Report from the 3rd Vienna Forum on European Energy Law, 2015

Report authors:  Leigh Hancher, Adrien de Hauteclocque and Małgorzata Sadowska[1]

The Vienna Forum on European Energy Law took place on 13 March 2015 in Vienna. Organised for the third time, the Forum is a joint initiative of the Energy Law and Policy Area of the Florence School of Regulation (FSR, European University Institute) and the Energy Community Secretariat, and is designed to highlight issues topical both for the European Union (EU) and the Energy Community (EnC).

This year, the Forum brought together about 150 experts from regulatory authorities, governments, EU institutions, law firms, consultancies and energy companies from the EU and the Energy Community Contracting Parties,[2] and provided an excellent platform for knowledge and practice sharing among professionals dealing with different aspects of energy market regulation on a daily basis.

The Forum’s panel sessions centred around four main topics.

  • The first session was devoted to the newly created, and much commented upon, EU Energy Union, its future role and its relevance to the Energy Community.
  • The second session focused on decarbonisation and renewable policies. In particular, the participants discussed the optimal design of the RES support schemes, and reviewed national experiences with green and white certificate markets.
  • The third session addressed law enforcement in the Energy Community.
  • The fourth and last session was in form of a roundtable discussion on the EU-Ukraine energy relations bringing together energy regulators and academics, as well as experts in diplomacy and foreign affairs.

 

Opening Remarks: Markets and Crisis

The Forum was opened by Dirk Buschle from the Energy Community Secretariat who presented a complex and troublesome picture of the current EU energy policy: ‘Keywords of this year’s Forum are markets and crisis’.

On the one hand, this policy needs to reconcile various, contradictory objectives, like security of supply, competitiveness and decarbonisation, and this risks bringing the internal energy market project to a political deadlock. On the other hand, the EU is facing an external security of supply crisis, with Ukraine in the centre.

As highlighted by Dirk Buschle, we need to develop a holistic policy approach and coherent strategy to tackle the internal and external challenges arising from the energy market transformation, and both the European Union and the Energy Community have key roles to play in this process.

Keynote Speech by Helmut Schmitt von Sydow

Panel discussions were preceded by a keynote address on the occasion of the 10th anniversary of the Energy Community. The speech was delivered by Helmut Schmitt von Sydow from the University of Lausanne, who chaired the negotiations and drafting of the EnC Treaty at the intergovernmental conference in 2005 in Athens.[3]

Helmut Schmitt von Sydow discussed the changing role of the Energy Community over the last ten years. Since its creation, the Energy Community evolved from an institution building up energy security and stability in the post-conflict South East European countries and bringing them closer to the European Union, to a key actor in promoting Europe’s energy security of supply.

The Forum attendees also got a valuable insight into the negotiation process at the birth of Energy Community, where contentious issues and political compromises significantly affected the final shape of the organisation as we know it today.

First Session on the Energy Union

Leigh Hancher from the FSR, Tilburg University and Allen & Overy LLP, introduced the first session of the Forum inviting the participants to take a closer look at the Commission’s proposal for the Energy Union (the Energy Union Paper),[4] and investigate what really lies behind this concept.

Following up on this, Janez Kopač from the Energy Community Secretariat called the Energy Union a ‘battle of pillars’, where initially the most important pillar, that is, the joint negotiations of energy contracts with Russia, was eventually lost in the Commission’s final proposal. The remaining five pillars, including the view promoted by the EnC Secretariat that the Energy Union can be an ‘upgraded’ Energy Community, are subject to a wider academic and policy debate, which is likely to continue in the future.

It was discussed that the Energy Union could potentially draw on certain legal mechanisms developed under the EnC Treaty. Most prominently, the possibility of each EnC Contracting Party to propose new aquis, which would then bind all the other Parties (including the EU), reflects a true partnership organisation with a pan-European vision, something which the Energy Union could (and should) aspire to.[5]

The Energy Community itself needs to adapt to the new tasks and challenges arising from its expansion. In particular, the new Contracting Parties may no more view it as a first step towards the EU accession, but rather as a permanent mechanism of cooperation with the European Union, assuming the role of a well-integrated and stable periphery within the sphere of EU control, without ever becoming its full-fledged members.

In that respect, it was questioned whether the Energy Community’s ambitious goals can be met without reforming the organisation’s legal, procedural and institutional set-up. These issues are discussed in-depth in the recent report ‘An Energy Community for the Future’ by the Energy Community’s High Level Reflection Group (the HLRG Report).[6]

According to Sami Andoura from the College of Europe, the key task of the Commission is, on the one hand, to revise the current energy policy and address its shortcomings and, on the other hand, to launch a long-term European energy transition project. This requires innovative thinking and policy-oriented ideas which would substantiate the newly adapted Framework Strategy,[7] and a strong involvement of stakeholders.

As noted by Sami Andoura, the Commission’s initiative is not about reinventing EU energy policy. Rather, it creates a political momentum to turn policy into real and concrete measures, ensuring the overall coherence of a process that is nowadays fragmented through a number of different goals and national interests. In a recent report published by the Jacques Delors Institute, Sami Andoura and Jean-Arnold Vinois assess the state of play of the European energy policy and identify the necessary actions to ensure the desired European integration and reap all its benefits.[8]

The presentations triggered questions from the audience on the structure, the content and the goals of the Energy Union. In particular, it was observed that the Energy Union lacks a centralised structure. While providing for a range of actions to enhance cooperation between countries, the Commission’s initiative does not envisage single mechanisms and central institutions similar to those created in other policy areas, such as the EU banking and finance policy.[9] Further, the proposed actions pursue different objectives, and reconciling them might pose significant challenges.

The panellists underlined that the lack of single mechanisms in the EU energy policy reflects its current fragmentation. However, it was noted that the Commission’s initiative envisages the reinforcement of the powers and independence of the Agency for the Cooperation of Energy Regulators (ACER) as well as enhancing the role of the Transmission System Operators (TSOs) in order to allow for a better integration of transmission system operation.

In terms of potential conflicts of goals, the panellists pointed at the gas sector, where the principle of solidarity fostered cooperation between the countries in the gas sector, opening doors to competition. Lastly, it was highlighted that while the proposed actions pursue deeper integration within the EU and foster cooperation between the EU countries, the Energy Union has an important external dimension, encompassing the Energy Community as well as the European Economic Area (EEA) States.

Closing the session, Leigh Hancher left the participants with an interesting question on why we ask for a more centralised structure for the EU energy policy, while, in fact we move towards decentralisation, developing markets for energy efficiency services and decentralised RES.

Second Session on Decarbonisation and Renewables

This latter topic, renewables and decarbonisation policy, was further discussed in the second session, chaired by Birgitte Jourdan-Andersen from the EFTA Surveillance Authority.[10] In the first presentation, Christoph Riechmann from Frontier Economics spoke about design of RES support schemes. Are auctions the future?

In an attempt to answer this question, Christoph Riechmann explained how a RES supply auction works, as well as the main economic arguments for and against implementing RES auction schemes. While auctions can help deliver RES penetration efficiently and at low cost, designing a good RES supply auction is not an easy task and can pose significant challenges for the regulator. To demonstrate this, Christoph Riechmann walked the audience through the key elements that one needs to consider when designing an auction, taking into account the criteria set out in the Guidelines on State aid for environmental protection and energy (EEAG)[11] as well as discussing various experiences with auctions across sectors and countries.

The presentation concluded that there are valid economic arguments for RES supply auctions and, even though designing a good auction might be challenging, the initial experiences show that auctions can be a way of bringing down the cost of procuring renewable energy.

The next presentation focused on the regulatory developments in Poland providing an interesting example of practical difficulties in implementing a renewable support scheme based on auctions. After a lengthy legislative process, the Polish parliament has recently adopted a new Act on Renewable Energy Sources (the RES Act)[12], changing the current system of green certificates into an auction-based mechanism.

Jan Rączka from the Regulatory Assistance Project provided a critical view on the new scheme, which is a project-specific feed-in tariff awarded in 15 year-long contracts. In particular, it was observed that the new support scheme, which will be in force only until 2020, favours energy incumbents and may actually slow down the development of wind generation, while providing an advantage to technologies with a rather limited potential in Poland, such as dedicated biomass installations and small hydro.

Another important criticism expressed by the speaker is that the reform of the entire system results in a two-year gap in support for new projects, bringing new capacity to the market in 2017/2018 at the earliest. Jan Rączka concluded that auctions will fail to bring competition to the Polish market for renewables, which will remain subject to political control. The key objectives underlying the reform could have been met by simply improving the green certificates scheme, instead of replacing it with a more complex auction mechanism.

The third presentation focused on the French experiences with the market for white certificates, which aim to support energy efficiency improvements. While the EU law does not yet establish an EU-wide ‘white certificate’ scheme, Article 7 of the Energy Efficiency Directive[13] requires Member States to establish energy efficiency obligation schemes or use alternative policy measures to achieve a certain targeted amount of energy savings amongst final consumers.

Some countries, among them France in 2005, have implemented market-based and rather complex white certificate schemes. Liliana Eskenazi from Allen & Overy LLP explained how the system has been organised in France in the general context of the Energy Efficiency Directive, and then proposed an assessment framework for white certificates in light of state aid rules, making a parallel with some Commission’s and the European Courts’ case law in relation to the neighbouring ‘green’ and ‘brown’ certificates.

This tentative legal assessment demonstrated that the French scheme may indeed involve state aid, noting that, if this were the case, the Commission provides no guidance in the EEAG on whether white certificates can be considered measures compatible with state aid rules.

In the fourth presentation, Saverio Massari from the University of Bologna talked about the Italian photovoltaic (PV) legislation.

The Italian PV market witnessed a rapid growth in years 2007-2013, but can we really label it a ‘green’ success story? According to Saverio Massari, the Italian case demonstrates how an unstable regulatory framework and unclear policy negatively impacts the market for renewables. The speaker discussed problems relating to governance, legislation and policy-making.

Firstly, according to the Italian law, the legislative competences in energy-related matters are shared between the national and regional authorities, creating regulatory differences across the country. Moreover, the secondary PV legislation has not been enacted in time with the market developments, creating a lot of legal uncertainty. Thirdly, the government’s feed-in tariff (FIT) policy had serious distortive effects on the market. In particular, the government started from very high tariffs to their premature cancellation in 2013, when the market has not yet achieved grid parity. This was then followed by the introduction of retroactive cuts in FIT for already connected PV installations.

All the system flaws deeply reshaped the Italian PV market, causing the exit of large investors, employment losses, as well as stifling the emerging domestic supply chain, reducing the inflow of foreign direct investments and creating regulatory uncertainty. Further, it has been observed that the Italian law introducing the retroactive cut in FIT is inconsistent, discriminatory and cannot be justified on grounds of public interest. As such, it may be challenged under the Italian Constitution, the European Convention of Human Rights and finally, the Energy Charter Treaty.

The last RES support scheme example revisited in this session was the Danish certificate market for green gas. Including gas in the EU decarbonisation policy means making a green gas market.

Denmark is very much advanced in green gas production and technology (biogas, in particular) and Energinet.dk, the Danish gas grid operator, issues green gas certificates in order to guarantee its green origin to the consumers. However, as argued by Søren Juel Hansen from Energinet.dk, green gas certificates are not yet recognised at the EU level (for instance, to meet the EU renewable transport fuel requirements), which constitutes a serious gap in the EU legislation. Further, there is a need for an EU-wide multilateral trading platform for green gas certificates, so that producers and consumers know their market value.

The follow-up discussion centred on the question whether integrating national RES support schemes at the EU level would be possible in the next decade or whether they are going to remain national in scope, in line with the recent case law of the European Courts.[14] While the integration of national support schemes would optimise investments in renewables, providing correct locational signals across Europe, and would also be technically feasible, it may turn out to be politically unacceptable because it implies that consumers in some countries would end up paying for renewable sources developed in other countries.

Such integration would also require reinforcing the grid, and this would meet with local opposition in many countries. As noted by Christoph Riechmann, rather than only trying to integrate national RES support schemes, we should prioritise strengthening the EU Emission Trading Scheme (EU ETS) so that it signals a higher CO2 abatement price. The system will be in a new equilibrium once the COprice corresponds to the implicit carbon price embodied in the national RES support schemes.

Third Session on the Energy Community’s law enforcement

The third session of the workshop, chaired by Andreas Gunst from DLA Piper LLP, was devoted to the Energy Community’s law enforcement, which is considered the weakest pillar of the Energy Community. Rozeta Karova from the EnC Secretariat talked about the enforcement record of the recent years, highlighting both the advantages and the downfalls of the current dispute settlement mechanism.

This invited the Forum attendees to discuss whether the existing enforcement system is still fit for purpose, in particular, whether it can still provide an efficient protection of investors’ rights within the Energy Community.

A prominent feature of the current enforcement system is the lack of court. Instead, breaches of EnC law by the Contracting Parties are established by the Ministerial Council,[15] which is a political (and not judicial) body and which doesn’t conduct legal assessment to support its decision. In practice, however, almost all cases have been settled already in the preliminary procedure, in the course of bilateral negotiations between the EnC Secretariat and the EnC Contracting Party, without the need to resort to the Council for a binding decision.[16]

In contrast to the procedure before the Council, the preliminary procedure proved to be an effective mechanism for resolving less politically sensitive cases. Through settlement of cases, the EnC Secretariat not only ensures compliance with the EU energy acquis but also addresses new legal issues in its opening letters and reasoned opinions, thus creating a body of case law of its own kind, characteristic of the Energy Community.

Rozeta Karova’s presentation made it clear that despite the positive effects of the preliminary procedure, the existing dispute settlement mechanism with no proper adjudicative body does not deliver the expected results in a system based on the rule of law. Thus, the HLRG Report considers that the establishment of a regional court, which would ensure a proper judicial protection for investors, would de-politicise law enforcement and overcome political deadlocks in the Council.[17]

The topic was further discussed by Nikolaus Pitkowitz from Graf & Pitkowitz who noted at the outset that with no full-fledged law enforcement system, the Energy Community resembles a lion without teeth. His presentation considered two possible models: a regional court and a court of arbitration (ISDS, Investor-State Dispute Settlement).

It was observed that the reform of the EnC enforcement system is particularly urgent since the EnC countries often fail to provide investors with credible recourse path for private enforcement of their contract. First of all, it is still debatable whether national courts have to directly apply the EnC Treaty provisions. Second of all, EnC members are perceived to be high risk countries for corruption and bribery.

In the follow-up discussion, the panellists assessed the existing dispute settlement mechanism from the investor’s perspective. For instance, there is a clear benefit for investors to settle cases in a timely manner, already in the preliminary phase, rather than having to wait for the Ministerial Council to resolve it.

Regarding the two enforcement models considered in the second presentation, the views were in favour of having a regional court. In particular, it was observed that a court would not only solve investor-state disputes, but more importantly, it would ensure compliance with the EU energy acquis. Further, the ISDS action may be a ‘nuclear option’ for the investor, rendering its future investments in the country which it takes to arbitration rather unlikely.

The final session on the EU-Ukraine energy policy relations.

What was first perceived as ‘Ukraine’s problems’ has turned into a pan-European geopolitical crisis – remarked Irina Paliashvili from the Ukrainian Legal Group, who chaired the session and provided the latest update on the International Monetary Fund’s lending programme and key legislative developments to bring Ukraine’s energy law in line with the 3rd Energy Package.

Irina Paliashvili also raised several burning issues such as corruption, poor investment climate and delays in the implementation of an appropriate social protection policy with respect to vulnerable consumers. Her introduction was followed by the presentation of Vsevolod Chentsov from the Ukrainian Ministry of Foreign Affairs who walked the audience through the last decade of the Russia-Ukraine gas crises, explaining the impact of geopolitics on the Ukrainian gas market.

The key reforms of the Ukrainian gas sector started in the aftermath of the 2009 gas crisis, once the country joined the Energy Community, and include price deregulation, network unbundling, third party access to all gas infrastructure, as well as importing the EU concept of public service obligation into national law, allowing the Ukrainian government to intervene if gas prices go beyond a cost-reflective level. With respect to interconnection between the Ukrainian gas network and the EU, one of the major problems which needs urgent attention relates to Gazprom’s control over both physical and virtual reverse flow capacities on the Ukraine-Slovakia interconnector, based on its legacy agreement with the Slovakian TSO in breach of the 3rd Energy Package.

As later noted in the discussion, besides this contractual restriction, there are no technical barriers for Ukraine to import gas from the EU, and necessary investments will be rather limited.

Andrei V. Belyi from the University of Tartu enriched the debate with an academic perspective on the current gas crisis, which, as was observed, stems from the territorial dispute over Crimea and therefore differs from the previous, mostly economic crises, and is much more difficult to resolve.

A clear political dimension of this crisis is also reflected in the marginalisation of the Energy Charter provisions as well as increasing security of supply concerns within the EU, resulting in investments in economically nonviable gas infrastructure projects. Transit risks have increased with Ukraine’s legislation of July 2014 allowing for cutting transit in retaliation for Russia’s actions.

Such legislation clearly contradicts the relevant provisions of the Energy Charter. Far from attempting to provide solutions to the crisis, Andrei Belyi suggested that two courses of action could help to avoid worsening the current situation. On the one hand, it would be useful to involve Gazprom (and the Russian Federation) in the debate by, for instance, relaunching the EU-Russia Gas Advisory Council. On the other hand, removing Gazprom’s export monopoly would help depoliticise the EU- Russia gas trade.

Walter Boltz from E-Control called for a closer cooperation between the EU and Ukraine in energy matters. In his view, such a cooperation is possible, despite a number of political, legal and technical barriers.

A major technical challenge is to integrate Ukraine’s network into the EU system. Among the legal and political obstacles were listed the following: raising the currently very low energy prices to cost-reflective level, increasing energy efficiency, implementing EU energy acquis and finally, combatting corruption. Walter Boltz named various regional initiatives, such as the European Neighbourhood Policy and the Eastern Partnership, and more recently the Energy Community, which together provide a comprehensive framework for enhanced cooperation between the EU and Ukraine, but need to be complemented by the practical implementation of the 3rd Energy Package.

At the same time – as noted by the speaker – an energy trialogue between the Russian Federation, the EU and the Ukraine remains of key importance for the success of this process, given that Ukraine’s dependence on Russian gas will continue in the foreseeable future, and also that the country will likely remain the major transit route for gas imports to Europe. Nevertheless, unlocking the reverse flow capacity together with improvements of gas transport within Europe would provide Ukraine with an alternative source of supply, increasing its energy security.

Regarding electricity, integrating Ukraine into the Western European grid would require significant investments in Ukraine, and this seems not to be an economically viable project for the time being. Since Ukraine’s electricity system will remain integrated with the Russian, reaching an understanding with Russia appears all the more important.

The roundtable continued with a speech by Walter Tretton from the Delegation of the EU to Ukraine, who provided an overview of the most recent developments in the EU energy diplomacy towards Ukraine and the Russian Federation in the light of the two key EU energy policy documents: the European Energy Security Strategy[18] and the Energy Union Paper.[19]

It was observed that ‘upgrading the strategic partnership with Ukraine’, as envisaged in the latter document, goes beyond pure gas transit arrangements and includes important reforms of Ukraine’s energy market in order to foster its integration into the EnC legal framework and decrease its dependence on Russian gas. In practice, the intensive and challenging negotiation process brought about several positive developments. This includes overcoming national interests and devising a common EU strategy to intervene in the negotiations with Russia, gradual unlocking of the reverse flow capacity and a breakthrough in the Russia-Ukraine negotiations resulting in the Winter Package. At the same time, continuous transit of gas to Europe, despite disruptions in the Russian gas supplies to Ukraine, increased confidence in Ukraine as a reliable provider of gas transit services.

In the coming year, EU diplomacy will focus on Ukraine’s energy market reforms. In that respect, timely implementation of system of social protection remains one of the greatest challenges, as deregulated gas prices are expected to raise by 300 to 600%. According to the speaker, active involvement of the EnC Secretariat is absolutely essential for the success of the reforms.

In the follow-up discussion, participants in the Forum explored the possibility of applying conditionality to the electricity sector which, in contrast to the gas sector, does not undergo any meaningful reforms. It was stressed that conditionality, although an important instrument to incentivise reforms, must be used in a clear and coordinated manner, and the conditions imposed on Ukraine should remain within the realm of feasibility.

The discussions at the Vienna Forum were wrapped up by Adrien de Hautecloque from the Court of Justice of the European Union and the Florence School of Regulation.

As he concluded, the Energy Union creates a new narrative which the integration process in the energy matters needs in order to get to a new level. However, in view of clashing national interests, this new narrative can easily come down to reshuffling of the energy competences and adding new layers of rules to the already complex regulatory landscape.

To avoid this, the Commission’s initiative needs a clearer vision and a sound governance framework within which national governments can make progress in integration within the spirit of cooperation and solidarity.

 

 


[1] Energy Law & Policy Area, Florence School of Regulation (Forum’s organisers).

[2] Albania, Bosnia and Herzegovina, Kosovo, Republic of Macedonia, Moldova, Montenegro, Serbia and Ukraine.

[3] Treaty establishing the Energy Community [2006] L 198/18, signed on 25 October 2005 in Athens, available at <https://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Legal/Treaty> accessed 17 March 2015 (EnC Treaty).

[4] Communication from the Commission, Energy Union Package – A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, COM/2015/080 final, Brussels, 25 February 2015, available at <http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=COM:2015:80:FIN> accessed 17 March 2015 (Energy Union Paper).

[5] See Art 42 of the EnC Treaty (n 3). Other important mechanisms include the mutual assistance obligation in the event of energy supply disruption (Art 45), single buyer mechanism (Art 43) as well as the possibility of extending the aquis to other essential infrastructure networks (eg transport) by means of a simplified procedure (Art 100).

[6] Report of the High Level Reflection Group of the Energy Community, An Energy Community for the Future, May 2014, available at <https://www.energy-community.org/portal/page/portal/ENC_HOME/ENERGY_COMMUNITY/Legal/HLRG> accessed 17 March 2015 (the HLRG Report).

[7] Communication from the Commission (n 4).

[8] Sami Andoura and Jean-Arnold Vinois, From the European Energy Community to the Energy Union – A Policy Proposal for the Short and the Long Term, Jacques Delors Institute, January 2015, available at <http://www.delorsinstitute.eu/011-20721-From-the-European-Energy-Community-to-the-Energy-Union.html> accessed 17 March 2015.

[9] In response to the financial crisis that emerged in 2008, the Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market, including a Single Supervisory Mechanism and a Single Resolution Mechanism for banks (Banking Union).

[10] EFTA stands for the European Free Trade Association. The EFTA Surveillance Authority monitors compliance with European Economic Area rules in Iceland, Liechtenstein and Norway, enabling them to participate in the European internal market.

[11] Communication from the Commission, Guidelines on State aid for environmental protection and energy 2014-2020 [2014] OJ C 200/1 (EEAG).

[12] Act of 20 February 2015 on Renewable Energy Sources, available at <http://orka.sejm.gov.pl/proc7.nsf/ustawy/2604_u.htm> accessed 17 March 2015 (RES Act). Provisions relating to the new support scheme will enter into force on 1 January 2016.

[13] Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC [2012] OJ L 315/1 (Energy Efficiency Directive).

[14] Case C-573/12 Ålands Vindkraft (judgment of the Court of 1 July 2014, nyr) and case C-204/12 Essent Belgium (judgment of the Court of 11 September 2014, nyr).

[15] Ministerial Council is the highest decision-making body of the Energy Community and gathers energy ministers of the Contracting Parties.

[16] Only two cases have been brought to the attention of the Ministerial Council in the last ten years of the Energy Community’s enforcement record.

[17] The HLRG Report (n 6).

[18] Communication from the Commission, European Energy Security Strategy, COM/2014/0330 final, Brussels, 28 May 2014, available at http://ec.europa.eu/energy/en/topics/energy-strategy/energy-security-strategy accessed 17 March 2015.

[19] Communication from the Commission (n 4).