Law360

There has been much tension in recent months between the European Commission and European Union member states on the potentially distorting effects of national support schemes for renewable energies. On July 1, 2014, the Court of Justice of the European Union handed down a preliminary ruling in a largely unnoticed Swedish dispute, whose conclusions endorse the member states’ national support schemes for renewable energies limited to domestic energy producers. This ruling has potentially significant negative effects for the internal energy market.

EU's Efforts to Complete the Internal Energy Market

In order to improve the competitiveness of the EU's energy supply, European institutions have deployed significant efforts in recent months to complete the EU’s internal energy market by the end of 2014. These efforts aim at an alignment of national regulatory frameworks for the energy sector to create a “level playing field” within the internal market. In parallel, faced with ambitious climate change targets, member states have made heavy use of national support measures for energy produced from renewable energy sources. The EC has consistently taken issue with RES programs as it considers them a key contributing factor in failing to create a functioning internal energy market. In recent months, the EC has advocated that national RES support schemes be opened to cross-border energy supply. Not surprisingly, this sparked negative reactions among member states, whose interest is to keep control over their domestic energy supply.

The Alands Vindkraft Case

The political tensions over RES support schemes have somewhat overshadowed a dispute related to the Swedish RES support scheme brought before the CJEU.

The case was brought by wind farm operator Alands Vindkraft AB on the Alands Islands, an archipelago in the Baltic Sea situated between Finland and Sweden. Although the islands are part of the Finnish territory, the Alands Vindkraft's Oskar wind farm is connected to the Swedish power grid. In 2009, Alands Vindkraft applied for Swedish “green” certificates. The application was rejected by the Swedish Energy Agency on the grounds that only RES electricity-generating facilities located within Sweden’s territory are considered eligible for allocation of “green” electricity certificates.Alands Vindkraft contested the decision before a Swedish court, which referred the case to the CJEU for a preliminary ruling. In essence, the questions that had to be decided by the CJEU were whether: (1) the Swedish system is compatible with the EU’s Renewable Energy Directive 2009/28/EC and (2) the RED is compatible with the free movement of goods principle as set forth in Article 34 TFEU. In relation to the latter, the issue is whether the RED does not open the door for member states to impose unjustifiable quantitative restrictions on imports or measures having equivalent effect.

Advocate General's Opinion

The Advocate General Yves Bot, issued his opinion on Jan. 28, 2014, and took the view that Sweden should extend its “green” certificates regime to RES producers from other member states.

First, the AD examined whether the Swedish RES support scheme is compatible with Article 3 of the Renewable Energy Directive. Article 3 RED obliges member states to meet individually assigned renewable energy targets. To this end, Article 3(3) RED stipulates that “in order to reach the targets […] member states may, inter alia, apply […] support schemes” and adds further that “without prejudice to Articles 87 and 88 of the treaty, member states shall have the right to decide […] to which extent they support energy from renewable sources which is produced in a different member state.” Since the wording and the objective of Article 3 RED authorizes member states to limit the scope of their national RES support schemes to renewable energy sources that are situated within their national borders, the AG concluded that the Swedish scheme was compliant with the RED.

However, in a second step, the AG went on to assess whether Article 3 RED is compatible with Article 34 TFEU, which forms part of the EU’s primary law and therefore takes precedence over the RED. Here, the AG considered two distinct legal aspects: (1) whether the compatibility of the RED with Article 34 TFEU can validly be assessed in the case at hand and, (2) whether the Swedish RES support measure is consistent with Article 34 TFEU.

Regarding the first aspect, the Swedish Energy Authority argued that Article 34 TFEU could not be invoked in the case under consideration since the RED provides for a comprehensive regulation of national RES support measures and the CJEU has consistently held “that where a particular sphere has been the subject of exhaustive harmonization at community level, any national measure relating thereto must be assessed in the light of the provisions of the harmonizing measure and not those of the treaty”. The AG, however, rejected the arguments brought forward by the Swedish Energy Authority on the grounds that the RED does not provide for an “exhaustive harmonization” of national RES support schemes, albeit without providing meaningful explanation in support of his assertion.

Regarding the second aspect, the AG concluded that Article 3(3) RED, and consequently the Swedish “green” certificate regime, constitutes a measure having equivalent effect to a quantitative restriction as described by Article 34 TFEU. The AG argued it cannot be excluded that the measure restricts trade between the member states. Although the system does not explicitly restrict the import of renewable energy from other member states, the measure has the potential to reduce such imports. This is because, while importers would solely be remunerated from the applicable market price, domestic renewable energy producers would receive financial support, which is generally higher than the market price, and, hence, would benefit from a competitive advantage.

The Court's Decision

The CJEU did not follow the AG's opinion in its entirety.

As the AG, the CJEU found that the Swedish “green” certificates scheme is compatible with Article 3 RED.

However, the CJEU disagreed with the AG on the alleged violation of the free movements of goods principle. The court first acknowledged that it is not precluded to examine whether the legislation at issue is compatible with Article 34 TFEU. It stressed in that respect that numerous recitals and provisions of the RED lend support to the conclusion that the RED does not provide for an exhaustive harmonization of RES support schemes.

The CJEU also recognized that the Swedish RES support scheme constitutes a measure having equivalent effect to a quantitative restriction on imports on the grounds that the scheme “is capable, in various ways, of hindering — at least indirectly and potentially — imports of electricity, especially green electricity, from other member states.”

However, the CJEU concluded and argued that the measure is justified since it promotes the protection of the environment. Such an objective is, according to the judgment, capable in principle of justifying barriers to the free movement of goods if it meets the requirements of the proportionality principle. In this regard, the court reasoned that the Swedish scheme is proportionate to the stated objective, in particular in view of the following aspects:

  • Determination of origin of electricity: The CJEU pointed out that, once electricity has been allowed into a transmission or distribution network, it is difficult to determine its origin. The court further stressed that in light of the individually assigned RES targets for member states under the RED, an opening of RES support systems to cross-border supply would require that energy from RES can be clearly identified. According to the judgment, however, the existing EU legislation would not provide the proper tools for such determination. In particular, the guarantees of origin, which are set forth by Article 15 RED, would not be capable of providing a proper RES verification since the sole purpose for those guarantees is to indicate to final customers the proportion of energy from renewable  sources in an electricity supplier’s energy mix.
  • Proper functioning of national RES support schemes: The CJEU held that member    states must be able to control the effects and costs of their national support schemes according to their different RES potentials, while at the same time maintaining investors’ confidence. The court held especially that in the case of certificate-based support schemes, the legitimate expectations of investors have to be duly taken into account. 
  • Protection of  domestic energy consumers: The CJEU acknowledged indirectly that an opening of national RES support schemes to nondomestic producers poses the risk of financially overburdening national RES support schemes and hence     consumers.

Conclusions

The judgment forms part of a series of prominent court cases tackling legal questions related to the promotion of renewable energies (e.g., the 2001 Preussen Elektra decision). However, given the ongoing political controversy between the EU and its member states over support measures for RES and their potentially adverse effects on the internal energy market, the CJEU's decision can hardly be regarded as a benign academic one. The member states’ costs to achieve the EU’s climate change targets are staggering. Many fear that a participation of nondomestic energy producers can easily overburden national RES support measures; let alone that national consumers, and possibly taxpayers, would have to finance foreign investors, which — especially in the aftermath of the financial crisis — seems hard to sell politically. In light of the foregoing, the court's decision appears reasonable.

However, the decision will probably have far-reaching consequences for the completion of the internal energy market insofar as it shields large chunks of the national markets from cross-border energy supply. Many EU member states have implemented ambitious RES targets into their support schemes. Germany, for instance, aims at achieving 50 percent market penetration of RES by 2030. Moreover, other states, such as the U.K., are trying to promote nuclear energy through quite similar restrictive national support schemes.

In view of the CJEU ruling, the next EC will have to be creative when pushing for the full completion of the internal energy market. It appears already that, in its ongoing investigation of the German RES support scheme, the commission has adopted a new legal approach to tackle national RES support schemes. It is now arguing that imported electricity ought to be exempted from the RES surcharges imposed by Germany and other member states to finance renewable energy on the ground that such surcharges have effects equivalent to a tariff, which is in principle incompatible with EU treaties. It remains to be seen, however, if this approach is creative enough to withstand scrutiny.