second by avoiding the use of measures that reduce investor certainty more than necessary. In relation to the first category mentioned above, the Electricity Directive and the Electricity Regulation both contain extensive rules aimed at facilitating the functioning of the electricity market by ensuring a non-discriminatory, objective, transparent and effective market for transportation. The requirements regarding a stable investment climate in the Security of Electricity Supply Directive, on the other hand, concern the more general facilitation of the electricity market as such. This raises the question of the extent to which the latter obligations constitute any new, substantive Member State obligations beyond those already contained in the Electricity Directive and the Electricity Regulation. In relation to the second category, the question arises whether, and to what extent, an obligation to facilitate a stable investment climate can be interpreted as restricting public intervention in the electricity market. The chief problem with introducing an obligation on Member States to take ‘the necessary measures to facilitate a stable investment climate’ lies in the openended nature of the requirement. It is not possible to distinguish precisely between a stable and an unstable investment climate, and it may be difficult to determine what measures are necessary to achieve stability. Accordingly, it is only possible to 804. International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/ IEA, 2005), 25.

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The Facilitation of a Stable Investment Climate attribute a substantive meaning to the obligation contained in Article 3(1) of the Security of Electricity Supply Directive by reading it in conjunction with the list of considerations which the Member States may take into account, in accordance with Articles 3(2) and 3(3), when implementing the general obligation. The scope of the obligation is examined in the following with particular focus on the establishment of marketplaces and the need to ensure a stable regulatory framework. 16.3.

THE ESTABLISHMENT OF LIQUID WHOLESALE MARKETS

16.3.1.

OVERVIEW

The introduction of competition within the electricity markets, as required by the Electricity Directive, inevitably implies the need to create some type of market mechanism for wholesale and retail trade, but the institutional organization and functioning of these marketplaces are not explicitly dealt with in the Electricity Directive.805 The Security of Electricity Supply Directive takes a slightly more proactive approach to the question. Article 3(2)(g) of the latter Directive requires Member States to take into account the importance of encouraging the establishment of liquid wholesale markets when implementing the obligation in Article 3(1) to ensure a stable investment climate.806 This requirement is accompanied by the obligation imposed in Article 5, which requires Member States, as one of the appropriate measures to maintain a balance between electricity demand and generation capacity availability, to ‘encourage the establishment of a wholesale market framework that provides suitable price signals for generation and consumption’.807 These obligations address the International Energy Agency’s observation cited above that investors need access to well-established marketplaces. Similar concerns have been emphasized by the Commission.808 Nevertheless, it is apparent that these carefully worded requirements cannot be interpreted as imposing comprehensive obligations to organize markets on the Member States. A more realistic 805. Article 41 of the Electricity Directive, setting forth a number of minimum requirements in order to ensure a well-functioning retail market, being an exception. 806. An electricity wholesale market can be defined as a market for the selling and buying of electricity in bulk, that is, a market where electricity generators can sell their output and suppliers can source the electricity they need to supply end consumers, see DG Competition Report on Energy Sector Inquiry, SEC (2006) 1724, 10.1.2007, 119 et seq. See also the definition of ‘wholesale customers’ in Art. 2(8) of the Electricity Directive, which applies correspondingly to the Security of Electricity Supply Directive in accordance with Art. 2 of the latter Directive. 807. Article 5(1)(a) of the Directive. The particular requirements of small isolated systems, as referred to by the provision, will not be discussed further here. 808. See for example Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 9, where it is emphasized that ‘Member States must, either individually or collectively, have a clear and unambiguous approach to the wholesale electricity market. Without this the regulatory risks to investors will be unacceptable.’

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Chapter 16 approach is therefore to question the extent to which they impose any substantive obligations on Member States at all when viewed in relation to the relevant alternatives for trading in electricity. Answering this question requires us to undertake an overview of the existing European trading alternatives and their potential functions from an investment perspective. These alternatives are described in section 16.3.2 below. The role and suitability of the provisions set forth in the Security of Electricity Supply Directive, in terms of their contribution to trade mechanisms that are beneficial to investments, are then discussed in section 16.3.3.

16.3.2.

ELECTRICITY WHOLESALE MARKETS: PHYSICAL AND FINANCIAL TRADE

Trade in electricity may take place either bilaterally or at organized marketplaces. In bilateral electricity trade, contracts for the sale and purchase of electricity are entered into directly between a buyer and a seller, either with the help of brokers or trading institutions, or solely at the initiative of the contracting parties. These agreements are often referred to as ‘over-the-counter’ (OTC) contracts. Bilateral trade currently plays an important role in many European electricity markets, and is likely to continue to do so in the future.809 Bilateral trade alone is not, however, likely to lead to a liquid wholesale market or provide suitable price signals for generation and consumption, in particular due to the lack of product standardization and the lack of transparency in such markets. The encouragement of liquid wholesale markets that will provide suitable price signals for generation and consumption therefore requires the establishment of some form of organized marketplace.810 Organized marketplaces for trade in electricity may take the form of power pools or power exchanges. Power pools were the forerunners to power exchanges in many electricity systems. It is difficult to provide a precise definition of the pool concept, but the main characteristic of the competitive power pool is that it allows for competition in electricity generation based on a very diverse product portfolio which takes into account numerous technical generation characteristics. It is

809. ECORYS Nederland BV, Review and Analysis of EU Wholesale Energy Markets. Historical and Current Data Analysis of EU Wholesale Electricity, Gas and CO2 Markets. Final Report (2008), in particular at 40–45. The Nordic power market provides an example. The relative share traded at the Nord Pool power exchange of total electricity volumes produced within the Nordic countries is steadily increasing, amounting to approx. 61.4% of total Nordic electricity production in 2006, see O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 73. This demonstrates that significant volumes will most likely continue to be traded bilaterally, even in markets considered well-functioning and mature, due to the market participants’ need to put together a more diverse product portfolio than the standardized products offered at power exchanges. 810. See also along these lines O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 37–38.

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The Facilitation of a Stable Investment Climate therefore only possible for electricity generators to participate in power pools.811 However, currently there appears to be a preference for the establishment of power exchanges rather than pools in most Member States.812 A power exchange provides a spot market for electricity which matches demand and supply, thereby also providing a transparent price for electricity trade.813 The products offered on a power exchange are highly standardized. Bids specify quantities and prices for a given period, usually on an hourly basis. The exchanges are therefore basically energy-only markets which do not take into account operational characteristics such as transportation capacity constraints or the need to ensure sufficient reserve capacity.814 Due to the specific characteristics of electricity, it is not possible to arrange literally real-time on-the-spot trading. Most electricity spot markets are therefore day-ahead markets.815 Since the products offered on a power exchange are standardized and the exchange is neutral in relation to the market, exchanges also allow for the participation of a much wider group of market participants than the traditional power pools. Hence, participants will typically include electricity generators, traders and large-scale end-users.816

811. See M.M. Roggenkamp & F. Boisseleau, ‘The Liberalisation of the EU Electricity Market and the Role of Power Exchanges’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 1–29, at 19–20. 812. O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 37. See also EuroPEX Association of European Power Exchanges, which currently has fourteen members, at webpage (last visited 22 Mar. 2010) for an overview of current European power exchanges. For the sake of completeness, it should be emphasized that the list of members also includes some power exchanges with modest market activity, see ECORYS Nederland BV, Review and Analysis of EU Wholesale Energy Markets. Historical and Current Data Analysis of EU Wholesale Electricity, Gas and CO2 Markets. Final Report (2008), 26, which focuses on the nine main European power exchanges. 813. M.M. Roggenkamp & F. Boisseleau, ‘The Liberalisation of the EU Electricity Market and the Role of Power Exchanges’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 1–29, at 20. 814. Ibid., 20–23. The operation of the power exchanges may, however, also play an important role in handling capacity constraints in the grid. The market-splitting models applied by Nord Pool Spot domestically in Norway and to Nordic cross-border trading are examples in this respect. The ownership shares of several European TSOs in their respective electricity market exchanges, such as the Dutch TSO TenneT’s ownership in APX and the Nordic TSOs’ ownership in Nord Pool Spot, also contribute to highlighting the relationship between the operation of the power exchanges and grid functions, see O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 38 at note 46. 815. The Nord Pool Elbas market, which is an hour-ahead power balancing market in addition to the day-ahead market, is an exception in this respect, see O.-H. Wasenden, ‘The Nordic Electricity Market – A Mature Internation Market and Power Exchange’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 31–80, at 63–64. 816. M.M. Roggenkamp & F. Boisseleau, ‘The Liberalisation of the EU Electricity Market and the Role of Power Exchanges’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 1–29, at 20–21.

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Chapter 16 Participation on power exchanges is usually voluntary.817 The exchanges therefore compete with different forms of bilateral trade. Although it could be argued that the establishment of power exchanges is not a prerequisite for establishing an internal electricity market based on competition, the exchanges clearly play a very important role in establishing efficient, reliable and transparent price formation for electricity spot-market trade.818 Consequently, well-functioning power exchanges contribute to the delivery of reliable electricity price signals for supply-side and demand-side conduct in the shorter term.819 Physical electricity spot-market trade is, however, not sufficient to provide market participants with the long-term price signals needed to decide on largescale investments with long construction lead times and amortization periods. Increased trade in financial power products, that is, trade in different forms of derivatives which apply electricity prices as their underlying reference, plays an important role in addressing these concerns.820 Although financial power markets are, with some exceptions, not yet fully developed in most European electricity markets, financial energy trading is growing rapidly.821 The establishment and operation of these financial markets are likely to play an important role in delivering long-term price signals for electricity generation investors for

817. Although there are some exceptions. Trade at Nord Pool, for example, is voluntary for trade at national level, but mandatory for cross-border trade, see O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 82–86. 818. Ibid., 86–87 and, similarly (in English), O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 37–38. 819. Market design and the more specific roles of power exchanges, such as their functions in grid capacity management, vary from region to region, see further M.M. Roggenkamp & F. Boisseleau, ‘The Liberalisation of the EU Electricity Market and the Role of Power Exchanges’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 1–29 for a general overview of the background, roles and regulation of European power exchanges as of 2005. The Nordic approach is, more recently, described by O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 86–93. 820. See O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), particularly at 43–57 and 94–127, for a thorough description of financial power markets, and (more briefly, for an English version) O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 29–43. 821. M.M. Roggenkamp & F. Boisseleau, ‘The Liberalisation of the EU Electricity Market and the Role of Power Exchanges’, in The Regulation of Power Exchanges in Europe, ed. M.M. Roggenkamp & F. Boisseleau (Antwerp: Intersentia, 2005), 1–29, at 19 and O.-H.B. Wasenden, EU Market Abuse Regulation in Energy Markets (Oslo: Cappelen, 2008), 40. According to ECORYS Nederland BV, Review and Analysis of EU Wholesale Energy Markets. Historical and Current Data Analysis of EU Wholesale Electricity, Gas and CO2 Markets. Final Report (2008), 37, there are currently only two EU power exchanges (EEX Phelix Futures and Endex Futures) with significant electricity futures markets in terms of volume (i.e., markets for the buying and selling of standardized electricity derivative products at a pre-determined price in the future (excluding forward contracts)).

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The Facilitation of a Stable Investment Climate two reasons.822 First, financial power markets offer potential investors hedging possibilities that help reduce the risks involved in estimating future electricity prices in volatile electricity markets.823 Second, derivative contracts traded on financial power markets are often entered into on longer time-horizons than the delivery times offered by the standardized products at physical power exchanges. Functioning financial power markets therefore have the potential to deliver longerterm price signals than those offered by physical spot markets.824 Long-term price signals are an important factor in the risk assessments undertaken by investors, given the long lead times of electricity generation construction and the fact that overnight construction costs are sunk.825 There is little doubt that increased physical and financial trading at power exchanges contributes to market liquidity826 and to the delivery of reliable and transparent price signals for supply-side and demand-side conduct in both the shorter and longer term. Well-functioning physical spot markets provide a basis for the establishment of financial power markets, which in turn provide long-term price signals to electricity generation investors.827 Our next question, then, concerns the extent to which the provisions of the Security of Electricity Supply Directive are suitable for contributing to the development of well-functioning EU physical and financial power markets.

822. O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 128–154. 823. Ibid., 135–139. 824. Ibid., 139–140. 825. Overnight construction costs can be defined as the total of all costs incurred for building a power plant accounted for as if they were spent instantaneously, see Nuclear Energy Agency and Internal Energy Agency, Projected Costs of Generating Electricity. 2005 Update (Paris: OECD/IEA, 2005), 35. 826. A majority of market participants questioned in a recent survey believed that power exchanges contributed to increasing market liquidity, see The Moffatt Associates Partnership, Review and Analysis of EU Wholesale Energy Markets. Evaluation of Factors Impacting on Current and Future Market Liquidity and Efficiency. Research Findings and Conclusions (2008), 80. It should, however, be emphasized that the concepts of ‘liquidity’ and ‘liquidity levels’ do not have a single meaning, and that liquidity may mean different things to different market participants, see the Moffatt report referred to above at 81 and ECORYS Nederland BV, Review and Analysis of EU Wholesale Energy Markets. Historical and Current Data Analysis of EU Wholesale Electricity, Gas and CO2 Markets. Final Report (2008), 31. 827. O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 140–154, argues – in my view convincingly – that the functions of financial power markets in offering price hedging possibilities and delivering long-term price signals contribute to giving well-functioning financial power markets a very important socio-economic function in competitive electricity market regimes, in particular with respect to promoting future supply-side investments. Whether well-functioning financial power markets also in principle can amount to a sufficient tool to ensure the necessary investments, including reserve capacity investments, as argued by Wasenden at 147–152, is more debatable.

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Chapter 16 16.3.3.

THE REQUIREMENTS IMPOSED

ON

MEMBER STATES

Although power exchanges are usually established as the result of private initiatives, public regulation can play a role in facilitating the establishment and functioning of such marketplaces. This author submits that Articles 3(2)(g) and 5(1)(a) of the Security of Electricity Supply Directive must be viewed in particular against the background of the aim of facilitating the establishment of well-functioning power exchanges. Nevertheless, the careful approach adopted in the Directive – that Member States shall encourage the establishment of liquid marketplaces that provide suitable price signals – appears primarily to amount to a declaration of policy rather than to a legal obligation of result. Nevertheless, the provisions may, in this author’s opinion, still have at least three (albeit limited) legal implications. First, the provisions appear to require Member States to exercise a preference for the establishment of power exchanges rather than power pools. It is possible to argue that power exchanges are better suited to the promotion of market liquidity, highlighted as an important factor in Article 3(2)(g), than power pools. On the other hand, the significance of this argument is debatable given the ambiguity of the concept of liquidity, which may mean different things to different categories of market participant.828 A more significant argument in favour of prioritizing power exchanges follows from the wording of Article 5(1)(a) to the effect that the wholesale market framework shall provide suitable price signals for generation and consumption. Since only electricity generators participate on power pools, while market participants on both supply-side and demand-side participate on power exchanges, the latter marketplaces are more likely to provide price signals for consumption than a pool model. Second, and to continue our first point above, the provisions raise the question of the extent to which Member States are required to facilitate the establishment of power exchanges. In this respect, the careful wording of the provisions to the effect that Member States shall take into account ‘the importance of encouraging the establishment of wholesale markets’829 and shall ‘encourage the establishment of a wholesale market framework’830 does not appear to place any obligations of result on Member States. At the very least, however, the requirement to encourage the establishment of functioning wholesale markets entails a requirement on Member States to abstain from restricting or discouraging the establishment and operation of power exchanges. It is not clear from the wording of Article 5(1)(a), with its general reference to ‘price signals for generation and consumption’, whether it also applies to long-term price signals for generation investments, but other parts of the

828. The Moffatt Associates Partnership, Review and Analysis of EU Wholesale Energy Markets. Evaluation of Factors Impacting on Current and Future Market Liquidity and Efficiency. Research Findings and Conclusions (2008), 81 and ECORYS Nederland BV, Review and Analysis of EU Wholesale Energy Markets. Historical and Current Data Analysis of EU Wholesale Electricity, Gas and CO2 Markets. Final Report (2008), 31. 829. Article 3(2)(g) of the Security of Electricity Supply Directive. 830. Ibid., Art. 5(1)(a).

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The Facilitation of a Stable Investment Climate provision, as well as the aims of the Directive and the Directive preamble clearly support this interpretation.831 Consequently, the Member State obligation to avoid discouraging the establishment and operation of power exchanges should be interpreted as applying to both physical and financial power markets. On the other hand, the provisions of the Security of Electricity Supply Directive cannot be interpreted as generally restricting Member States’ rights to permit only one power exchange to operate within a designated system area. The existence of several competing power exchanges may potentially raise problems relating to the coordination of the exchanges as instruments for ensuring market liquidity and the coordination of network operation (to the extent that the power exchange performs grid capacity management functions).832 The provisions only require the more general promotion of liquid and well-functioning markets, and do not restrict the Member States’ rights to coordinate the institutional organization of the market in order to ensure its functioning. And third, the emphasis of the Directive on market facilitation as the primary instrument for attracting necessary investments may be interpreted as a restriction on Member States’ right to intervene in the market before seeking a market-based solution. More specifically, it could be argued that a Member State confronted with a strained supply-demand balance in the longer term would be required actively to encourage the establishment and operation of a functioning power exchange before making recourse to cruder means of intervention in order to promote the necessary investments. This view does, however, entail some difficult implications that will be further explored in the next part of the book, and which raise questions about the extent to which the provisions can be understood as requiring Member States to have recourse to instruments of market facilitation. Although the above discussion shows that the wholesale market requirements of the Security of Electricity Supply Directive may impose some limited obligations on Member States, it is fair to say that the substantive legal implications of these provisions are in practice very limited. There has been a rapid increase in the establishment of European power exchanges and physical and financial power trading wholly independently of the Directive’s requirements, which were only recently subject to Member State implementation.833 In this author’s opinion, it is 831. See in particular the references to ‘the availability of generation capacity’ in Art. 5(1) and to additional measures, including ‘provisions facilitating new generation capacity and the entry of new generation companies to the market’ in Art. 5(2)(a). Moreover, Art. 1(1)(a) underlines that ensuring ‘an adequate level of generation capacity’ constitutes one of the aims of the Directive. Finally, paras 11 and 12 of the preamble to the Directive, in addressing the supplydemand regulation under Art. 5, refer explicitly to ‘potential investors in generation’ and a framework that is ‘conducive to investments in generation capacity’, respectively. 832. See also The Moffatt Associates Partnership, Review and Analysis of EU Wholesale Energy Markets. Evaluation of Factors Impacting on Current and Future Market Liquidity and Efficiency. Research Findings and Conclusions (2008), 81, where it is emphasized that many market participants in the survey expressed the view that there were too many exchanges. 833. Article 8(1) of the Security of Electricity Supply Directive, which requires Member State transposition by 24 Feb. 2008.

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Chapter 16 likely these developments will continue without the provisions of the Directive making much difference in either direction. Consequently, it is doubtful whether the provisions in Articles 3 and 5 of the Directive discussed above have any significant substantive function beyond expressing (arguably well-founded) policy declarations. 16.4.

TRANSPARENT AND STABLE REGULATORY FRAMEWORK

Article 3(2) of the Security of Electricity Supply Directive also provides that Member States shall take into account ‘the importance of a transparent and stable regulatory framework’ in implementing the obligation to facilitate a stable investment climate.834 This requirement seeks to address the concern that unstable regulatory conditions and, in particular, ad hoc regulatory interventions in competitive electricity markets, are liable to lead to investor uncertainty and, consequently, deter new investments. The following statement by Eurelectric in its Roadmap to a Pan-European Market illustrates this concern: [i]t is of utmost importance that regulators and governments refrain as far as possible from intervening on the market, in particular on the price level or on the demand for investment. In this respect, much of the success of developing wholesale markets will depend on policy makers’ and regulators’ ability to let the market work.835 The core of this statement is a request that governments should not intervene in the market or alter regulatory conditions in a way that affects the profitability of investments already made or that makes it difficult to estimate the profitability of projects at the planning state. Against this background, the requirement regarding a stable regulatory framework in the Security of Electricity Supply Directive raises three questions in particular. First, does the obligation, when read in conjunction with the more general requirement to facilitate a stable investment climate in Article 3(1), impose a positive obligation on Member States to correct market failures that are detrimental to investments? Second, does the Directive restrict the discretion of Member States to alter regulatory conditions on the basis of the reasoning that rapidly changing regulatory regimes lead to investor uncertainty and deter investment? And, third, can the provision be interpreted as prohibiting Member States from intervening on electricity markets to regulate price levels due to the negative effect of price caps on the investment climate? With respect to the first question, this author submits that Article 3 of the Security of Electricity Supply Directive cannot be interpreted as requiring Member States to adopt measures aimed at correcting existing market failures. A general 834. Ibid., Art. 3(2)(b). 835. Eurelectric, Integrating Electricity Markets through Wholesale Markets: EURELECTRIC Road Map to a Pan-European Market (2005), 30.

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The Facilitation of a Stable Investment Climate EU obligation to this effect would potentially have far-reaching consequences for the Member States’ margin of discretion, and would give rise to a number of difficult questions of interpretation. For example, as disclosed by the Commission’s Energy Sector Inquiry, imperfect competition is a characteristic market failure of European electricity markets, where most wholesale markets are still national in scope, with a high level of concentration in electricity generation.836 This market structure increases the potential for market abuse, possibly also to the detriment of the investment climate. Nevertheless, the generally worded provisions of Article 3 of the Security of Electricity Supply Directive cannot be interpreted to the effect that Member States are required to adopt the radical instruments that would probably be needed to significantly alter this market structure. It is true that removal of burdensome authorization criteria for the construction of new generation capacity would facilitate market access for new participants, thereby eroding the market shares of incumbents. Yet the vague provisions of the Directive can hardly be understood as requiring Member States to remove authorization criteria which are explicitly permitted by Article 7 of the Electricity Directive.837 Similarly, the provisions of the Security of Electricity Supply Directive cannot be interpreted as requiring Member States to guarantee investments in interconnectors or, even more radically, to split up national incumbents, although such measures could contribute to improving competition.838 Turning to the second question raised above, the wording of Article 3 of the Directive does seem to require that the regulatory means applied by a Member State should not compromise the existence of a ‘transparent and stable regulatory framework’. Thus it would seem that rapidly changing regulatory conditions for new investments, or ad hoc interventions to benefit particular building projects, could potentially fall foul of this provision. If market participants suspect that new support schemes for investments will be introduced in the future, planned investments may be delayed in order to benefit from potential future subsidies. Changing regulatory conditions are therefore potentially detrimental to investments in both the security of supply and environmental interest. Notwithstanding the need for a stable regulatory regime, however, it is difficult to see what specific legal obligations for Member States could follow from a requirement to facilitate a stable investment climate by taking into account the importance of a transparent and stable regulatory framework. Although frequent changes in regulatory conditions, 836. DG Competition Report on Energy Sector Inquiry, SEC (2006) 1724, 10.1.2007, 130–150. 837. In this respect, Art. 3(3)(d) of the Security of Electricity Supply Directive merely sets forth that Member States, in implementing the obligation to ensure a stable investment climate, may also take account of the importance of removing administrative barriers to investments in infrastructure and generation capacity. This provision as such does not impose any distinct obligations on Member States. 838. See U. Hammer, ‘Interconnectors and Market Coupling – Illustrated by NorNed’, in European Energy Law Report IV, ed. M.M. Roggenkamp & U. Hammer (Antwerpen: Intersentia, 2007), 281–291 for a brief discussion of the relationship between market coupling and market integration in relation to the NorNed cable between Norway and the Netherlands, which was officially opened in 2008.

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Chapter 16 such as changes to tax and subsidy schemes, are liable to affect investor certainty, the generally worded Directive provisions cannot, in this author’s view, be interpreted as prohibiting Member States from adopting new, or altering existing, regulatory instruments to promote investment. Not only would such an interpretation result in comprehensive restrictions on the Member States’ margin of appreciation, but it would also be impossible to define the scope of the obligation: how often and to what extent could an existing tax or subsidy scheme be amended before there was a breach of a legal obligation to ensure a stable investment climate? The above conclusion leads us to ask whether Article 3 of the Directive has any substantive implications for Member States’ regulation of electricity market price levels, that is, price capping. Public intervention in respect of price levels clearly contributes to investor uncertainty, and is therefore counterproductive for the facilitation of a stable investment climate and security of supply.839 At the same time, price caps may, in certain situations, be a tempting instrument of intervention for national authorities in the interest of redistribution. The concept of economic efficiency has nothing to do with the way in which scarce resources are distributed between people or groups in society.840 Efficiency targets do not, for example, take into account any need to protect particularly vulnerable customers, as opposed to wealthy ones, from having their electricity disconnected. Similarly, they do not guarantee all consumers access to electricity at reasonable prices, if ‘reasonable’ means anything other than the prevailing market price. Such redistribution in the interests of welfare normally reflects some form of distributional justice, referred to by Hammer as a non-economic reason for regulation.841 High electricity prices may adversely affect consumers, in particular lowincome households, whose options for switching to other sources of energy are limited. Given the vital importance of electricity as an input in the general economy, other customer groups, such as power-intensive industries, are also very likely to protest against high prices. These end-user concerns regularly lead to political pressure for regulatory intervention at times of high electricity demand and electricity prices. This situation gives rise to a dilemma for regulatory authorities. On the one hand, high electricity prices are – at least in the shorter term – likely to benefit electricity producers at the expense of customers. The producers may originally have projected lower returns on their investment than current prices would anticipate. Accordingly, the rise in prices may lead to excessive rents or windfall profits for the producers, provided that the rise in prices is not solely due to a corresponding increase in the cost of production. Regulatory authorities may therefore be tempted to cap prices to the (short-term) benefit of consumers and industry. On the other hand, price regulation is liable to induce end-users to 839. Commission Communication: Prospects for the internal gas and electricity market, COM (2006) 841 final, 10.1.2007, 8–9. 840. U. Hammer, ‘EC Secondary Legislation of Network Markets and Public Service: An Economic and Functional Approach’, JONI 3, no. 1 (2002): 39–75, at 43. 841. Ibid., 43, where different aspects of distributional justice are also mentioned.

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The Facilitation of a Stable Investment Climate over-consume electricity and electricity producers to under-invest in new generation capacity by setting prices at a level below marginal costs.842 Decisions on generation investments, like other investments, are based on expectations as to return on capital invested. If the expected return is lower than that from other investments of comparable risk, the money will go towards those other investments, not electricity generation. Thus, from a market perspective, price capping by government has two undesirable effects: first, it discourages future investment; and second, it distorts the rate of return on existing investments.843 It may not always be easy for regulators to distinguish between situations where prices are high due to normal market behaviour during periods of peak demand and situations where prices are high due to market abuse.844 In addition, politicians and regulators who have sold the concept of electricity liberalization and competition to the public on the basis that it would contribute to lower electricity prices may find it very difficult to explain the rationale for allowing the very high prices that may occur at times of peak demand – all the more so if they are unable to ascertain whether the prices are solely the result of functioning markets or whether they are also the result of illegitimate market abuse. Consequently, although regulation of electricity prices is – for good reason – viewed with great scepticism by economists, concerns that such price caps may be introduced from time to time by Member States are not wholly unrealistic. Neither the Electricity Directive nor the Security of Electricity Supply Directive explicitly prohibits price caps, in either wholesale or retail markets.845 However, given that price caps are likely to undermine the ability of wholesale markets to provide appropriate price signals to encourage investment, such regulatory interventions run contrary to the objectives and means promoted by the Security of Electricity Supply Directive.846 In this author’s opinion, it is therefore 842. R.J. Pierce Jr & E. Gellhorn, Regulated Industries in a Nutshell, 4th edn (St Paul: West Group, 1999), 58. 843. Ibid., 99. 844. J.M. Griffin & S.L. Puller, ‘A Primer on Electricity and the Economics of Deregulation’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 1–28, at 16–20. 845. The universal service provision in Art. 3(3) of the Electricity Directive may even require Member States to introduce price caps for household customers in retail markets in some situations, by requiring household customers to be guaranteed reasonable electricity prices. Originally, the Commission sought, as a general rule, to prohibit Member States from regulating electricity prices for end-users, see Proposal for a Council Directive concerning common rules for the internal market in electricity and common rules for the internal market in natural gas, COM (1991) 548 final,14.3.1992, 36 (in the Danish language version), the proposal for Art. 3(3). This proposal was not adopted in the first Electricity Directive, nor has it resurfaced in subsequent legislative initiatives. 846. See, inter alia, Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 8, which emphasizes that price caps may cause uncertainty for investors in relation to reserve capacity investments. The Commission has also held that price regulation may, depending on the way it is designed, breach other Community provisions. Several infringement proceedings have already been launched in this respect, see Communication from the Commission to the Council and the European Parliament: Prospects for

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Chapter 16 possible to argue that regulatory measures which are particularly harmful to the investment climate, such as the introduction of price caps in electricity wholesale markets, run contrary to the requirements imposed by Article 3 of the Security of Electricity Supply Directive. Consequently, although the provision requiring a stable regulatory framework primarily appears to embody a policy declaration rather than an obligation of result, the possibility cannot be ruled out that it also imposes some substantive obligations on Member States in cases where the measures introduced are clearly harmful to the investment climate. 16.5.

IS THE STABLE INVESTMENT CLIMATE OBLIGATION SUITABLE FOR THE PROMOTION OF INTERNAL ELECTRICITY MARKET FUNCTIONING?

The obligation to facilitate a stable investment climate differs in several respects from other EU provisions that aim to promote market-based electricity generation investments in the security of supply interest. The most striking difference lies in the broad nature of the provision compared to other Union measures. Provisions relating to the definition of role and responsibilities and the establishment of an authorization procedure are liable to influence the investment climate by imposing specific requirements on Member States. The obligations discussed in the present chapter, on the other hand, require Member States to promote an overall objective through the attainment of other (intermediate) aims. The general objective of a stable investment climate is to be achieved through the realization of other aims, such as the establishment of liquid wholesale markets and the promotion of a stable regulatory framework. The rationale behind the provisions discussed in this chapter is hardly controversial. Investor certainty is fundamental for attracting market-based investments and will only be achieved through the facilitation of a stable investment climate. A stable investment climate, in turn, requires the establishment of liquid and well-functioning wholesale markets and a transparent and stable regulatory framework. Since a stable investment climate is likely to facilitate cross-border establishment for new market participants, the internal market rationale for the adoption of the provisions, as expressed in Article 1(1) of the Security of Electricity Supply Directive, is also plausible. The crucial question is therefore not whether the provisions in question are built on a well-founded rationale, but whether they are suitable for promoting that aim. The broad wording of Article 3(1) of the Security of Electricity Supply Directive could, in principle, be applied to strike down a variety of Member State the Internal Gas and Electricity Market, COM (2006) 841 final, 10.1.2007, 9. As argued by C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 239, regulated tariffs may also be designed in such a way that they risk contravening the provisions of the Electricity Directive (e.g., the non-discrimination requirement) although the Directive as such does not prohibit regulated tariffs or price caps.

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The Facilitation of a Stable Investment Climate measures which would be liable to deter investment. Read in conjunction with the other provisions of the Directive, however, it is clear that the Directive does not necessitate a rigorous review of national regulatory conditions. We have seen that the Directive’s open-ended requirements concerning the establishment of liquid wholesale markets are likely to exercise only limited influence on the development of European power exchanges. Moreover, the legal implications of the Directive’s emphasis on the importance of a transparent and stable regulatory framework are unclear. On the one hand, it is obvious that this requirement, if it gives rise to any legal obligations at all, cannot be interpreted as imposing on Member States any obligation to correct major market failures or to avoid changing regulatory conditions as such. On the other hand, the possibility cannot be ruled out that the provision could be applied as an instrument to restrict the Member States’ application of measures deemed particularly harmful to the investment climate, such as the introduction of price caps in wholesale markets. In the interests of legal certainty, the Directive would have benefited from clearer wording in this latter respect. Nevertheless, the requirements regarding a stable investment climate discussed in this chapter primarily amount to declarations of policy. The fact that they may be declarations of well-founded policies is, in this author’s view, not sufficient to justify their existence as separate Directive provisions within a field of law that is already subject to a high level of legislative complexity and fragmentation.

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Chapter 17

Concluding Remarks

The purpose of this part of the book has been to analyse EU facilitation of investments in electricity generation capacity through the establishment of a regulatory framework to promote market-based investments. Our research objects have been the internal electricity market provisions that define the roles and responsibilities of different market actors, the provision governing national authorization procedures for the construction of new generation capacity, and the Member State obligations to facilitate a stable investment climate. The provisions discussed in this part emphasize the regulatory point of departure in respect of supply-side investments in the internal electricity market: investments should be made by market participants based on the price signals provided by functioning electricity wholesale markets. Consequently, the main focus of the Union and the Member States should be the promotion of functioning markets in order to attract sufficient investments in the security of supply interest. The legal implications of these EU measures aimed at market facilitation are, however, unclear. Member States are required to define the roles and responsibilities of market actors and public authorities in the security of supply and, to a lesser degree, environmental, interest. At the same time, EU law restricts the Member States’ discretion in defining roles and responsibilities by setting forth specific structural requirements for the organization of the sector, particularly in respect of the division between generating and supply activities on the one hand and network monopoly activities on the other. These latter requirements are not primarily motivated by security of supply concerns. They are rather motivated by a need to ensure nondiscrimination in relation to electricity transportation in order to facilitate a functioning electricity market where electricity undertakings may compete on a level playing field.

Chapter 17 By and large, it is unproblematic and uncontroversial that network undertakings, and in particular TSOs, are required to assume some responsibility for ensuring security of supply and environmental protection by ensuring the provision of a well-functioning grid. The TSOs’ responsibility for ensuring sufficient reserve generation capacity falls into a slightly different category, since reserve capacity generation in principle amounts to an electricity production activity, rather than a grid-related activity. However, given the lack of incentives for market participants to invest in reserve generation capacity, some form of centralized coordination of investments appears to be necessary and the TSOs are the natural vehicles to perform that task. The clarification in the Security of Electricity Supply Directive of the TSOs’ responsibilities in this respect is therefore welcome. Apart from this clarification, the requirements made of Member States in the Directive to define roles and responsibilities in the security of supply interest are of limited practical significance when viewed in the light of the existing provisions of the Electricity Directive. Moreover, the Security of Electricity Supply Directive does not clarify which instruments the TSOs may and may not apply to perform their reserve capacity tasks. Consequently, EU measures do not provide a specific answer to the problem of how to balance the need for sufficient reserve generation capacity on the one hand against the need to avoid market distortions on the other. Article 7 of the Electricity Directive governs national authorization procedures for the construction of new electricity generation capacity. These procedures are of considerable importance for both market participants, who depend on authorizations to gain market access, and for Member States, which may pursue their energy policy interests through the adoption of authorization criteria. Some authors have argued that Article 7 of the Electricity Directive builds on the economic point of departure that market access should be non-restricted in order to promote potential competition and, consequently, economic efficiency in the electricity market. This approach lends some support to the view that the discretion of Member States in choosing and amending their authorization criteria is limited, since such actions may impede market access. In this author’s opinion, a more reductionist approach, whereby the provision is viewed in the context of the need to ensure the functioning of the internal market by promoting non-discriminatory rules on establishment, is more appropriate. Consequently, the provision should be interpreted to the effect that Member States retain wide discretion to choose between different energy sources and to determine the general structures of their energy supply, and that the primary focus of the provision is to avoid arbitrary discrimination in authorization decisions. The requirement in the Security of Electricity Supply Directive that Member States shall take the necessary measures to facilitate a stable investment climate could, based solely on its wording, be perceived as far-reaching. However, read in the context of other parts of EU electricity market legislation, this author submits that the provisions of the Security of Electricity Supply Directive at this point must primarily be seen as declarations of policy that give rise to few obligations of result for Member States. An exception may arise from a possible interpretation of the provision to restrict Member States’ rights to introduce measures which are 242

Concluding Remarks particularly harmful to the investment climate, such as price regulation in wholesale markets. The analysis in this part of the study has also revealed the demonstrable differences between the regulatory approaches applied in the Electricity Directive and the Security of Electricity Supply Directive. The former Directive, which has as its overall objective to improve the operation of the internal electricity market, is less concerned with the specific objective of promoting investments in the security of supply (or in the environmental) interest. Nevertheless, several of the Directive’s provisions contribute to facilitating market-based investments, such as the unbundling requirements that indirectly define the roles and responsibilities of market participants and the requirements for non-discriminatory and transparent authorization procedures. The Security of Electricity Supply Directive, on the other hand, is more focused on the specific challenges involved in attracting electricity generation investments in the security of supply interest and is more explicit in its market-based focus. Nevertheless, the latter Directive provides for less rigorous regulation than the Electricity Directive and its provisions, with some exceptions, amount primarily to declarations of policy. In this respect, it is appropriate to note that the provisions that have the weakest internal market rationale under current Article 114(1) TFEU, such as the requirement in Article 3(1) of the Security of Electricity Supply Directive to define roles and responsibilities, are also the provisions that appear to be of least legal significance for the promotion of internal market investments. Consequently, there are several areas where the more generally focused Electricity Directive contains provisions of more significance to security of supply issues than the specific, and partially overlapping, Security of Electricity Supply Directive. From a technical legal point of view, it is therefore reasonable to question whether adopting a separate Security of Electricity Supply Directive was the correct approach in the first place, or whether the relevant provisions should rather have been adopted as amendments to the Electricity Directive. The Union measures discussed in this part are, with some exceptions, of a general nature, with some providing an overall framework for market-based investments and some providing no more than declarations of policy. In this author’s view, it is therefore clear that these measures are not sufficient in their own right to guarantee the electricity generation investments needed to meet future demand in the Member States. Consequently, the EU measures discussed so far do not rule out, or pre-empt, the Member States’ right of recourse to free movement restrictions as discussed above in Part III of the book.847 However, the question of whether the present EU measures are likely to ensure the necessary investments, and consequently whether recourse to the grounds for exemption from the provisions of the Treaty is pre-empted, also requires an analysis of the specific Union measures governing Member State interventions as instruments for attracting investments. The EU regulation of such national interventions is the topic of the next part of the book.

847. See in particular Ch. 9.3 above.

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Part V

Public Intervention

Chapter 18

Introduction

The establishment of a market to function as the primary instrument to promote necessary investments will not necessarily preclude Member States from intervening in the electricity market in order to promote new investments in electricity generation. Indeed, public authorities will be likely to wish to intervene in the market if market actors fail to pursue publicly desired investments based on the authorization procedure and the measures of market facilitation discussed in Part IV above. The soundness of the rationale for public intervention may vary and intervention may also provoke varying degrees of public controversy. The same is true regarding the choice of instrument to apply. Today most parties would agree that some form of market intervention may be necessary to promote investments in electricity production from renewable energy sources in order to reduce energy dependency and mitigate climate change, although opinions may differ as to the preferred instruments of intervention. By contrast, views are more diverse on whether intervention is in any event necessary to ensure investments in sufficient generation capacity to satisfy demand at all times, including peak-load situations. EU legislation leaves no doubt that national instruments of intervention still have a role to play within the internal electricity market. Article 3(10) of the Electricity Directive requires Member States to implement measures to achieve, inter alia, the objectives of environmental protection and security of supply.848 The provision also emphasizes that the Member States may make available adequate economic incentives for the attainment of these objectives. Moreover, Article 5(2) of the Security of Electricity Supply Directive provides that, without 848. This requirement must primarily be perceived as a declaration of policy rather than as imposing a legal obligation of result on Member States, see similarly, with respect to Art. 3(7) in Electricity Directive 2003/54/EC, C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 252–253.

Chapter 18 prejudice to the State aid provisions of the TFEU, the Member States may take additional measures to maintain a balance between supply and demand, including measures facilitating the provision of new generation capacity.849 These provisions do not, however, define the scope of the Member States’ rights to intervene in the market, and are therefore of little substantive value in their own right.850 Consequently, questions concerning the Member States’ rights to intervene in the market must be determined on the basis of the more specific provisions that either require or restrict the use of such interventions. Member States are under an obligation continuously to monitor the adequacy of their national systems to meet current and projected demand for electricity.851 If such monitoring reveals likely strains in the balance between supply and demand, the situation can, in principle, be dealt with through the adoption of measures either to increase supply or to decrease (or restrict the growth in) demand or to promote investment in interconnector capacity to regions with a supply surplus. Although we will primarily focus on supply-side measures in this part of the book, demandside and infrastructure measures are also of crucial importance and will be discussed to some extent as alternatives in the following sections. The instruments of intervention available to Member States fall generally into two categories. First, public authorities may wish to derogate from authorization procedure requirements in the Electricity Directive in order to pursue necessary investments more actively. Second, public authorities may provide investment incentives to market actors and/or impose investment obligations on them in order to ensure the necessary investments are made. Such incentives and obligations may either be introduced in conformity with the authorization procedure or by taking advantage of an exemption from the authorization procedure requirements. This part of the book aims to analyse the Member States’ rights to derogate from the authorization procedure requirements in Article 7 of the Electricity Directive. We will focus primarily on the right to derogate in the security of supply interest before comparing this with the right to derogate in the environmental interest. We will then discuss the different legal implications of reliance on these interests. The Electricity Directive makes available two possible grounds for derogation. First, Article 8 includes an explicit exemption from Article 7 to enable the launching of tendering procedures to promote supply-side or demand-side investments. This provision is discussed below in Chapters 19 and 20. Second, Article 3 makes available an exemption from some of the provisions of the Directive, including Article 7, to the extent that such exemption is necessary to perform public

849. Article 5(2)(a) of the Directive. 850. A particularly striking example in this respect is provided by Art. 5(2)(f) of the Security of Electricity Supply Directive, which sets forth that Member States may resort to the implementation of tendering procedures in accordance with the Electricity Directive. Except for providing a superfluous reference to the substantive provisions of Art. 8 of the Electricity Directive, it is difficult to see that this provision has any separate function at all. 851. Article 4 of the Electricity Directive and Art. 7 of the Security of Electricity Supply Directive.

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Introduction service obligations in the general economic interest. This provision is further commented on in Chapters 21 and 22 below. If an exemption from the authorization procedure is combined with other forms of incentives, such as investment aid, the legality of such incentives will also have to be considered in the light of other areas of EU law. The State aid provisions of the TFEU are particularly relevant in this respect. Accordingly, some types of measure launched by Member States, such as tendering procedures including subsidy elements, will be subject to a double test; having to comply both with the conditions for the granting of an exemption under the Electricity Directive and with the State aid provisions in primary EU law. The application of the TFEU State aid provisions in such situations is further discussed in Part VI of the book.

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Chapter 19

Electricity Generation Tenders in the Security of Supply Interest

19.1.

INTRODUCTION

Article 8 of the Electricity Directive permits Member States to derogate from their authorization procedures in the security of supply or environmental interest by launching tendering procedures or equivalent measures for new supply-side or demand-side investments. In this chapter we will focus on tenders in the security of supply interest, while tenders in the environmental interest will be discussed more briefly in the next chapter to illustrate the different legal implications of reliance on these different interests. A tendering procedure is defined by the Electricity Directive as ‘the procedure through which planned additional requirements and replacement capacity are covered by supplies from new or existing generating capacity’.852 Thus, a public tender for new electricity generation capacity transfers the initiative for capacity investments from the market participants to the regulatory authorities by allowing the latter to plan and choose which projects to put out to tender. While authorization procedures leave the initiative for proposing new projects – and decisions on whether to realize authorized projects – to market participants, the primary issue left to potential bidders by the tendering process is that of price.853 Tendering 852. Article 2(24) of the Directive. It follows from this definition and Art. 8(4) of the Directive that consideration must also be given to the ability of existing plants to deliver the required capacity in invitations to tender. In the following we will focus on new investments. 853. Although the tender specifications may also rely on other criteria, see for an example of more broadly defined (and, in the opinion of the Commission, too broadly defined) criteria, Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, in particular at para. 248.

Chapter 19 procedures therefore amount to an alternative, more proactive, public approach to the question of market access for potential investors.854 A tendering procedure may, in principle, be launched without any elements of subsidy. In practice, however, it is difficult to envisage such a tender for the right to build new capacity attracting any interest, since the rationale for launching a tender in the first place is to promote investments that market participants do not consider profitable.855 The element of subsidy will typically take the form of a price premium on long-term power purchase contracts with potential generation capacity investors, with the subsidy being made up of the difference between expected market prices and the fixed price offered by the successful bidder.856 The tendering procedure may be administered either by regulatory authorities, by private bodies independent of other electricity market activities or by TSOs subject to full ownership unbundling.857 There are several ways in which the subsidy element may be financed: TSOs running a tendering procedure may spread the cost among customers by raising grid tariffs; State resources may be applied to cover the cost; or suppliers may be required to buy electricity from the successful bidder at the tender price.858 The extent to which the subsidy as such is lawful under EU law will, however, have to be determined on the basis of the State aid provisions of the TFEU, not under the provisions of the Electricity Directive.859 Article 8 of the Electricity Directive does not limit Member States’ rights to launch tenders to projects that involve specific technologies or primary energy sources. It also does not explicitly distinguish between investments in base-load, medium-load or peak-load capacity. Moreover, the provision leaves to Member States’ discretion the choice of whether to launch supply-side or demand-side tenders as a means of ensuring the supply-demand balance.860 This formal point

854. Consequently, the tendering procedure in the Electricity Directive must be separated from the EU law obligations imposed on certain categories of investors to tender for the procurement of goods or services in connection with the realization of an investment, see in particular Directive 2004/17/EC of the European Parliament and of the Council of 21 Mar. 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sector, OJ L134/1, 30.4.2004. 855. See similarly, H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), 291. 856. See for an example the agreements under scrutiny in Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007. 857. Article 8(5) of the Electricity Directive. 858. Eurelectric, Security of Electricity Supply – Roles, Responsibilities and Experiences within the EU (2006), 38 and M. Mendonc¸a, Feed-in Tariffs. Accelerating the Deployment of Renewable Energy (London: Earthscan, 2007), 14–15. 859. Chapter 25.2 below. 860. The definition in Art. 2(24) of the Electricity Directive refers to supply-side measures only, but it follows clearly from the wording of Art. 8(1) that demand-side tenders or equivalent demand-side measures are also covered by the provision. Given that the promotion of energy efficiency and demand-side measures is a primary Union priority within the internal electricity

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Electricity Generation Tenders in the Security of Supply Interest of departure is, however, subject to two modifications in practice. First, Article 8(2) specifically permits tenders in the environmental interest and in the interest of promoting infant new technologies. As we shall see below in Chapter 20, the threshold when relying on these interests to promote electricity production from renewable energy sources and CHP plants is, in practice, lower than the threshold when relying on security of supply interests to justify investments in conventional power plants. Second, the alternative procedures ‘equivalent in terms of transparency and non-discrimination’ as set forth in Article 8(1) in practice all relate to the specific issue of ensuring sufficient reserve capacity margins for peak-load situations. This has also been confirmed by the Commission in one of its interpretative notes to Electricity Directive 2003/54/EC where it clarifies the types of measures it regards as equivalent within the meaning of the nearly identical Article 7 of that Directive – all such measures relate to reserve capacity generation.861 More specifically, the tendering provision in Article 8(1) of the Electricity Directive has two main functions. First, it requires Member States to ‘ensure the possibility, in the interests of security of supply, of providing for new capacity or energy efficiency/demand-side management measures through a tendering procedure or any procedure equivalent in terms of transparency and nondiscrimination’.862 This implies that Member States are under an obligation to be prepared to launch tendering (or equivalent) procedures at short notice in the event of strains in the supply-demand balance.863 Second, the provision restricts the Member States’ freedom to apply such tendering procedures as an exemption from the authorization procedure. The rationale behind the Member State obligation to be prepared to launch tenders in the event of security of supply problems is that strains in the supplydemand balance in one Member State may also eventually threaten the balance in other connected Member States. The rationale behind restricting the Member States’ freedom to launch tendering procedures is related to the economics of market functioning: public interventions in the form of tendering procedures may contribute to investor uncertainty and deter future market-based investments, which may, in turn, have consequences for neighbouring countries.864

861.

862. 863. 864.

market, the sole reference to supply-side measures in Art. 2(24) is open to criticism, but does not have any substantive legal implications as such. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, 5–8. Since Art. 8 of the new Electricity Directive is for all practical purposes identical to Art. 7 of Electricity Directive 2003/54/EC, the interpretative note and the literature discussing the latter provision is still of relevance to the understanding of Art. 8 of the new Electricity Directive. Article 8(1) of the Electricity Directive. See further C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 316–318 for a discussion of this requirement. Consequently, Union effects from market price distortions are more likely to arise as a result of interventions in non-peripheral regions with well-established interconnection with other regions than in peripheral regions where the effects are likely to remain national in scope, see P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 524.

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Chapter 19 In the following, we will focus on this latter restriction on Member States’ right to launch tendering procedures or equivalent measures. In this respect, Article 8(1) second sentence provides that tendering procedures or equivalent measures providing for new capacity or energy efficiency/demand-side management may ‘be launched only where, on the basis of the authorization procedure, the generating capacity to be built or the energy efficiency/demand-side management measures to be taken are insufficient to ensure security of supply’. This limitation raises two questions: how should the concept of ‘security of supply’ be interpreted within the context of Article 8(1); and in what situations can the authorization procedure be deemed ‘insufficient to ensure’ the aim of security of supply? These questions will be discussed below in sections 19.3 and 19.4, respectively. The related issues of electricity imports and interconnector investments are then dealt with in section 19.5. Before commencing these analyses, we will briefly discuss the internal market effects of launching a tendering procedure, which are also relevant to the understanding of the substantive requirements of the provision, below in section 19.2. 19.2.

THE INTERNAL MARKET EFFECTS OF LAUNCHING TENDERING PROCEDURES

The tendering procedure in Article 8 of the Electricity Directive requires Member States to comply with the same fundamental conditions relating to nondiscrimination, objectivity and transparency as those set forth under the authorization procedure in Article 7. These principles are fundamental to any tendering procedure.865 They also follow explicitly from the conditions relating to the publication and content of the tender specifications in Article 8(3) and, more indirectly, from the reference to ‘a tendering procedure or any procedure equivalent in terms of transparency and non-discrimination, on the basis of published criteria’ in Article 8(1). These similarities between the authorization and tendering procedures in terms of guaranteeing non-discriminatory market access may lead one to ask why the EU only exceptionally allows Member States to have recourse to the tendering procedure. In its Communication on Energy Infrastructure and Security of Supply from 2003, the Commission held that tendering ‘should, however, be seen as an absolute last resort given the numerous distortive effects that such a measure can have on the market and the bias that this produces in favour of purely supply-side measures. In particular, the existence of the possibility to tender will tend to constrain independent investment decisions being made spontaneously’.866 Similar views 865. See, for example, the general principles enshrined in Art. 10 of Directive 2004/17/EC of the European Parliament and of the Council coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sector, OJ L134/1, 30.4.2004. 866. Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 8–9.

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Electricity Generation Tenders in the Security of Supply Interest are shared by several other commentators. Cameron holds that the tendering procedure ‘is a measure that is clearly an intervention in the market with potentially wide distorting effects’.867 Eurelectric underscores that tendering procedures should only be applied as a very last resort to avoid physical supply shortage, since these procedures constitute ‘a massive intervention in the market, which in itself can bring about market failure’.868 A more nuanced approach is taken by Finon & Midttun, who emphasize that the use of tenders may have some negative consequences for efficiency since, as well as potentially creating overcapacity and thus depressing market prices, it could also possibly create incentives for free-riding by market participants who would have been ready to invest even in the absence of tenders.869 The general concern raised by the commentators referred to above is that the launching of tenders may distort future market signals by creating an expectation among market participants that future investments may be subsidized if security of supply concerns arise. This expectation may lead market participants to delay planned investments in order to be able to free-ride on the next wave of tenders, which are likely to be more profitable than ordinary market-based investments made under an authorization-based regime. On the other hand, market interventions in the form of tenders do not represent any major threat to the profitability of investments already made unless the tenders are of such a large scale that they depress market prices. Consequently, an assumption among market participants that tenders may be launched is likely to be less detrimental to investor certainty than an assumption that electricity price caps will be introduced, causing electricity prices to be set below marginal costs. It is open to question whether the market concerns raised above, which are of a predominantly economic nature, are sufficient to qualify the restrictions on the use of tendering procedures as constituting measures that genuinely have as their object the improvement of the conditions for the establishment and functioning of the internal market under Article 114 TFEU. Although tendering procedures may contribute to investor uncertainty, they do not necessarily discriminate as such between different categories of market participants. A situation where some power plants are operated with a guaranteed rate of return under subsidized long-term

867. P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 524. Nevertheless, he appears to be of the opinion that the conditions for the application of the tendering procedure under Electricity Directive 2003/54/EC are not very strict, see at 133. 868. Eurelectric, Security of Electricity Supply – Roles, Responsibilities and Experiences within the EU (2006), 38. 869. D. Finon & A. Midttun, ‘Reshaping European Energy Industry: Patterns and Challenges’, in Reshaping European Gas and Electricity Industries: Regulation, Markets and Business Strategies, ed. D. Finon & A. Midttun (Amsterdam: Elsevier, 2004), 357–387, at 378. See also H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), 292, who states that ‘[i]t is evident that launching a tendering procedure constitutes an intervention in the generation market from the part of the authorities, which affects the investment signal in the market’.

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Chapter 19 power purchase contracts, while others are operated under ordinary market conditions, could arguably be liable to distort competition between the different categories of market participants. On the other hand, the market participants concerned would have had the opportunity to compete for the long-term power purchase contracts in the first place through the tender procedure. The principal internal market rationale for restricting the use of tenders is therefore rather the concern, as indicated by Jones, that national incumbents may win every tender by means of strategic under-bidding in order to limit market access for new entrants.870 It can also be argued that a situation where market access to some Member States is determined through authorization procedures while access to others is determined on the basis of tendering procedures gives rise to a complex regulatory situation that may, in itself, make cross-border establishment more difficult for market participants. Accordingly, given the margin of discretion available to the Union for determining the means to approximate laws, the restrictions on the use of tendering procedures are, in this author’s opinion, clearly not beyond the competence of the EU under Article 114 TFEU. There is, however, reason to emphasize that the ‘numerous distortive effects’ referred to by the Commission in its statement cited above primarily relate to the distortion of future market price signals as an instrument for attracting investments rather than to the distortion of competition between market participants. Consequently, the application of the notion of security of supply as a condition for Member State action under Article 8 of the Electricity Directive opens up possibilities for interventions of a very different Union nature than the free movement restrictions discussed above in Part III of the book. This difference is also of relevance for the interpretation of security of supply as a condition for Member State action under Article 8 of the Directive. 19.3.

THE CONCEPT OF SECURITY OF SUPPLY IN ARTICLE 8 OF THE ELECTRICITY DIRECTIVE

19.3.1.

UNINTERRUPTED ELECTRICITY SUPPLIES

TO

CUSTOMERS

The market facilitation measures discussed above in Part IV of the book illustrate how Directive obligations can be imposed on Member States in pursuit of security of supply objectives. Article 8(1) of the Electricity Directive takes a different

870. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 15. Jones also mentions economies of scale as a possible reason why the incumbent may win all tenders. In this author’s opinion, it is not evident that any advantages an incumbent may have due to economies of scale are a relevant concern when discussing whether the EU is acting legitimately in limiting the use of tendering procedures. The point of departure for any award procedure must be that the best offer in economic terms should prevail, irrespective of whether some bidders enjoy a favourable position due to their relative market size.

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Electricity Generation Tenders in the Security of Supply Interest approach by making the notion of security of supply a condition for Member State conduct. This makes it crucial to have a clear understanding of the definition of the notion as it is applied under Article 8. The Electricity Directive only provides fragmented and unspecific definitions relating to the notion of security of supply. The definition of ‘security’ as meaning ‘both security of supply and provision of electricity, and technical safety’ does not provide much guidance for the understanding of the concept.871 The definition of ‘supply’, that is, ‘the sale, including resale, of electricity to customers’ read in conjunction with the definition of ‘customers’ as including both wholesale and final electricity customers, implies that security of supply cannot be seen from a purely end-user perspective.872 These definitions do not, however, provide much guidance as to the situations in which a security of supply concern may be said to arise. The definition of ‘security of electricity supply’ provided by the Security of Electricity Supply Directive could, in principle, be applied to assist with the understanding of the term under the Electricity Directive.873 The definition of the notion as ‘the availability of an electricity system to supply final customers with electricity, as provided for under this Directive’ is, unfortunately, not very informative. The reference to the Directive’s own provisions is liable to make the definition circular and also renders it unsuitable for use as a universal definition of the concept. Moreover, the reference to final customers deviates from the more general customer perspective employed in the Electricity Directive. In the interests of consistency, it is unfortunate that two Directives that not only apply to the same sector of the economy but also to the same objects of regulation apply different definitions of the same concept, although the substantive significance of these differences is likely to be limited.874 It is, for example, difficult to see that interpreting the security of supply concept as referring strictly to end-users on the one hand or to customers more generally on the other has any practical significance for the application of the term under Article 8 of the Electricity Directive. Any disruption in supplies to wholesale customers is ultimately also likely to affect endusers. Nevertheless, the definition provided by the Security of Electricity Supply Directive is, in any event, of limited value for the understanding of the notion under the Electricity Directive.

871. Article 2(28) of the Electricity Directive. See also S.M. Goldberg, ‘The Directives Regulating Security of Supply: A Snapshot’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 109–127, at 119, who points out that this definition is somewhat wider than the corresponding definition in Art. 2(32) of Gas Directive 2003/55/EC. 872. Articles 2(19) and 2(7) of the Electricity Directive, respectively. 873. Article 2(b) of the Security of Electricity Supply Directive. 874. This is not the only example of a term that is defined differently in different pieces of internal electricity market legislation. The definition of the term ‘interconnector’ in the Electricity Regulation Art. 2(1) deviates from the definition of the term ‘interconnectors’ in the Electricity Directive Art. 2(13). However, as is apparent from the wording of the provision in the Electricity Regulation, this difference in definition is intentional.

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Chapter 19 The provision of uninterrupted electricity supplies to customers is highlighted as a core security of supply objective in most attempts to define the meaning of the notion and there is little doubt that the notion, as it is applied in Article 8, includes this objective.875 There is, however, no precise definition of what this objective actually entails. It is evident that ensuring security of supply does not mean that all customers have to be guaranteed completely uninterrupted electricity supplies at all times. Some minor interruptions will occur in any electricity system and it would not be economically feasible to seek to avoid them through increased investment.876 The aim must therefore be understood as being to ensure adequate generation capacity and an appropriate supply-demand balance in order to enable adequate continuity of supply. In other words, achievement of the aim requires a balance to be kept continuously between the provision of excess generation capacity (to allow for exceptional situations) and the cost (and possibly also other more fundamental consequences) of electricity interruptions in those cases where demand outstrips supply.877 What, then, is an adequate level of continuity of supply? On the one hand, the Campus Oil judgment and subsequent case law offer a possible starting point: any public intervention must be for the purposes of safeguarding energy supplies in the event of a crisis and the envisaged interruptions must constitute a genuine and sufficiently serious threat to a fundamental interest of society.878 This is, however, clearly not the intended approach of Article 8 of the Electricity Directive. The rationale behind the limitation on the use of tenders relates primarily to the promotion of the functioning and efficiency of the market. In addition, the launching of tenders can hardly be said to have the same restrictive effect on EU trade as the free movement restrictions in Campus Oil and subsequent cases. An approach more in line with the economic rationale underlying the provision would therefore be to permit public intervention in situations where there is a risk that the market will not be able to clear for an unacceptable length of time each year, that is, that demand will outstrip supply so that electricity rationing has to be imposed on customers. This approach is supported by the Security of Electricity Supply Directive, which emphasizes that Member States may, inter alia, introduce tendering procedures in order to maintain a supplydemand balance.879 The ‘balance between supply and demand’ is defined by the Directive as ‘the satisfaction of foreseeable demands of consumers to use electricity without the need to enforce measures to reduce consumption’.880 The interpretation of the latter part of the definition as referring in particular to electricity rationing is further supported by the wording of the Swedish language version, 875. Chapter 6 above. 876. Eurelectric, Security of Electricity Supply – Roles, Responsibilities and Experiences within the EU (2006), 5–6. 877. See similarly H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), 280. 878. Case 72/83, Campus Oil, [1984] ECR 2727. See Ch. 9.4 above. 879. Article 5(2)(f) of the Security of Electricity Supply Directive. 880. Ibid., Art. 2(d).

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Electricity Generation Tenders in the Security of Supply Interest which refers to the satisfaction of consumer demand utan att tvingande a˚tga¨rder beho¨ver vidtas fo¨r att minska fo¨rbrukningen.881 Since the value of lost load is high, the risk of electricity rationing being imposed for a significant amount of time, irrespective of whether such rationing is likely to pose a threat to the fundamental interests of society, should consequently be sufficient to justify intervention under Article 8 of the Electricity Directive. The tolerable level of supply shortage is, however, not subject to legal harmonization at Union level. The standard set by the Irish TSO Eirgrid in its Generation Adequacy Reports, where a level of expected supply shortage of up to eight hours a year is stated as being acceptable, appears to be consistent with international adequacy standards and may function as an indication, although not strictly speaking a legally binding one, in EU law.882 Another difficulty involved in determining at what point the market will not be able to clear, possibly resulting in blackouts and rationing, relates to the assessment of demand-side conduct. It follows from the wording of Article 8(1) that a Member State will not be permitted to launch a tender if ordinary market conduct, such as reduced electricity demand due to higher electricity prices, is sufficient to ensure security of supply. This means that the price sensitivity of demand is an important factor in determining whether public interventions are necessary to ensure there is supply-demand balance. This price sensitivity may vary from country to country and region to region, depending on market characteristics such as the possibilities enjoyed by consumers in practice to reduce electricity consumption or switch to other energy sources.883 In this respect, it is noteworthy that Union legislators are of the opinion that the introduction of competition in retail markets has not led to significant competition in products and services which could have resulted in improved energy efficiency on the demand side.884 Moreover, the longer-term demand situation may also be difficult to assess due to the demand-side impact of new large-scale end-users that may enter or exit the market, such as the establishment or winding-up of power intensive industry. Consequently, it can be difficult to determine with any amount of precision whether market-based demand-side conduct will be sufficient to cope with a strained supply-demand situation, or whether interventions in the form of tenders are necessary.

881. It is firmly established case law that the interpretation of a provision of EU law involves comparing the versions in different languages, see Case C-72/95, Aannemersbedrijf P.K. Kraaijeveld BV e.a. v. Gedeputeerde Staten van Zuid-Holland, [1996] ECR I-5403, para. 28 and Case C-36/98, Spain v. Council, [2001] ECR I-779, para. 47. 882. For a recent report see Eirgrid plc, Generation Adequacy Report: 2010–2016 (2009), 14. See also Eurelectric, Security of Electricity Supply – Roles, Responsibilities and Experiences within the EU (2006), 39. 883. See P. Anker-Nilssen, Per, ‘Energibruk og energipriser – et fordelingsproblem’, MAGMA Tidsskrift for økonomi og ledelse No. 5-6 (2006), 93–102, for an example of the difficulties involved in measuring price sensitivity of demand and the problems of social redistribution which may arise as a consequence of the price system in the Norwegian electricity market. 884. Paragraph 9 of the preamble to the Energy Efficiency Directive.

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Chapter 19 19.3.2.

SUPPLY INTERRUPTIONS

AND

ELECTRICITY PRICES

A question related to the above discussion on uninterrupted electricity supplies is whether electricity prices are in any way relevant for the applicability of the notion of security of supply under Article 8 of the Electricity Directive. In other words, does Article 8 permit tenders to be launched not only in order to provide uninterrupted electricity supplies to customers, but also in order to do so at a reasonable price? We have seen above that several authors include reasonable prices as an aim within the scope of their definitions of security of supply.885 Furthermore, electricity price levels are explicitly recognized as a legitimate concern under the public service provisions in Articles 3(2) and 3(3) of the Electricity Directive. On the other hand, there is nothing in the wording of Article 8 to indicate that electricity prices are of any relevance. To accept the achievement of reasonable prices as justifying the launch of a tender would also contradict the economic rationale underlying Article 8 and, more generally, the regulatory point of departure for competitive electricity markets. The market-based approach to new investments is founded on the idea that electricity price increases caused by shifts in market demand and supply will induce investors to initiate new projects. These investments will, in turn, contribute to security of supply in the long term.886 If Member States had the right to launch tender processes in order to ensure reasonable electricity prices, this would mean they had the right to manipulate prices by triggering new investments, instead of letting new investments be triggered by prices. In this author’s opinion, the provision cannot be interpreted as being at odds with the Directive’s underlying economic rationale in the absence of clear wording to the contrary. This suggests that high electricity prices as such cannot justify intervention in the security of supply interest under Article 8 of the Electricity Directive. The above conclusion parallels the prevailing doctrine on the relationship of economic considerations to the free movement provisions, as expressed by the Court of Justice in Campus Oil and subsequent decisions.887 To apply by analogy the Court’s ruling in Campus Oil, the mere fact that a tender that pursues legitimate security of supply interests also has economic implications is not sufficient to render recourse to tendering unlawful. The fact that public intervention may have the side effect of reducing prices for end-users cannot therefore prevent the launch of a tender by a Member State where it is considered necessary to avoid supply interruptions. A more difficult question is whether electricity price levels could conceivably amount to a relevant security of supply concern in those exceptional cases where sudden, sharp price increases – so-called price spikes – occur. Such price spikes are more likely to occur in electricity markets than in most other markets, particularly 885. Chapter 6 above. 886. Chapter 5.2 above. 887. Case 72/83, Campus Oil, [1984] ECR 2727, para. 35.

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Electricity Generation Tenders in the Security of Supply Interest due to the short-run price inelasticity of demand and supply. This price inelasticity may also contribute to increasing the market power of electricity producers and this may, in turn, possibly result in the setting of electricity prices above marginal cost. Although price spikes are primarily an economic concern, the possibility cannot be ruled out that their existence may ultimately threaten other legitimate interests, such as public health or public security. The Court of Justice has in several decisions acknowledged that the risk of seriously undermining the financial balance of national social security systems may constitute grounds justifying exemption from the free movement provisions of the Treaty, even though such grounds are clearly economic in nature.888 Given that electricity is a fundamental input in the economy, there is good reason to ask whether similar reasoning could be applied under Article 8 of the Electricity Directive. This question is unlikely to be of much significance in practice, however, since price spikes would in all likelihood signal a need for supply-side or demand-side investments. If the rise in prices did not bring about market-based investments, whether due to the abuse of market power or other reasons, then tenders could in principle be justified in the interests of ensuring uninterrupted supplies. 19.4.

MARKET-BASED MEASURES NOT SUFFICIENT TO ENSURE SECURITY OF SUPPLY

19.4.1.

INTRODUCTION

Article 8 of the Electricity Directive provides that a tendering procedure may only be launched if supply- or demand-side measures being taken on the basis of the authorization procedure are insufficient to ensure security of supply. As concluded in section 19.3 above, a tender can consequently only be launched if measures otherwise implemented by the market participants are not sufficient to ensure a balance between supply and demand without the need to impose rationing on the demand side. In the following we consider the factors that need to be present for the condition ‘insufficient to ensure’ to be fulfilled. Since the provision is neutral as to the nature of the investments pursued, a tender may, in principle, be launched to address a number of different threats to security of supply. These threats may relate to shortages of primary fuels or shortages of either base-load or peak-load capacity. These different scenarios raise different questions concerning the fulfilment of the conditions laid down in Article 8(1) of the Directive, and will therefore be discussed separately in the following. The use of tendering procedures to alleviate the risk of interruptions to primary fuel supplies is discussed below in section 19.4.2. We will then discuss the provision in relation to risks concerning 888. Case C-158/96, Kohll, [1998] ECR I-1931, para. 41; Case C-372/04, Watts, [2006] ECR I-4325 (Grand Chamber), para. 145 and Case C-208/05, ITC Innovative Technology Center GmbH v. Bundesagentur fu¨r Arbeit, [2007] ECR I-181, para. 43.

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Chapter 19 inadequate generation capacity more generally in section 19.4.3, before considering the provision’s application to the particular challenges of ensuring sufficient reserve capacity margins in section 19.4.4. 19.4.2.

PUBLIC INTERVENTION TO REDUCE THE IMPACT INTERRUPTIONS IN PRIMARY FUEL SUPPLIES

19.4.2.1.

Overview

OF

Electricity supply disruptions may occur because there are insufficient primary energy sources for electricity generation. A risk of disruptions to supplies of primary energy sources thus also represents a risk of electricity supply disruptions. The magnitude of the risk varies from region to region, depending on factors such as the primary energy sources used in electricity generation, the extent to which the energy mix and supply sources are diversified, and energy import dependency. In systems where hydropower is predominant, for example, the risk is potentially high, given fluctuations in precipitation from year to year, as periods of low precipitation may result in too low reservoir levels.889 In thermal systems, the risks are more closely associated with the risk of disruptions to imports of primary energy sources. Risks relating to disruptions in fossil energy imports and, particularly in the case of EU electricity generation, disruptions in natural gas imports, are in most cases beyond the control of Member States, revealing the geopolitical risks inherent in the EU’s fossil fuel import dependency.890 Events beyond the reach of the EU’s internal energy market decision-making, such as political unrest in producer countries or politically motivated export restrictions, could, in principle, abruptly halt EU natural gas imports or lead to sudden price increases.891 Disruptions in natural gas supplies would be likely to affect electricity generation in Member States with a substantial degree of gas dependency on the electricity supply side. Depending on the supply- and demand-side flexibility of the electricity market in question, such a situation could lead to a rapid and unforeseen

889. Within Europe, Norway’s situation is exceptional, given the country’s almost complete reliance on hydropower in electricity generation (accounting for approximately 96% of domestic electricity production), see Ministry of Petroleum and Energy, Facts 2008. Energy and Water Resources in Norway (Oslo: 2008), 19. There are, however, other examples of EU countries where hydropower production plays a significant role, such as Austria and Sweden, although the relative share of generation accounted for by hydropower in these countries is considerably lower than in Norway, see Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 42. 890. See Commission Communication: An energy policy for Europe, COM (2007) 1 final, 10.1.2007, 3–4 and Ch. 4.2 above on the external energy dependency of the EU. 891. Clingendael International Energy Programme, Study on Energy Supply Security and Geopolitics. Final Report (Report prepared for DGTREN) (2004), 38.

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Electricity Generation Tenders in the Security of Supply Interest rise in electricity prices and, in the worst case, possible supply interruptions for end-users.892 A Member State may wish to reduce the potential impact of disruptions in supplies of primary fuels by increasing supply-side or demand-side flexibility. On the supply-side, the risks may be reduced by promoting a diversified energy mix in electricity generation to guard against disruption in the supply of certain energy sources. The issue of diversification is relevant both to the geographical origins of primary fuels and the use of different types of primary energy sources. Internal electricity market measures are most likely to affect the latter form of diversification, on which we will focus in the following. The use of a tendering procedure to achieve energy diversification targets in the security of supply interest raises two questions under the ‘insufficient to ensure’ condition laid down in Article 8(1) of the Electricity Directive. First, is the Member State’s attempt to achieve a desired energy mix necessary to ensure a balance between electricity supply and demand? Second, if the answer to the first question is positive, is the launch of a tendering procedure necessary to achieve the desired energy mix? 19.4.2.2.

The Necessity of a Diversified Energy Mix

Different market participants possess different technological expertise and financial capabilities, and different capital and operational cost structures are involved in the building and operation of power plants that use different primary energy fuels. Purely market-based investments are therefore likely to contribute to some level of fuel diversification. While some market participants will have a technological lead in the field of renewables and will thus priorities such investments, others will be in a position to finance typical base-load investments with high capital costs and lower variable costs (such as nuclear plants), while still others may be likely to priorities peak-load investments with a reverse cost structure (such as open-cycle gas turbines). Moreover, electricity producers are also likely to seek

892. The situation as regards energy import dependency and the flexibility and vulnerability of national electricity markets in this respect differs widely between the Member States. For example, Finland is largely dependent on Russia for supplies of natural gas, but at the same time has a fairly diversified energy mix in electricity generation, with solid fuels, nuclear and renewables accounting for significant shares, increasing the flexibility of the system. In comparison, a country such as Hungary, which also relies heavily on gas imports, may possibly be more prone to supply disruptions due to the significant share of natural gas in electricity generation. At the other end of the scale, the electricity system of a country such as France is likely to be less affected by interruptions in gas imports or price increases because nuclear fuels account for a significant share of the country’s electricity generation. See Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, Part B, Statistical Annex, 27 (France), 39 (Hungary) and 57 (Finland).

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Chapter 19 to diversify their primary energy sources in order to manage risk.893 Nevertheless, given that the primary motivation for any market-based investment is the maximization of profit, investors will not necessarily be willing to contribute to a publicly desired energy source diversification at national level unless the proper incentives are in place. The main difficulty with assessing whether a desired level of energy source diversification is necessary in the security of electricity supply interest is the abstract nature of the risk of fuel interruptions. It is notoriously difficult to predict the risk of interruptions in the supply of primary energy sources, since the events that cause such interruptions will often be beyond the control of the Member State in question. A gas importer will generally be unable to exercise much control over political decisions affecting the export of natural gas from producer countries, while a Member State dependent on hydropower has no control over future precipitation. With respect to the former example, the question of whether imported energy sources are subject to a higher risk of disruption than indigenous sources is open to debate, as is, accordingly, the extent to which energy dependency is in fact an energy security problem at all.894 In the absence of clear, scientifically-based answers, questions concerning the need for energy diversification will inevitably be tinged by political considerations. The essential question in our present context is therefore whether, and to what extent, Member State choices to pursue energy diversification in order to safeguard against an abstract risk factor are subject to EU review. The main concern in relation to energy import dependency is, arguably, the risk of increased energy prices, rather than the risk of long-term interruptions in energy imports. Relieving such economic effects is clearly a legitimate EU objective under Article 3 TEU, but, as we have seen above in our discussion of the definition of security of supply, it does not supply Member States with a relevant argument for the application of Article 8 of the Electricity Directive. Member States would therefore have to rely on the aim of safeguarding against the more abstract risk of primary fuel interruptions that might cause interruptions in electricity supplies. The relationship between the choice of primary energy sources and environmental objectives is less abstract than the corresponding relationship between the energy mix and security of supply. Article 8(1) is therefore not likely to be of much relevance to the application of tenders for new electricity production from renewable energy sources, since it will be easier for Member States to rely on

893. See the Energy Review 2006 by the British Government as quoted by C. Robinson, ‘The Economics of Energy Security: Is Import Dependence a Problem?’, CRNI 8, no. 4 (2007): 425–451, at 440. 894. C. Robinson, ‘The Economics of Energy Security: Is Import Dependence a Problem?’, CRNI 8, no. 4 (2007): 425–451, argues strongly against the perception that energy dependency is a problem, concluding at 433 that ‘import dependence is an irrelevance when considering energy security’. In this author’s opinion, this conclusion goes too far in minimizing the potential risks of energy dependency.

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Electricity Generation Tenders in the Security of Supply Interest Article 8(2).895 In practice this means that Article 8(1) will apply to the promotion of investments in electricity production from carbon fuels and nuclear energy. Jones argues that the launching of tenders to promote nuclear energy investments can be accepted under Electricity Directive 2003/54/EC, provided the Member State in question can justify the need for a certain proportion of nuclear capacity in the interests of security of supply.896 Moreover, he suggests it is unlikely that the Commission will object to Member State arguments citing such interests.897 There is, in this author’s view, much merit to the latter careful approach to EU review of Member State security of supply concerns. Such a review of potential primary fuel interruptions in reality raises the question of the Member States’ freedom to determine their level of energy security. Although the risks of electricity supply interruptions due to primary energy fuel disruptions may be limited, it should in principle be up to the individual Member States to assess the potential risk and the energy diversification targets needed to reduce it. The proportionality assessment carried out by the Court of Justice when considering mandatory requirements under the free movement provisions of the TFEU might be of assistance in this respect. The question whether a legitimate interest may be attained by measures that are less restrictive on trade, that is, the question of the necessity of the restriction, is often subjected to intense scrutiny during the Court’s assessment. On the other hand, the Court tends to show a great deal of restraint when assessing the level of protection adopted by Member States when evaluating the proportionality sensu stricto of a measure.898 In this author’s opinion, there is little justification for subjecting decisions to launch tenders to more intensive review, since such measures are also likely to be less restrictive on trade than free movement restrictions. The question of what is a suitable level of security must, however, be distinguished from cases involving tenders for plants using certain primary energy fuels that are not appropriate if a particular energy mix is being sought in the interests of security of supply. Given the gas import dependency of most EU Member States, tenders for the construction of new gas plants are a possible example in this respect. Although each tender would have to be considered on its particular merits, it is generally difficult to see how a Member State that is a net gas importer could argue that further prioritization of electricity production

895. Chapter 20 below. 896. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 20. The application of the provision to nuclear investments also raises the more general question of the applicability of the TFEU to nuclear energy, since the relationship between the provisions of the Euratom Treaty as lex specialis and the more general TFEU provisions has yet to be fully clarified by the Court of Justice, see further below in Ch. 28.3. 897. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 20. 898. Above in Ch. 9.6. See also J.H. Jans, ‘Proportionality Revisited’, LIEI 27, no. 3 (2000): 239–265, at 248–252.

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Chapter 19 from natural gas could safeguard against interruptions in gas imports (and hence electricity supply disruptions).899 A final question relevant in a review of the Member States’ level of energy security might relate to tenders for electricity plants applying indigenous energy sources, such as peat (in the case of Ireland) or coal (in the case of Germany). Such investments promote national energy security by reducing import dependency. At the same time, allowing each Member State to pursue the goal of becoming self-sufficient (or, more realistically, partially self-sufficient) for its primary energy source requirements would be problematic for the achievement of a true internal energy market. In addition, promoting different sources of primary energy has different effects on Union energy policy interests. The promotion of new gas plant investments, even in the few Member States that are not net importers of natural gas, is still detrimental to the EU aim of reducing fossil fuel import dependency. The promotion of coal plant construction, on the other hand, may promote Union security of supply objectives to some extent, since the EU viewed as a block still possesses indigenous coal reserves. At the same time, coal power investments are clearly detrimental to the attainment of the EU’s environmental objectives. Since the security of supply interests promoted through investments in coal and gas power can, in principle, be achieved in other ways that promote both environmental and energy security interests, such as investments in renewables or demand-side measures, there are good reasons to argue de lege ferenda that national measures to promote fossil fuel investments should be subject to strict requirements and intense Union review. There is, however, nothing in the wording of Article 8 of the Electricity Directive to indicate that the provision supports this approach. In State aid cases, the Commission has adopted a rather pragmatic approach to the above issue by relying on Article 11(4) of Electricity Directive 2003/54/EC by analogy in decisions relating to the promotion of electricity production from indigenous fuel sources in the security of supply interest. A corresponding provision is now enshrined in Article 15(4) of the new Electricity Directive. Consequently, Member States have been allowed to support the use of indigenous energy sources to account for up to 15% of the primary energy necessary to produce electricity consumed domestically.900 Article 15(4) of the new Electricity Directive (and 899. Norway is an anomaly is this respect. Since the country relies almost exclusively on hydropower in electricity production, years with low precipitation constitute a risk for security of supply that may be countered by investment in other types of production capacity, such as gas plants. Moreover, since the country is also one of the few net exporters of gas in Europe, reliance on gas plants does not pose any threat to national security of supply as such. See Ministry of Petroleum and Energy, Facts 2008. Energy and Water Resources in Norway (Oslo: 2008), 18–36 and Ministry of Petroleum and Energy and Norwegian Petroleum Directorate, Facts 2009. The Norwegian Petroleum Sector (2009), 46–49, for an overview of Norwegian electricity generation activities and gas exports, respectively. 900. Commission decision of 24 Apr. 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers – Case No. C 7/2005, OJ L219/9, 24.8.2007, in particular paras 101–104 (electricity production from brown coal at the Trbovlje Thermoelectric Power Station) and Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to

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Electricity Generation Tenders in the Security of Supply Interest Article 11(4) of Electricity Directive 2003/54/EC) corresponds to Article 8(4) of the first Electricity Directive 96/92/EC. The background to these provisions on the preferential treatment of indigenous energy sources is an attempt made during the early 1990s to set an appropriate limit on the proportion of indigenous sources necessary to ensure security of supply (which Member States could, accordingly, support).901 This also helps explain the Commission’s analogous reliance on the provision in relation to other support schemes than priority dispatch, which is the only one explicitly mentioned, but which is an impractical incentive mechanism in a functioning competitive market.902 Whether 15% is, in practice, a realistic figure for ensuring sufficient primary energy supplies is debatable, but the provisions do establish a presumption that the Union legislator perceives national incentives to promote investments up to this limit as legitimate. From that perspective, the 15% limit may be perceived as an attempt to strike a balance between the Member States’ pursuit of security of supply interests through prioritizing indigenous energy sources and the EU’s interest in limiting restrictions on trade. Although Article 15(4) of the new Electricity Directive does not apply directly to incentives in the form of tenders or State aid, the Commission’s approach, whereby the provision is applied by analogy to establish a presumption as to acceptable support levels, appears to offer a reasonable solution, although perhaps more from the point of view of pragmatism than legal elegance. To sum up, Article 8(1) of the Electricity Directive must, in this author’s opinion, be understood as allowing Member States a wide margin of discretion to determine their levels of energy diversification and energy security to take account of possible interruptions in supplies of primary energy Although it is, in principle, possible to review at Union level whether an electricity system has the supply-side and demand-side flexibility to cope with a primary fuel interruption, the Member States should be allowed considerable freedom to determine the extent of primary fuel interruptions a system should be dimensioned to handle. Consequently, the provision conforms with the general point of departure often expressed by EU institutions that the choice of energy mix should be left to the Member States.

award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, para. 234. See also with respect to the corresponding provision in Art. 8(4) of the former Electricity Directive 96/92/EC, inter alia, Staatliche ¨ sterreich, Ersatz von ‘Stranded Costs’, SG(2001) D/290567, Beihilfe nr. N 34/99 – O 25.7.2001, 13–16 (electricity production from brown coal at the Kraftwerk Voitsberg) and State aid No. N 6/A/2001 – Ireland, Public Service Obligations imposed on the Electricity Supply Board with respect to the generation of electricity out of peat, COM (2001) 3265 final, 30.10.2001, 6–7. 901. P.K. Lyons, EC Energy Policy. A Detailed Guide to the Community’s Impact on the Energy Sector (London: Financial Times Business Information, 1992), 42–43. 902. Chapter 14.4.3 above.

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Chapter 19 19.4.2.3.

The Necessity of Launching a Tendering Procedure

The tendering procedure in Article 8 may only be launched if the measures taken by market participants on the basis of the authorization procedure are not sufficient to ensure security of supply. This assessment of the necessity of public intervention has some similarities with the necessity test that forms part of the proportionality assessment in relation to free movement restrictions. We have seen that the authorization procedure in Article 7 of the Directive recognizes the Member States’ rights to set specific criteria concerning primary energy sources for new generation capacity construction.903 Consequently, restrictions – or, in an extreme case, a moratorium – may be placed on the construction of power plants applying certain categories of primary energy sources, such as, for example, gas or coal, in order to promote the use of other sources and technologies. The wording of Article 8(1) implies that the conditions for the application of the tendering procedure will only be fulfilled if market participants have failed to invest in the desired energy sources on the basis of the primary energy source criteria established under the authorization procedure. On the other hand, there is no basis in Article 8 for requiring Member States to seek to induce market participants to invest by supplementing the authorization procedure with other forms of subsidies before recourse is made to the tendering procedure. General State aid schemes may, for example, be introduced in the form of tax exemptions or rebates for the construction and operation of electricity plants applying certain primary energy fuels. Such general support schemes, provided that they are well designed and not subject to rapid change, are likely to have a less adverse effect on the investment climate and investor certainty than the ad hoc launching of tendering procedures. Nevertheless, the application of Article 8 only requires the Member State to have (unsuccessfully) sought to rely on the authorization procedure as the primary instrument. According to the provision’s wording, it does not require recourse to other incentives or instruments of intervention to have been sought before the tendering procedure is relied on. Consequently, the casuistic nature of EU regulation within the field, with State aids being subject to Treaty control and the launching of tenders as such being subject to Directive control, gives rise to some illogical legal consequences, since Article 8 is only concerned with exemptions from Article 7 in particular, not with public interventions and subsidy schemes in general. 19.4.3.

PUBLIC INTERVENTION TO AVOID RISKS ELECTRICITY GENERATION CAPACITY

OF INADEQUATE

The provision of continuity of supply to final customers requires the existence of sufficient generation capacity to produce the electricity demanded at all times.

903. Article 7(2)(g) of the Electricity Directive, discussed above in Ch. 15.4.3.

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Electricity Generation Tenders in the Security of Supply Interest Thus, in addition to the primary energy-related concerns discussed above, another dimension of risk to security of supply concerns generation capacity adequacy. While most would agree that an energy-only market will not necessarily deliver the investments required to achieve a desirable energy mix in absence of further regulation, views on whether public intervention is necessary to ensure sufficient generation capacity as such are more diverse.904 Proponents of a purely market-based approach to investments are likely to argue that market participants will ensure the making of necessary investments in new generation capacity provided that investor certainty is not compromised by undue public intervention.905 Proponents of a more centrally coordinated approach to investments will argue that the particular attributes of electricity markets mean that a basically unregulated market for investments in electricity generation will not be a sufficient vehicle to attract the necessary supply-side measures.906 The regulatory point of departure in both the Security of Electricity Supply Directive and the Electricity Directive is that investments should be market-based.907 Nevertheless, several factors may contribute to deter investments, making recourse to a tendering procedure relevant, even with regard to investments in typical base-load generation capacity.908 First, we have already concluded that Member States retain wide discretionary powers to set authorization criteria relating to the siting and choice of primary energy mix for new power plants, even though these criteria may constitute obstacles to investment.909 If market participants do not view those investment options left open as profitable in the absence of further public incentives, further subsidies may be necessary. Member States that have adopted a strict approach to new investments, perhaps for environmental reasons, cannot be restrained from launching tendering procedures to promote desired investments if such investments are not undertaken by market participants on the basis of the authorization procedure. 904. See further in Ch. 5.2 above. 905. See, for example, C. Robinson, ‘The Economics of Energy Security: Is Import Dependence a Problem?’, CRNI 8, no. 4 (2007): 425–451, particularly at 430–433, who specifically focuses on primary energy source import dependency concerns, but also refers more generally to the building of power plants. 906. See, for example, H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), in particular at 284–285, who proposes that a single actor should be made explicitly responsible for ensuring generation adequacy because of concerns that a purely market-based approach might result in underinvestment in generation capacity. 907. See, for example, para. 56 of the preamble to the Electricity Directive, which sets forth that: ‘Market prices should give the right incentives for the development of the network and for investing in new electricity generation.’ 908. According to D. Finon & A. Midttun, ‘Reshaping European Energy Industry: Patterns and Challenges’, in Reshaping European Gas and Electricity Industries: Regulation, Markets and Business Strategies, ed. D. Finon & A. Midttun (Amsterdam: Elsevier, 2004), 357–387, at 377, some European countries, such as France and Belgium, appear to be moving towards allowing public authorities to launch tenders for the construction of base-load facilities. 909. Chapter 15 above.

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Chapter 19 Consequently, despite the arguably well-founded concern voiced by the Commission that authorization procedures and conditions that constitute obstacles to investment should not lead to a ‘quasi automatic reliance by Member States on the basis of Article 7 [of Directive 2003/54/EC, now Article 8 of the new Electricity Directive]’, this author submits that Member States are not legally restrained from applying tendering procedures in this type of situation.910 Second, investments may be deterred by market or regulatory imperfections. In Part IV of the book above we discussed how the market facilitation measures in the Security of Electricity Supply Directive could, at least to some extent, be interpreted as requiring Member States to promote the establishment of liquid wholesale market arrangements and to maintain a stable regulatory framework in the security of supply interest. If supply-side investments deemed necessary by a Member State fail to be made, despite compliance with the market facilitation requirements in the Security of Electricity Supply Directive, the launch of a tendering procedure should, in principle, be permitted. For example, a concern may arise that imperfect supply-side competition due to market concentration among generators contributes to distort price signals and thereby deters desirable investments. Since the provisions of the Security of Electricity Supply Directive do not require Member States to correct market failures caused by imperfect competition, fulfilment of the Directive’s provisions offers no guarantee that sufficient market-based investments will be carried out in the absence of public incentives or interventions. Moreover, Article 8 of the Electricity Directive does not require Member States to seek to alleviate market failures through regulation before resorting to the tendering procedure, even if it were possible to establish that the former approach was less restrictive on trade and competition. The provision only requires the authorization procedure to be insufficient to promote the necessary investments. This leaves us with the question of whether a tendering procedure may be launched even if the security of supply problems confronted by a Member State are the result of its failure to comply with EU measures. A Member State might, for example, have failed to fulfil its (albeit limited) obligations to facilitate the establishment of liquid wholesale markets, or have contributed to regulatory uncertainty by imposing price caps in wholesale markets contrary to the obligations concerning a stable investment climate in the Security of Electricity Supply Directive. If launching a tendering procedure is permissible in such situations, this means, in effect, that Member States may rely on an exemption from the main rules of the Electricity Directive in order to remedy the effects of a failure to comply with the Security of Electricity Supply Directive. The clear point of departure in such situations must be that Member States cannot make use of their own breaches of obligations under EU law as a basis for requiring exemptions from other areas

910. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, 8.

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Electricity Generation Tenders in the Security of Supply Interest of EU law.911 On the other hand, a failure to deal with market imperfections combined with a weak regulatory design might bring about a negative investment spiral that might eventually require the taking of immediate action. In such situations, reliance on the tendering option should not, in this author’s opinion, be precluded per se, although the launch of a tender would not relieve the Member State of its other obligations to facilitate a stable investment climate in the longer run. However, if the reasons for a shortfall in capacity could be traced to a breach of secondary law obligations, there is reason to assume that the question of necessity in relation to the launch of the tender would be subject to intense Union scrutiny. Such a solution would not be unlike the approach adopted by the Court of Justice in Campus Oil, where Ireland was allowed to rely on (current) Article 36 TFEU as an exemption from Article 34 TFEU, despite the fact that Union measures imposed in the security of supply interest had not been complied with.912 The adoption of a different approach under Article 8 of the Electricity Directive could potentially have far-reaching Union effects, as problems with the supply-demand balance in one Member State may ultimately threaten the situation in other Member States. 19.4.4.

PUBLIC INTERVENTION TO ENSURE SUFFICIENT RESERVE CAPACITY MARGINS

19.4.4.1.

Introduction

EU law recognizes that public incentives or interventions may be necessary in order to ensure sufficient reserve capacity margins for exceptional peak-load situations. As emphasized above in Part IV, the Member States are under an obligation to require TSOs to ensure an appropriate level of reserve generation capacity or to adopt equivalent market-based measures.913 A first question which arises in this respect is how to separate the reserve generation capacity notion from the notion of ‘normal’ generation capacity, since the EU approach to the different situations differs. This question is discussed below in section 19.4.4.2. Launching a tendering procedure is only one of several options available to the TSOs in order to ensure the supply-demand balance during peak load. Article 8 of the Electricity Directive also permits the application of other equivalent measures, as will be briefly discussed 911. The reasoning that a Member State should not be allowed to rely on its own failure to implement Community measures has been particularly addressed by the Community Courts as one of the theoretical bases for the doctrine on the direct effect of Directives, see S. Prechal, Directives in EC Law, 2nd edn (Oxford: Oxford University Press, 2005), 220–226 with further references. The critique raised by Prechal on the application of this reasoning as a motivating factor for requiring the direct effect of Directives has no corresponding application to the questions discussed in the text above. 912. Case 72/83, Campus Oil, [1984] ECR 2727, see particularly the Opinion of AG Sir Gordon Slynn at ECR 2765. 913. Chapter 14.4.4.2 above. See in particular Art. 5(1)(b) of the Security of Electricity Supply Directive.

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Chapter 19 below in section 19.4.4.3. A particular question in the latter respect is whether TSOs may also be entitled to own and operate reserve generation capacity despite the unbundling requirements in the Electricity Directive which prohibits TSO involvement in electricity production activities. This question is discussed in section 19.4.4.4. 19.4.4.2.

The Distinction between ‘Normal’ Capacity and Reserve Capacity

The terms ‘generation reserve capacity’ and ‘reserve capacity’ are applied by the Security of Electricity Supply Directive as well as the Electricity Directive, but neither provides any definition of the terms.914 We saw above that reserve capacity, or capacity margins, can be defined as the percentage excess of installed generation capacity over annual peak demand, which comprises generation units which are only operated in extraordinary situations.915 The promotion of sufficient levels of investment in reserve capacity margins to cope with exceptional demand situations entails some particular challenges for a market-based system. Since generating units belonging to the capacity margin will operate only under exceptional circumstances, they are extremely sensitive to electricity price levels during the few hours each year during which investment costs need to be recovered. It is extremely questionable whether it is at all possible to recover investment costs during these few hours of operation in energy-only markets, even if regulators were able to withstand the temptation of imposing price caps in these exceptional situations.916 A possible lack of investment in reserve capacity margins in energy-only markets can be resolved through the provision of different forms of incentive schemes, such as capacity mechanisms which specifically remunerate producers for keeping capacity in reserve.917 The delegation of responsibility for reserve 914. Paragraph 10 of the preamble and Art. 5(1)(b) of the Security of Electricity Supply Directive and Art. 15(6) of the Electricity Directive. 915. Chapter 14.4.4.2 above. 916. See, inter alia, Eurelectric, Can the Electricity Sector Attract Adequate Investment? A European Perspective (2004), 17, who emphasize ‘[t]hat competitive markets will automatically, and in a timely manner, deliver all necessary investments and related security of supply should not be taken for granted. In particular for reserve and peak-power investments the market might not always deliver the necessary incentives’. This is an empirical question which can only be answered by undertaking an economic assessment of the market in question. For an example, see P.L. Joskow, ‘The Difficult Transition to Competitive Electricity Markets in the United States’, in Electricity Deregulation – Choices and Challenges, ed. J.M. Griffin & S.L. Puller (Chicago: The University of Chicago Press, 2005), 31–97, at 80–86, in which an assessment for the New England area of the US for the period 1999–2002 is carried out. Joskow concludes that the spot markets and ancillary services markets in question did not provide incentives that were nearly sufficient to make reserve capacity investments profitable. 917. Along these lines see E.S. Amundsen & L. Bergman, ‘Provision of Operating Reserve Capacity: Principles and Practices on the Nordic Electricity Market’, CRNI 2, no. 1 (2007): 73–98, at 92. For a more sceptical view on capacity mechanisms, see, inter alia,

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Electricity Generation Tenders in the Security of Supply Interest capacity to TSOs in the Security of Electricity Supply Directive shows that the particular challenges posed by the need to ensure sufficient capacity margins are acknowledged at EU level. On the other hand, the required or acceptable level of capacity margins in national or regional electricity systems is not subject to any express harmonization in EU law. Nor is there any legal harmonization at European level of permitted upper limits of loss of load expectations.918 Such harmonization would in practice be difficult to establish at European level, since the required reserve capacity margins might vary from State to State and region to region. For example, a region which suffered from a poorly developed electricity grid would be more prone to interruptions originating from one or a few production facilities than a region with a highly meshed electricity grid. Consequently, the former region may require a higher reserve capacity margin than the latter to safeguard against production or grid interruptions. Moreover, the societal costs of interruptions also vary from region to region. As a result, such harmonization is unlikely to be attempted.919 In the absence of harmonized reserve capacity standards, questions of when to allow tenders for construction of new capacity will have to be determined on the basis of the general condition that the authorization procedure has not been sufficient to ensure a balance between supply and demand without recourse to demand-side rationing. From this perspective, the fundamental difference between normal capacity and reserve capacity is based on the assumption that investments in reserve capacity necessary to ensure security of supply will not be made by market participants acting solely in their own commercial interest.920 This distinction between services of commercial interest and services of non-commercial interest is also vital for determining the distinction between ordinary services and public service obligations carried out in the general economic interest.921 In its Irish CADA State aid decision, the Commission set forth how the line between

918.

919.

920.

921.

International Energy Agency, Lessons from Liberalised Electricity Markets (Paris: OECD/ IEA, 2005), 161 and O.-H.B. Wasenden, Energimarkedsrett: om informasjonsplikt og markedsatferd i det finansielle kraftmarkedet (Oslo: Cappelen, 2007), 149. Loss of load expectations (LOLE) can be defined as the mathematical expectation of the number of hours in the year during which the available generation plant will be inadequate to meet instantaneous demand, see Eirgrid plc, Generation Adequacy Report: 2008–2014 (2007), 44. Consequently, the term provides a general measure of system adequacy. For a further explanation of LOLE calculations in practice, see 53–-54 of the Eirgrid report. According to Commission staff working document accompanying the Second Strategic Energy Review: Europe’s current and future energy position. Demand – resources – investments, 13.11.2008, 43, European capacity margins have generally been considered acceptable when ranging between 18% and 25%, while 15% presently seems to be accepted as a minimum. Policy concerns that price mechanisms in liberalized energy markets may not be sufficient to provide the generation capacity necessary to meet demand at all times are reflected in several Community documents, see, inter alia, the Commission Communication: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003, 8–9 and Commission Communication: Final report on the Green Paper ‘Towards a European strategy for the security of energy supply’, COM (2002) 321 final, 26.6.2002, Annex II, 16. See further Ch. 21.3.4 below.

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Chapter 19 services of commercial interest and services of non-commercial interest may be drawn in the electricity sector in this respect.922 The case concerned the Irish notification of a State aid scheme relating to public service obligations to invest in new electricity generation capacity for security of supply reasons. A Generation Adequacy Report prepared by the Irish TSO had demonstrated that the Irish market would be faced with a substantial capacity shortfall from 2005 onwards and, consequently, that 550 MW of additional plant capacity would have to be installed by 2007 with another 150 MW needed by 2009. The estimated shortfall of 550 MW by 2007 was equivalent to approximately 10% of the capacity installed in the Republic of Ireland in 2003.923 To deal with this long-term capacity deficit, the Irish Commission for Energy Regulation decided to create incentives for electricity generators to invest in 531 MW of new capacity. The Energy Commission offered to award Capacity and Differences Agreements (CADAs) lasting up to ten years to electricity generators who undertook the construction of new generation capacity. The CADAs provided that the generators would receive period-weighted capacity payments based on their capacity availability at all times. The electricity generated would, however, still be sold to a mandatory Pool Market. At times when the Pool price exceeded a pre-defined Strike price, based on the short-run marginal costs of the most efficient new plants available, the generators would have to reimburse the difference between the Pool price and the Strike price. Capacity payments to the generators, as well as receipt of potential reimbursements, were to be handled by the counter-party to the CADAs, the public electricity supply branch of the Irish Electricity Supply Board.924 Following a bidding process, the CADAs were awarded to generators offering the cheapest conditions for capacity payments.925 Consequently, the scheme in effect refocused the bidders’ incentives from selling electricity at the highest possible electricity market spot prices to also ensuring sufficient electricity generation capacity by introducing capacity payments.926 The Commission’s decision in Irish CADA was based on the first Electricity Directive 96/92/EC, which left Member States’ to decide whether to apply an authorization procedure or a tendering procedure for investments in new electricity generation capacity.927 Accordingly, Ireland’s choice not to apply the authorization procedure did not require any exemption from the first Electricity Directive. Nonetheless, the question of the definition of public service obligations still arose in the assessment of whether the Irish scheme involved State aid under (current) Article 107(1) TFEU. The Commission found that the CADA arrangement did not involve State aid, as the four cumulative conditions set forth by the Court of Justice 922. 923. 924. 925. 926.

State aid No. N 475/2003, Irish CADA, 16.12.2003. Ibid., para. 5. Ibid., paras 6–10. Ibid., para. 16. The Irish scheme thus resembled a capacity option or reliability contract, see similarly H. Knops, A Functional Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), 294, and further below in s. 19.4.4.3. 927. Articles 4 and 5 of Electricity Directive 96/92/EC.

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Electricity Generation Tenders in the Security of Supply Interest in Altmark were fulfilled.928 In this respect, the public service obligations imposed on the generators by the Irish authorities were closely scrutinized by the Commission in its assessment of the first Altmark condition. According to the Commission, one of the conditions for considering the setting up of sufficient reserve capacity generation as a service of general economic interest was that: A clear distinction is made between ‘normal’ capacity and ‘reserve’ capacity generation. The former being the capacity that the market would spontaneously provide to cover expected demand (or expected increases of demand) under normal market and regulatory conditions. Indeed, in a liberalised market, as with other products, private investors are expected to ensure that sufficient capacity is available to meet demand. In general terms, the price mechanism is the way that this is expected to be achieved in the competitive market. As prices rise investment will become viable and either more capacity will come on stream, or demand will be constrained. A transparent and reliable price mechanism for wholesale electricity is sufficient in this respect. The provision of (or the increase of) normal capacity generation cannot be considered a Service of General Economic Interest. The ‘reserve’ capacity is the additional capacity that would not be spontaneously provided by normal market forces but is considered necessary in order to meet peaks of demand. One may indeed wonder whether investors are prepared to invest in peaking capacity to cover the very highest periods of demand or incidents where a large proportion of other generation is not available. It is arguable that such investment might not occur because such events are infrequent and their occurrence is unpredictable. Accordingly there may be a case for governments to provide further measures, in addition to market mechanisms, to ensure adequate capacity is available.929 This author submits that this distinction between normal and reserve capacity is equally relevant to the application of Article 8 of the Electricity Directive. The requirement that the authorization procedure must be insufficient to ensure security of supply can also be described as a requirement that the market-based system established in accordance with Article 7 must be insufficient to ensure security of supply in the absence of further State measures. In other words, Article 8 applies where market participants will not carry out the investments in question solely on the basis of their own commercial interests in the absence of further regulation. The approach described above does not provide any precise criteria for determining whether reserve generation capacity may be promoted through the 928. Case C-280/00, Altmark, [2003] ECR I-7747. This decision is commented on in more detail below in Ch. 26.3. See State aid No. N 475/2003, Irish CADA, 16.12.2003, paras 18–65. The question whether the counter-party to the CADA, the public electricity supply branch of the Electricity Supply Board, received State aid was also analysed by the Commission, which concluded that no State aid was involved, see paras 66–77. 929. State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 35.

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Chapter 19 launching of tendering procedures. On the contrary, the Commission’s approach merely brings us back to the regulatory point of departure for the distinction between Articles 7 and 8 of the Electricity Directive: investments should be primarily market-based and public intervention should only be permitted to the extent that market participants will not invest in the necessary facilities on market terms. Similarly to our discussion above in relation to energy diversification, the setting of reserve capacity standards essentially involves establishing a Member State’s level of energy security. Moreover, calculations that attempt to establish the amount of necessary reserve capacity include numerous uncertain elements, such as future demand for electricity, the future performance (and possible curtailments) of generators and transportation facilities, and levels of electricity imports and exports. National regulators and TSOs are arguably better qualified to perform such assessments than EU institutions. Accordingly, this author submits that the EU’s competence to review capacity margins established by Member States under Article 8 will, in practice, be restricted to the identification of manifest errors or cases where Member States have sought to circumvent the authorization procedure by defining ordinary base-load investments as reserve capacity investments. So, when will the launch of a tendering procedure be ‘necessary’ for the promotion of reserve capacity margins? As concluded above with respect to energy mix considerations, this condition only requires Member States to substantiate that recourse to the authorization procedure has not been successful. In conclusion, this means that it is de facto unlikely that the EU will overrule a Member State’s decision to launch a tendering procedure in order to promote reserve capacity construction, although the wording of Article 8 does, in principle, allow for Union review. 19.4.4.3.

The Relationship to Equivalent Procedures

Article 8(1) of the Electricity Directive specifically permits Member States to use other procedures equivalent in terms of transparency and non-discrimination in lieu of the tendering procedure to ensure security of supply. The provision leaves the choice of whether to priorities tendering procedures or equivalent procedures to Member States, but does not indicate the nature of the contemplated alternative procedures. In an interpretative note to the corresponding Article 7 in Electricity Directive 2003/54/EC, the Commission clarifies the alternative procedures that it assumes are available to Member States by setting forth a list of capacity mechanisms.930 The measures mentioned are: capacity payments; capacity requirements; reliability contracts; capacity subscriptions; and keeping capacity standby for reserve purposes.931 Although, formally speaking, the note is not legally binding and cannot 930. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, 6–7. 931. Capacity subscriptions, which require the installation, where consumers are located, of electronic fuses that may be activated in times of scarcity, appear so far not to be technically or economically feasible on a larger scale, see also along these lines H. Knops, A Functional

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Electricity Generation Tenders in the Security of Supply Interest be read as providing an exhaustive list of options for Member States, it nevertheless provides a useful list of measures that de facto seem to be available. A common feature of all the proposed capacity measures is that they seek to alleviate the reserve capacity problems of energy-only markets by promoting the keeping of sufficient capacity reserves for peak-load situations. Consequently, the reference to equivalent procedures in Article 8(1) must primarily be seen as referring to reserve capacity measures in particular, although the provision does not, in principle, rule out the application of equivalent procedures to alleviate other threats to the supply-demand balance.932 According to Article 5(1)(b) of the Security of Electricity Supply Directive, Member States shall require TSOs to ensure that an appropriate level of generation reserve capacity is available for balancing purposes, and/or they shall require TSOs to adopt equivalent market-based measures. The requirement for reserve capacity tasks to be imposed on TSOs fits reasonably well with the list of measures proposed by the Commission in its interpretative note, since TSOs are arguably the best suited vehicles to perform or coordinate these tasks. A more pertinent question is whether the TSO obligations in the Security of Electricity Supply Directive require TSOs to ensure the availability of sufficient reserve capacity through the adoption of market-based procedures, since several of the measures proposed by the Commission are not market-based. The term ‘market-based procedures’ may be criticized for imprecision. Nevertheless, such procedures seem to have the fundamental characteristic that the instruments applied must rely on the basic economic concepts of supply and demand to determine the price of the product or service in question. Demand for the product, on the other hand, may be artificially created through central coordination.933 The wording of Article 5(1)(b) is open to two different interpretations in this respect. It can be read as meaning that the requirement for TSO measures to be market-based applies only to the residual (demand-side) category of the provision or, alternatively, as meaning that market-based procedures must also be applied to ensure availability of an appropriate level of generation reserve capacity. The preamble of the Directive appears to support the latter approach by stating that reserve capacity measures ‘should be market-based’.934 This interpretation Legal Design for Reliable Electricity Supply. How Technology Affects Law (Antwerpen: Intersentia, 2008), 305–306. Nor is this solution, as we shall see, specifically mentioned in the preamble to the Security of Electricity Supply Directive. It will therefore not be discussed further in the following. 932. The emphasis on reserve capacity measures is also emphasized by the fact that Art. 8(2) does not refer to the application of equivalent procedures in the environmental interest, presumably because it is difficult to envisage what type of alternative measures could be introduced. Similarly, it is difficult to envisage what type of alternative measures could be introduced to pursue a desired energy mix in the security of supply interest. 933. For example, green certificate schemes are generally referred to as market-based, while feed-in tariffs are not, see Eurelectric, Can the Electricity Sector Attract Adequate Investment? A European Perspective (2004), 15. 934. Paragraph 10 of the preamble to the Security of Electricity Supply Directive.

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Chapter 19 also fits best with the wording of Article 5(1)(b), as well as with the partly overlapping requirement of the Electricity Directive that TSOs shall procure the energy they use to cover reserve capacity in their system according to market-based procedures.935 On the other hand, the preamble to the Security of Electricity Supply Directive also offers several examples of measures which may be applied by the TSOs in order to ensure the availability of sufficient reserve generation capacity. These measures are broadly similar to those in the list provided in the Commission’s interpretative note and are not necessarily market-based. The preamble sets forth that the instruments employed by TSOs ‘could include measures such as contractual guarantees and arrangements, capacity options or capacity obligations. These measures could also be supplemented by other non-discriminatory instruments such as capacity payments’.936 Capacity payments, as further described by the Commission in its interpretative note, are essentially payments made by TSOs to electricity generators for keeping reserve capacity available at all times.937 This introduces the idea of generation capacity as a separate product in its own right that can be sold at a profit, thus offering generators an incentive to keep capacity on standby. Such capacity payments were, as we saw above, part of the Irish CADA scheme.938 Levels of capacity payments are centrally coordinated, leaving electricity generators free to determine how much reserve capacity they will keep available (and thus their capacity payment income). At least as long as capacity prices are centrally coordinated and not governed by the market, it is doubtful whether such measures can correctly be referred to as market-based. The capacity obligations referred to in the preamble (referred to as capacity requirements in the Commission’s interpretative note) are more likely to qualify as market-based measures. Such schemes allow TSOs to oblige suppliers to acquire a certain percentage of reserve capacity, which may be tradable.939 This creates an artificial, centrally coordinated, demand for reserve capacity, with prices controlled by the market. This approach has some similarities with green or white certificate models introduced in the environmental interest.940 Capacity options – or reliability contracts – also leave price setting to the market by obliging TSOs to buy call options from generators that may be called at a pre-defined strike price.941 This approach, which was also applied under the 935. Article 15(6) of the Electricity Directive. 936. Paragraph 10 of the preamble to the Security of Electricity Supply Directive. 937. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, 6. 938. State aid No. N 475/2003, Irish CADA, 16.12.2003. 939. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the Internal Market in Electricity and Natural Gas: Measures to Secure Electricity Supply, 16.1.2004, 6. 940. For a brief description of green and white certificate models, see Commission Communication: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005, 4–5 and Commission Green Paper: Energy Efficiency or Doing More with Less, COM (2005) 265 final, 22.6.2005, 28, respectively. 941. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the Internal Market in Electricity and Natural Gas: Measures to Secure Electricity Supply, 16.1.2004, 6–7.

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Electricity Generation Tenders in the Security of Supply Interest Irish CADA scheme, also acts as an inducement for generators to keep capacity available in peak-load situations, since they otherwise would incur a loss corresponding to the difference between the market price and the strike price when the options are called.942 Finally, the preamble to the Security of Electricity Supply Directive includes an open-ended category of ‘contractual guarantees and arrangements’, which may, in principle, comprise a number of other solutions, including bilateral reserve capacity arrangements entered into by TSOs with generators on market terms. Specific agreements with generators to keep old facilities on standby for reserve purposes (so-called ‘moth-ball reserves’) may also possibly be subsumed under this alternative.943 The above description of the various reserve capacity measures reveals two factors of some interest for the application of Article 8 of the Electricity Directive to the TSOs instruments for ensuring reserve capacity. First, the reference in the preamble of the Security of Electricity Supply Directive to instruments which are not necessarily market-based, such as capacity payments, means that this Directive cannot be understood as requiring TSOs to adopt market-based reserve capacity measures, although an intuitive understanding of the wording in Article 5 of the Directive indicates otherwise. Second, to the extent that market-based procedures are applied in practice, it is legitimate to ask why the application of such procedures requires an exemption from Article 7 of the Electricity Directive in the first place. For example, the application by TSOs of capacity options or capacity obligations does not seem to counteract the application of the authorization procedure, meaning that an exemption should not in practice be necessary. Moreover, even if the application of such procedures should require some form of exemption from Article 7 of the Electricity Directive, it is difficult to see why TSOs should only be allowed to adopt such market-based procedures in exceptional cases when it can be established that measures taken on the basis of the authorization procedure are not sufficient to ensure security of supply. 19.4.4.4.

The TSOs as Reserve Electricity Producers?

Determination of the instruments on which TSOs may rely on in order to fulfil their reserve capacity responsibilities ultimately also gives rise to the question whether TSOs may potentially act as electricity producers in situations when the reserve capacity margin needs to be utilized. In other words, can a TSO construct or procure generating units as strategic reserves with the intention of utilizing them as necessary in periods of exceptional peak-load? This solution has been 942. The RKOM (regulerkraftopsjonsmarkedet) operated by Norwegian TSO Statnett is an example in this respect, see E.S. Amundsen & L. Bergman, ‘Provision of Operating Reserve Capacity: Principles and Practices on the Nordic Electricity Market’, CRNI 2, no. 1 (2007): 73–98, at 92–96 for an overview of the RKM (regulerkraftmarkedet) and RKOM. 943. See also Art. 8(4) of the Electricity Directive, which specifically requires consideration to be given in the invitations to tender to the ability of existing units to supply the capacity needed.

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Chapter 19 authorized for several European TSOs pursuant to national legislation.944 Formally speaking, the TSO would be taking on the role of producer as defined in the Electricity Directive, which is prohibited by the Directive’s unbundling provisions.945 This raises the question whether the reserve capacity tasks imposed on the TSOs by the Security of Electricity Supply Directive (and, to a lesser extent, by the Electricity Directive) can be interpreted to give rise to an exemption from this prohibition. Neither the Electricity Directive nor the Security of Electricity Supply Directive explicitly recognizes rights for TSOs to keep reserve capacity on standby and possibly utilize it in peak-load situations.946 On the contrary, we have seen that the Directives seek primarily to rely on the application of market-based procedures by the TSOs, although this requirement is not unconditional. However, if one accepts that TSOs may contract with generators to keep mothballed capacity on standby for reserve purposes, it is legitimate to ask whether the market effects would be any different if the TSOs were to invest in, and keep on standby, such capacity themselves. In both cases, the possible negative market effects relate to the element of uncertainty represented by reserve capacity, as it may be utilized on the basis of centrally coordinated security of supply interests rather than on the basis of market prices. The design of the conditions under which reserve capacity may be utilized is therefore important for ensuring that the market actors’ investment decisions and production profiles are influenced as little as

944. According to s. 34b of Sa¨hko¨markkinalaki (386/1995) (the Finish Electricity Market Act), legally unbundled electricity system operators may engage in supplying and selling energy for certain specifically defined purposes. Belgian law applies a similar approach, see Arts 8 and 9 of Loi relative a` l’organisation du marche´ de l’e´lectricite´ of 29 Apr. 1999. The Norwegian TSO Statnett has been authorized to build two gas plants, each with an installed capacity of 150 MW, in mid-Norway, where the supply situation is strained. The gas plants may only be started up if their non-operation is likely to lead to demand-side rationing and start-up of the plants requires a specific consent from the Norwegian regulator NVE in accordance with s. 22a of the Norwegian System Operation Regulation and the appurtenant authorizations. See further the authorizations from NVE dated 15 Jun. 2007 and 4 Sep. 2007 for the building of two gas plants in the Aure and Aukra municipalities, respectively, and the authorization for reserve power to be employed under very strained operating conditions dated 1 Sep. 2006. 945. Chapter 14.3 above. 946. The only opening for a different interpretation follows from the wording of Art. 15(6) of the Electricity Directive, which requires TSOs to ‘procure the energy they use’ to cover reserve capacity in accordance with market-based procedures (emphasis added). The wording could, in principle, be construed as involving not only the procurement by TSOs of electricity as an energy source, but also the procurement of primary energy sources to be applied in electricity production. Interpreted to this effect, the provision could provide a presumption that TSOs may own reserve generation capacity, requiring that the fuels for electricity generation should be procured according to transparent, non-discriminatory and market-based procedures. However, this wide interpretation does not fit well with the other provisions of the Electricity Directive, which also apply the term ‘energy’ synonymously with ‘electricity’, see in particular Art. 15(7) on the charges for energy imbalances. This author therefore submits that Art. 15(6) must also be interpreted as specifically referring to electricity as an energy product.

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Electricity Generation Tenders in the Security of Supply Interest possible by the reserve capacity’s existence.947 This requires that the neutral conduct of TSOs is guaranteed in reserve capacity decisions. Such neutrality is, however, not necessarily guaranteed by requiring TSOs to contract with generators to keep moth-balled capacity on standby rather than keeping it themselves. Although neither the Electricity Directive nor the Security of Electricity Supply Directive provides a clear basis for allowing TSOs to keep (and possibly utilize) capacity for reserve purposes, this author submits that such measures may qualify as a permitted equivalent procedure under Article 8(1) of the Electricity Directive. In order to ensure neutrality in reserve capacity production, the investment in and operation of reserve generation facilities should ideally only be permitted for ownership unbundled TSOs. The latter de lege ferenda opinion does not, however, have any explicit support in the wording of the provision, and therefore does not amount to a requirement under the prevailing legislation. 19.5.

THE RELATIONSHIP TO ELECTRICITY IMPORTS AND INTERCONNECTOR INVESTMENTS

19.5.1.

EXPORT RESTRICTIONS AND THE RELIANCE ON ELECTRICITY IMPORTS

Article 8 of the Electricity Directive does not elaborate explicitly on the possible relevance of electricity imports when assessing whether tenders should be permitted in the security of supply interest. However, the very idea of introducing measures to secure customer supplies suggests that Member States must, generally speaking, take account of projected electricity imports and exports, as well as indigenous supply sources, when assessing their future supply-demand balance. To interpret the provision to the effect that electricity imports and exports are irrelevant when assessing the supply-demand balance would also contradict the Directive’s overall objective of establishing a functioning internal electricity market in which barriers to inter-state trade are reduced. Determination of the extent to which Member States are required to rely on imports as a means of ensuring security of supply inevitably raises the question of whether a Member State can de facto assume that electricity imports will be as reliable as domestic electricity production. Potential differences in reliability may be caused by a number of technical factors, such as interconnector reliability and capacity, the technical reliability of the supply sources and so forth, which can only be fully established on a case-by-case basis. From a more general legal perspective, there is also the question of the extent to which Member States are entitled to impose export restrictions in exceptional situations. If Member States are entitled to take measures to safeguard their own supplies in the form of export restrictions, 947. St. meld. nr. 18 (2003–2004) Om forsyningssikkerheten for strøm mv. (Norwegian White Paper No. 18 (2003–2004) on security of electricity supply et al.), 103. See also L.J. De Vries, Securing the Public Interest in Electricity Generation Markets. The Myths of the Invisible Hand and the Copper Plate (Delft: Technische Universiteit Delft, 2004), 111–115.

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Chapter 19 this logically implies that adjacent Member States will not enjoy an unconditional guarantee of unrestricted electricity imports in crisis situations. Since much of the energy security debate specifically concerns security of supply in exceptional situations, fears that national measures may be taken to safeguard supply in the form of provisional export restrictions may not be entirely unrealistic. In the following we will therefore consider the right of exporting Member States to adopt such safeguarding measures and see how these rights affect the obligations of importing Member States to take into account projected electricity imports when assessing the supply-demand balance in the light of potential tenders. Member States are generally prohibited from imposing restrictions on electricity exports by both the Treaty provisions on the free movement of goods and by the non-discrimination requirements in internal electricity market legislation. The Court of Justice has been careful not to apply the far-reaching Dassonville formula evolved under Article 34 TFEU to the corresponding prohibition on export restrictions in Article 35 TFEU.948 Nevertheless, an export ban or quota restriction on electricity undoubtedly constitutes a quantitative restriction caught by the latter provision.949 More importantly, export restrictions are, in this author’s opinion, also prohibited by the numerous non-discrimination requirements set forth in the Electricity Directive, the Electricity Regulation and the Security of Electricity Supply Directive. Article 3(1) of the Electricity Directive requires Member States to ensure that electricity undertakings are operated in accordance with the principles of the Directive and prohibits Member States from discriminating between these undertakings as regards either rights or obligations. This sweeping obligation is supplemented by more specific requirements imposed on Member States, such as obligations to ensure that grid operators do not discriminate between system users950 and that the implementation of a third-party access system to the grid is ‘applied objectively and without discrimination between system users’,951 as 948. In Case 15/79, P.B. Groenveld BV v. Produktschap voor Vee en Vlees, [1979] ECR 3409, para. 7, the Court held that current Art. 35 TFEU ‘concerns national measures which have as their specific object or effect the restriction of patterns of exports and thereby the establishment of a difference in treatment between the domestic trade of a Member State and its export trade in such a way as to provide a particular advantage for national production or for the domestic market of the State in question at the expense of the production or of the trade of other Member States’. Similar statements have been made by the Court in several cases, see for example Case 237/82, Jongeneel Kaas BV and Others v. Netherlands and Stichting Centraal Orgaan Zuivelvontrole, [1984] ECR 483, para. 22 and Case C-47/90, E´tablissements Delhaize fre`res et Compagnie Le Lion SA v. Promalvin SA and AGE Bodegas Unidas SA, [1992] ECR I-3669, para. 12. 949. See Case 2/73, Riseria Luigi Geddo v. Ente nazionale Risi, [1973] ECR 865, para. 7, where the Court held that the term quantitative restrictions ‘covers measures which amount to a total or partial restraint of, according to the circumstances, imports, exports or goods in transit’ in relation to the now repealed Regulation No. 359/67/EEC of the Council of 25 Jul. 1967 on the common organization of the market in rice, OJ 174/1, 31.7.1967. 950. Articles 12(f) (TSOs) and 25(2) (DSOs) of the Electricity Directive. 951. Ibid., Art. 32(1).

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Electricity Generation Tenders in the Security of Supply Interest well as obligations to respect the non-discrimination principle in the implementation of public service obligations and tendering procedures, as discussed above in this part of the book. With its focus on inter-State transmission, the Electricity Regulation provides that network congestion shall be mitigated through nondiscriminatory and market-based methods,952 while the Security of Electricity Supply Directive imposes a more general obligation on Member States to ensure that any measure adopted in accordance with the latter Directive shall be nondiscriminatory.953 The status of these non-discrimination requirements as specific expressions of the general principle of equality,954 as well as of the legislative objective of promoting cross-border trade in electricity, provides a strong argument in favour of interpreting the scope of the prohibitions widely. An export restriction in effect treats domestic and export trades differently, giving the domestic market an advantage at the expense of markets in other Member States. In other words, such a restriction may at the very least result in customers being treated differently depending on whether they are based in the Member State where the restrictive measure is introduced or in another Member State. This difference in treatment is likely at least to fall within the scope of the non-discrimination provisions in Article 3(1) of the Electricity Directive and Article 3(4) of the Security of Electricity Supply Directive. The application of the non-discrimination requirements in the context of the internal electricity market legislation means that any difference in treatment will have to be justified under the secondary legislation, not on the basis of the more general exemption grounds in Article 36 TFEU.955 In the latter respect, Article 114(10) TFEU provides that internal market measures shall, where appropriate, include a safeguard clause authorizing Member States to take provisional measures subject to a Union control procedure for the non-economic reasons enshrined in Article 36 TFEU. Accordingly, Article 42 of the Electricity Directive sets forth a Union procedure in respect of safeguard measures that introduces strict substantive requirements for reliance on such measures. The provision states that these measures may only be applied temporarily and only in the event of ‘a sudden crisis in the energy market and where the physical safety or security of persons, apparatus or installations or system integrity is threatened’. Furthermore, the second subparagraph of the provision introduces a strict proportionality test under which such measures must be assessed. Moreover, a Member State introducing safeguards must notify the Member States affected, as well as the Commission, without delay and the provision empowers the 952. 953. 954. 955.

Article 16(1) of the Electricity Regulation. Article 3(4) of the Security of Electricity Supply Directive. Case C-17/03, VEMW, [2005] ECR I-4983, para. 47. Ibid., para. 54. Moreover, it is established case law that where a matter has been subjected to exhaustive harmonization at EU level, any national measures relating to that matter must be assessed in the light of the harmonizing measures, and not in the light of the Treaty provisions, see Case C-470/03, A.G.M.-COS.MET Srl v. Suomen valtio, Tarmo Lehtinen, [2007] ECR I-2749 (Grand Chamber), para. 50, with further references to case law.

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Chapter 19 Commission to amend or abolish safeguard measures ‘insofar as they distort competition and adversely affect trade in a manner which is at variance with the common interest’. The strict requirements for the adoption of export restrictions set forth in Article 42 of the Electricity Directive are further supplemented by Articles 4(3) and 4(4) of the Security of Electricity Supply Directive. Article 4(3) provides that Member States shall not discriminate between cross-border contracts and national contracts when implementing safeguard measures under the corresponding provision in Article 24 of Electricity Directive 2003/54/EC. Article 4 of the Security of Electricity Supply Directive must be interpreted as applying correspondingly to Article 42 in the new Electricity Directive. Consequently, the provision prevents Member States from particularly targeting electricity exports when applying safeguard measures. In this author’s opinion, this provision is in fact one of the most important contributions made by the Security of Electricity Supply Directive to the development of the internal electricity market. Its effect is to prevent Member States, in the interests of Union solidarity, from prioritizing domestic demand over cross-border demand, even if a crisis should arise in the energy market. The provision is moreover supplemented by Article 4(4), which requires the close cooperation of TSOs in the adoption of emergency measures. Thus the provisions of the Electricity Directive and the Security of Electricity Supply Directive in effect preclude Member States from adopting safeguard measures in the form of export restrictions even in cases where there is a risk of a national energy crisis. Given this ban on export restrictions, it is difficult to see how a Member State could successfully argue that tenders were necessary to ensure the national supply-demand balance in cases where the supply deficit could technically be met through imports from other Member States. The above discussion on the relationship between the non-discrimination requirements in internal electricity market legislation and export restrictions also raises the question of the corresponding relationship between these requirements and import restrictions and measures having equivalent effect. We saw above in Part III of the book that measures adopted in the security of supply or environmental interests, such as the operational subsidies at stake in Campus Oil956 and the German feed-in scheme discussed in PreussenElektra,957 may also affect energy imports. By prioritizing domestic operations and investments at the expense of imports, these measures are also likely to be caught by several of the nondiscrimination requirements in secondary law, in particular the generally worded prohibitions in Article 3(1) of the Electricity Directive and Article 3(4) of the Security of Electricity Supply Directive. However, the situation with regard to justifying these measures by the interests pursued differs, in this author’s opinion, from that discussed above with regard to export restrictions. The safeguard clause

956. Case 72/83, Campus Oil, [1984] ECR 2727. 957. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Electricity Generation Tenders in the Security of Supply Interest in Article 42 of the Electricity Directive does not appear to have been drafted with permanent incentive schemes that also affect imports, such as feed-in schemes, in mind. In view of the nature of Article 42, which aims to establish a Union procedure for dealing with extraordinary situations through the adoption of provisional safeguards in accordance with Article 114(10) TFEU, this author therefore submits that a difference in treatment affecting imports does not have to be justified in the light of that provision. Moreover, unlike the first Electricity Directive that was scrutinized in VEMW, neither the present Electricity Directive nor the Security of Electricity Supply Directive sets forth derogations containing cut-off dates relevant to the assessment of such justifications.958 In this author’s opinion, the grounds justifying such measures will therefore have to be assessed on the basis of the more general objectives of internal electricity market legislation. This approach means that any difference in treatment scrutinized under the prohibitions contained in the Directive can, in principle, be justified on the same environmental and security of supply grounds as those permitted by the Court of Justice under the free movement provisions of the Treaty. Consequently, this author submits that the application of the non-discrimination requirements in secondary law to such free movement restrictions would, in principle, raise corresponding issues concerning justification and proportionality as those discussed by the Court in the case law analysed in Chapter 9 above.959 19.5.2.

THE RELATIONSHIP

WITH INTERCONNECTOR INVESTMENTS

A somewhat different question is whether Member States may not only be required to take into account electricity imports and exports using existing interconnectors, but may also be required to invest in additional interconnection capacity as an alternative to domestic supply-side investments. A more interconnected energy market has been one of the central objectives of EU energy policy ever since the start of the process of establishing an internal energy market.960 Without better interconnection, the idea of creating a single internal electricity market without internal frontiers in which free movement is ensured in accordance with the

958. See Case C-17/03, VEMW, [2005] ECR I-4983, paras 54–71 on the Court’s reasoning with respect to the derogation in Art. 24 of the first Electricity Directive 96/92/EC. 959. Although there is no case law that specifically applies the proportionality principle to the nondiscrimination provisions in the electricity market legislation, the Court of Justice has on several occasions assessed equal treatment requirements in the light of the proportionality principle in cases concerning the application of secondary law to the free movement of workers and social contributions, see Case C-213/05, Wendy Geven v. Land Nordrhein-Westfalen, [2007] ECR I-6347 (Grand Chamber), paras 18–19; Case C-57/96, H. Meints and Minister van Landbouw, Natuurbeheer en Visserij, [1997] ECR I-6689, paras 44–48 and Case C-237/94, John O’Flynn v. Adjudication Officer, [1996] ECR I-2617, paras 17–29. This author submits that this approach should be correspondingly applied to the internal electricity market legislation. 960. Commission working document: The internal energy market, COM (88) 238 final, 2.5.1988, 6.

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Chapter 19 provisions of the TFEU will simply not work.961 In Irish CADA, the Commission also emphasized that the development of new interconnection infrastructure is an instrument to secure Member States’ supplies. According to the Commission, this solution is more rational than production aid schemes ‘since it allows the correct functioning of the internal market, reduces market distortions and gives to the Member States the possibility to share reserve capacity. For the same reason this approach would generally reduce the need of reserve capacity at the level of each individual Member State’.962 Moreover, greater integration of electricity markets will also increase supply-side competition and reduce the impact of market power by increasing the size of geographical markets.963 Although EU energy policy interests are heavily weighted towards prioritizing interconnector construction over-investments in national generation capacity for the purposes of securing sufficient reserve capacity, this prioritization is not clearly reflected in any Member State obligations under the Electricity Directive or the Security of Electricity Supply Directive. Article 8 of the Electricity Directive does not require interconnector construction to be given priority. Furthermore, neither Directive imposes any clear investment obligations on Member States or TSOs for the building of interconnectors.964 EU law cannot therefore be interpreted as requiring Member States to priorities interconnector construction over tenders for domestic generation capacity, even though such prioritization could contribute to the security of supply of the Member State in question. 19.6.

APPRAISAL AND CONCLUDING REMARKS

Article 8 of the Electricity Directive in part requires Member States to keep themselves prepared to launch tenders if necessary in the security of supply interest and in part offers possible derogations in the security of supply interest from the authorization procedure in Article 7. The former obligation indicates the status of tenders as central Union measures to safeguard the electricity supply-demand balance, while the restrictions on their use demonstrate that they are intended for exceptional situations only. 961. See Commission Communication: Priority Interconnection Plan, COM (2006) 846 final, 10.1.2007 on the need for interconnector investments, where it is also emphasized (at 3) that interconnectors are a prerequisite for a functional internal market. 962. State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 32. In this particular case, however, the Commission recognized that interconnector construction did not offer an economically rational way of meeting security of supply shortfalls, given Ireland’s specific geographical situation, see para. 34 of the decision. See also the Explanatory Memorandum to Commission Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment, COM (2003) 740 final, 10.12.2003, 5. 963. See similarly R. Pierce, M. Trebilcock & E. Thomas, ‘Regional Electricity Market Integration. A Comparative Perspective’, CRNI 8, no. 2 (2007): 215–257, at 222–224. 964. See further H. Bjørnebye, ‘Interconnecting the Internal Electricity Market: A Goal Without a Plan?’, CRNI 1, no. 3 (2006): 333–353.

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Electricity Generation Tenders in the Security of Supply Interest This chapter has focused on the generally strict restraints on the Member States’ rights to launch tendering procedures. While the first Electricity Directive put the tendering procedure on par with the authorization procedure, allowing Member States to choose which procedure to apply, under the present Directive the tendering procedure may only be relied on as a safeguard to be applied in exceptional circumstances. The fact that the tendering procedure requires Member States to comply with the same fundamental conditions of non-discrimination, objectivity and transparency as those applying to the authorization procedure raises questions about the EU rationale for only allowing Member States exceptional recourse to tenders. The primary reasoning appears to be based on concerns that tenders may distort future electricity price signals in a way that will deter future market-based investments and lead to efficiency losses. Consequently, arguments to the effect that the tendering procedure has ‘numerous distortive effects’, ‘is clearly an intervention in the market’ or constitutes ‘a massive intervention in the market’ must be viewed in the context of the general economic debate on the appropriateness of public intervention in competitive electricity markets, rather than from the traditional EU internal market perspective that emphasizes trade restrictions and distortions of competition. This economic rationale for market regulation has some merit when viewed against the background of the objectives enshrined in Article 3 TEU, but it is not central to the idea of creating an internal market in accordance with Article 114 TFEU, and it is far from clearly communicated in the Union documents leading up to the adoption of the prevailing Electricity Directive. Thus the principal internal market rationales for restricting the use of tenders are concerns that tenders may favour domestic incumbents and that reliance on the authorization procedure by all Member States facilitates cross-border establishment through the approximation of national laws. Clarifying the rationale behind the restrictions on the use of tenders is important primarily because it helps place these public interventions in the security of supply interest in their proper internal market context. While the restrictions discussed in Campus Oil965 and PreussenElektra966 essentially obstructed intraUnion trade to the benefit of national investment and production, interventions in the form of tenders primarily raise concerns in relation to their effects on the general ability of a competitive electricity market to deliver future market-based investments. These latter concerns are significant when viewed from the general perspective of economic efficiency and regulatory design, but nevertheless differ within an EU internal market context from the apparent free movement restrictions discussed in the Court cases referred to above. Consequently it is not self-evident that the conditions for allowing tenders in the security of supply interest should be interpreted restrictively, despite the fact that they constitute an exemption from the authorization procedure, which is the main EU rule.

965. Case 72/83, Campus Oil, [1984] ECR 2727. 966. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Chapter 19 Nevertheless, the approach of Articles 7 and 8 of the Electricity Directive underlines the regulatory point of departure for electricity generation investments in the internal electricity market, which is that investment decisions primarily should be made by market participants based on the price signals of functioning electricity wholesale markets. Consequently, public intervention in these markets through the launching of a tendering procedure should only be allowed if market participants fail to invest in the generation capacity necessary to ensure security of supply. This regulatory attempt to strike a balance between market-based investments and necessary public interventions creates difficulties at several levels. This author submits that the notion of security of supply as it is applied under Article 8 of the Electricity Directive should be defined as the provision of an adequate level of continuity of electricity supplies to customers, with electricity price levels as such not qualifying as a security of supply concern. Achieving security of supply through investment therefore requires the promotion of investments necessary to ensure a balance between supply and demand without recourse to rationing on the demand side. Consequently, the tendering procedure may only be launched if the supply-side or demand-side measures being taken on the basis of the authorization procedure are not sufficient to ensure such a supply-demand balance. An initial difficulty with this approach concerns the understanding of the concept of measures being taken on the basis of the authorization procedure. The reference to the authorization procedure requires the provision to be read as referring to measures taken on the basis of the authorization procedure and other measures of market facilitation introduced on the basis of Union measures, such as the facilitation of electricity wholesale markets. On the other hand, the reference to the authorization procedure cannot be interpreted as requiring Member States to seek to establish particular public incentive schemes to back-up the authorization procedure before resorting to the tendering procedure. For example, even though a favourable tax regime for publicly desired investments may assist in attracting investments under the authorization procedure, Article 8 does not require recourse to such instruments to have been sought. The Electricity Directive does not regulate such incentive schemes, which will have to be scrutinized on the basis of TFEU provisions such as the State aid rules. This means that Articles 7 and 8 of the Electricity Directive essentially regulate the relationship between measures of market facilitation and market intervention casuistically and the distinctions made in these provisions are not always applicable to Member States interventions. A second problem with the requirement for tenders only to be launched if the application of the authorization procedure is insufficient to ensure security of supply, concerns the determination by Member States of their levels of energy security. The risks of electricity interruptions due to primary energy source interruptions may be limited, but questions concerning measures to safeguard against such interruptions by means of primary energy source diversification should, in principle, be left to Member States’ discretion, since this ultimately concerns the Member State’s level of energy security. Moreover, risks of primary fuel interruptions are difficult to assess, and the intensity of any Union review of the matter would have to be determined by taking this into account. 288

Electricity Generation Tenders in the Security of Supply Interest Notwithstanding concerns about primary energy diversification, the root causes of generation capacity inadequacy may be difficult to establish for regulators at Member State as well as Union level. Insufficient capacity investments may be caused by market failures or by weaknesses in regulatory design, or a combination of both factors. Accordingly it may be difficult to determine the proper instruments to apply to alleviate the situation, making it difficult to refuse recourse to the tendering procedure if the existence of a capacity deficit can be established. Finally, there already seems to be agreement at Union level that some form of public regulation may be needed to ensure sufficient reserve capacity for exceptional peak-load situations, but the task of distinguishing between reserve capacity and ‘normal’ capacity is not necessarily an easy one. The extensive Member State reporting obligations included in the Electricity Directive and the Security of Electricity Supply Directive, as well as in the RES Directive and the Cogeneration Directive, are likely to contribute to a better overview of national market conditions at Union level over time.967 This may provide a better foundation for EU review of the necessity of Member State intervention in the security of supply interest. Nevertheless, the fundamental concerns relating to Member States’ margin of discretion in determining their level of energy security, and the practical difficulties of analysing the market in question, support the conclusion that Union review of Member States’ decisions to launch tenders under Article 8 should be applied carefully. When Articles 7 and 8 of the Electricity Directive are viewed in conjunction, it also appears reasonable to question whether the market facilitating approach represented by the authorization procedure and the market intervention approach represented by the tendering procedure in fact differ fundamentally from a market perspective at all. In Part IV above, we concluded that Member States enjoy a wide margin of discretion to determine their authorization criteria in respect of matters such as fuel sources and siting. Thus market participants’ margin of discretion to model their investment projects may, in reality, be substantially restricted by legitimate authorization criteria. Although a tendering procedure, because it targets specific projects, will always impose greater restrictions on the choices of market participants than an authorization procedure, it is not clear that the differences between the procedures are so fundamental as to justify a clear distinction between them in EU law. After all, a tendering procedure is also market-based in the sense that market participants are left to compete for (pre-defined) projects. In theory, a project put out to tender that could have been conducted on ordinary market terms should attract tenders offering to complete the investment at prices that do not involve any public subsidies at all. In that case, the only difference between the procedures would be that in authorization procedures Member States define future projects negatively (by establishing restrictive criteria) while in tendering procedures future projects are defined positively (as specific projects are selected for realization). 967. See further Art. 4 of the Electricity Directive, Art. 7 of the Security of Electricity Supply Directive, Art. 22 of the RES Directive and Art. 10 of the Cogeneration Directive.

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Chapter 19 While Articles 7 and 8 may be criticized for over-emphasizing the legal distinction between authorization and tendering procedures, a striking feature of Article 8(1) is that it leaves to Member States’ discretion the choice of technologies to invest in and whether to conduct supply-side, demand-side or infrastructure investments. There is a general acknowledgment today at Union level that non-carbon-based supply-side investments should be prioritized over carbonbased investments and that demand-side measures should be prioritized over supply-side investments in the environmental and security of supply interest. Moreover there is also consensus, at least at the level of general policy, that investments in interconnectors between national markets should be prioritized over national supply-side measures to the extent that these measures may achieve the same goals. Despite these areas of consensus, Article 8 does not require Member States to adopt any specific priorities. Whether this point of departure is altered by the application of Article 8(2), or by the application of other EU measures, will be discussed further in the following chapter.

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Chapter 20

Tenders in the Environmental Interest

20.1.

INTRODUCTION

We concluded the last chapter by emphasizing that Article 8(1) of the Electricity Directive largely leaves the choice of project to put out to tender to Member States’ discretion. Despite political acknowledgements at Union level that investments in electricity production from renewable sources and demand-side conservation measures should be prioritized in the environmental and security of supply interests, Article 8(1) does not require Member States to adopt any priorities to this effect. This chapter considers whether other EU measures may nonetheless require or induce Member States to prioritize investments that promote both environmental and security of supply objectives when launching tendering procedures. This question will be considered from two perspectives. First, Article 8(2) of the Electricity Directive permits the launching of tendering procedures in the interests of environmental protection and the promotion of infant new technologies. This raises the question whether the threshold for launching tenders in the environmental interest under Article 8(2) of the Directive differs from the threshold under Article 8(1). If the conditions imposed by Article 8(2) are more lenient than the conditions under Article 8(1), Member States may de facto be induced to priorities investments promoting the environmental (in addition to the security of supply) interest. This question is discussed in section 20.2 below. Second, it is also possible to argue that the interplay between the tendering provision and other EU measures may induce – or even require – Member States to priorities in certain ways when adopting tendering procedures. This approach also raises the question de lege ferenda why such prioritization was not made more explicit through direct integration in the internal electricity market provisions, such as the tendering provision. The relationship between the tendering provision and

Chapter 20 other EU measures, as well as the lack of integration of Union priorities into the provision, are discussed in section 20.3. 20.2.

ARTICLE 8(2) OF THE ELECTRICITY DIRECTIVE: TENDERS IN THE ENVIRONMENTAL INTEREST

Article 8(2) of the Electricity Directive permits a tendering procedure to be launched if the supply- or demand-side measures being taken on the basis of the authorization procedure are insufficient to achieve the interests of environmental protection and the promotion of infant new technologies. The provision allows tenders for new supply-side capacity as well as for energy efficiency and demandside measures. With respect to supply-side investments, it follows explicitly from the preamble of the Directive that new capacity under Article 8(2) includes, inter alia, generation from renewable sources and CHP plants.968 The Electricity Directive’s definition of renewable energy sources includes ‘renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases)’.969 Consequently, the Directive leaves no doubt that tenders for investments in electricity generation from renewable energy sources can in principle be launched under Article 8(2). Moreover, the reference in the preamble to CHP plants also means that tenders are permissible for new cogeneration capacity. The Electricity Directive does not specify whether tenders in the environmental interest can only be launched for highefficiency cogeneration based on a useful heat demand, as defined by the Cogeneration Directive, or whether the provision applies to cogeneration capacity in general.970 However, given the way in which high-efficiency cogeneration is defined in the latter Directive, through the identification of cogeneration projects that in fact contribute to energy efficiency, these requirements must apply correspondingly under Article 8(2) in order for tenders to qualify as being in the environmental interest. The definitions in the Cogeneration Directive establish a presumption that less efficient cogeneration plants, or plants whose heat production is not based on a useful demand, do not contribute to energy efficiency and are consequently not suitable for the promotion of environmental interests.971 968. Paragraph 43 of the preamble to the Electricity Directive. 969. Ibid., Art. 2(30). Art. 2(a) of the RES Directive applies a slightly wider definition of ‘energy from renewable sources’ as meaning ‘energy from renewable non-fossil sources, namely wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases’. 970. See Annex III to the Cogeneration Directive on the definition of ‘high efficiency cogeneration’ and Arts 3(b) and (c) of the Directive on the understanding of ‘useful heat demand’. 971. See further L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 94–96, 101– 102, 107–109, 125–127 and 139–144 on the contents of the relevant definitions in the Cogeneration Directive.

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Tenders in the Environmental Interest Article 8(2) of the Electricity Directive leaves open the question of what other energy sources or technologies may potentially also benefit from tenders. While Article 8(2) generally refers to ‘infant new technologies’, in addition to interests of environmental protection, the preamble to the Directive also opens up other possibilities through its reference to inter alia renewables and CHP.972 The overall structure of Article 8, as well as the particular wording of Article 8(2), indicates that the overarching objective of the latter provision is the promotion of environmental interests. Whether a Member State is seeking to justify a tender on the grounds of environmental interests as such or, more specifically, through the need to promote infant new technologies, the tender must have as its ultimate objective promotion of the aims of environmental protection. Fossil fuel plants with CCS facilities are one example of plants using a type of technology that might allow them to qualify for tenders under Article 8(2) of the Electricity Directive. CCS technologies, or at least some of the necessary technologies, are still being developed and are not yet commercially viable.973 Apart from commercial barriers, these technologies also raise some environmental and healthand-safety issues that require further research.974 CCS technologies should therefore at present be regarded as immature technologies whose development and commercial application will almost certainly require large-scale public subsidies and facilitation in some form.975 Given the potential of CCS technologies for reducing CO2 emissions, and the current state of development of these technologies, this author submits that fossil fuel plants with CCS facilities must be regarded as employing an infant new technology that promotes environmental objectives, which may consequently be the object of tenders pursuant to Article 8(2) of the Electricity Directive. An even more controversial question is whether nuclear power plants could also qualify under Article 7(8), given their negligible GHG emissions compared to 972. Paragraph 43 of the preamble to the Electricity Directive. 973. Commission Staff Working Document: Accompanying document to the Proposal for a Directive of the European Parliament and of the Council on the geological storage of carbon dioxide, Impact Assessment, SEC (2008) 54 final, 23.1.2008, 16–20. For a general overview of the legal barriers to CCS development, see M. Newbery, ‘CCS and Clean Coal: Legal Barriers to Development’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 149–168. 974. Commission Staff Working Document: Accompanying document to the Proposal for a Directive of the European Parliament and of the Council on the geological storage of carbon dioxide, Impact Assessment, SEC (2008) 54 final, 23.1.2008, 20. 975. It has been estimated that EUR 1 billion is needed in R&D funding in the period up to 2020 to make CCS technologies commercially viable, see M. Newbery, ‘CCS and Clean Coal: Legal Barriers to Development’, in European Energy Law Report V, ed. M.M. Roggenkamp & U. Hammer (Antwerp: Intersentia, 2008), 149–168, at 161 with further references. At present, only a handful of CCS pilot projects are taking place worldwide, with another handful expected to start in Europe in the near future. To this author’s knowledge, none are so far operating on a purely commercial basis. For an overview of current and anticipated pilot projects, see the Commission’s website (last visited 24 Mar. 2010).

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Chapter 20 most other methods of electricity generation.976 As we will revert to later, nuclear investments may remain a special case under internal electricity market legislation due to the relationship between the provisions of the TFEU and the Euratom Treaty. The possibility cannot therefore be ruled out that the provision may also be applied to this category of investments, despite the controversial policy issues and environmental concerns associated with nuclear power production in Europe.977 A common feature of investments in the energy sources and technologies discussed above is that, as well as promoting environmental objectives, they are likely to help reduce (or slow the increase in) the energy dependency of the EU.978 This raises the question whether the threshold for launching tenders to promote investments (primarily) in the environmental interest under Article 8(2) is lower than the threshold for launching tenders to promote conventional supply-side investments in the security of supply interest under Article 8(1). We saw above that Member States’ determination of their level of security of supply is, in principle, subject to Union review, although it was argued that such reviews should be non-intensive.979 By contrast, EU law does not restrict the Member States’ rights to set ambitious targets for national reductions in anthropogenic GHG emissions in the environmental interest. These targets may, in turn, be translated into sector-specific intermediate goals, such as targets for the use of renewables in domestic electricity generation, for energy efficiency and conservation requirements or for CCS requirements for fossil-based power production. Some of these targets are subject to EU regulation through the obligations imposed on Member States by the RES Directive and the Energy Services Directive. The former Directive imposes mandatory national renewable targets on Member States.980 The latter requires Member States to ‘adopt and aim to achieve an overall national indicative energy savings target of 9% for the ninth year of application of this Directive, to be reached by way of energy services and other energy efficiency improvement measures’.981 Member States are, however, free to set more ambitious national targets than those specified in the Directives.982 Consequently, Member States have the freedom to set ambitious targets for national reductions in anthropogenic GHG emissions in the environmental interest 976. Commission staff working document: EU energy policy data, SEC (2007) 12, 10.10.2007, 39. 977. See further Ch. 28.3 below. 978. With the possible exception of gas plants with CCS technology (as opposed to coal plants with CCS), due to the EU’s limited indigenous gas volumes. 979. Chapter 19.4.2 above. 980. See in particular Art. 3 of the RES Directive. 981. Article 4(1) of the Energy Efficiency Directive. 982. The right to set more ambitious energy savings targets is explicitly recognized by para. 13 of the preamble to the Energy Efficiency Directive. Correspondingly, Art. 3(1) of the RES Directive sets forth that Member States shall ensure that its share of energy from renewable sources ‘is at least’ its national target in 2020. Moreover, since both Directives were adopted on the basis of (now) Art. 192 TFEU, it follows from Art. 193 TFEU that these Union measures shall not prevent Member States from maintaining or introducing more stringent protective measures, provided they are compatible with the TFEU. See further J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 103–111 on the interpretation of Art. 193 TFEU (former Art. 176 EC) in this respect.

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Tenders in the Environmental Interest and, correspondingly, the freedom to set ambitious supply-side and demand-side targets in the environmental interest. If the levels of energy savings or electricity production from renewable energy sources (or, as the case may be, CCS plants) reflected by national targets are not met on the basis of the authorization procedure, Member States are free to launch tenders in the environmental interest in accordance with Article 8(2) of the Electricity Directive.983 Since investments in most of the technologies and energy sources in question are, generally speaking, as yet unable to compete economically with conventional supply-side technologies, this test is likely to be easily met.984 The above discussion shows that the difference in the interests pursued under Articles 8(1) and 8(2) also gives rise to a more fundamental difference in the way tenders are assessed under the two paragraphs. To apply Article 8(1), a Member State must demonstrate that the proposed supply-side or demand-side tender is necessary to ensure, without the imposition of rationing on the demand side, a sufficient balance between supply and demand. Under Article 8(2), a Member State may simply set environmental targets, such as limits on CO2 emissions, and launch tendering procedures for the purposes of attaining those targets to the extent that market participants fail to do so on the basis of the authorization procedure. This means it is de facto easier for Member States to rely on tenders in the environmental interest than in the security of supply interest. Whether the former category of measures also promotes security of supply objectives, in addition to environmental objectives, is immaterial for an evaluation under Article 8(2). The same would hold true if the measures also incidentally contributed to the promotion of economic interests by, for example, influencing end-user electricity prices, provided that the measures were primarily motivated by environmental interests.985 Since measures of the type discussed in this section are likely to promote security of supply objectives as well environmental objectives, Article 8 of the Electricity Directive can, in practice, be seen as giving priority to investments in sustainable energy security. Thus a strict application of the conditions laid down in Article 8(1) may indirectly have the beneficial environmental effect of giving increased priority to public measures that pursue both security of supply and environmental interests. 983. See similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 319 with respect to the corresponding provision in Art. 7(2) in Electricity Directive 2003/54/EC. 984. Investment in large-scale hydropower production is an example of an exception from this practical point of departure. Such investments are generally perceived as economically competitive with other conventional technologies, see L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 20. It is therefore unlikely that a tender procedure would be deemed necessary to promote new large-scale hydropower investments. These projects tend to be restricted by more practical matters, such as the very limited potential for new large-scale hydropower projects in most Member States as a result of resource scarcity and local environmental concerns. 985. In this author’s opinion, the reasoning of the Court of Justice in determining the distinction between economic and other legitimate grounds justifying exemption from the free movement provisions of the Treaty applies correspondingly to Art. 8 of the Electricity Directive, see Case 72/83, Campus Oil, [1984] ECR 2727, para. 35 and above in Ch. 9.4.1.

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Chapter 20 20.3.

THE LACK OF SUSTAINABLE INVESTMENT REQUIREMENTS IN INTERNAL ELECTRICITY MARKET LEGISLATION

Article 8(2) of the Electricity Directive is not the only provision of EU law that can be interpreted as indirectly prioritizing sustainable investments by facilitating Member States’ reliance on environmental interests. We have seen how the Court of Justice adopted a very careful approach when permitting the application of feed-in tariffs in PreussenElektra, despite their discriminatory effects on trade,986 and in the next part of the book we will consider briefly how the Commission’s State aid guidelines on environmental protection allow public financing in the environmental interest.987 There are, however, few EU measures that require Member States to priorities such investments. We have seen that Article 8 of the Electricity Directive requires investments primarily to be market-based, but that it does not require Member States to prioritize sustainable investments in cases where the launch of a tender is permitted. The Security of Electricity Supply Directive is careful to emphasize its reliance on a market-based approach to promote efficient and secure market functioning, but is, with some minor exceptions, neutral on Member States’ investment priorities, such as the choice between supply-side and demand-side measures. For example, the non-exhaustive list in Article 5(2) of the Directive, which permits Member States to take additional measures to ensure the supply-demand balance, does not mention any priorities. Rather, it merely refers to both supply-side and demandside measures, as well as making a reference, which has little independent legal significance, to the tendering procedure in the Electricity Directive.988 The mandatory targets governed by the RES Directive and the indicative targets comprised by the Energy Efficiency Directive, by their nature, require Member States to take a more proactive approach to prioritization. The RES Directive imposes clear obligations on Member States to comply with their national mandatory targets as set out in Annex I to the Directive.989 These obligations lends support to the view that Member States that have not sought to comply with the targets will be obliged to exploit their potential for renewable electricity production before launching tenders for conventional supply-side investments. The corresponding provision in Article 4(1) of the Energy Efficiency Directive requires Member States to ‘aim to achieve’ the indicative targets and to ‘take cost-effective, practicable and reasonable measures designed to contribute towards achieving the target’. The wording of the latter provision indicates that Member States are, at the very least, legally obliged to use their best efforts to meet the indicative targets by

986. Case C-379/98, PreussenElektra, [2001] ECR I-2099, discussed above in Chs 9.7 and 9.8. 987. Community Guidelines on State aid for Environmental protection, C 82/1, 1.4.2008, discussed below in Ch. 27. 988. See Arts 5(2)(a), 5(2)(d) and (e), and 5(2)(f) of the Directive, respectively. 989. Article 3 of the RES Directive.

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Tenders in the Environmental Interest introducing appropriate measures, although the wording does not signify clear obligations of result.990 Moreover, the Security of Electricity Supply Directive provides that Member States shall take account of the importance of ensuring proper implementation of the RES Directive (and the Cogeneration Directive) when fulfilling the obligation under Article 3(1) to ensure a stable investment climate.991 Given the market-based approach of the Security of Electricity Supply Directive, and general concern that public interventions such as the launching of tenders may affect the investment climate negatively, it is possible to argue that Member States should take care to ensure that tenders contribute towards attaining the targets in the RES Directive, to the extent that tenders are launched at all. On this basis one could argue that a Member State which has not sought to comply with its targets will be obliged to exploit its potential for renewable electricity production before launching supply-side tenders for facilities using conventional energy sources. Although the Security of Electricity Supply Directive does not refer to the Energy Efficiency Directive, the wording of Article 4(1) of the latter Directive, in this author’s opinion, supports a similar conclusion with respect to the prioritization of energy efficiency and conservation measures. This interpretation is also supported by the environmental objectives of the Treaty, in the light of which the EU measures in question should be construed.992 With respect to cogeneration, Article 7(1) of the Cogeneration Directive establishes a more direct relationship between the need for new supply-side investments and the potential for demand-side measures. The provision sets forth that: Member States shall ensure that support for cogeneration – existing and future units – is based on the useful heat demand and primary energy savings, in the light of opportunities available for reducing energy demand through other economically feasible or environmental advantageous measures like other energy efficiency measures.993 The rationale for the latter part of the provision has been explained in the literature as an attempt to address concerns that cogeneration should not be exploited as a way to allow energy consumption to increase for free.994 Since this is a general concern in relation to new supply-side investments in the electricity sector, regardless of the 990. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 292, argues that the term ‘adopt and aim to achieve’ in Art. 4(1) of the Energy Efficiency Directive imposes a legally enforceable obligation on Member States to show that they are introducing energy efficiency measures sufficient to meet their indicative targets. 991. Article 3(2)(e) of the Security of Electricity Supply Directive, which also emphasizes that this requirement applies insofar as the provisions of the Directives relate to security of electricity supply. 992. J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 21, who argue that ‘secondary European legislation can – and indeed must – be interpreted in the light of the environmental objectives of the Treaty, even outside the environmental field’. 993. Emphasis added. 994. L. Werring (ed.), EU Energy Law Volume III. EU Environmental Law. Energy Efficiency and Renewable Energy Sources (Leuven: Claeys & Casteels, 2006), 117.

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Chapter 20 technology employed, it is worth asking why a similar approach has not been adopted as a general rule under the Electricity Directive or the Security of Electricity Supply Directive. As emphasized by the Commission in its Irish CADA decision, the first priority when addressing security of supply concerns should normally be to ensure that policies are in place to control growth in demand, given that demand-side measures are cheaper, quicker to take effect and more in line with the environmental commitments of the EU.995 Moreover, demand-side measures are also likely to pursue the Union objective of reducing external energy dependency.996 Hence the objectives of competitiveness and environmental protection, as well as long-term security of supply, all support the prioritization of demand-side over supply-side measures.997 Against this background, this author submits that the Electricity Directive and, to an even greater extent, the Security of Electricity Supply Directive are too preoccupied with those aspects of the security of supply debate that address market facilitation and economic efficiency. This preoccupation is to the detriment of a consideration that is, arguably, even more important: the environmental sustainability of energy security investments, or what may be termed the environmental efficiency of security of supply measures. This finding suggests there is a strong case for arguing that Article 11 TFEU can be applied as a basis for requiring Union institutions to strengthen the integration of environmental requirements into the internal electricity market legislation in order to make energy security investments environmentally optimal.998 995. State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 31. See also the Explanatory Memorandum to Commission Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment, COM (2003) 740 final, 10.12.2003, 3–4, where it is stated that ‘[d]emand management must, therefore, be at the centre of any Member State’s policy to maintain security of supply. A policy of projecting demand on the assumption of ‘‘business as usual’’ and then using this as a basis for forecast the additional generation requirement is not a policy that is sustainable, either at national or Community level’. (underscored in original text). 996. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, 7. 997. See also, for a more general critique of the misallocation of capital flows stemming from the prioritization of supply-side investments over demand-side investments in energy, P. Hawken, A. Lovins & L.H. Lovins, Natural Capitalism. Creating the Next Industrial Revolution (London: Little, Brown and Company, 1999), 266–270, who emphasize that there currently exist no meaningful way to compare supply-side and demand-side investment opportunities, and that current investment regimes allocate far too much money to supply-side investments. 998. See N. Dhondt, ‘Integration of Environmental Protection into the EC Energy Policy’, YEEL 4 (2005): 247–302, who argues at 250 that the integration principle requires that specific energy policy objectives must be pursued in such a way that environmentally optimal behaviour and practices are stimulated or preferred over any alternative. The interpretation and application of Art. 11 TFEU raises several issues that are beyond the scope of this book, such as whether environmental policy has priority over other interests and the legal enforceability of the provision, which will therefore not be dealt with in the following. For a further analysis of Art. 11 TFEU (in addition to N. Dhondt, referred to above), see J.H. Jans & H.H.B. Vedder, European Environmental Law, 3rd edn (Groningen: Europa Law Publishing, 2008), 16–23 and B. Sja˚fjell, Towards a Sustainable European Company Law: A Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case (The Netherlands: Kluwer Law International, 2009), in particular at 206–215.

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Chapter 21

Electricity Generation Investments as a Service of General Economic Interest

21.1.

INTRODUCTION

In Part III above, we briefly discussed the Court of Justice’s approach, in preliberalized electricity markets, to security of supply tasks as services of general economic interest under Article 106(2) TFEU. Services of general economic interest, or public service obligations, are also subject to secondary electricity market legislation, in particular through the provisions of Article 3 of the Electricity Directive. The latter provision corresponds, with some modifications and expansions, to Article 3 of Electricity Directive 2003/54/EC. This chapter’s primary objective is to discuss the extent to which electricity generation investments fall within the scope of services of general economic interest as that notion is applied in secondary legislation. As we shall see, this raises the more fundamental question of how to reconcile the regulatory presumption that investments should be market-based with the traditional legal view of services of general economic interest, which is that they comprise tasks that market participants will not be willing to undertake on ordinary market terms. Article 3(2) of the Electricity Directive provides that Member States may, under certain conditions, impose public service obligations in the general economic interest on certain undertakings operating in the electricity sector. This provision is supplemented by Article 3(14), which gives Member States a right not to apply Articles 7, 8, 32 and 34 of the Directive insofar as these provisions would obstruct the performance of the public service obligations in question, and insofar as an exemption would not affect the development of trade to an extent contrary to Union interests. Consequently the provisions, when read in conjunction,

Chapter 21 amount to a sector-specific application of Article 106(2) TFEU, opening up the possibility of derogations from the market-based approach reflected by, inter alia, the authorization procedure in Article 7 of the Directive. This means that Article 7 is not only subject to specific exemptions, that is, the launching of tenders under Article 8, but also to a more general exemption based on public service obligations. The Member States’ rights to impose public service obligations in the general economic interest are discussed in this chapter, while the right of exemption from other provisions of the Electricity Directive to ensure the performance of such obligations is discussed in the next chapter. The right to impose public service obligations under Article 3(2) raises questions of both a procedural and a substantive nature. The procedural questions relate in part to the requirements governing the award procedure for the selection of the public service provider and in part to the requirements governing the formulation of the public service obligations in question. The substantive questions relate in particular to two issues: what interests qualify as general economic interests; and what is the nature of the obligations that are permitted for the promotion of those interests under Article 3(2)? In the following we will focus on these substantive questions, while the procedural considerations will only be discussed to the extent necessary to provide a context for this latter discussion.999 The general regulatory approach under Article 3 of the Electricity Directive differs slightly from that under Article 106 TFEU, as the former provision not only restricts the Member States’ right of exemption from the Directive’s provisions for the purposes of ensuring the performance of public service obligations, but also restricts the right to impose public service obligations as such. We will comment on this regulatory approach in section 21.2 below. We will then concentrate on the substantive concept of public service obligations in the general economic interest in section 21.3 before concluding the chapter in section 21.4.

21.2.

RESTRICTIONS ON THE MEMBER STATES’ RIGHTS TO IMPOSE PUBLIC SERVICE OBLIGATIONS

Article 3(2) sets forth that the Member States ‘may impose’ public service obligations on electricity undertakings subject to the requirements of the provision. This raises the question whether the wording also implies that Member States may not impose public service obligations on electricity undertakings unless the

999. Consequently, Art. 3 of the Electricity Directive also raises a number of other questions which will not be dealt with in the following. For a general overview of the issues raised by the to a large extent corresponding Art. 3 in Electricity Directive 2003/54/EC, see C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 224–225 (and, for a further discussion of those issues, at 223–255).

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Electricity Generation Investments as a Service requirements of Article 3(2) are fulfilled. The wording of the provision indicates that this is the case. The preamble to the Directive also supports this conclusion by setting forth that: [r]espect for the public service requirements is a fundamental requirement of this Directive, and it is important that common minimum standards, respected by all Member States, are specified in this Directive [. . .]1000 It is difficult to see how such common minimum standards may be achieved at Union level unless Article 3(2) is interpreted as prohibiting Member States from adopting other public service obligations than those explicitly permitted by the provision. The fact that Article 3(15) of the Directive requires Member States to inform the Commission of any measures adopted in fulfilment of public service obligations, irrespective of whether such measures require derogations from the Directive or not, also lends some, arguably limited, support to this conclusion. Consequently, the approach adopted in Article 3(2) of the Directive differs from that adopted in Article 106(2) TFEU in that the latter provision does not restrict the Member States’ rights to impose public service obligations per se, provided they are not contrary to other provisions of the Treaty.1001 The approach adopted in Article 3(2) may be explained by the Directive’s focus, as expressed in Article 3(1), on avoiding discrimination between electricity undertakings by Member States ‘as regards either rights or obligations’. If a public service obligation is imposed on an undertaking, that undertaking is likely to be differently treated compared to other undertakings in comparable situations. Since public service obligations have traditionally been an important vehicle for promoting national energy policy interests, it is manifestly important to ensure that public service obligations are applied in a way that respects the principle of nondiscrimination. Accordingly, one function of Article 3(2) is to limit the discriminatory and competitive effects of granting exemptions from the general principle contained in Article 3(1) (that all undertakings should enjoy similar rights and be subject to similar obligations) by defining in what circumstances and subject to what requirements public service obligations may be imposed. Interpreting Article 3(2) as restricting the rights of Member States to impose public service obligations also raises the related question of whether the provision must be understood as providing an exhaustive list of interests which may be pursued by Member States. This question is not crucial for our subsequent

1000. Paragraph 46 of the preamble to the Directive. Emphasis added. 1001. In the latter case, it is possible to envisage that a public service obligation as such would also involve the granting of special or exclusive rights contrary to Art. 106(1) in combination with Art. 102 TFEU (or, in theory, Art. 101 TFEU), which would consequently require an exemption under Art. 106(2) TFEU (and therefore result in an approach corresponding to the one applied by the Electricity Directive), see further J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 147–190.

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Chapter 21 discussions in this study, since the provision explicitly recognizes both security of supply and environmental interests. The question is, however, relevant in situations where Member States are seeking to promote other interests than those explicitly mentioned through the application of public service obligations. The wording of Article 3(2), ‘public service obligations which may relate to [. . .]’, may be interpreted either as establishing a requirement that the public service obligations may only relate to the mentioned interests or as simply setting forth examples of relevant interests that may be pursued.1002 The reference in the preamble to the importance of common minimum standards supports the former interpretation.1003 This author submits that this interpretation also conforms best with the wording of the provision. In describing the different security of supply and environmental interests the word ‘including’ is used, which suggests that the description is not intended to be exhaustive. A similar approach could have been applied if the provision’s objective had been to provide a non-exhaustive list of interests.1004 Moen and Dyrland discuss the same question in relation to the parallel provision in Article 3(2) of the former Gas Directive 98/30/EC. They argue that the list of interests should be regarded as non-exhaustive given that Article 106 TFEU, on which the provision is based and which is explicitly referred to, provides for the application of a dynamic standard which should not be frozen by the provision of an exhaustive list in a Directive.1005 In this author’s opinion, the latter argument is not decisive when interpreting a Directive provision which has as one of its purposes the approximation of Member States laws and, consequently, as one of the means to attain that aim, may require the sector-specific and exhaustive interpretation of a Union concept.1006 1002. Emphasis added. Versions in other languages do not provide any greater clarity on the question of interpretation. In this respect, the Danish version reads ‘offentlige serviceforpligtelser, som kan omfatte [. . .]’, the Swedish version ‘allma¨nnyttiga tja¨nster, vilka kan avse [. . .]’, the French version ‘des obligations de service public qui peuvent porter sur [. . .]’ and the German version ‘Verpflichtungen auferlegen, die sich auf [. . .]’. 1003. Paragraph 46 of the preamble to the Electricity Directive. 1004. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 229–230 also concludes that the list of interests in the corresponding Art. 3(2) in Electricity Directive 2003/54/EC is exhaustive without further substantiating this conclusion. B.O. Gram Mortensen, Elforsyning: Afvejning af hensyn til en sektor pa˚ vej mod det indre marked (København: Jurist- og Økonomforbundets forlag, 1998), 152, comes to the opposite conclusion with respect to the corresponding list of interests in Art. 3(2) of the former Electricity Directive 96/92/EC. The latter author particularly emphasizes the application of the term ‘kan’ in the Danish language version. It should be noted that there is a minor difference between the wording in the former Directive and in the present Directive in the Danish language version. While the former Directive referred to services ‘som kan vedrøre’, the present Directive refers to services ‘som kan omfatte’. In the English language versions, however, both Directives refer to services ‘which may relate to’. 1005. K.B. Moen & S. Dyrland, EUs gassmarkedsdirektiv (Oslo: Fagbokforlaget, 2001), 122–123. 1006. See Case C-220/06, Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia v. Administracio´n General del Estado, [2007] ECR I-12175, paras 78–83 for a recent example of a decision where recourse to Art. 106(2) TFEU was refused since imposing the services in question on one single undertaking would have been contrary to Art. 7 of Directive 97/67/EC of the European Parliament and of the Council of 15 Dec. 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L15/14, 21.1.1998.

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Electricity Generation Investments as a Service 21.3.

THE CONCEPT OF PUBLIC SERVICE OBLIGATIONS IN THE GENERAL ECONOMIC INTEREST

21.3.1.

INTRODUCTION

The first sentence of Article 3(2) of the Electricity Directive sets forth that: Having full regard to the relevant provisions of the Treaty, in particular Article [106] thereof, Member States may impose on undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency, energy from renewable sources and climate protection.1007 Consequently, internal electricity market legislation provides an example of a sector-regulated approach to the issue of services of general interest. Union commitment to this latter area, which covers services of both economic and noneconomic interest, has been growing over the past decade,1008 culminating in the adoption of a separate protocol to the Lisbon Treaty on services of general interest.1009 In the following our focus will be sector-specific and we will discuss the substantive scope of the concept of public service obligations in the general economic interest in the light of investments in electricity generation capacity. An initial, conceptual, question is whether, on the basis of the wording of Article 106(2) TFEU and Article 3(2) of the Directive, the notions of public service obligations and services of general economic interest are synonymous or whether they are, in fact, two separate concepts. This is briefly clarified below in section 21.3.2. We will then move on to the more fundamental issue of the scope of the terms. In this regard we will primarily consider two questions: what interests qualify as general economic interests; and what obligations qualify as public service obligations imposed to pursue these interests? These questions are dealt with in sections 21.3.3 and 21.3.4 respectively. Finally, the non-discrimination principle as a basis for the imposition of public service obligations is briefly considered in section 21.3.5. 21.3.2.

PUBLIC SERVICE OBLIGATIONS AND SERVICES OF GENERAL ECONOMIC INTEREST: ONE OR TWO CONCEPTS?

While Article 106(2) TFEU applies to undertakings entrusted with the operation of services of general economic interest, Article 3(2) of the Electricity Directive sets 1007. Emphasis added. 1008. See in particular Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003; Commission Communication: White Paper on services of general interest, COM (2004) 374 final, 12.5.2004; and Commission Communication: Services of general interest, including social services of general interest: a new European commitment, COM (2007) 725 final, 20.11.2007. See also G. Napolitano, ‘Towards a European Legal Order for Services of General Economic Interest’, European Public Law 11, no. 4 (2005): 565–581. 1009. Protocol to the Lisbon Treaty on services of general interest, OJ C306/158, 17.12.2007.

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Chapter 21 forth that Member States may impose in the general economic interest public service obligations on undertakings operating in the electricity sector.1010 The difference in wording raises the question whether there is a difference between services of general economic interest on the one hand and public service obligations on the other.1011 The wording of Article 3(2) of the Electricity Directive clearly suggests there is no material difference, as both terms are used in the same sentence. This approach is supported by the wording of the TFEU and the case law of the Court of Justice, as well as Commission documents. The term services of general economic interest is applied in Article 14 TFEU, which provides that: Without prejudice to Article 4 of the Treaty on European Union or to Articles 93, 106 and 107 of this Treaty, and given the place occupied by services of general economic interest in the shared values of the Union as well as their role in promoting social and territorial cohesion, the Union and the Member States, each within their respective powers and within the scope of application of the Treaties, shall take care that such services operate on the basis of principles and conditions, particularly on the basis of economic and financial conditions, which enable them to fulfil their missions. The European Parliament and the Council, acting by means of regulations in accordance with the ordinary legislative procedure, shall establish these principles and set these conditions without prejudice to the competence of Member States, in compliance with the Treaties, to provide, to commission and to fund such services. This provision was, in a slightly different form, included in the EC Treaty by the Treaty of Amsterdam.1012 The Final Act to the Treaty of Amsterdam includes a declaration on this Article in section 13 which reads as follows: The provisions of Article 7d [now Article 14 TFEU] of the Treaty establishing the European Community on public services shall be implemented with full

1010. The emphasis in Art. 3(2) of the Electricity Directive on services in the economic interest not only serves to underline the Article’s relationship with Art. 106(2) TFEU, but also helps distinguish the notion of economic interests from the non-economic interests also comprised by the Union’s increasing commitment towards services of general interest. See Commission Communication: Services of general interest, including social services of general interest: a new European commitment, COM (2007) 725 final, 20.11.2007, 4–6 on the relationship between services of general economic interest on the one hand and non-economic services on the other. The distinction between these different types of services is also acknowledged in the Protocol to the Lisbon Treaty on services of general interest, OJ C306/158, 17.12.2007, Arts 1 and 2. 1011. As emphasized by the Commission, the term ‘public service’ as such is less specific than the terms ‘service of general economic interest’ and ‘public service obligation’, see Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003, 7, at paras 19 and 20. In the following, we will focus on the more specific notion of a ‘public service obligation’. 1012. Treaty of Amsterdam amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts, signed in Amsterdam 2 Oct. 1997, OJ C340/1, 10.11.1997.

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Electricity Generation Investments as a Service respect for the jurisprudence of the Court of Justice, inter alia as regards the principles of equality of treatment, quality and continuity of such services.1013 This declaration, read in conjunction with Article 14 TFEU, also suggests a lack of any material difference between the terms public service obligations and services of general economic interest.1014 Moreover, the Court of Justice has applied the terms synonymously in several decisions. In Inno, the Court held that ‘[t]he exclusion or the restriction of competition on the market in telephone equipment cannot be regarded as justified by a task of a public service of general economic interest within the meaning of [current Article 106(2)] of the Treaty’.1015 In Altmark, the Court referred to the existence of public service obligations as a condition under Article 107(1) TFEU.1016 In its assessment in Enirisorse of whether Italian port services fulfilled this first Altmark requirement, on the other hand, the Court held that it did not follow from case law that the operation of any commercial port constituted the operation of a service of general economic interest.1017 The Commission also appears to apply the terms synonymously both in its 2001 Communication on services of general interests in Europe and in individual decisions.1018 Consequently, obligations to perform services of general economic interest and public service obligations are synonymous concepts in EU law in general and the Electricity Directive in particular.1019 21.3.3.

DEFINING THE GENERAL ECONOMIC INTEREST: SECURITY ELECTRICITY SUPPLY – AT REASONABLE PRICES?

OF

We saw in Part III of the book that, in cases concerning pre-liberalized regimes, neither the Court of Justice nor the Commission was reluctant to classify security of 1013. Final Act to the Treaty of Amsterdam, OJ C340/115, 10.11.1997, at 133 (emphasis added). 1014. The Danish language version seems further to emphasize that no clear distinction is intended to be drawn between the concepts. In the Danish version of the declaration, the term ‘almene tjenesteydelser’ (‘general services’) is applied rather than the term ‘offentlig tjenesteydelse’ (‘public service’), which is applied in Art. 93 TFEU. 1015. Case C-18/88, Re`gie des te´le´graphes et des telephones v. GB-Inno-BM SA, [1991] ECR I-5941, para. 22 (emphasis added). 1016. Case C-280/00, Altmark, [2003] ECR I-7747, in particular at para. 89. 1017. Joined Cases C-34/01 to C-38/01, Enirisorse SpA and Ministero delle Finanze, [2003] I-14243, paras 32 and 33. See also the opinion of AG Tizzano in Case C-53/00, Ferring, [2001] ECR I-9067, where he appears to apply the terms synonymously, see paras 51, 66 and 67. 1018. See the definitions in Commission Communication: Services of general interests in Europe, OJ C17/4, 19.1.2001, Annex 2, 20 and the reasoning in State aid No. N 475/2003, Irish CADA, 16.12.2003, paras 21–45, respectively. 1019. J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 279–280 with further references, suggests that the omission of the term ‘public service’ from Art. 106(2) TFEU may possibly be explained by a desire to emphasize that ‘services of general economic interest’ is a Community law concept which does not as such have to correspond with the national concepts of public service evolved in some Member States. Needless to say, this does not mean that the term ‘public service’ de jure signifies a national concept which is not subject to Union review.

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Chapter 21 supply or environmental protection as general economic interests within the meaning of Article 106(2) TFEU.1020 Indeed, the Commission has described continued secure electricity supplies as probably the electricity sector’s most important public service objective, even in liberalized regimes.1021 This corresponds to the general perception of the energy sector as one of a handful of sectors in the economy where services of general economic interest play a key role.1022 Article 3(2) of the Electricity Directive maintains this perception by setting forth that Member States may impose public service obligations ‘which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency, energy from renewable sources and climate protection’.1023 The interests mentioned to a large extent reflect the services of general economic interest identified by the Court of Justice in Almelo and the energy monopoly decisions.1024 The wording of the provision leaves no doubt that the security of supply and environmental interests discussed above in relation to the tendering procedure also qualify as general economic interests within the meaning of Article 3(2).1025 Consequently, ensuring a balance between supply and demand in order to promote continuity of supply is clearly a general economic interest, as is the objective of reducing GHG emissions to mitigate climate change. The main difficulty with the wording of Article 3(2), at least when viewed from a supply-side perspective, is that it also explicitly recognizes the price of electricity supplies as a general economic interest. This approach appears to derive from the pre-liberalization case law of the Court of Justice. To recap, the Court noted in Almelo that the task of ensuring the supply of electricity to all customers in all parts of the national territory at uniform rates and on objective terms amounted to a service of general economic interest under Article 106(2) TFEU.1026 In Commission v. Netherlands, the Court acknowledged as a public service obligation the statutory duty ‘to ensure the efficient operation of the national public electricity supply at costs which are as low as possible and in a socially responsible fashion’.1027 Recognition of electricity prices as a general economic interest also 1020. Chapter 10.3 above. 1021. Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001, 21. 1022. See, inter alia, Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003, 7 (at para. 17) and 10. 1023. See also the emphasis on security of supply objectives in paras 46 and 50 of the preamble to the Electricity Directive. 1024. Case C-393/92, Almelo, [1994] ECR I-1477 and Cases C-157-160/94, Commission of the European Communities v. Kingdom of the Netherlands, Italy, France and Spain, respectively, [1997] ECR I-5699 et seq. 1025. Chapters 19 and 20 above. 1026. Case C-393/92, Almelo, [1994] ECR I-1477, paras 47–48. 1027. Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699, paras 34–43 and para. 91 of the joined opinion of AG Cosmas to the Court.

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Electricity Generation Investments as a Service conforms to the Commission’s acknowledgment of the concept of affordability, which was introduced by a Community regulation within the telecommunications sector as an aspect of services of general interest.1028 We concluded above that high electricity prices as such cannot justify intervention in the security of supply interest by application of the tendering procedure in Article 8 of the Electricity Directive.1029 Within that context, we also emphasized that acceptance of electricity prices as a relevant concern when justifying the launch of tenders would be inconsistent with the regulatory point of departure for competitive electricity markets. In particular, a right for Member States to intervene on the supply side in order to ensure reasonable prices would effectively mean that Member States could manipulate prices by promoting new investments, instead of having to wait for price increases to deliver the right investment signals.1030 These considerations also apply to supply-side interventions by Member States in the form of the imposition of public service obligations on particular undertakings. Nevertheless, electricity prices are acknowledged as a relevant interest under Article 3(2) and, more strikingly, this view is even more firmly established in the universal service provision in Article 3(3). Article 3(3) requires Member States to ensure that household customers, as well as small enterprises if the Member State deems it appropriate, have access to electricity ‘of a specified quality [. . .] at reasonable, easily and clearly comparable, transparent and non-discriminatory prices’. Such universal service obligations have been deemed by the Commission to constitute one of the common elements of the concept of services of general economic interest.1031 The definition of ‘reasonable prices’ within the context of a competitive market raises several questions of interpretation that will not be pursued further here.1032 It suffices to note that it is questionable whether unregulated electricity prices in competitive markets will always be ‘reasonable’ for end-users, given the nature of investment cycles and the volatility of electricity prices. Thus, depending on the meaning accorded to the term ‘reasonable prices’, the provision may possibly be interpreted as obliging Member States to insulate household customers from price spikes in electricity markets, with the consequence that price increases in wholesale markets will not lead to changes in demand-side behaviour. Consequently, although underlying policy considerations may support a different solution, Articles 3(2) and 3(3) of the Directive not only recognize electricity 1028. 1029. 1030. 1031.

Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003, 18. Chapter 19.3.2 above. Ibid. Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003, 16 and 35–37. 1032. See further C. Valmot, ‘Universal service. En fremstilling av medlemsstatenes forsyningsplikt innenfor det europeiske elektrisitetsmarkedet’, Marius No. 352 (2007), 74–88 for a discussion on the requirement concerning reasonable prices in the corresponding Art. 3(3) of Electricity Directive 2003/54/EC. See also Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003, 38–39 on the related universal service concept of affordability.

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Chapter 21 prices as a relevant public service interest, but also to some extent require Member States to take action to ensure that electricity is supplied to household customers at a reasonable price. This approach is open to criticism, bearing in mind that the establishment of a regulatory design to promote market-driven supply-side and demandside conduct is one of the ideas underlying the Electricity Directive and, to an even greater extent, the Security of Electricity Supply Directive.1033 The background to these Union measures is markedly different from the situations dealt with by the Court of Justice in the pre-liberalization cases, which essentially concerned regimes where electricity prices were not determined by the market. Under such regimes, which were often characterized by the presence of vertically integrated electricity undertakings with exclusive supply rights and obligations within defined geographical areas, the existence of public service obligations relating to price made perfect sense. A vertically integrated supplier would be likely to incur higher-than-average costs when supplying certain categories of end-users, typically because of geographical and demographical conditions. As a result, regulators might have to require the supplier to charge equal prices to all customers as a universal service or public service obligation. The supplier’s exclusive supply rights would then enable the supplier to offset the additional costs of supplying some end-users by charging similar prices to other customers who could be supplied at lower cost, such as customers in urban areas, without risking competition from market participants intent on creaming off the most valuable market shares. The approach to electricity supply within a liberalized market regime, where competitive production and supply activities have been unbundled from monopoly grid activities, differ from the realities discussed above. The higher-than-average cost of supplying some customer groups due their location is primarily a grid investment issue. Connection costs and the costs of building transmission and distribution lines will necessarily be higher per customer in rural areas than in towns. The regulation of connection and transportation tariffs may therefore be justified in order to ensure the social distribution of the higher grid investment costs in rural communities. The references to electricity prices in Articles 3(2) and 3(3) accordingly still have some merit when perceived from the perspective of grid investment. The imposition of price obligations on producers and suppliers is more difficult to reconcile with a market-based approach. The Electricity Directive required full market opening from 1 July 2007, that is, from that date all customers had to be free to purchase electricity from the supplier of their choice.1034 Exclusive rights to supply customers within profitable geographical areas, in order to compensate suppliers for having to supply customers in higher-cost areas at reasonable prices, are therefore in any case prohibited. More importantly, an obligation on some producers or suppliers to sell electricity at regulated prices would necessarily have a distortive effect on the setting of market prices, in particular if the regulated price 1033. See, inter alia, para. 56 of the preamble to the Electricity Directive. 1034. Article 33(1)(c) read in conjunction with the definition of eligible customers in Art. 2(12) of the Directive.

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Electricity Generation Investments as a Service were to fall below the market price. Nevertheless, the designation of a supplier of last resort which is required to sell electricity at regulated prices may be necessary for social purposes in order to protect economically vulnerable customers who have been cut off by their supplier. This option is explicitly recognized in Article 3(3) of the Directive, and the protection of vulnerable customers is further recognized in Articles 3(7) and 3(8). Consequently, one of the aims of Article 3 is to strike a balance between the market-based approach on the one hand and, on the other, the need to promote the protection of household customers in general and of vulnerable customers in particular. While there is evidently a need to protect vulnerable customer groups, the general approach applied in Article 3(3), which appears to open up the possibilility of regulated, reasonable prices for all household customers, is open to criticism. However, even though Article 3(3) of the Electricity Directive requires Member States to ensure that certain market segments on the demand-side benefit from reasonable prices, the provision does not suggest that Member States may pursue this aim by adopting specific supply-side investment measures. The only means suggested by the Directive is the appointment by Member States of suppliers of last resort. In this author’s opinion, the wording and functions of Articles 3(2) and 3(3) do not support the application of the provisions to justify the imposition of investment obligations on the supply side in order to ensure reasonable electricity prices for certain end-users. It is also highly questionable whether such supply-side measures would be either suitable or necessary to guarantee reasonable electricity prices for household customers, and possibly small enterprises, in the longer term, as we will revert to below. 21.3.4.

DEFINING THE PUBLIC SERVICE OBLIGATION: INVESTMENTS IN NEW ELECTRICITY GENERATION CAPACITY

Like Article 106(2) TFEU, the first sentence in Article 3(2) of the Electricity Directive provides little guidance as to the understanding of the term ‘public service obligation’. It merely states that Member States may impose public service obligations in the general economic interest which may relate to, inter alia, security of supply and environmental protection. Except for providing a list of legitimate general economic interests, neither the provision itself nor the preamble to the Directive appear to restrict the wide margin of discretion afforded to Member States in defining their public service obligations under Article 106(2) TFEU.1035 As is the case with the tendering provision in Article 8 of the Directive, the approach to the conditions established in Article 3(2) differs fundamentally in practice depending on whether justification is sought on the basis of environmental or security of supply interests.

1035. Chapter 10.2 above.

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Chapter 21 In respect of the environmental interest, there is little doubt that an obligation to invest in electricity generation from renewable energy sources may qualify as a public service obligation in the general economic (environmental) interest.1036 If such investments are not pursued by ordinary market participants on market terms, such an obligation is likely to be deemed necessary to promote environmental interests, thus qualifying as a public service obligation under Article 3(2), provided the more general conditions in the second sentence of the provision are fulfilled.1037 Consequently, as we shall see further below, it is de facto easier for Member States to rely on public service investment obligations that are primarily in the environmental interest (but which, incidentally, may also promote security of supply interests) than on investment obligations that are exclusively in the security of supply interest. The approach under Article 3(2) thus corresponds with the approach of Articles 8(1) and (2) on this point. With respect to the security of supply interest, the question of defining a public service obligation as promoting a legitimate general economic interest raises two questions in our present context. The first is whether a supply-side obligation to invest in new generation capacity could ever qualify as a public service obligation within a regime where obligations to supply defined customer groups are no longer imposed on electricity producers. The second is whether public service obligations in the form of investment obligations are necessary to promote security of supply interests. The first question essentially gives rise to a discussion of whether investments made by electricity producers are an activity that exhibits the characteristics of a public service, which was defined by Advocate General Van Gerven in Porto di Genova as activities of direct benefit to the public.1038 On the one hand, electricity 1036. Of some concern in this respect, at least when read in isolation, is the Commission’s argument in its decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, paras 230–231. The Commission argued that considering the fulfilment of environmental standards to be a service of general economic interest would conflict directly with the ‘polluter pays’ principle enshrined in EU law. On this basis, one could argue that any compensation for the promotion of environmental measures, including the reduction of GHG emissions from electricity generation, goes against the polluter pays principle, since the external costs of emissions should in principle be borne by the polluter. There is, however, little to suggest that the Commission intended its reasoning, which should be read in the context of the case, to have this meaning. As the Commission stated in para. 232 of its decision, four of the power plants affected by the decision (and, apparently, claimed by Poland to be promoting environmental aims) in fact featured on the WWF’s list of Europe’s thirty most polluting power stations. 1037. That is, the obligation must be ‘clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for electricity undertakings of the Community to national consumers’. 1038. AG Van Gerven’s opinion to the Court in Case C-179/90, Merci convenzionali porto di Genova SpA v. Siderurgica Gabrielli SpA, [1991] ECR I-5889, para. 27. See also Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning

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Electricity Generation Investments as a Service producers in competitive markets will not normally be subject to statutory requirements to ensure supplies to end-users and will, in practice, sell their electricity through wholesale markets on market terms. The existence of a direct link between supply-side investments and general public benefit is thus somewhat questionable. On the other hand, an obligation to increase electricity generation might assist in the maintenance of an appropriate balance between electricity supply and demand, which would be of general public benefit, even in absence of any obligations to supply all customers within a given area. This author therefore submits that to require a more direct link between generation investments and supplies to endusers would be excessively formalistic and that a more realistic approach would be to focus more exclusively on whether the investment obligations are necessary to promote the general economic interest.1039 The Commission has taken a similar view, both in respect of cases concerning electricity reserve capacity investments1040 and those concerning security of primary energy supplies.1041 The first preamble of the Security of Electricity Supply Directive, which is further commented upon below, also appears to support this conclusion. With respect to the second question, we saw above in Part III of the book that, although Article 106(2) TFEU leaves Member States a wide margin of discretion in defining their public service obligations, a minimum requirement is that those obligations must be necessary in the general interest. In other words, only obligations that will not be carried out by ordinary market participants on ordinary market terms may qualify as public service obligations.1042 In addition, the general economic interest in question must not already be protected by other Union measures, in which case imposing a separate public service obligation in order to pursue that interest would be superfluous. Accordingly, an assessment of whether an investment obligation qualifies as a public service obligation in the security of supply interest in principle raises the same questions as those raised when evaluating the

1039.

1040. 1041.

1042.

compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, para. 228 on the Commission’s point of departure for determining Member States’ margin of discretion to determine the scope of their services of general economic interest. This approach is also to some extent supported by the wide approach to services of general economic interests advocated by the Court of First Instance in Case T-289/03, BUPA v. Commission, [2008] ECR II-81, para. 186, where it held, inter alia, that ‘it does not follow from Community law that, in order to be capable of being characterised as an SGEI, the service in question must constitute a universal service in the strict sense, such as the public social security scheme’. State aid No. N 475/2003, Irish CADA, 16.12.2003 and State aid No. N 143/2004 – Ireland, Public Service Obligation – Electricity Supply Board (ESB), COM (2004)2632 final, 14.7.2004. See, inter alia, Commission decision of 24 Apr. 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers – Case No. C 7/2005, OJ L219/9, 24.8.2007, in particular at paras 98–123, and State aid No. N 6/A/2001 – Ireland, Public Service Obligations imposed on the Electricity Supply Board with respect to the generation of electricity out of peat, COM (2001)3265 final, 30.10.2001, particularly at para. 41. Chapter 10.2 above.

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Chapter 21 right to launch tendering procedures under Article 8(1) of the Directive. Consequently, the same questions will arise in the present context concerning the necessity of State intervention to promote a publicly desirable energy mix, sufficient generation capacity in general and sufficient reserve capacity in particular.1043 A possible difference when assessing necessity under Articles 8 and 3(2) arises as a result of differences between the interests protected by the provisions, since Article 3(2), unlike Article 8, also recognizes the price of electricity supplies as a relevant general economic interest. This raises the question whether an obligation to invest in electricity generation capacity in the interests of ensuring reasonable electricity prices for customers could qualify as a public service obligation under Article 3(2) of the Electricity Directive. A pragmatic answer to this question would involve pointing out that, at least within non-peripheral markets, an obligation would have to comprise very significant investment tasks in order to increase supply to an extent likely to have any significant effect on general price levels in the electricity market. Investment obligations are therefore likely to be neither suitable nor necessary to promote reasonable end-user prices. A more theoretically-based approach would be to argue that Article 3(2) must be construed restrictively in this respect, since the Electricity Directive seeks to introduce a market-based system where electricity prices stimulate investments, not vice versa. The preamble to the Security of Electricity Supply Directive reflects the latter approach by providing that: The guarantee of a high level of security of electricity supply is a key objective for the successful operation of the internal market and [the Electricity Directive] gives the Member States the possibility of imposing public service obligations on electricity undertakings, inter alia, in relation to security of supply. Those public service obligations should be defined as precisely and strictly as possible, and should not result in the creation of generation capacity that goes beyond what is necessary to prevent undue interruption of distribution of electricity to final customers.1044 The legal relevance of the preamble to the Security of Electricity Supply Directive to the interpretation of the wording of the Electricity Directive is debatable. Although the preamble to one Union Directive is not irrelevant when interpreting another Directive, this author submits that the legal significance of such texts should be considered more carefully when they do not appear in the preamble to the Directive containing the provision to be interpreted. The preamble to the Security of Electricity Supply Directive should not therefore, in this author’s opinion, be applied in such a way as to deprive the wording of Article 3(2) of the Electricity Directive, which explicitly refers to electricity prices, of any content. On the other hand, the preamble, which has been adopted as part of a Union 1043. See further Ch. 19.4 above. 1044. First paragraph of the preamble to the Security of Electricity Supply Directive. Emphasis added.

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Electricity Generation Investments as a Service measure and which codifies a regulatory point of departure that also underlies the adoption of the Electricity Directive, is a strong argument in favour of interpreting Article 3(2) restrictively. Article 3(2) should therefore, in this author’s opinion, be interpreted as prohibiting Member States from imposing supply-side investment obligations solely in the interest of ensuring reasonable prices for end-users. The legal elegance of the Union legislator’s provision of interpretational signals for the Electricity Directive in the preamble of another Directive is another matter and may certainly be criticized from a technical point of view. On the other hand, the provision may possibly be applied to justify other forms of public service obligation in the interest of reasonable electricity prices. The most obvious examples in this respect would be obligations imposed on grid operators to connect all customers to the electricity network at reasonable prices and obligations concerning suppliers of last resort as mentioned in Article 3(3). 21.3.5.

A

BRIEF

LOOK

AT THE

NON-DISCRIMINATION PRINCIPLE PUBLIC SERVICE OBLIGATIONS

AS A

BASIS

FOR THE IMPOSITION OF

Article 3(2) also sets forth several other requirements relating to the contents and imposition of public service obligations. These requirements, which will only be discussed briefly in the following, follow primarily from the second sentence of the provision, which provides that the public service obligations ‘shall be clearly defined, transparent, non-discriminatory, verifiable and shall guarantee equality of access for electricity undertakings of the Community to national consumers’.1045 The need to respect the principle of non-discrimination in decisions concerning public service obligations is an important reason for the establishment of these conditions. The provision prohibits, for obvious reasons, the application of discriminatory public service tasks, which must be interpreted as including both directly and indirectly discriminatory obligations. A Member State cannot, for example, oblige an undertaking to treat electricity undertakings in similar situations differently unless the difference in treatment can be objectively justified. Moreover, the Article seeks to avoid any potential risk of discrimination by requiring public service obligations to be clearly defined, transparent and verifiable. In effect this implies that the public service obligation in question must be defined as precisely as possible.1046 Precise definitions are important for market participants who will 1045. The third sentence, which authorizes Member States to introduce the implementation of longterm planning, is in this author’s opinion of limited legal significance, since the Member States would retain this option even in the absence of this wording, and will therefore not be discussed in the following. 1046. This interpretation follows from all three requirements, and not only from the requirement that the obligation shall be ‘clearly defined’, since it would be difficult to verify an obligation in the absence of a precise definition and, moreover, an imprecise definition would be liable to suffer from a lack of transparency. See also the emphasis on the importance of a precise definition in the first paragraph of the preamble to the Security of Electricity Supply Directive.

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Chapter 21 need to determine whether to express an interest in performing a public service obligation and on what terms. Consequently, a precise definition is not least important for evaluating the level of public service compensation necessary to compensate an undertaking for the costs involved in performing an obligation. This means that an obligation which simply requires an electricity producer to ensure its customers have a non-interrupted electricity supply, without setting forth any requirements concerning the means to pursue that interest, will not fulfil the requirements of Article 3(2) second sentence. The above discussion shows that although the requirements in Article 3(2) relate directly to the contents of the public service obligation, they also have important implications for the award procedure. One could also argue that the provision applies directly to the award procedure as such, with the effect that the public service provider must be selected by way of a non-discriminatory award procedure. This question is, however, of limited practical significance, since Article 3(6) of the Directive requires any form of public service compensation to be granted in a non-discriminatory and transparent manner. In practice, a public service obligation will usually be accompanied by some form of public service compensation, and the benefit to the undertaking selected to perform the tasks will therefore be associated with the right to compensation rather than the obligation to perform the tasks as such. Hence the Directive requires public service obligations and compensation to be awarded pursuant to non-discriminatory procedures. In practice it is difficult to see how this requirement can be fulfilled without launching a tendering procedure, assuming that the tasks in question can be performed by undertakings other than those in a natural monopoly position, that is, the TSOs and DSOs. Since electricity generation tasks can always be performed by undertakings other than the grid operators, a tendering procedure will, in principle, always be necessary in order to impose supply-side investment tasks on certain undertakings.1047 21.4.

CONCLUSIONS

Article 3(2) of the Electricity Directive restricts the Member States’ rights to impose public service obligations on electricity undertakings in the general economic interest. The notion of a general economic interest is, however, widely defined, and appears to be heavily influenced by the Court of Justice’s

1047. The requirement in Art. 5(1)(b) of the Security of Electricity Supply Directive, that Member States shall impose responsibility for reserve capacity on TSOs, may, however, be interpreted as an exemption from this requirement in respect of the TSOs’ performance of reserve capacity obligations. Since reserve capacity obligations are reserved to a single market participant pursuant to EU law, the performance of those tasks is inevitably not subject to competition, see the Court’s corresponding reasoning in Case C-220/06, Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia v. Administracio´n General del Estado, [2007] ECR I-12175, paras 39–41.

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Electricity Generation Investments as a Service pre-liberalization case law in Almelo1048 and the energy monopoly cases.1049 Consequently, the provision not only recognizes environmental and security of supply concerns as general economic interests, but also electricity prices as such. The inclusion of electricity prices as a general economic interest under Article 3(2) and, even more so, the obligation to ensure reasonable electricity prices for household customers in Article 3(3), is of some concern when viewed from the perspective of the desire to ensure market-based investments in the security of supply interest. On the basis of the underlying rationale for the promotion of market-based investments, this author therefore submits that Articles 3(2) and 3(3) of the Directive must be interpreted restrictively to the effect that the provisions do not allow Member States to impose general supply-side investment obligations on producers solely in the interest of ensuring reasonable electricity prices. Price regulation may, however, have some merit within other areas of the resource chain, such as in relation to grid investments to distant and vulnerable customers, which may otherwise give rise to excessive transportation tariffs. The question of electricity prices apart, the application to electricity generation investments of Article 3(2) appears largely to correspond to the application of Article 8. In this respect, Articles 3(2) and Article 8 therefore play very similar roles in the public promotion of new supply-side investments. In the following chapter, this similarity will be further explored as we discuss the right of Member States pursuant to Article 3(14) to make exemptions from the provisions of the Electricity Directive when this is necessary to allow a service provider to perform public service obligations.

1048. Case C-393/92, Almelo, [1994] ECR I-1477. 1049. Cases C-157-160/94, Commission of the European Communities v. Kingdom of the Netherlands, Italy, France and Spain, respectively, [1997] ECR I-5699 et seq.

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Chapter 22

Exemptions from the Electricity Directive in the General Economic Interest

22.1.

INTRODUCTION

The principal aim of a Member State when defining a task as a public service obligation will normally be to ensure exemption for the public service provider from EU law provisions alleged to obstruct the performance of the tasks in question. The Member States’ right to derogate from the Electricity Directive in order to pursue public service objectives is regulated in Article 3(14) of the Directive, which sets forth that: Member States may decide not to apply the provisions of Articles 7, 8, 32 and/or 34 insofar as their application would obstruct the performance, in law or in fact, of the obligations imposed on electricity undertakings in the general economic interest and insofar as the development of trade would not be affected to such an extent as would be contrary to the interests of the Community. The interests of the Community include, inter alia, competition with regard to eligible customers in accordance with this Directive and Article [106] of the Treaty. This sector-specific application of Article 106(2) TFEU defines the scope of possible exemptions from the Directive by explicitly setting forth the derogation options available. The provisions that may be subject to exemption feature among the Directive’s primary instruments for achieving its aim of improving the operation of the internal market. They regulate both the overall means for attracting new generation investments (Articles 7 and 8) and the fundamental requirements on third-party access (Articles 32 and, to a lesser extent, 34). Accordingly,

Chapter 22 although their scope is restricted, the importance of Directive exemptions in the general economic interest is far from marginal. Of the four derogation options in Article 3(14), those concerning Articles 7, 8 and 32 are of the most practical relevance to public service obligations in relation to new electricity generation investments.1050 A public service obligation to invest entails the resumption by the Member State of an active role in promoting power plant construction, as the Member State will impose investment tasks on market participants, rather than relying on market-based initiatives under the authorization procedure. A public service obligation of such a nature thus requires exemption from Article 7 of the Directive per se. An exemption from Article 8 seems at first sight less practical, since this provision’s principal function is to provide grounds for exemption from Article 7. The reference in Article 3(14) to Article 8 does, however, serve to clarify that Member States are free to choose between Articles 3 and 8 as grounds for derogation from Article 7. Consequently, Articles 3(2) and 3(14) provide Member States with alternative options for derogating from the authorization procedure in Article 7. This, in turn, raises the question of the extent to which the public service derogation options differ materially from the application of the tendering procedure in Article 8. We will revert to this question below. Unlike exemption from Articles 7 and 8, exemption from Article 32 of the Directive may, in its own right, amount to a form of economic incentive for investors in electricity production. An investor might, for example, require lower-than-average transportation tariffs or transportation priority rights in order to ensure that its electricity can reach the market at a cost that guarantees an acceptable rate of return on its power plant investments. Such tariff rebates and possible priority rights are likely to be prohibited in general by Article 32, which raises the question whether an exemption under Article 3(14) is necessary to ensure investments in the general economic interest.1051 In the following we will commence, in section 22.2 below, by briefly defining the relationship between the exemption grounds provided in Article 3 of the 1050. Article 34 requires Member States, subject to some reservations, to take the measures necessary to enable producers and supply undertakings to build direct lines. Exemptions from this provision may, in principle, be necessary in order to ensure grid operators obtain an acceptable rate of return on their grid investments by ensuring that potential customers are restricted from building direct lines. It is, however, difficult to see that exemptions from this provision can be of much practical significance for the promotion of generation investments, and they are therefore not commented on further in the following. 1051. The wording of Art. 32(1) causes some confusion as to its application to electricity producers by addressing the rights of both ‘eligible customers’ and ‘system users’. The definition of ‘eligible customers’ does not appear to include electricity producers as such, see the definitions in Arts 2(12) and 2(7) (although the reference to producers in Art. 2(11) causes some additional confusion). The definition of ‘system users’ in Art. 2(18), on the other hand, must also be interpreted as including electricity producers. Given the fundamental importance of ensuring third-party access to infrastructure in order to promote the functioning of the internal electricity market, there is no reason to apply a restrictive interpretation to Art. 32 by excluding producers in this respect. See also the corresponding reasoning of the Court of Justice in Case C-439/06, Citiworks, [2008] ECR I-3913, paras 37–65.

318

Exemptions from the Electricity Directive Electricity Directive and those provided in Article 106(2) TFEU. We will then, in section 22.3, concentrate in more detail on one of the more fundamental themes raised by Article 3(14), which is the understanding of the proportionality principle enshrined in the provision. On this background, we will revert to the question of the relationship between public service obligation procedures and tendering procedures in section 22.4, before concluding this chapter in section 22.5. 22.2.

THE RELATIONSHIP BETWEEN THE EXEMPTION GROUNDS IN ARTICLE 3(14) OF THE ELECTRICITY DIRECTIVE AND THOSE IN ARTICLE 106(2) TFEU

As a general point of departure, Article 106(2) TFEU allows exemptions from the Treaty provisions, while Article 3(14) of the Electricity Directive allows exemptions from (some of) the Directive provisions. The wording of Article 3(14) of the Directive makes it clear that exemptions under the provision only apply to the Directive, and that the Directive provision cannot be applied correspondingly as ground for exemption from the primary TFEU provisions. Whether Article 106(2) TFEU can be applied to derogate from Directive provisions other than those explicitly mentioned in Article 3(14) is less evident. Article 106(2) TFEU can, at least in principle, be invoked to justify exemptions from EU secondary law provisions.1052 On the other hand, the provision cannot be interpreted as restricting the Union’s competence to adopt internal market measures to harmonize national approaches to public service regulation. Just as recourse to Article 36 TFEU is no longer possible to justify free movement restrictions within areas subject to total harmonization, recourse to Article 106(2) TFEU is not possible where Union measures suggest otherwise. Articles 3(2) and 3(14) of the Electricity Directive, when read in conjunction, establish a sector-specific understanding of the concept of public service. Although the provisions generally leave Member States a wide margin of discretion when defining their public service obligations, the wording of Article 3(14) does not appear to allow exemptions from the Directive in the general economic interest other than those explicitly mentioned. On the contrary, the specific reference to Articles 7, 8, 32 and 34 makes it clear, in this author’s opinion, that the provision does not allow exemptions from other provisions. This view is also supported by the parallel provision in Article 3(10) of the Gas Directive, which only allows derogations from Article 4 of that Directive on the authorization procedure for natural gas facilities. The meaning of these provisions would be significantly compromised if they were to be interpreted as only providing a non-exhaustive

1052. The Court of First Instance assumed this in Case T-260/94, Air Inter SA v. Commission, [1997] ECR II-997, paras 134–138, but nevertheless found that the conditions of Art. 106(2) TFEU were not fulfilled in respect of the measures at issue (concerning provisions in a Community Regulation on access for Community air carriers to intra-Community air routes).

319

Chapter 22 list of exemptions that might be supplemented by further exemptions from the relevant Directive through the direct application of Article 106(2) TFEU. The Court of Justice’s decision in VEMW also supports the conclusion that Article 3(14) of the Electricity Directive should be interpreted as providing an exhaustive list of derogation options that precludes the direct application of Article 106(2) TFEU to other Directive provisions. In that decision, once it had established that the first Electricity Directive 96/92/EC did not permit the disputed preferential capacity rights for the cross-border transmission of electricity, the Court found it no longer necessary to reply to the referring court’s question on whether Article 106(2) TFEU could be construed to justify the measures in dispute.1053 Several authors have interpreted this conclusion as indicating that Article 106(2) TFEU cannot be relied on to provide grounds for exemption from other Directive provisions than those explicitly recognized by the Directive itself.1054 Although the Court did not provide an unambiguous answer, this author agrees that this is a reasonable interpretation of the Court’s approach.1055 This interpretation has been further reinforced by the Court’s more recent decision in Citiworks, where it specifically held that Member States may only depart from the principles enshrined in Article 20 of Electricity Directive 2003/54/EC (which corresponds to Article 32 in the new Electricity Directive) in: cases where Directive 2003/54 lays down exceptions or derogations. [. . .] It is therefore only where a provision such as [the national measure] come within the scope of those exceptions or derogations that it will be compatible with Directive 2003/54.1056 On this basis, the Court addressed the grounds for exemption provided in Articles 20(2), 3(8) and 26(1) of Electricity Directive 2003/54/EC (corresponding to Articles 32(2), 3(14) and 44(1) of the new Electricity Directive), none of which could justify the measures in question, without even mentioning the issue of Article 106(2) TFEU.1057 Within areas such as the internal electricity market, where a sector-specific meaning of the concept of public service has been applied

1053. Case C-17/03, VEMW, [2005] ECR I-4983 (Full Court), paras 89–90. 1054. L. Hancher, ‘Case C-17/03, VEMW, APX en Eneco N.v. v. DTE, Judgment of the Full Court of 7 June 2005, nyr’ (case note), CMLR 43 (2006): 1125–1144, at 1141. See also for a thorough discussion of the issue A.-K. Nesdam, Det indre transportmarkedet – en analyse av virkemiddelbruken i den fellesskapsrettslige energimarkedslovgivningen (Doctoral Thesis, University of Oslo, 2007), 211–231, who comes to the same conclusion at 229. 1055. Alternatively, the Court’s approach could be interpreted as meaning that the questions raised by Art. 106(2) TFEU had already been correspondingly dealt with during the evaluation of the Directive provisions, and that it would accordingly be superfluous to subject Art. 106(2) TFEU to separate treatment, as the reasoning or result would not be any different. 1056. Case C-439/06, Citiworks AG, [2008] ECR I-3913, paras 55–56. For a general introduction to the background and content of the decision, see the case note by W. Geldhof & S. Tormans, ‘Case C-439/06 – ECJ Leaves Limited Scope for Exemptions from Third Party Access Obligations for So-Called Operational Networks’, EEELR 17, no. 4 (2008): 256–259. 1057. Case C-439/06, Citiworks AG, [2008] ECR I-3913, paras 57–65.

320

Exemptions from the Electricity Directive and the Directive specifically regulates grounds for exemption from its provisions, this author submits that Article 106(2) TFEU can no longer be applied directly to justify exemption from the Directive’s provisions.1058 Consequently, recourse to Article 106(2) TFEU is only relevant to the extent that derogations from Treaty provisions, such as the State aid provisions, are necessary in addition to any potential derogations from the provisions of the Electricity Directive.1059 22.3.

THE PRINCIPLE OF PROPORTIONALITY INHERENT IN ARTICLE 3(14)

22.3.1.

THE PROBLEM: ARE EXEMPTIONS FROM THE DIRECTIVE NECESSARY TO PURSUE PUBLIC SERVICE MEANS OR PUBLIC SERVICE ENDS?

As stated in Chapter 9.6 above, a measure must generally fulfil three requirements to satisfy the proportionality principle in EU law: (i) it must be suitable to protect the interests requiring protection; (ii) it must be necessary to attain the objectives pursued; and (iii) it must not restrict intra-Union trade to an extent disproportionate to the intended objective or result. These general proportionality criteria are also to some extent present in Article 3(14) of the Electricity Directive. The wording of Article 3(14) only implies the presence of a suitability criterion but, as with the proportionality assessment under Article 36 TFEU, the requirement for there to be a causal relationship between objectives and means rarely causes any problems in practice. The necessity requirement follows explicitly from the wording of the provision and is often of greater practical significance: Member States may decide not to apply Articles 7, 8, 32 and 34 ‘insofar as their application would obstruct the performance, in law or in fact, of the obligations imposed on electricity undertakings in the general economic interest’. Finally, although the provision does not codify a proportionality strictu sensu criterion as such, the requirement that the development of trade should not be affected to an extent contrary to the interests of the Community bears some resemblance to the third proportionality requirement referred to above. Following the adoption of the Lisbon Treaty, the Community interest criterion referred to in Article 3(14) of the Directive will be referred to as the Union interest criteria in the following, in line with the amendments made in the TFEU in general and in Article 106(2) TFEU in particular.1060 A fundamental question concerning the application of the proportionality test under Article 3(14) is whether an exemption may be granted from the 1058. A similar view is shared by C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 231. 1059. See further below in Ch. 26.3.3 on the direct application of Art. 106(2) TFEU to State aid. 1060. For the sake of simplicity, this condition is referred to in the following as the Union interests criterion, although the condition strictly speaking consists of two components, one relating to the development of trade and one to the interests of the Union.

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Chapter 22 provisions of the Directive simply because derogation is necessary in order for the public service provider to carry out its obligations (as defined by the Member State), or whether derogation must be necessary to promote the underlying general economic interest. In the former case, the proportionality assessment does not call into question the Member State’s definitions of public service obligations, provided these obligations promote a general economic interest and similar obligations would not be performed by ordinary market participants on ordinary market terms. In the latter case, derogation would only be justified if the obligations imposed on the service provider did not go beyond what was necessary to attain the underlying general economic interests. Application of the latter approach would involve a more intense EU review of underlying national policy choices. The following simplified example may help illustrate the practical implications of this question. Member State A projects that the balance between electricity production and supply will become strained in the longer term and, due to the particular attributes of its national electricity market, has established that existing and potential new electricity generators will not invest in new supply-side capacity on ordinary market terms. At the same time, there is considerable potential for adopting energy conservation measures that will reduce demand and for investment in interconnectors to other electricity markets with supply surpluses and export potential, but none of these measures will be implemented without active State support. Notwithstanding the demand-side and interconnection possibilities available, Member State A chooses to impose obligations on electricity generators to invest in new supply-side capacity in the security of supply interest and, accordingly, requires exemption from Article 7 of the Directive. When considering the issue of proportionality, if we apply the first approach described above, the potential for the adoption of energy conservation and infrastructure measures to ensure the supply-demand balance is, in principle, irrelevant to the assessment of whether an exemption is necessary. Under the latter approach, it could be argued that the adoption of demand-side and interconnection measures would be better suited to promote Union energy policy interests, and that Member State A should therefore seek recourse to these measures (which also may require exemptions from the Directive) before requiring exemptions in order to pursue supply-side measures. The interpretation of the corresponding Article 3(8) in Electricity Directive 2003/54/EC made by the Court of Justice in Citiworks does not appear to resolve the question: It follows from Article 3(8) of Directive 2003/54 that the Member States may decide to restrict third-party rights of access to transmission and distribution systems in order to ensure the supply of a public electricity service. However, in order to do so, the Member States must, on the one hand, ascertain whether an unrestricted right of access to the systems would obstruct the performance by the system operators of their public-service obligations and, on the other, determine whether that performance cannot be achieved by other means which 322

Exemptions from the Electricity Directive do not impact adversely on the right of access to the systems, which is one of the rights enshrined in Directive 2003/54.1061 The Commission, however, appears to support the latter approach, which involves a more intense proportionality review, in one of its interpretational notes to the Electricity and Gas Directives,1062 in which it relies on the corresponding approach taken in its Irish CADA decision.1063 The latter case was decided on the basis of the State aid provision in current Article 107(1) TFEU and the conditions for public service compensation provided by the Court in Altmark,1064 not on the basis of the then yet-to-be-implemented Electricity Directive 2003/54/EC. Nevertheless, the Commission’s reasoning with respect to public service obligations is equally relevant to the application of Article 3(14) of the new Electricity Directive. In the following, we will therefore first examine in more detail the Commission’s approach in Irish CADA, before assessing this point of view in the light of the necessity and Union interest criteria enshrined in Article 3(14). 22.3.2.

THE COMMISSION’S APPROACH – IRISH CADA

Although the Commission concluded in its Irish CADA decision that the disputed Irish measures were not contrary to the former EC Treaty, the broad reasoning applied to the definition of the concept of public service obligations is still helpful for the understanding of the public service concept in general and the proportionality assessment in particular.1065 To recap, the outcome of the decision essentially relied upon whether the obligations imposed on electricity generators under the Irish CADA arrangement qualified as clearly defined public service obligations, as required under the first condition of the ‘Altmark test’ established by the Court of Justice.1066 As a starting point, the Commission defined the objective of the Irish measure – ensuring adequate security of supply – as well as the means, which was to impose on generators an obligation to bring new electricity reserve capacity to the system in order to meet electricity demand at all times, including peak periods.1067 The Commission found, not surprisingly, that security of energy supply constituted a legitimate objective of general economic interest.1068 More importantly, it went on to point out that ‘this legitimate objective can be achieved by 1061. Case C-439/06, Citiworks, [2008] ECR I-3913, para. 60. 1062. Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Public service obligations, 16.1.2004, 2. See also similarly C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 231–233. 1063. State aid No. N 475/2003, Irish CADA, 16.12.2003. 1064. Case C-280/00, Altmark, [2003] ECR I-7747. 1065. State aid No. N 475/2003, Irish CADA, 16.12.2003. 1066. Case C-280/00, Altmark, [2003] ECR I-7747, para. 89. 1067. State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 22. 1068. Ibid., para. 29.

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Chapter 22 different means, whose impact on competition and trade between Member States may be very different’.1069 On this basis, the Commission emphasized that the first priority when attempting to ensure security of supply should normally be to control growth in demand, since demand-side measures were also likely to pursue other Community objectives (environmental commitments) and were more efficient than supply-side measures (cheaper and quicker to take effect).1070 The Commission also found that the development of new interconnectors was generally more rational than production aid schemes ‘since it allows the correct functioning of the internal market, reduces market distortions, and gives to the Member States the possibility to share reserve capacity. For the same reason this approach would generally reduce the need of reserve capacity at the level of each individual Member State’.1071 However, given Ireland’s specific geographical situation, the Commission recognized that interconnector construction might not be an economically rational way to deal with security of supply shortfalls in the case at hand.1072 In principle there are two possible legal bases for the argument put forward by the Commission. The first approach, favoured by the Commission, involves taking the view that only public service tasks which do not affect the development of trade to an extent contrary to the interests of the Union qualify as public service obligations.1073 This approach is, however, in stark contrast to the general point of departure that Member States enjoy a wide margin of discretion in defining their public service obligations. This discretionary competence is also highlighted in the preamble to the Electricity Directive, which provides that it is ‘important that the public service requirements can be interpreted on a national basis, taking into account national circumstances and subject to the respect of Community law’.1074 On this basis, I have already concluded that the concept of public service obligations, as enshrined in Article 3(2) of the Directive, only requires the tasks in question to pursue a general economic interest which would not be pursued by ordinary market participants on ordinary market terms.1075 Consequently, this author submits that the wide approach argued by the Commission in Irish CADA cannot be subsumed under the definition of public service obligations as such.1076 1069. 1070. 1071. 1072. 1073.

Ibid., para. 30. Ibid., para. 31. Ibid., para. 32. Ibid., para. 34. See, in addition to State aid No. N 475/2003, Irish CADA, 16.12.2003, the reasoning in Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Public service obligations, 16.1.2004, 2. 1074. Paragraph 46, last sentence, of the preamble to the Electricity Directive. 1075. Chapter 21 above. 1076. The reasoning of the Commission at this point is, arguably, even more questionable when viewed in relation to the State aid provisions of the Treaty, which constituted the legal basis for the decision. Art. 107(1) TFEU defines measures of State intervention in relation to their effects rather than by reference to their causes or aims, see, inter alia, Case C-56/93, Kingdom of Belgium v. Commission of the European Communities, [1996] ECR I-723, para. 79. The aim of the provision is to prevent trade between Member States from being affected by advantages granted by public authorities which distort or threaten to distort competition

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Exemptions from the Electricity Directive The second approach would be to interpret Article 3(14) of the Electricity Directive as requiring the public service obligation imposed by the Member State to be necessary for the fulfilment of the general economic interest and not affect the development of trade to such an extent as would be contrary to the interests of the Union. With respect to the necessity criterion, this understanding would contradict the wording of the provision, which allows exemptions from certain provisions insofar as their application would obstruct the performance of the obligations imposed on undertakings in the general economic interest. Consequently, the wording suggests that it is the necessity of allowing exemptions from the Directive in order for the required tasks to carried out that constitutes the object of the assessment, not the necessity of imposing the obligations in question in order to promote the general economic interests pursued. On the other hand, the wording of the Union interest criterion suggests a broader evaluation of Member State and Union interests in imposing public service obligations in the general economic interest: that is, exemptions may only be granted insofar as the development of trade is not affected to an extent contrary to Union interests. This author therefore submits that, to the extent that the Commission’s reasoning in Irish CADA has a basis in EU law, it is most appropriate to subsume it under the Union interest criterion in Article 3(14) of the Directive. The implications of this view, as will be further established below, are that the evaluation of the necessity criterion is restricted to a rather straightforward assessment of whether an exemption from the Directive is necessary to perform a defined public service task, while the Union interest criterion may, in principle, involve a broader evaluation of national versus Union interests. 22.3.3.

THE NECESSITY OF EXEMPTIONS FROM THE DIRECTIVE PERFORMANCE OF SECURITY OF SUPPLY OBLIGATIONS

FOR THE

For the purposes of our discussion, the necessity test in Article 3(14) of the Directive essentially poses the question whether the application of Article 7 or 32 will obstruct the performance, in law or fact, of the investment obligations imposed on the relevant public service undertaking. In other words, the issue is whether exemptions from the Directive are necessary to enable the undertaking to carry out projects as defined and required by the Member State. With respect to Article 7, we have already emphasized that the imposition of an investment obligation by a Member State in itself requires exemption from the authorization procedure, which should be granted provided the obligation falls within the scope of the concept of a public service obligation as defined in by favouring certain undertakings or certain products, see Case C-387/92, Banco Exterior de Espan˜a v. Ayuntamiento de Valencia, [1994] ECR I-877, para. 12. This point of departure puts the reasons for, or the aims of, the State measure firmly in the background in the assessment concerning possible aid under Art. 107(1) TFEU, and the interpretation of the public service obligation concept as applied in relation to that provision should, in this author’s opinion, be applied correspondingly.

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Chapter 22 Article 3(2) of the Directive. So far, therefore, the assessment of investment obligations under Articles 3(2) and 3(14) parallels the corresponding evaluation under Article 8, in that exemption from the authorization procedure should be granted if the investment promotes a general economic interest but would not be carried out by ordinary market participants on ordinary market terms, that is, on the basis of the authorization procedure. If the Member State additionally provides specific investment incentives to the service provider in the form of favourable transportation tariffs, an exemption from Article 32 of the Electricity Directive may also be required. This raises the question whether the requirement in Article 32 for transportation tariffs to apply to all eligible customers objectively and without discrimination is likely to obstruct the performance of the investment obligation in question. In practice, the assessment is likely to focus on whether the public service provider will incur any additional costs in performing the public service obligation that it would not otherwise have incurred. If additional costs will be incurred, it is settled case law under Article 106(2) TFEU that these may be covered by public service compensation insofar as this is necessary to enable the service provider to perform the obligation on economically acceptable terms,1077 including the receipt by the service provider of a reasonable rate of return.1078 This case law is equally relevant to the application of Article 3(14) of the Electricity Directive.1079 Hence, an exemption from Article 32 of the Directive may be held necessary to the extent that it allows tariff incentives that contribute to compensating the service provider for public service costs and it allows the service provider a reasonable rate of return. 22.3.4.

THE CRITERION CONCERNING THE DEVELOPMENT UNION

OF

TRADE

AND THE INTERESTS OF THE

22.3.4.1.

The Criterion as a Separate Proportionality Requirement

Article 3(14) of the Electricity Directive also sets forth the condition that exemptions will only be granted ‘insofar as the development of trade would not be 1077. See Case C-320/91, Corbeau, [1993] ECR I-2533, para. 16, and Case C-393/92, Almelo, [1994] ECR I-1477, para. 49 as later refined by the Court in Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699, para. 43, and, more recently, Case C-162/06, International Mail Spain SL v. Administracio´n del Estado and Correos, [2007] ECR I-9911, paras 34–35. 1078. See correspondingly Case C-280/00, Altmark, [2003] ECR I-7747, para. 92. 1079. See Case C-162/06, International Mail Spain SL v. Administracio´n del Estado and Correos, [2007] ECR I-9911, paras 33–37, where the Court correspondingly applied the case law on financial compensation under Art. 86(2) EC within the context of providing compensation to universal service providers under Directive 97/67/EC of the European Parliament and of the Council of 15 Dec. 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L15/14, 21.1.1998. This author submits that the reasoning of the Court must apply correspondingly to the relationship between Art. 106(2) TFEU and Art. 3(14) of the Electricity Directive.

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Exemptions from the Electricity Directive affected to such an extent as would be contrary to the interests of the Community’. This criterion corresponds to the second sentence of Article 106(2) TFEU, which ‘seeks to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Community’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the Common Market’.1080 A question that has been discussed in relation to Article 106(2) TFEU is whether the Union interests criterion should be interpreted as a clarification of the necessity requirement or as constituting a separate condition. The wording of the provision, which simply states in the second sentence that ‘[t]he development of trade must not be affected to such an extent as would be contrary to the interests of the Union’, does not provide a clear answer. According to Buendia Sierra, case law seems to suggest that the second sentence of Article 106(2) TFEU should be interpreted as a clarification of the necessity requirement in the first sentence.1081 More recent case law does not appear to clarify whether the requirements are separate or, alternatively, one single condition.1082 The wording of Article 3(14) in the Directive, on the other hand, argues strongly in favour of interpreting this sector-specific Union interest criterion as a separate condition. While the relationship between the conditions is ambiguous in Article 106(2) TFEU, Article 3(14) separates them more clearly by setting forth that exemptions may be granted insofar as the application of the provisions would obstruct the performance of the public service obligations ‘and insofar as the development of trade would not be affected to such an extent as would be contrary to the interests of the Community’.1083 This author therefore submits that, at least under Article 3(14) of the Directive, the Union interest criterion must be viewed as constituting a separate condition. In the following, we will discuss the legal implications of this criterion in more detail. 22.3.4.2.

Development of Trade

By requiring that the development of trade shall not be affected to an extent that would be contrary to the Union’s interests, Article 3(14) precludes exemptions to the extent that (i) the exemption has an effect on the development of trade; and 1080. Case C-202/88, France v. Commission, [1991] ECR I-1223. para. 12. 1081. J.L. Buendia Sierra, Exclusive Rights and State Monopolies under EC Law: Article 86 (Formerly Article 90) of the EC Treaty (Oxford: Oxford University Press, 1999), 341–352. 1082. See the identical statements of the Court in Case C-209/98, Sydhavnens Sten & Grus, [2000] ECR I-3743, para. 74; Case C-340/99, TNT Traco SpA v. Poste Italiane SpA and Others, [2001] ECR I-4109, para. 52 and Case C-220/06, Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia v. Administracio´n General del Estado, [2007] ECR I-12175, para. 78, where the Court held that current Art. 106(2) TFEU may be relied on ‘to the extent to which performance of the particular task assigned to that undertaking can be assured only through the grant of such rights and provided that the development of trade is not affected to such an extent as would be contrary to the interests of the Community’. 1083. Emphasis added.

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Chapter 22 (ii) the effects on trade are of such magnitude that they are contrary to the interests of the Union. It is reasonable to ask whether the first part of the condition, that is, whether the exemption has an effect on the development of trade, has any independent significance at all. Since measures adopted on the basis of Article 114 TFEU must genuinely have as their object the improvement of the conditions for the establishment and functioning of the internal market, it is possible to argue that measures validly based on that provision must be presumed to contribute to the development of trade in the internal market. Hence the granting of an exemption from a provision that contributes to the development of trade – in our case Articles 7, 8, 32 or 34 of the Electricity Directive – will also, according to this reasoning, a priori have a negative impact on such development. There is little doubt that exemption from a fundamental principle of the internal electricity market, such as the third-party access requirement in Article 32, will be deemed to affect the development of trade. Restrictions on third-party access are liable to hamper the free movement of electricity as well as appreciably distort competition.1084 As we discussed above in Chapter 19.6, however, the link between exemptions from the authorization procedure in Article 7 of the Directive and the development of trade is less obvious. As long as the alternative public service obligation procedure respects the fundamental requirements of nondiscrimination, objectivity and transparency, the principal internal market rationale for relying on the authorization procedure is that other alternatives are de facto more likely to favour national incumbents and may possibly also hinder the approximation of national laws. Any potential losses in economic efficiency due to the market intervention, on the other hand, will not necessarily have an appreciable effect on the development of trade from an internal market perspective. Nevertheless, the threshold in EU law for recognizing that a measure has an effect on the development of trade appears to be modest. The Court of Justice has consistently been careful not to invoke the corresponding condition under the State aid provision in Article 107(1) TFEU, and there are no indications in case law to suggest a more rigorous application of the requirement under Article 106(2) TFEU or, more particularly, under Article 3(14) of the Directive.1085 An exemption from Article 7 of the Directive is therefore, in this author’s view, likely to be deemed to have an effect on the development of trade. Whether that effect is of such magnitude that it can be deemed contrary to the interests of the Union is a different matter, which will be discussed further below.

1084. See also Case C-439/06, Citiworks, [2008] ECR I-3913, para. 44, where the Court emphasized that ‘open third-party access to transmission and distribution systems constitutes one of the essential measures which the Member States are required to implement in order to bring about the internal market in electricity’. 1085. See Ch. 26.1 below on this requirement under Art. 107(1) TFEU.

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Exemptions from the Electricity Directive 22.3.4.3.

Interests of the Union

The second sentence of Article 3(14) of the Electricity Directive explicitly states that the interests of the Union ‘include, inter alia, competition with regard to eligible customers in accordance with this Directive and Article [106] of the Treaty’. This means that competition with regard to all customers (i.e., wholesale and final customers) amounted to a Union interest with effect from 1 July 2007.1086 The Directive does not specify what other Union interests are encompassed by the words inter alia. In the energy monopoly cases, the Court of Justice held that, given the explanations offered by the Dutch, Italian and French Governments, ‘it was incumbent on the Commission, in order to prove the alleged failure to fulfil obligations, to define, subject to review by the Court, the Community interest in relation to which the development of trade must be assessed’.1087 This suggests that the concept of the Union interest criterion is a dynamic one. The Commission has yet to clarify its view on possible Union interests in the electricity sector other than competitive concerns.1088 However, in this author’s opinion, the present EU emphasis on the environmental and security of supply interests provides a strong basis for qualifying these interests as Community (Union) interests within the meaning of Article 3(14) of the Directive. Article 3 TEU and, to an even greater extent, the principle of environmental integration enshrined in Article 11 TFEU, provide strong Treaty-based arguments in favour of acknowledging environmental protection as a Union interest within the meaning of Article 3(14) of the Directive. Moreover, we have also seen in this book that the promotion of the interests of environmental protection and security of supply enjoy broad consensus at EU level, as has been emphasized by both the European Council and the Commission.1089 In particular, these interests are highlighted as primary regulatory objectives in Article 3(1) of the Electricity Directive.1090 Consequently, this author submits that the establishment of a common European energy policy contributes towards qualifying not only the objective of promoting competition, but also the objectives of security of supply and environmental protection as Union interests within the meaning of the Electricity Directive. 1086. Article 33(1)(c) read in conjunction with Art. 2(12) of the Electricity Directive. 1087. Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699, para. 69; Case C-158/94, Commission of the European Communities v. Italy, [1997] ECR I-5789, para. 65 and Case C-159/94, Commission of the European Communities v. France, [1997] ECR I-5815, para. 113. 1088. In Commission Decision (EEC) 91/50, Ijssencentrale, [1991] OJ L28/32, 2.2.1991, the question of the Community interests in the energy sector was touched on by the Commission, see para. 47. The Commission’s reasoning was, however, confined to the Community interest in maintaining free movement of energy given the efforts to achieve a single internal energy market. 1089. See, inter alia, the Presidency Conclusions from the European Council meeting held on 23 and 24 Mar. 2006 on establishing an energy policy for Europe, 24.3.2006 (7775/06), 13–17 and Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, respectively. 1090. See also similarly in Art. 3(1) of the Gas Directive.

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Chapter 22 This approach to the concept of Union interests means that an assessment of whether trade will be affected to an extent contrary to the interests of the Union must be based on a broader set of criteria than those solely relating to trade and competition. On this basis, it is, for example, difficult to see how an exemption from the authorization procedure in Article 7 necessary for the performance of public service obligations to promote renewable investments could ever be held to affect trade to an extent contrary to Union interests. Not only would the negative effects on trade of an exemption from the authorization procedure be modest, but the measures in question would also be likely to have a positive effect on other Union interests. On the other hand, other situations can be envisaged where the required exemptions from the Directive would have a greater impact on trade, while the investments promoted by the exemptions would be less beneficial – or even detrimental – to Union interests. An assessment of the effect on Union interests might, for example, turn out differently if a Member State required an exemption from Article 32 of the Directive in order to induce a producer to invest in new gas plant capacity. Although such investments and restrictions on trade might possibly have some merit from the perspective of national security of supply, the measure would pursue neither EU environmental interests nor long-term energy security interests by reducing gas import dependency. Other examples could be applied to illustrate and discuss the nature of the Union interest evaluation under Article 3(8) of the Directive. The fundamental point to be made in the present context, however, is that the acknowledgment of environmental protection and security of supply objectives as Union interests leads to a broader evaluation of national energy policy choices within an EU context. Granted, this approach also has its weaknesses. Accepting that the Commission and, ultimately, the Court of Justice have competence to assess national public service exemptions on the basis of more fundamental EU energy policy interests implies an acknowledgment that the energy policy choices of Member States are subject to more fundamental EU review than an assessment of restrictions on trade and competition. One argument against this approach is that a broader EU review is likely to interfere with Member State decisions on matters traditionally regarded as national prerogatives, such as the choice of national energy mix.1091 Another argument of a quite different nature is that such decisions, given their strategic importance for Member States, should be subject to strict democratic control. More precisely, EU requirements regarding Member States’ choices on whether to adopt supply-side or energy conservation/demand-side measures and fossil or non-fossil generation investments should, in this author’s opinion, be determined by the Parliament and the Council and 1091. Both the European Council and the Commission have repeatedly emphasized that this choice should be left to the discretion of individual Member States, see, inter alia, the Presidency Conclusions from the European Council meeting held on 23 and 24 Mar. 2006 on establishing an energy policy for Europe, 24.3.2006 (7775/06), 16 and Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006, 9, respectively.

330

Exemptions from the Electricity Directive laid down in EU measures under the legislative procedures provided by the TFEU. Commission review of Member State choices on the basis of a general Union interest criterion could, in practice, mean that competence is conferred on one EU institution to review sensitive questions of national energy policy and to adopt decisions which are unlikely to be overruled by the Court of Justice due to the often complicated technical, economic and political questions involved. In the light of the above, this author submits that the Union interest criterion in principle provides the Commission and the Court of Justice with competence to assess national public service exemption grounds on the basis on more fundamental EU environmental and security of supply interests, although the intensity of the review should be limited. This approach also means that, contrary to our conclusions in relation to Article 8 of the Directive, reliance on Article 3(14) may to some extent require Member States to prioritize between different measures on the basis of their suitability for attaining EU environmental and security of supply objectives. 22.4.

THE RELATIONSHIP BETWEEN PUBLIC SERVICE OBLIGATION PROCEDURES AND TENDERING PROCEDURES

The above analysis of public service obligation provisions illustrates that, although the legal requirements vary for the applicability of exemption provisions, the assessments made under Articles 8 and 3 of the Electricity Directive are essentially very similar. This observation raises, in turn, the question whether Member States are free to choose which procedure to rely on and, if so, whether that choice has any significant practical implications for the promotion of new electricity generation investments. The requirement inherent in Article 3(2) of the Directive for the public service obligation to be necessary for the pursuit of the general economic interest in question means that public service obligations cannot be imposed on undertakings to pursue general economic interests that are already safeguarded by other provisions of EU law.1092 Member States cannot, for example, impose public service obligations to ensure a secure, reliable and efficient transmission system on market participants other than TSOs, given the specific obligation imposed by Article 12(d) of the Directive. Although a general discussion of this issue is beyond the scope of this study, there is good reason to believe that Articles 3(2) and 3(14) of the Directive are therefore likely to be of limited practical significance within important areas of public service tasks such as grid operation, given the significant number of specific EU measures already adopted within the field. With respect to electricity generation investments, on the other hand, we have seen in this book that, apart from the tendering procedure in Article 8 of the Electricity Directive, EU measures offer 1092. See also along these lines C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 123–126.

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Chapter 22 few specific means likely to guarantee the necessary investments. The reference in Article 3(14) to not only Article 7 but also Article 8 as derogation options should be interpreted as meaning that Member States are free to choose whether to rely on the general public service obligation procedure in Article 3 or the more specific tendering procedure in Article 8 as a means to promote investments. This finding leads us to ask to what extent the approaches are substantively different. It follows from Article 3(6) of the Electricity Directive that any State compensation granted for the fulfilment of public service obligations must be awarded in a way that is non-discriminatory and transparent. In principle, these requirements may be fulfilled either by arranging a tendering procedure for the right to perform public service obligations (possibly giving entitlement to public service compensation) or by way of other non-discriminatory procedures. In practice, however, it is hard to see what other non-discriminatory procedures might be applied, except in cases where the obligation can only be performed by one particular undertaking. The fact that Member States are, in practice, obliged to arrange a tendering procedure for the award of public service obligations under Article 3 makes the question whether there is any substantive difference between the application of Articles 3 and 8 to supply-side investments even more pressing. The application of both provisions shares many similar traits. Both seek to establish a distinction between investments made by market participants on market terms on the one hand and investments that require active promotion through measures of State intervention on the other. Furthermore, both provisions require the investment task in question to be awarded pursuant to a tendering procedure and neither regulates the possible links with State aid measures, which will have to be assessed separately under the State aid provisions of the TFEU. Moreover, the application of both provisions entails de facto the existence of a lower threshold for Member States’ reliance on investment interventions in the environmental interest than in the security of supply interest. The principal substantive difference between the provisions in relation to supply-side investments seems therefore to lie in the finding that the Union interest criterion in Article 3(14) of the Directive possibly gives rise to a broader approach to the assessment of Union interests in relation to the adoption of a national measure, while Article 8 formally leaves these choices to the Member States. Consequently, with respect to exemptions from Article 7 of the Directive, it is difficult to see that the right of Member States to impose public service obligations in the general economic interest will have much practical relevance in providing an alternative to the tendering procedure in Article 8. The application of Article 3(14) may possibly, however, be of some practical relevance to supply-side investments by way of permitting derogations from Article 32 of the Directive. 22.5.

CONCLUSIONS

Article 3(14) of the Electricity Directive permits Member States to derogate from, inter alia, Articles 7 and 32 of the Directive insofar as the application of the 332

Exemptions from the Electricity Directive provisions would obstruct the performance of public service obligations imposed on electricity undertakings and provided the development of trade is not affected to an extent contrary to the interests of the Union. This sector-specific application of Article 106(2) TFEU in principle opens up the possibility of exemptions from the provisions of the Directive in the interest of promoting new electricity generation investments, although the provision is likely to be of limited relevance in practice as an alternative to the tendering procedure in Article 8. The principal question discussed in this chapter is whether the proportionality requirements enshrined in Article 3(14) mean either that derogations from the Directive must be necessary to enable the public service provider to carry out its obligations or that the derogation must be necessary in order to promote the underlying general economic interest. The latter approach involves a more intense EU review of national energy policy choices than the former. We have argued above that the interests of the Union, as the concept is applied in Article 3(14), encompass not only competition with regard to all customers but also EU security of supply and environmental protection interests. On that basis, this author submits that the assessment under the latter provision allows for a broader approach to the balancing of Member State and Union interests in granting exemption from the provisions of the Directive than the corresponding assessment under the tendering provision in Article 8. However, given the existence of the more specific grounds for exemption under the latter tendering provision, the practical application of Article 3(14) to the promotion of supply-side investments is likely to be limited to cases where there is a need for exemption from provisions other than Article 7. This means, in turn, that the scope of the possible exemption offered by the provision in relation to the promotion of supply-side investments is, in practice, narrow.

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Chapter 23

Concluding Remarks

In this Part V we have discussed the principal EU measures governing Member State interventions aimed at promoting new investments in electricity generation. Our analysis has revealed conclusions on several levels and we will emphasize the most important in this concluding section. In order to define the circumstances under which a Member State is permitted to intervene in the market to ensure electricity supplies, it is necessary to clarify the meaning of the security of supply concept. A study of the EU measures that define the Member States’ right of intervention, of which Articles 3 and 8 of the Electricity Directive are particularly important examples, thus provides a good basis for analysing the Union approach to the concept. This study lends support to the findings of the previous parts of the book: security of supply is a multi-faceted concept which can hardly be subjected to one uniform definition, even within a specific area such as the promotion of electricity generation investments. Neither the Electricity Directive nor the Security of Electricity Supply Directive provides a satisfactory general definition of the concept and, even worse, to the extent that the Directives do provide definitions, they are not fully consistent with each other. Moreover, different provisions in the same Directive may also rely on different definitions. We have argued above that the concept as it has been applied under Article 7 of the Electricity Directive must be understood as an aim to ensure a balance between supply and demand without a need for rationing on the demand side. It is a clear point of departure that electricity price levels are irrelevant in this context. This latter view is, however, difficult to reconcile with the approach under Articles 3(2) and 3(3) of the Directive, which specifically refer to reasonable prices as a general economic interest. The relationship between the first recital of the Security of Electricity Supply Directive, which emphasizes that public service obligations should only be applied to ensure noninterrupted supplies, and the public service provisions of the Electricity Directive, which explicitly refer to reasonable prices as a legitimate concern, provide a

Chapter 23 telling example of the ambiguous relationship between electricity prices and supply interruptions. Given the difficulties involved in defining the concept as such, it is no surprise that the task of defining the circumstances under which Member States may intervene in the market to ensure security of supply also proves to be a source of several interpretational problems. The difficulties encountered have much in common with the questions dealt with by the Court of Justice in determining the extent to which security of supply may be applied as a ground to justify exemptions from the Treaty provisions on the free movement of goods, discussed above in Part III. While the right to intervene is, as a general rule, strictly defined, we have argued above that the provisions in question cannot be interpreted to mean that Member States’ choices affecting their levels of energy security, such as decisions to opt for energy diversification as a hedge against gas import interruptions, are subject to strict Union review. Moreover, we have seen that the question of the necessity of public intervention, for example to ensure sufficient reserve generation capacity, raises a number of difficult problems, relating, inter alia, to the functioning of the relevant market, to which there may be no clear answer. Consequently, this author submits that it is not unlikely that a variation on the approach taken by the Court in Campus Oil will be applied under the secondary law measures regulating the internal electricity market: while EU institutions will be likely to formulate very strict criteria governing the necessity of public intervention in the first place, they may well end up giving the Member States the benefit of doubt and accepting interventions to the extent that their necessity cannot be ruled out. The approaches to interventions under the free movement provisions of the TFEU and under the measures regulating the internal electricity market do, however, differ on one important point. While derogations from the former provisions amount to exemptions from the fundamental free movement principles of the Treaty, and are consequently closely associated with restrictions on trade, derogations from the latter provisions primarily affect economic efficiency. The launching of a tendering procedure in derogation from the authorization procedure of the Electricity Directive, for example, is more likely to affect competitiveness and future market-based investments than to restrict inter-state trade as such. Acknowledging this raises, in turn, the question of whether measures that seek to define the Member States’ rights of market intervention are based on a sufficient Union rationale in the first place. Another parallel that can be drawn between the measures of public intervention discussed in this part and the Court’s reasoning under the Treaty provisions on the free movement of goods concerns the difference between reliance on interventions in the environmental and in the security of supply interests. While recourse to investment interventions in the latter interest is only exceptionally permitted under Articles 8 and 3 of the Electricity Directive, it is de facto difficult to envisage situations where recourse to interventions in the environmental interest would be seriously restricted under the same provisions. Consequently, the different approaches adopted by the Court in its reasoning in, on the one hand, Campus Oil and subsequent security of supply case law and, on the other hand, PreussenElektra 336

Concluding Remarks are to some extent also reflected in the application of the internal electricity market legislation. This trend, which may possibly contribute to the promotion of sustainable energy security investments, is in this author’s opinion a desirable one. On the other hand, considering both the importance of the environmental interests involved and the potential for promoting both sustainability and energy security aims though the same means, it is striking that internal electricity market legislation does not require Member States to prioritize sustainable energy security investments. The tendering provision in the Electricity Directive is a case in point. While the provision limits the Member States’ rights to derogate from reliance on market-based investments in order to promote competitiveness, it does not require Member States to ensure that interventions made in the security of supply interest contribute to sustainable investment. Finally, to pick up from our concluding remarks to Part IV above, the analysis in this chapter raises the question whether internal electricity market measures preempt the application of the free movement provisions of the Treaty to the effect that Member States are precluded from recourse to Article 36 TFEU. Together with the measures of market facilitation discussed earlier, the measures of intervention discussed in this part constitute the principal EU provisions aimed at promoting supply-side investments in the security of supply interest. These measures do not provide for an exhaustive harmonization of the provisions relating to the free movement of electricity, nor do the more generally worded non-discrimination requirements in secondary law. Moreover, considering the reservations about, and criticisms made against, the provisions dealt with above, there is in this author’s opinion little reason to assume that these provisions of market intervention provide the necessary measures to ensure protection of the security of supply interests in question. Consequently, as the internal market measures discussed in this and the previous part of the book are not necessarily sufficient to ensure an adequate level of electricity generation investments, recourse to the free movement provisions of the Treaty cannot in principle be ruled out, although exemptions under Article 36 TFEU are only likely to be granted in highly exceptional situations. Another category of substantive Treaty provisions, which are subject to many assessments and conditions similar to those applicable to the secondary law measures discussed so far, but which nevertheless apply in parallel to the internal electricity market legislation, is made up of the State aid provisions. These provisions are considered further in the next part of the book.

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Part VI

State Aid to Electricity Generation Investments

Chapter 24

Introduction

State intervention in the form of the launching of tenders or the imposition of public service obligations, as discussed in Part V above, will in most cases also involve economic incentives to promote the investments in question. In addition to the Commission’s and the Court of Justice’s assessment under the internal electricity market legislation of a Member State’s right to intervene, the incentive mechanisms as such will also be subject to scrutiny under the State aid provisions of the TFEU. Accordingly, public interventions are, in principle, subject to a double test under primary and secondary legislative provisions: they must comply with the sector-specific requirements of secondary law as well as the fundamental State aid provisions of the Treaty. The objective of this part of the book is twofold. First, we will show how the EU measures discussed in the previous part of the book are supplemented by State aid control in the assessment of Member State interventions. In this context, we will focus primarily on the consequences for the assessment of Member State interventions of the boundaries, as ultimately drawn up by the Court of Justice, of the prohibition on State aid in Article 107(1) TFEU. On the basis of this analysis, we will ask what new developments are brought to the table by the internal electricity market regulation of State intervention, as discussed above, to supplement the existing State aid control mechanisms provided by the Treaty. This perspective will direct our focus towards the specific aspects of State aid that are of particular relevance to the application of the internal electricity market legislation. More general analyses of the application of EU State aid law to the energy sector may be found elsewhere.1093 This approach also means that we will not discuss the 1093. See, inter alia, L. Hancher, ‘State Aid’, in EU Energy Law. Volume II: EU Competition Law and Energy Markets, ed. C.W. Jones, 2nd edn (Leuven: Claeys & Casteels, 2007), 549–699; P.D. Cameron, Competition in Energy Markets. Law and Regulation in the European Union, 2nd edn (Oxford: Oxford University Press, 2007), 427–459, and E.D. Cross et al., ‘EU Energy

Chapter 24 application of the State aid provisions to incentive instruments not requiring derogation from the internal electricity market legislation. For example, differentiated tax schemes intended to promote investments based on specific fuel sources may be combined with the authorization procedure and comply with the market-based point of departure of the Electricity Directive (provided the scheme is nondiscriminatory), but may nevertheless amount to State aid and have to be assessed accordingly.1094 Second, we will discuss the relevance to the topic of this book of the specific regimes established at EU level for two of the most important fuel sources in electricity generation – coal and nuclear material. These two separate regimes are discussed in this part because of their particular importance to State aid control although, as we shall see, the nuclear regime may also have some implications for the application of internal electricity market measures. In the following we will first provide a brief overview, in Chapter 25 below, of the TFEU State aid regime and, in general terms, its relationship to the sectorspecific electricity market legislation. The substantive questions raised by the application of Article 107(1) TFEU to incentives to encourage electricity generation investments will then be considered in more detail in Chapter 26. For the sake of completeness, the Commission’s competence to declare State aid compatible with the internal market is also discussed, albeit more briefly, in Chapter 27. Finally, in Chapter 28, we will discuss the relationship of the EU rules on State aid to the special regimes established for coal (under the former ECSC Treaty) and nuclear material (under the Euratom Treaty), respectively.

Law’, in Energy Law in Europe. National, EU and International Regulation, ed. M.M. Roggenkamp et al., 2nd edn (Oxford: Oxford University Press, 2007), 225–392, at 283–299. 1094. See further W. Scho¨n, ‘State Aid in the Area of Taxation’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 241–276. The introduction of tax schemes and charges imposed by Member States may also raise the question of the application of Arts 30 and 110 TFEU, see in this respect Case C-213/96, Outokumpu Oy, [1998] ECR I-1777 and Case C-206/06, Essent, [2008] ECR I-5497. The application of these provisions will not be discussed in the following.

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Chapter 25

Overview of the TFEU State Aid Regime

25.1.

A BRIEF INTRODUCTION TO THE TFEU STATE AID REGIME

The Treaty State aid provisions are set forth in Articles 107–109 TFEU, corresponding to previous Articles 87–89 EC. Article 107 provides the principal substantive rules, while Article 108 primarily deals with procedural matters.1095 Article 109 confers competence on the Council to adopt appropriate secondary legislation for the application of Articles 107 and 108 TFEU.1096 The general procedural principles established in Article 108 TFEU are supplemented by Council Regulation (EC) No. 659/1999.1097 These procedural rules, which relate to the notification and assessment of existing and new aid measures, as well as the legal 1095. The latter provision also includes a safeguard rule granting the Council authority to decide (unanimously) that unlawful aid is compatible with the common market in exceptional cases, see Art. 108(2) TFEU third subparagraph. 1096. See for example Council Regulation (EC) No. 994/98 of 7 May 1998 on the application of Arts 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L142/1, 14.5.1998, which grants the Commission authority to adopt group exemptions, pursuant to which the Commission has recently adopted Commission Regulation (EC) No. 800/2008 of 6 Aug. 2008 declaring certain categories of aid compatible with the common market in application of Arts 87 and 88 of the Treaty (now Arts 107 and 108 TFEU) (General block exemption Regulation), OJ L214/3, 9.8.2008. 1097. Council Regulation of 22 Mar. 1999 laying down detailed rules for the application of Art. 93 of the EC Treaty, OJ L83/1, 27.3.1999, with subsequent amendments. This Regulation is in part a codification of previous case law from the Community Courts on procedural State aid issues, but also introduces new rules. It is complemented by Commission Regulation (EC) No. 794/2004 of 21 Apr. 2004 implementing Council Regulation (EC) No. 659/1999, OJ L140/1, 30.4.2004, with subsequent amendments, which contains rules on notification, report forms, calculation of time limits and the interest rate for recovery of unlawful aid.

Chapter 25 consequences of granting unlawful aid, will not be dealt with in detail in the following.1098 The Commission is charged with keeping existing aid systems under constant review and must be informed of new aid granted by Member States to enable it to assess whether the aid is compatible with the internal market in accordance with Article 107 TFEU. In cases where the State aid is determined to be incompatible with the internal market, the Commission must require the Member State in question to abolish or alter the terms of the aid.1099 Decisions by the Commission on State aid may ultimately be brought before the Court of Justice.1100 EU State aid control derives from the need to maintain a level playing field for all undertakings active within the internal market, regardless of their country of establishment.1101 More specifically, the aim of Article 107 TFEU ‘is to prevent trade between Member States from being affected by benefits granted by the public authorities which, in various forms, distort or threaten to distort competition by favouring certain undertakings or the production of certain goods’.1102 The evaluation under Article 107 TFEU falls into two parts. First, it is necessary to determine whether a given measure constitutes State aid within the meaning of Article 107(1). If it does, the question arises whether the aid nevertheless ‘shall be compatible’ or ‘may be considered to be compatible’ with the internal market in accordance with Article 107(2) or 107(3), respectively, of which the latter discretionary alternative is by far the most relevant in practice. It is of paramount importance to distinguish between the assessment of whether a measure constitutes State aid under Article 107(1) TFEU and, if it does, the assessment of whether it is nevertheless possible to declare the aid compatible with the internal market under Article 107(3) TFEU. The conditions for the application of the prohibition of State aid in Article 107(1) TFEU1103 constitute a legal concept that has to be interpreted on the basis of objective factors subject to review by the Court of Justice.1104 Based on the wording that certain aid categories may be 1098. See further D. Grespan & L. Bellodi, in EU Competition Law: Volume I Procedure: Antitrust – Merger – State Aid, ed. G.L. Tosato & L. Bellodi (Leuven: Claeys & Casteels, 2006), 327–430 for an extensive overview of the procedural issues relating to the EU State aid regime. 1099. Article 108 TFEU. 1100. See Arts 108(2) and (3) and Arts 251 TFEU et seq. 1101. State aid action plan: Less and better targeted State aid: a roadmap for State aid reform 2005– 2009, COM (2005) 107 final, 7.6.2005, 3 (para. 7). 1102. Case 173/73, Italy v. Commission, [1974] ECR 709, para. 13, and, more recently, joined Cases C-393/04 and C-41/05, Air Liquide Industries Belgium SA v. Ville de Seraing (C-393/ 04) and Province de Lie`ge (C-41/05), [2006] ECR I-5293, para. 27. 1103. M. Ross, ‘State Aid and National Courts: Definitions and Other Problems – A Case of Premature Emancipation?’, CMLR (2000): 401–423, at 402, states that it is well established that Art. 87(1) EC amounts to a prohibition, referring to Case 78/76, Steinike & Weinlig v. Federal Republic of Germany, [1977] ECR 595, para. 8, although, as he points out, the Court emphasized that this prohibition ‘is neither absolute nor unconditional’. 1104. Joined Cases C-341/06 P and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, [2008] ECR I-4777 (Grand Chamber), paras 141–142, where the Court of Justice nevertheless appears to open up the possibility of allowing some discretion to the Commission to the extent that complex economic appraisals are involved, see para. 143.

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Overview of the TFEU State Aid Regime considered compatible with the internal market, it is, however, settled case law that the Commission enjoys a wide discretion when applying Article 107(3) TFEU and that the Court of Justice is restricted to identifying potential manifest errors or instances of misuse of powers in the Commission’s assessment.1105 The Commission has developed extensive guidelines concerning its application of the latter provision. Moreover, Member States are under an obligation to notify the Commission in advance of any new State aid to be implemented. In the absence of such prior notification, and without the Commission’s approval, new aid implemented by a Member State is in principle unlawful and, as a clear point of departure, fully recoverable from the aid recipient.1106 Measures not caught by the prohibition in Article 107(1) TFEU, however, do not amount to State aid and prior notification of such measures is not required. Consequently, the limits of the prohibition in Article 107(1) TFEU also impose significant restraints on EU State aid control. 25.2.

THE RELATIONSHIP BETWEEN THE STATE AID PROVISIONS OF THE TREATY AND THE INTERNAL ELECTRICITY MARKET LEGISLATION

As will be further substantiated below, many of the assessments made in the application of the TFEU State aid provisions to public investment incentives are broadly similar to the assessments made under the secondary electricity market legislation. This does not mean, however, that the secondary law provisions imply the existence of a sector-specific application of the EU State aid rules. Although the secondary provisions may to a certain extent be inspired by, and complement, the Treaty’s State aid provisions, they do not pre-empt the application of the Treaty provisions. This view is supported by the wording of both the Electricity Directive and the Security of Electricity Supply Directive. Article 3(2) of the Electricity Directive sets forth that ‘[h]aving full regard to the relevant provisions of the Treaty, in particular Article [106] thereof’ Member States may impose public service obligations on undertakings in the electricity market.1107 The position of the Directive in relation to the State aid provisions in particular is further clarified by the preamble to the Directive, which provides that to ‘the extent to which measures taken by Member States to fulfil public service obligations constitute State aid under [Article 107(1)] of the Treaty, there is an obligation under [Article 108(3)] of the Treaty to notify them to the Commission’.1108 This reminder that Member States are under an obligation to notify the 1105. See, inter alia, Case 730/79, Philip Morris Holland B.V v. Commission, [1980] ECR 2671, para. 17 and Case C-148/04, Unicredito Italiano SpA v. Agenzia delle Entrate, [2005] ECR I-11137, para. 71. 1106. See further Council Regulation (EC) No. 659/1999 of 22 Mar. 1999 laying down detailed rules for the application of Art. 93 of the EC Treaty, OJ L83/1, 27.3.1999. 1107. Emphasis added. 1108. Paragraph 49 of the preamble to the Electricity Directive.

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Chapter 25 Commission of State aid measures in accordance with the State aid provisions of the Treaty means that the State aid provisions apply irrespective of whether or not the public service conditions of the Electricity Directive are fulfilled. There is no reason to view the relationship between the application of the tendering procedure in Article 8 of the Directive and the State aid provisions any differently. Thus, as argued by Hancher, the Electricity Directive cannot be interpreted as having any effect on the answer to the initial question of whether or not a particular measure is an aid pursuant to (current) Article 107(1) TFEU.1109 Wording indicating a similar relationship between the internal electricity market legislation and the Treaty provisions on State aid can be found in the Security of Electricity Supply Directive. Article 5(2) of the Directive provides [w]ithout prejudice to Articles 87 and 88 of the Treaty (current Articles 107 and 108 TFEU) a non-exhaustive list of measures which may be implemented by Member States in order to secure the balance between electricity supply and consumer demand.1110 Moreover, the preamble to the Directive sets forth more generally that ‘[w]ithout prejudice to Articles [107, 108 and 109] of the Treaty, it is important for Member States to lay down an unambiguous, appropriate and stable framework which will facilitate security of electricity supply and is conducive to investments in generation capacity and demand management techniques’.1111 Consequently, it is clear that the secondary internal electricity market provisions do not replace the State aid provisions of the Treaty, but complement them. This means, in principle, that Member State interventions in electricity markets, to the extent that economic incentives are involved, will be subject to a double test. In practice, the assessments made when applying these tests are, as we shall see, broadly similar, which means that the two tests, for most practical purposes, usually take the form of a single evaluation.1112

1109. L. Hancher, ‘State Aids in the Energy Sector’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 457–492, at 488. 1110. Emphasis added. 1111. Paragraph 12 of the preamble to the Security of Electricity Supply Directive. 1112. Although it should be emphasized that the consequences of a breach of internal electricity market provisions on the one hand and State aid rules on the other differ fundamentally, in particular from the perspective of market participants, since a Member State’s breach of the former provisions is likely to lead to infringement proceedings, while unlawful aid granted contrary to the State aid rules may be recovered from the recipient.

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Chapter 26

The Boundaries of Article 107(1) TFEU

26.1.

INTRODUCTION

The starting point for the evaluation of whether a measure constitutes State aid follows from Article 107(1) TFEU, which provides that an aid is incompatible with the internal market if all the conditions set out in that provision are fulfilled.1113 Based on the wording of the provision, four cumulative conditions must be met for a measure to constitute State aid. The measure must involve: (i) aid granted by a Member State or through State resources in any form whatsoever, which; (ii) distorts or threatens to distort competition by; (iii) favouring certain undertakings or the production of certain goods; and (iv) affects trade between Member States.1114

1113. It is settled case law that the conditions in Art. 107(1) TFEU are cumulative, see Case C-482/ 99, Stardust Marine, [2002] ECR I-4397, para. 68; Case C-280/00, Altmark, [2003] ECR I-7747, para. 74; Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941, para. 55 and joined Cases C-341/06 P and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, [2008] ECR I-4777 (Grand Chamber), para. 121. 1114. Different authors structure and describe the State aid conditions in slightly different terms, but these differences in approach do not necessarily have any substantive implications. See, for example, L. Hancher, ‘The General Framework’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 30–101, at 38 for a slightly different structure and wording of the four conditions. Some authors also operate with five conditions instead of four, see R.M. D’Sa, European Community Law on State Aid (London: Sweet & Maxwell, 1998), 55, who sets forth as a separate condition that ‘there is no opposing Treaty provision, i.e. the aid does not fall within an exemption/derogation provided for in the Treaty’. The Court of Justice has also formulated the conditions slightly differently in more recent case law, see for example Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941, para. 56 and joined Cases C-341/06 P

Chapter 26 A Member State may subsidize investments made by a successful bidder in a tendering procedure or by a public service obligation provider in a number of different ways. Investment subsidies to the successful bidder in a tendering procedure are typically offered in the form of a price premium on long-term power purchase contracts. Economic aid may, however, also be provided through a number of other instruments, such as direct (non-refundable) economic contributions, interest-free or low-interest loans, State guarantees, the injection of capital on non-market-based terms, tax exemptions or tax benefits, favourable conditions for the purchase of public land, goods or services, or funding of R&D activities.1115 All the subsidy instruments mentioned above may amount to an aid as the concept is applied under Article 107(1) TFEU. Moreover, economic contributions disbursed to specific undertakings as part of specific tendering or public service obligation procedures are, with one important exception, also likely to fulfil the three last State aid conditions under Article 107(1) TFEU. The provision of economic support to a single or restricted group of market participants clearly fulfils the third condition, known as the selectivity criterion, by favouring certain undertakings or the production of certain goods.1116 Moreover, the criteria that an aid must distort or threaten to distort competition and must affect trade between Member States will be readily met within an internal electricity market based on competition. As held more generally by Ross, it is difficult to envisage how a Member State could grant selective aid within the meaning of the existing case law and not at the same time distort competition in this market.1117 With respect to and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, [2008] ECR I-4777 (Grand Chamber), para. 122. 1115. Commission staff working paper: Inventory of public aid granted to different energy sources, COM (2002) (COM number reference and date not available), 4. 1116. The wide scope of the selectivity criterion is well illustrated by the Court of Justice’s reasoning in Case C-143/99, Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fu¨r Ka¨rnten, [2001] ECR I-8365, paras 33–55. Essentially, the Court concluded that an Austrian energy tax rebate on electricity and natural gas supplies to undertakings primarily involved in the manufacture of goods constituted selective State aid, since the rebate did not apply to all undertakings regardless of their activities (the service sector was excluded) and could not be justified by the nature and the general scheme of the system. Moreover, it follows from case law that aid may be selective within the meaning of Art. 107(1) TFEU even if it concerns a whole economic sector, see Case C-75/97, Belgium v. Commission, [1999] ECR I-3671, para. 33 and Case C-66/02, Italy v. Commission, [2005] ECR I-10901, para. 95. For an example of the application of the condition to aid to electricity producers, see Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, paras 254–257. 1117. M. Ross, ‘State Aid and National Courts: Definitions and Other Problems – A Case of Premature Emancipation?’, CMLR (2000): 401–423, at 415, with further references to case law at 415–417. See, however, also L. Hancher, ‘The General Framework’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 30–101, at 73, who emphasizes at a general level that, although the condition is usually met with ease, a number of cases have emphasized its growing importance.

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The Boundaries of Article 107(1) TFEU the fourth criterion, any aid measure which strengthens the position of an undertaking compared with other undertakings competing in Union trade will, as a point of departure, be deemed to affect trade between Member States.1118 Selective aid within a competitive sector where the regulatory focus is currently centred on market integration is therefore unlikely to be held not to affect trade.1119 In the light of the above, we are left with two particular issues to explore further in the following analysis of State aid in relation to tendering or public service obligation procedures.1120 First, for economic support to qualify as State aid under Article 107(1) TFEU, it must constitute an ‘aid granted by a Member State or through State resources in any form whatsoever’. In practice, a Member State may, rather than providing economic aid directly from public budgets, require certain categories of market participants to remunerate the aid recipient. This approach is applied in many national feed-in tariff schemes and was scrutinized by the Court of Justice in the light of the State aid provisions in PreussenElektra.1121 Similar methods of financing are, in principle, conceivable to provide incentives in relation to tendering and public service obligation procedures. The applicability of Article 107(1) TFEU to these aid schemes is further discussed in section 26.2 below. Second, as mentioned above, the application of the other three State aid conditions under Article 107(1) TFEU is subject to one important exception: compensation for the performance of public service obligations is, in accordance with the Court’s landmark ruling in Altmark and subsequent decisions, not to be regarded as State aid provided that the four, now well-known, Altmark conditions 1118. M. Ross, ‘State Aid and National Courts: Definitions and Other Problems – A Case of Premature Emancipation?’, CMLR (2000): 401–423, at 416 with further references to case law. 1119. See along these lines Case C-206/06, Essent, [2008] ECR I-5497, paras 76–77. Aid to capitalintensive projects such as electricity generation investments is likely to exceed the threshold value of EUR 100,000 over three years in Commission Regulation (EC) No. 69/2001 of 12 Jan. 2001 on the application of Arts 87 and 88 EC to de minimis aid, OJ L10/30, 13.1.2001, Art. 2, and is therefore also unlikely to fall outside the criteria of Art. 107(1) TFEU on the basis of that Regulation. Moreover, the effect on trade criterion is likely to be fulfilled even within isolated markets (such as, for example, Malta), since the aid measure may affect the possibilities for undertakings from other Member States to seek establishment in the national market, see the corresponding reasoning of the Court in Case C-280/00, Altmark, [2003] ECR I-7747, paras 77–78. See also Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, paras 258–264 for an example of the Commission’ application of the distortion of competition and effect on trade criteria. 1120. For more general discussions of the questions raised by Art. 107(1) TFEU, see, inter alia, M. Ross, ‘State Aid and National Courts: Definitions and Other Problems – A Case of Premature Emancipation?’, CMLR (2000):401–423; J.A. Winter, ‘Re(de)fining the Notion of State Aid in Article 87(1) of the EC Treaty’, CMLR (2004): 475–504 and L. Hancher, ‘The General Framework’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 30–101, particularly at 30–88. 1121. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Chapter 26 are fulfilled.1122 The relationship between these conditions and the conditions applied in connection with tendering and public service obligation procedures under the Electricity Directive are further discussed in section 26.3 below. The topic of public service compensation also raises the related question of whether Article 106(2) TFEU could be applied as a ground for exemption in cases where the Altmark conditions are not fulfilled. This question is also briefly considered in the latter section. 26.2.

AID GRANTED BY A MEMBER STATE OR THROUGH STATE RESOURCES IN ANY FORM WHATSOEVER

26.2.1.

THE CONCEPT

OF

AID

The concept of an aid within the meaning of Article 107(1) TFEU has been widely defined by the Court of Justice. The Court has, on numerous occasions, held that Article 107(1) TFEU should be interpreted as not distinguishing between measures of State intervention by reference to their causes or aims, but by reference to their effects.1123 Accordingly, the fact that a given State measure is, for example, of a social character will not on its own be sufficient to prevent the measure from being classified as aid.1124 Consequently, economic contributions granted in connection with tendering or public service obligation procedures may be considered to constitute aid within the meaning of Article 107(1) TFEU, irrespective of whether the measures pursue legitimate objectives, such as environmental or security of supply interests, or not. This interpretation of Article 107(1) TFEU means that not only direct aid measures, but also indirect aid measures whereby Member States abstain from collecting revenues (e.g., tax exemptions), may amount to State aid.1125 The Court of Justice has often made this point by stating that the concept of an aid within the meaning of

1122. Case C-280/00, Altmark, [2003] ECR I-7747. 1123. See, inter alia, Case 173/73, Italy v. Commission, [1974] ECR 709, para. 13; Case 310/85, Deufil GmbH & Co. KG v. Commission, [1987] ECR 901, para. 8; Case C-56/93, Belgium v. Commission, [1996] ECR I-723, para. 79 and Case C-75/97, Belgium v. Commission, [1999] ECR I-3671, para. 25. Whether the doctrine that aid measures are solely defined in relation to their effects applies without exception in the assessment of possible State aid is, however, open to discussion, see M. Ross, ‘State Aid and National Courts: Definitions and Other Problems – A Case of Premature Emancipation?’, CMLR (2000): 401–423, at 403, and J.A. Winter, ‘Re(de)fining the Notion of State Aid in Article 87(1) of the EC Treaty’, CMLR (2004): 475–504, at 503–504. 1124. Case C-75/97, Belgium v. Commission, [1999] ECR I-3671, para. 25 with further references to case law. 1125. See Case C-143/99, Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fu¨r Ka¨rnten, [2001] ECR I-8365 for one of many examples from case law where tax rebates have been deemed to constitute State aid.

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The Boundaries of Article 107(1) TFEU Article 107(1) TFEU is wider than that of a subsidy.1126 In recent case law, the Court has usually referred to the first condition under Article 107(1) TFEU more generally as requiring ‘that there must be intervention by the State or through State resources’.1127 In defining this condition, the Court has, in line with earlier case law, emphasized that: the agreed benefits may include not only positive benefits such as subsidies, loans or direct investment in the capital of enterprises, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which therefore, without being subsidies in the strict sense of the word, are of the same character and have the same effect. The supply of goods or services on preferential terms is one of the indirect advantages which have the same effects as subsidies [. . .].1128 On this basis, it is clear that economic contributions disbursed to specific undertakings as part of specific tendering or public service obligation procedures are likely to qualify as aid within the meaning of Article 107(1) TFEU, irrespective of the choice of subsidy instrument. It is more difficult to determine in which cases aid is deemed to be ‘granted by a Member State or through State resources’, as will be further discussed below. 26.2.2.

GRANTED

26.2.2.1.

Introduction

BY A

MEMBER STATE

OR THROUGH

STATE RESOURCES

For an aid measure to qualify as State aid, it must either be granted by a Member State or through State resources in any form whatsoever. Economic aid disbursed by the State as such, whether granted through central or regional government, 1126. The relationship between the concepts of subsidy and aid was first dealt with by the Court of Justice in Case 30/59, De Gezamenlijke Steenkolenmijnen in Limburg v. High Authority of the European Coal and Steel Community, [1961] ECR 1, at 19, in relation to the interpretation of Art. 4(c) of the former ECSC Treaty, which prohibited ‘subsidies or aids granted by Member States [. . .] in any form whatsoever’. The observations made by the Court in that case have subsequently been repeated in similar forms by the Court on numerous occasions in relation to Art. 87 EC, see, inter alia, Case C-387/92, Banco Exterior de Espan˜a v. Ayuntamiento de Valencia, [1994] ECR I-877, para. 13; Case C-143/99, Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fu¨r Ka¨rnten, [2001] ECR I-8365, para. 38 and Case C-66/02, Italy v. Commission, [2005] ECR I-10901, para. 77. 1127. Case C-280/00, Altmark, [2003] ECR I-7747, para. 75; Case C-345/02, Pearle, [2004] ECR I-7139, para. 33; Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941, para. 56; Case C-206/06, Essent, [2008] ECR I-5497, para. 64 and joined Cases C-341/06 P and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, [2008] ECR I-4777 (Grand Chamber), para. 122 (emphasis added). 1128. Joined Cases C-341/06 P and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, [2008] ECR I-4777 (Grand Chamber), para. 123.

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Chapter 26 clearly fulfils this requirement.1129 Moreover, it is settled case law that the term State resources includes aid granted through public or private bodies designated or established by the State.1130 Compensation granted through energy regulatory authorities, which are both designated and financed by public authorities, therefore also falls within the ambit of Article 107(1) TFEU, irrespective of whether the regulatory authorities are organized as independent bodies or not.1131 There is, for example, little doubt that a long-term power purchase contract entered into by the State or by an energy regulatory authority on preferential terms in order to promote new investments involves aid granted by the State or through State resources. However, if contracts on preferential terms are entered into by other market participants pursuant to requirements imposed by the State, the applicability of Article 107(1) TFEU is less obvious. This approach may be applied to promote investments subject to tendering or public service obligation procedures, and is often applied in feed-in tariff schemes where suppliers are typically required to purchase a certain proportion of their supplies from domestic renewable sources at fixed prices. A related example concerns public requirements imposed on TSOs and DSOs to invest in grid connections and provide transportation capacity to new power plants at lower prices than those needed to allow a reasonable rate of return on the grid investments. Finally, grid operators, and in particular TSOs, may be used by Member States as vehicles to levy charges on certain categories of market participants and then redistribute the funds to other participants, such as electricity generation investors. For the advantages outlined above to fulfil the criterion of being ‘granted by a Member State or through State resources’, they must, first, be granted directly or indirectly through State resources and, second, be imputable to the State.1132 While the first condition focuses on the origin of the resources and whether the State has control over them in general, the second is primarily concerned with whether the specific compensation measures adopted are imputable to the Member State as part of its activities.1133 In the following we will first discuss the concept of State resources in relation to compensation financed by market participants pursuant to public requirements. We will then discuss the two conditions more specifically in relation to the conduct of TSOs. 26.2.2.2.

Investment Subsidies Induced by State Conduct

The Court of Justice’s decision in PreussenElektra helped clarify whether Member State requirements for certain categories of undertakings to subsidies other 1129. See, inter alia, Case 248/84, Germany v. Commission, [1987] ECR 4013, para. 17. 1130. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 58. 1131. See also C. Arhold, ‘The 2007/2008 Case Law of the European Court of Justice and the Court of First Instance on State Aid’, EStAL 7, no. 3 (2008): 441–494, at 442, who emphasizes that bodies outside the administrative structure of the Member State, such as agencies, are encompassed by the term ‘State resources’. 1132. Case C-345/02, Pearle, [2004] ECR I-7139, para. 35. 1133. See also along these lines C. Arhold, ‘The 2007/2008 Case Law of the European Court of Justice and the Court of First Instance on State Aid’, EStAL 7, no. 3 (2008): 441–494, at 445.

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The Boundaries of Article 107(1) TFEU undertakings amounted to State aid under (current) Article 107(1) TFEU.1134 The State aid aspects of the case in fact received much more attention during the Court’s proceedings than the free movement issues already discussed, as is illustrated by the extensive reasoning provided by both AG Jacobs and the Court on the matter.1135 To recap, the disputed feed-in tariff scheme in the German StrEG essentially obliged electricity supply undertakings to buy a share of their electricity supplies from local renewable energy sources at fixed prices, and, in turn, entitled the supply undertakings to reimbursement from upstream network operators of some of the supplementary costs involved. The predecessor of the StrEG had previously been approved by the Commission under the State aid provisions, but, following several legislative amendments, the Commission had already expressed renewed concerns about the scheme’s compatibility with the State aid provisions when the case came before the Court of Justice for a preliminary ruling.1136 The parties did not dispute that the national measures at issue conferred an economic advantage on producers of electricity from renewable energy sources.1137 The Court also appeared to assume, although not explicitly, that the distortion of competition and effect on trade criteria were fulfilled.1138 The essential State aid question dealt with by the Court was therefore whether Article 107(1) TFEU only applied to measures financed through State resources.1139 As held by AG Jacobs, the wording ‘granted by a Member State or through State resources’ in Article 107(1) TFEU can be read in two different ways.1140 On the one hand, a wide reading of the provision suggests that the second category – ‘through State resources’ – covers aid financed through public funds, while the first category – ‘granted by a Member State’ – covers all other measures which are not financed through State resources, but which can be attributed to the conduct of the State.1141 On the other hand, a narrower reading of the provision suggests that aid must be financed through State resources, and that the first and second categories refer to aid granted directly by the State and aid granted by public or private bodies designated by the State, respectively.1142 The parties to the case and the Commission argued in favour of the wider interpretation of the wording of Article 107(1), maintaining in particular that a narrow reading would open the door to circumvention of the State aid regime by Member States. The German government argued that the wording of the provision, 1134. Case C-379/98, PreussenElektra, [2001] ECR I-2099. 1135. See above in Chs 9.7 and 9.8 on the free movement of goods aspects of the case. 1136. A. Johnston et al., ‘The Proposed New EU Renewables Directive: Interpretation, Problems and Prospects’, EEELR 17, no. 3 (2008): 126–145, at 131–132. 1137. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 54. 1138. See similarly R. Van der Vlies & M. Bronckers, ‘The European Court’s PreussenElektra Judgment: Tensions between EU Principles and National Renewable Energy Initiatives’, ECLR 22, no. 10 (2001): 458–468, at 461. 1139. Case C-379/98, PreussenElektra, [2001] ECR I-2099, paras 56–67. 1140. Opinion of AG Jacobs in Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 114. 1141. Ibid., para. 115. 1142. Ibid., para. 116.

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Chapter 26 as well as existing case law and the system of the Treaty, suggested a narrow reading of the provision, and that a wider interpretation would bring practically all national legislation regulating relationships between undertakings within the scope of the State aid rules.1143 The Advocate General found that a narrow reading of Article 107(1) TFEU, that is, as encompassing only advantages granted directly or indirectly through State resources, was firmly established in existing case law.1144 He went on to discuss whether this case law should be reconsidered, before concluding that a narrow reading should prevail. In his opinion, this approach would lead to fewer consequential problems, be more in line with the procedural rules of Article 108 TFEU and provide greater legal certainty. He also argued that the dangers of Member State circumvention should not be exaggerated, as such measures were in any case likely to infringe other Treaty provisions.1145 The Court followed the Advocate General’s opinion, emphasizing that only advantages granted directly or indirectly through State resources were to be considered aid within the meaning of Article 107(1) TFEU. Consequently, as held by the Court, the reference to aid ‘granted by a Member State or through State resources’ is intended to encompass both advantages granted directly by the State and advantages granted by a public or private body designated or established by the State.1146 On this basis, the Court found that neither the obligation to purchase renewable electricity nor the financial allocation imposed by the reimbursement scheme amounted to State aid within the meaning of Article 107(1) TFEU, as the obligations did not involve any direct or indirect transfer of State resources.1147 The PreussenElektra judgment has received both criticism and support in academic literature.1148 In this author’s opinion, the reasoning of the Court and the Advocate General was well-founded, not least since it is difficult to see where the limits of State aid control could be drawn if the prohibition were to apply more generally to economic advantages attributed to the conduct of the State. Notwithstanding the differing views on the approach of the Court, its reasoning has nevertheless been adhered to by the Commission in subsequent cases, and the Court has not explicitly departed from its interpretation in subsequent case law.1149 1143. Ibid., paras 108–109. 1144. Ibid., paras 117–133. 1145. Ibid., paras 134–159. The strength of the latter argument put forward by AG Jacobs was, however, to some extent reduced by the Court in its conclusion that the measures at issue were not contrary to (current) Arts 34 and 36 TFEU, see above in Ch. 9.7. 1146. Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 58. 1147. Ibid., paras 59–67. 1148. See, for example, J.A. Winter, ‘Re(de)fining the Notion of State Aid in Article 87(1) of the EC Treaty’, CMLR (2004): 475–504, at 483–484, who supports the view of the Advocate General and the Court, while R. Van der Vlies & M. Bronckers, ‘The European Court’s PreussenElektra Judgment: Tensions between EU Principles and National Renewable Energy Initiatives’, ECLR 22, no. 10 (2001): 458–468, at 462–465 are more critical. 1149. See, inter alia, the Commission’s approach to national green certificate schemes following the Court’s PreussenElektra decision in Aide d’Etat no N 550/2000 – Belgique. Certificats verts dans le secteur de l’electricite´, SG 2001 D/ 290545, 25.7.2001, 6 and Statligt sto¨d

354

The Boundaries of Article 107(1) TFEU However, the subsequent ruling in Essent shows that the Court is determined to be careful in reviewing whether publicly imposed charges levied on certain categories of market participants nevertheless qualify as State resources.1150 The latter case essentially concerned a Dutch statutory scheme which imposed a charge on electricity customers in order to cover the stranded costs incurred by national electricity generators prior to the liberalization of the Dutch electricity market.1151 Grid operators were responsible for collecting the charge, while the undertaking SEP, a subsidiary of four electricity generation undertakings, was designated to manage the funds (in addition to being an aid recipient). The Court held that this arrangement was to be regarded as the granting of advantages through State resources to the benefit of SEP.1152 The reasoning of the Court, which is not entirely clear, appears to be as follows. Monies collected from a surcharge imposed (but not collected) by the State on purchasers of electricity have their origin in a State resource.1153 The grid operators collecting the monies were publicly owned, a fact which may be applied to support the argument that the resources remained under public control (although the Court did not explicitly elaborate on the latter argument).1154 SEP was specifically designated to manage the funds collected by the grid operators, and was subject to strict public monitoring and control mechanisms in carrying out its tasks, meaning that the amount still remained under public control.1155 The Court’s approach in Essent means that statutory schemes which require some categories of market participants to pay a charge which, in turn, is levied and redistributed by designated bodies such as TSOs, is likely to be considered aid granted through State resources. Although the Court explicitly held that the

1150. 1151.

1152. 1153.

1154. 1155.

N 789/2002 – Sverige. Elcertifikatsystemet [Transl.: State aid No. N 789/2002 – Sweden]. The electricity certificate scheme), COM (2003) 382 final, 5.2.2003, 5 of the (non-paginated) letter, and State aid No. N 6/A/2001 – Ireland, Public Service Obligations imposed on the Electricity Supply Board with respect to the generation of electricity out of peat, COM (2001) 3265 final, 30.10.2001, 4–5, where it expressed doubt on the applicability of Art. 87(1) EC following the PreussenElektra decision, and therefore did not come to any conclusion on the issue. Case C-206/06, Essent, [2008] ECR I-5497. Stranded costs are costs which firms must bear because of commitments they made and are no longer able to honour as a result of the liberalization of the sector in question, see the now repealed Community guidelines on State aid for environmental protection, OJ C37/3, 3.2.2001, para. 7 at note 18. Case C-206/06, Essent, [2008] ECR I-5497, paras 65–75. Ibid., paras 66 and 47. The underlying reasoning at this point, on which the Court does not further elaborate, may possibly be explained by one of two arguments: that the arrangement in practice amounted to a public tax scheme, with the twist that specific bodies were designated by the State to collect, manage and disperse the funds; or that the State in imposing a charge but not collecting it foregoes revenue, which should then be considered to comprise State resources, see for another example in the latter respect, Case T-233/04, Kingdom of the Netherlands v. Commission of the European Communities, [2008] ECR II-591, para. 75, concerning the Dutch implementation of its Emission Trading System. Case C-206/06, Essent, [2008] ECR I-5497, para. 68. Ibid., paras 69–70.

355

Chapter 26 measures at issue differed from those discussed in PreussenElektra,1156 the attempt to distinguish the cases is, in this author’s view, not entirely convincing.1157 The relevance of the Court’s argument that the undertakings in PreussenElektra ‘had not been appointed by the State to manage a State resource, but were bound by an obligation to purchase by means of their own financial resources’ is not immediately clear. The PreussenElektra undertakings referred to here were required to grant compensation in the form of paying fixed electricity prices, while the undertaking managing a State resource in Essent (i.e., SEP) was one of the aid recipients. The concern voiced by AG Mengozzi in his opinion to the Court, that the judgment in PreussenElektra is likely to have a significant effect on the outcome of the electricity sector liberalization process by restricting Union State aid control, and that the reasoning of the Court in that case should therefore not be extended beyond the specific merits of the case, is perhaps a more realistic explanation for the Court’s reasoning.1158 Nevertheless, in the wake of Essent, the situation appears to be that, while the interpretation offered by the Court in PreussenElektra still prevails, any statutory scheme involving the allocation of charges and advantages between market participants by designated bodies such as TSOs is likely to be subject to intense scrutiny in the light of the wording ‘granted through State resources’. Hence, an obligation for suppliers to buy a certain proportion of their electricity supplies from a pre-defined group of producers at fixed terms and prices is not likely to constitute aid, while a charge levied by TSOs on suppliers and redistributed to producers may possibly constitute State aid. The two cases consequently illustrate the fine line which has to be drawn between compensation which is granted through State resources and compensation which is not, although the reasoning behind the making of this distinction is not always easy to explain. 26.2.2.3.

Advantages Granted by TSOs: State Resources and Imputability

The potential role of TSOs (and, to a lesser extent, DSOs) in promoting electricity generation investments raises particular questions concerning the application of Article 107(1) TFEU, given the specific nature and responsibilities of these undertakings. Internal electricity market legislation requires Member States to designate these undertakings and impose on them a number of crucial system responsibilities.1159 Moreover, in many Member States a number of public service obligations and competences of a basically public-law nature, which go beyond the minimum requirements of internal electricity market legislation, are conferred on these undertakings.1160 These tasks may also relate to the promotion of new 1156. 1157. 1158. 1159. 1160.

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C-379/98, PreussenElektra, [2001] ECR I-2099. Case C-206/06, Essent, [2008] ECR I-5497, para. 74. Opinion of AG Mengozzi in Case C-206/06, Essent, [2008] ECR I-5497, paras 97–98. Chapter 14.4 above. See E.M. Basse, B.O. Gram Mortensen & A. Rønne, ‘Myndighedsopgaver udøvet af private virksomheder – systemansvar i elsektoren’, Marius No. 319 (2004), particularly at 20–29, for a discussion of the tasks of the Danish TSO (Energinet.dk, subsequent to a merger of the former TSOs effected in 2005, after the article was written).

The Boundaries of Article 107(1) TFEU investments.1161 In addition, TSOs are subject to public ownership and control in a number of Member States, being to varying extents integrated into government structures.1162 All of these characteristics contribute to giving TSOs a quasi-public role which raises some specific questions as to whether investment incentives provided by them constitute State resources and are imputable to the State. The Court of Justice offered several guiding principles in relation to these latter questions in Stardust Marine.1163 The case concerned the then publicly controlled Cre´dit Lyonnais group’s capital increases in its subsidiary Stardust Marine, through both Cre´dit Lyonnais and several other subsidiaries. The Commission had determined that several capital increases and recapitalizations between 1994 and 1997 amounted to State aid, and ordered Stardust Marine to make repayment. France brought an action for annulment of the Commission decision before the Court of Justice, denying, inter alia, that funds used by subsidiaries of Cre´dit Lyonnais to finance Stardust Marine could be classified as State resources or that the financing could be regarded as imputable to the French State. In respect of the French government’s first argument mentioned above, the Court noted that Cre´dit Lyonnais and the subsidiaries providing funding to Stardust Marine were all under the control of the State and therefore had to be regarded as public undertakings within the meaning of the then prevailing Transparency Directive.1164 The French authorities were therefore able, directly or indirectly, to exercise a dominant influence over those undertakings.1165 The Court then held, with reference to existing case law, that it was not necessary to establish in every case that there had been a transfer of State resources in order for the advantage granted to one or more undertakings to qualify as State aid.1166 Furthermore, the Court emphasized that Article 107(1) TFEU did not only cover the permanent 1161. See, for an example, Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007, paras 168–182 (concerning the power purchase agreements entered into by the publicly owned Polish electricity network operator PSE). 1162. For example, the Swedish TSO Svenska Kraftnet is formally organized as a part of the Swedish government, as an ‘affa¨rsverk’, , the French TSO RTE is organized as a State-owned limited company and a subsidiary of the EDF Group, , while the Danish TSO Energinet.dk is an independent State-owned enterprise, . For an example from the EEA Member States, the Norwegian TSO Statnett is also organized as an independent State-owned enterprise, (all urls last visited 24 Mar. 2010). 1163. Case C-482/99, Stardust Marine, [2002] ECR I-4397. 1164. Commission Directive 80/723/EEC of 25 Jun. 1980 on the transparency of financial relations between Member States and public undertakings, OJ L195/35, 29.7.1980, subsequently replaced by Commission Directive 2006/111/EC of 16 Nov. 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L318/17, 17.11.2006, where ‘public undertakings’ are defined in Art. 2(b). 1165. Case C-482/99, Stardust Marine, [2002] ECR I-4397, paras 32–34. 1166. Ibid., para. 36.

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Chapter 26 assets of the public sector. Consequently, even if the funds were not permanently held by the Treasury, the fact that they remained constantly under public control, and therefore available to the competent national authorities, was sufficient to qualify them as State resources within the meaning of Article 107(1) TFEU.1167 In respect of the French government’s second argument mentioned above, the Court did not accept the Commission’s reasoning that the State’s indirect control over the companies providing economic support to Stardust Marine constituted sufficient grounds for concluding that the support was imputable to the State. It was also necessary to examine whether the public authorities had been involved in the adoption of the measures, and such involvement ‘may be inferred from a set of indicators arising from the circumstances of the case and the context in which that measure was taken’.1168 These indicators included the undertaking’s ability to make a contested decision without taking account of the requirements of the public authorities, as well as the undertaking’s: integration into the structures of the public administration, the nature of its activities and the exercise of the latter on the market in normal conditions of competition with private operators, the legal status of the undertaking (in the sense of its being subject to public law or ordinary company law), the intensity of the supervision exercised by the public authorities over the management of the undertaking, or any other indicator showing, in the particular case, an involvement by the public authorities in the adoption of a measure or the unlikelihood of their not being involved, having regard also to the compass of the measure, its content or the conditions which it contains1169 These indicators, while perhaps, as Winter puts it, not exactly concise and catchy, at least establish a point of departure for an evaluation of whether investment incentives provided by TSOs, or other market participants for that matter, are imputable to the State.1170 In the following, we will first consider the issue of State resources before considering the question of imputability. To the extent that TSOs (or other market participants) are organized as public undertakings, that is, undertakings over which public authorities may directly or indirectly exercise a dominant influence as defined in the Transparency Directive, the funds of the undertakings are likely to qualify as State resources, as was the case in Stardust Marine.1171 Correspondingly, the funds of a TSO whose resources are 1167. 1168. 1169. 1170.

Ibid., paras 37–38. Ibid., paras 50–55. Ibid., paras 55–56. J.A. Winter, ‘Re(de)fining the Notion of State Aid in Article 87(1) of the EC Treaty’, CMLR (2004): 475–504, at 487. 1171. Case C-482/99, Stardust Marine, [2002] ECR I-4397, paras 34–38 and the definition in Art. 2(b) of Commission Directive 2006/111/EC of 16 Nov. 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L318/17, 17.11.2006. Following the rather atypical State aid case discussed by the Court of Justice in Case C-345/02, Pearle, [2004] ECR I-7139, paras 35–39, it is in theory possible that, to the extent that a publicly controlled TSO acts as a vehicle for levying and allocating resources for a purpose determined by other

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The Boundaries of Article 107(1) TFEU controlled by a Member State, by a combination of other means than ownership, with the result that all the essential acts of the TSO must be authorized by the State, may also constitute State resources.1172 Moreover, funds levied and allocated between market participants by TSOs pursuant to specific statutory schemes are also likely to qualify as State resources, irrespective of whether the designated TSO qualifies as a public undertaking or not.1173 On the other hand, the transportation tariff income of TSOs which are not publicly controlled does not, in this author’s opinion, qualify as a State resource, although the Member State is likely to, and under internal electricity market legislation may even be required to, exercise a level of control over the calculation of tariffs.1174 This type of public control is primarily intended to prevent the TSO from abusing its monopoly grid position and does not mean that the Member State retains full control over the TSO’s funds. Nor does it mean that the TSO’s tariff income collected from grid customers can be considered a public charge and thus a State resource within the meaning of Article 107(1) TFEU. The question of whether an advantage granted by a TSO through funds considered State resources is imputable to the State within the meaning of Stardust Marine1175 is easily answered in situations such as the one discussed in Essent.1176 In the latter case, public authorities were not only involved in the adoption of the measures at issue, but designed and implemented the scheme more generally by statute. Thus the issue of imputability did not arise. The Commission decision on Polish power purchase contracts, concerning the advantages granted by the Polish TSO, PSE, in the form of long-term power purchase agreements on preferential terms, provides another example of a case where there could be little doubt that the measure was imputable to the State.1177 In this case, it was established that the

1172. 1173. 1174.

1175. 1176. 1177.

market participants, without any State involvement, the resources stemming from that activity do not qualify as State aid. See E. Gambaro, A. Nucara & L. Prete, ‘Pearle: So Much Unsaid!’, EStAL 1 (2005): 3–15, particularly at 3–6, for a background and discussion of the case at this point. It is, however, difficult to envisage that this alternative is of much practical interest with respect to electricity generation investment incentives. See Case T-136/05, EARL Salvat et al. v. Commission, [2007] ECR II-4063, paras 141–154 and the case note by C. Arhold, ‘The 2007/2008 Case Law of the European Court of Justice and the Court of First Instance on State Aid’, EStAL 7, no. 3 (2008): 441–494, at 442–445. See along these lines Case C-379/98, PreussenElektra, [2001] ECR I-2099, para. 58 and Case C-206/06, Essent, [2008] ECR I-5497, paras 65–75. See in particular Arts 23(1)(f) and (2)-(4) of the Electricity Directive. See also Statsstøttesag nr. N 278/2001 – Danmark. Elreformen – Nye VE-baserede anlæg, 20.6.2001, 6–7, where the Commission, on the basis of PreussenElektra, concluded that the payment by privately owned grid system operators required to buy electricity at fixed prices from renewable energy sources did not involve State resources (contrary to the situation for payment by publicly owned undertakings). Case C-482/99, Stardust Marine, [2002] ECR I-4397, paras 50–56. Case C-206/06, Essent, [2008] ECR I-5497. Commission decision of 25 Sep. 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007.

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Chapter 26 power purchase contracts were concluded by PSE not for commercial purposes, but in order to implement other important policy objectives.1178 Moreover, apart from the fact that the invitations to tender for the contracts were sent out by the Polish Ministry of Industry and Trade, PSE was publicly owned and controlled and the price structure in the power purchase agreements was designed to ensure the necessary investments would be made (rather than to protect the commercial interests of PSE as the buyer).1179 The Commission therefore had no hesitation in concluding that the use of PSE’s funds under the power purchase agreements was imputable to the State according to the criteria laid down in Stardust Marine.1180 The question of imputability is less clear-cut in cases where a TSO grants advantages which may be beneficial to its own commercial interests as well as to the promotion of more general policy interests. The provision by TSOs of so-called locational signals (surcharges or rebates on entry point transportation tariffs in order to incentivize producers to invest in areas with generation capacity deficits) is a possible example in this respect. On the one hand, TSOs may resort to such schemes in order to ensure grid-optimal location for new electricity generation capacity. This, in turn, will be likely to reduce future grid investment costs for TSOs. Since TSOs will, in all likelihood, recover their grid investment costs by raising transportation tariffs, which are ultimately borne by all customers, grid-optimal investments are not only beneficial for TSOs, but also for the general public. Nevertheless, even if a TSO chose to involve the public authorities in its plans to adopt such locational signals, the fact that the TSO would be adopting the measure primarily in the interests of reducing its own investment costs should, in the author’s opinion, be sufficient to disqualify the measure from being imputable to the State. On the other hand, it is also conceivable that locational signals could be adopted to pursue other interests, such as the more general aim of promoting generation investments in a system area with a strained supply-demand balance. TSOs or DSOs might, for similar reasons, commit themselves to investing in grid connections or reinforcements to new generating facilities without requiring full compensation from the producers. In this latter type of situation, grid operators are more likely to be guided by general policy interests than purely commercial objectives. Consequently, the nature of the activity may, in itself, indicate State involvement, and other indicators may reinforce this impression. A Member State in its capacity as the general assembly of a publicly owned TSO may, for example, have adopted by-laws requiring the TSO to take into account socio-economic considerations in its operations. Such requirements, in combination with often comprehensive statutory obligations concerning system responsibility, may contribute to a situation where many of the indicators set out in Stardust Marine suggest that the measures in question may be imputed to the State, although the outcome of any such evaluation will inevitably rely on the merits of each specific case.

1178. Ibid., para. 178. 1179. Ibid., paras 179–180. 1180. Ibid., para. 181.

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The Boundaries of Article 107(1) TFEU 26.2.3.

CONCLUDING REMARKS: THE RELATIONSHIP OF STATE AID REQUIREMENTS OF THE ELECTRICITY DIRECTIVE

TO THE

We emphasized above that the aim of Article 107 TFEU is to prevent trade between Member States from being affected by benefits granted by public authorities that distort or threaten to distort competition by favouring certain undertakings or the production of certain goods.1181 This aim has some similarities with the overall objective of the Electricity Directive, to improve the operation of the internal electricity market,1182 which must ultimately be achieved by ensuring the free movement of electricity and eliminating appreciable distortions of competition.1183 For a measure to come within the reach of EU State aid control, the advantage must be granted directly or indirectly through State resources and the measure must be imputable to the State. This means that the application of Article 87(1) TFEU not only turns on whether the economic compensation affects trade and distorts competition on the market where intervention is sought, but also on the origin of the economic resources disbursed. From the perspective of the market, issues such as whether an advantage is financed through a levy imposed on a certain group of market participants or directly through State resources, or whether an intervention by TSOs is imputable to the State, are likely to be of less interest than the effects of the measure in question. In the latter respect, the conditions under which the Electricity Directive exceptionally allows recourse to public intervention, whether by way of tendering or public service obligation procedures, focus more on the effects on the market of a potential intervention. Thus, to the extent that investment incentives provided to an investor pursuant to a tendering or public service obligation procedure do not amount to a disbursement of State resources imputable to the State, Articles 3 and 8 of the Electricity Directive nevertheless confer a competence on the EU to review the necessity of the Member State intervention. On the other hand, we have seen that economic aid granted in relation to a tendering or public service obligation procedure is, de facto, very likely to be considered aid granted through State resources and imputable to the State. The most important exception is feed-in tariffs similar to those scrutinized by the Court in PreussenElektra, but such measures are not generally prohibited by the Electricity Directive, and are therefore at any rate not likely to be subject to review under the Directive. This brings us to our next question, discussed below, which concerns the extent to which compensation provided in relation to tendering or public service obligation procedures may nevertheless avoid classification as State aid through qualifying as compensation for the performance of public service obligations.

1181. Chapter 25.1 above. 1182. Case C-439/06, Citiworks, [2008] ECR I-3913, para. 38. 1183. See, more generally, Case C-376/98, Germany v. Parliament and Council, [2000] ECR I-8419, particularly at paras 96–114, and further above in Ch. 11.2.2.

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Chapter 26 26.3.

COMPENSATION FOR THE PERFORMANCE OF PUBLIC SERVICE OBLIGATIONS

26.3.1.

OVERVIEW

OF THE

ALTMARK CRITERIA

We saw in Part V above that the tendering and public service obligation procedures, enshrined in Articles 8 and 3 of the Electricity Directive, respectively, are essentially similar with respect to new electricity generation investments.1184 Consequently, the investment obligations of the market participant eventually chosen by means of one of these procedures, irrespective of which procedure the choice is based upon, are likely to qualify as public service obligations. This raises the question of whether the investment incentives granted to the chosen undertaking, even if they are granted by the State or through the application of State resources, are nevertheless beyond the scope of Article 107(1) TFEU to the extent that they amount to compensation for the performance of public service obligations. In the latter situation, the compensation would not, arguably, constitute a real financial advantage, insofar as it only amounted to compensation for services performed. On the other hand, allowing such compensation to escape classification as State aid would be liable to restrict EU State aid control within an area of great practical interest. The question whether compensation granted by the State to offset additional costs incurred in the performance of public service obligations qualifies as State aid was for some time controversial.1185 In its first ruling on the issue in Ferring, the Court of Justice concluded, contrary to the view of the Court of First Instance, that compensation corresponding to additional costs actually incurred in discharging public service obligations should be regarded as compensation for services provided and as such did not constitute a real advantage and hence was not State aid under Article 107(1) TFEU.1186 This view attracted criticism as well as various suggestions from several Advocates General as to how the issue should be 1184. See in particular Ch. 22.4 above. 1185. For an overview of the earlier views adopted by the Commission and the Court of First Instance on the matter, see the opinion of AG Tizzano to the Court in Case C-53/00, Ferring, [2001] ECR I-9067, paras 56–58, the first opinion of AG Le´ger delivered to the Court on 19 Mar. 2002 in Case C-280/00, Altmark, [2003] ECR I-7747, paras 63–66, and A. Sinnaeve, ‘State Financing of Public Services: The Court’s Dilemma in the Altmark Case’, EStAL 3 (2003): 351–363, at 352–354. While the Commission initially did not consider public service compensation to be contrary to (now) Art. 107(1) TFEU, the Court of First Instance adopted the view that such compensation should be classified as State aid, which in principle could be exempted under Art. 106(2) TFEU, see Case T-106/95, FFSA, [1997] ECR II-229, paras 163–172, and Case T-46/97, SIC, [2000] ECR II-2125, paras 83–84. 1186. Case C-53/00, Ferring, [2001] ECR I-9067, para. 27. Concerning the alternative application of Art. 106(2) TFEU to the measures, the Court only indirectly answered the question of the national referring Court by holding that the provision was not applicable to the extent that the compensation exceeded the costs incurred by performing public service obligations, see paras 30–33.

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The Boundaries of Article 107(1) TFEU resolved.1187 This eventually led the Court of Justice to reconsider its view in its landmark ruling by the Full Court in Altmark.1188 The preliminary ruling in Altmark concerned the granting, by a German regional government, of licenses to a bus transportation undertaking for the provision of scheduled bus transport services. The undertaking was also granted public subsidies for operating the services. One of the questions referred to the Court of Justice by the Bundesverwaltungsgericht was whether these subsidies, to compensate for losses incurred in operating local public transportation, qualified as State aid under Article 107(1) TFEU. The Court in principle followed the approach, established in Ferring, that a State measure which must be regarded as constituting compensation for the discharge of public service obligations is not caught by Article 107(1) TFEU, but added that a number of conditions must be satisfied for such compensation to escape classification as State aid.1189 The Court then set forth four cumulative conditions, in practice establishing a strict quid pro quo approach to the approval of compensation for the performance of public service obligations.1190 First, the recipient undertaking must actually have public service obligations to discharge, and those obligations must be clearly defined.1191 Second, the compensation must be based on parameters established in advance in an objective and transparent manner.1192 Third, the compensation cannot exceed an amount necessary to cover the costs incurred in the discharge of the public service obligations, including a reasonable profit.1193 And fourth, if the recipient has not been chosen pursuant to a public procurement procedure, the level of compensation must be determined on the basis of an analysis of the costs that a typical, well-run and adequately equipped undertaking would have incurred in discharging those obligations (including a reasonable profit).1194 Consequently, compensation for the performance of public service obligations only escapes classification as State aid under Article 107(1) TFEU if it complies with all four Altmark conditions as set out above.1195 This approach has been 1187. See the two opinions of AG Le´ger delivered on 19 Mar. 2002 and 14 Jan. 2003 in Case C-280/ 00, Altmark, [2003] ECR I-7747, the opinion of AG Jacobs in Case C-126/01, Ministe`re de l’E´conomie, des Finances et de l’Industrie v. GEMO SA, [2003] ECR I-13769, and the opinion of AG Stix-Hackl in joined Cases C-34/01 to C-38/01, Enirisorse, [2003] I-14243. 1188. Case C-280/00, Altmark, [2003] ECR I-7747. 1189. Ibid., paras 87–88. 1190. Ibid., paras 89–94. 1191. Ibid., para. 89. 1192. Ibid., para. 90. 1193. Ibid., para. 92. 1194. Ibid., para. 93. 1195. Not surprisingly, the decision immediately provoked extensive academic debate. As an illustration, see just some of the articles discussing the case in one single issue of EStAL, A. Sinnaeve, ‘State Financing of Public Services: The Court’s Dilemma in the Altmark Case’, EStAL 3 (2003): 351–363; L. Hancher, ‘Towards a New Definition of a State Aid under European Law: Is there a New Concept of State Aid Emerging?’, EStAL 3 (2003): 365–373, at 371–372; and the case annotation by U. Schnelle, ‘Bidding Procedures in EC State Aid Surveillance over Public Service after Altmark Trans’, EStAL 3 (2003): 411–413.

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Chapter 26 followed consistently in the subsequent case law of the Courts and must be considered firmly established,1196 although the scope and interpretation of each of the four conditions is still subject to debate.1197 26.3.2.

THE RELATIONSHIP BETWEEN THE ALTMARK CRITERIA REQUIREMENTS IN THE ELECTRICITY DIRECTIVE

AND THE

Both the procedures of market intervention in Articles 3 and 8 of the Electricity Directive on the one hand and the Altmark conditions under the State aid provisions on the other in practice require tendering procedures to be carried out. This raises the question whether there is, in reality, much difference between the application of the Electricity Directive requirements and the State aid requirements in situations where a State grants advantages to certain undertakings in order to promote investments. In principle, the object of the assessment should mean that the requirements are applied in quite different ways. The aim of an assessment under Articles 3 and 8 of the Electricity Directive is to establish whether an exemption from the authorization procedure is necessary to promote legitimate interests, that is, security of supply and environmental interests. The assessment under the Altmark conditions aims to establish the necessity of awarding economic compensation as part of a tendering procedure in order to promote those interests. In practice, however, assessments concerning the award of public service tasks and public service compensation may concern the same issues to a large extent and, de facto, take the form of a single test. The first Altmark condition requires the recipient undertaking actually to have clearly defined public service obligations to discharge. It is difficult to see any reason why the concept of public service obligations, as it was applied by the Court of Justice under Article 107(1) TFEU in Altmark, should be interpreted differently from the concept of services of general economic interests as applied under Article 106(2) TFEU.1198 Consequently, as is the case under Article 106(2) TFEU, the first Altmark condition must also be understood as leaving Member States a 1196. See, with respect to the Court of Justice, joined Cases C-34/01 to C-38/01, Enirisorse, [2003] I-14243, paras 30–40 and Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941, paras 59–72, and, with respect to the Court of First Instance, Case T-274/01, Valmont Nederland BV v. Commission of the European Communities, [2004] ECR II-3145, paras 129–137 and Case T-266/02, Deutsche Post AG v. Commission, [2008] ECR II-1233, paras 72–73. 1197. See in particular the extensive reasoning of the Court of First Instance in Case T-289/03, BUPA v. Commission, [2008] ECR II-81, commented upon by C. Arhold, ‘The 2007/2008 Case Law of the European Court of Justice and the Court of First Instance on State Aid’, EStALl 7, no. 3 (2008): 441–494, at 454–460; the editorial by A. Bartosch, ‘The Ruling in BUPA – Clarification or Modification of Altmark?’, EStAL 7, no. 2 (2008): 211; and the case annotation by A. Biondi, ‘BUPA v. Commission’, EStAL 7, no. 2 (2008): 401–407. 1198. This view is also shared by the Court of First Instance in Case T-289/03, BUPA v. Commission, [2008] ECR II-81, para. 165. See also A. Biondi, ‘BUPA v. Commission’, EStAL 7, no. 2 (2008): 401–407, at 403, who supports the Court’s approach in this respect.

364

The Boundaries of Article 107(1) TFEU wide margin of discretion to determine what constitutes services of general economic interests, as it does not seek to set out a clear and precise regulatory definition of the concept.1199 Therefore, a public service obligation that is in the general economic interest pursuant to Article 3(2) of the Electricity Directive will clearly also amount to a public service obligation within the meaning of the more general first Altmark criterion. Correspondingly, if the requirements for launching a tendering process in accordance with Article 8 of the Electricity Directive are fulfilled, the first Altmark condition will also be fulfilled, as the successful bidder will in practice be performing a public service task which market actors will not be willing to undertake on ordinary market terms. The other three conditions lay down a strict procedure to prevent any overcompensation, and hence economic advantage, escaping classification as State aid. The second condition, that compensation must be based on parameters established in advance in an objective and transparent manner, corresponds to Article 8 of the Electricity Directive, which requires tenders to be based on pre-published criteria which also contain a detailed description of any incentive measures.1200 With respect to derogations in accordance with Article 3 of the Electricity Directive, the condition in Article 3(6), which requires any aid to be granted in a nondiscriminatory and transparent way, would prima facie appear to embody a less rigorous approach. In practice, however, Member States are likely to find it difficult to satisfy the requirements on non-discrimination and transparency in cases where compensation parameters have been established after a public service obligation has been awarded.1201 The third Altmark condition, which establishes that compensation must not exceed what is necessary to cover the costs incurred in carrying out public service obligations (including a reasonable profit), requires the making of a separate assessment from those required under the Electricity Directive. Although Articles 3(14) and 8 of the Electricity Directive require any exemption from the authorization procedure to be necessary for the attainment of the legitimate interests involved, the provisions do not touch on the necessity of any potential economic compensation. On the other hand, it is possible to argue that an exemption from the authorization procedure, which has been granted in relation to a tendering or other non-discriminatory procedure under the Electricity Directive, will also be likely to comply with the third Altmark condition. If the procedure for the selection of the 1199. Case T-289/03, BUPA v. Commission, [2008] ECR II-81, paras 165–166. The Court of First Instance’s emphasis on the wide margin of discretion of Member States in the following paras 167–208 (in particular at para. 167), is, however, more open to debate, see A. Biondi, ‘BUPA v. Commission’, EStAL 7, no. 2 (2008): 401–407, at 403–404. The Court of Justice also appears to take a relaxed position to what may constitute a public service obligation under the first Altmark condition, see, for a recent example, the brief acknowledgment of the existence of a public service in Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941, paras 62–63. 1200. See in particular Art. 8(3) third subparagraph of the Electricity Directive. 1201. C.W. Jones, EU Energy Law. Volume 1: The Internal Energy Market, 2nd edn (Leuven: Claeys & Casteels, 2006), 227.

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Chapter 26 successful aid recipient is objective, transparent and non-discriminatory, as required by the Directive, it could be argued that the compensation provided to the best bidder will be presumed not to exceed the costs necessary to carry out the tasks in question.1202 The final Altmark condition provides that in cases where the recipient is not chosen pursuant to a public procurement procedure, the level of compensation must be fixed at a benchmark arrived at through an analysis of the costs a typical, well-run undertaking would have incurred in discharging the same obligations. This condition, and in particular its application in situations where the recipient is not chosen pursuant to a public procurement procedure, raises a number of questions which will not be pursued further here.1203 Since the provisions of the Electricity Directive establish a clear preference for the award of public service obligations on the basis of tendering procedures, the condition is likely to be fulfilled in most cases, provided the conditions of the Electricity Directive are met. On this basis, it is possible to conclude that, although the object of the assessment entails differences between the procedures, the application of the conditions set forth in the Electricity Directive and under the Altmark test essentially raises many of the same questions. 26.3.3.

THE RELATIONSHIP

WITH

ARTICLE 106(2) TFEU

Not only are the Court’s Altmark conditions intrinsically strict, but the Commission also appears to apply them very strictly in its State aid cases, only rarely finding that a national scheme fulfils all four conditions.1204 This raises the question whether Article 106(2) TFEU can be applied as an alternative ground to exempt public service compensation from the State aid rules, since the conditions set out in this provision are less rigorous than those in Altmark. The Commission seems to favour the application of Article 106(2) TFEU, having declared many national

1202. See similarly State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 54. On the other hand, more recent Commission practice seems to emphasize that the application of Union tendering procedures is not in itself necessarily sufficient to fulfil the Altmark conditions, see L. Hancher, ‘State Aid’, in EU Energy Law. Volume II: EU Competition Law and Energy Markets, ed. C.W. Jones, 2nd edn (Leuven: Claeys & Casteels, 2007), 549–699, at 672. 1203. See, for an overview of the discussions and arguments raised in this respect, F. Mortensen, ‘Altmark, Article 86(2) and Public Service Broadcasting’, EStAL 7, no. 2 (2008): 239–249, at 244–246. 1204. See ibid., 239–249, for a discussion of the Commission’s approach within the area of public broadcasting, where no national scheme has so far been deemed to fulfil the four conditions. The case law of the Court of First Instance so far seems to indicate a less rigorous approach to the application of the conditions, see in particular Case T-289/03, BUPA v. Commission, [2008] ECR II-81, and the comments to the latter case referred to in note 1197 above. It should also be emphasized that the Commission did find all four conditions to be fulfilled in State aid No. N 475/2003, Irish CADA, 16.12.2003.

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The Boundaries of Article 107(1) TFEU schemes incompatible with the Altmark conditions but compatible with the internal market under Article 106(2) TFEU.1205 The Commission’s preference for reliance on Article 106(2) TFEU is also highlighted by its adoption of a specific framework for State aid in the form of public service compensation.1206 Under this framework, State aid or exclusive rights may be declared compatible with the Treaty under Article 106(2) TFEU if exemption from the Treaty is necessary for the operation of services of general economic interest and the aid or rights concerned will not affect the development of trade to an extent contrary to the interests of the Union.1207 In this latter respect, the framework exhibits several similarities between assessments carried out under Article 106(2) TFEU and under the Altmark conditions.1208 Some of these similarities are obvious. Not only are the concepts of public service obligations under Article 106(2) TFEU and the first Altmark condition identical, but an advantage that exceeds the additional costs borne by an undertaking in discharging public service obligations cannot be regarded as necessary for the operation of those services within the meaning of Article 106(2) TFEU.1209 It should, however, be emphasized that there are also differences between the application of the two legal bases. Article 106(2) TFEU does not, for example, require Member States to have followed competitive tendering procedures for the award of services of general economic interest.1210 Nor does the provision explicitly require the parameters for calculating the compensation to be set out in advance, unlike the second Altmark condition. Nevertheless, although the Altmark conditions are more rigorous than those provided by Article 106(2) TFEU, the differences between them as regards electricity generation investments may, in practice, turn out to be modest. We have already seen that the conditions for obtaining an exemption under the Electricity Directive largely parallel the Altmark requirements. Consequently, the fact that the conditions in Article 106(2) TFEU are less rigorous than the Altmark requirements is of little practical value if the State measure in question also requires a derogation from the Directive.

1205. F. Mortensen, ‘Altmark, Article 86(2) and Public Service Broadcasting’, EStAL 7, no. 2 (2008): 239–249. 1206. Community framework for State aid in the form of public service compensation, OJ C297/04, 29.11.2005. At the same time, the Commission also adopted a decision on the application of Art. 86(2) EC to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, [2005] OJ L312/67, 29.11.2005. The decision is only of general application to undertakings with an annual turnover of less than EUR 100 million receiving annual compensation of less than EUR 30 million, see Art. 2(1)(a). 1207. Community framework for State aid in the form of public service compensation, OJ C297/04, 29.11.2005, para. 8. 1208. Ibid., in particular at paras 9–19. 1209. Case C-53/00, Ferring, [2001] ECR I-9067, para. 32. 1210. Case T-442/03, SIC – Sociedade Independente de Comunicac¸a˜o, SA v. Commission of the European Communities, [2008] ECR II-1161, paras 145–146.

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Chapter 26 26.3.4.

FOUR LEGAL BASES: A SINGLE LEGAL

TEST?

In Part V above, we concluded that the public service procedure in Article 3 of the Electricity Directive and the tendering procedure in Article 8 of the Electricity Directive raised many of the same questions with respect to new supply-side investments in the electricity sector. In this part we have seen that the application of the Altmark conditions, as well as the application of Article 106(2) TFEU, to compensation granted in combination with these Directive procedures essentially raises the same issues as those assessed under the Directive. Consequently, it is possible to argue that, at least as a point of departure, the application of these different legal bases in primary and secondary EU law de facto amounts to a single legal test. There are three crucial aspects to this single test. First, a Member State’s designation of one or a defined group of undertakings to invest in electricity generation capacity in the security of supply interest must (as a clear point of departure) be carried out in accordance with a non-discriminatory, transparent and objective tendering procedure. Second, Member States may only launch such tendering procedures when necessary in the security of supply or environmental interest. And, third, the compensation provided must not exceed the costs involved in performing the public service obligations, including a reasonable profit. The first two aspects essentially follows from both the State aid provisions of the Treaty, as interpreted by the Court in Altmark, and the provisions of the Electricity Directive. The third follows from the State aid provisions. This entails that the primary contribution of the provisions of the Electricity Directive, beyond the conditions already following from the State aid provisions of the Treaty, is the requirement that tendering procedures as such may only be launched when necessary to pursue a legitimate interest, irrespective of whether public service compensation is involved or not. Considering the difficulties involved in applying this latter condition, as discussed above in Part V, one may therefore argue that the Directive’s contribution to EU regulation of Member State interventions in the security of supply and environmental interest is limited.

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Chapter 27

State Aid Declared Compatible with the Internal Market under Article 107(3) TFEU

Measures which qualify as State aid under Article 107(1) may, in certain cases, be declared compatible with the internal market in accordance with Articles 107(2) and (3) TFEU. Article 107(2) TFEU sets out three categories of aid that shall be compatible with the internal market if the conditions in the provision are fulfilled. These distinct categories of aid are, however, of very limited practical relevance, if any, to electricity generation investments.1211 Article 107(3) TFEU is of far greater significance for the assessment of State aid to promote new supply-side investments in the electricity sector. The provision sets forth five categories of aid, in litra (a)-(e), which ‘may be considered’ to be compatible with the internal market. On the basis of this wording, it is settled case law that the Commission enjoys a wide discretion for the purposes of applying Article 107(3) TFEU. As a result, the Court of Justice confines itself to examining the Commission’s assessment to identify potential manifest errors or instances of misuse of powers.1212 Aid considered compatible with the internal market in accordance with Article 107(3) TFEU will normally be permitted by the Commission for a given period and/or, in the case of investments, up to a given percentage of eligible investment costs. 1211. See further L. Hancher in L. Hancher, T. Ottervanger & P.J. Slot, EC State Aids, 3rd edn (London: Sweet & Maxwell, 2006), at 104–108 and 472–473 for an overview of the provision. 1212. In Case 730/79, Philip Morris Holland B.V v. Commission, [1980] ECR 2671, the Court emphasized that (current) Art. 107(3) TFEU, unlike Art. 107(2), ‘gives the Commission a discretion by providing that the aid it specifies ‘‘may’’ be considered to be compatible with the common market’, see para. 17. This point of view has been repeated in a number of subsequent judgments, see, inter alia, Case C-148/04, Unicredito Italiano SpA v. Agenzia delle Entrate, [2005] ECR I-11137, para. 71 with further references to case law.

Chapter 27 The Commission has adopted extensive guidelines on the horizontal and vertical (i.e., sector-specific) application of Article 107(3) TFEU. It would go far beyond the scope of this book to undertake a general analysis of the relevance of these various guidelines to electricity generation investments.1213 One aspect should, however, be briefly considered as a continuation of the discussion above: to what extent is State aid granted in the security of supply interest as part of a public service obligation or tendering procedure likely to be considered compatible with the internal market under Article 107(3) TFEU, and how does this compare to the situation in relation to State aid granted in the interest of environmental protection? We saw above that compensation granted in connection with a tendering procedure under the Electricity Directive may escape classification as State aid either on the basis that it is not considered to be granted through State resources and imputable to the State, or on the basis of the Altmark conditions, or on the basis of Article 106(2) TFEU. Whether compensation is granted in the security of supply or environmental interest is not significant for the outcome of an assessment pursuant to Article 107(1) TFEU, which generally does not distinguish between measures by reference to their causes or aims but defines them by reference to their effects. However, we have also seen that a measure may easily be caught by Article 107(1) by reason of the Union Courts’ wide interpretation of the conditions contained in the provision. In the latter case, the Commission’s practice under Article 107(3) TFEU means the approach will vary widely depending on whether the State aid is being granted in the security of supply or in the environmental interest. The Commission has not adopted separate guidelines on the granting of State aid in the security of supply interest. Consequently, assessments in specific cases are based directly on the general wording of the aid categories listed in Article 107(3) TFEU, of which the application of Article 107(3)(c) is particularly relevant.1214 The latter provision permits ‘aid to facilitate the development of 1213. See, for a more general analysis of guidelines with relevance to the energy sector as well as on individual energy sector decisions, L. Hancher, ‘State Aid’, in EU Energy Law. Volume II: EU Competition Law and Energy Markets, ed. C.W. Jones, 2nd edn (Leuven: Claeys & Casteels, 2007), 549–699, at 634–671 (although this was published before the new Environmental Guidelines were adopted). 1214. The aid categories included in Arts 107(3)(a) and (b) may, in principle, also be of some relevance to electricity generation investments. Regional aid in accordance with Art. 107(3)(a) would primarily have to be granted on the basis of low standards of living or serious underemployment, but could possibly also benefit electricity generation investments. The application of this provision is, however, of limited importance to the electricity production investment aid schemes, since, as a point of departure, only multisectoral aid schemes are likely to qualify for an exemption under that provision, see Case T-152/99, Hijos de Andre´s Molina, SA (HAMSA) v. Commission, [2002] ECR II-3049, paras 199–209. Moreover, aid to investments in new technologies, such as CCS technologies, may possibly qualify as ‘an important project of common European interest’ under Art. 107(3)(b), see, for an example, the EFTA Surveillance Authority Decision of 16 Jul. 2008 on Test Centre Mongstad (Norway), 503/08/COL, where the Authority considered State aid to the CCS Test Centre to be compatible with Art. 61(3)(c) EEA (corresponding to 107(3)(c) TFEU) ‘without

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State Aid Declared Compatible with the Internal Market certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’. Article 107(3)(c) in principle allows the Commission a wide margin of discretion to assess the compatibility with the Treaty of security of supply measures on the specific merits of each separate case. In the absence of specific guidelines on the issue, the Commission has, however, in practice chosen to identify electricity production from indigenous energy sources as a service of general economic interest which, by analogy, may be supported up to the 15% threshold established in Article 15(4) of the Electricity Directive.1215 This practice was originally adopted under the first Electricity Directive in cases concerning stranded costs where the national measures notified to the Commission did not comply with the Commission’s methodology criteria.1216 As discussed above, the Commission has applied the same practice in other State aid cases under Electricity Directive 2003/54/EC and this now appears to be settled Commission practice.1217 Consequently, also under the new Electricity Directive, it is unlikely that the Commission will accept State aid in the security of supply interest for investments in electricity generation from indigenous energy sources where these sources exceed 15% of the primary energy necessary to produce the electricity consumed domestically. The Commission’s approach to State aid for electricity generation investments in the environmental interest differs significantly from its approach in relation to security of supply. The Community guidelines on State aid for environmental protection (the ‘Environmental Guidelines’), which supersede the former environmental guidelines adopted in 2001, are of particular interest in this respect.1218 The guidelines apply to all sectors of the economy governed by the TFEU, including the energy sector.1219 Moreover, these guidelines are supplemented by the General block exemption Regulation, which declares certain categories of aid for environmental protection to be ex ante compatible with the internal market,

1215. 1216.

1217. 1218. 1219.

excluding that the project may be eligible under Article 61(3)(b) [corresponding to 107(3)(b) TFEU]’ (18 of the decision). See also Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, paras 69 and 147. Chapter 19.4.2.2 above. See the Commission communication relating to the methodology for analysing State aid linked to stranded costs, 26.7.2001. See also B. Allibert, ‘Compensations of Stranded Costs in the European Union Electricity Sector’, EStAL 1 (2003): 3–19 for a discussion of the stranded cost methodology in general, and at 17–19, of aspects concerning security of supply in particular. See the Commission cases referred to in Ch. 19.4.2.2, note 53 above. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, which replace Community guidelines on State aid for environmental protection, OJ C37/3, 3.2.2001. Ibid., para. 59. The guidelines do not set out specific rules for the authorization of aid for the installation of CCS technologies in view of the current lack of experience within the area. They do signal, however, that ‘the Commission will have a generally positive attitude towards State aid for such projects’ which could be assessed on the basis of (current) Arts 107(3)(c) or (b) TFEU, see the Environmental Guidelines, paras 69 and 147.

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Chapter 27 provided a number of conditions are fulfilled.1220 Generally speaking, the General block exemption applies to the same categories of electricity market aid as the Environmental Guidelines, but subject to a maximum amount.1221 In the following we will focus on the guidelines. The Environmental Guidelines state the primary objective of State aid control in the field of environmental protection as being ‘to ensure that State aid measures will result in a higher level of environmental protection than would occur without the aid and to ensure that the positive effects of the aid outweigh its negative effects in terms of distortions of competition, taking account of the polluter pays principle’.1222 To achieve this aim, the guidelines build on the so-called ‘balancing test’ evolved by the Commission in its State Aid Action Plan.1223 This test essentially entails a determination of the compatibility of State aid with the internal market by balancing the positive impact of an aid in reaching a common interest against its negative effects on trade and competition.1224 The test as applied under the Environmental Guidelines involves three steps: (i) is the aid measure aimed at the objective of environmental protection? (ii) is it suitable and necessary to deliver that objective? and (iii) are the distortions of competition and effect on trade limited, so that the overall balance is positive?1225 This test has some similarities with that applied to assess whether measures restricting the free movement ensured by the TFEU are justified.1226 Like the Court of Justice’s approach to environmental protection as a justification for free movement restrictions, the Environmental guidelines apply a correspondingly favourable approach to national incentive measures in the environmental interest. The Environmental Guidelines cover, inter alia, aid for renewable energy sources and high-efficiency cogeneration.1227 On the basis of the more general 1220. Commission Regulation (EC) No. 800/2008 of 6 Aug. 2008 declaring certain categories of aid compatible with the common market in application of Arts 87 and 88 of the Treaty (General block exemption Regulation), OJ L214/3, 9.8.2008. 1221. B. Alterskjær et al., Statsstøtte: EØS-avtalens regler om offentlig støtte (Bergen: Fagbokforlaget, 2008), 181. The General block exemption Regulation applies to investment aid for environmental protection up to EUR 7.5 million per undertaking per project (Art. 6(1)(b)), and is therefore of limited relevance to large-scale investment projects, which will have to be considered on the basis of the environmental guidelines. For smaller scale investments, however, the Regulation is likely to be of practical interest, as it covers investment aid to enable undertakings to exceed Community environmental standards (Art. 18) as well as investment aid for high-efficiency cogeneration (Art. 22) and the promotion of energy from renewable energy sources (Art. 23). 1222. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, para. 6. 1223. State aid action plan: Less and better targeted State aid: a roadmap for State aid reform 2005– 2009, COM (2005) 107 final, 7.6.2005. 1224. Ibid., paras 11 and 20, and Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, paras 15–17. 1225. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, para. 16 and, in more detail, paras 18–37. 1226. B. Alterskjær et al., Statsstøtte: EØS-avtalens regler om offentlig støtte (Bergen: Fagbokforlaget, 2008), 184–185. 1227. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, paras 101–111 and 112–119, respectively.

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State Aid Declared Compatible with the Internal Market distinction made under State aid control, the guidelines distinguish between operating aid and investment aid, with the Commission being generally more reluctant to accept the former category of aid than the latter.1228 The concept of operating aid also includes measures which, although they may have an effect on investments, strictly speaking constitute operating subsidies, such as feed-in schemes and power purchase agreements entered into on preferential fixed-price conditions.1229 In the latter respect, operating aid may nevertheless be granted to compensate for the difference between the cost of producing electricity from renewable sources and the market price of electricity, including the depreciation costs of extra investments made in the interests of environmental protection and a normal rate of return on capital.1230 Moreover, Member States may also grant support for renewable energy sources through the launching of tenders for periods up to ten years, provided that it can be shown ‘that support is essential to ensure the viability of the renewable energy sources concerned, does not in the aggregate result in overcompensation and does not dissuade renewable energy producers from becoming more competitive’.1231 These provisions also generally apply to high-efficiency cogeneration.1232 Compared to operating aid, as discussed above, the Environmental Guidelines apply an even more favourable approach to investment aid, which in general may cover up to 60% of eligible investment costs or up to 100% if the aid is granted on the basis of a genuinely competitive tendering process.1233 Consequently, without going into the more specific conditions and procedures established by the Environmental Guidelines in more detail, it is possible to conclude that this regime adopts a favourable approach to compensation granted in the environmental interest as part of public service obligation or tendering procedures, provided the compensation constitutes State aid. As a result, while the compatibility with the Treaty of compensation granted in the security of supply interest will, in many cases, be likely to turn on the question of whether the conditions in Article 107(1) TFEU are fulfilled, compensation which is suitable and necessary to pursue investments in the environmental interest is also likely to be considered compatible under Article 107(3) TFEU and the Environmental Guidelines. 1228. See similarly B. Alterskjær et al., Statsstøtte: EØS-avtalens regler om offentlig støtte (Bergen: Fagbokforlaget, 2008), 186 with respect to the corresponding State aid regime under the EEA Agreement. See also along these lines L. Hancher, ‘State Aid’, in EU Energy Law. Volume II: EU Competition Law and Energy Markets, ed. C.W. Jones, 2nd edn (Leuven: Claeys & Casteels, 2007), 549–699, at 646. 1229. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, para. 70, point 20) (definition of ‘operating benefits’). 1230. Ibid., para. 109 Option 1 a, where it is also emphasized that operating aid may only be granted until the plant has been fully depreciated according to normal accounting rules. See, for an example of such operating aid under the corresponding provisions of the former Community guidelines on State aid for environmental protection, OJ C37/3, 3.2.2001, para. 59, the Commission’s decision in Statsstøttesag nr. N 278/2001 – Danmark. Elreformen – Nye VE-baserede anlæg, 20.6.2001, 7–8. 1231. Community guidelines on State aid for environmental protection, C 82/1, 1.4.2008, para. 110. 1232. Ibid., para. 119. 1233. See ibid., paras 102–106 for aid to renewable energy sources and paras 114–116 with respect to high-efficiency cogeneration.

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Chapter 28

The Application of the TFEU to Investments in Coal and Nuclear Power

28.1.

INTRODUCTION

The application of the TFEU State aid provisions must also be viewed in relation to the other Community Treaties: the now repealed ECSC Treaty and the Euratom Treaty. The historical importance of these Treaties to the functioning of the electricity market is obvious given their application to two of the most commonly applied primary energy sources in EU electricity generation: coal and nuclear material. The ECSC Treaty included separate provisions on State aid, but following that Treaty’s expiry on 23 July 2002, the TFEU State aid provisions now also apply to the coal and steel industry. Nevertheless, coal subsidies are still subject to a special State aid regime on the basis of transitional rules adopted in connection with the expiry of the ECSC Treaty. The particular issues raised by this regime in relation to security of supply are briefly considered in section 28.2 below. The legal relationship between the provisions of the former EC Treaty and those of the still-prevailing Euratom Treaty was governed by Article 305(2) EC, which set forth that the provisions of the former treaty should not derogate from those of the latter. Article 305 EC was repealed by the Lisbon Treaty, but the principle enshrined in Article 305(2) EC was retained through the adoption of a new Article 106(a)(3) in the Euratom Treaty with similar content: ‘The provisions of the Treaty on European Union and of the Treaty on the Functioning of the European Union shall not derogate from the provisions of this Treaty.’1234 1234. Adopted by Protocol 2 to the Lisbon Treaty Amending the Treaty Establishing the European Atomic Energy Community, OJ C306/199, 17.12.2007.

Chapter 28 The application of this lex specialis principle raises several questions of interpretation which have yet to be clarified by the Court of Justice. Such questions have often emerged in relation to the application of the EC State aid provisions to activities covered by the Euratom Treaty, since the latter Treaty does not contain separate State aid provisions. In essence, this raises the question whether TFEU State aid provisions can also be applied to activities governed by the Euratom Treaty, or whether such application would entail a derogation from other Euratom Treaty provisions contrary to Article 106(a)(3) Euratom. As we shall see, however, similar interpretational problems also arise with respect to the potential application of internal electricity market measures to Euratom activities. The relationship between the provisions of the TFEU and the Euratom Treaty is discussed below in section 28.3.

28.2.

TFEU STATE AID PROVISIONS APPLIED TO COAL POWER INVESTMENTS

The ECSC Treaty had as its object to establish a Community for trade in coal and steel based upon a common market, common objectives and common institutions. The relationship between the provisions of that Treaty and the EC Treaty was governed by Article 305(1) EC, which lost its practical significance when the ECSC Treaty expired (and has now been repealed by the Lisbon Treaty). The relationship between the applications of the Treaties established in that provision does, however, contribute to explaining the prevailing distinction between the application under the TFEU of the general State aid regime and the specific coal industry regime. Article 305(1) EC also set forth a lex specialis principle, but using slightly different wording to Article 305(2) EC concerning Euratom.1235 The Court of Justice interpreted the former provision to mean that insofar as matters were not regulated by the ECSC Treaty or subject to rules adopted on the basis of it, the EC Treaty and rules made under it could apply to products covered by the ECSC Treaty.1236 However, as the ECSC Treaty included provisions on State aid, it was common ground that the State aid provisions of the EC Treaty did not apply to

1235. Article 305(1) EC provides that: ‘The provisions of this Treaty shall not affect the provisions of the Treaty establishing the European Coal and Steel Community, in particular as regards the rights and obligations of Member States, the powers of the institutions of that Community and the rules laid down by that Treaty for the functioning of the common market in coal and steel’ (emphasis added). 1236. Case 328/85, Deutsche Babcock Handel GmbH v. Hauptzollamt Lu¨beck-Ost, [1987] ECR 5119, para. 10. In his opinion to the Court, AG Sir Gordon Slynn formulated the meaning of Art. 305(1) as follows at 5131: ‘I read [the provision] as meaning that the EEC Treaty may apply to coal and steel except to the extent that matters are dealt with in the ECSC Treaty or in rules made under it; in so far as the latter has occupied the ground the EEC Treaty provisions are not to have effect.’

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The Application of the TFEU to Investments in Coal and Nuclear Power coal subsidies.1237 On the other hand, neither electricity as a product nor the electricity generating facilities needed to produce electricity from coal were included within the common market established by the ECSC Treaty. Consequently, investment incentives to promote power plant construction, even if coal was being applied as a fuel source, would have had to be assessed on the basis of the EC Treaty State aid provisions. Compensatory payments to electricity producers for the acquisition of domestic coal could, however, represent an indirect form of aid to coal manufacturers to be assessed in accordance with the ECSC Treaty.1238 Following the expiry of the ECSC Treaty, subsidies to the coal industry became subject to scrutiny under Article 87(1) EC, and later under Article 107(1) TFEU. The assessment to determine whether measures constituting State aid may nevertheless be declared compatible with the Treaty is, however, subject to a specific Council Regulation (the ‘Coal Industry Regulation’).1239 The Regulation came into force on the expiry of the ECSC Treaty and applies until 31 December 2010.1240 The adoption of the Coal Industry Regulation should be seen in the context of coal prices on the world market that had made European coal production nonviable on the one hand, while the Union’s increasing external energy dependency suggested that, on the other, the development of indigenous sources of primary energy should be promoted.1241 At the same time, the Regulation seeks to avoid aid to the coal industry from affecting electricity producers’ choice of sources of primary energy supply.1242 This means that aid to indigenous coal production must not result in lower delivery prices for Union coal than for third-country coal of equal quality.1243 Compliance with this condition requires extensive monitoring of prices of third-country coal intended for electricity production, and a Union monitoring system has been established to this effect.1244 1237. Article 4(c) ECSC sets forth an absolute ban on ‘subsidies or aids granted by States [. . .] in any form whatsoever’ to coal and steel undertakings. This strict point of departure was modified in part by Art. 67 ECSC, which allowed the granting of aid in specific circumstances, and in part by Art. 95(1) ECSC, which enabled the making of decisions and recommendations to pursue ECSC objectives where further action was not specifically regulated in the ECSC Treaty. Decisions on the basis of the latter provision also in practice included State aid to the coal and steel industry. See further T. Otterwanger, ‘ECSC’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 322–343. 1238. See L. Hancher, T. Ottervanger & P.J. Slot, EC State Aids, 1st edn (London: Sweet & Maxwell, 1993), 50 and 194–195 with further references. 1239. Council Regulation (EC) No. 1407/2002 of 23 Jul. 2002 on State aid to the coal industry, OJ L205/1, 2.8.2002. 1240. Ibid., Art. 14. 1241. Staatliche Beihilfe N 320/2004 – Deutschland. Umstrukturierungsplan fu¨r den deutschen Steinkohlenbergbau 2006–2010, K(2005)1781 endg., 22.VI.2005, para. 78. The geopolitical dimensions of promoting indigenous coal extraction are also clearly emphasized in the preamble to the Coal Industry Regulation, see in particular at paras 3, 4, 5 and 7. 1242. Council Regulation (EC) No. 1407/2002 of 23 Jul. 2002 on State aid to the coal industry, OJ L205/1, 2.8.2002, para. 17 of the preamble. 1243. See ibid., Arts 4(c) and (e) with respect to aid for reduction of activity. 1244. Council Regulation (EC) No. 405/2003 of 27 Feb. 2003 concerning Community monitoring of imports of hard coal originating in third countries, OJ L62/1, 6.3.2003. The Regulation

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Chapter 28 Consequently, the EU regime for State aid to the coal industry aims to encourage electricity producers to use indigenous coal resources while, at the same time, avoiding interference in their choice of primary energy sources for new power plant investments. Whether this policy is sensible from a broader perspective, if we also take into account the challenges of climate change and the need to promote renewable energy sources, is certainly debatable. 28.3.

THE RELATIONSHIP BETWEEN THE PROVISIONS OF THE TFEU AND THE EURATOM TREATY

28.3.1.

BACKGROUND

The Euratom Treaty, which was concluded at the same time as the EC Treaty, established a separate Community which had as its task ‘to contribute to the raising of the standard of living in the Member States and to the development of relations with the other countries by creating the conditions necessary for the speedy establishment and growth of nuclear industries’.1245 The nuclear material governed by the Euratom Treaty has two principal areas of application: military use and the generation of electricity. Both these activities required strict control and the facilitation of investments in order to attain the objective of encouraging the development of the then immature European nuclear industry. The Treaty can therefore, as maintained by Cusack, be seen as dirigiste and promotional in comparison to the more market-oriented EC Treaty (and, subsequently, TFEU).1246 The development of European nuclear energy is a fundamental Euratom Treaty objective. As recalled in the Treaty preamble, the parties are ‘[r]esolved to create the conditions necessary for the development of a powerful nuclear industry which will provide extensive energy resources [. . .]’.1247 Viewed from the perspective of current EU energy policy, this objective, and even the very existence of the Treaty, seem something of a paradox. While it has been held repeatedly that EU energy policy shall not influence Member States’ choices between different energy sources, all EU States are members of an integrated Community which has as a central objective the promotion of the development requires Member States to provide the Commission with aggregate information on imports and import prices of coal intended for, inter alia, electricity production and prices aggregated at Community level are, in turn, published by the Commission each semester, see in particular Arts 2 and 7 of the Regulation. 1245. Article 1 Euratom. Originally, separate institutions were established for the different Communities of ECSC, Euratom and EEC. Although formally still separate Communities, the institutions were for practical purposes ‘merged’ in order to administer them as one by the Treaty Establishing a Single Council and a Single Commission of the European Communities, signed 8 Apr. 1965 and entering into force on 1 Jul. 1967, OJ 152/1, 13.7.1967. 1246. T.F. Cusack, ‘A Tale of Two Treaties: An Assessment of the Euratom Treaty in Relation to the EC Treaty’, CMLR (2003): 117–142, in particular at 125–126. 1247. Third preamble to the Euratom Treaty.

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The Application of the TFEU to Investments in Coal and Nuclear Power of the most controversial energy source available, namely nuclear energy. In addition there are the widely different regulatory approaches adopted in the internal electricity market legislation on the one hand and the Euratom Treaty provisions on the other. The introduction of competition, central to the establishment of the internal electricity market, is not recognized by the Euratom Treaty, which has not been substantially amended since its adoption in 1957.1248 It is therefore hardly surprising that many Member States have supported the idea of revising and updating the Euratom Treaty, as was recently emphasized by a Declaration to the Final Act of the Lisbon Treaty.1249 Despite the practical and political difficulties involved in applying the Euratom Treaty within the prevailing context of the internal electricity market, the provisions of the Treaty make it clear that investment activities relating to nuclear electricity generation fall within its scope.1250 In order to perform the overall task set out in Article 1 Euratom, the Community shall, inter alia, facilitate investment and ensure the free movement of capital for investment in the field of nuclear energy.1251 The Treaty also includes a separate Chapter IV on investments which, in Article 40, imposes on the Commission an obligation to publish programmes indicating nuclear energy production targets and ‘all types of investment required for their attainment’ in order to stimulate investments and facilitate coordinated development. Article 41 requires persons and undertakings engaged in the industrial activities listed in Annex II to the Treaty to inform the Commission of investment projects relating to new installations. Annex II to the Treaty specifically includes ‘[n]uclear reactors of all types and for all purposes’.1252 Consequently, investments in reactors for research purposes as well as those built for general electricity production and supply purposes fall within the scope of the Treaty. With respect to the legal relationship between the TEU and the TFEU on the one hand and the Euratom Treaty on the other, Article 161(a)(3) Euratom provides that the provisions of the TEU and the TFEU ‘shall not derogate’ from those of the Euratom Treaty. This raises the question of the extent to which the application of EU State aid provisions and EU internal electricity market measures amounts to derogations from the more sector-specific provisions of the Euratom Treaty, with the effect that internal electricity market legislation does not apply to nuclear 1248. See T.F. Cusack, ‘A Tale of Two Treaties: An Assessment of the Euratom Treaty in Relation to the EC Treaty’, CMLR (2003): 117–142 and L. Hancher, ‘State Aids in the Energy Sector’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 457–492, at 458–464 for a more thorough introduction to the contents and purposes of the Euratom Treaty. 1249. Declaration by the Federal Republic of Germany, Ireland, the Republic of Hungary, the Republic of Austria and the Kingdom of Sweden, Declarations concerning provisions of the Treaties, point 54, attached to the Final Act to the Lisbon Treaty, OJ C306/231, 17.12.2007, at OJ C306/268.  1250. See also Case C-115/08, CES, NYR, paras 98–107. 1251. Articles 2(c) and 2(g) Euratom, respectively. 1252. Activity 11 of Annex II to the Euratom Treaty.

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Chapter 28 power investments. The application of EU State aid provisions is discussed in section 28.3.2 below, while the Euratom Treaty’s relationship to internal electricity market legislation more generally is briefly considered in section 28.3.3. 28.3.2.

THE APPLICABILITY OF EU STATE AID PROVISIONS TO INVESTMENTS IN NUCLEAR POWER

The issue of the applicability of EU State aid provisions to investments in nuclear energy is complicated by the fact that the Euratom Treaty, unlike the ECSC Treaty, does not include any separate State aid provisions.1253 On the other hand, the Euratom Treaty does include provisions whose object is to promote nuclear investments. This raises the question of how to apply the lex specialis principle codified in Article 161(a)(3) Euratom, taking into account the fact that the Euratom Treaty includes objectives whose attainment may be affected by EU State aid provisions, but at the same time does not provide for a regime that directly contradicts EU State aid provisions. There are essentially two approaches to the issue of the relationship between the TFEU and the Euratom Treaty in State aid matters. The first approach is to view the two treaties as mutually independent in the sense that a matter which is governed by the Euratom Treaty – even if it is not subject to intense regulation – falls outside the scope of regulation of the TFEU. This approach is maintained by Cusack with respect to the former EC Treaty, who illustrates his line of reasoning by referring to, inter alia, the following arguments of the Commission in its KLE case: As a sectoral Treaty containing special rules for a common policy, including supplies coming from outside the Community, the Euratom Treaty takes precedence over the general provisions of the EC Treaty. This precedence not only derives from the general legal principle that special rules take precedence over general ones but is expressly stated in Article 232 (2) [subsequently Article 305(2) EC and now Article 161(a)(3) Euratom] of the EC Treaty [. . .]. Moreover, the European Atomic Energy Community and the European Economic Community were established, from a legal, organizational and institutional viewpoint, as two mutually independent Communities and the legal acts of one Community are not subject to the acts of the other. On this basis, any attempt to construe Chapter VI of the Euratom Treaty as lex imperfecta and to make the implementation of the Euratom Treaty’s

1253. Article 6(a) Euratom provides that in order to encourage the carrying out of research programmes the Commission may ‘provide financial assistance within the framework of research contracts, without, however, offering subsidies’. Consequently, the Treaty does seem to restrict the Community’s right to provide aid, although the scope of this ban is not entirely clear.

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The Application of the TFEU to Investments in Coal and Nuclear Power common supply policy subject to Article 113 of the EEC Treaty is to be rejected.1254 According to Cusack, this view also applies to the State aid provisions of the EC Treaty (and, now, the TFEU), which consequently do not apply to public aid granted to projects that fall within the scope of the Euratom Treaty.1255 The second approach is to adopt the starting point that the TFEU rules apply to the nuclear sector provided those rules are not at variance with those of the Euratom Treaty. On the basis of this approach, it is possible to argue that, in the absence of substantive provisions or clear indications to the contrary, the TFEU State aid regime applies to the nuclear sector.1256 As a point of departure, the words ‘shall not derogate’ in Article 161(a)(3) Euratom appear to indicate that the application of the TFEU provisions is only excluded to the extent that this is likely to obstruct the application of specific Euratom Treaty provisions. The corresponding former Article 305(2) EC was briefly considered by the Court of Justice in the Transparency Directive Case, which unfortunately did not fully clarify the issue.1257 The case was the result of applications by France, Italy and the United Kingdom to declare void the then recently adopted Transparency Directive.1258 As a subsidiary argument, France contended that, as the field of application of the Directive seemed wholly general, it therefore also applied to undertakings covered by the ECSC and Euratom Treaties. Such extended application was claimed to interfere with a series of provisions in the latter treaties and was therefore claimed to contravene rules which determined the fields of application of the Treaties, in particular (former)

1254. 94/285/Euratom: Commission Decision of 21 Feb. 1994 relating to a procedure in application of the second paragraph of Art. 53 of the Euratom Treaty, OJ L122/30, 17.5.1994, para. 22. See T.F. Cusack, ‘A Tale of Two Treaties: An Assessment of the Euratom Treaty in Relation to the EC Treaty’, CMLR (2003): 117–142, at 127. As Cusack points out, the decision of the Commission was later unsuccessfully contested before the Court of First Instance in Joined Cases T-149/94 and T-181/94, KLE v. Commission, [1997] ECR II-161, and, subsequently, before the Court of Justice in Case C-161/97 P, KLE v. Commission, [1999] ECR I-2057. 1255. T.F. Cusack, ‘A Tale of Two Treaties: An Assessment of the Euratom Treaty in Relation to the EC Treaty’, CMLR (2003): 117–142, in particular at 130–134. 1256. L. Hancher, ‘State Aids in the Energy Sector’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 457–492, in particular at 458–460, appears to advocate this view. She is, however, careful to point out that the European Courts have yet to reach a definitive position on the matter, and that nuclear energy ‘may remain a special case in that the EC Treaty rules cannot be straightforwardly and directly applied to evaluate aid to this sector’. 1257. Joined Cases 188-190/80, France, Italy and United Kingdom v. Commission, [1982] ECR 2545. 1258. Commission Directive 80/723/EEC of 25 Jun. 1980 on the transparency of financial relations between Member States and public undertakings, OJ L195/35, 29.7.1980 (now repealed and replaced by Commission Directive 2006/111/EC of 16 Nov. 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L318/17, 17.11.2006).

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Chapter 28 Article 305 EC.1259 The Commission argued that the reason the Directive did not state that it did not apply to ECSC undertakings was that such application was precluded by Article 305 EC read in conjunction with the State aid provisions of the ECSC Treaty. Furthermore, the Commission claimed that, since the Euratom Treaty did not contain any provisions on State aid, former Articles 87 and 88 EC (current Articles 107 and 108 TFEU), and hence also the Transparency Directive, were applicable to the nuclear sector.1260 The Advocate General followed the reasoning of the Commission with respect to the Directive’s non-application to ECSC undertakings.1261 He then went on to point out that: In the [Euratom] Treaty on the other hand, there are no rules comparable to Articles [now 107–109 TFEU]. Consequently, as part of the EEC Treaty which aims at total economic integration, those provisions must in principle also apply to [Euratom] undertakings. [. . .] On account of the connection between [now Article 106 TFEU] and [now Article 107 TFEU et seq.], it is then only logical that the former provision must also be applied in the field of the [Euratom] Treaty.1262 The Court chose not to elaborate on the Advocate General’s reasoning on the relationship between the Euratom and EC Treaties, simply holding that Article 305(2) EC ‘states merely that the provisions of the latter are not to derogate from those of the former’. Against this background the Court, without further analysis, concluded that the French Government had not established that the provisions of the Directive derogated from the provisions of the Euratom Treaty and rejected the submission.1263 Some authors appear to apply the opinion of the Advocate General, cited above, as an argument in favour of applying the State aid provisions of the EC Treaty to Euratom undertakings.1264 This position is,

1259. Joined Cases 188-190/80, France, Italy and United Kingdom v. Commission, [1982] ECR 2545, at ECR 2557. 1260. Ibid., at ECR 2558–2559. 1261. Opinion of AG Reischl in Joined Cases 188-190/80, France, Italy and United Kingdom v. Commission, [1982] ECR 2545, at ECR 2599. 1262. Ibid. 1263. Joined Cases 188-190/80, France, Italy and United Kingdom v. Commission, [1982] ECR  2545, para. 32. See also Case C-115/08, CES, NYR, where the Court made reference to Art. 305(2) EC without elaborating on its interpretation, and then went on to establish that the principle of prohibition of discrimination on grounds of nationality is a general principle of Community law which also applies as a principle under the Euratom Treaty, see in particular at paras 81–91. 1264. R.M. D’Sa, European Community Law on State Aid (London: Sweet & Maxwell, 1998), 42 and originally also L. Hancher, T. Ottervanger & P.J. Slot, EC State Aids, 1st edn (London: Sweet & Maxwell, 1993), 50, who, however, have modified this view in the third edition of the book, where it is emphasized that the Court did not address the issue directly, see L. Hancher, ‘State Aids in the Energy Sector’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 457–492, at 459.

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The Application of the TFEU to Investments in Coal and Nuclear Power however, criticized by Cusack, who emphasizes that the Court of Justice did not fully follow the reasoning of the Advocate General on this point.1265 One of the reasons why the Court of Justice has not had a chance to give a clear ruling on the relationship between the EU State aid provisions and the provisions of the Euratom Treaty may be that the Commission has avoided confrontation on the issue. In several cases concerning State aid to Euratom activities, the Commission has concluded that the existence of State aid under former Article 87(1) EC cannot be ruled out, but nevertheless found that the aid is compatible with the EC Treaty in accordance with Article 87(3) EC.1266 The approach of the Commission in its State aid decision in UK Nuclear Decommissioning Authority is of particular interest in this respect.1267 The latter decision concerned the creation of a public body known as the Nuclear Decommissioning Authority (NDA), which was set up to be responsible for the management of most public sector nuclear liabilities in the UK. For this purpose, the ownership of nuclear sites and assets belonging to the publicly owned company British Nuclear Fuels Limited (BNFL), which were approaching the time for decommissioning, were transferred to the NDA. These assets included sites for nuclear electricity generation, nuclear fuel manufacturing and nuclear waste disposal, as well as a number of associated financial assets. The decommissioning activities of the NDA were envisaged to be funded by the net revenues generated by the transferred assets as well as financial guarantees from the State.1268 The Commission considered that the financial guarantees provided by the State constituted State aid to the benefit of the NDA within the meaning of Article 87(1) EC (current Article 107(1) TFEU).1269 This finding was, perhaps, made 1265. T.F. Cusack, ‘A Tale of Two Treaties: An Assessment of the Euratom Treaty in Relation to the EC Treaty’, CMLR (2003): 117–142, at 131 and 133. 1266. See, inter alia, Aid C 31/2002 (ex N 149/2000) – Transitional regime for the electricity market. Invitation to submit comments pursuant to Art. 88(2) of the EC Treaty, OJ C222/2, 18.9.2002 (concerning the measures aimed at promoting the dismantling of experimental nuclear sites. See also the subsequent Communication from the Commission, pursuant to Art. 88(2) of the EC Treaty, OJ C175/8, 15.7.2005, terminating the procedure), Commission decision of 22 Sep. 2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, 2005/407/EC, OJ L142/26, 6.6.2005 (concerning in particular the impact on the funding of nuclear liabilities and the treatment of spent fuel) and Commission decision of 4 Apr. 2006 on the State aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, 2006/643/EC, OJ L268/37, 27.9.2006. See also L. Hancher, ‘State Aids in the Energy Sector’, in EC State Aids, ed. L. Hancher, T. Ottervanger & P.J. Slot, 3rd edn (London: Sweet & Maxwell, 2006), 457–492, at 460–464, for further discussion on the State aid decisions of the Commission within the nuclear sector. 1267. Commission decision of 4 Apr. 2006 on the State aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, 2006/643/ EC, OJ L268/37, 27.9.2006. 1268. See further ibid., paras 11–35, on the background to the case. 1269. Ibid., in particular at paras 151–155. The Commission also considered whether the transfer of assets and sites, in relieving BNFL of charges that it might otherwise have to bear, constituted State aid to the benefit of BNFL, but found this not to be the case, see paras 109–150.

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Chapter 28 easier by the fact that it had not even been challenged by the UK.1270 The Commission was, however, careful to emphasize from the outset that at least part of the measure ‘concerns issues covered by the Euratom Treaty and therefore has to be assessed accordingly’.1271 This acknowledgment was followed by the more ambiguous remark that ‘to the extent that it is not necessary for or goes beyond the objectives of the Euratom Treaty or distorts or threatens to distort competition in the internal market, it has to be assessed under the EC Treaty’.1272 The Commission then noted that the measures at issue addressed one of the most important priorities of the nuclear sector, and that they were fully in line with the objectives of the Euratom Treaty.1273 Having found that the measures constituted State aid, the Commission went on to assess whether they could be declared compatible with the EC Treaty on the basis of Article 87(3)(c) and, accordingly, applied its ‘balancing test’.1274 In its assessment of the positive contributions of the measures to the fulfilment of Community objectives, the Commission attached much importance to the fulfilment of Euratom Treaty objectives, emphasizing that the measures would ‘clearly contribute’ to fulfilling these aims and that their contribution in this regard was ‘very important’.1275 In balancing these positive considerations against the negative effects on competition, the Commission noted that distortions of competition would also result from the measures, in particular because the NDA was to be allowed to continue commercial operation of the transferred assets on certain conditions.1276 These negative effects were, however found to be outweighed by the positive contributions made by the measures towards the achievement of the Euratom Treaty objectives.1277 The measures were therefore deemed compatible with the common market, subject to compliance with a number of conditions.1278 A similar approach to that described above was also applied by the Commission, although perhaps in a slightly less refined version, in its decision on State aid to British Energy.1279 The logical consequence of this approach is that the Commission considers the current TFEU State aid provisions to be in general applicable to activities comprised by the Euratom Treaty. On the other hand, it is careful to take into account the contributions of the measures towards the attainment of Euratom Treaty objectives when considering their compatibility with the common 1270. 1271. 1272. 1273. 1274. 1275. 1276. 1277. 1278. 1279.

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Ibid., para. 155. Ibid., para. 78. Ibid. (emphasis added). Ibid., paras 79–84. See Ch. 27 above on the substance of the ‘balancing test’. Commission decision of 4 Apr. 2006 on the State aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, 2006/643/ EC, OJ L268/37, 27.9.2006, paras 160–162. Ibid., paras 163 et seq. Ibid., in particular at paras 192, 206, 213, 217 and 223. Ibid., para. 228. Commission decision of 22 Sep. 2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, 2005/407/EC, OJ L142/26, 6.6.2005, paras 240–245 and 326.

The Application of the TFEU to Investments in Coal and Nuclear Power market under current Article 107(3) TFEU. Consequently, the Commission has adopted the second approach outlined at the beginning of this section: the TFEU rules apply to the nuclear sector provided those rules are not at variance with those of the Euratom Treaty. In the absence of a ruling by the Court of Justice to the contrary, the Commission’s approach appears, in this author’s opinion, to be well-founded. Whether the application of the ‘balancing test’ is a suitable analytical tool for determining the relationship between the provisions of the TFEU and the Euratom Treaty is, however, another matter. By requiring that the provisions of the TFEU ‘shall not derogate’ from those of the Euratom Treaty, Article 161(a)(3) Euratom does not appear to contemplate the balancing of a measure’s negative and positive effects on the attainment of the respective Treaty objectives. Consequently, a measure which cannot be declared incompatible with the TFEU without compromising the attainment of provisions of the Euratom Treaty would, in this author’s opinion, have to be accepted on the basis of Article 161(a)(3) Euratom, irrespective of its negative effects on trade and competition. It is submitted that recourse to the ‘balancing test’ in the assessment of Euratom activities under Article 107(3) TFEU tends to conceal this fact and that the test is therefore an inappropriate analytical tool for determining the relationship between the provisions of the two Treaties. Whether it is possible to refuse State aid to nuclear power plant investments without compromising the attainment of Euratom Treaty provisions has to be established on a case-by-case basis. While some Euratom Treaty provisions concerning investments, such as those in Articles 41–44 relating to reporting and information on investment projects, may not be compromised by State aid control, other provisions, such as conferral of advantages to Joint Undertakings, could possibly be more difficult to harmonies with the application of a strict State aid control regime.1280 In the event of regulatory conflict in the latter case, the provisions of the Euratom Treaty must, in this author’s opinion, prevail in accordance with Article 161(a)(3) Euratom. 28.3.3.

THE RELATIONSHIP BETWEEN THE EURATOM TREATY ELECTRICITY MARKET LEGISLATION

AND INTERNAL

The reference in Article 161(a)(3) Euratom to the provisions of the TFEU must be interpreted as also comprising measures adopted on the basis of the TFEU. The questions discussed above therefore also apply to the relationship between Euratom Treaty provisions and internal electricity market measures. This means that electricity market measures, such as the conditions established under the tendering and public service obligation provisions of the Electricity Directive, can only be applied to investments in nuclear power to the extent that they do not compromise the attainment of Euratom Treaty provisions. The Commission’s

1280. See the Euratom Treaty, Arts 45 et seq. and Annex III.

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Chapter 28 pragmatic approach to the issue in relation to the State aid provisions may possibly also to some extent characterize its application of the internal electricity market measures. In the latter respect, one way of harmonizing the two legal regimes would be to take into account when interpreting specific electricity market measures their positive effects on the attainment of Euratom Treaty objectives. Consequently, it might be argued that Union institutions should be less rigorous in their review of tenders and public service obligations in the security of supply interest, to the extent that they pursue nuclear investments, than in their review of investments in other conventional electricity generation facilities.

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Part VII

Conclusion

Chapter 29

Towards Sustainable Energy Security Investments

29.1.

THE FUNDAMENTALS

The overall research objective of this study has been to analyse the extent to which EU regulation of electricity generation investments addresses today’s security of supply challenges, which require a broader balancing of security, competitiveness and sustainability interests. This analysis has produced conclusions on several levels. In this concluding part we will recapitulate our most important findings and demonstrate the relationships between them. Finally, we will conclude the book by briefly considering how the present regulatory shortcomings could be remedied in order to address the investment challenges currently facing the Union. At a fundamental level, the analysis in this book has largely confirmed the hypothesis advanced in the introduction: since the regulatory ideas underlying the electricity market reform were conceived at a time when the current investment challenges facing the EU lay far beyond the horizon, the codification of these ideas fails to address today’s investment challenges. Competition was introduced into EU electricity production and supply for two purposes: as a means to promote trade and market integration on the one hand and as a means to promote economic efficiency on the other. The promotion of new electricity generation investments was not among the chief concerns of the early stages of this market reform. The concept of a competitive electricity market was founded upon theories developed during the 1980s. According to these theories, electricity spot markets not only contributed to short-term economic efficiency, but also to the achievement of a socially optimal level of investments in the longer term. Moreover, most Member States entered the era of liberalization having, as a legacy from their previous non-competitive regimes, over-invested in electricity

Chapter 29 generation capacity. This was also a period when fossil fuels were cheap and recognition of the threats of climate change had not nearly reached today’s level. Against this background, it is no wonder that the initial Community reforms were primarily focused on reaping the same trade and efficiency benefits that had already resulted from competitive commodity trade in other sectors of the economy. Accordingly, as in other commodity markets, the regulatory point of departure for new investments in electricity production was that of decentralized, market-based decision-making: investment choices were to be made by market participants based on price signals from functioning electricity markets. The principal role of government, from this perspective, was to facilitate the functioning of the electricity market. In other words, the point of departure for the public promotion of investments in electricity production was one of non-regulation. The general task of establishing a functioning internal electricity market, as well as the specific task of attracting an optimal level of investment in electricity production, has proved more complex than originally envisaged. When the Commission launched its first working document on the internal energy market in 1988, surely few could have predicted the vast quantity of EU legislation to which we are now witness twenty-two years later. There are several explanations for this increased complexity. With respect to electricity generation investments in particular, it is possible with hindsight to observe at least three regulatory concerns that have gradually caught up with the Union legislature. First, the renewed attention paid at the turn of the century to energy import dependency helped bring about a focus on the choice of primary energy sources applied in electricity generation. More specifically, it underlined the need to promote the use of indigenous and more diverse energy sources in electricity production in order to mitigate the potential threat of fossil fuel import interruptions and abrupt price increases. Second, growing recognition of the climate effects of greenhouse gas emissions has provided a more fundamental rationale for investment in new technologies and renewable energy sources to help mitigate climate change. Third, the theoretical position that electricity spot markets contribute to the achievement of a socially optimal level of investment in the longer term has been heavily criticized for failing to reflect the situation in practice. Overcoming the first two energy source-related concerns outlined above obviously requires regulation of the competitive market. The role of regulation in alleviating the third capacity-related concern is still fiercely debated. What all three challenges have in common, however, is a lack of any clear consensus about the regulatory design necessary to overcome them. It is also not obvious what role the EU should play in determining that regulatory design. Moreover, recognition of these challenges has come about at a time when the internal electricity market is still very much under construction. To mention just a few of the remaining obstacles: not all markets are fully open to competition; the level of cross-border trade is still limited; there is still insufficient separation between grid-related and competitive activities; and many markets are subject to 390

Towards Sustainable Energy Security Investments undue public intervention and regulatory uncertainty. Consequently, there is at present a lack of empirical evidence as to the ability of a well-functioning internal electricity market – if, indeed, one can ever be established – to attract the necessary market-based investments. This means that the task of regulating the market is one that will involve regulation in several phases at several levels, where much will inevitably have to be learned as the process moves along. It is something of a paradox that this gradual development of a regulatory regime is taking place within a market system that cites regulatory uncertainty in itself as a significant obstacle to new investments. It is in the context of this regulatory confusion, if not regulatory crisis, that we need to consider how far EU regulation of electricity generation investments addresses today’s security of supply challenges. The crucial question is whether internal electricity market legislation provides a suitable basis for the regulation of the competitive market to ensure an optimal level of investments. The challenges outlined above suggest this is no easy task. Add to this the broad political agreement that EU law shall respect Member States’ choice of energy mix while, at the same time, pursuing a European energy policy one of whose central aims is to influence the choice of energy sources in electricity production, and it seems justifiable to wonder whether the task is achievable at all. Nevertheless, while not underestimating the extraordinary challenges faced by the Union legislature, this author suggests that it could do better than it has done so far. The security of supply legislation analysed in this book can for practical purposes be divided into two categories. The first consists of measures requiring Member States to facilitate the functioning of the electricity market in order to attract market-based investments, while the second consists of measures restricting the Member States’ rights to have recourse to instruments of market intervention designed to attract investments. Our analysis of both of these categories of measures, viewed in relation to the primary provisions of the TFEU, has revealed several shortcomings in addressing today’s security of supply challenges. The most important criticism that can be levelled against them is that they are overly preoccupied with codifying the original idea of promoting market-based investments at the expense of the need to address present investment challenges. The conclusions to this effect and their relationship to our overall hypothesis are recapitulated in the following. 29.2.

MARKET FACILITATION: THE WRONG APPROACH TO THE RIGHT IDEAS

The Electricity Directive and the Security of Electricity Supply Directive are both examples of EU measures which aim to promote electricity generation investments by facilitating the functioning of the electricity market. This approach is, however, particularly pronounced in the latter Directive, whose central idea is to establish ‘a framework within which Member States are to define transparent, stable and 391

Chapter 29 non-discriminatory policies on security of electricity supply compatible with the requirements of a competitive internal market for electricity’.1281 Several of the EU instruments of market facilitation discussed in more detail in Part IV of this book are based on ideas that have considerable merit from the perspective of economic theory. There is, for example, little reason to question the view that clear definitions of roles and responsibilities and the promotion of a stable investment climate are vital ingredients for attracting market-based investments.1282 Although the theories underlying the provisions of the Security of Electricity Supply Directive are often sound, we have argued in this book that the provisions largely fail to achieve their intended effects. There are essentially two reasons for this. First, as we have seen in this study, many of the measures in question are broadly worded and appear to express political declarations of intent rather than clear-cut obligations for Member States. The measures typically require Member States to pursue an intermediate objective – e.g., the facilitation of a stable investment climate or the provision of clear definitions of electricity market roles and responsibilities – but they fail to establish a clear approach for pursuing these objectives. The ambiguity of the measures in itself creates regulatory uncertainty by rendering their interpretation difficult. More importantly, the extent to which these generally worded obligations are likely to contribute to the Directive’s objectives of ensuring an adequate level of generation capacity and an adequate balance between supply and demand is questionable.1283 Second, the relationship between the security of supply interests pursued by the measures and the internal market rationale for their adoption on the basis of Article 114(1) TFEU is, at best, indirect. The Security of Electricity Supply Directive, according to its own wording, ‘establishes measures aimed at safeguarding security of electricity supply so as to ensure the proper functioning of the internal market for electricity’.1284 Recourse to Article 114 TFEU as legal basis presupposes that these security of supply measures in some way contribute to ensuring the free movement of electricity or the elimination of appreciable distortions of competition. One could argue that EU measures which require Member States to facilitate a stable investment climate at least contribute indirectly to improving the functioning of the internal electricity market by facilitating investments and, consequently, the free movement of capital and cross-border trade. This internal market rationale underlying the adoption of the measures is, however, not obvious. The requirements imposed by the Directive on Member States to define electricity market roles and responsibilities constitute an example of an even more tenuous relationship between the security of supply interests pursued by the measures and the internal market rationale underlying their adoption. It is reasonable to ask whether a mere obligation to define roles and responsibilities, without the provision 1281. 1282. 1283. 1284.

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Article 1(2) of the Security of Electricity Supply Directive. See in particular ibid., Arts 3 and 5. Ibid., Art. 1(1). Ibid.

Towards Sustainable Energy Security Investments of much guidance as to how those roles and responsibilities should be defined, is at all likely to contribute to reducing barriers to trade and competition. Considering the EU’s wide margin of discretion in determining the means to approximate laws, we have argued in this study that the adoption of the provisions of the Security of Electricity Supply Directive does not exceed the competence conferred on the EU by virtue of Article 114 TFEU. Moreover, the competence conferred on the EU by the new Article 194 TFEU is also likely to provide sufficient legal basis for similar measures to be adopted in the future. Nevertheless, it is worth noting that these measures appear to have been adopted primarily in response to the economic debate on how to attract market-based investments in competitive electricity markets, and less on the basis of a need to establish a functioning internal market as envisaged by Articles 26(2) and 114 TFEU. Consequently, several of the measures in the Security of Electricity Supply Directive to a large extent fail to address both their intermediate security of supply aims and their more fundamental purpose in relation to the internal market. By contrast, we have seen how the more generally focused Electricity Directive includes measures based on a clearer internal market rationale which, at the same time, are likely to have a more appreciable effect on market-based investments. Unbundling requirements that indirectly define the roles and responsibilities of market participants offer an example in this respect. It would be wrong to give the impression that the Security of Electricity Supply Directive lacks legal effect. Several of its provisions complement the regulatory regime of the Electricity Directive, for example, provisions relating to TSOs responsibilities for generation reserve capacity and those imposing nondiscrimination requirements on Member States when adopting safeguard measures.1285 However, given the marginal independent significance of the Security of Electricity Supply Directive, it would, in this author’s opinion, have been preferable for its, arguably few, provisions of substantive legal significance to have been incorporated as a part of the new Electricity Directive, rather than in the form of a separate Directive. From a technical point of view, such an approach would have been more beneficial for the development of the internal electricity market legislation, which is already becoming too wide-ranging and complex. More fundamentally, the provisions of the Security of Electricity Supply Directive illustrate the limitations of imposing generally worded, supranational requirements on Member States in contributing to well-functioning markets. The task of designing competitive markets to promote the necessary market-based investments within a politicized field such as energy appears quite simply too complex for much benefit to be gained from this regulatory approach. Thus, this author submits that the important lesson to be learned from the shortcomings of the Security of Electricity Supply Directive is not that its individual provisions are flawed, but that the Directive’s very approach is unsuited to overcoming today’s investment challenges.

1285. Ibid., Arts 5(1)(b) and 4(3), respectively.

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Chapter 29 29.3.

MARKET INTERVENTION: DEFINING THE INDEFINABLE TO AVOID THE INEVITABLE

Member States may resort to market intervention in order to attract desired investments for a number of more or less legitimate reasons and through the application of a number of different instruments. In this book we have analysed Member States’ rights to intervene in the security of supply interest, under both primary and secondary EU law, and compared this to their rights to intervene in the interest of environmental protection. We have focused in particular on interventions that require exemption from the authorization procedure in the Electricity Directive or from the free movement provisions of the TFEU. This analysis has raised three general questions. First, how to define the concept of security of supply as a legitimate ground for exemption from the provisions of EU law provisions. Second, under what circumstances is an exemption to allow public intervention necessary (proportional) to ensure security of supply through the promotion of new investment? And, third, are Member State interventions to promote investments in the interest of environmental protection subject to different, and in practice more favourable, treatment during EU review than interventions in the security of supply interest? In order to define the circumstances in which a Member State is permitted to intervene in the market to ensure security of supply, it is necessary to clarify the meaning of the concept. Consequently, defining the term as an EU law concept has also been an intermediate aim of this study. Security of supply, or energy security, has always been a multi-faceted term, and the notion’s ambiguity has, not surprisingly, also flawed attempts to define the legal concept and its regulatory implications. The choice in the Electricity Directive to apply an authorization procedure as the main instrument for the construction of new generating capacity reflects the Directive’s market-based point of departure for new investments. The Member States’ rights to have recourse to public service obligation and tendering procedures under Articles 3 and 8 of the Directive, respectively, in the form of exemptions from this authorization procedure have constituted particularly important study objects in this book. Neither the Electricity Directive nor the Security of Electricity Supply Directive provide a clear definition of the concept of security of supply when applied as a ground for exemption within the meaning of those provisions, and the feeble attempts to define the term are not entirely consistent. The various primary law provisions of the TFEU that can be used as a source of interpretational inspiration also provide widely different approaches to the concept. On the one hand, we have seen how the concept may be perceived as an intermediate goal for the attainment of a number of the broadly defined economic objectives enshrined in Article 3 TEU. Given the fundamental role of electricity as an input in the general economy, continuity of supply is arguably an important intermediate goal, perhaps even a precondition, for attaining these ultimate Treaty objectives. On the other hand, when the term is used to justify an exemption from the free movement provisions of the TFEU, it is accorded an entirely different and more restrictive meaning. The Court of Justice’s approach to security of supply as a ground to justify exemption in the interests of public-security restricts its 394

Towards Sustainable Energy Security Investments application to measures intended to safeguard energy supplies ‘in the event of a crisis’ where there is ‘a genuine and sufficiently serious threat to a fundamental interest of society’.1286 Electricity supply disruptions are, in practice, unlikely to have such devastating effects, and their impact is more likely to be primarily economic. The most serious electricity interruptions experienced in Europe over the last decade have not had any grave consequences for public health, and certainly did not threaten public security, although they did cause economic costs to society. Nevertheless, given the importance of stable energy supplies to the functioning of modern society, we cannot in principle rule out the possibility that supply interruptions may threaten public health and ultimately, although not very realistically, national security. As a result, it may de facto be difficult for the Court of Justice to refuse to allow Member States to invoke public security as a ground to justify exemption from the Treaty when security of supply is at stake, meaning that the more important test is likely to be whether the measures at issue are proportionate to the interests pursued. We have argued that the concept of security of supply, as applied by the Electricity Directive, should essentially be understood as the ensuring of a balance between supply and demand without a need for rationing on the demand side. The fact that an exemption from the authorization procedure in the Electricity Directive has appreciably less restrictive effects on trade than an exemption from the fundamental Treaty principles offers support for this wider Directive-based approach to the concept as against the Court of Justice’s approach under the free movement provisions of the Treaty. Nevertheless, given the difficulties involved in predicting the societal impact of supply disruptions, the scope for exemptions on the basis of security of supply concerns might, in practice, not be so very different under the provisions of the Treaty and the Electricity Directive. Recourse to the public service obligation and tendering procedures of the Electricity Directive essentially requires exemption from the authorization procedure to be necessary for the promotion of investments needed to ensure security of supply. This assessment of proportionality will inevitably be based on predictions of future market conduct, which may be extremely unreliable. Forecasts based on factors such as future electricity demand, the future availability of primary energy sources and the extent to which planned market-based investments may or may not be carried out are bound to be uncertain. We have argued in this book that this uncertainty should give Member States the benefit of the doubt in EU review of exemptions from the authorization procedure. The difficulties involved in determining the necessity of exemptions from the Electricity Directive are paralleled in the assessment of the proportionality of national measures restricting the free movement required by the Treaty. However, while derogations from the Treaty’s fundamental free movement provisions constitute by their very nature restrictions on trade, and should therefore be subject to intense scrutiny, derogations from the authorization procedure of the Electricity

1286. Case C-503/99, Commission v. Belgium, [2002] ECR I-4809, paras 46–47.

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Chapter 29 Directive are likely to be more modest in their impact on internal market trade and competition. The Electricity Directive requires the fundamental EU conditions of non-discrimination, objectivity and transparency to be observed irrespective of whether new investments are promoted through the application of the authorization procedure or public service obligation or tendering procedures. Moreover, potential distortions of competition resulting from State compensation to public service obligation providers or successful bidders are in any event subject to scrutiny under the State aid provisions of the Treaty. Although Member States have a certain potential to escape State aid control by ensuring that aid is not granted through State resources, this is by no means a large loophole. Thus the primary reason for only exceptionally allowing Member States recourse to tendering and public service obligation procedures appears to be concern that these procedures may distort future electricity price signals in a way that deters future market-based investments and leads to efficiency losses. Accordingly, there is reason to question whether a legal framework which only exceptionally permits derogations from its market-based procedure is supported by a convincing Union rationale in the first place. Not only are these derogations likely to have less impact on EU trade than derogations from the fundamental free movement provisions of the Treaty, but the criteria for determining the situations in which Member States should be allowed recourse to exemptions are also notoriously difficult to assess. Moreover, certain categories of exemptions, such as the establishment of capacity markets under Article 8 of the Electricity Directive, have been held by some economic commentators to constitute the necessary components of a functioning market, rather than instruments to be applied only exceptionally. This adds to the confusion as to how and why to draw a distinction between market-driven procedures and procedures based on market intervention. Consequently, the current legislative framework is not likely to be very effective in its attempt to promote competitiveness by requiring Member States primarily to have recourse to market-based procedures for new investments. Articles 3 and 8 of the Electricity Directive also permit exemptions from the authorization procedure when this is necessary to promote investments in the interests of environmental protection. We have argued in this book that the evaluation of such exemptions is less complex than the corresponding assessment of security of supply measures. Investments in renewable energy sources and technologies which contribute to a reduction in greenhouse gas emissions, and which will not be carried out by market participants on the basis of the authorization procedure, may be promoted through the launching of public service obligation or tendering procedures. The wide margin of discretion enjoyed by Member States under the Electricity Directive to promote environmental interests corresponds well with the Court of Justice’s approach to feed-in tariffs under (current) Article 34 TFEU in PreussenElektra.1287 The Court’s pragmatic approach when reconciling the interests of Union trade and environmental protection was, if not legally 1287. Case C-379/98, PreussenElektra, [2001] ECR I-2099.

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Towards Sustainable Energy Security Investments elegant, very welcome from the perspective of ensuring investment in sustainable electricity generation. Given the apparent success of feed-in tariff schemes in promoting investments in electricity generation from renewable energy sources, with such schemes now being applied in some form in the majority of Member States, it would have been paradoxical for these schemes to have been held to conflict with Treaty provisions at a time when large-scale renewable investments are a top EU priority. There is no reason to apply a more rigorous approach in assessing exemptions from the authorization procedure of the Electricity Directive, as such exemptions’ effects on trade are less significant than those of exemptions from the free movement provisions of the Treaty. The conclusions recapitulated above lead us to make two fundamental observations in relation to the hypothesis advanced in this book. First, the restrictions imposed on Member States’ rights of exemption from requirements to pursue market-based investments under the internal electricity market legislation are primarily a codification of the thinking originally underlying the electricity market reform: market-based investments contribute to cost efficiency and should therefore be prioritized. Given the practical difficulties involved in defining the circumstances giving rise to the need for market intervention, it is, however, questionable whether supranational requirements imposed on Member States to prioritize market-based investments are likely to have much impact on the promotion of economic efficiency and, ultimately, EU competitiveness. Second, it is difficult to see that the requirements set forth by the Directive make much contribution to overcoming the investment challenges presently facing the EU. In the latter respect, it is surprising that the internal electricity market legislation, while limiting Member States’ rights to depart from reliance on market-based investments, does not require Member States to ensure that interventions made in the security of supply interest also contribute to sustainable investment. This latter observation is further expanded in the final section below. 29.4.

OFF THE BEATEN PATH: TOWARDS SUSTAINABLE ENERGY SECURITY

The conclusions reached above suggest that substantial parts of the internal electricity market measures analysed in this study are likely to make only a limited contribution to electricity market efficiency and, ultimately, EU competitiveness. This does not mean that the provisions are detrimental in general to the establishment of a functioning internal electricity market or, more specifically, to the promotion of electricity generation investments. It does, however, suggest that parts of the internal electricity market instruments concerning electricity generation investments are redundant and, simply put, could most likely be repealed with little impact on market development. In the latter respect, it is also tempting to ask whether the idea of market-based electricity generation investments is in any event realistic in the context of the European electricity market. At a very general level, one might speculate whether 397

Chapter 29 the current legal framework really provides much scope for market-driven investments, in the sense of investment decisions being left to be made by market participants on the basis of price levels in functioning electricity markets. After all, nuclear investments may remain a special case under the Euratom Treaty; extraction of indigenous coal for electricity generation purposes may benefit from subsidies; investments in electricity generation from renewables benefit from a number of favourable conditions (often including, in practice, non-market based feed-in tariff schemes); high-efficiency cogeneration may benefit from similar support; and the provision of reserve capacity margins for exceptional peak-load situations is a special case. The existence of these arrangements does not preclude the establishment of a competitive electricity market, but does raise some questions as to whether the price mechanisms of this competitive market will really be the main contributor to ensuring optimal investments in the longer term. Perhaps a more realistic way of looking at the current framework would be to accept that electricity spot markets contribute primarily to short-term economic efficiency, while the promotion of investments in the longer term will always require special treatment and be subject to some level of public control and intervention. Moreover, in the wake of the recent global financial crisis, the question arises whether electricity producers can be expected to attract the capital needed, at acceptable costs, to invest in necessary electricity generation facilities solely on the basis of future (and volatile) electricity prices, even if these are hedged in financial power markets. In a situation where the availability of capital is still constrained, restricting central planning and the provision of income guarantees such as long-term power purchase contracts and feed-in tariff schemes may not be the preferred option to promote necessary investments. After all, the risk of overinvestment is hardly a central concern in the current European energy and financial policy agenda. The findings in this study argue strongly in favour of a need to reconsider the focus of internal electricity market legislation so that today’s investment challenges may be properly addressed. The overarching objectives of the TFEU, as well as European energy policy, clearly suggest that the starting point for regulation should be the promotion of environmentally sustainable investments, whether through market-based means or not. A separate body of EU law already exists to promote such investments, where the adoption of the new RES Directive in 2009 was a particular important milestone. This Directive provides a firm basis for requiring Member States to ensure that their share of energy from renewable sources is consistent with the overall target of at least 20% share of energy from renewable energy sources in the EU’s gross final consumption of energy in 2020. The question, then, is how to design a regulatory regime which facilitates the investments needed to achieve at least the overall target set by the RES Directive. In the latter respect, it is striking that requirements to promote sustainable investments have not to a greater extent been implemented in the central internal electricity market legislation. While Member States’ rights to derogate from reliance on market-based investments are limited in order to promote competitiveness, the latter legislation only to a limit extent require Member States to ensure that 398

Towards Sustainable Energy Security Investments interventions made in the security of supply interest contribute to environmental protection. There is, in principle, no reason why this legislation could not also require Member States, to the extent that interventions are needed to promote energy security, to promote measures which contribute to sustainable energy security, whether that means recourse to investments in renewables, to energy-saving measures, or to the application of infant technologies such as CCS. These requirements should ideally constitute an integral part of any authorization procedure or instrument of intervention at Member State level. Correspondingly, such requirements should be integrated into the internal electricity market measures that specifically govern these procedures as a supplement to environmental legislation imposing overall targets such as the RES Directive. To provide an example, in the words of the Commission: The first priority should normally be to ensure that policies are in place to control growth in demand. Such an approach is cheaper, works faster and is in line with the commitments of the European Union relating to emissions of greenhouse gases. It is only on[c]e these avenues have been exploited that Member States should look to measures on the supply side.1288 There is much merit to this argument, but it is not sufficiently well-reflected in internal electricity market legislation in its current state. In this author’s opinion it should be. The legal implementation of such an approach may require some new thinking, and may not be market-based, but it would constitute a step in the right direction in addressing today’s most important investment challenge: ensuring sustainable energy security.

1288. State aid No. N 475/2003, Irish CADA, 16.12.2003, para. 31.

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412

Table of Cases (In Chronological Order)

Judgments of the Court of Justice Case 7/61, Commission of the European Economic Community v. Italian Republic, [1961] ECR 317 Case 26/62, NV Algemene Transport- en Expeditie Onderneming van Gend & Loos v. Netherlands Inland Revenue Administration, [1963] ECR 1 Case 6/64, Flaminio Costa v. E.N.E.L, [1964] ECR 585 Case 9/70, Franz Grad v. Finanzamt Traunstein, [1970] ECR 825 Case 10/71, Ministe`re public luxembourgeois v. Madeleine Muller, Veuve J.P. Hein and Others, [1971] ECR 723 Case 2/73, Riseria Luigi Geddo v. Ente nazionale Risi, [1973] ECR 865 Case 127/73, Belgische Radio en Televisie v. SV SABAM and NV Fonior (BRT II), [1974] ECR 313 Case 155/73, Giuseppe Sacchi, [1974] ECR 409 Case 173/73, Italian Republic v. Commission of the European Communities, [1974] ECR 709 Case 8/74, Procureur du Roi v. Benoıˆt and Gustave Dassonville, [1974] ECR 837 Case 104/75, Adriaan de Peijper, Managing Director of Centrafarm BV, [1976] ECR 613 Case 35/76, Simmenthal SpA v. Ministero delle Finanze italiano, [1976] ECR 1871 Case 46/76, W. J. G. Bauhuis v. The Netherlands State, [1977] ECR 5

85 208 75 208 118 282 117 118 344, 350 76 97 80 76

Table of Cases (In Chronological Order) Case 78/76, Steinike & Weinlig v. Federal Republic of Germany, [1977] ECR 595 344 Case 5/77, Carlo Tedeschi v. Denkavit Commerciale s.r.l., [1977] ER 1555 81, 82 Case 30/77, Regina v. Pierre Bouchereau, [1977] ECR 1999 93 Case 77/77, Benzine en Petroleum Handelsmaatschappij BV and Others v. Commission of the European Communities, [1978] ECR 1513 73 Case 7/78, Regina v. Ernest George Thompson et al., [1978] ECR 2247 94 Case 120/78, Rewe-Zentral AG v. Bundesmonopolverwaltung fu¨r Branntwein, [1979] ECR 649 76 Case 15/79, P.B. Groenveld BV v. Produktschap voor Vee en Vlees, [1979] ECR 3409 282 Case 730/79, Philip Morris Holland BV v. Commission of the European Communities, [1980] ECR 2671 345, 369 Joined Cases 188-190/80, French Republic, Italian Republic and United Kingdom of Great Britain and Northern Ireland v. Commission of the European Communities, [1982] ECR 2545 381, 382 Case 283/81, Srl CILFIT and Lanificio di Gavardo SpA v. Ministry of Health, [1982] ECR 3415 10 Case 218/82, Commission of the European Communities v. Council of the European Communities, [1983] ECR 4063 129, 202 Case 237/82, Jongeneel Kaas BV and Others v. Netherlands and Stichting Centraal Orgaan Zuivelvontrole, [1984] ECR 483 282 Case 238/82, Duphar BV and Others v. The Netherlands State, [1984] ECR 523 85 Case 72/83, Campus Oil Limited and Others v. Minister for 76, 77, 79–84, Industry and Energy and Others, [1984] ECR 2727. 86–89, 91, 95, 98–100, 111, 112, 126, 160, 258, 260, 271, 284, 287, 295 Case 106/83, Sermide SpA v. Cassa Conguaglio Zucchero and Others, [1984] ECR 4209 209 Case 240/83, Procureur de la Re´publique v. Association de de´fense des bruˆleurs d’huiles usages, [1985] ECR 531 69, 106 Case 248/84, Federal Republic of Germany v. Commission of the European Communities, [1987] ECR 4013 352 Joined Cases 201/85 and 202/85, Marthe Klensch and Others v. Secre´taire d’E´tat a` l’Agriculture et a` la Viticulture, [1986] 129–130, ECR 3477 202 Case 310/85, Deufil GmbH & Co. KG v. Commission of the European Communities, [1987] ECR 901 350 414

Table of Cases (In Chronological Order) Case 328/85, Deutsche Babcock Handel GmbH v. Hauptzollamt Lu¨beck-Ost, [1987] ECR 5119 Case 45/86, Commission of the European Communities v. Council of the European Communities, [1987] ECR 1493 Case 66/86, Ahmed Saeed Flugreisen and Silver Line Reisebu¨ro GmbH v. Zentrale zur Beka¨mpfung unlauteren Wettbewerbs e.V., [1989] ECR 803 Case 118/86, Openbaar Ministerie v. Nertsvoederfabriek Nederland BV, [1987] ECR 3883 Case 126/86, Fernando Roberto Gime´nez Zaera v. Institut Nacional de la Seguridad Social and Tesorerı´a General de la Seguridad Social, [1987] ECR 3697 Case 302/86, Commission of the European Communities v. Kingdom of Denmark, [1988] ECR 4607 Case C-3/88, Commission of the European Communities v. Italian Republic, [1989] ECR 4035 Case C-18/88, Re´gie des te´le´graphes et des te´le´phones v. GB-Inno-BM SA, [1991] ECR I-5941 Case C-21/88, Du Pont de Nemours Italiana SpA v. Unita` sanitaria locale N* 2 di Carrara, [1990] ECR I-889 Case C-202/88, French Republic v. Commission of the European Communities, [1991] ECR I-1223 Case C-347/88, Commission of the European Communities v. Hellenic Republic, [1990] ECR I-4747 Case C-300/89, Commission of the European Communities v. Council of the European Communities, [1991] ECR I-2867 Case C-2/90, Commission of the European Communities v. Kingdom of Belgium, [1992] ECR I-4431 Case C-47/90, E´tablissements Delhaize fre`res et Compagnie Le Lion SA v. Promalvin SA and AGE Bodegas Unidas SA, [1992] ECR I-3669 Case C-179/90, Merci convenzionali porto di Genova SpA v. Siderurgica Gabrielli SpA, [1991] ECR I-5889 Joined Cases C-72/91 and C-73/91, Firma Sloman Neptun Schiffahrts AG v. Seebetriebsrat Bodo Ziesemer der Sloman Neptun Schiffahrts AG, [1993] ECR I-887 Joined Cases C-267/91 and C-268/91, Criminal Proceedings against Bernard Keck and Daniel Mithouard, [1993] ECR I-6097 Case C-320/91, Criminal Proceedings against Paul Corbeau, [1993] ECR I-2533 Case C-379/92, Criminal Proceedings against Matteo Peralta, [1994] ECR I-3453 Case C-387/92, Banco Exterior de Espan˜a v. Ayuntamiento de Valencia, [1994] ECR I-877

376 131 119 85 66 69, 105 209 118, 127, 305 105 117, 327 87, 88 140 106, 108 282 119, 310 66 76 117, 118, 326 139 325, 351 415

Table of Cases (In Chronological Order) Case C-393/92, Municipality of Almelo and Others v. NV Energiebedrijf Ijsselmij, [1994] ECR I-1477 Case C-56/93, Kingdom of Belgium v. Commission of the European Communities, [1996] ECR I-723 Case C-280/93, Federal Republic of Germany v. Council of the European Union, [1994] ECR I-4973 Case C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699 (together with Cases C-158/94, C-159/94 and C-160/94 collectively referred as ‘the Energy Monopoly cases’) Case C-158/94, Commission of the European Communities v. Italian Republic, [1997] ECR I-5789 (together with the cases noted under Case C-157/94 above collectively referred to as ‘the Energy Monopoly cases’) Case C-159/94, Commission of the European Communities v. French Republic, [1997] ECR I-5815 (together with the cases noted under Case C-157/94 above collectively referred to as ‘the Energy Monopoly cases’) Case C-160/94, Commission of the European Communities v. Kingdom of Spain, [1997] ECR I-5851 (together with the cases noted under Case C-157/94 above collectively referred to as ‘the Energy Monopoly cases’) Case C-237/94, John O’Flynn v. Adjudication Officer, [1996] ECR I-2617 Case C-72/95, Aannemersbedrijf P.K. Kraaijeveld BV e.a. v. Gedeputeerde Staten van Zuid-Holland, [1996] ECR I-5403 Case C-124/95, The Queen, ex parte Centro-Com Srl v. HM Treasury and Bank of England, [1997] ECR I-81 Case C-242/95, GT-Link A/S v. De Danske Statsbaner (DSB), [1997] ECR I-4449 Case C-284/95, Safety Hi-Tech Srl v. S. & T. Srl., [1998] ECR I-4301 Case C-57/96, H. Meints and Minister van Landbouw, Natuurbeheer en Visserij, [1997] ECR I-6689 Case C-158/96, Raymond Kohll v. Union des caisses de maladie, [1998] ECR I-1931 Case C-203/96, Chemische Afvalstoffen Dusseldorp BV and Others v. Minister van Volkshuisvesting, Ruimtelijke Ordening en Milieubeheer, [1998] ECR I-4075 Case C-213/96, Outokumpu Oy, [1998] ECR I-1777 Case C-389/96, Aher-Waggon GmbH v. Bundesrepublik Deutschland, [1998] ECR I-4473 416

75, 118–121, 123, 124, 306, 315, 326 324, 350 217 121, 122, 124, 306, 315, 326, 329 75, 121–123, 329 117, 121–124, 329

121, 122 210, 285 259 82 119 97, 139 210, 285 96, 261

106 69, 107, 342 106

Table of Cases (In Chronological Order) Case C-75/97, Kingdom of Belgium v. Commission of the European Communities, [1999] ECR I-3671 348, 350 Case C-112/97, Commission of the European Communities v. Italian Republic, [1999] ECR I-1821 82, 83 Case C-161/97 P, Kernkraftwerke Lippe-Ems GmbH v. Commission of the European Communities, [1999] ECR I-2057 381 ¨ sterreich, [1999] Case C-302/97, Klaus Konle v. Republik O ECR I-3099 205 Case C-36/98, Kingdom of Spain v. Council of the European Union, [2001] ECR I-779 10, 140, 259 Case C-209/98, Entreprenørforeningens Affalds/Miljøsektion (FFAD) v. Københavns Kommune, [2000] ECR I-3743 124, 327 Case C-367/98, Commission of the European Communities v. Portuguese Republic, [2002] ECR I-4731 (together with Cases C-483/99, C-503/99, C-463/00, C-98/01, C-174/04, joined Cases C-282/04 and C-283/04, and C-112/05 collectively referred to as ‘the Golden Shares cases’) 89, 90, 101 133, 135, Case C-376/98, Federal Republic of Germany v. European 136, Parliament and Council of the European Union, [2000] 361 ECR I-8419 Case C-379/98, PreussenElektra AG and Schleswag AG, in the 69, 70, 77, 98, 103–110, 112, presence of Windpark Reußenko¨ge III GmbH and Land 113, 160, 284, Schleswig-Holstein [2001] ECR I-2099 287, 296, 349, 352–354, 356, 359, 396 Case C-398/98, Commission of the European Communities v. Hellenic Republic, [2001] ECR I-7915 85, 86 Case C-405/98, Konsumentombudsmannen v. Gourmet International Products AB, [2001] ECR I-1795 100 Case C-54/99, Association Eglise de scientologie de Paris and Scientology International Reserves Trust v. The Prime Minister, [2000] ECR I-1335 91, 94 Case C-143/99, Adria-Wien Pipeline GmbH and Wietersdorfer & Peggauer Zementwerke GmbH v. Finanzlandesdirektion fu¨r 348, 350, Ka¨rnten, [2001] ECR I-8365 351 Case C-205/99, Asociacio´n Profesional de Empresas Navieras de Lı´neas Regulares (Analir) and Others v. Administracio´n General del Estado, [2001] ECR I-1271 219 Case C-340/99, TNT Traco SpA v. Poste Italiane SpA and Others, [2001] ECR I-4109 327 Case C-482/99, French Republic v. Commission of the European 347, Communities, [2002] ECR I-4397 357–359

417

Table of Cases (In Chronological Order) Case C-483/99, Commission of the European Communities v. French Republic, [2002] ECR I-4781 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) Case C-503/99, Commission of the European Communities v. Kingdom of Belgium, [2002] ECR I-4809 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) Case C-53/00, Ferring SA v. Agence centrale des organismes de se´curite´ sociale (ACOSS), [2001] ECR I-9067 Case C-137/00, The Queen v. The Competition Commission, Secretary of State for Trade and Industry and The Director General of Fair Trading, ex parte Milk Marque Ltd and National Farmers’ Union, [2003] ECR I-7975 Case C-280/00, Altmark Trans GmbH and Regierungspra¨sidium Magdeburg v. Nahverkehrsgesellshcaft Altmark GmbH, and Oberbundesanwalt beim Bundesverwaltungsgericht, [2003] ECR I-7747 Case C-442/00, A´ngel Rodrı´guez Caballero v. Fondo de Garantı´a Salarial (Fogasa), [2002] ECR I-11915 Case C-463/00, Commission of the European Communities v. Kingdom of Spain, [2003] ECR I-4581 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) Joined Cases C-465/00, C-138/01 and C-139/01, Rechnungshof ¨ sterreichischer Rundfunk and Others and (C-465/00) v. O Christa Neukomm (C-138/01) and Joseph Lauermann ¨ sterreichischer Rundfunk, [2003] (C-139/01) v. O ECR I-4989 Joined Cases C-34/01 to C-38/01, Enirisorse SpA and Ministero delle Finanze, [2003] I-14243 Case C-98/01, Commission of the European Communities v. United Kingdom of Great Britain and Northern Ireland, [2003] ECR I-4641 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) Case C-106/01, The Queen, on the Application of Novartis Pharmaceuticals UK Ltd v. The Licensing Authority Established by the Medicines Act 1968, [2004] ECR I-4403 Case C-126/01, Ministe`re de l’E´conomie, des Finances et de l’Industrie v. GEMO SA, [2003] ECR I-13769 Case C-211/01, Commission of the European Communities v. Council of the European, [2003] ECR I-8913

418

89–91, 101, 102 89–92, 98, 101, 102, 111, 160, 395 305, 362, 367

209 275, 305, 323, 326, 347, 349–351, 362, 363 215

89–91, 101

210 305, 363, 364

89 209, 218 363 140, 202

Table of Cases (In Chronological Order) Case C-338/01, Commission of tihe European Communities v. Council of the European Union, [2004] ECR I-4829 Case C-463/01, Commission of the European Communities v. Federal Republic of Germany, [2004] ECR I-11705 (Grand Chamber) Case C-448/01, EVN AG and Wienstrom GmbH v. Republik ¨ sterreich, [2003] ECR I-14527 O Case C-491/01, The Queen v. Secretary of State for Health, ex parte British American Tobacco (Investments) Ltd and Imperial Tobacco Ltd, [2002] ECR I-11453 Case C-66/02, Italian Republic v. Commission of the European Communities, [2005] ECR I-10901 Case C-309/02, Radlberger Getra¨nkegesellschaft mbH & Co. and S. Spitz KG v. Land Baden-Wu¨rttemberg, [2004] ECR I-11763 (Grand Chamber) Case C-345/02, Pearle BV, Hans Prijs Optiek Franchise BV and Rinck Opticie¨ns BV v. Hoofdbedrijfschap Ambachten, [2004] ECR I-7139 Case C-422/02 P, Europe Chemi-Con (Deutschland) GmbH v. Council of the European Union, [2005] ECR I-791 Case C-434/02, Arnold Andre´ GmbH & Co. KG v. Landrat des Kreises Herford, [2004] ECR I-11825 (Grand Chamber) Case C-17/03, Vereniging voor Energie, Milieu en Water, Amsterdam Power Exchange Spotmarket BV, Eneco BV v. Directeur van de Dienst uitvoering en toezicht energie, [2005] ECR I-4983 (Judgment of the Full Court) Joined Cases C-128/03 and C-129/03, AEM SpA and AEM Torino SpA v. Autorita` per l’energia elettrica e per il gas and Others, [2005] ECR I-2861 Case C-210/03, The Queen, on the Application of: Swedish Match AB and Swedish Match UK Ltd v. Secretary of State for Health, [2004] ECR I-11893 (Grand Chamber) Case C-293/03, Gregorio My v. Office national des pensions (ONP), [2004] ECR I-12013 Case C-380/03, Federal Republic of Germany v. European Parliament and Council of the European Union, [2006] ECR I-11573 (Grand Chamber) Case C-436/03, European Parliament v. Council of the European Union, [2006] ECR I-3733 (Grand Chamber) Case C-451/03, Servizi Ausiliari Dottori Commercialisti Srl v. Giuseppe Calafiori, [2006] ECR I-2941 Case C-470/03, A.G.M.-COS.MET Srl v. Suomen valtio, Tarmo Lehtinen, [2007] ECR I-2749 (Grand Chamber) Case C-148/04, Unicredito Italiano SpA v. Agenzia delle Entrate, [2005] ECR I-11137.

140, 202 97 107 134, 135, 138 348, 351 97 351, 352, 358 209, 215, 418 134, 135

213, 320 213, 215 134, 135 66 134–136 131, 134, 136 347, 351, 364, 365 283

419

Table of Cases (In Chronological Order) Joined Cases C-158/04 and C-159/04, Alfa Vita Vassilopoulos AE (C-158/04) and Carrefour Marinopoulos AE (C-159/04) v. Elliniko Dimosio and Nomarchiaki Aftodioikisi Ioanninon, [2006] ECR I-8135 97 Case C-174/04, Commission of the European Communities v. Italian Republic, [2005] ECR I-4933 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) 89 Joined Cases C-282/04 and C-283/04, Commission of the European Communities v. Kingdom of the Netherlands, [2006] ECR I-9141 89 Case C-372/04, The Queen, on the Application of Yvonne Watts v. Bedford Primary Care Trust and Secretary of State for Health, [2006] ECR I-4325 (Grand Chamber) 261 Joined Cases C-393/04 and C-41/05, Air Liquide Industries Belgium SA v. Ville de Seraing (C-393/04) and Province de Lie`ge (C-41/05), [2006] ECR I-5293 344 Joined Cases C-463/04 and C-464/04, Federconsumatori and Others (C-463/04) and Associazione Azionariato Diffuso dell’AEM SpA and Others (C-464/04) v. Comune di Milano, [2007] ECR I-10419 89 Case C-112/05, Commission of the European Communities v. Federal Republic of Germany, [2007] ECR I-8995 (together with the cases noted under Case C-367/98 above collectively referred to as ‘the Golden Shares cases’) 89 Case C-208/05, ITC Innovative Technology Center GmbH v. Bundesagentur fu¨r Arbeit, [2007] ECR I-181 261 Case C-213/05, Wendy Geven v. Land Nordrhein-Westfalen, [2007] ECR I-6347 (Grand Chamber) 210, 235 Case C-305/05, Ordre des barreaux francophones et germanophone and Others v. Conseil des ministres, [2007] ECR I-5305 (Grand Chamber) 130, 202 Case C-162/06, International Mail Spain SL v. Administracio´n del Estado and Correos, [2007] ECR I-9911 326 Case C-206/06, Essent Netwerk Noord BV v. Aluminium 75, 342, 349, Delfzijl BV, [2008] ECR I-5497 351, 355, 356, 359 Case C-220/06, Asociacio´n Profesional de Empresas de Reparto y Manipulado de Correspondencia v. Administracio´n General 302, 314, del Estado, [2007] ECR I-12175 327 Joined Cases C-341/06 P and C-342/06 P, Chronopost SA and La Poste v. Union franc¸aise de l’express (UFEX) and Others, 344, 347, [2008] ECR I-4777 (Grand Chamber) 351

420

Table of Cases (In Chronological Order) Case C-439/06, Citiworks AG v. Flughafen Leipzig/Halle GmbH, Bundesnetzagentur, [2008] ECR I-3913 Case C-239/07, Julius Sabatauskas and Others, [2008] ECR I-7523  Case C-115/08, Land Obero¨sterreich v. CES as, nyr, 379

8, 10, 149, 318, 320, 323, 328, 361 8, 10, 149 382

Opinions of the Court of Justice Opinion 2/94, Opinion pursuant to Article 228(6) of the EC Treaty, [1996] ECR I-1759 Opinion 2/00, Opinion of the Court of 6 December 2001, [2001] ECR I-9713

130 139

Judgments of the Court of First Instance Joined Cases T-149/94 and T-181/94, Kernkraftwerke Lippe-Ems GmbH v. Commission of the European Communities, [1997] ECR II-161 Case T-260/94, Air Inter SA v. Commission, [1997] ECR II-997 Case T-106/95, Fe´de´ration franc¸aise des socie´te´s d’assurances (FFSA) et al. v. Commission of the European Communities, [1997] ECR II-229 Case T-46/97, SIC – Sociedade Independente de Comunicac¸a˜o SA v. Commission of the European Communities, [2000] ECR II-2125 Case T-152/99, Hijos de Andre´s Molina, SA (HAMSA) v. Commission, [2002] ECR II-3049 Case T-274/01, Valmont Nederland BV v. Commission of the European Communities, [2004] ECR II-3145 Case T-17/02, Fred Olsen, SA v. Commission of the European Communities, [2005] ECR II-2031 Case T-266/02, Deutsche Post AG v. Commission of the European Communities, [2008] ECR II-1233 Case T-289/03, British United Provident Association Ltd (BUPA), BUPA Insurance Ltd and BUPA Ireland Ltd v. Commission of the European Communities, [2008] ECR II-81 Case T-442/03, SIC – Sociedade Independente de Comunicac¸a˜o, SA v. Commission of the European Communities, [2008] ECR II-1161 Case T-233/04, Kingdom of the Netherlands v. Commission of the European Communities, [2008] ECR II-591 Case T-87/05, EDP v. Commission, [2005] ECR II-3745

381 319 118, 362 326 370 364 118 364 311, 364–366 118, 367 355 13 421

Table of Cases (In Chronological Order) Case T-136/05, EARL Salvat pe`re & fils, Comite´ interprofessionnel des vins doux naturels et vins de liqueur a` appellations controˆle´es (CIVDN) and Comite´ national des interprofessions des vins a` appellation d’origine (CNIV) v. Commission of the European Communities, [2007] ECR II-4063

359

Advocate General Opinions Opinion of Mr Advocate General Reischl delivered on 4 May 1982 in joined Cases 188-190/80, French Republic, Italian Republic and United Kingdom of Great Britain and Northern Ireland v. Commission of the European Communities, [1982] ECR 2545 Opinion of Advocate General Sir Gordon Slynn delivered on 10 April 1984 in Case 72/83, Campus Oil Limited and Others v. Minister for Industry and Energy and Others, [1984] ECR 2727 (‘Campus Oil’) Opinion of Advocate General Sir Gordon Slynn delivered on 7 April 1987 in Case 328/85, Deutsche Babcock Handel GmbH v. Hauptzollamt Lu¨beck-Ost, [1987] ECR 5119 Opinion of Mr Advocate General Tesauro delivered on 23 May 1990 in Case C-347/88, Commission of the European Communities v. Hellenic Republic, [1990] ECR I-4747 Opinion of Mr Advocate General Van Gerven delivered on 19 September 1991 in Case C-179/90, Merci convenzionali porto di Genova SpA v. Siderurgica Gabrielli SpA, [1991] ECR I-5889 Opinion of Mr Advocate General Darmon delivered on 8 February 1994 in Case C-393/92, Municipality of Almelo and Others v. NV Energiebedrijf Ijsselmij, [1994] ECR I-1477 Joined opinion of Mr Advocate General Cosmas delivered on 26 November 1996 in Cases C-157/94, Commission of the European Communities v. Kingdom of the Netherlands, [1997] ECR I-5699, C-158/94, Commission of the European Communities v. Italian Republic, [1997] ECR I-5789, C-159/94, Commission of the European Communities v. French Republic, [1997] ECR I-5815 and C-160/94, Commission of the European Communities v. Kingdom of Spain, [1997] ECR I-5851 (collectively referred to as ‘the Energy Monopoly cases’) Opinion of Mr Advocate General Alber delivered on 9 July 1998 in Case C-112/97, Commission of the European Communities v. Italian Republic, [1999] ECR I-1821 422

381, 382 79, 81, 83, 86, 99, 271 376 87

119

119, 121

121 82–83

Table of Cases (In Chronological Order) Opinion of Mr Advocate General Le´ger delivered on 16 May 2000 in Case C-36/98, Kingdom of Spain v. Council of the European Union, [2001] ECR I-779 140 Opinion of Mr Advocate General Jacobs delivered on 26 October 77, 104–106, 2000 in Case C-379/98, PreussenElektra AG and 108, 110, Schleswag AG, in the presence of Windpark Reußenko¨ge III 113, 353 GmbH and Land Schleswig-Holstein, [2001] ECR I-2099 Opinion of Mr Advocate General Jacobs delivered on 14 December 2000 in Case C-405/98, Konsumentombudsmannen v. Gourmet International Products AB, [2001] ECR I-1795 100 Opinion of Mr. Advocate General Ruiz-Jarabo Colomer delivered on 15 February 2001 in Case C-398/98, Commission of the European Communities v. Hellenic Republic, [2001] ECR I-7915 85 Joined opinion of Mr Advocate General Ruiz-Jarabo Colomer delivered on 3 July 2001 in Cases C-367/98, Commission of the European Communities v. Portuguese Republic, [2002] ECR I-4731, C-483/99, Commission of the European Communities v. French Republic, [2002] ECR I-4781 and C-503/99, Commission of the European Communities v. Kingdom of Belgium, [2002] ECR I-4809 90 Opinion of Mr Advocate General Tizzano delivered on 8 May 2001 in Case C-53/00, Ferring, [2001] ECR I-9067 305, 362 Opinion of Mr Advocate General Le´ger delivered on 19 March 2002 in Case C-280/00, Altmark, [2003] ECR I-7747 362 Opinion of Mr Advocate General Le´ger delivered on 14 January 2003 in Case C-280/00, Altmark, [2003] ECR I-7747 363 Opinion of Ms Advocate General Stix-Hackl delivered on 7 November 2002 in joined Cases C-34/01 to C-38/01, Enirisorse, [2003] I-14243 363 Opinion of Mr Advocate General Jacobs delivered on 30 April 2002 in Case C-126/01, Ministe`re de l’E´conomie, des Finances et de l’Industrie v. GEMO SA, [2003] ECR I-13769 363 Opinion of Mr Advocate General Jacobs delivered on 29 April 2004 in Case C-422/02 P, Europe Chemi-Con (Deutschland) GmbH v. Council of the European Union, [2005] ECR I-791 209 Opinion of Mr Advocate General Mengozzi delivered on 24 January 2008 in Case C-206/06, Essent Netwerk Noord BV v. Aluminium Delfzijl BV, [2008] ECR I-5497 356 Judgments of National Courts Marknadsdomstolens dom 2003:5 (Dnr B 1/02), Konsumentombundsmannen v. Gourmet International Products Aktiebolag, 5.2.2003 (Swedish Appeal Court)

100 423

Table of Community Legislation

Treaties ECSC Treaty: Treaty establishing the European Coal and Steel Community, signed at Paris on 18 April 1951 (expired 23 July 2002) Euratom Treaty: Treaty establishing the European Atomic Energy Community, signed at Rome on 25 March 1957 EC Treaty: Treaty establishing the European Community, signed at Rome on 25 March 1957, as last amended by the Treaty of Athens (signed on 16 April 2003), OJ C321 E/37, 29.12.2006 (consolidated version) Treaty Establishing a Single Council and a Single Commission of the European Communities, signed at Brussels on 8 April 1965, OJ 152/1, 13.7.1967 Single European Act, signed at Luxembourg on 17 February 1986 and at The Hague on 28 February 1986, OJ L169/1, 29.6.1987 Maastricht Treaty (also referred to as ‘TEU’): Treaty on European Union, signed at Maastricht on 7 February 1992, OJ C191/1, 29.7.1992 EU Treaty: Treaty on European Union, signed at Maastricht on 7 February 1992, as last amended by the Treaty of Athens (signed on 16 April 2003), OJ C321 E/37, 29.12.2006 (consolidated version) EEA Agreement: Agreement on the European Economic Area, signed at Oporto on 2 May 1992, OJ L1/3, 3.1.1994

61, 375 61

61 378 68, 132 142–143

62 24

Table of Community Legislation Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice, signed at Oporto on 2 May 1992, OJ L344/1, 31.12.1994 Agreement on a Standing Committee of the EFTA States, signed at Oporto on 2 May 1992 Agreement on a Committee of Members of Parliament of the EFTA States, signed at Reykjavik on 20 May 1992 Amsterdam Treaty: Treaty of Amsterdam amending the Treaty on European Union, the Treaties establishing the European Communities and certain related acts, signed at Amsterdam on 2 October 1997, OJ C340/1, 10.11.1997 Final Act to the Treaty of Amsterdam, OJ C340/115, 10.11.1997 Energy Community Treaty: Treaty establishing the Energy Community, signed at Athens on 25 October 2005 Lisbon Treaty: The Treaty of Lisbon amending the Treaty on European Union and the Treaty Establishing the European Community, signed at Lisbon 13 December 2007, OJ C306/1, 17.12.2007 Consolidated version of the Treaty on the Functioning of the European Union, OJ C115/47, 9.5.2008

24 24 24

118, 304 305 34

379 7

Non-ratified Treaties Treaty establishing a Constitution for Europe, signed at Rome on 29 October 2004, OJ C310/1, 16.12.2004

143

Treaty Protocols and Declarations Declaration on Article 130r of the EEC Treaty, Declaration to the Single European Act, OJ L169/25, 29.6.1987 Declaration on civil protection, energy and tourism, in the Final Act to the Treaty of the European Union, OJ C191/97, 29.7.1992 Protocol On the Exercise of Shared Competence, OJ C306/158, 17.12.2007 Declaration by the Federal Republic of Germany, Ireland, the Republic of Hungary, the Republic of Austria and the Kingdom of Sweden, Declarations concerning provisions of the Treaties, point 54, attached to the Final Act to the Lisbon Treaty, OJ C306/231, 17.12.2007, at OJ C306/268 Protocol to the Lisbon Treaty on services of general interest, OJ C306/158, 17.12.2007 Final Act to the Treaty of Lisbon, OJ C306/231, 17.12.2007 Protocol 2 to the Lisbon Treaty Amending the Treaty Establishing the European Atomic Energy Community, OJ C306/199, 17.12.2007 426

141 143 118, 303, 304

379 118, 303, 304 86, 379 375

Table of Community Legislation Regulations Council Regulation (EEC) No. 3577/92 of 7 December 1992 applying the principle of freedom to provide services to maritime transport within Member States (maritime cabotage), OJ L364/7, 12.12.1992 Council Regulation (EC) No. 994/98 of 7 May 1998 on the application of Articles 92 and 93 of the Treaty establishing the European Community to certain categories of horizontal State aid, OJ L142/1, 14.5.1998 Council Regulation of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L83/1, 27.3.1999 Regulation (EC) No. 2494/2000 of the European Parliament and of the Council of 7 November 2000 on measures to promote the conservation and sustainable management of tropical forests and other forests in developing countries, OJ L288/6, 15.11.2000 Commission Regulation (EC) No. 69/2001 of 12 January 2001 on the application of Articles 87 and 88 EC to de minimis aid, OJ L10/30, 13.1.2001 Council Regulation (EC) No. 1407/2002 of 23 July 2002 on State aid to the coal industry, OJ L205/1, 2.8.2002 Council Regulation (EC) No. 405/2003 of 27 February 2003 concerning Community monitoring of imports of hard coal originating in third countries, OJ L62/1, 6.3.2003 Regulation (EC) No. 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity, OJ L176/1, 15.7.2003 Council Regulation (EC) No. 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ L207/1, 18.8.2003 Commission Regulation (EC) No. 794/2004 of 21 April 2004 implementing Council Regulation (EC) No. 659/1999, OJ L140/1, 30.4.2004 Regulation (EC) No. 1775/2005 of the European Parliament and of the Council of 28 September 2005 on conditions for access to the natural gas transmission networks, OJ L289/1, 3.11.2005 Regulation (EC) No. 1370/2007 of the European Parliament and of the Council of 23 October 2007 on public passenger transport services by rail and by road and repealing Council Regulations (EEC) Nos 1191/69 and 1107/70, OJ L315/1, 3.12.2007

120

343 343, 345

56 349 377 377

148 134 343

148

120 427

Table of Community Legislation Commission Regulation (EC) No. 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market in application of Articles 87 and 88 of the Treaty (General block exemption Regulation), OJ L214/3, 9.8.2008 Regulation (EC) No. 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators, OJ L211/1, 14.8.2009, 12 Electricity Regulation: Regulation (EC) No. 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No. 1228/2003, OJ L211/15, 14.8.2009 Regulation (EC) No. 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No. 1775/2005, OJ L211/36, 14.8.2009

343 153

14

23–24

Directives Council Directive 85/337/EEC of 27 June 1985 on the assessment of the effects of certain public and private projects on the environment, OJ L175/40, 5.7.1985 Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons, OJ L164/3, 30.6.1994 Directive 96/57/EC of the European Parliament and of the Council of 3 September 1996 on energy efficiency requirements for household electric refrigerators, freezers and combinations thereof, OJ L236/36, 18.9.1996 Directive 97/67/EC of the European Parliament and of the Council of 15 December 1997 on common rules for the development of the internal market of Community postal services and the improvement of quality of service, OJ L15/14, 21.1.1998 Directive 2000/55/EC of the European Parliament and of the Council of 18 September 2000 on energy efficiency requirements for ballasts for fluorescent lighting, OJ L279/33, 1.11.2000 Directive 2001/37/EC of the European Parliament and of the Council of 5 June 2001 on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco products – Commission statement, OJ L194/26, 18.7.2001 428

206–207

207

39

302

39

135

Table of Community Legislation Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market, OJ L283/33, 27.10.2001 Directive 2001/80/EC of the European Parliament and of the Council of 23 October 2001 on the limitation of emissions of certain pollutants into the air from large combustion plants, OJ L309/1, 27.11.2001 Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the energy performance of buildings, OJ L1/65, 4.1.2003 Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC, OJ L176/57, 15.7.2003 Cogeneration Directive: Directive 2004/8/EC of the European Parliament and of the Council of 11 February 2004 on the promotion of cogeneration based on a useful heat demand in the internal energy market and amending Directive 92/42/EEC, OJ L52/50, 21.2.2004 Directive 2004/17/EC of the European Parliament and of the Council of 31 March 2004 coordinating the procurement procedures of entities operating in the water, energy, transport and postal services sector, OJ L134/1, 30.4.2004 Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply, OJ L127/92, 29.4.2004 Directive 2005/32/EC of the European Parliament and of the Council of 6 July 2005 establishing a framework for the setting of ecodesign requirements for energy-using products and amending Council Directive 92/42/EEC and Directives 96/57/EC and 2000/55/EC of the European Parliament and of the Council, OJ L191/29, 22.7.2005 Security of Electricity Supply Directive: Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment, OJ L33/22, 4.2.2006 Energy Efficiency Directive: Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on energy end-use efficiency and energy services and repealing Council Directive 93/76/EC, OJ L114/64, 27.4.2006 Council Directive 2006/67/EC of 24 July 2006 imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products, OJ L217/8, 8.8.2006

156

33–34 39

148, 284

252, 254 24, 136

39

8

15 137 429

Table of Community Legislation Commission Directive 2006/111/EC of 16 November 2006 on the transparency of financial relations between Member States and public undertakings as well as on financial transparency within certain undertakings, OJ L318/17, 17.11.2006 Directive 2006/123/EC of the European Parliament and of the Council of 12 December 2006 on services in the internal market, OJ L376/36, 27.12.2006 Directive 2008/1/EC of the European Parliament and of the Council of 15 January 2008 concerning integrated pollution prevention and control, OJ L24/8, 29.1.2008 RES Directive: Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L140/16, 5.6.2009 Electricity Directive: Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC, OJ L211/55, 14.8.2009 Gas Directive: Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 203/55/EC, OJ L211/94, 14.8.2009

357 207 203, 212

12, 14

8

12

Repealed Legislation Council Directive 65/65/EEC of 26 January 1965 on the approximation of provisions laid down by Law, Regulation or Administrative Action relating to proprietary medicinal products, OJ 22/369, 9.2.1965 Regulation No. 359/67/EEC of the Council of 25 July 1967 on the common organization of the market in rice, OJ 174/1, 31.7.1967 Regulation (EEC) No. 1191/69 of the Council of 26 June 1969 on action by Member States concerning the obligations inherent in the concept of a public service in transport by rail, road and inland waterway, OJ L156/1, 28.6.1969 Commission Directive 80/723/EEC of 25 June 1980 on the transparency of financial relations between Member States and public undertakings, OJ L195/35, 29.7.1980 Council Directive 90/547/EEC of 29 October 1990 on the transit of electricity through transmission grids, OJ L313/30, 13.11.1990 Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas through grids, OJ L147/37, 12.6.1991 430

218 282

120 357, 381 146 146

Table of Community Legislation Council Directive 93/36/EEC of 14 June 1993 coordinating procedures for the award of public supply contracts, OJ L199/1, 9.8.1993 First Electricity Directive: Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity, OJ L27/20, 30.1.1997 First Gas Directive: Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas, OJ L204/1, 21.7.1998 Directive 98/43/EC of the European Parliament and of the Council of 6 July 1998 on the approximation of the laws, regulations and administrative provisions of the Member States relating to the advertising and sponsorship of tobacco products, OJ L213/9, 30.7.1998 (declared void by Case C-376/98, Germany v. Parliament and Council, [2000] ECR I-8419) State aid environmental guidelines, OJ C37/3, 3.2.2001

107

146–147

147

133 27, 355, 371, 373

431

Community Documents (In Chronological Order)

Official Journal Council decision 77/706/EEC of 7 November 1977 on the setting of a Community target for a reduction in the consumption of primary sources of energy in the event of difficulties in the supply of crude oil and petroleum products, OJ L292/9, 16.11.1977 Council Resolution of 16 September 1986 concerning new Community energy policy objectives for 1995 and convergence of the policies of the Member States, OJ C241/1, 25.9.1986 Proposal for a Council Directive concerning common rules for the internal market in electricity and common rules for the internal market in natural gas, COM (1991) 548 final, OJ C65/4, 14.3.1992 Council Resolution of 23 November 1995 on the Green Paper for a European Union Energy Policy, OJ C327/3, 7.12.1995 Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C220/15, 19.7.1997 Council Decision 1999/468/EC of June 1999 laying down the procedures for the exercise of implementing powers conferred on the Commission, OJ L184/23, 17.7.1999 Communication from the Commission: Services of general interests in Europe, OJ C17/4, 19.1.2001 Community Guidelines on State aid for environmental protection, OJ C37/3, 3.2.2001 (repealed)

31

31, 58

43, 237 12, 67 101 154 119, 305 27, 355, 371, 373

Community Documents (In Chronological Order) Commission Guidelines: State aid and risk capital, OJ C235/3, 21.8.2001 Council Decision of 25 April 2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder, OJ L130/1, 15.5.2002 Commission Decision 2003/796/EC of 11 November 2003 on establishing the European Regulators Group for Electricity and Gas, OJ L296/34, 14.11.2003 Community framework for State aid in the form of public service compensation, OJ C297/04, 29.11.2005 Commission decision of 28 November 2005 on the application of Article 86(2) EC to State aid in the form of public service compensation granted to certain undertakings entrusted with the operation of services of general economic interest, [2005] OJ L312/67, 29.11.2005 Council Decision 2005/905/EC 17 October 2005 on the signing by the European Community of the Energy Community Treaty, OJ L329/30, 16.12.2005 Decision No. 1364/2006/EC of the European Parliament and of the Council of 6 September 2006, OJ L262/1, 22.9.2006 Final adoption of the general budget of the European Union for the financial year 2007 (2007/143/EC, Euratom), OJ L77/I/1, 16.3.2007 Community Guidelines on State aid for Environmental protection, C82/1, 1.4.2008 Notice published pursuant to Article 27(4) of Council Regulation (EC) No. 1/2003 in Cases COMP/B-1/39.388 – German Electricity Wholesale Market and COMP/B-1/39.389 – German Electricity Balancing Market, OJ C146/34, 12.6.2008

48

70 12 367

367 25 13 4 56

12

COM Documents Competing the internal market: White Paper from the Commission to the European Council, COM (1985) 310 final, 14.6.1985 Commission working document: The internal energy market, COM (88) 238 final, 2.5.1988 Proposal for a Council Directive concerning common rules for the internal market in electricity and common rules for the internal market in natural gas, COM (1991) 548 final, 14.3.1992 434

132 32, 36, 71, 72, 146, 285

43, 237

Community Documents (In Chronological Order) Commission White Paper: An energy policy for the European Union, COM (95) 682 final, 13.12.1995 Proposal for a Directive of the European Parliament and of the Council on the promotion of electricity from renewable energy sources in the internal electricity market, COM (2000) 279 final, 10.5.2000 Commission Green Paper: Towards a European strategy for the security of energy supply, COM (2000) 769 final, 29.11.2000 Communication from the Commission to the Council and the European Parliament: Completing the internal energy market, COM (2001) 125 final, 13.3.2001 Communication from the Commission to the Council and the European Parliament: Completing the energy market. Proposal for a Directive of the European Parliament and of the Council amending Directives 96/92/EC and 98/30/EC concerning common rules for the internal market in electricity and natural gas, COM (2001) 125 final, 13.3.2001 Commission communication relating to the methodology for analyzing State aid linked to stranded costs, 26.7.2001 (no COM reference provided), document available at (last visited 24 March 2010) Commission staff working paper: Inventory of public aid granted to different energy sources, COM (2002) (COM number reference and date not available) Amended proposal for a Directive of the European Parliament and of the Council amending Directives 92/96/EC and 98/30/EC concerning rules for the internal markets in electricity and natural gas and Amended proposal for a Regulation of the European Parliament and of the Council on conditions for access to the network for cross-border exchanges in electricity, COM (2002) 304 final, 7.6.2002 Commission Communication to the Council and the European Parliament: Final report on the Green Paper ‘Towards a European strategy for the security of energy supply’, COM(2002) 321 final, 26.6.2002 Proposal for a Directive of the European Parliament and the Council concerning measures to safeguard security of natural gas supply, COM (2002) 488 final, 11.9.2002 Proposal for a Directive of the European Parliament and the Council concerning the alignment of measures with regard to security of supply for petroleum products, COM (2002) 488 final, 11.9.2002

32, 71

109 32, 35, 37, 54, 70 8, 43, 71 124–125, 148, 173, 174, 197, 201, 306

371 348

148

273 136

136

435

Community Documents (In Chronological Order) Commission Green Paper on services of general interest, COM (2003) 270 final, 21.5.2003 Commission Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment, COM (2003) 740 final, 10.12.2003 Communication from the Commission to the European Parliament and the Council: Energy Infrastructure and Security of Supply, COM (2003) 743 final, 10.12.2003 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: White Paper on services of general interest, COM (2004) 374 final, 12.5.2004 Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions: Winning the Battle Against Global Climate Change, COM (2005) 35 final, 9.2.2005 State aid action plan: Less and better targeted State aid: a roadmap for State aid reform 2005–2009, COM (2005) 107 final, 7.6.2005 Commission Green Paper: Energy Efficiency or Doing More with Less, COM (2005) 265 final, 22.6.2005 Communication from the Commission: The support of electricity from renewable energy sources, COM (2005) 627 final, 7.12.2005 Commission Green Paper: A European Strategy for Sustainable, Competitive and Secure Energy, COM (2006) 105 final, 8.3.2006 Communication from the Commission: Action Plan for Energy Efficiency: Realising the Potential, COM (2006) 545 final, 19.10.2006 Communication from the Commission to the Council and the European Parliament: Prospects for the internal gas and electricity market, COM (2006) 841 final, 10.1.2007 Communication from the Commission to the Council and the European Parliament: Priority Interconnection Plan, COM (2006) 846 final, 10.1.2007 Communication from the Commission: Inquiry pursuant to Article 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report), COM (2006) 851 final, 10.1.2007 436

115, 303, 304, 306, 307 71, 190, 286, 298 12, 167, 227, 237, 254, 273

115, 303

35 344, 372 38, 278 104, 109, 112, 203, 278 7, 12, 32, 57, 58, 141, 329, 330 38 174, 236, 238 286

3, 26, 148

Community Documents (In Chronological Order) Communication from the Commission to the European Council and the European Parliament: An energy policy for Europe, COM (2007) 1 final, 10.1.2007 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/54/EC concerning common rules for the internal market in electricity, COM (2007) 528 final, 19.9.2007 Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas, COM (2007) 529 final, 19.9.2007 Proposal for a Regulation of the European Parliament and of the Council establishing an Agency for the Cooperation of Energy Regulators, COM (2007) 530 final, 19.9.2007 Proposal for a Regulation of the European Parliament and of the Council Amending Regulation (EC) No. 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity, COM (2007) 531 final, 19.9.2007 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No. 1775/2005 on conditions for access to the natural gas transmission networks, COM (2007) 532 final, 19.9.2007 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Accompanying the Communication on ‘A single market for 21st century Europe’. Services of general interest, including social services of general interest: a new European commitment, COM (2007) 725 final, 20.11.2007 Communication from the Commission to the Council and the European Parliament: On a first assessment of national energy efficiency action plans as required by Directive 2006/ 32/EC on energy end-use efficiency and energy services, Moving forward together on energy efficiency, COM (2008) 11 final, 23.1.2008 Proposal for a Directive of the European Parliament and of the Council on the use of energy from renewable sources, COM (2008) 19 final, 23.1.2008 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: 20 20 by 2020 Europe’s climate change opportunity, COM (2008) 30 final, 23.1.2008

32, 34, 57, 262 148, 175, 178

148 148

148

148

116, 303, 304

38 219

4, 36, 57 437

Community Documents (In Chronological Order) Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Second Strategic Energy Review. An EU energy security and solidarity action plan, unofficial version published 13.11.2008, available at (last visited 24 March 2010)

4, 32, 37

Commission Cases Commission Decision 91/50/EEC 16 January 1991 relating to a proceeding under Article 85 (now 81 EC) of the EEC Treaty (IV/32.732 – IJsselcentrale and others), OJ L28/32, 2.2.1991 Commission Decision 93/126/EEC of 22 December 1992 relating to a proceeding under Article 85 (now 81 EC) of the Treaty and Article 65 of the ECSC Treaty (IV/33.151 – ‘Jahrhundertvertrag’) (IV/33.997 – VIK-GVSt), OJ L50/14, 2.3.1993 Commission Decision 94/285/Euratom of 21 February 1994 relating to a procedure in application of the second paragraph of Article 53 of the Euratom Treaty, OJ L122/30, 17.5.1994 Aide d’Etat No. N 550/2000 – Belgique. Certificats verts dans le secteur de l’electricite´, SG 2001 D/ 290545, 25.7.2001 State aid No. N 6/A/2001 – Ireland, Public Service Obligations imposed on the Electricity Supply Board with respect to the generation of electricity out of peat, COM (2001) 3265 final, 30.10.2001 Statsstøttesag nr. N 278/2001 – Danmark. Elreformen – Nye VEbaserede anlæg (Trans.: State Aid No. 278/2001 – Denmark. The electricity reform – New RE-based power plants), 20.6.2001 Aid C 31/2002 (ex N 149/2000) – Transitional regime for the electricity market. Invitation to submit comments pursuant to Article 88(2) of the EC Treaty, OJ C222/2, 18.9.2002 (see also Communication from the Commission, OJ C175/8, 15.7.2005) Statligt sto¨d N 789/2002 – Sverige. Elcertifikatsystemet [Trans.: State Aid No. 789/2002 – Sweden. The electricity certificate scheme], COM (2003) 382 final, 5.2.2003 Irish CADA: State aid N 475/2003 – Ireland, Public Service Obligations in respect of new electricity generation capacity for security of supply, COM (2003) 4488 final, 16.12.2003

438

122

122 381 354 267, 311, 355

359, 373

383, 433

274, 278, 298, 311, 324,

355 275, 286, 305, 323, 366, 399

Community Documents (In Chronological Order) State aid N 143/2004 – Ireland, Public Service Obligation – Electricity Supply Board (ESB), COM (2004) 2632 final, 14.7.2004 EDP/ENI/GDP: Commission decision declaring a concentration to be incompatible with the common market, Case No. COMP/M.3440, COM (2004) 4715 final, 9.12.2004 Commission decision of 22 September 2004 on the State aid which the United Kingdom is planning to implement for British Energy plc, 2005/407/EC, OJ L142/26, 6.6.2005 Staatliche Beihilfe N 320/2004 – Deutschland. Umstrukturierungsplan fu¨r den deutschen Steinkohlenbergbau 2006–2010 [Trans.: State Aid No. 320/2004 – Germany. Restructuring plan for the German coal industry 2004–2010), K (2005) 1781 endg., 22.6.2005 Communication from the Commission, pursuant to Article 88(2) of the EC Treaty, to the other Member States and interested parties, State aid C 31/2002 (ex N 149/2000), OJ C175/8, 15.7.2005 (see also Invitation to submit comments in Aid C 31/2002, OJ C222/2, 18.9.2002) E.ON/MOL: Commission decision declaring a concentration to be compatible with the common market and the EEA Agreement, Case No. COMP/M.3696, COM (2005) 5593 final, 21.12.2005 Commission decision of 4 April 2006 on the State aid which the United Kingdom is planning to implement for the establishment of the Nuclear Decommissioning Authority, 2006/643/EC, OJ L268/37, 27.9.2006 Gaz de France/Suez: Commission decision declaring a concentration to be compatible with the common market and the EEA Agreement, Case No. COMP/M.4180, COM (2006) 5419 final, 14.11.2006 Commission decision of 24 April 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers – Case No. C 7/2005, OJ L219/9, 24.8.2007 Commission decision of 25 September 2007 on State aid awarded by Poland as part of Power Purchase Agreements and the state aid which Poland is planning to award concerning compensation for the voluntary termination of Power Purchase Agreements, COM (2007) 4319 final, 25.9.2007

311

13 383, 384

377

383

13

383–384

13

266, 311

252

439

Community Documents (In Chronological Order) Commission decision of 5 March 2008 on the granting or maintaining in force by the Hellenic Republic of rights in favour of Public Power Corporation S.A. for extraction of lignite, Case COMP/B-1/38.700, unofficial English translation (only the Greek text is authentic), (last visited 24 March 2010). An English summary of the decision is published in OJ C93/3, 15.4.2008

211

Various Community Documents Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Measures to Secure Electricity Supply, 16.1.2004, (last visited 24 March 2010) Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: Public service obligations, 16.1.2004, (last visited 24 March 2010) Note of DG Energy & Transport on Directives 2003/54/EC and 2003/55/EC on the internal market in electricity and natural gas: The role of the regulatory authorities, 14.1.2004, (last visited 24 March 2010) Commission Staff Working Paper, Interpretative note on Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas: The regulatory authorities, 22.1.2010 (last visited 18 March 2010) Eurostat, European Electricity Market Indicators of the Liberalisation Process 2005–2006 (Statistics in focus, Environment and energy, 88/2007) Eurostat Yearbook 2008, Europe in Figures (data extracted in August 2007) Paper from the High Representative and the European Commission to the European Council: Climate change and international security, S113/08, 14.3.2008

440

253, 270, 276, 278, 298

120, 323

176

173, 175 5 5, 26, 27 36

Other Documents

EFTA Surveillance Authority Decisions EFTA Surveillance Authority Decision of 16 July 2008 on Test Centre Mongstad (Norway), 503/08/COL. High-Level Policy Documents Presidency Conclusions Presidency Conclusions from the Lisbon European Council meeting held on 23 and 24 March 2000, 24.3.2000 (100/1/00). Presidency Conclusions from the European Council meeting held on 23 and 24 March 2006 on establishing an energy policy for Europe, 24.3.2006 (7775/06). Presidency Conclusions from the Brussels European Council held on 8 and 9 March 2007, 2.5.2007 (7224/1/07). Council Documents Common position adopted by the Council with a view to the adoption of a Directive of the European Parliament and of the Council concerning rules for the internal market in electricity and repealing Directive 96/92/EC, document 15528/02, 29.1.2003. European Parliament Resolutions European Parliament legislative resolution on the proposal for a European Parliament and Council directive amending Directives 96/92/EC and 98/30/EC

Other Documents concerning common rules for the internal market in electricity and natural gas, P5_TA(2002)0106, 13.3.2002. International and National Law International Law United Nations Framework Convention on Climate Change, signed in New York on 9 May 1992. Energy Charter Treaty, signed in Lisbon on 17 December 1994. National Legislation and Preparatory Work Energiloven 29. juni 1990 nr. 50 (the Norwegian Energy Act (Act No. 50 of 29 June 1990)). Forskrift 7. mai 2002 nr. 448 om systemansvaret i kraftsystemet (Norwegian Regulation No. 448 of 7 May 2002 on the System Responsibility for the Electricity System). St prp No. 1 (2002–2003) for the Budget Term 2003, Ministry of Oil and Energy (Norwegian Parliamentary bill). St. meld. nr. 18 (2003–2004) Om forsyningssikkerheten for strøm mv. (Norwegian White Paper No. 18 (2003–2004) on security of electricity supply, etc.). SOU 2005:4, Liberalisering, regler och marknader (Electricity market report to the Swedish government). Erneuerbare-Energien Gesetz vom 21. Juli 2004 (BGBl. I S. 1918) zuletzt gea¨ndert durch Artikel 1 des Gesetzes vom 7. November 2006 (BGBl. I S. 2550) (‘EEG’). Sa¨hko¨markkinalaki (386/1995) (the Finish Electricity Market Act (386/1995)). Loi relative a` l’organisation du marche´ de l’e´lectricite´, 29 AVRIL 1999, Moniteur Belge, 11.5.1999 (ed. 2) (Belgian Law of 29 April 1999 on the organization of the Electricity market). Loi de 12 Aout 2003 visant a` modifier l’article 15/5 de la loi du 12 avril 1965 relative au transport de produits gazeux et autres par canalizations, Moniteur Belge, 9.9.2003 (ed. 1) (Belgian Law of 12 August 2003 amending Law of 12 April 1965). Authorizations and Guidelines Godkjenning av reservekraft til bruk under svært anstrengte kraftsituasjoner, 1. september 2006 (the approval of Norwegian regulator NVE of the reserve capacity arrangement proposed by TSO Statnett pursuant to section 22a of Norwegian Regulation No. 448 of 7 May 2002 on the System Responsibility for the Electricity System). Anleggskonsesjon meddelt Statnett SF 15. juni 2007 (authorization for Norwegian TSO Statnett to build reserve capacity gas plant in Aura municipality, Norway). 442

Other Documents Anleggskonsesjon meddelt Statnett SF 4. september 2007 (authorisation for Norwegian TSO Statnett to build reserve capacity gas plant in Aukra municipality, Norway). Press Releases and Speeches Antitrust: Commission initiates formal proceedings against Electrabel and EDF for suspected foreclosure of the Belgian and French electricity markets, 26 July 2007 (MEMO/07/313). Antitrust: Commission welcomes E.ON proposals for structural remedies to increase competition in German electricity market, 28 February 2008 (MEMO/08/132). Antitrust: Commission market tests commitments proposed by E.ON concerning German electricity markets, 12 June 2008 (MEMO/08/396). EU Energy Commissioner Andris Piebalgs, Speaking Notes welcoming the agreement between Gazprom and Naftogaz, 04 January 2006 (SPEECH 06/01). Energy Council, 27 February 2008 (MEMO/08/127). Newspaper Articles (In Chronological Order) Gas power stations halted to help coal industry (BBC News, 3.12.1997, author not identified), (last visited 24 March 2010). Krugman, Paul. Reckonings: The Unrefined Truth. Opinion published in The New York Times, 9.5.2001, (last visited 24 March 2010). Porter, Adam. Global Refinery Shortage Shifts Power Balance. BBC News, 2.10.2005, (last visited 24 March 2010). Landler, Mark. Europe’s Image Clashes with Reliance on Coal. The New York Times, 20.6.2006, (last visited 24 March 2010). Rosenthal, Elisabeth. Europe Turns Back to Coal, Raising Climate Fears. The New York Times, 23.4.2008, (last visited 24 March 2010). Friedman, Thomas L. 9/11 and 4/11. Opinion published in The New York Times, 20.7.2008, (last visited 24 March 2010).

443

Index

A Adequacy, 6, 7, 29, 44–47, 49–51, 82, 176, 186, 187, 191, 248, 259, 269, 273, 274 Adequate generation capacity, 6–8, 155, 258, 392 Adequate transmission capacity, 181, 183 Administrative burden, 197, 220 Administrative procedures, 157, 158 Advertising, 100, 133, 134 Affect trade, 284, 330, 348, 349 Affordability, 307 Affordable prices, 49, 54, 57, 58 Agency for the Cooperation of Energy Regulators (ACER), 12, 49, 149, 153, 154, 176, 178 Aid recipient, 345, 349, 355, 356, 366 Almelo, 76, 118–121, 123, 124, 306, 315, 326 Altmark, 75, 118–121, 123, 124, 275, 305, 306, 315, 323, 326, 349, 350, 362–368, 370 Ancillary services, 181, 186, 187, 189, 272 Anthropogenic greenhouse gas emissions, 34, 56, 57, 113, 211, 294 Arbitrary discrimination, 77, 218, 219, 221, 242 Attributes of electricity markets, 5, 6, 46–50, 269

Authorization procedure, 16, 151, 166, 175, 177, 197–222, 238, 243, 247, 249, 251, 253, 254, 256, 261, 268–270, 273–276, 279, 286–289, 292, 295, 300, 318, 319, 325, 326, 328, 330, 336, 342, 365, 394–397, 399 B Balance between supply and demand, 8, 42, 155, 182, 185–187, 190, 194, 248, 253, 258, 259, 261, 263, 271, 273, 277, 281, 282, 284, 286, 288, 295, 296, 306, 311, 322, 335, 346, 392, 395 Balancing, 3, 12, 21, 58, 68, 70, 72, 78, 97, 185–191, 229, 277, 372, 384, 385, 389 Balancing services, 186–187, 189, 190 Balancing test, 372, 384, 385 The Barcelona Summit, 25 Barrier to entry, 199 Base-load, 47, 252, 261, 263, 269, 276 Best available techniques, 212 Bilateral agreements, 169 Bilateral investment treaties, 224 Bilateral trade, 228, 230 Biomass, 27, 109, 292 Blackouts, 45, 94, 95, 259 Brussels European Council, 4, 12, 35, 36, 174 Budget autonomy, 175

Index Building heating, 158 Buy local, 77, 105 C California electricity crisis, 45, 46 Campus oil, 31, 76–93, 95, 98–100, 102, 103, 105, 111, 112, 126, 160, 258, 260, 271, 284, 287, 295, 336 Capacity extensions, 181 margins, 187–191, 253, 262, 271–281, 398 mechanisms, 272, 276 options, 274, 278, 279 payments, 190, 274, 276, 278, 279 requirements, 276, 278 rights, 213, 214, 216, 320 subscriptions, 276 Carbon capture and storage (CCS), 37, 38, 55, 70, 73, 139, 144, 210, 212, 293–295, 370, 371, 399 Carbon-based fuel sources, 211 CCS technologies, 55, 70, 73, 139, 293, 370, 371 Central coordination, 41, 277 Central planning, 41–43, 199, 398 Certificates of origin, 107 CHP plants, 253, 292 Citiworks, 8, 10, 149, 318, 320, 322, 323, 328, 361 Clear definitions of roles and responsibilities, 16, 166, 170, 193, 252, 255, 258, 259, 392 Climate change, 3, 4, 29–39, 42, 45, 56, 57, 70, 139, 203, 247, 306, 378, 390 CO2 emissions, 35, 36, 38, 51, 293, 295 Coal power, 4, 266, 376–378 subsidies, 375, 377 Coal Industry Regulation, 377 Cogeneration, 14, 156–158, 185, 219, 220, 292, 297, 372, 373, 398 Cogeneration Directive, 14, 15, 70, 139, 140, 156, 158, 220, 289, 292, 297 Combustion, 5, 34, 37, 38, 158 Comitology procedure, 154 Commodity markets, 46, 147, 179, 390 Common market, 13, 61, 67, 117, 132, 327, 343, 369, 372, 376, 377, 384

446

Community support scheme, 157 Comparability, 210, 215–219 Comparable situations, 209, 210, 214, 215, 218–220, 301 Competences, 9, 29, 53, 66, 116, 129–132, 135, 136, 139–141, 144, 146, 161, 171, 174, 177, 178, 202, 211, 356 Competition authorities, 172, 176 Competitive electricity markets, 3, 6, 41, 44–51, 125, 149, 160, 166, 186, 187, 234, 260, 272, 287, 307, 393 Competitive market prices, 99, 100 Competitiveness, 3, 5, 15, 21, 31, 33, 42, 51, 53, 58, 65–68, 161, 298, 336, 337, 389, 396–398 Conferral of powers, 66, 129–132 Constitutional Treaty, 143–145 Consumer protection, 8, 58, 76, 125, 134, 150 Continuity of supply, 44, 47, 123–125, 258, 268, 306, 394 Conventional energy sources, 37, 297 Coordinated development, 181 Cost of capital, 225 Cost-efficient, 5, 38, 58, 72 Cross-border, 7, 25, 43, 113, 154, 199, 205, 213, 229, 230, 238, 256, 284, 287, 320, 390, 392 Cross-border exchanges in electricity, 14, 148, 154, 283 Cross-subsidization, 171 Customers, 23, 25, 43, 44, 48–50, 54, 55, 58, 67, 68, 94, 104, 112, 121, 123, 124, 150, 153, 156, 160, 169, 178, 191, 227, 236, 237, 252, 256–260, 268, 283, 288, 306–309, 311–313, 315, 317, 318, 326, 329, 333, 355, 359, 360 D Dassonville, 76, 80, 105, 282 Day-ahead markets, 229 Declarations of policy, 239, 242, 243 Demand-side measures, 190, 194, 252, 261, 266, 288, 290, 292, 296–298, 324, 330 Demand-side rationing, 47, 273, 280 Demand-side-management, 253, 254, 346 Depreciation costs, 373 Development of trade, 117, 120, 122, 299, 317, 321, 324–331, 333, 367

Index Differentiated tax schemes, 342 Direct aid measures, 350 Directly discriminatory, 80, 105, 313 Discriminatory, 102, 103, 105, 106, 108, 110, 146 Distortions of competition, 133, 136, 142, 161, 192, 193, 202, 204, 221, 287, 361, 372, 384, 396 Distributed generation, 176, 220 Distribution, 8, 23, 24, 30, 70, 95, 104, 107, 122, 123, 125, 150, 153, 173, 178–180, 183, 184, 189, 213, 220, 236, 308, 312, 322, 328 Distribution system operators (DSOs), 153, 166, 171, 179–181, 183–185, 188, 190, 191, 193, 194, 282, 314, 352, 356, 360 Dominant influence, 357, 358 Duly sustained, 198, 205 E Economic aims, 159 Economic development, 67, 68, 73 Economic efficiency, 8, 42, 48, 167, 203, 205, 221, 236, 242, 287, 298, 328, 336, 389, 397, 398 Economic impact, 72, 211 Economic interests, 16, 62, 70, 84, 93, 95, 115–127, 151, 160, 172, 214, 219, 249, 273, 275, 295, 299–315, 317–333, 335, 364, 365, 367, 371 Economic objectives, 68, 72, 202, 394 ECSC Treaty, 122, 143, 342, 351, 375–377, 380, 382 Effect on trade, 349, 353, 372 Electricity Directive, 8, 12, 14–16, 23–25, 27, 43, 57, 70, 104, 107, 120, 124, 125, 146–155, 166, 169–189, 191–193, 197–202, 204, 206–211, 213–216, 218–221, 223, 226, 227, 235, 237, 238, 242, 243, 247–249, 251–261, 263, 267–272, 274–276, 278–289, 292–296, 299–309, 312–315, 317–333, 335–337, 342, 345, 346, 350, 362–368, 371, 385, 391, 393–397 Electricity Directive 2003/54/EC, 10, 43, 146, 148, 149, 151, 153, 173–176, 179, 180, 185, 197, 198, 204, 206, 211, 212, 219, 247, 253, 255, 265–267, 276, 284, 295, 299, 300, 302, 307, 320, 322, 323, 371

Electricity flows, 25, 166, 183 generation capacity, 5, 8, 42, 44, 45, 47, 48, 83, 103, 111, 125, 166, 172, 177, 179, 182, 187, 189, 198–200, 202, 206, 216, 217, 222, 225, 241, 242, 251, 268–271, 274, 303, 309–313, 360, 368 generators, 5, 187, 192, 212, 227, 229, 232, 274, 278, 322, 323, 355 grids, 14, 25, 29, 43, 147, 149, 151, 153, 155, 183, 213, 216, 273 imports, 25, 105, 112, 113, 254, 276, 281–286 industry interests, 153, 174, 175 interruptions, 67, 68, 258, 288, 395 prices, 41, 44, 47–49, 58, 71, 225, 230, 231, 236, 237, 255, 259–261, 272, 287, 288, 295, 306–309, 312, 313, 315, 335, 336, 356, 396, 398 regulation, 14, 24, 25, 146, 149, 154–155, 182, 226, 257, 282, 283 retail markets, 24, 49, 153, 227, 237, 259 sales, 51, 178 spot markets, 6, 11, 44, 229, 230, 274, 389, 398 spot-market pricing, 44, 46 supply, 8, 15, 16, 24, 33, 42, 44, 53, 55, 62, 67, 68, 71, 77, 83, 92, 104, 105, 122, 124, 135–137, 145, 148, 155–156, 160, 166, 167, 170, 171, 180, 184–187, 189–195, 204, 213, 223, 224, 226–228, 231–235, 237, 238, 242, 243, 248, 252, 253, 255, 257–259, 262–267, 269–286, 289, 296–298, 305–309, 312–314, 337, 345, 346, 353, 355, 391–395 supply contracts, 107, 213, 214 wholesale markets, 67, 227–231, 238, 241, 288 Electricity Regulation (EC) No. 714/2009, 14, 154 Electricity Regulation No. 1228/2003, 14, 148, 154, 155 Eligible customers, 308, 317, 318, 326, 329 Embargo, 30, 31 Emissions, 6, 15, 21, 33–38, 51, 56, 57, 69, 70, 113, 139, 172, 211, 293–295, 306, 310, 355, 390, 396, 399 Empirical evidence, 45, 391 Employment conditions, 205 End-user supply, 23, 24, 169

447

Index End-users, 23, 25, 43, 44, 48, 49, 67, 70, 121, 135, 229, 236, 237, 257, 259, 260, 263, 307–309, 311, 313 Energy Charter Treaty, 224 Energy conservation, 322, 330 consumption, 4, 31, 32, 36–38, 297 dependency, 38, 51, 211, 247, 262, 264, 294, 298, 377 disruptions, 96 efficiency, 15, 36–39, 55, 73, 104, 109, 140, 143, 156, 158, 176, 186, 204, 206, 220, 252–254, 259, 278, 292, 294–297, 306 import dependency, 3, 29–39, 88, 262–264, 390 losses, 186, 188, 189 mix, 7, 27, 29, 141, 142, 170, 205, 211, 216, 219, 221, 263–265, 267, 269, 276, 277, 312, 330, 391 mix diversification, 72, 262–267 monopoly cases, 91, 100, 118, 121–123, 126, 127, 129, 146, 169, 306, 315, 329 products, 54, 62, 71, 75, 86–93, 101, 111, 157, 280, 379 regulatory authorities, 176, 192, 193, 352 savings, 15, 38, 47, 49, 139, 143, 158, 294, 295, 297, 399 Energy Services Directive, 70, 139, 140, 294 Energy-only markets, 6, 44, 46–48, 51, 170, 210, 229, 269, 272, 277 Environmental guidelines, 27, 371–373 Environmental integration, 56, 329 Environmental interests, 16, 33, 62, 70, 73, 103–110, 112–114, 116, 124, 136, 140, 151, 152, 156, 160, 161, 165, 186, 198, 199, 212, 219–220, 225, 235, 241, 243, 248, 251, 253, 277, 278, 291–298, 302, 306, 310, 330, 332, 336, 337, 364, 368, 370–373, 396 Environmental policy, 107, 139, 298 Environmental protection, 5, 27, 33, 55, 56, 66, 68–71, 75, 83, 105, 106, 110, 124, 139, 159–161, 204, 242, 247, 291–293, 296, 298, 303, 306, 309, 329, 330, 333, 355, 370–373, 394, 396, 399 Environmental sustainability, 5, 15, 51, 53, 56, 57, 298 Equal treatment, 208–210, 215, 224, 285 Essent, 75, 324, 349, 351, 355, 356, 359

448

Essential public services, 84, 86 Establishment and functioning of the internal market, 103, 130, 133, 135, 136, 143, 144, 155, 159, 161, 166, 198, 202, 221, 223, 242, 255, 286, 328, 392 EU competitiveness, 8, 43, 48, 58, 86, 159, 165, 397 EU energy consumption, 4, 31, 32, 36–38, 297 EU energy solidarity, 137 Euratom, 4, 61, 376, 378–383, 385 Euratom Treaty, 17, 61, 142, 143, 265, 294, 342, 375, 376, 378–386, 398 European Coal and Steel Community (ECSC), 61, 122, 142, 143, 342, 351, 375–378, 380–382 European Council, 4, 7, 12, 31, 32, 34–36, 42, 132, 141, 147, 148, 174, 329, 330 European Economic Community (EEC), 14, 30, 31, 34, 39, 61, 62, 68, 78, 80, 84, 100, 107, 120, 122, 141, 146, 206, 218, 282, 329, 357, 376, 378, 381, 382 European integration, 61, 62 European Network for Transmission System Operators for Electricity (ENTSO-E), 154 European Parliament, 8, 12–15, 23, 32–34, 39, 56, 71, 109, 120, 124, 133, 134, 136, 143, 144, 146–148, 153, 173–175, 178, 190, 197, 201, 203, 207, 212, 219, 237, 252, 254, 286, 293, 298, 302, 304, 306, 326 European Regulators’ Group for Electricity and Gas (ERGEG), 12, 26 European solidarity, 31 Exclusive competence, 137, 138 Exclusive import rights, 122 Exclusive rights, 90, 96, 115–118, 127, 301, 305, 308, 327, 367 Exclusive supply rights, 41, 120, 121, 308 Existing aid systems, 344 Externalities, 51 F Feed-in tariff, 69, 103–105, 108–113, 252, 277, 296, 349, 352, 353, 361, 396–398 Ferring, 305, 362, 363, 367 Final consumption, 157, 398

Index Final customers, 24, 25, 48, 54, 55, 104, 112, 156, 160, 178, 191, 257, 268, 312, 329 Financial markets, 230 Financial power markets, 23, 45, 230, 231, 233, 398 Financial trade, 228–231 Fossil fuels, 4, 21, 27, 30, 38, 51, 262, 266, 293, 390 Free market access, 200, 221 Free movement of capital, 89–91, 222, 379, 392 of goods, 69, 76, 82, 84, 86, 89, 90, 95–97, 100, 103, 105, 106, 109, 118, 124, 126, 127, 133, 142, 161, 207, 282, 336, 353 restrictions, 78, 103, 110, 126–127, 256, 258, 265, 268, 285, 287, 319, 372 Freedom of establishment, 89, 149, 197–199, 209, 220–222 Fuel diversification, 263 Full market opening, 150, 308 Functionally independent, 172, 175 Fundamental interest of society, 91–95, 111, 125, 160, 258, 259, 395 G Gas import dependency, 4, 33, 265, 330 markets, 23, 91, 147, 148, 179 plants, 27, 210–212, 265, 266, 280, 292, 294, 330 prices, 33, 51 Gas Directive 2003/55/EC, 120, 147, 148, 176, 253, 257, 270, 278, 298, 323, 324 Gate closure, 185 General block exemption Regulation, 323, 371, 372 Generation capacity adequacy, 7, 269 planning, 182 reserves, 49, 72, 187, 189–192, 194, 242, 262, 271, 272, 275, 277, 278, 393 Generation of electricity, 3, 5, 8, 14–17, 23, 26, 27, 32, 44, 47, 50, 55, 58, 73, 111, 123, 139, 154, 157, 165, 166, 173, 183, 186, 193, 207, 231, 267, 294, 311, 335, 337, 355, 378, 389, 391, 397 Geographical markets, 50, 286 Geopolitical, 21, 29–31, 36, 87, 88, 92, 211, 262, 377

Geothermal, 27, 292 GHG concentrations, 34, 36, 57 Global average temperatures, 35 Golden Shares, 88, 89, 92–94, 101, 111 Goods, 38, 44, 48, 67, 69, 75–77, 82, 84, 86, 89, 90, 95–100, 102, 103, 105, 106, 108, 109, 118, 119, 124, 126, 127, 133, 135, 142, 161, 179, 197, 207, 252, 282, 336, 344, 347, 348, 351, 353, 361 Grandfathered priority rights, 216 Greenhouse gas (GHG) emissions, 6, 15, 21, 34, 36–38, 56, 57, 69, 70, 113, 139, 211, 293, 294, 306, 310, 390, 396, 399 Grid access, 153, 157, 158, 183, 185, 186 availability, 26, 148 operators, 14, 44, 104, 183, 191, 194, 282, 313, 314, 318, 352, 355, 360 optimal investments, 360 optimal location, 182, 360 security, 166 Grid-to-grid competition, 13 Gross final consumption, 157, 398 Guarantees of origin, 157, 219 H Harmonization, 26, 81, 82, 109, 136, 138, 141, 174, 193, 194, 205, 222, 259, 273, 283, 319, 337 Health policy, 130, 133 Heat energy, 158 High-efficiency cogeneration, 158, 220, 292, 372, 373, 398 Household customers, 237, 307–309, 315 Human health, 82, 95, 139 Hydrocarbons, 207 Hydropower, 27, 37, 45, 72, 187, 262, 264, 292, 295 I Impact on trade, 330 Imperfect competition, 235, 270 Import and export monopolies, 121, 123 Import restrictions, 77, 78, 80, 284 Imputability, 356–360 Incentive schemes, 272, 285, 288

449

Index Incentives, 16, 37, 44, 45, 47, 49, 103, 119, 152, 154, 181, 182, 225, 242, 247–249, 255, 264, 267–272, 274, 278, 318, 326, 342, 345, 346, 357–359, 361, 362, 365, 372, 377 Incumbents, 26, 154, 173, 178, 202, 210, 211, 235, 256, 287, 328, 329 Independent agencies, 172 Independent system operator (ISO), 152, 179 Independent transmission operator (ITO), 152, 153, 179, 181 Indicative targets, 156, 157, 296, 297 Indigenous energy sources, 141, 266, 267, 371 Indirect aid measures, 350 Indistinctly applicable measures, 107 Infant new technologies, 253, 291–293 Input fuel, 6, 158 Institutional freedom, 172, 175, 177 Institutional organization, 171, 172, 175, 193, 227, 233 Instruments of intervention, 16, 172, 176, 177, 247, 248, 268 Integrated companies, 152, 153 Integration, 7, 15, 26, 31, 50, 56, 61, 62, 66, 69, 71–73, 92, 103, 124, 144, 146, 154, 161, 176, 198, 199, 218, 224, 286, 291, 292, 298, 329, 349, 358, 382, 389 Interconnected systems, 181, 183 Interconnection, 25, 26, 71, 72, 143–145, 155, 183, 253, 285, 286, 322 Interconnector investments, 25, 155, 248, 254, 281–286 Interconnectors, 25, 182, 183, 235, 248, 254, 257, 281, 285, 286, 290, 322, 324 Intergovernmental Conferences, 131, 141 Intergovernmental Panel on Climate Change (IPCC), 34, 35, 38 Interim targets, 157 Internal electricity market, 3, 4, 7–9, 11–15, 17, 21, 23–27, 37, 42, 43, 50, 53, 55, 71, 73, 80, 83, 103, 109, 114, 116, 120, 124, 125, 127, 129–158, 170–176, 178, 180, 188, 192, 193, 197, 198, 201, 230, 237–239, 241, 243, 247, 253, 257, 263, 270, 276, 278, 281–288, 291, 294, 296–298, 303, 306, 320, 323, 324, 328, 336, 337, 341, 342, 345–346, 348, 356, 359, 376, 379, 380, 385–386, 390–393, 397–399

450

Internal gas market, 23, 148, 213 Internal market trade, 202, 287, 396 International agreements, 224 International cooperation, 36 International Energy Agency, 6, 31, 42, 44, 46, 48, 54, 58, 81, 167, 200, 203, 225–227, 273 Interoperability, 181 Intra-Community trade, 97, 105, 107 Intra-union trade, 76, 96, 97, 112, 287, 321 Investment adequacy, 29 aid, 249, 370, 372, 373 decisions, 6, 8, 11, 41, 71, 152, 166, 169–195, 198, 225, 254, 280, 288, 398 incentives, 248, 326, 345, 357–359, 361, 362, 377 obligations, 179, 181, 248, 286, 309–313, 315, 325, 326, 362 regulation, 5, 9, 50–51, 58 Investor uncertainty, 50, 58, 170, 226, 234, 236, 237, 253, 255 Irish CADA, 273, 275, 278, 279, 286, 298, 305, 311, 323–325, 366, 399 Isolated markets, 72, 349 J Joint projects, 349 K Keck, 76 Kyoto protocol, 69, 70 L Land use, 33, 204, 206 Legal basis, 9, 63, 104, 131, 132, 134–142, 144, 145, 155, 161, 186, 192, 202, 210, 221, 324, 392, 393 Legal certainty, 102, 214, 354 Legally distinct, 172, 175 Level playing field, 136, 150, 179, 241, 344 Liberalization, 42, 43, 45, 129, 146, 147, 215, 216, 237, 306, 308, 315, 355, 356, 379 Liquid wholesale markets, 224, 227–234, 238, 239, 270 Lisbon summit, 42, 147

Index Load, 46, 47, 67, 95, 119, 189, 252, 259, 273 Load factor, 46 Loans, 225, 348, 351 Locational signals, 154, 181, 182, 360 Long-term power purchase contracts, 252, 255, 256, 348, 352, 398 Long-term price signals, 230–232 Loss of load, 273 M Managing energy flows, 181 Mandatory national overalls targets, 157, 296 Mandatory requirements, 69, 76, 77, 85, 93, 95, 96, 105–107, 265 Manifest errors, 118, 119, 276, 345, 369 Manufacturing of goods, 179 Margin of discretion, 103, 118, 171, 172, 206–208, 219, 222, 235, 256, 267, 289, 309, 311, 319, 324, 365, 393, 396 Marginal costs, 47, 185, 237, 255, 261, 274 Market abuse, 50, 228–230, 235, 237 access, 166, 167, 199–203, 205, 211, 216, 218, 221, 235, 242, 252, 254, 256 concentration, 26, 148, 235, 270 facilitation, 9, 16, 163–243, 247, 256, 270, 288, 298, 337, 391–393 failures, 48, 50, 148, 170, 234, 235, 239, 255, 270, 289 integration, 26, 50, 71–73, 144, 154, 161, 198, 199, 286, 349, 389 intervention, 3, 9, 17, 151, 165, 247, 288, 289, 328, 336, 337, 364, 391, 394–397 liberalization, 41–43, 45, 215 liquidity, 231–233 opening, 7, 150, 215, 308 participants, 8, 12, 13, 16, 44, 46, 48–50, 55, 125, 135, 136, 147, 155, 166, 170, 171, 179, 180, 188, 189, 191–194, 198–200, 202, 203, 206, 210, 211, 216, 218, 219, 222, 225, 228–233, 235, 238, 241–243, 251, 252, 255, 256, 261, 263, 268, 269, 273, 275, 276, 288, 289, 299, 308, 310, 311, 313, 314, 318, 322, 324, 326, 331, 332, 346, 348, 349, 352, 355, 356, 358, 359, 361, 362, 390, 393, 396, 398

power, 23, 45, 50, 67, 154, 230, 231, 233, 261, 286, 398 price signals, 154, 256 Market-based investments, 3, 8, 48, 165, 167, 170, 193, 194, 199, 203, 224, 241, 243, 253, 255, 261, 263, 264, 270, 287, 315, 336, 337, 391, 393, 395–398 measures, 189, 190, 192, 261–281 procedures, 187–189, 277–280, 396 Marketplaces, 167, 169, 178, 226–228, 232 Measures for the approximation of national legislation, 132, 133 Measures having equivalent effect, 75–77, 80, 284 Medium-load, 47, 252 Member State solidarity, 65, 71–73, 103, 137, 143–145, 284 Ministry, 10, 27, 177, 182, 262, 266, 360 Misuse of powers, 345, 369 Monopoly rights, 121, 122, 146, 169 N National action plans, 157 National champion, 173 National choices of energy mix, 72, 141, 330 National energy policy objectives, 16, 86, 145, 222, 301, 330 National energy regulators, 149, 174 National incumbents, 173, 178, 235, 256, 328 National measures having equivalent effect to quantitative import and export restrictions, 75, 77, 80 National regulatory authority, 172–177 National renewable targets, 294 National support schemes, 157 Natural gas, 12, 21, 24, 32, 33, 43, 55, 75, 90, 120, 121, 125, 136, 146–148, 173, 174, 176, 197, 201, 211, 237, 253, 262–264, 266, 270, 276, 278, 298, 306, 319, 323, 324, 348 Natural monopoly, 13, 314 Necessity, 97, 98, 101–103, 123, 125, 263–268, 271, 289, 312, 321, 323, 325–327, 336, 361, 364, 365, 395 Necessity requirements, 321, 327 Network codes, 154, 182 Network investments, 155, 182, 185

451

Index Network monopolies, 14 Network-bound energy markets, 147 New aid, 343, 345 New entrants, 201, 216, 221, 256 Non-carbon sources, 4 Non-discrimination, 167, 175, 208–220, 238, 253, 254, 276, 282–285, 287, 313, 337, 365, 396 Non-discrimination principle, 209, 210, 213, 217, 218, 220, 283, 303, 313–314 Non-discriminatory, 13, 26, 106, 147, 150, 151, 153, 155, 186, 188, 189, 197, 199, 204, 205, 214, 219, 226, 242, 243, 278, 307, 313, 314, 332, 365, 366, 368, 392 Non-discriminatory access, 147, 198, 200, 213, 254 Non-economic interests, 84, 304 Not in my back yard syndrome, 203 Nuclear energy, 231, 265, 378–381 industry, 378 investments, 265, 294, 386, 398 power plants, 94, 203, 293, 385 sector, 381–385 sources, 27 O Objective justification, 209, 210, 214, 216, 217, 219–221, 313 Objectively justified, 209, 210, 214, 217, 219, 220, 313 Objectivity, 208, 254, 287, 328, 396 Obstacles to trade, 136, 154 Oil crisis, 29–31, 33, 78, 80, 87, 94, 137 Open market access, 166, 198 Operating aid, 373 Operating subsidies, 100, 373 Operational rules, 29 Operational security, 155 Optimal investments, 3–17, 42–50, 360, 398 Optimal level of investment, 6, 8, 11, 44, 46, 68, 389, 391 Optimal resource allocation, 44 Ordinary legislative procedure, 133, 140, 143–145, 304 Organisation for Economic Co-operation and Development (OECD), 6, 31, 42, 44, 46, 48, 49, 54, 58, 167, 200, 203, 225, 226, 231, 273

452

Organized marketplaces, 169, 228 Over-investment, 42, 51, 68, 286 Over-the-counter (OTC), 228 Overcapacity, 3, 42, 45, 79, 99 Overcompensation, 373 Ownership control, 102, 172 Ownership interests, 152 P Participants and public institutions, 16 Peak-load capacity, 47–49, 170, 252, 261 Peak-load plants, 47, 188 Peak-load situations, 49, 71–73, 170, 180, 188, 247, 252, 271, 277, 279, 280, 289, 398 Peat, 266, 267, 311, 355 Petroleum products, 31, 75, 76, 78, 79, 81, 84–88, 90, 99, 102, 136, 137 Petroleum-related activities, 207 Physical spot markets, 231 Political independence, 174, 178 Potential competition, 166, 199, 200, 221, 242 Power exchanges, 12, 178, 185, 228–233, 239 Power plant construction, 166, 198, 318, 377 Power pools, 228, 229, 232 Power to legislate, 130 Power-intensive industries, 236, 259 Preamble, 11, 43, 66, 70, 107, 125, 139, 140, 151, 156, 166, 170, 179, 187, 190, 192, 193, 201, 204, 220, 221, 233, 259, 269, 272, 277–279, 292–294, 301, 302, 306, 308, 309, 311–313, 324, 345, 346, 377, 378 Pre-competitive electricity markets, 42 Pre-competitive regulatory regime, 216 Predictable market conditions, 224 Preferential capacity rights, 213, 214, 320 Preferential grid access, 157 Preferential rights, 200, 214 Preferential treatment, 152, 171, 178, 215, 267 Pre-liberalized European energy markets, 116 PreussenElektra, 69, 70, 77, 78, 98, 103–109, 112, 113, 160, 213, 282, 287, 296, 336, 349, 352–356, 359, 361, 396 Price caps, 49, 51, 226, 234, 236–239, 255, 270, 272 formation, 26, 148, 230 interventions, 50, 58

Index premium, 252, 348 regulation, 236, 237, 243, 315 sensitivity of demand, 259 signals, 8, 14, 44, 154, 157, 222, 227, 228, 230–232, 237, 241, 256, 270, 287, 288, 390, 396 spikes, 49, 260, 261, 307 of supplies, 303, 306 volatility, 49, 58 Primary energy fuels, 4, 47, 204, 263, 265, 268 Primary energy savings, 158, 297 Primary energy sources, 3, 6, 21, 23, 26, 27, 55, 72, 107, 158, 184, 187, 199, 207–219, 221, 225, 252, 262–264, 266, 268, 269, 280, 288, 375, 378, 390, 395 Principle of environmental integration, 56, 68, 329 Principle of equality, 214, 215, 218, 283 Principle of non-discrimination, 208–219, 313 Priority access or guaranteed access, 184 Priority dispatch, 184–186, 267 Priority rights, 216, 318 Private bodies, 177, 252, 352–354 Producer, 24, 25, 42, 44, 49, 50, 58, 80, 104, 105, 109, 112, 123, 125, 150, 169–171, 178–182, 185, 186, 191, 197–200, 202, 217, 220, 221, 225, 236, 237, 261–264, 266, 272, 279–281, 308, 310, 311, 314, 315, 318, 330, 348, 353, 356, 360, 373, 377, 378, 398 Production, 3, 5–7, 13–16, 23–27, 30, 32, 33, 37, 41, 43, 47, 49–51, 55, 57, 67, 69, 70, 72, 78, 87, 92, 96, 104, 107–109, 112, 113, 123, 136, 141, 147, 152, 156–158, 171, 176, 178, 179, 181, 182, 184, 185, 187, 189, 193, 200, 203, 205, 207, 209, 211, 212, 220, 221, 228, 236, 242, 247, 253, 262, 264–267, 272, 273, 280–282, 286, 287, 291, 292, 294–297, 308, 318, 322, 324, 344, 347, 348, 361, 370, 371, 377–379, 389–391 Proportionality principle, 97, 100, 102, 112, 285, 319, 321 Proportionality requirements, 88, 102, 108, 138, 160, 321, 326–327, 333 Proportionality sensu stricto, 97, 265 Proportionality test, 96, 98, 101, 283, 321 Proportionate, 77, 85, 96, 100, 108, 112, 113, 219, 395

Protection of health, 76, 95 Protective effect, 80 Protective measures, 81, 139, 140, 294 Public authorities, 51, 117, 119, 166, 171, 190, 192, 194, 225, 241, 247, 248, 269, 324, 344, 352, 358–361 Public bodies, 166, 172, 175, 177, 383 Public charge, 359 Public consultation, 203 Public control, 101, 102, 111, 355, 358, 359, 398 Public health, 68, 76, 80, 93–96, 100, 106, 110, 111, 133–135, 204, 206, 261, 395 Public incentives, 16, 37, 269–271, 288 Public intervention, 9, 46, 125, 157, 172, 226, 236, 247, 253, 258–260, 262–281, 287, 288, 297, 336, 341, 361, 391, 394 Public investment incentives, 345 Public ownership, 102, 205, 357 Public policy, 76, 79, 83, 84, 93, 94, 99 Public regulation, 51, 58, 232, 289 Public security, 76–80, 83–96, 99, 100, 102, 111, 124, 125, 160, 203, 261, 394, 395 Public security interests, 62, 83–86, 100, 160 Public service compensation, 314, 323, 326, 332, 350, 362, 364, 366–368 Public service obligations, 16, 119, 120, 123, 124, 151, 169, 179, 192, 198, 204, 214, 216, 267, 273–275, 283, 299–315, 317–319, 322–328, 330–333, 335, 341, 345, 348–352, 355, 356, 361–368, 370, 373, 385, 386, 394–396 Public service provider, 300, 314, 317, 322, 326, 333 Public undertakings, 90, 115, 116, 357–359, 381 Public-security exemption, 88, 92, 93, 100, 111, 160 Purchase obligation, 12, 78–80, 83, 100, 105 Q Qualified majority, 132 Quality, 65, 68, 95, 139, 302, 303, 305–307, 326, 377 Quantitative restrictions on imports, 76 Quid pro quo, 363

453

Index R

S

Rate of return, 170, 237, 255, 318, 326, 352, 373 Rationing, 47, 258, 259, 261, 273, 280, 288, 295, 335, 395 Real-time balance, 186, 187 Real-time electricity meters, 48 Reasonable prices, 54, 55, 236, 260, 305–309, 313, 335 Reasonable profit, 363, 365, 368 Reasonable rate of return, 326, 352 Regional government, 351, 363 Regularity, 303, 306 Regulated prices, 308, 309 Regulated third-party access, 153 Regulatory responsibilities, 153, 175 Regulatory uncertainty, 46, 226, 270, 391, 392 Reliability, 44, 49, 181, 183, 193, 213, 281 Reliability contracts, 274, 276, 278 Reliable electricity supply, 24, 124, 252, 255, 258, 269, 274, 277 Reliable supply, 44 Renewable energy sources, 4, 14, 15, 27, 37, 51, 69, 70, 73, 77, 78, 104, 105, 107–109, 112, 113, 136, 139, 140, 156–158, 176, 184–186, 203, 219–220, 247, 253, 264, 278, 292, 295, 297, 310, 353, 359, 372, 373, 378, 390, 396–398 Renewables Directive, 12, 103–105, 107, 110, 112, 353 Reporting obligations, 155, 158, 289 RES Directive, 12, 14, 15, 27, 36, 70, 107, 109, 113, 139, 140, 156–158, 183–186, 194, 220, 289, 292, 294, 296, 297, 398, 399 Reserve capacity, 45, 71–73, 180, 187–192, 194, 195, 229, 231, 237, 242, 253, 262, 271–281, 286, 289, 311, 312, 314, 323, 324, 393, 398 Reserve capacity sharing, 72 Reserve generation capacity, 72, 170, 181, 186–191, 195, 242, 271, 272, 275, 278, 280, 336 Restrictive effects on trade, 160, 395 Retail markets, 24, 49, 153, 227, 237, 259 Review intensity, 96–103 Roles and responsibilities, 16, 125, 155, 166, 169–195, 223, 241–243, 392, 393

Safeguard measures, 283, 284, 393 Scientologie, 91, 94 Secondary legislation, 9, 16, 24, 63, 78, 116, 127, 129, 209, 236, 283, 299, 343 Sector Inquiry, 6, 24–26, 148, 149, 152, 227, 235 Sector-specific energy regulators, 172 Security of Electricity Supply Directive, 8, 15, 16, 24, 53, 145, 148, 155–156, 166, 167, 170, 171, 185, 189–195, 204, 223, 224, 226–228, 231–235, 237, 238, 242, 243, 247, 248, 257, 258, 269–273, 277–286, 289, 296–298, 308, 311–314, 335, 345, 346, 391–394 Security of supply, 3–5, 12, 15–17, 21, 29–33, 36, 45, 51, 53–55, 57, 58, 61–62, 65–73, 75, 77, 78, 83–96, 98, 99, 101, 103, 110–112, 114–127, 132, 135–138, 140, 141, 144, 145, 151, 152, 154–156, 158–161, 165–167, 169–171, 176, 181–185, 191, 192, 194, 198, 212, 219, 223, 225, 227, 235–237, 241–243, 247, 251, 253–282, 284–286, 288, 291, 294, 295, 298, 299, 302, 303, 306, 309, 312, 315, 323–326, 329–333, 335, 336, 364, 368, 370, 371, 375, 389, 391–396 Security of supply interests, 5, 15, 16, 62, 63, 73, 76, 79, 81, 87, 90, 110–114, 124, 125, 131, 135, 145, 151, 160, 161, 165, 166, 170, 171, 180, 184, 185, 192, 194, 238, 241–243, 248, 251–291, 294, 295, 307, 309–311, 315, 322, 329, 331, 332, 336, 337, 350, 368, 370, 371, 373, 386, 392, 394, 397, 399 Selectivity criterion, 348 Services of general economic interest, 62, 115–127, 151, 160, 172, 214, 219, 275, 299–315, 364, 365, 367, 371 Services of general interest, 115, 118, 119, 303–307 Share of renewable energy in final consumption, 157 Shared competence, 29, 53, 62, 116, 137 Short-term price inelasticity of demand, 261 Short-term price inelasticity of supply, 49 Siting, 203, 204, 206, 226, 269, 289

454

Index Small and/or distributed generation, 220 Socio-economic considerations, 360 Solar, 27, 34, 292 Special or exclusive rights, 115, 116, 118, 301 Spot-market, 6, 8, 11, 44, 229–231, 272, 389, 390, 398 Spot market pricing, 44, 46 Stable investment climate, 155, 167, 223–239, 241, 242, 270, 271, 297, 392 Stable regulatory framework, 224, 227, 234–239, 270 Stardust Marine, 347, 357–360 State aid, 9, 16, 17, 27, 48, 56, 102–105, 225, 248, 249, 251, 252, 266–268, 273–275, 278, 286, 288, 296, 298, 305, 310, 311, 321, 323, 324, 328, 332, 337, 341, 343–359, 361–373, 375–386, 396, 399 State aid control, 341, 342, 344, 345, 354, 356, 361, 362, 372, 373, 385, 396 State compensation, 332, 396 State guarantees, 348 State resources, 105, 252, 347, 349–362, 370, 396 Stranded costs, 267, 355, 371 Strategic behaviour, 50 Strategic undertakings, 89, 101, 102 Subsidiarity, 134, 137–138, 150 Subsidies, 38, 100, 172, 175, 177, 225, 235, 268, 269, 284, 289, 293, 348, 351–356, 363, 373, 375, 377, 380, 398 Subsidy elements, 249, 252 Subsidy schemes, 158, 177, 236, 268 Suitability, 97, 98, 101, 102, 228, 331 Suitability criterion, 321 Supplier of last resort, 309 Supply area, 105, 169 disruption, 31, 33, 49, 51, 54, 85, 92, 93, 137, 262, 263, 266, 395 interruptions, 49, 68, 94, 160, 260–261, 263, 265, 336, 395 obligations, 16, 41, 115–127, 169, 181–183, 191, 325–326 shortage, 30, 45, 255, 259 Supply-side concentration, 50 Supply-side investments, 15, 38, 39, 47, 231, 241, 270, 285, 290, 292, 294, 296–298, 309, 311, 313–315, 332, 333, 337, 368, 369

Supply-side measures, 37, 139, 248, 252–254, 269, 290, 298, 309, 322, 324 Support schemes, 109, 113, 157, 235, 267, 268 Sustainability, 3, 5, 15, 21, 34, 37, 51, 53, 54, 56–58, 161, 165, 298, 337, 389 Sustainable development, 34–36, 54, 56, 57, 65, 68, 69 Sustainable investments, 56, 57, 296–298, 337, 397, 398 System code, 213, 214 System reliability, 181, 183 System responsibility, 182, 360 T Tariff quota, 217 Tariff rebates, 318 Tariffs, 69, 75, 103–105, 108–113, 121, 153, 174, 181, 182, 185, 186, 217, 238, 252, 277, 296, 308, 315, 318, 326, 349, 352, 353, 359–361, 396–398 Tax benefits, 348 exemptions, 268, 348, 350 Tedeschi, 80–82 Tender price, 252 Tendering procedures, 16, 151, 176, 177, 198, 201, 202, 248, 249, 251–256, 258, 261, 263, 268–271, 274, 276, 283, 287–292, 295, 296, 306, 307, 312, 314, 318, 319, 331–333, 336, 346, 348, 364, 366–368, 370, 373, 394–396 Treaty on Functioning of the European Union (TFEU), 7, 9, 11–13, 16, 17, 23, 24, 33, 43, 55–57, 62, 65–73, 75–90, 94–96, 98, 102, 103, 105, 107, 108, 110–113, 115–122, 124–127, 129– 145, 149, 155, 160, 161, 178, 192, 193, 202, 205, 208–211, 214, 217, 221, 224, 243, 248, 249, 252, 255, 256, 265, 271, 274, 282, 283, 285–288, 294, 298–306, 309, 311, 317, 319–321, 323–329, 331–333, 336, 337, 341–373, 375–386, 391–394, 396, 398 Third legislative package, 148, 149, 152, 155, 174 Third-country exporters, 30 Third-party access, 147, 153, 282, 317, 318, 328

455

Index Tobacco Advertising, 133, 134 Traders, 12, 78, 217, 229 Trans-European Networks, 13, 143 Transmission capacity, 25, 50, 181–183, 214 system operation, 151, 152 system operators, 151, 154, 182, 184, 188–190 Transparency of accounts, 153 requirement, 205 Transparent data, 26, 148 and stable regulatory framework, 224, 234–239 Treaty Establishing a Constitution for Europe, 143 True proportionality, 97 TSO, 12, 25, 149, 151–154, 166, 170, 171, 179–195, 229, 242, 252, 259, 271–274, 276–282, 284, 286, 314, 331, 352, 355–361, 393

310, 312–314, 317, 318, 321, 325, 327, 331–333, 344, 345, 347–349, 351–359, 361–364, 366–368, 372, 377, 379, 381, 382, 385 Union competences, 132, 138, 139 Union institutions, 129, 131, 138, 298, 386 Union interests, 115, 160, 299, 321, 323, 325, 327, 329–333 Union solidarity, 73, 284 United Nations, 25, 29, 34, 54, 55, 70 Universal service obligations, 307 Unlawful aid, 343, 344, 346 V Value of lost load, 67, 259 VEMW, 208, 213–217, 283, 285, 320 Vertical foreclosure, 26, 148 Vertically integrated monopolies, 41 Vertically integrated public utilities, 146 Vulnerable customers, 236, 309, 315 W

U UK Nuclear Decommissioning Authority, 383 Unbundling requirements, 149, 152, 153, 171, 179, 180, 187, 193, 243, 272, 393 Under-investment, 45, 51, 111 Undertakings, 13, 14, 16, 41, 85, 88–92, 101, 102, 104, 105, 113, 115–123, 125, 146, 150, 152, 169, 171–173, 176, 178–180, 194, 206, 209, 210, 213, 214, 216, 225, 241, 242, 272, 282, 299–304, 307, 308,

456

Wholesale customers, 178, 227, 257 market, 12, 23, 24, 67, 154, 224, 227–235, 237–239, 243, 270, 288, 307, 311 market framework, 227, 232 Wind power, 27, 104, 109, 186 turbines, 203, 206, 225 Windfall profits, 236

ENERGY AND ENVIRONMENTAL LAW & POLICY SERIES

1. Stephen J. Turner, A Substantive Environmental Right: An Examination of 2. 3. 4. 5. 6. 7. 8. 9.

10. 11.

the Legal Obligations of Decision-makers towards the Environment, 2009 (ISBN 978-90-411-2815-7). Helle Tegner Anker, Birgitte Egelund Olsen & Anita Rønne (eds), Legal Systems and Wind Energy: A Comparative Perspective, 2009 (ISBN 978-90-411-2831-7). David Langlet, Prior Informed Consent and Hazardous Trade: Regulating Trade in Hazardous Goods at the Intersection of Sovereignty, Free Trade and Environmental Protection, 2009 (ISBN 978-90-411-2821-8). Louis J. Kotze´ and Alexander R. Paterson (eds), The Role of the Judiciary in Environmental Governance: Comparative Perspectives, 2009 (ISBN 978-90411-2708-2). Tuula Honkonen, The Common but Differentiated Responsibility Principle in Multilateral Environmental Agreement’s: Regulatory and Policy Aspects, 2009 (ISBN 978-90-411-3153-9). Barbara Pozzo (ed.), The Implementation of the Seveso Directives in an Enlarged Europe: A Look into the Past and a challenge for the Future, 2009 (ISBN 978-90-411-2854-6). Henrik M. Inadomi, Independent Power Projects in Developing Countries: Legal Investment Protection and Consequences for Development, 2010 (ISBN 978-90-411-3178-2). Nahid Islam, The Law of Non-Navigational Uses of International Watercourses: Options for Regional Regime-Building in Asia, 2010 (ISBN 978-90411-3196-6). Yasuhiro Shigeta, International Judicial Control of Environmental Protection: Standard Setting, Compliance Control and the Development of International Environmental Law by the International Judiciary, 2010 (ISBN 978-90-411-3151-5). Katleen Janssen, The Availability of Spatial and Environmental Data in the European Union: At the Crossroads between Public and Economic Interests, 2010 (ISBN 978-90-411-3287-1). Henrik Bjørnebye, Investing in EU Energy Security: Exploring the Regulatory Approach to Tomorrow’s Electricity Production, 2010 (ISBN 978-90-411-3118-8).

Investing in EU Energy Security

Exploring the Regulatory Approach to Tomorrow’s Electricity Production By Henrik Bjørnebye Since the introduction a quarter-century ago of market-based investments in the production of electricity and other critical services, our awareness of the underlying issues affecting the supply and consumption of energy has changed radically. No longer can Europe (or any region) rely on over-capacity of electricity generation and inexpensive primary energy fuels, or disregard the signs of potentially catastrophic climate change. The author of this timely and sharply focused book shows that, in the light of our current knowledge, ensuring new investments – and the right investments – in electricity generation constitutes an urgent energy policy challenge facing the EU over the coming decades. He accordingly makes the case for a serious reconsideration of the market facilitation and market intervention rules under electricity market legislation in the EU. In the first detailed legal analysis of the EU’s internal electricity market framework for investments in electricity generation facilities from the perspective of security of supply, this book cover such legal issues as the following in precise detail: − applicability of the Treaty on the Functioning of the European Union (TFEU); − security of supply as a ground for exemption on the basis of public security; − justifications of public intervention; − the applicability of EU State aid provisions to investments in energy security; − requirements imposed by EU law on Member States for ensuring cost-efficient investments in European supply security; − facilitation of renewable energy sources and cogeneration in the environmental interest; − the Court of Justice’s approach to Member State interventions; − the Court’s decisions on restrictions on free movement in the environmental interest; − Member States’ right to launch tendering procedures for new generation capacity; − Member States’ right to impose public service obligations in the general economic interest on certain undertakings; and − relationship between the provisions of the TFEU and those of the Euratom Treaty in relation to investments in nuclear power generation. The book demonstrates convincingly that today’s energy supply challenges must be based on a broader balancing of security, competitiveness and sustainability interests. It suggests that the internal electricity market provisions of the Electricity Directive and the Security of Electricity Supply Directive would benefit from focusing more intensely on requiring investments in technologies and primary energy sources that will help mitigate climate change and reduce European energy import dependency, and less on the need for ensuring cost-efficient investments through market-based means. ISBN 978-90-411-3118-8 Through its detailed analysis of EU law in an area of great significance to both market participants and the public sector, Investing in EU Energy Security will be welcomed by legal advisors, whether working for the EU electricity industry or public agencies responsible for implementation of internal electricity market measures, as well as by academics in this hugely important field of current research.

EELP 11