‘Some Kind of Balance’: the Notion of a ‘Fully Operational’ Internal Energy Market and the Maintenance of National Preferences for Renewable Production

To what extent does EU law permit national schemes for the support of renewable energy generation, to discriminate in favour of domestic production against imports? That was the question directly addressed in two recent decisions of the European Court of Justice (the Grand Chamber ruling of 1 July 2014 in Ålands Vindkraft (case C-573/12) and the ruling of the Fourth Chamber of 11 September 2014 in Essent Belgium (joined cases C-204 to C208/12).

29th September 2014

To what extent does EU law permit national schemes for the support of renewable energy generation, to discriminate in favour of domestic production against imports? That was the question directly addressed in two recent decisions of the European Court of Justice (the Grand Chamber ruling of 1 July 2014 in Ålands Vindkraft (case C-573/12) and the ruling of the Fourth Chamber of 11 September 2014 in Essent Belgium (joined cases C-204 to C208/12).

At issue in each case was a national scheme (first in Sweden and then in Belgium) which incentivised generators of renewable electricity within the national territory. Suppliers were required to purchase their output in order to meet national target levels but prevented those same suppliers from purchasing any of their ‘quota’ from generators located outside the national territory (e.g., by importing power from those generators).

In particular, both cases addressed the fundamental question of whether such national preferences amounted to restrictions on the free movement of goods (electricity being classified as goods for Treaty purposes) under Article 34 TFEU and, if so, whether such restrictions were capable of being justified as a proportionate response to environmental protection concerns.  

Background

This was a question which the ECJ had examined previously in the landmark PreussenElectra ruling in 2001 in which it had found that national preferences could be justified on environmental grounds.  However, that ruling was delivered at a time when the internal energy market was in a relatively under-developed state when the key directives in the then First Energy Package recognising that they constituted only a ‘further phase’ in the liberalisation of the electricity market which left some obstacles to trade in electricity between Member States in place.

Since then the internal market has become more closely integrated, with a Second (and now Third) Energy Package replacing the First.  The implications of the Second Package (dating from 2003) were discussed in the Grand Chamber ruling of 2010 in Federutility (case C-265/08) which emphasised the fundamental role of the market (‘the operation of supply and demand’) in determining how the energy industry is run and governed in each of the Member States.

Ålands Vindkraft & Essent Belgium

The Grand Chamber in Ålands Vindkraft acknowledged that the basis upon which the court in PreussenElectra had arrived at its conclusions (notably the view expressed as to the ‘incomplete’ nature of the internal energy market at that time) was no longer necessarily reflective of the current position.  Specifically it noted that the purpose of legislation such as the Second Energy Package had been, “to enable a fully operational internal market in electricity to be established, in which the cross-border trade in electricity within the European Union is intensified and all suppliers will be able to supply their goods and consumers will be free to choose their supplier” (paragraph 86).  However, the Court remained of the view that, in the case of support for renewable generation, the nature of electricity (i.e., its essentially ‘untraceable’ quality) was such that a Member State, confronted with a binding national greenhouse gas target, could legitimately design a support scheme so as to benefit only those producers falling within its jurisdiction.

However, as the Grand Chamber pointed out, the finding that a national preference of this sort was one which a Member State could legitimately express left open the question of whether the design of the support scheme in question went further in pursuing that legitimate objective than would be justifiable under the principle of proportionality.  Importantly, in that context, the Court noted that, by its very nature, a national support scheme which uses ‘green certificates’ and is designed to impose the additional cost of producing green electricity directly on the market (i.e., by suppliers and users / consumers of electricity), “requires for its proper functioning market mechanisms that are capable of enabling traders — who are subject to the quota obligation and who do not yet possess the certificates required to discharge that obligation — to obtain certificates effectively and under fair terms” (paragraph 113). This, the Court held, meant that it was, “important that mechanisms be established which ensure the creation of a genuine market for certificates in which supply can match demand, reaching some kind of balance, so that it is actually possible for the relevant suppliers and users to obtain certificates under fair terms” (paragraph 114).  Commenting on the design of the Swedish scheme in question, the Court noted that, “the green certificates are actually sold, in the Member State concerned, on a market that is open to competition and, accordingly, the price of those certificates is determined by the interplay of supply and demand” (paragraph 115).

Finally, the Court addressed the proportionality of the mechanism in the Swedish scheme under which suppliers and users which do not meet their quota obligation have to pay a specific fee.  According to the Court, while the imposition of such a fee might be considered necessary as an incentive to producers (to increase their production of green electricity) and to traders (to take steps to acquire the requisite certificates), “it is none the less necessary that neither the method for determining that fee nor the amount of that fee go beyond what is necessary for the purposes of providing such an incentive; in particular, it is necessary in that connection that no excessive penalties be imposed on the traders concerned” (paragraph 116).

Implications

On one view, the rulings in Ålands Vindkraft and in Essent Belgium  can be read as a broad reaffirmation of the rights of individual Member States to grant preferred status to their domestic renewables industry when looking to fulfill their national emissions targets.   On the other hand, however, these rulings would also seem to place new emphasis on the ‘fully operational’ nature of the internal energy market and its role in securing the efficient outcomes for energy consumers, including where they are being asked by Member States to shoulder the cost of delivering EU environmental policies.  This suggests that where there are constraints on the ability of domestic renewable production to meet domestic demand for ‘green power’ under ‘fair terms’ then Member States may in future have to permit excess demand to be satisfied by imports if they are to avoid legal action.