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With the publication of the Communication on a new policy framework for climate and energy policy on 22ndJanuary 2014,[1] the Commission put forward a binding EU level headline target of 40% reduction of domestic EU greenhouse gas (GHG) emissions in 2030 compared to emissions in 1990. This target is supposed to shape  the European climate and energy policy from 2020 till 2030. Notably, no binding national renewable energy targets were proposed, rather the Commission similarly proposed a binding EU level headline target as well, this time of 27% renewables by 2030. In order to reach this binding EU level headline target for renewables, the Commission proposed a new governance framework based on national plans. Based on upcoming guidance by the Commission, these plans shall be prepared by the Member States under a common approach, which shall ensure stronger investor certainty and greater transparency, and shall enhance coherence, EU coordination and surveillance. An iterative process between the Commission and Member States is supposed to guarantee the plans are sufficiently ambitious, as well as their consistency and compliance over time. However, there have been questions as regards what this “New Governance” actually is, and in particular which powers the Commission may have under it in order to make sure that the EU level binding renewable energy target is reached.

To that end, we will first look into the definition and the history of the New Governance approach. Then we will turn to its application in practice and see how it normally works, before we look at some areas in which it has been used so far. After that we will turn to the criticism issued on the New Governance approach, applied in other areas, and will draw parallels to renewable energy policy. Finally, we will conclude on the consequences for the binding EU level renewable energy target.

 

[1]              European Commission (2014) A policy framework for climate and energy in the period from 2020 to 2030, COM(2014) 15 FINAL, Brussels, 22.1.2014

What is the “New Governance”?

New Governance has traditionally evolved where old hierarchies are being displaced or – for example, in the case of EU education policies – never existed. As the EU is only competent in areas where the Member States have granted it competences, New Governance was deemed a solution to create more coherence in areas where the Member States were more reluctant to leave the field to the EU. Some suggest that we are witnessing new forms of EU governance that simply supplement and compensate for some of the deficits of old forms of EU governance.[1]

The notion of an open method of coordination (OMC) materialized first in the conclusions of the Lisbon Summit in March 2000. The leaders at Lisbon affixed this new mode of non-binding governance in the EU’s official tool kit and called for its application to many policy areas touching the heart of the welfare state, thus those more “sensitive” areas where the Member States did not really want to step back from the legislative seat and leave it to the EU. The OMC was inspired by the perceived success of the “soft” governance tools utilized by European Employment Strategy since 1998 to pursue EU objectives by enhancing state’s problem-solving capacity via mutual learning processes and creating peer pressure on the Member States by increasing transparency (e.g. indicators, performance & policy targets) and multilateral surveillance, while leaving decision-making authority with the Member States themselves.

Taken at face value, the OMC is a collection of mechanisms previously developed under the broad ‘soft law’ tradition in the EU, such as collective recommendations, review and monitoring, and benchmarking, which also bear similarities with the Organization for Economic Co-operation and Development (OECD) practices.[2]

How does it normally work?

In the Lisbon Strategy, the OMC is described as ‘the means of spreading best practice and achieving greater convergences towards the main EU goals’.[3] The OMC is a new form of governance in the context of the European Union, as it is a less supranational, less integrationist one than the general “Community Method” of legislation, which – in contrast – is characterized by a) the Commission’s monopoly of the right of initiative; b) widespread use of qualified majority voting in the Council; c) an active role for the European Parliament; and d) the uniform interpretation of Community law by the Court of Justice[4]. The OMC on the other hand involves so-called "soft law" measures which are more or less binding on the Member States in varying degrees but which never take the form of directives, regulations or decisions.

As form of EU soft law, a process of policymaking which does not lead to binding EU legislative measures nor require Member States to change their law, the OMC works in stages:

Firstly, countries agree on common objectives for the EU (agenda setting), establishing quantitative and qualitative indicators, guidelines and benchmarks as a means of comparing best practice and measuring progress, monitored by the Commission (benchmarking). Secondly, these European guidelines are translated into national and regional policies by setting specific targets and adoption measures (what is or has been called the “National Action Plan”) and finally, the period of monitoring and evaluation organized as a mutual learning process (peer review).[5]

In short, the OMC can be described as a soft law mechanism that supports the Member States in developing their own policies in order to achieve common objectives regarding a subject of common concern.[6] Therefore, the OMC creates an iterative process in which it fosters mutual learning by the exchange of good practices and innovative approaches.

Where has it been used so far?

The employment title of the Treaty on the Functioning of the European Union (TFEU), originally introduced by the 1997 Treaty of Amsterdam, is perceived as the original model of the OMC, encapsulated in Article 148 TFEU. Employment policy is the paradigm case of the OMC: an annual report leads to guidelines, which the Member States ‘shall take into account in their employment policies’, followed by an annual report on national employment policy, reviewed in a report by the Council and Commission upon which the European Council may make (non-binding) recommendations to Member States.[7]

However, the OMC is not restricted to the sphere of employment. It is being applied to other policy areas as well, such as research and development, social protection, enterprise policy and immigration[8]. The Commission’s Social Policy Agenda envisages the OMC being applied to all areas of social policy; a specific example is the Community Action Programme to combat discrimination, adopted in November 2000 (Decision 2000/750/EC) for the period 2001-2005. Also, it has been applied in asylum and immigration policy, health policy and environmental policy. With the exception of environmental and social policy, up to present, private actors have hardly any role to play neither in the formulation of joint goals at the EU level nor in their implementation at the national level.

Fields such as environmental policy and sustainable development in which a broad range of hard and soft law instruments already exist have begun to be ‘integrated’ into the Lisbon strategy on economic and social governance, and OMC-type strategies have also been proposed in areas where at present the EC has few or no legal powers, such as youth policy.[9]

General criticism on the New Governance

The OMC is still under criticism. The main criticism is that there are so many uncertainties about it, due to the fact that there is little legislation but – if at all – only negotiations and sometimes recommendations. Another piece of criticism may relate to the fact, that the European Parliament is not involved – thus that the normal legislative procedures within the EU are being replaced by something negotiated only between the Commission and the Member States. What needs to be discussed in particular is the integration capacity of the OMC assessed by its legal dynamics and several questions remain open today: Which instruments are actually involved? How are they related?  Does the OMC create “ripples” in the national legal order, and if yes, what kind of “ripples”?[10] Applying this criticism to the Commission's proposal to use the New Governance approach in order to reach the binding EU level target of at least 27% renewable energy by 2030, it remains rather unclear how this system would be able to make up for the lack of national binding targets: How can non-binding national plans provide for the required long-term certainty? On what legal basis will the Commission assess these plans and develop recommendations?[11] What will the Commission do in case the recommendations are not respected? Can the Member States be “forced” to stick to their national plans?

Preliminary 'conclusions' and 'solutions' to the open questions on New Governance to reach a binding EU level renewable energy target

Having set out what the OMC generally means and where it has been used, it becomes clear that this sort of soft law approach seems to be deemed fit for policy areas which are considered “sensitive”, thus areas which touch the nature of the welfare state and where the EU traditionally has little to say.

That the Commission now proposes such an approach with regards to renewable energy policy indicates that this policy area has become “sensitive” as well, so that the EU more and more withdraws from exercising any binding legislative competences. This step back may have to do with the opposition the Member States lately showed towards any binding obligations for them to develop renewable energy. It might also have to do with the Commission's “fear” of Member States actually invoking Art. 194(2) TFEU, which is said to protect the Member States' sovereignty over their national energy mix.[12]

In any event, from the history and application of OMC so far, as well as from the Commission's proposal itself, we see that New Governance will not include any binding legislation. In the climate and energy package, the Commission even expressly states that such might be proposed only later after the iterative process the New Governance approach is deemed to be has proven to fail. Rather, everything will be in the hands of the Member States. They will set out in national plans what they are prepared to do and the Commission may be able to give recommendations, in case those commitments do not seem to suffice for meeting the binding EU level target. However, classically and according to the wording in Art. 288 TFEU, such recommendations are again non-binding. The Member States can thus simply ignore them, it appears. The Commission will not be able to do anything.[13]

With that, what will be the New Governance for renewable energy in Europe, if the Commission gets the proposal through, will in fact be very little. National policies may or may not add up to the binding EU level target, and – as there are no binding obligations on the Member States – the EU will not have any tools at hand to make the Member States do anything. Thus, the likelihood that the binding EU level target will not be met is quite big. In fact, one may ask why the EU is setting itself a target at all, when the means to reach it are so limited.

 

 

[1]              Heritier, A. (2003) New Modes of Governance in Europe: increasing political capacity and policy effectiveness? In T. Boerzel & R. Chichowski (Eds) The State of the European Union, vol. 6, 105-126. Oxford: Oxford University Press.

[2]              Marcussen, M. (2003) ‘Multilateral surveillance and the OECD. Playing the ideagame’, in K. Armingeon and M. Beyeler (eds), OECD Surveillance and Welfare States in Western Europe, Cheltenham: Edward Elgar.

[3]              European Council of Lisbon, Presidency Conclusions of March 2000, par. 37 (Lisbon Strategy) available on: http://europa.eu/european-council/index_en.htm.

[4]              Wallace, Helen, 2000: The Institutional Setting: Five Variations on a Theme. In: Helen Wallace / William Wallace (eds.), Policy-Making in the European Union. Oxford: Oxford University Press, 3-37.

[5]              See for a more elaborate description of the OMC §1.2. See among many others, also: Pochet 2005, p. 41; Sakellaropoulos, Th. (2004), ‘The Open Method of Coordination: A Sound Instrument for the Modernization of the European Social Model’, in Th. Sakellaropoulos and J. Berghman (eds.), Connecting Welfare Diversity within the European Social Model. Antwerpen: Intersentia, p. 55-92, in particular p. 56; and Vandenbroucke, F. (2002a), ‘The EU and Social Protection: What Should the European Convention Propose?’, MPIfG Working Paper 02/6, p. 9-10.

[6]              Kenner, Jeff (Spring 1999) “The EU Employment Title and the ‘Third Way’: Making Soft Law Work?” The International Journal of Comparative Labour Law and Industrial Relations, v15, n1 pp. 33-60.

[7]              See http://www.eurofound.europa.eu/areas/industrialrelations/dictionary/definitions/openmethodofcoordination.htm para 3-4

[8]              Smismans, S. (2006) 'New Modes of Governance and the Participatory Myth'. European Governance PapersVol., No. (N-06-01).

[9]              COM(2001)681 Commission White Paper on a New Impetus for European Youth.

[10]             Ashiagbor (2004), ‘The European Employment Strategy and the regulation of part-time work’, In S. Sciarra, P. Davies and M. Freedland (eds), Employment Policy and the regulation of Part-time work in the European Union. A Comparative Analysis. Cambridge: Cambridge University Press, p. 35-62.

[11]             E.g. Szyszczak 2000, p. 2-5 (legal base) and p. 171-173 (compliance upheld by European Court of Justice); Nielsen 2000, p. 56-67 (chapter II.6, which includes subjects such as direct effect and supremacy of EU law); Barnard 2006, p. 62-104 (chapter 2, which includes competence, decision-making and the legislative process); Blanpain 2008, p. 104-110 (legislative process and decision-making), p. 151-160 (competence).

[12]             For a detailed discussion on the interpretation of Art. 194(2) TFEU and the consequences for European renewable energy policy, see e.g. Fouquet et al. D3.2 Report Report on legal requirements and policy recommendations for the adoption and implementation of a potential harmonised RES support scheme, prepared in the course of the beyond2020 project, available at: http://www.res-policy-beyond2020.eu/pdffinal/Report%20on%20legal%20requirements%20and%20policy%20recommendations%20for%20the%20adoption%20and%20implementation%20of%20a%20potential%20harmonised%20RES%20support%20scheme%20(beyond2020%20-%20D3-2).pdf.

[13]             For a more detailed assessment of the New Governance approach as proposed in the climate and energy package 2030, see: Fouquet & Nysten, Legal opinion legal assessment of the European Commission's proposal for renewable energy policy beyond 2020, available at: http://stopclimatechange.net/fileadmin/content/documents/climate%20policy/Legal_Opinion_European_Parliament_Green_group.pdf.

I.               Background

Lately, there has been quite some discussion in the media whether national renewable energy support schemes, i.e. support schemes which only benefit renewable energy installations which are located within the territory of the respective Member State maintaining the support scheme, would be against primary European law and would thus have to be abolished. The Renewable Energy Directive 2009/28/EC was said to be invalid and would have to be changed by the European Commission. In consequence, it was said, Member States would have to support renewable energy installations anywhere within the European Union.

This paper seeks to provide an overview over the legal framework of national renewable energy support schemes, starting with the rules on free movement of goods, their interpretation with relation to renewable energy so far given by the European Court of Justice, turning to the Renewable Directive and the regime it presents for national renewable energy support schemes and ending with the conclusions of the Advocate General at the European Court of Justice, who lately had to give his conclusions in two specific cases relating to this topic, and to a certain extent caused the discussions. 

It will not be argued in favor or against a certain interpretation, but it is the intention purely to inform.

However, in an outlook at the very end, the potential future developments will be briefly summarized.

I.               Article 34 TFEU

Article 34 of the Treaty on the Functioning of the European Union (TFEU) states:

“Quantitative restrictions on imports and all measures having equivalent effect shall be prohibited between Member States.”

According to the case-law of the European Court of Justice, this prohibition is intended to include “all measures having equivalent effect to quantitative restrictions on imports, covers any national measure which is capable of hindering, directly or indirectly, actually or potentially, intra-Community trade”.[1]

However, such measures can in some, limited cases be justified. Article 36 TFEU in this respect allows “prohibitions or restrictions on imports (…)  justified on the grounds of public morality, public policy of public security; the protection of health and life of humans, animals or plants; the protection of national treasures possessing artistic, historic or archaeological value; or the protection of industrial and commercial property” at least as long they are not arbitrary discrimination of disguised trade restrictions.

The European Court of Justice has applied those justifications in the past to measures which openly discriminate based on the origin of the goods. For cases which do not discriminate, but only implicitly interfere with the free movement of goods by making it more difficult for goods from other Member States to participate in the national market (so-called “indistinctly applicable rules” which thus apply to all goods, but are harder to be met goods from other Member States), additional justifications may be used.

In the past, the Court has for examples accepted the following ones to justify indistinctly applicable rules:

-       Consumer protection, provided that the national rule “really works” on the facts of the case (i.e. protects consumer choice rather than restricting it to give an advantage to national industry) and there are no less restrictive means to achieve that objective;[2]

-       Fairness of commercial transactions, for example when it comes to rules against counterfeit and imitations, provided that they do not prohibit or restrict the marketing of goods which have been made according to fair and traditional practices of another Member State merely because they are similar to the goods produced in the Member State having the rule;[3]

-       Public health, which can, as mentioned above, also justify discriminatory measures;[4] or

-       Environmental protection.[5]

Those justifications are generally only available in the absence of Community legislation, but the list is not exhaustive, but other reasons may be accepted by the Court as well. Generally, however, the measures will have to stand a balancing test, i.e. the European Court of Justice will look whether they are the least restrictive means to meet the objective and thus do not go beyond what is strictly necessary. 

II.             PreussenElektra[6]

The case concerned the predecessor of the present German renewable energy support scheme, the Stromeinspeisegesetz. Similar to the situation today under the Erneuerbare-Energien-Gesetz, the Stromeinspeisegesetz provided for a purchase obligation according to which energy traders had to buy renewable electricity at a fixed price from producers located within Germany.

The European Court of Justice first looked to whether such a provision could constitute an obstacle to the free movement of goods as enshrined in Article 34 TFEU and found that according to its own case-law,

“that an obligation placed on traders in a Member State to obtain a certain percentage of their supplies of a given product from a national supplier limits to that extent the possibility of importing the same product by preventing those traders from obtaining supplies in respect of part of their needs from traders situated in other Member States (see, to that effect, Case 72/83 Campus Oil [1984] ECR 2727, paragraph 16; Case C-21/88 Du Pont de Nemours Italiana [1990] ECR I-889, paragraph 11).”

However, in case, the Court found the obstacle to be justified. First it was referred to the objective of environmental protection, then to the protection of health and life of humans, animals and plants, to both of which renewable energy is said to contribute. References were made to several provisions in European law expressing the importance of those objectives, such as the former Internal Electricity Market Directive 96/92, which expressly stated in Recital 29 that for purposes of environmental protection, Member States were allowed to give priority to electricity from renewable energy sources.

Thus, overall, the European Court of Justice decided that an obligation to purchase renewable electricity from national producers resulting in a certain limit to imports from other Member States was an obstacle to free movement, but justified for the sake of environmental protection and the protection of health and life of humans, animals and plants.

In the ruling the formulation was then a bit put in perspective, and it was said that

“In the current state of Community law concerning the electricity market, such provisions are not incompatible with [Article 34].”

One addition the Court made related to the nature of electricity, and the traceability of the green characteristics of renewable energy. It was stated in par. 79f. of the judgment:

“Moreover, the nature of electricity is such that, once it has been allowed into the transmission or distribution system, it is difficult to determine its origin and in particular the source of energy from which it was produced.

In that respect, the Commission took the view, in its Proposal for a Directive 2000/C 311 E/22 of the European Parliament and of the Council on the promotion of electricity from renewable energy sources in the internal electricity market (OJ 2000 C 311 E, p. 320), submitted on 10 May 2000, that the implementation in each Member State of a system of certificates of origin for electricity produced from renewable sources, capable of being the subject of mutual recognition, was essential in order to make trade in that type of electricity both reliable and possible in practice.”

 

III.           The Renewable Energy Directive 2009/28/EC

The Renewable Energy Directive 2009/28/EC entered into force more than eight years after the PreussenElektra judgment. Article 3(3) Directive 2009/28/EC states:

“In order to reach the targets set in paragraphs 1 and 2 of this Article Member States may, inter alia, apply the following measures:

(a) support schemes;

(b) measures of cooperation between different Member States and with third countries for achieving their national overall targets in accordance with Articles 5 to 11.

Without prejudice to Articles 87 and 88 of the Treaty, Member States shall have the right to decide, in accordance with Articles 5 to 11 of this Directive, to which extent they support energy from renewable sources which is produced in a different Member State.”

Recital 25 Directive 2009/28/EC in this respect adds:

“…This Directive aims at facilitating cross-border support of energy from renewable sources without affecting national support schemes. It introduces optional cooperation mechanisms between Member States which allow them to agree on the extent to which one Member State supports the energy production in another and on the extent to which the energy production from renewable sources should count towards the national overall target of one or the other. In order to ensure the effectiveness of both measures of target compliance, i.e. national support schemes and cooperation mechanisms, it is essential that Member States are able to determine if and to what extent their national support schemes apply to energy from renewable sources produced in other Member States and to agree on this by applying the cooperation mechanisms provided for in this Directive.”

Thus, supporting renewable energy installations in other Member States, from the pure wording of the Directive, appears to be voluntary. The cooperation mechanisms introduced are at the Member States’ disposal if they decide that they want to support renewable energy production abroad. While the Directive does not seem to prohibit any system which would support renewable energy production outside the own territory of a Member State outside the cooperation mechanisms,  it seems clear that such could not be used by the Member States in order to meet their binding national renewable energy targets as imposed by Article 3 Directive 2009/28/EC.

IV.          Advocate General Bot’s conclusions

On January 28, 2014, Advocate General Yves Bot delivered his conclusions in the case C-573/12 to the European Court of Justice, in which he stated that – according to his understanding of the law – Article 3(3) of the Directive 2009/28/EC would be violating Article 34 TFEU to the extent that it does make cooperation voluntary and thus does allow the Member States to principally discriminate renewable energy produced in other countries by generally denying access to the national support scheme.

The case concerned a power plant located on the Ålands islands, thus close to the Swedish coast but being an autonomous region administratively belonging to Finland. Sweden, maintaining a green certificate scheme to support renewable electricity, refused issuing certificates to the plant, which was connected to the Swedish but not to the Norwegian grid, based on the fact that it was not on Swedish grounds, thus not a “Swedish” renewable energy installation.

The Advocate General answered the first question by the Swedish court, whether such a green certificate scheme would be a support scheme in accordance with the Directive 2009/28/EC, in the affirmative. Then he turned to the Directive 2009/28/EC itself and while he concluded that it would – without any doubts as regards its proper interpretation – make support to renewable energy produced in other Member States voluntary. However, the second question, whether the Swedish system was in line with Article 34 TFEU, he answered negatively – and not only for the Swedish system but also for the Directive 2009/28/EC.

In short, he found that Article 34 TFEU would not allow a national rule, according to which producers of renewable electricity are granted green certificates, which have to be used by electricity suppliers and users in order to reach a certain quota, in so far as this rule excludes producers whose installations are located in another Member State. Article 3(3) of the Directive 2009/28/EC would be invalid, according to him, in so far as it would allow the Member States to restrict the access to their national support schemes for producers with renewable electricity installations located in other Member States.

To substantiate his findings he referred to the development of the internal energy market as an objective of the European Union. Also he said that since there are guarantees of origin one can trace the “green quality” of the renewable electricity – even though they may not be used for target achievement as expressed in Article 15(3) of the Directive 2009/28/EC and do not by themselves give any right in the course of a national support scheme. Therefore, the line of argumentation in PreussenElektra would no longer fly: Unlike back then, now there would be a means of proving the “green quality”. He added that the attempt to rely on the restrictions as regards the use of guarantees of origin in the Directive 2009/28/EC would amount to a justification of a breach of primary EU law by reference to secondary EU law, which under the hierarchy of norms is anyways not possible.

Having set out those principles underlying his conclusions, the Advocate General turned to the arguments presented by the parties in order to support their submission that any restrictions would be justified for the purposes of environmental protection: First, he said, that there would be no proof that allowing renewable electricity produced in other Member States access to the national support scheme would undermine the functioning of such schemes. Rather, the extent to which such electricity would in fact be imported was limited due to technical obstacles in the international electricity trade. Further, the Member States would have tools at hand in order to adapt their support schemes, i.e. to avoid the price decline of green certificates through – for example – setting a higher quota. Second, he rejected the argument that “opening up” national support schemes would require a cooperation agreement. He seems to agree with the German submission that the cooperation mechanisms under the Directive 2009/28/EC were intended to help the Member States, but finds that in practice they may rather hinder attempts to “open up” national support schemes: Prohibiting cooperation agreements may lead to adaption and coordination of national support schemes, the Advocate General seems to think. Third, he says that the argument that Article 194(2) AEUV protects the sovereignty of the Member States over their national energy mix cannot be successfully invoked either, as the Directive 2009/28/EC itself and in particular the binding national renewable energy targets would prove that such restrictions are possible. Fourth, he rejects the argument that “open” support schemes would allow cherry-picking by the renewable energy producers and abuse, as he thinks that the cooperation mechanisms could be used so as to adapt and coordinate national support schemes, so that e.g. getting support from two Member States at the same time would not be possible. Finally, he considers the argument brought forward by the Swedish Regulator that allowing support to renewable electricity installations in other Member States would lead to a situation in which national consumers would have to pay for renewable electricity installations in other Member States. In this regard he questions how this could be related to environmental protection, as environmental protection would rather require making national consumers pay for renewable electricity imports instead of letting them pay for national production from fossil fuels.

Thus, Advocate General Bot, after discussion and rejection of all the arguments presented, insists in his conclusions and asks the European Court of Justice to invalidate Article 3(3) of the Directive 2009/28/EC in so far as it allows restrictions in national support schemes as regards renewable electricity installations located in other Member States.

However, as he understands the problems this would create – i.e. the Directive 2009/28/EC would need to be amended – he also asks to give a “period of grace” of 24 months during which the Directive 2009/28/EC would remain in force the way it is, so as to allow for its amendment.

V.            Summary and Outlook

With the conclusions of the Advocate General, the oral proceedings have ended and the judges will now take the case into consideration and draft their judgment. This normally takes between three and five months.

Noteworthy in this regard is that there is a – at least somewhat – similar case on the desk of the European Court of Justice: In May 2013 Advocate General Bot concluded in the joined cases C-204/12 until C-208/12 that the Flemish regulator was acting in conflict with Article 34 TFEU when he rejected foreign guarantees of origin in the context of meeting the Flemish quota obligation support scheme while accepting Flemish guarantees of origin. No judgment has been issued so far, and it may well be that the European Court of Justice will take the opportunity to treat the two cases – and thus the question of the relation between national support schemes under the Directive 2009/28/EC and the free movement of goods according to Article 34 TFEU – together in order to come to a coherent and hopefully satisfactory outcome. In this regard, one may add that the European Court of Justice is not in any way bound by what the Advocate General states, although in most cases the judges follow the Advocate General.

In any event, at least as long as there is no judgment, the Directive 2009/28/EC remains in force as it is.

 

[1] ECJ, Case 8/74 Dassonville [1974] ECR 837, par. 5.

[2] E.g. ECJ, Case 178/84 Commission v. Germany [1987] ECR 1227.

[3] E.g. ECJ Case 58/80 Dansk Supermarked v. Imerco [1981] ECR 181.

[4]E .g. ECJ, Case 178/84 Commission v. Germany [1987] ECR 1227.

[5] E.g. ECJ, Case 302/86 Commission v. Denmark [1988] ECR 4607.

[6] ECJ, Case C-378/98 PreussenElektra AG v. Schleswag AG [2001] ECR I-2099.

In June 2014, the European Commission adopted new Guidelines on State aid for environmental protection and energy 2014–2020 (the Guidelines). One of the main points of the Guidelines is to determine the rules for granting state aid for energy generated from renewable sources so that it is compatible with European competition law. The Guidelines were published in the Official Journal on 28 June 2014 and since 1 July 2014 are applied to all new State aid measures, as well as to existing ones already in the assessment procedure.  However, as there are many questions relating to the future design and development of existing renewable energy support scheme, this paper shall – based on two examples – show how Member States can fill in the requirements under the Guidelines.[1]

 

[1] See also: Understanding State aid in European Law, updated July 2014, available for download under: http://keepontrack.eu/contents/virtualhelpdeskdocuments/update-state-aid.pdf.

I.               The rules under the new Guidelines

With regards to electricity from renewable energy sources, the Guidelines foresee a gradual introduction of competitive bidding processes for allocating public support. The Guidelines are applicable until 2020, preparing the ground for achieving the objectives set in the 2030 Framework. In this regard, according to the European Commission, it is expected that in the period 2020 – 2030 established renewable energy sources will become grid-competitive, implying that subsidies and exemptions from balancing responsibilities should be phased out gradually. To ensure this, market instruments such as auctioning or competitive bidding process open to all generators producing electricity from renewable sources should ensure that subsidies are reduced to a minimum in view of their complete phasing out.[1]

Therefore the Guidelines prescribe the following system: Aid shall be granted to all generators as a premium in addition to the market price. All  generators must sell their electricity directly in the market. Beneficiaries must be subject to standard balancing responsibilities (an obligation on producers to compensate for short-term deviations from their previous delivery commitments). Moreover, measures shall be put in place to ensure that generators have no incentive to generate electricity in times of negative prices. Most importantly, however, the latest from 2017 onwards, the beneficiaries of the aid shall be determined in the course of a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria.[2] All these conditions do not apply to installations of less than 500 kW (wind energy up to installed 3 MW or 3 units) and demonstration projects.[3]  For installations of less than 1 MW (wind energy up to 6 MW or 6 units) no tendering is required, but the rest of the conditions apply.[4]

 

I.               Examples support schemes approved by the European Commission under the new Guidelines.

In the first couple of weeks after the adoption of the Guidelines, two renewable energy support schemes were approved. This suggests that the Member States in question had been actively following the development of the Guidelines and had been taking them into account when designing their support schemes. In order to see which trends may come up in the design and development of renewable energy support schemes also within the other Member States of the European Union (EU), one may look to those two cases for examples.

1.              United Kingdom – Contracts for Difference

In July 2014, the European Commission concluded that the United Kingdom (UK) Contracts for Difference (CfD) scheme to promote the generation of electricity from renewable sources is in line with EU state aid rules. European Commission Vice President in charge of competition policy Joaquín Almunia said: “The UK Contracts for Difference encourage all renewable energy technologies producing electricity to compete against each other for support beyond 2016. It is a fine example of how to promote the decarbonisation of the economy with market-based support mechanisms, at the lowest possible cost for consumers”.[5]

The CfD scheme will run for 10 years, with a budget of GBP 15 billion (selected individual projects will be able to receive support for up to 15 years). First payments of support to applicants based on the CfD scheme should start in April 2015. The budget will be split between three technology groups: More established technologies (such as onshore wind, solar photovoltaic, energy from waste with combined heat and power, small hydropower, landfill gas and sewage gas); less established technologies (such as offshore wind, wave, tidal stream, anaerobic digestion or geothermal energy); and biomass conversions. More established technologies will compete against each other for support in a common auction. Less established technologies will initially benefit from allocated budgets but will also be subject to competitive auctions with some degree of cross-technology competition.[6]

Aid granted under the scheme will be paid out as a variable premium on top of a reference electricity (wholesale) price, and up to a pre-defined strike price. When the average wholesale price of electricity is below the strike price, generators will receive a top-up payment. In case of wholesale electricity prices above the strike price, generators will have to repay the difference. The payments will be financed by a levy on electricity consumers.

The UK is also intending – probably no earlier than 2018 – to open their support scheme to renewable electricity produced in other Member States, most likely in the course of cooperation with Ireland. A work programme to tackle the problems identified as regards such cooperation has been adopted in August 2014.[7] 

According to the UK Renewable Energy Association (REA), it is surprising that the Government has allocated three times as much budget to less established technologies (£155 million per year) than to the cheaper, more established technologies (£50 million per year) in the first allocation round. The REA believes that it is mainly the more established technologies that can immediately plug the looming capacity crunch with low carbon generation whilst ensuring value for money for the consumer. It is nevertheless very important to foster innovation and cost reduction in the early stage technologies that offer the promise of a huge boost in engineering jobs and a price-stable, low carbon energy future.[8]

2.              Germany – Tendering scheme under the German Renewable Energy Act (EEG 2014)

The support system under the German Renewable Energy Act (EEG) is financed by electricity suppliers in respect of the electricity supplied to end consumers in Germany. Suppliers equalize the amounts among each other and pass it on to end consumers in the form of the so-called EEG-surcharge. There are still arguments being made, that the EEG system does not contain State aid after all, and the EEG 2012 is still under assessment of the European Commission. Nevertheless, Germany notified its reforms of the EEG to the European Commission.

In July 2014, the European Commission found the new EEG 2014 to be in line with EU state aid rules. “The EEG 2014 paves the way for more market integration of renewables. In the medium term this should lead to lower costs for consumers. Also, the progressive opening up of tenders to operators located in other Member States is a very positive development for the internal energy market“, said Joaquín Almunia.[9]

The EEG 2014 provides advantages at certain levels of the electricity market. Through the feed-in tariffs and premiums, producers of renewable electricity and electricity from mine gas (EEG electricity) are granted payments which guarantee that they will obtain a price for their electricity that is higher than the market price. Certain energy-intensive users are advantaged as well, because the EEG-surcharge which can be charged from them is capped above a specific minimum contribution they all have to make. Some other consumers are exempted (partially) as well from sharing in the costs of renewable energy support under certain circumstances.

While Germany considered that the EEG 2014 would not constitute State aid within the meaning of Article 107 AEUV as it would not be financed “by the State or through State resources”,  the Commission concluded that it is; the State can control, direct and influence the administration of the funds. Moreover, the State has defined to whom the advantage is to be granted, the eligibility criteria and the level of support and has entrusted the Transmission System Operators with the task to centralize and administer all financial flows related to feed-in tariffs and the EEG-surcharge. Therefore, the support for EEG electricity is financed from State resource, according to the Commission.

However, the Commission accepted that the support scheme is directed at the objective of common interest of promoting the development of renewable energy and the German authorities have indicated that the notified scheme is intended to incentivise production of EEG electricity so that the share of renewables in German electricity supply rises to 40-45% by 2025. Also the scheme contributes to achieving the overall national target set out in the Renewable Energy Directive.

The exemptions for the energy intensive industry are in accordance with the provisions of the State aid Guidelines and thus also to be considered justified. Regarding the exemptions of certain other categories of consumers, the Commission concluded that most of the exemptions and reductions are justified e.g. exemption for the electricity that is auto-generated and used for the own supply provided that for the part of the electricity that is not consumed, no support has been requested; exemption for installations having a capacity of maximum 10 kW and for a maximum of 10 MWh/year where the surcharge amount would be lower that the administrative burden related to it. For some provisions the approval was conditional, though. [10]

As regards its design, the EEG 2014 corresponds to the State aid Guidelines, not only as regards the provisions on the exemptions for the energy-intensive users, but also as regards the design of the support scheme.. It entered into force on 1 August 2014, after approval by the Commission. The yearly budget for the support of renewable electricity is estimated at around € 20 billion. Contrary to the EEG 2012, the majority of new renewable power plants will not receive fixed feed-in tariffs. Instead producers are obliged to sell the electricity on the market (with some exceptions). They will receive market premium paid on top of the market price for electricity. Until 31 December 2016 the market premiums will be determined by reference to administratively set reference values.[11]

For solar installations on the ground, a pilot tender shall be organised starting in 2015. An ordinance on pilot tenders is expected for the second half of 2014. The pilot tender shall determine the level of the premiums and allocation of the aid between participants to the tender. As of 2017, for all technologies tenders shall generally be used to set the level of the financial support under the EEG for all technologies. In addition, such tenders will be opened for up to 5% of the tendered capacity to installations located in other Member States provided that there is a cooperation agreement with Germany in accordance with the Renewable Energy Directive, Directive 2009/28/EC. The German government is already working on implementing legislation in this regard as well. Small installations (below 100 kW) will continue to benefit from feed-in tariffs and are not obliged to sell on the market and/or participate in the auctions. The EEG 2014 was approved by the Commission for 10 years.

II.             OutlookWith the UK and Germany, the first two Member States have seen their renewable energy support schemes assessed under the new Guidelines. Both basically followed the Guidelines and designed competitive system that will (in the longer term) consider electricity produced from renewable energy sources also in other Member States. This is an interesting development, in particular considering that the European Court of Justice found that free movement law does not necessarily require the Member States

[1] Communication from the Commission: Guidelines on State aid for environmental protection and energy 2014-2020, par. 108, 109. (available for download under: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014XC0628(01)&from=EN).

[2] Communication from the Commission: Guidelines on State aid for environmental protection and energy 2014-2020, par. 127. 

[3] Communication from the Commission: Guidelines on State aid for environmental protection and energy 2014-2020, par. 126. 

[4] Communication from the Commission: Guidelines on State aid for environmental protection and energy 2014-2020, par. 128.

[5] European Commission´s Press Release: State aid: Commission authorises UK aid package for renewable electricity production, 23 July 2014 (available for download under:  http://europa.eu/rapid/press-release_IP-14-866_en.htm).

[6] European Commission´s Press Release: State aid: Commission authorises UK aid package for renewable electricity production, 23 July 2014 (available for download under:  http://europa.eu/rapid/press-release_IP-14-866_en.htm).

[7] DECC, Contract for Difference for non-UK Renewable Electricity Projects , 4.08.2014 (available for download under: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/340932/DECC_Non-UK_CfD_August_2014.pdf).

[8] UK Renewable Energy Association comments on draft budget for Contracts for Difference scheme: available for download under: http://www.r-e-a.net/news/renewable-energy-association-comments-on-draft-budget-for-contracts-for-difference-scheme.

[9] European Commission´s Press release: State aid: Commission approves German renewable energy law EEG 2014, 23 July 2014 (available for download under: http://europa.eu/rapid/press-release_IP-14-867_en.htm). 

[10] European Commission´s Decision: State aid – Germany; EEG 2014 – Reform of the Renewable Energy Law. July 2014

[11] European Commission´s Press release: State aid: Commission approves German renewable energy law EEG 2014, 23 July 2014 (available for download under: http://europa.eu/rapid/press-release_IP-14-867_en.htm). 

Since the entry into force of the Guidelines for Environmental and Energy Aid 2014-2020 (Guidelines),[1] renewable energy support schemes that constitute operating aid will have to correspond to certain requirements. In a nutshell, the Guidelines foresee the introduction of market premiums (instead of feed-in tariffs) and competitive tendering procedures for renewable electricity.[2] The Guidelines not only apply to new support schemes, but also to existing ones, provided that they constitute State aid in accordance with the definition in Art. 107 Treaty on the Functioning of the European Union (TFEU).

Here, the Guidelines foresee a special regime: While all other State aid measures will have to be brought in line with the Guidelines by 2016, for existing renewable energy support schemes, par. 250 of the Guidelines provides:

“Where necessary, existing aid schemes within the meaning of Article 1(b) of Council Regulation (EC) No 659/1999 (105) concerning operating aid in support of energy from renewable sources and cogeneration only need to be adapted to these Guidelines when Member States prolong their existing schemes, have to re-notify them after expiry of the 10 years-period or after expiry of the validity of the Commission decision or change (106) them.”

In footnote 106,one can find the explanation that a “change” has to be understood as “any notifiable change within the meaning of Article 1(c) of Regulation (EC) No 659/1999.”

Thus, existing (i.e. notified and approved at the time the Guidelines entered into force) support schemes for renewable energy only need to conform with the Guidelines upon prolongation (i.e. Member State decides that while e.g. originally support scheme only planned to be in force until 2017, now it should last until 2020), re-notification (i.e. the decision of the European Commission approving the support scheme has expired and thus re-notification is necessary, even if the scheme if the scheme shall be continued) or a change “within the meaning of Article 1(c) of Regulation (EC) No 659/1999.”

While the first two events are rather clear, the question arises what such a change could constitute. As will be seen in the following overview, this question can however not be answered globally, but it will depend on the exact circumstances of the case. Nevertheless, the applicable rules will be outlined briefly below.

 

[1] Communication from the Commission — Guidelines on State aid for environmental protection and energy 2014-2020, OJ C 200, 28.6.2014, p. 1–55.

[2] Compare par. 124f. Guidelines, see also: D. Fouquet, J. Nysten, Keep on Track! The Legal Helpdesk, Application Package, How to design tendering procedures for renewable electricity, available at: http://keepontrack.eu/contents/virtualhelpdeskdocuments/tendering-rules-for-res_8501.pdf; as well as: D. Fouqet, J. Nysten, Keep on Track! The Legal Helpdesk, Dynamic Development of Support Schemes – the impact of the State aid Guidelines, available at: http://keepontrack.eu/contents/virtualhelpdeskdocuments/updatedynamicdevelopment.pdf.

• I.               Change “within the meaning of Article 1(c) of Regulation (EC) No 659/1999.”

Art. 1(c) Regulation 659/1999/EC[1] reads:

“(c) `new aid’ shall mean all aid, that is to say, aid schemes and individual aid, which is not existing aid, including alterations to existing aid;”

With that, it is basically expressed, that when an aid scheme is changed, this aid scheme becomes “new aid”. However, it does not yet say, what a change could be. For that, Regulation 794/2004/EC offers some guidance.[2] Here, Art. 4(1) explains the following:

“For the purposes of Article 1(c) of Regulation (EC) No 659/1999, an alteration to existing aid shall mean any change, other than modifications of a purely formal or administrative nature which cannot affect the evaluation of the compatibility of the aid measure with the common market. However an increase in the original budget of an existing aid scheme by up to 20 % shall not be considered an alteration to existing aid.”

Thus, a change which would make a support scheme new aid and thus require adaption to the Guidelines in accordance with par. 250 of the Guidelines would be a change that either:

-          Is not purely formal or administrative, so that it cannot affect compatibility with the common market; or

-          Comprises an increase of the overall budget for the support scheme by more than 20%.

• II.             Evaluation

As mentioned above, there is no overall answer to the question what exactly would make a change to an existing support scheme a change “within the meaning of Article 1(c) of Regulation (EC) No 659/1999.”, i.e. a change relevant to the application of the Guidelines.

For budget changes, the rules are clear: If a Member State decides to spend more than 20% more than originally envisioned on the support for renewables over the given time period, than such increase of the overall budget (note: this does not relate to the amount of money one producer might get, but to the budget available for all producers!) is a relevant change.

For other changes, it is more difficult to see whether a change is relevant or not. Formal or administrative changes could relate for example to changes in names or in applicable procedures, provided they do not impact the aid as such and thus the common market. Generally, it appears that the Commission considers changes covered by the original approval decision not as relevant changes in this context, i.e. when a change is not relevant for and in particular does not create a conflict with the arguments of the Commission in the approval decision, it should not be relevant in this regard. Whether this is the case thus depends on the exact plans for change and the precise formulations chosen in the approval decision, which will therefore have to be assessed carefully.

 

[1] Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union of the EC Treaty, OJ L 83/1, 27.03.1999, p. 1-9.

[2] Commission Regulation (EC) No 794/2004 of 21 April 2004 implementing Council Regulation (EC)No 659/1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 140, 30.4.2004, p. 1–134.