Game changers impacting the European energy sector

This report prepared by the global law firm, Dentons, examines the impacts on the European energy section including the US shale revolution and cost issues surrounding the aggressive move to renewables. An excerpt of the report is provided below. The full report can be accessed by clicking the link(s) on this page.

Many Member States have reviewed the effectiveness of their renewable energy support instruments and have implemented reforms to their support schemes as they seek to reduce the cost of financing their national renewable energy targets. Most controversially, Spain and Italy have introduced/are proposing retrospective adjustments to their respective support schemes that have resulted in actual/threatened legal action by affected investors.

Consistent with the targets contained in the Renewable Energy Directive, the 2020 strategy and the 2030 Framework, in April 2014 the Commission published revised State Aid Guidelines (Guidelines) setting out the conditions that renewable energy support schemes must meet to be considered compatible with the rules of the internal market.

The Guidelines move renewable energy support schemes towards market-based allocation mechanisms, such as auctions and other competitive bidding processes and will require the recipients of such support to be subject to market obligations such as balancing (although outsourcing is permitted). With effect from 1 January 2016, generators are expected to sell renewable energy directly in the market and to receive support in the form of a 'top-up' payment above the market price. This would suggest that FITs will no longer be compatible as they insulate generators from market pricing risk unlike FIPs and Green Certificates. Under the Guidelines, projects over 1 MW in size will have to take part in a technology-neutral competitive bidding process (although there will be a transitional period during 2015/2016 where this requirement will be limited to five percent of planned new renewable energy capacity) and technology specific bidding processes are permitted in certain circumstances. Generators will also no longer receive support when electricity prices are negative, a situation that has often arisen in mainland Europe during exceptionally sunny periods.

In addition, the ability of national schemes to exclude participants from other Member States that is allowed under the Renewables Directive was recently called into question in a case referred to the Court of Justice of the EU by the Swedish courts. Ålands Vindkraft, operator of a wind farm in the Åland Islands, applied to participate in the Swedish “green certificate” scheme. Although connected to the Swedish grid, the project was in Finnish territory, and its application was refused on that ground, pursuant to the relevant Swedish law.

The Advocate General, who gave his opinion on the case on 28 January 2014, came to the conclusion that schemes that restrict the availability of subsidy to home-grown renewables, and the provisions of the Renewables Directive that ostensibly permit such restrictions were inconsistent with the EU Treaties’ rules on the free movement of goods and did not fall within any of the public interest exceptions that case-law has recognized as capable of overriding the right of free movement. In this case the overriding interest was supposedly the protection of the environment: the promotion of renewable generation reduces greenhouse gas emissions and helps to avoid harmful climate change.

But the Advocate General could not see how preventing the import of “foreign” green electricity helped the environment.

The Court’s judgment, delivered by the full Grand Chamber of 15 judges, declined to follow the Advocate General in those parts of his reasoning which were more disturbing for the status quo in EU renewable support schemes. The Court agreed that legislation such as the Swedish law is capable of impeding imports of electricity and so is in principle incompatible with the free movement rules. But it found that this restriction could be objectively justified. Without confronting head-on the question of how the overriding interest of environmental protection is served by a restriction on imports, it concluded that the Swedish scheme as a whole served an environmentally beneficial purpose and found that Sweden could legitimately consider that the territorial limitation in its law did not go beyond what was necessary to attain the objective of increasing the production and consumption of green electricity in the EU.

It will be interesting to see whether the restriction of renewable energy support schemes to national projects will survive the move to EU wide targets under the 2030 Framework.

There follows a review of the reforms of the national support schemes of the following Member States: France, Spain, Germany, UK, Poland and Romania.

Game Changers Europe Energy Sector

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NOV 1 2014
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