On 30 November 2016, the European Commission officially unveiled the latest instalment of its ongoing Energy Union initiative, which will reform some of the central pieces of EU energy legislation. Referred to in advance as the "Winter Package" (not to be confused with the rather more limited package released in February 2016), it has been published as the "Clean Energy for all Europeans" proposals and is the most significant series of proposals yet to emerge under the Commission's "Energy Union" brand. It will have far-reaching implications within and potentially beyond the existing EU single energy market.
There is a lot to consider in these proposals, and we will return to some of the issues they raise in more depth and from other perspectives in future posts. What follows is an overview and some initial thoughts from a predominantly UK-based viewpoint.
Important though it is, many of the Winter Package's proposed reforms are evolutionary rather than revolutionary. Some could even be criticised for lacking ambition. The Commission's proposals certainly provide opportunities for newer technologies such as storage and demand side response and for those seeking to make use of newer commercial models such as aggregation or community energy schemes, but all these groups are still likely to need to work hard in many cases to exploit the leverage that the new rules would give them. It is interesting that what has been picked up most in early news reports of the Winter Package is the Commission's move to end subsidies for coal-fired plant. This is a significant step, but it is only one part of a complex and multi-layered set of draft legislative measures, and is one of the few instances in those measures of a provision that overtly tilts the playing field in favour of or against a particular technology in a new way.
The story so far
Let's begin by reminding ourselves what Energy Union is about. The project is said to have five "dimensions". These are:
- Security, solidarity & trust: the buzz-words are "diversification of supply" and "co-operation between Member States" – all informed by anxieties about over-dependence on Russian gas.
- A fully-integrated internal energy market: going beyond the 2009 " Third Package" of gas and electricity market liberalisation measures (and their ongoing implementation through the promulgation of network codes) to achieve genuine EU-wide single gas and power markets.
- Energy efficiency: using less energy can be hard, but it is the best way to meet environmental objectives and it can also be a significant source of new jobs and economic growth.
- Climate action – decarbonising the economy: signing and ratifying the Paris CoP21 Agreement was the easy bit. How is the EU going to achieve deep decarbonisation of not only its power but also its heat and transport sectors so as to meet its UNFCCC obligations?
- Research, innovation & competitiveness: can European businesses still take the lead in developing technologies that will save the planet, and also make money out of commercialising them?
In other words, Energy Union is about everything that matters in EU energy policy. To date, at least in relation to electricity markets, the initiative has involved a lot of consultation but not many concrete legislation proposals. The new Winter Package goes a long way towards redressing this balance, but it shows there is still a lot of work to do.
What is in the Winter Package?
The documents published by the Commission (all available from this link) include legislative proposals and a range of explanatory and background policy documents. The legislative proposals are for:
- a revised Directive on the Internal Market for Electricity (the Revised IMED – Annexes here);
- a revised Electricity Market Regulation (the Revised Market Regulation – Annexes here and here);
- a revised Renewable Energy Directive (the Revised RED – Annexes here);
- a Regulation on the Governance of the Energy Union (the Governance Regulation – Annexes here);
- a new Regulation on Electricity Sector Risk-Preparedness (the Risk Regulation – Annex here);
- a recast Regulation on the Agency for the Cooperation of Energy Regulators) (the ACER Regulation – Annex here);
- a Directive (with Annex) amending the existing Energy Efficiency Directive; and
- a Directive (with Annex) amending the existing Energy Performance of Buildings Directive.
We comment below on what seem to us at this stage to be the most interesting points in these, and also on the Communication on Accelerating Clean Energy Innovation (the Innovation Communication).
The Revised IMED
The legislative elements of the Winter Package are all inter-related, but the Revised IMED is as good a place to start as any. Its early articles include two programmatic statements:
- National legislation must "not unduly hamper cross-border flows of electricity, consumer participation including through demand-side response, investments into flexible energy generation, energy storage, the deployment of electro-mobility or new interconnectors".
- Electricity suppliers must be free to determine their own prices. Non-cost reflective power prices should only apply for a transitional period to vulnerable customers, and should be phased out in favour of other means of support except in unforeseeable emergencies.
In some ways, this sets the tone for the more specific provisions that follow. It often seems that the Commission never loses an opportunity to put forward legislation in the form of a directly applicable Regulation rather than in the form of a Directive that by definition requires Member States to take implementing measures in order fully to embed its effect within national regulation. However, the revised IMED, like its predecessor, stands out as a classic old-school Directive, in which EU legislators tell Member States lots of results to be achieved, but do not prescribe many of the means by which this is to happen. Moreover, even the expression of those objectives is (inevitably) qualified: in other words, get rid of the barriers to the Commission's vision of Energy Union, except the ones you can justify. Of course, that is slightly unfair: as noted below, there are at least one or two eye-catching points in the revised IMED, and there are significant changes proposed in other parts of the Winter Package that should further the objectives of the revised IMED, but it arguably demonstrates less willingness to get to grips with some of the most difficult of the longer-term and more fundamental changes in the market than the call for evidence on moving towards a smart, flexible energy system that was published on 10 November by the UK government and GB energy regulator Ofgem (although admittedly the UK authorities are only asking questions, not proposing solutions at this stage).
A market for consumers (and prosumers)
The revised IMED would enhance the rights of consumers generally in a variety of ways. For example:
- Price increases are to be notified and explained in advance, giving them the opportunity to switch before an increase takes effect. Switching must take no longer than three weeks.
- Termination fees may only be charged where a fixed term contract is terminated prematurely, and must not exceed the direct economic loss to the supplier.
- All consumers are to be entitled, on request, to a "dynamic electricity price contract" which reflects spot market price fluctuations at least as frequently as market settlement occurs. They will of course need smart meters to make this work (see further below).
- All consumers are to be entitled to contract with aggregators, without the consent of their supplier, and to end such contracts within three weeks.
In addition, special consideration is given to two newly defined categories of persons.
- "Active consumers" are defined as individuals or groups "who consume, store or sell electricity generated on their premises, including through aggregators, or participate in demand response or energy efficiency schemes", but who do not do so commercially / professionally.
- "Local energy communities" are defined as organisations "effectively controlled by local shareholders or members, generally non-profit driven or generally value rather than profit-driven...engaged in local energy generation, distribution, aggregation storage, supply or energy efficiency services, including across borders".
Active consumers are to be:
- entitled to undertake their chosen activities "in all organised markets" without facing disproportionately burdensome procedures or charges; and
- encouraged to participate alongside generators in all organised markets. Obviously in most cases they will do this through aggregators, who are to be treated "in a non-discriminatory manner, on the basis of their technical capabilities". For example, they are not to be required to pay compensation to suppliers or generators (contrary to some of the suggestions in the UK call for evidence referred to above).
Local energy communities:
- are similarly not to be discriminated against;
- may "establish community networks and autonomously manage them" and "purchase and sell electricity in all organised markets";
- must not make participation in a local energy community compulsory, or limit it to those who are shareholders in or members of the community; and
- will be subject to the unbundling rules for distribution system operators if they are DSOs.
As in the original Directive 2009/72/EC, there are provisions requiring improvements to customer billing and encouraging the rollout of smart meters.
- Customers should receive bills once a month where remote reading of the meter is possible.
- Where a Member State has decided not to mandate smart meters for cost-benefit reasons, they are to revisit their assessment "periodically" and report the results to the Commission.
- The draft Directive sets out functionalities that smart meters must include where a Member State mandates their rollout. In such cases, the costs of smart metering deployment are to be shared between all consumers. In other cases, every customer is entitled, on request, to receive a smart meter that complies with a slightly reduced set of functionalities.
- The implementation of smart metering must encourage active participation of consumers in the electricity supply market (although this may be qualified by a cost-benefit analysis).
- There are a number of provisions reflecting both concerns about cybersecurity and the importance of making useful data securely available to legitimate market participants.
DSOs (and EVs)
There has been no shortage of recent commentary on how the shift towards decentralised generation of electricity, combined with the potential for storage and more active consumer behavior, may require changes in the role of the 2,400 market participants that the IMED has always called distribution system operators, but which in many jurisdictions have historically not had, even within their own networks, the kind of "system operator" responsibilities of a transmission system operator. The recent UK call for evidence on flexibility appears at least prepared to contemplate some significant realignment of the respective functions of DSOs and TSOs. There is nothing so fundamental in the revised IMED, but there are a number of new provisions about DSOs.
- DSOs are to be allowed, and incentivised, to procure services such as distributed generation, demand response and storage in order to make their networks operate more efficiently. DSOs will be paid for this, and must specify standardised market products for these services.
- Every two years, DSOs must update five to ten year network development plans for new investments, "with particular emphasis on the main distribution infrastructure which is required...to connect new generation capacity and new loads including re-charging points for electric vehicles", as well as demand response, storage, energy efficiency etc.
- DSOs serving isolated systems or fewer than 100,000 consumers can be excused from this requirement, but note that in general, those operating "closed distribution systems" are to be subject to the same rules as other DSOs under the revised IMED.
However, although DSOs are to facilitate the adoption of new technologies, such as storage and EVs, they are not encouraged to diversify into actually providing them to end users themselves.
- Member States are to facilitate EV charging infrastructure from a regulatory point of view, but DSOs may only "own, develop, manage or operate" EV charging points if the regulator allows them to after an open tender process in which nobody else expresses an interest in doing so. And even then, the service taken on by the DSO must be re-tendered every five years.
- Similar rules would apply to the development, operation and management of storage facilities by either DSOs or TSOs. For TSOs, there would be an additional requirement that the storage services or facilities concerned are "necessary" to ensure efficient and secure operation of the transmission system, and are not used to sell electricity to the market.
What makes these provisions significant is that until now, with the IMED in its original form silent on the subject of storage, the operation of storage facilities had been seen as potentially falling within the categories of generation or supply. This appeared to make the involvement of DSOs or TSOs in storage projects (at least as investors) subject to the general unbundling restrictions, and so has tended to inhibit the progress of energy storage initiatives in a number of cases. The proposed new rules are restrictive in some respects, but bring a degree of clarity and at least recognise storage as a distinct category.
The Revised Market Regulation
General organisation of the electricity market
Like the revised IMED, the Revised Market Regulation begins with firm statements of purpose: enabling market access for all resource providers and electricity customers, enabling demand response, aggregation and so on. It goes on to list 14 "principles" with which "the operation of electricity markets shall comply" – starting with "prices are formed based on demand and supply" and finishing with "long-term hedging opportunities allow to hedge parties against price volatility risks".
Entirely in keeping with these principles, the first specific provision is that all market participants are to be responsible for (or to delegate to a responsible third party) the consequences of any imbalance they create in the electricity system as a result of importing or exporting to or from the grid at a given time more or less than they had said would be the case at that time in previous notifications to the system operator. This much-trailed provision may be a significant change for renewable generators in some jurisdictions (though not in GB, where imbalance charging reforms are already being implemented). In an earlier draft, the Revised Market Regulation only permitted sub-500kW renewables or high-efficiency CHP to be exempted from this requirement. In the published version, this exemption has been broadened to include RES projects that have received state aid that has been cleared by the commission and that have been commissioned before the Revised Market Regulation enters into force. It also requires that "all market participants" are to have access to the balancing market on non-discriminatory terms, either directly or through aggregators.
There are a number of quite detailed provisions on the overall organisation of electricity markets. We pick out a few of the more notable ones below.
- There is a shift from a national to a regional approach. As the explanatory memorandum to the draft Directive puts it: "In certain areas, e.g. for the EU-wide 'market coupling' mechanism, TSO cooperation has already become mandatory, and the system of majority voting on some issues has proven to be successful...Following this successful example, mandatory cooperation should be expanded to other areas in the regulatory framework. To this end, TSOs could decide within 'Regional Operational Centres'...on those issues where fragmented and uncoordinated national actions could negatively affect the market and consumers (e.g. in the fields of system operation, capacity calculation for interconnectors, security of supply and risk preparedness).". Functions to be carried out at a regional level include "the dimensioning of reserve capacity" and "the procurement of balancing capacity".
- As far as possible, the organisation of markets is to avoid any rules that could restrict cross-border trading or the participation of smaller players. So, for example, trades are to be anonymous and in a form that does not distinguish between bidders within and outside a bidding zone. The minimum bid size is not to exceed 1 MW.
- Market participants are to be able to trade energy as close to real time as possible, with imbalance settlement periods being set to 15 minutes by 1 January 2025.
- Long-term (firm, and transferable) transmission rights or equivalent measures are to be put in place to enable e.g. renewable generators to hedge price risks across bidding zone borders. Such rights are to be allocated in a market-based manner through a single allocation platform.
- As a general rule, there must be no direct or indirect caps or floors on wholesale power prices, other than a cap at the value of lost load and a floor of minus €2000, or during a 2-year transitional period when a transitional maximum and minimum clearing price may be allowed. Defined as "an estimation in €/MWh of the maximum electricity price that consumers are willing to pay to avoid an outage", the value of lost load is to be defined nationally and updated at least every five years. This concept will evidently need refinement, as there is a difference between what individual consumers may be prepared to pay and the kind of price spikes that it is reasonable for wholesale markets to bear for short periods of time.
- Dispatching of generation and demand response is to be market-based. Priority dispatch for renewables is to be brought to an end subject to certain exceptions (these are summarised in the section on the revised RED below). On the other hand, where redispatch (changing generator output levels) or curtailment is imposed by the system operator other than on market-based criteria, the draft Regulation imposes restrictions on when RES, high-efficiency CHP and self-generated power can be redispatched or curtailed.
- There is to be a review of the bidding zones within the single electricity market, so as to maximise economic efficiency and cross-border trading opportunities while maintaining security of supply. In other words, the market coupling process should allow customers to benefit from the availability of lower-priced wholesale power in adjacent markets, but the bidding zone boundaries need to take account of "long-term structural congestion" in the network infrastructure for this to be workable and without adverse side-effects. TSOs are to participate in the review, but the final decisions are to be taken by the Commission.
- A significant piece of work is to be undertaken by ACER on "the progressive convergence of transmission and distribution tariff methodologies". This is to include, but not be limited to, some issues that have recently proved contentious in the GB context, including the respective shares of tariffs to be paid by those who generate and those who consume power; locational signals (how much more should generators pay if they are located a long way from where the power they generate used); and which network users should be subject to tariffs (would this, for example, open up the question of whether generators connected to the distribution network should pay a share of transmission network charges?).
- Separately, the draft Regulation sets out some general principles about network charges and restricts both the circumstances in which revenue can be generated from congestion management and the uses to which such revenue can be put.
Resource adequacy (a.k.a. Capacity Markets)
The growth in the share of installed generating capacity in many Member States represented by intermittent renewable generators and the unattractive economics of new large-scale combined cycle gas-fired plant has left many governments in the EU concerned about security of power supply and turning to various forms of capacity market subsidy in order to ensure that the lights stay on. The Commission has been concerned that capacity markets dampen the price signals that should drive new investment and potentially introduce new barriers to cross-border power flows. A number of national capacity market regimes have been investigated by the Commission's DG Competition; both the UK and French approaches to the problem have received state aid clearance.
The starting point of the draft Regulation in this area is an annual assessment of "the overall adequacy of the electricity system to supply current and projected demands for electricity ten years ahead". This European-level assessment will form the yardstick against which national proposals to introduce a capacity mechanism are to be judged. If it has "not identified a resource adequacy concern, Member States shall not introduce capacity mechanisms" and no new contracts shall be concluded under existing capacity mechanisms. Where capacity mechanisms are introduced, they must not distort the market unnecessarily; interconnected Member States should be consulted; and other approaches, such as interconnection and storage, should be considered first.
The draft Regulation prescribes common elements which capacity mechanisms must contain, including that they must be open to providers in interconnected Member States (unless they take the form of strategic reserves) and that the authorities of one country must not prevent capacity located in their territory from participating in other countries' capacity mechanisms. Those participating simultaneously in more than one capacity mechanism "shall be subject to two or more penalties if there is concurrent scarcity in two or more bidding zones that the capacity provider is contracted in". Maybe that will help to dampen industry's appetite for capacity markets.
Finally, the draft Regulation sets an emission limit of 550 gCO2/kWh for plant on which a final investment decision is made after the Regulation enters into force. Such plant must have emissions below this limit if it is to be eligible for capacity mechanism support. The draft Regulation goes on to state that generation capacity emitting at this level or higher is "not to be committed in capacity mechanisms 5 years after the entry into force of this Regulation". These provisions may be motivated by laudable decarbonisation objectives, but they must at the very least risk precipitating a rush to take final investment decisions in new coal-fired generating capacity over the next two years. It is possible, but unlikely, that they might stimulate further investment in carbon capture and storage (to bring the emissions of coal-fired plants below the threshold). Previous experience with emissions limit rules also suggests that much will depend on how emissions are measured – the usual trick of polluting plant being to argue that they should be counted not per hour of generation, but averaged out over time so as to allow for plant to run above the limit for short periods. This is bound to be an area for lively negotiations between Member States and in the European Parliament.
The Commission's proposals in relation to capacity markets need to be read alongside DG Competition's final report on its investigation and the accompanying Staff Working Paper. We will look in more detail at this aspect of the proposals and how it might affect existing Member State initiatives in a future post. For now, it is sufficient to note that although this part of the Winter Package is entirely consistent with the logic of the evolving single electricity market, for some, it may simply appear to be an unacceptable blow to the principle of Member States' self-determination of their own generating mix.
In addition to its existing roles, the TSO umbrella body, ENTSO-E, will acquire new responsibilities for the European resource adequacy assessment and in relation to the Regional Operational Centres, including adopting a proposal for defining the regions which each will cover, and generally monitoring and reporting on their performance. A parallel umbrella body for DSOs, with consultative functions, is also to be set up.
The draft Regulation devotes a number of articles to the Regional Operational Centres. They will be limited liability companies established by TSOs (with adequate cover for potential liabilities incurred by the impact of their decisions). Their role is to complement TSO functions by ensuring the smooth operation of the interconnected transmission system, but apparently from the perspective of planning and analysis rather than real-time operational control. Specific areas of their work (listed under 17 headings) include outage planning coordination, calculating the minimum entry capacity available for participation of foreign capacity in capacity mechanisms, and much else besides.
This area of the draft Regulation will need careful development and implementation if the proliferation of new bodies and functions is not to result in confusion and a lack of accountability. However, the question of whether to grant Regional Operational Centres binding decision-making powers in relation to some of their potential functions is left to be decided by the national regulatory authorities of a system operating region.
The Revised RED
Target for 2030
The existing Renewable Energy Directive (2009/28/EC) sets out the binding national targets for each Member State to achieve a specified proportion of its energy consumption to be obtained from renewable energy sources (RES) by 2020, contributing to an EU-wide goal of 20% of final energy from RES. The revised RED starts from a slightly different point, since EU leaders decided in 2014 to move away from legally binding national RES targets imposed at EU level but to set a goal of achieving at least 27% of energy from RES across the EU by 2030. The starting point of the revised RED, therefore, is that "Member States shall collectively ensure" that the 27% target is achieved by 2030, whilst, individually, ensuring that they continue to obtain at least as high a proportion of final energy from RES as they were obliged to achieve by 2020.
At this point, you may ask what the enforcement mechanism is for meeting the new EU-wide target. An answer (of sorts) is to be found in the Governance Regulation – see below.
With reference to subsidies for RES, the revised RED builds on the principles set out in the Commission's 2014 guidelines on state aid in the energy and environmental sectors: competitive auctions in which all technologies can compete on a level playing field are to be the norm, with traditional feed-in tariffs limited to small projects.
The revised RED also makes provision on two points that have led to disputes in connection with RES subsidies. First, picking up on a point that has in the past given rise to litigation under general EU Treaty principles, it would set quotas for the proportion of capacity tendered in RES subsidy auctions that each Member State must throw open to projects from other Member States. Second, with an eye to the numerous cases brought against Member States either under domestic constitutional / administrative law or under the Energy Charter Treaty, the revised RED attempts to outlaw retrospective reductions in support for RES once that support has been awarded, unless these are required because a state aid investigation by the Commission has found the subsidy received by a project is unduly generous. Note that while the first of these rules appears to relate only to RES electricity subsidies, the second is expressed in a way that suggests that it relates to all RES projects. An additional measure of reassurance for investors is a requirement to consult on and publish "a long-term schedule in relation to expected allocation for [RES] support" looking at least three years ahead.
Other points of interest in the draft Directive in connection with RES power include:
- In a magnificently brief reference to one of the most important market trends in the renewable power sector, the revised RED would require Member States to "remove administrative barriers to corporate long-term power purchase agreements to finance renewables and facilitate their uptake".
- The process of applying for permits to build and operate new RES projects is to be streamlined, with a single point of contact co-ordinating the permitting process (including for associated network infrastructure) and ensuring that it does not last longer than three years. This provision would confers on all RES projects (again, the current language of the draft Directive does not limit this to power sector projects) a benefit currently only conferred at EU level under the Infrastructure Regulation on those projects singled out as Projects of Common Interest – although in its current form it is questionable if it would give a developer thwarted by slow decision-making in a given case a useful remedy.
- The permitting procedures for repowering of existing projects are to be "simplified and swift" (i.e. not to last more than 1 year), although this may not apply if there are "major environmental or social" impacts. If you were hoping to be able to demand fast-track treatment for applications to repower existing wind farms with fewer, taller turbines generating more power, don't hold your breath.
- The existing RED rules on priority dispatch for RES generators are to be abolished. This point is reiterated in the Revised Market Regulation. However, that draft Regulation provides for "grandfathering" of priority dispatch rights for existing RES (and high efficiency CHP) generators until such time as they undergo "significant modifications". Exceptions are also permitted for innovative technologies and sub-500kW installations (from 2026, sub-250kW), if no more than 15% of total installed generating capacity in a given Member State benefits from priority dispatch (beyond that level, the threshold is 250kW or 125kW from 2026).
- The revised RED likes prosumers, or as it calls them, "renewable self-consumers". They are to be entitled to sell their surplus power "without being subject to disproportionate procedures and charges that are not cost reflective", to receive a market price for what they feed into the grid, and not to be regulated as electricity suppliers if they do not feed in more than 10MWh (as a household) or 500MWh (as a business) annually (Member States may set higher limits).
- The revised RED also likes "renewable energy communities". The draft definition of these is a little complicated, but essentially they are locally based entities that are either SMEs or not for profit organisations, which are to be allowed to generate, consume, store and sell renewable electricity, including through PPAs.
Heat, cooling and transport
The revised RED seeks to "mainstream" RES in heating and cooling installations, and in the transport sector. The means by which it seeks to achieve this are not, at first sight particularly dramatic, given the acknowledged scale and difficulty of the challenge of decarbonising these sectors.
In relation to heat and cooling, Member States are to identify "obligated parties amongst wholesale or retail energy and energy fuel suppliers" and require them to increase the share of RES in their heating and cooling sales by at least 1 percentage point a year. The obligation should be capable of being discharged either directly or indirectly (including by installing or funding the installation of highly efficient RES heating and cooling systems in buildings). This does not seem hugely ambitious. Mention is made of "tradable certificates" – it feels a bit like a combination of the Renewables Obligation, but applied to heat and cooling, and the Clean Development Mechanism under the Kyoto Protocol. It is also relevant in this context that the revised RED envisages that renewable guarantees of origin (REGOs or GoOs) will in future be available for the production and injection into the grid of renewable gases such as biomethane.
The rules aimed at the transport sector are also based on mandatory requirements on fuel suppliers – in this case to incorporate both a minimum (annually increasing) percentage of certain kinds of RES fuel, waste-based fossil fuel and RES electricity into the transport fuel they supply and to ensure that the parts of that supply that take the form of advanced biofuels and biogas from specified sources (which must constitute a certain part of the overall RES percentage) contribute to an increasing reduction in greenhouse gas emissions. The provisions for calculating the various percentages are quite complex, involving as they do an element of lifecycle emissions calculation (e.g. considering the emissions from the generation of electricity used to produce advanced biofuels).
On district heating and cooling, the revised RED takes a three-pronged approach.
- Member States are to ensure that authorities at local, national and regional level "include provisions for the integration and deployment of renewable energy and the utilisation of unavoidable waste heat or cold when planning, designing, building and renovating urban infrastructure, industrial or residential areas and energy infrastructure, including electricity, district heating, and cooling, natural gas and alternative fuel networks".
- The efficiency of district heating systems is to be certified. Providers of such systems must grant access to new customers where they have the capacity to do so (unless they are new and meet exemption criteria based on efficiency and use of renewables). Customers of systems that are not efficient may disconnect from them in favour of their own RES heat and cooling, but Member States may restrict this right to those who can demonstrate that the customer's own heating or cooling solution is more efficient.
- There is to be regular consultation between operators of district heating and gas / electricity networks about the potential to exploit synergies between investments in their respective networks. Electricity network operators must also assess the potential for using district heating and cooling networks for balancing and energy storage purposes.
This is all unobjectionable. It is not clear that in itself it will be enough to cause a major expansion of district heating and cooling where it does not already exist, or to significantly increase the take-up of RES heat and cooling options, but perhaps this is the kind of area where an effective policy push can only be delivered at national, or indeed municipal level.
Following a trend that has been evident for some time in UK subsidies for RES electricity, the revised RED would appear to prohibit "public support for installations converting biomass into electricity" unless they apply high efficiency CHP, if they have a fuel capacity of 20 MW or more. However, the precise words setting this out have been moved from the operative provisions of the draft Directive into a recital, which also clarifies that this would not require the termination of support that has already been granted to specific projects, but that new biomass projects will only be able to be counted towards renewables targets if they apply high efficiency CHP.
What is clear is that the revised RED would tighten the sustainability criteria applicable to biofuels and bioliquids at various points in the energy supply chain, with greenhouse gas emissions – for example those arising from land use to grow the raw materials that become biofuels – being designated as a distinct impact to be measured. If you dig up soil with a high carbon content to grow something that will become biofuel, you may end up increasing rather than reducing overall GHG emissions, so this is obviously to be avoided.
The Governance Regulation
The Governance Regulation is meant to hold everything together. In particular, it aims to give credible underpinning to the commitments on climate change that the EU as a whole has made under the Paris Agreement (but which must ultimately be delivered by Member State action) and to bridge the gap left by having an EU level 2030 renewables target but no correspondingly increased Member State level targets. It also gives legislative expression to the EU's Union-level energy and climate targets to be achieved by 2030, which are:
- a binding target of at least 40% domestic reduction in economy-wide greenhouse gas emissions as compared with 1990;
- a binding target of at least 27% for the share of renewable energy consumed in the EU;
- a target of at least 27% for improving energy efficiency in 2030, to be revised by 2020, having in mind an EU level of 30%;
- a 15% electricity interconnection target for 2030.
In outline, the Regulation works as follows.
- Every 10 years, starting in 2019, each Member State is to produce an integrated national energy and climate plan covering a period of ten years, two years ahead (so e.g. the 2019 plan covers 2021 to 2030, and so on). The plan is to set out, in relation to each of the five dimensions of the Energy Union, the current state of play in the relevant Member State; the national objectives and targets, policies and measures they have adopted; and their projections (including in relation to emissions) going forward to 2040. The draft Regulation sets out in considerable detail the information which is required to be included.
- In relation to RES and energy efficiency, Member States are expressly required to take into account the need to contribute towards achieving the relevant EU level targets, and to ensure, collectively, that they are met. In relation to RES policies, they are also to take into account "equitable distribution of deployment" across the EU, economic potential, geographic constraints and interconnection levels.
- The draft Regulation states that Member States must consult widely on the plans and suggests that there may also be a need for the preparation of and consultation on a strategic environmental assessment of the draft plans in some cases.
- Every two years (starting in the first year to which the plans apply), Member States are to report to the Commission on the status of implementation of their plans; on GHG policies, measures and projections; on climate change adaptation and support to developing countries; on progress in relation to renewable energy, energy efficiency and energy security; on internal market benchmarks such as levels of interconnectivity; and on public spending on relevant research and innovation projects. In addition, the draft Regulation specifies how Member States are to report annually on GHG inventories for UNFCCC purposes.
- The plans and drafts are to be updated if necessary after five years (with the first draft update in 2023 and the first update in 2024), using the same procedures. Updates cannot result in Member States setting themselves lower targets.
- The plans are first to be submitted to the Commission for comment one year in advance, in draft (i.e. first draft by 1 January 2018). Either at this point or in its annual State of the Energy Union reports, the Commission may make recommendations to individual Member States, for example about "the level of ambition of objectives and targets" in its draft plan, and Member States "shall take utmost account" of these when finalising the plan. Member States are obliged to issue annual progress reports on their plans and these must include an explanation of how they have taken utmost account of any Commission recommendations and how it has implemented or intends to implement them. Any failure to implement the Commission's recommendations must be justified.
- Member States whose share of RES falls below their 2020 baseline must cover the gap by contributing to an EU-level fund for renewable projects. If it becomes clear by 2023 that the 2030 RES target is not going to be met, Member States must cover the gap in the same way, or by increasing the percentage of RES fuel to be provided by heat and transport fuel suppliers under the revised RED, or by other means. Action may also be taken by the Commission at EU level.
The answer to the question of how the 2030 targets are enforced is therefore – and perhaps inevitably – somewhat incomplete. Whilst one may doubt the usefulness, under the current RED, of the prospect of the Commission taking infraction proceedings against a Member State that fails to reach the required percentage of RES energy by 2020, there is arguably nothing in the Governance Regulation that has even this degree of legal bite when it comes to pushing recalcitrant Member States into action from the centre. However, ultimately the whole edifice of the Paris Agreement, of which this is effectively a supporting structure, will only work on the basis of a combination of the economic attractions of better energy efficiency, cheaper renewables and other technological advances, and stakeholder pressure, including through democratic and judicial processes. The Governance Regulation, like the UK's Climate Change Act 2008 with its system of carbon budgets, certainly provides some scope for interested parties to challenge national authorities who are, for example, failing unjustifiably to implement Commission recommendations.
The Risk Regulation
The Risk Regulation exists to provide "a common framework of rules on how to prevent, prepare for and manage electricity crisis situations, bringing more transparency to the preparation phase and...ensuring that electricity is delivered where it is needed most". A common approach to identifying and quantifying risks is seen as essential to building the necessary "trust" and "spirit of solidarity" between Member States. The draft Regulation would replace the rather less ambitious existing Directive 2005/89/EC.
ENTSO-E is tasked with developing a common risk assessment methodology, on the basis of which it is to draw up and update regional crisis scenarios such as extreme weather conditions, natural disasters, fuel shortages or malicious attacks. Provision is made for emergency planning at both national and regional levels, with the Regional Operational Centres playing a significant role at various points. As throughout the Winter Package, emphasis is laid on using market measures wherever possible, so that forced disconnections, for example, should be response of last resort, and Member States facing a crisis should not automatically seek to curtail outbound cross-border power flows.
The ACER Regulation
It comes as no surprise that the Winter Package proposes conferring more powers on ACER. So, for example, the methodologies and calculations underlying the European resource adequacy assessment will require the approval of, and may be amended by, ACER – since, as one of the recitals to the draft Regulation notes, "fragmented national state interventions in energy markets constitute an increasing risk to the proper functioning of cross-border electricity markets". But the draft Regulation is far from representing a major transformation of ACER into an EU energy super-regulator.
The Innovation Communication
The Innovation Communication picks up on a number of the themes emphasised in the various legislative proposals. It builds on existing initiatives, for example within the framework of the EU's Horizon 2020 funding programme, for which it includes some new money. The need to leverage more private sector investment in innovative energy-related technologies is noted, with some examples of where this has already been achieved. The Communication also states that the Commission, with Member States, will take a leading role in two of the workstreams identified by the international Mission Innovation Initiative.
Four particular priorities are singled out as technology focus areas for EU innovation funding:
- Energy storage solutions, including the (perhaps not unambitious) objective of "re-launching the production of battery cells in Europe".
- Electro-mobility and a more integrated urban transport system, which amongst other things will include tackling "fragmentation in the developing market of low-emission transport".
- Decarbonising the EU building stock by 2050: going beyond "today's nearly zero-energy designs" to include e.g. the application of circular economy principles.
- Integration of renewables: reducing the costs of existing established technologies; promoting new technologies like building-integrated photovoltaics; and intensifying efforts to integrate renewables through storage and the transport sector.
Last but not least, energy efficiency. The two draft Directives on this make less wide-ranging changes to the existing legislation.
Under the revised Energy Efficiency Directive, Member States will be obliged to deliver the equivalent of 1.5% of annual energy sales (by volume) to final consumers over the period 2021-2030 – but with scope to determine how those savings are phased.
As regards the Energy Performance of Buildings Directives, there is an emphasis on encouraging the use of smart technologies. There is also a requirement, when building or carrying out major renovations of buildings with more than 10 car parking spaces, to install one alternative fuel re-charging point for every 10 spaces in a non-residential context and to put in pre-cabling for re-charging points for EVs in all spaces in a residential context. In the non-residential context at least, the re-charging point must be "capable of starting and spotting charging in relation to price signals". There are also some new requirements to monitor the energy efficiency of non-residential buildings, presumably in the hope that if their owners become aware of how much inefficiencies of design or operation are costing them, they will invest in improvements.
At the same time, the Commission has issued an ecodesign working plan for 2016-2019, reminding us as it does so that EU ecodesign and energy labelling deliver "energy savings equivalent to the annual consumption of Italy" and "save almost €500 per year" on household energy bills, as well as delivering approximately €55 billion extra revenue for industry.
One of the many energy-sector questions raised by the UK's decision to leave the EU is on what terms participants in the electricity markets in GB and Northern Ireland (and indeed the Republic of Ireland, until such time as it has a direct interconnection with Continental Europe) may be able to continue to participate in the EU's single electricity market in a post-Brexit world. Possible models for this include membership of the European Economic Area (as an EFTA, rather than an EU state) or joining the Energy Community (many of whose members are candidates for EU membership, but disputes within which are resolved by a political Association Council without reference to the Court of Justice of the EU).
The Winter Package in its published form casts no direct light on this subject. However, in a version of the main legislative proposals that was leaked only a couple of weeks before they were published, a number of the draft measures (such as the draft revised IMED) included a couple of articles that appeared to offer some grounds for hope – if continued UK membership of the single EU electricity market is the sort of prospect that makes you hopeful.
- Like the EU itself, the Energy Community is currently operating on (or is working towards) the version of the single electricity and gas markets set out in the Third Package of EU liberalisation measures adopted in 2009. The leaked draft revised IMED set out a process for the Energy Community and the Commission to incorporate the revised Directive into the Energy Community's legislative framework. So if the UK was happy with the final form of the Winter Package legislation, the option of continuing to be subject to and getting the benefit of it as a member of the Energy Community would be a possible option.
- On the other hand, once the UK ceases to be an EU Member State, and assuming it does not opt for EEA membership, it will simply become a "third country" (with or without the benefit of a bespoke EU / UK free trade agreement). The leaked draft revised IMED suggested that third countries may participate in the single electricity market provided that they agree to adopt, and apply, "the main provisions" of the Winter Package legislation; EU state aid rules; the REMIT rules on wholesale energy market integrity; "environmental rules with relevant for the power sector"; and rules on enforcement and judicial oversight that require it to submit either to the authority of the Commission and the CJEU or "to a specific non-domestic enforcement body and a neutral non-domestic Court or arbitration body which is independent from the respective third country".
Reading these provisions in the UK, it was hard not to see them as drafted with Brexit in mind. Of course, the EU is, or aspires to be, physically connected to power systems in other non-EU countries as well (such as the potential solar energy exporters of North Africa), so it would be wrong to see them entirely in that light.
How the absence of such provisions, or the prospect of their potential reinsertion, will affect the dynamics of the UK's participation in negotiations on the Winter Package (which is likely to take place while the UK is still a Member State) is another question. In our view, the UK and its electricity industry stakeholders should in any event try to play a leading and constructive role in the whole of the negotiations on the Winter Package, as they have in negotiation on past internal energy market measures.
Maybe, in one sense, it is better that the draft provisions on third country participation have not been included at this stage. Similar provisions could be negotiated on a standalone basis later, and include the gas as well as electricity single markets, for example. By leaving them out of the Winter Package (for whatever reason), the Commission may have prevented the UK team from being unduly distracted from the main subject of the legislative proposals, or expending its negotiating capital on their Brexit dimension.
The Winter Package covers a lot of ground, but then it needs to do so, since the next ten years are acknowledged to be crucial to the success of global efforts to avoid dangerous climate change. It may not be as radical as some would like, but then whilst some of its requirements are already more or less met by a number of Member States, for others they may represent a considerable challenge. In one sense it is a timely reminder of both the scope and the limitations of the European project.
There are a lot of links between the individual pieces of draft legislation. There are also a number of areas where the drafting suggests that some key concepts have not yet been absolutely fully thought out. Steering negotiations so as to result in a clear and coherent legal framework will be difficult. The risks of (calculated or inadvertent) lack of clarity in the final texts may be higher than is usual with EU legislation, leading to wrangles with regulators and before the courts down the line – or simply having a chilling effect on what could be useful activity. However, since the need for action is urgent, waiting for perfect legislation is not a luxury the EU can afford. So it is vital that those with an interest in making Energy Union work scrutinise the parts of the Winter Package that matter to them carefully, and tell their national governments or MEPs where they find it wanting.
Dentons will be holding a breakfast discussion on the Winter Package at our London office on 8 December 2016 (8.30 to 10 am). If you would like to attend, please email email@example.com.
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.