I Overview

The energy markets in the Netherlands have been fully liberalised for almost 15 years now. Numerous companies are active in the production/generation, trade and supply market – activities that are strictly separated from the operation of electricity and gas networks. The government opted for full ownership unbundling of vertically integrated energy companies, the strictest model available under the European Union energy directives. Ownership unbundling was not only required for transmission system operators (TSOs), but also for distribution system operators (DSOs), the last remaining two of which were unbundled in 2017.

As regards energy consumption, natural gas has traditionally been one of the most important resources in the Netherlands. After having initially discovered several small pockets, in 1959 the Dutch Crude Oil Company (NAM, a 50-50 joint venture of Shell and ExxonMobil) discovered a large natural gas field in the Groningen province, under the town of Slochteren. Since 1963 the NAM has been producing natural gas from this field, and in the same year Gasunie was founded as a trade and transportation company fully owned by the Dutch state. The public-private cooperation framework pertaining to the production and trade of gas is known as the 'Gasgebouw' (Gasbuilding).

The Netherlands has been dependent on its natural gas for more than half a century, but owing to the increasing occurrence of earthquakes in the Groningen province as a consequence of the production of natural gas, public opinion has gradually turned negative. In a recent letter to parliament, the Minister of Economic Affairs and Climate (the Minister) proposed to reduce production from the Groningen field from 21.6 billion m3 in 2017 to 12 billion m3 per year, by October 2022 at the latest.2 The termination of gas production in Groningen requires a series of drastic measures on both the supply and demand side. As the majority of Dutch consumers still uses low calorific Groningen gas, most gas-fired equipment (for, inter alia, central heating and cooking) is not compatible with high calorific gas and will have to be replaced in due course. In the meantime, Gasunie Transport Services (GTS, a subsidiary of Gasunie that is designated as the national gas network operator) intends to expand its nitrogen facilities, where (imported) high calorific gas is converted into low calorific gas by adding nitrogen.

The political desire to decrease dependency from natural gas is also reflected in the coalition agreement of the new national government that was formed in October 2017. The government coalition agreement envisages an ambitious energy policy, to be implemented in energy-related legislation, as well as a proposed new climate act. Pursuant to the coalition agreement, greenhouse gas emissions must be reduced by 49 per cent by 2030. This is predominantly to be achieved by the capture and storage of carbon emissions resulting from heavy industry and the closing of all coal-fired power stations by 2030. Concrete agreements will be made in the context of an anticipated national climate agreement between (decentral) governments, industry and other relevant parties. The current national energy agreement dates back to 2013 and is therefore in need of renewal, also in light of the recent developments regarding Groningen gas. Together with the gradual, but swift phasing-out of the production of natural gas from Groningen, the Dutch energy transition is facing huge challenges.

II Regulation

i The regulators

The Authority for Consumers and Markets (ACM)3 is the designated national regulatory authority in the field of energy market regulation. The specialised Energy Department of the ACM monitors and enforces compliance with the Electricity Act 1998, the Gas Act (together: the Acts) and the Heat Act, and the rules laid down in several EU regulations and delegated legislation. To that end, the ACM has a wide range of powers in order to enforce compliance with energy regulations. It has the competence to, depending on the nature of the infringement, impose an order subject to a penalty or a fine of up to €900,000 per violation or in some cases up to 10 per cent of a company's annual turnover. Besides ex officio investigative and enforcement powers, the ACM also has the power to resolve and settle disputes between customers and network operators and the discretion to act upon a request for enforcement action. Apart from enforcing compliance with the Acts, the ACM adopts regulation regarding tariffs and tariff-setting methodology, technical codes and rules concerning information exchange between operators.

In February 2018, the ACM disclosed its policy priorities for 2018 and 2019. Transition of the energy supply market is one of the key priorities as the ACM wishes to ensure that the transition to sustainable energy sources takes place efficiently, while preventing the energy transition from becoming more expensive than necessary.4 The ACM emphasises the importance of reliable and well-functioning energy markets during the transitional period.

As regards mining, the State Supervision of Mines (SSM) is the independent supervisory authority to monitor compliance with the Dutch Mining Act. It supervises the exploration, production, transport and storage of minerals such as oil, gas and salt, as well as geothermal heat (an increasingly important source of renewable energy). Its supervision focuses on safety, health, environment and (technically) efficient extraction. SSM also regularly advises the Minister and other competent authorities on mining related topics.

ii Regulated activities

The operation of electricity and gas transmission and distribution networks is strictly regulated, in accordance with the EU rules on energy market liberalisation. The Minister has appointed TenneT as the TSO for the national high-voltage electricity network and GTS as the TSO for the national gas transport network. These TSOs have been certified by the ACM to confirm their compliance with the unbundling requirements from Directive 2009/73/EC (Gas) and Directive 2009/72/EC (Electricity). The regional electricity and gas network operators, DSOs, are required by law to have economic ownership over their operated networks. Both TSOs and DSOs have specified tasks pursuant to the Acts and are prohibited from providing goods or services in competition with third parties (apart from certain exceptions). This competition prohibition does not apply to group companies of network operators, but these group companies may only engage in certain infrastructure-related activities, as further explained below.

In addition to transportation activities, network operators perform certain other statutory tasks as well, such as providing connections to customers and performing metering services to small (household) consumers. The provision of metering services to other than small consumers is in principle an unregulated market activity. Parties that carry out metering responsibility must be accredited by TenneT.

The supply of electricity and gas to small consumers requires a supply licence from the ACM (through delegation by the Minister). Pursuant to the Acts, small consumers are users with a grid connection with a maximum capacity of 3x80A for electricity and 40m3(n)/h for gas. Suppliers can either choose to apply for a licence or cooperate with a licensed supplier and act as reseller. Applicants must demonstrate that they have the required organisational, financial and technical capabilities and comply with the applicable regulations for the supply of electricity, gas or both to small consumers. The ACM has the competence to attach conditions and restrictions to a licence, and has the right to revoke a licence.

The supply of heat to small consumers (e.g., via district heating networks) requires a licence from the ACM (through delegation by the Minister) in accordance with the Heat Act, unless the heat is supplied to only up to 10 users at the same time or to one or more buildings the supplier itself owns or leases, or amounts to less than 10,000GJ of heat per year. The ACM sets the maximum tariffs for the supply of heat. The Heat Act is currently under review and several amendments have been proposed, including proposed changes to the tariff structure.

For the generation of electricity no licence is required under the Electricity Act. However, a licence from the Minister is required for building and operating an offshore wind park, pursuant to the Offshore Wind Energy Act. The applicant must perform a feasibility study in order to apply for a licence and the Minister can attach conditions to such licence.

For balancing purposes, programme responsibility applies to the feed-in and extraction of electricity and gas from the relevant networks, which must be exercised by a programme responsible party accredited by TenneT or GTS, respectively.

Exploration and production activities regarding minerals, including oil and gas, and the exploration and production of geothermal heat, require a licence from the Minister pursuant to the Mining Act. Furthermore, the Minister can grant a licence on the basis of the Mining Act for the underground storage of substances such as gas and CO2. Licences can be subject to conditions.

LNG installations are also subject to several provisions in the Gas Act, including the obligation to designate an operator and submit the applicable tariff structure to the ACM for approval.

iii Ownership and market access restrictions

The Acts stipulate that transmission and distribution networks, as well as the shares in TSOs and DSOs, must be owned directly or indirectly by the Dutch state, provinces, municipalities or other public bodies. The Acts also contain the group prohibition, which provides that a company that produces/generates, trades or supplies electricity or gas cannot be part of the same group of companies as a network operator (the network group). The Acts also prohibit network operators to deliver goods and provide services by means of which they enter into competition.

In April 2018, the Energy Transition Progress Act was adopted, which amends the Acts. The new act comprises a set of policies that previously appeared in the STROOM Bill, which was rejected by the upper house of parliament in 2016, and mainly aims to further define the role of the network operator and the other companies in the network company group. The legislator deems it important to protect the network infrastructure against unnecessary (commercial) risks on the one hand, and to prevent network group companies from operating too broadly, thereby hampering innovation from private market parties, on the other hand. The new Act demarcates the tasks of the network operator and its group companies. The network operator is only allowed to perform certain tasks specifically assigned to it. For group companies of the network operator, an exhaustive list of allowed activities is included in the Acts. These permitted side-activities relate to infrastructure and network operation and include the construction and operation of cables, pipelines, electric vehicle charging infrastructure, installations for hydrogen, biogas and heat, as well as the provision of metering services. While introducing stricter definitions of allowed activities, the new Act also creates the possibility for the Minister to assign temporary tasks to network operators and grant exemptions to deviate from certain provisions (restrictions) in the Acts by way of experiment. Other matters that are regulated by the new act include the possibility for the national TSOs (TenneT and GTS) to enter into cross-participations with foreign TSOs, and potential relocation or underground reconstruction of parts of the high-voltage network that are close to housing. The new Act will enter into force on 1 January 2019.

iv Transfer of control and assignments

The Electricity Act 1998 provides that any change of control (within the meaning of the Dutch Competition Act) with respect to a power generation plant with a nominal capacity of more than 250MW must be notified to the Minister. In cases of a change of control in an LNG installation or LNG company, a similar notification requirement applies under the Gas Act. Following such notification, the Minister assesses the risks with respect to public safety and security of supply and may attach conditions to the change of control. An (appealable) decision will normally be taken by the Minister within four months; however, there is no compulsory waiting period.5 Transactions that are not (timely) notified are subject to possible annulment.

III Transmission/transportation and distribution services

i Vertical integration and unbundling

The Dutch government opted for unbundling of TSOs as early as in 2001, two years before European unbundling regulations were adopted in the second energy package. Under the current Acts, TSOs are subject to full ownership unbundling and certification by the ACM, which must verify that the TSO is organised and structured in accordance with the conditions of ownership unbundling. Although not required by the EU rules on energy market liberalisation, ownership unbundling is also required by law for DSOs in the Netherlands. This is reflected in the Acts by the aforementioned group prohibition that was introduced by the Independent Network Operators Act (WON). When the WON entered into force in 2008, the group prohibition was challenged before the Dutch courts by three (at the time) vertically integrated energy companies. After lengthy proceedings and a preliminary ruling from the Court of Justice of the European Union, the Dutch Supreme Court finally ruled in 2015 that the group prohibition is compatible with EU law. Subsequently, the last two remaining vertically integrated energy companies, Delta and Eneco (two of the claimants in the legal proceedings), were unbundled in 2017.

ii Transmission/transportation and distribution access

For both electricity and gas, a distinction is made in the Acts between the national transmission networks (operated by TenneT and GTS) and the regional distribution networks (operated by several DSOs). Each DSO operates the public network in its own designated region and is responsible for its construction, maintenance and operation as well as possible expansion. Access to the networks must be granted on a non-discriminatory basis and can only be denied if capacity is reasonably not available. Tariffs for use of the network are regulated pursuant to the Acts, and the entire process regarding access is supervised by the ACM.

In respect of certain private energy networks, the Acts provide for an exemption from the obligation to designate a network operator, which can be granted by the ACM to owners of closed distribution systems.

iii Tariffs

The tariffs for services rendered by network operators (transport tariffs) are regulated by the ACM, which determines these tariffs ex ante in three steps. First, the ACM adopts a method decision for a regulatory period of three to five years. Five different types of network operators are discerned and for each of these groups a different method decision is published.6 The method decisions explain how the ACM will calculate the allowed revenue of the operators in question, based on efficient costs. Second, the ACM publishes X-factor decisions for each individual network operator, in which the ACM calculates the base level of revenue for the network operator and the annual tariff cut (this is the X-factor, being an efficiency factor). X-factor decisions are adopted for the same regulatory period as the method decisions they are based on. Lastly, the ACM publishes annual tariff decisions for each regulatory period, in which the ACM sets the maximum tariffs for each individual operator by making use of the calculations in the X-factor decisions and in accordance with the tariff codes.

With respect to heat, the Heat Act provides that the ACM determines maximum tariffs for the supply of heat.

iv Security and technology restrictions

Under a new act regarding rules on data processing and cybersecurity notification requirements, which was adopted in July 2017, companies operating in vital sectors are obliged to notify cyberattacks to the National Cyber Security Centre. The notification obligation applies irrespective of the public or private nature of a company. Vital sectors include the gas, electricity, telecommunications and drinking water sectors. Gas and electricity network operators, as well as the NAM, are mentioned explicitly in a delegated act as vital companies to which the notification obligation applies.7

IV Energy markets

i Development of energy markets

On the Dutch wholesale markets for gas and electricity, various types of energy spot and forward contracts can be entered into. These energy contracts can be concluded for different periods and times. The energy markets are characterised and subdivided based on the type of contract that is offered.

In the Netherlands, GTS offers the title transfer facility (TTF) as a virtual market place that enables parties to transfer gas in the transport network (entry-paid gas) to another party. Gas can be traded on the TTF via ICE ENDEX (European Energy Derivatives Exchange) under spot and future contracts.

Electricity is traded on different markets: via exchange markets ICE ENDEX and the Amsterdam Power Exchange (APX), which is now part of the pan-European energy trading market EPEX SPOT, via the over-the-counter market and via the imbalance markets for gas and electricity that are operated by GTS and TenneT respectively. ICE ENDEX enables trading in future contracts for electricity. The APX offers day-ahead and intraday trading in electricity.

ii Energy market rules and regulation

Exchanges for derivatives (such as futures) must be licensed by the Ministry of Finance under the Financial Services Act, and are supervised by the Netherlands Authority for the Financial Markets and the Dutch Central Bank. Parties that wish to trade on an exchange need to be members and must meet the administrative requirements that are imposed by the relevant platform.

iii Contracts for sale of energy

Suppliers of gas and electricity enter into individual supply contracts with end users. Gas and electricity prices for medium and large consumers are not regulated. Suppliers to small consumers must have a supply licence and are obliged to provide a reliable supply of energy at reasonable tariffs and conditions. These suppliers must inform the ACM annually regarding the tariffs and conditions they will apply for the supply of electricity and gas in the following year. If a supplier is planning on changing the tariffs for the coming year, the supplier has to submit the new tariffs to the ACM four weeks in advance, before adjusting the rates. When the ACM deems the new rates to be excessive, it may impose a maximum rate in order to protect the consumers.

Suppliers must also inform the ACM about organisational, financial and technical changes within their companies. In addition, licensed suppliers must have a customer complaints procedure in place and inform customers about the origin and environmental quality of the electricity supplied. Licensed suppliers are obliged to offer small consumers a model supply agreement (in accordance with the uniform model established by the ACM), but may in addition also offer other contract forms.

iv Market developments

The Dutch government intends to close all coal-fired plants in the Netherlands by 2030 at the latest. According to the Minister, this is an important measure to achieve the required CO2 reduction. The Council of State has advised the Minister that the phasing out of coal-fired plants can best be realised by introducing a specific production prohibition.

As regards heat, on 6 March 2017 an amendment to the Heat Act was adopted in the lower house of parliament. The revised Heat Act will remove a number of bottlenecks for block heating. Also, associations of owners and landlords are no longer considered as suppliers under the proposed act. The revision will introduce new regulations as well. It is proposed that the ACM not only determines the maximum heat prices, but also the rates for, inter alia, the connection fee and the delivery device. In addition, the Act creates room to apply for exemptions to deviate from certain provisions by way of experiment, for instance to gain experience with new market models. Finally, the compensation scheme for malfunctions has also been adjusted to make it more in line with that for electricity and gas.

V Renewable energy and conservation

i Development of renewable energy

In order to encourage the development of renewable energy and meet its ambitious climate goals, the Netherlands has reserved €12 billion to provide subsidies in 2018 for the production of renewable energy under the Renewable Energy Grant Scheme (SDE+). The SDE+ budget will be divided into two tranches, whereby each tranche will allocate a budget of 6 billion euros. The SDE+ is a grant that provides producers with a financial compensation for the renewable energy they generate. It is available for the production of renewable electricity, renewable gas and renewable heat or a combination of renewable heat and electricity. For energy produced from biomass, a system of controls is in place to ensure that the production meets the criteria for sustainability. Eligible applicants for an SDE+ subsidy are companies, institutions and non-profit organisations. The renewable energy project must be realised in the Netherlands.

The SDE+ scheme is a form of a feed-in-subsidy where the compensation is equal to the difference between the base rate and the correction amount The base rate is equal to the production costs of the relevant renewable energy (electricity, gas or heat) and the correction amount is the energy market price. For each technology, a base energy price is determined that sets the lower limit for the correction amount and thus maximises the compensation received per unit of renewable energy.

Another development is that the Ministry intends to amend the Energy Invoice, Consumption and Indicative Cost Overview Decree, introducing new obligations for regional network operators and for suppliers of gas, electricity, heating and cooling in order to accelerate further CO2 reduction, thereby creating a better environment. The Ministry aims to realise this reduction by ensuring that energy suppliers provide consumers (that have a smart energy meter) with a monthly consumption and indicative costs overview.

This amendment has been introduced following a covenant that was signed on 23 May 2017 by private associations Energie-Nederland, Netbeheer Nederland (association of network operators), UNETO-VNI, the Dutch Association for Sustainable Energy and the Ministries of Interior Affairs and Economic Affairs. One of the goals of the covenant is to realise by 2020 an extra saving of 10 petajoule (PJ) in energy consumption by residents (owners or tenants) of a living space, associations of owners, tenants and small-business users. Part of the covenant is to improve the consumption and indicative cost overview, so that this stimulates more energy saving. Other improvements in the covenant include adjusting the presentation of the consumption and indicative cost overview to customer wishes (e.g., by mail, e-mail or website, depending on preference and effectiveness), giving information about behavioural alternatives and presenting the information in an attractive and stimulating manner for the customer.

ii Energy efficiency and conservation

In September 2013, the public-private Energy Agreement for Sustainable Growth (the Energy Agreement) was concluded between the Dutch government and employers, trade unions, environmental organisations and others. The Energy Agreement contains provisions on energy conservation, boosting energy generation from renewable sources and job creation, in line with the Dutch government's aim of achieving a wholly sustainable energy system by 2050. The main goals set for achieving this sustainable energy supply system are:

    1. reducing final energy consumption by an average 1.5 per cent annually, which corresponds to a saving of 100PJ in the country's final energy consumption by 2020; and
    2. an increase in the proportion of energy generated from renewable sources to 14 per cent in 2020, and an even further increase to 16 per cent in 2023.

In October 2017, the Energy Research Centre of the Netherlands published the National Energy Exploration (NEV). ECN signals a strong growth in renewable energy in the Netherlands, which will result in a total growth in the proportion of energy generated from renewable sources of 17.3 per cent in 2023, surpassing the above-mentioned target of 16 per cent. Furthermore, the pace of the annual energy consumption saving has been accelerated to 1.7 per cent per year, well above the annual 1.5 per cent agreed upon in the Energy Agreement. The NEV on the other hand does note that, with the current efforts, the goal of 14 per cent renewable energy and 100PJ extra energy saving in 2020 are not yet within reach. In this respect, the NEV formulates additional measures to bring these goals within reach.

The anticipated measures include an accelerated approach for onshore wind energy. The central government, provinces and municipalities need to use a more coordinated approach to remove bottlenecks that threaten to slow down the realisation of the agreed 6,000MW of onshore wind capacity by 2020. Furthermore, the Dutch government's own substantial areas of land may also be used for the generation of renewable energy. To ensure an optimal use, six or seven solar energy pilot projects are being prepared with an average capacity of 80–100MW per project. These projects will be realised before 2020. Based on the experiences with these pilot projects the Dutch government will decide in more detail in which way the property of the state can or will be used for climate and energy transition and reaching the agreed targets.

In addition, on 19 June 2017, the Dutch government together with Energiebeheer Nederland, TNO and seven consortia signed a Green Deal for Ultra-Deep Geothermal Projects. The consortia are developing potential pilot projects, divided over different regions, for the extraction of geothermal heat from a depth of more than 4km, with a temperature far above 100 degrees Celsius, mainly for heat supply in the process industry. The aim of the Green Deal is to realise the three most promising ultra-deep geothermal energy projects. The projects of the consortia each have a size of approximately 1PJ.

The improvements to the SDE+ and the budget of €12 billion for 2018 should be sufficient to meet the targets for 2020 and 2023. In the SDE+ for 2018, a number of improvements were made for the cost-efficient promotion of renewable energy production, including on the terrain of renewable heat projects and biogas.

In 2018, the Investment Subsidy for the Promotion of Renewable Energy (ISDE scheme), for the purchase of solar boilers, heat pumps, biomass boilers and pellet stoves by private and business users, will be continued with a budget of €100 million. Also, the government and the business sector will try to draw more attention to the advantages of small-scale heat options within the built environment.

iii Technological developments

The Netherlands wants to reduce the negative effects and the use of fossil energy sources such as coal, petroleum and natural gas, in order to reduce CO2 emissions and create a more sustainable energy production. Carbon Capture and Storage (CCS) is one of the tools to achieve this. As mentioned before, the new government aims at a CO2 reduction target of 49 per cent in 2030 compared to 1990. Under the new coalition agreement, CCS is set to play a major role in reducing industrial emissions. Of the total CO2 reduction in 2030 (56Mton CO2), no less than one-third (18Mton) is envisaged to be captured by industry and stored in empty gas fields (but a lower number than 18Mton is currently being discussed). The coalition agreement states that 'CCS can be a major contribution to the reduction of emissions in industry, the electricity sector and waste incineration plants'. To stimulate technologies for the reduction of CO2 emissions, the coalition agreement announces that SDE+ subsidy scheme will also support investments in CCS and other low carbon technologies.

VI The year in review

In 2017, the issue of decreasing Groningen natural gas production (as a result of earthquakes) played an important role in the public and political debate. This faster-than-anticipated decrease in gas production can be regarded as an important driver for the energy transition and was also one of the core topics in the parliamentary elections of March 2017. Following these elections, a new government was formed in October 2017. The newly formed government envisages a (new) public–private climate and energy agreement and set an ambitious emission reduction objective of 49 per cent by 2030. Other developments in 2017 included the ownership unbundling of the last two vertically integrated energy companies (Delta and Eneco).

Significantly more sustainable energy was produced in the Netherlands in 2017 compared to 2016. Solar PV energy generation rose by around 40 per cent, owing to a sharp increase in installed capacity (number of solar panels) in the Netherlands. Wind energy production rose by around 30 per cent in 2017 compared to 2016, mainly as a consequence of the commissioning of the Gemini offshore wind park.

VII Conclusions and outlook

Even though the Energy Transition Progress Act has just recently been adopted by parliament, a proposed new Energy Act is already anticipated for early 2019 (the 'Energy Act 1.0', to be followed up in due course by an 'Energy Act 2.0'). This new Energy Act should eventually unify and replace the existing Acts and further streamline energy market regulation. A review of the Mining Act is envisaged as well, in order to better facilitate the production and use of geothermal energy as a relatively new source of energy. In addition, the Netherlands will have to implement the new European Clean Energy Package, which is currently being prepared and will most likely be ready for implementation by 2021.


Footnotes

1 Dick Weiffenbach is a partner, Sander Simonetti is executive director and Nicolas Jans and Pieter Leopold are associates at HVG Law LLP.

2 Letter from the Minister to the speaker of the Dutch lower house of parliament, dated 29 March 2018.

3 ACM was established in 2013 as a merger between the Netherlands Consumer Authority, the Netherlands Independent Post and Telecommunications Authority and the Netherlands Competitions Authority, the latter of which monitored compliance with energy regulation until 1 April 2013.

4 For ACM's key priorities for 2018 and 2019 visit https://www.acm.nl/en/publications/acms-key-priorities-
2018-and-2019-digital-economy-green-energy-prescription-drug-prices-and-ports.

5 Parliamentary Papers Second Chamber 2010-2011, 32 814, No. 3, p. 10.

6 The two TSOs, several gas network DSOs, several electricity network DSOs and the operator of the offshore electricity network.

7 Decision (order in council) of 4 December 2017, Stb. 2017, 467.