Originally published on Energy Post.
By Karel Beckman.
The national renewable support schemes in the EU are on the verge of a major overhaul. National governments will soon not be allowed anymore to limit renewables subsidies to domestic producers: they will have to treat all EU-based producers alike. This at any rate is the very likely outcome of a court case now before the EU Court of Justice, says Peter Niermeijer, Secretary-General of RECS International, an organisation that promotes pan-European trade in renewable energy, in an interview with Energy Post. According to Niermeijer, the court decision, expected in a matter of months, will have far-reaching political consequences: it will force an end to the fragmentation of national energy policies in the EU and give a big push to the integration of the EU energy market. It will also radically undermine existing support schemes, including the laws which form the basis of the German Energiewende.
On 28 January, Advocate-General Yves Bot of the Court of Justice of the European Union published an Opinion in a case that could prove to be a landmark in the history of EU energy policy. The case was originally brought by a tiny Finnish wind power producer, Ålands Vindkraft, against the Swedish Energy Agency, and subsequently referred by the Swedish judge to the EU court. The Opinion is crystal-clear and has quite sensational implications – if the Court accepts it, which is very likely, as the judges rarely diverge from what their Advocate-General advises.
The case centers on the legitimacy of article 3 of the EU’s Renewable Energy Directive, adopted in 2009. This article says in effect that EU Member States are allowed to set up national support schemes for renewables from which they can exclude foreign suppliers. However, article 34 of the EU Treaty, which mandates the “free movement of goods” in the internal market, prohibits “discrimination” of foreign (EU-based) suppliers. So the question is whether article 3 of the Renewable Energy Directive is legitimate in the light of the EU Treaty. The Advocate-General’s answer is: no, it is not.
Strangely enough, this very straightforward Opinion from the French magistrate has hardly received any publicity so far, apart from a few very brief news reports on some news wires. Peter Niermeijer, who has followed the case closely, is puzzled by this lack of response. “I can’t explain it”, he says. “Apparently countries think they will be able to continue business-as-usual somehow. I don’t think so.”
The case of Ålands Vindkraft – on which the EU Court may pronounce a verdict any day now – is hardly academic. What is at stake may be nothing less than the success or failure of the EU’s pursuit of an internal energy market.
Everyone knows that – although the European Council (the Heads of State of the EU Member States) made a promise that the internal energy market will be “completed” in 2014 – there is no integrated EU energy market today. In fact, most observers would agree that in recent years the EU energy market has becomemore rather than less fragmented. Electricity prices, for example, are diverging rather than converging.
One of the key factors in the failure so far of the EU internal energy market is that each EU Member State runs its own national support programme for renewable energy. Ten or even five years ago, this did not matter much, as renewables accounted for only a fraction of the total energy supply. But with the fast growth of reneables (e.g. 23% of power generation in Germany last year), the expanding support programmes are increasingly upsetting the level playing field that is supposed to exist in the market.
Thus, for example, “surplus” wind and solar power from Germany nowadays is frequently exported to Germany’s neighbours, where this subsidised power pushes conventional power production out of the market. Utility companies have complained bitterly about such “market distortions ”. Analysts have pointed out that the national schemes also lead to gross inefficiencies: wind and solar power get built where subsidies are highest rather than where there is most wind or sun in Europe, they say. This leads to needless extra costs that in the long run may endanger the very success of the “energy transition”. The European power exchanges, which have done a lot to integrate electricity markets in Europe, have recently issued an urgent call for “stronger (European) market integration of renewables”.
The European Commission is aware of the problem. In November it published a Guidance for State Intervention in Electricity in which it advises Member States on how to reform their support schemes for renewables in the hope that they will become more harmonised across the EU. But these are purely voluntary guidelines.
However, the Commission may be about to get a helping hand – from the EU Court of Justice.
The case that is before the Court is based on the action of a small windpower producer on the Åland Islands, a Swedish-speaking region of Finland in the Baltic Sea close to Sweden. This company, Ålands Vindkraft , which sells its wind power to Sweden, asked the Swedish Energy Agency (Energimyndigheten) in 2009 to be granted renewable energy certificates. The Energimyndigheten refused on the grounds that Ålands Vindkraft is based in Finland. The company then went to court in Sweden. The Swedish judge referred the matter to the EU Court.
The Ålands case is actually the second of this nature. The first case was brought by the Belgian subsidiary of the Dutch utility Essent (now a subsidiary of RWE), which had asked for Belgian green certificates for wind power that it had imported, but was refused on the same grounds. In this case, the same Advocate-General, Yves Bot, already gave an Opinion on 8 May 2013. The EU Court has not ruled on this yet, however, because apparently it wanted to await the Ålands case and come to a consistent verdict. In the Ålands Opinion, Bot refers several times to the Essent case.
So what was the problem for the Swedish judge?
Article 3 of the Renewable Energy Directive says that each Member State has to achieve a certain percentage of renewable energy (one of the famous “2020 targets”), measured in terms of consumption. Member States are encouraged to establish “incentives” to meet this target. They are also allowed (but not required) to cooperate with other Member States in setting up cross-border incentive schemes.
This last is an important point. Originally the European Commission had wanted to make such cross-border cooperation the rule and had proposed an “opt-out” for Member States. But the European Parliament and the Council of Ministers (i.e. the Member States) wanted to keep renewables subsidies a national prerogative. They changed the Commission’s proposal into an “opt-in” arrangement. Up to now only Sweden and Norway have opted in and set up a bilateral “joint support system”.
The Swedish judge who had to rule on Ålands’ complaint wondered:
- First, whether article 3 of the Renewable Energy Directive does indeed allow national Member States to shut out foreign suppliers.
- Secondly, whether this is a form of discrimination as defined by article 34 of the EU Treaty.
- Thirdly, whether such discrimination could be justified.
In his Opinion published on 28 January, Advocate-General Bot answers the first two questions in the affirmative and the third one in the negative.
Bot establishes first of all that the Renewable Energy Directive does allow Member States to keep foreign producers from making use of national incentive schemes. Secondly, he concludes that without a doubt thisdoes give domestic producers an advantage over their foreign competitors.
This leaves the third question – whether this discrimination could in this case be justified. EU law makes it possible for Member States to take discriminating measures, but only under certain strict conditions, for example to protect the environment, when there is no other way to do so. But Bot flatly rejects the idea that national support schemes for renewable energy could be exempted on this ground. If renewables subsidies are meant to protect the environment, writes Bot, how could subsidizing renewables imported from other countries undermine this effort? Implicitly he here refers to the fact that climate change is an international, global problem, not a local environmental issue.
In his Opinion, Bot discusses – and rejects – a number of possible counterarguments. For example, it could be argued that it is difficult for Member States to determine the origin of electricity imported from abroad. But Bot says this cannot be true, since the Renewable Energy Directive explicitly mandates the setting up of a system of Guarantees of Origin by the Member States.
He also rejects the notion that allowing foreign producers to make use of national support schemes might disrupt those schemes. After all, he says, national governments are free to limit the amount of subsidy they want to pay.
Bot also refers to the Internal Energy Market directive of 2009 (which became effective in 2011). This, he writes, has the aim of establishing a “fully operational internal market for electricity which, thanks to an interconnected network makes it possible to sell electricity [within the EU] in identical circumstances”. He adds that it’s an explicit aim of the Internal Energy Market Directive to connect the networks to make cross-border trade in renewable electricity possible.
He further points out that the European Commission in its communication of 5 November 2013, theGuidance for State Intervention in Electricity, argues that cross-border arrangements, such as that set up by Norway and Sweden, can help reduce costs and prevent market distortions between countries.
Finally, there is the argument that, according to the famous article 194 of the EU Treaty, each EU Member State has the right to decide over its own national “fuel mix”. But the Advocate-General notes that this is not an absolute principle: after all the EU has already established and accepted national renewable energy targets for Member States!
In the end, Bot concludes unambigously that there are no good grounds for the EU Renewable Energy Directive to allow discrimination of foreign suppliers in national support schemes. The Directive “must be declared invalid” on this point, he writes.
What will be the consequences if, as is likely, the EU Court takes over the Opinion of its Advocate-General?
Bot does advise the Court not to make its decision retroactive, since he believes Member States acted in good faith and this would make them liable to large claims. He suggests that Member States will be given two years to adjust their support schemes.
Nevertheless, it is clear that countries will not be able to maintain their current practices. Flavia Distefano, the Brussels-based lawyer who conducted the court case for Ålands Vindkraft in Sweden and before the EU Court in Luxemburg, says that “the implications of the case are huge”. If the EU Court confirms the Opinion of the Advocate-General, “this would be binding on Sweden”, she says. Other Member States would also have to take the decision into account, says Distefano. The European Commission will have to adapt the Third Directive.
For a country like Germany it surely means it will have to adapt the legal basis of the Energiewende. Costs of the Energiewende are already very high. If foreign renewable enegy producers can start making use of the generous German subsidies, the scheme is likely to become too burdensome. German consumers are also not very likely to be willing to pay for subsidies to, say, Italian or Spanish solar power producers.
Other countries will face similar issues. The Netherlands, for example, has just set up an €18 billion support scheme for offshore wind projects. In future, if, say, a Danish or British offshore wind producer exports its power to the Netherlands, it may have an equal right to receive government support.
According to Niermeijer, the Member States will have little choice but to harmonise their support schemes: “It will be a victory for the European Commission and everyone else who wants to see an integrated European energy market come into existence.”
Niermeijer’s organisation, RECS International, which is backed by the likes of Eon, RWE, Vattenfall, GDF Suez, Enel, Dong and many smaller energy companies, has worked for years to create a pan-European electricity tracking system based on Guarantees of Origin (see below). Niermeijer hopes that the upcoming decision by the EU Court will propel this system into the EU-wide standard for cross-border renewable energy trade.
He suggests there is one fundamental change Member State governments could make: they could change the current producer-driven subsidy schemes into consumer-based programs. “All these national support schemes are essentially arrangements between governments and producers. They decide who gets subsidized and who does not. If you replace this by a system based on Guarantees of Origin, you put consumers in the driver’s seat. The government can still promote specific types of electricity if it wants to by proving consumers with tax exemptions or other incentives. But it is consumers who will decide.”
As a consumer right now, says Niermeijer, you can choose which car dealer you go to, but you can only buy one type of car. He would like to see that changed: “I want to decide myself which car I drive. That’s what a market is about after all.”
Promoting renewable energy through Guarantees of Origin – how does it work?
The reason why RECS International, a foundation backed by a large number of European energy producers, traders, wholesalers, suppliers and consumers, is trying to harmonise renewable support schemes is because they have an alternative they believe in: they would like to see cross-border trade develop in renewable energy based on Guarantees of Origin (GOs). According to Peter Niermeijer, Secretary-General of RECS, this is the most efficient, transparent and consumer-oriented system available – although he admits that not everybody agrees.
Niermeijer was actually the originator of the GO system in Europe. He and his colleagues at the Dutch company KEMA (now integrated into DNV-GL) developed a first green certificate trading system in the Netherlands back in 1998. At that time all power production companies in the Netherlands had to meet domestic renewable energy targets and were given the possibility to do so by buying green certificates (“green labels”) from other companies. The system was based on the NOx trading system which had first been established in California, says Niermeijer. “We were the first in Europe”.
It is important to note that the Renewable Energy Directive is ambivalent on how GOs should be integrated into the European energy trading system. On the one hand, the Directive tells Member States they should set up a system to monitor renewable energy production and issue producers with specific GOs (for solar power, wind power, etcetera) for each MWh produced. Such a system has now been set up in 16 EU countries, says Niermeijer. Those countries subscribe to the European standard that has been introduced by the independent Association of Issuing Bodies, which is made up of Transmission System Operators and Energy Regulators. “The other countries have so far shut themselves off from this international trading system”, says Niermeijer. He notes that the Electricity Directive mandates that every supplier must inform consumers about the fuel mix it has used.
With the GOs, then, a system is in place for EU-wide renewable energy trade. The way it works is that when, say, an Italian solar power producer puts a certain amount of solar power on the grid, it gets an equivalent amount of GOs, which it can sell separately in the market. A consumer in, say, Austria, who wants to buy Italian solar power, can do so by buying electricity from any supplier who can deliver the appropriate GOs. As soon as the electricity is consumed, the GO is “cancelled”.
But here’s the rub: although the Renewable Energy Directive mandates the setting up of this GO system, at the same time it spells out that GOs cannot play a role in establishing whether any Member State meets its renewable energy target!
According to Niermeijer this leads to an absurd situation. He gives the example of the Netherlands, which imports a lot of renewable energy from Norway and Sweden, but cannot make this consumption count for fulfilling its target – even though the targets are supposed to be measured by renewable energy consumption, not production.
Nevertheless, a number of countries have started to use the GO system, says Niermeijer, not to meet their targets, but for market reasons: to give consumers a choice in the kind of electricity they use. This is precisely what the whole system is meant to accomplish, he says: to put the consumer in the driving seat.
He gives the example of Norway, one of the frontrunners in the system. This country has a well-established system of issuing GOs to Norwegian renewable energy producers. They can sell these GOs abroad, for instance to suppliers in the Netherlands who can then, backed by these GOs, deliver “green electricity” to customers who ask for it. In this way, consumers can stimulate the production of renewable energy,.
Of course when a Norwegian producer sells its GOs to a Dutch supplier, its own electricity is not green anymore! This is the consequence of Norwegian producers selling their GOs to foreign customers. (Apparently Norwegian consumers themselves don’t care enough to demand GOs from their suppliers – but this may be because they don’t realise they are actually buying “dirty” energy.)
Another interesting example mentioned by Niermeijer is Austria, which actually forbids the import of nuclear-generated electricity. It simply does not allow nuclear GOs into the country. In the Netherlands, on the other hand, there is a supplier that only sells nuclear energy. The owner – and his customers – are active supporters of nuclear power, who in this way try to promote the production of it. Niermeijer says this is exacly how the system is supposed to work: making the consumer King.
One weakness of the system right now is that not all countries monitor all sources of electricity properly. For example, the Netherlands measures the production of renewable energies specifically for each producer and grants GOs for that, but for non-renewable energy no GOs are required.
The energy companies themselves are actually also ambivalent about the GO system, says Niermeijer. “There is support for it inside the companies, but also resistance. They know it will bring costs down. Production units inside those companies however do like the high subsidies of course.”
And there are others who do not like the GO system. WWF, for example, has its own scheme for promoting renewable energy, called Gold Power,. This is based on emission reduction projects within WWF’s so-called Gold Standard. Under this system, renewable energy projects that can prove “additionality” (i.e. they would not otherwise have been built) are granted “carbon credits”. According to Niermeijer there is no need for such a system for renewables . “GOs”, he says, “link the emissions on the production side to consumers, without any need for expensive monitoring of additionality.”
Photo Credit: Sigfrid Lundberg