After ruling on the internal gas market and virtual reverse flow capacities at the beginning of June 2014 (C-198/12 Commission v. Bulgaria), the Court of Justice of the European Union (“ECJ”) just determined, in a judgment delivered on 2 July 2014, the compatibility with EU law of territorial restrictions applied in national renewable energy support schemes (C‑573/12 Ålands Vindkraft AB v. Energimyndigheten). The issue at stake was whether a Member State could restrict participation in its national renewable energy support scheme to producers located within its territory. Member States with generous renewable energy support schemes most likely welcomed the ECJ’s decision declaring such territorial restrictions compatible with EU law with some relief.

However the ECJ’s conclusions were based on the current legislative framework applicable to renewable energy, in particular Directive 2009/28/EC (the “RES Directive”). Should the EU regulatory environment substantially change, the ECJ’s ruling in this case may no longer be applicable.

Green energy subsidization in the EU has largely been a national concern. Despite the RES Directive’s specific mechanisms to promote cooperation among Member States to harmonise their renewable energy support schemes and the European Commission’s (the “EU Commission”) sustained efforts to promote the use of such mechanisms, Member States have so far been reluctant to use them. Their unwillingness to cooperate may stem from the fact that many (if not all) Member States regard subsidisation of renewable energy production as a legitimate way to support their economy and are not inclined to share financial incentives with other Member States.

Background of the case

Based on the RES Directive one would have thought that, in the absence of a specific cooperation mechanism between two or more Member States, only domestic renewable electricity generators would be eligible to participate in national renewable energy support schemes. But Ålands Vindkraft AB (“Ålands”), a power producer, thought otherwise and sought approval from the Swedish regulator to participate in the Swedish renewable energy support scheme for its wind farm located in Finland.

The Swedish regulator rejected Ålands’ application on the grounds that only renewable electricity production installations located in Sweden were eligible to participate in the Swedish renewable energy support scheme. Ålands filed an appeal against the decision of the Swedish regulator in the Swedish court, arguing that its wind farm supplied Sweden with renewable power and that excluding it from the Swedish support scheme amounted to unfair discrimination and a violation of the fundamental freedom of free movement of goods enshrined in Article 34 of Treaty on the Functioning of the European Union (“TFEU”). The Swedish court referred the matter to the ECJ for a preliminary ruling on the interpretation of the RES Directive and its relationship to Article 34 TFEU.

Interestingly, the Advocate General shared Ålands’ position and called on the ECJ to invalidate the provision of the RES Directive allowing Member States to limit access to their national renewable support schemes to producers whose installations were located within their territory. In a departure from its typical practice, the ECJ did not follow the Advocate General’s opinion.

Ruling based on the law as it stands

In its ruling delivered by the Grand Chamber, the ECJ decided that EU law as it stands does not prohibit national legislation restricting participation in a national renewable energy support scheme to green electricity producers located within the territory of a Member State.

In reaching this conclusion, the ECJ first dismissed the argument put forward by the Swedish and German Governments that renewable energy subsidisation had been the subject of exhaustive harmonisation with the adoption of the RES Directive so that any national measure relating thereto had to be assessed on the basis of the RES Directive alone. According to the ECJ, the RES Directive is far from bringing about exhaustive harmonisation of national support schemes for green energy production, and hence does not preclude the examination of territorial restrictions in national renewable energy support schemes in light of Article 34 TFEU.

The ECJ determined that the territorial restriction set forth in the Swedish regulation constituted a measure having an effect equivalent to a quantitative restriction on imports, which was in principle incompatible with Article 34 TFEU. However, and departing from the opinion of the Advocate General, the ECJ held that such restriction to the free movement of goods principle was justified on environmental protection grounds and concluded that it was therefore not incompatible with EU law.

Implications for future regulatory framework

The ECJ reiterated that its opinion was based on the law as it stands, i.e. on the current EU renewable energy regulatory framework. Thus, it may be that in a different regulatory environment the ECJ would have reached a different conclusion, for example:

  • Exhaustive harmonisation of national support schemes for green energy production may preclude the application of the TFEU when assessing the compatibility of national renewable energy support schemes with EU law; or
  • Even if the TFEU applies, justifying territorial restrictions in national renewable energy support schemes may be more difficult in the context of a single EU-level renewable energy target combined with enhanced EU Commission oversight over such support schemes.

In January 2014 the EU Commission published its energy and climate package of proposals for the period of 2020 to 2030 (the “2020 – 2030 Proposals” – see our comments here), an important step in the on-going debate on the future of EU energy policy. The debate is expected to settle with the adoption of the new 2020-2030 EU energy policy framework by the European Council in October this year.

Based on the 2020 – 2030 Proposals, the future EU renewable energy regulatory framework will most likely be substantially different from the law as it stands. All interested parties, including EU policy makers, national governments, stakeholders and investors, should pay careful attention to the substance of the future EU renewable energy environment and determine on its basis whether – and to what extent – the ECJ’s conclusions in the Ålands case will remain applicable.