IOverview

The European energy markets are regulated primarily by a substantial body of European Union secondary legislation. Beyond the secondary legislation, which is comprised of regulations (directly applicable in Member States), directives (subject to transposition into domestic law), decisions (directly applicable and binding on the addressee), recommendations, opinions, and atypical acts (i.e., communications, guidelines, white and green papers), European energy market regulation needs to be understood in the greater context of a number of bilateral and multilateral treaties.

These include the European Union Treaties, namely the Treaty on the European Union (TEU), the Treaty on the Functioning of the European Union, the Treaty establishing the European Atomic Energy Community (Euratom), and the Charter of Fundamental Rights of the European Union. Other treaties include the Energy Charter Treaty, the Energy Community Treaty, pending the agreement establishing the World Trade Organization, the United Nations Framework Convention on Climate Change and the pending Paris Agreement, as well as bilateral investment treaties and bilateral project-specific agreements, such as pipeline or interconnector projects.

The 1994 European Charter Treaty, which builds on the 1991 European Energy Charter, is an unprecedented multilateral framework for international energy cooperation. The Treaty addresses four areas:

  1. non-discriminatory conditions for trade and provisions on reliable cross-border energy transit;
  2. protection of direct foreign investment and protection against key non-commercial risk;
  3. a dispute resolution system between participating states and between investors and host states; and
  4. the promotion of energy efficiency.

The Energy Community is an international organisation joining the European Union with a number of countries from the South East Europe and Black Sea regions, with the primary aim of extending the European acquis communautaire on energy, environment, competition and renewables to the parties. The Energy Community Treaty additionally sets up a regulatory mechanism for the regional network energy markets. It is worth noting that the implementation of the European internal energy market in contracting states is a measure that facilitates potential membership of the European Union, as demonstrated by Bulgaria and Romania in 2007 and Croatia in 2013.

The Paris Agreement has been ratified by 148 out of 197 parties to the United Nations Framework Convention on Climate Change, reaching its threshold to enter into force in October 2016. It sets ambitious targets for the parties to mitigate and adapt to climate change and contribute to the decarbonisation of the global economy, and imposes obligations upon all European Union Member States.

The cornerstone of the European energy policy is the internal energy market, which aims to achieve three primary objectives: affordable and competitively priced energy, environmental sustainability and energy security. In its achievement, European Union competition law plays an essential and complementary role, with free market provisions being enforced in coordination with energy regulators.

In its adoption of ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ in February 2015, the Commission has set itself the priority of establishing the Energy Union, a grand strategy for European energy policy. It sets out five key ‘dimensions’:

  1. energy security, solidarity and trust;
  2. a fully integrated European energy market;
  3. energy efficiency contributing to moderation of demand;
  4. decarbonising the economy; and
  5. research, innovation and competitiveness.

The Energy Union goes beyond the concept of the internal energy market in that it introduces an element of foreign policy, addressing security and supply risks in the European neighbourhood, and in doing so seeking to create a unified European approach to importing energy. This strategy develops the concept of solidarity in matters of energy supply as introduced by the Treaty of Lisbon.

The next step in the development of the Energy Union is covering the period of 2021 to 2030. In November 2016, the European Commission published the proposal for the Clean Energy for All Europeans package (formerly known as the Winter Package), a legislative package that largely proposes to update the Third Energy Package and other key EU environmental legislation. The proposals must, however, pass through the ordinary legislative procedure and may undergo material changes prior to their enactment. At the time of writing, the Energy Performance in Buildings Directive, recast Renewable Energy Directive, amendment to the Energy Efficiency Directive, and new Regulation on the Governance of the Energy Union have been enacted, and the recast Electricity Directive, recast Electricity Access Regulation, recast ACER Regulation and a new Regulation on Electricity Sector Risk-Preparedness are expected to be enacted in mid-2019.

It is clear that there is a substantial body of legislation regulating the European energy markets. For the purpose of this chapter, the main provisions of key secondary energy legislation will be presented.

IIEuropean electricity and gas regulatory system

The Third Energy Package, which is due to be amended and expanded by the Clean Energy Package, is a legislative package comprised of three regulations and two directives designed to create the internal market for electricity and gas. These are the ACER Regulation,2 the Electricity Directive3 and Gas Directive,4 and the Electricity Access Regulation5 and Gas Access Regulation,6 The regulatory system for the European energy markets is effectively divided into the national and European Union level.

On the national level, the Electricity and Gas Directives require Member States to designate national regulatory authorities (NRAs), independent bodies that are primarily responsible for setting national transmission or distribution tariffs, cooperating with other NRAs on cross-border issues, monitoring the investment plans of national transmission system operators (TSOs), and ensuring the transparency of consumption data for consumers.

The ACER Regulation provides for the establishment and legal status of the Agency for the Cooperation of National Regulators (ACER), a European forum for the cooperation of NRAs. It defines its tasks, in particular those regarding NRAs, cross-border infrastructure access conditions and operational security, obligations on consultations and transparency, monitoring and reporting obligations on the electricity and natural gas sectors, organisational structure and its budget.

The Commission proposal for a recast ACER Regulation includes provisions on new tasks and restructuring to reflect the enhanced role ACER is to play in the Energy Union, as well as allowing ACER to establish local offices in Member States.

ACER and the NRAs form the core of the European electricity and gas regulation system and are supported by a number of other bodies as described below.

The Commission proposal for a Regulation on the Governance of the Energy Union7 centralises governance and reporting provisions for the entire EU energy sector, including provisions on integrated national energy and climate plans; long-term low emission strategies; Commission assessment of national plans and EU target achievement; national and EU systems on greenhouse gas emissions and removals by sinks; and cooperation and support between Member States and the EU.

IIIElectricity

iElectricity Directive

The Electricity Directive focuses specifically on establishing the European internal market for electricity. In particular, it sets out public service obligations for electricity undertakings and customer protection obligations, the monitoring of security of supply by Member States, technical rules and the promotion of regional cooperation of Member States and NRAs. As regards new generation capacity, it establishes an authorisation procedure and a tendering option.

Furthermore, transmission systems and TSOs must be unbundled; however, Member States may instead opt to designate an independent system operator. Unbundling provisions include the designation and certification of TSOs by NRAs, their tasks, ownership unbundling, dispatching and balancing, and confidentiality, as well as defining decision-making powers of TSOs regarding the connection of new power plants.

Distribution system operators (DSOs) must additionally be unbundled, with the Directive providing for their designation by the Member States, their tasks and confidentiality obligations, as well as provisions on optional closed distribution systems. For both TSOs and DSOs, the unbundling process includes the transparency of their accounts to Member States or any designated authority.

The Directive further regulates transmission and distribution system access, notably on the freedom of third-party access, market opening and reciprocity, and direct lines to all eligible customers.

As discussed above, the Electricity Directive establishes NRAs, including their objectives, duties and organisational structure, and includes provisions on retail markets, as well as safeguard measures in response to a sudden energy market crisis, and the non-discriminatory nature of the Directive’s implementation.

The Commission proposal for the recast Electricity Directive includes provisions on further developing market-based pricing with an option for public intervention for vulnerable consumers, the expansion of consumer rights, the expansion of the tasks of NRAs regarding regional cooperation on cross-border matters, the clarification of the roles of TSOs regarding energy storage and regional coordination centres, and the clarification of the role of DSOs regarding energy storage and recharging points for electric vehicles. The recast Electricity Directive is expected to be adopted by the Council by mid-2019 and will take effect as of 2021.

iiElectricity Access Regulation

The Electricity Directive is coupled with the Electricity Access Regulation, which establishes the European Network of Transport System Operators for Electricity (ENTSO-E), a European forum for the cooperation of TSOs, which is tasked with monitoring national TSOs and their EU-wide network development plans. The Regulation designates tasks for ENTSO-E and monitoring obligations for ACER.

The Regulation furthermore establishes network codes (see Section III.iii), regulates network access charges, the provision of information by TSOs, general principles of congestion management and special provisions on new interconnectors.

The Commission proposal for the recast Energy Access Regulation includes provisions on core market principles, in particular that electricity prices are formed based on demand and supply and forbidding caps or floors on wholesale prices; the introduction of rules on balancing markets; the non-discriminatory and market basis of power generation and demand-response dispatching; the introduction of a definition of bidding zone borders; and the introduction of a European cooperation platform for DSOs. The recast Electricity Access Regulation is expected to be adopted by the Council by mid-2019 and will take effect as of 2021.

iiiNetwork codes

Network codes8 are technical rules designed to address key priorities specified by the European Commission.9 These aim to develop and harmonise specific aspects of the European energy networks, including capacity allocation, balancing supply and demand, requirements of generators and transmission networks, and security of supply.

Currently, 10 electricity network codes have been specified, which are grouped into three categories:

  1. connection codes, which set requirements for the connection of both generators and large customers to the transmission grids;
  2. operational codes, designed to regulate the operation of the transmission systems and the security of supply, and to ensure that supply and demand of electricity within and between transmission systems is balanced; and
  3. market codes, which encourage a transparent and competitive pan-European marketplace for electricity and capacity in all timescales, and stimulate generator diversification and infrastructure optimisation.

At the time of writing, eight and thereby all of the originally planned electricity network codes have entered into force. The network code on capacity allocation and congestion management (CACM)10 sets out methods for allocating capacity in day-ahead and intra-day timescales, and designates nominated electricity market operators as coupling operators, and sets out their tasks as well as tasks for TSOs relating to single day-ahead and intraday coupling. The CACM includes detailed provisions on terms, conditions and methodologies on capacity allocation and congestion income distribution.

The network code on forward capacity allocation11 sets out methods for allocating capacity in the forward markets, and aims to promote effective long-term cross-zonal trade with long-term cross-zonal hedging products for market participants, optimise the calculation and allocation of long-term cross-zonal capacity, provide non-discriminatory access to long-term cross-zonal capacity, ensure fair and non-discriminatory treatment of TSOs and market participants, and enhance the transparency and reliability of information.

The network code on electricity balancing12 sets out provisions on terms and conditions or methodologies of TSOs and their approval; roles and responsibilities of TSOs in the electricity balancing market; the establishment of European platforms for the exchange of balancing energy from (1) replacement reserves, frequency restoration reserves with manual activation and (2) frequency restoration reserves with automatic activation; the establishment of a European platform for the imbalance netting process; the procurement of balancing services; cross-zonal capacity for balancing services, balancing settlement and balancing algorithms; and reporting obligations.

The network code on emergency and restoration13 sets out provisions on regional coordination; the development of a system defence plan and a restoration plan; the development of rules and procedures for the suspension and restoration of market activities; information exchange between TSOs; and compliance testing with obligations under the code.

The network code on demand connection14 sets out requirements for the grid connection of transmission-connected demand facilities, transmission-connected distribution facilities, distribution systems and demand units as used by a demand facility or closed distribution system to provide demand-response services.

The network code on high voltage direct current connections15 sets out requirements for long-distance direct current connections, links between different synchronous areas and direct current-connected power park modules, such as offshore wind farms.

The network code on requirements for generators16 provides requirements for newly constructed generators, as well as notification procedures and compliance provisions.

The network code on system operation17 sets out provisions on operational security requirements; data exchange between different market participants; compliance with SO provisions; the development of training programmes on and certification of real-time system operation, operational planning, operational security analysis, outage coordination and control area adequacy analysis; the availability and provision of ancillary services; scheduling; the implementation and operation of an ENTSO-E operational planning data environment; and load-frequency control and reserves.

ivProposal for risk preparedness

The Commission proposal for a Regulation on Risk-Preparedness in the Electricity Sector proposes measures for risk assessments and risk preparedness, as well as the management of any electricity crisis situations in the Union, in particular setting out methodologies to assess electricity security of supply and to identify crisis situations on the level of both Member States and their regions. This proposal is expected to adopted by the Council in mid-2019.

IVNatural gas

iGas Directive

The Gas Directive is the natural gas counterpart to the Electricity Directive, setting up a similar regulatory structure for the internal market for natural gas. In doing so, it sets out public service and customer protection obligations for gas undertakings, authorisation procedures, the monitoring of security of gas supply, regional solidarity, the promotion of regional cooperation, and technical rules.

The Directive includes provisions on the unbundling of transmission systems and TSOs, their designation and certification by NRAs, their certification in relation to third countries, the unbundling of transmission system owners and storage system operators, and the designation of storage and LNG system operators, as well as duties for these entities. As an alternative to unbundling, Member States may opt to establish independent system operators.

DSOs must be unbundled, with the Directive regulating the designation of DSOs, their tasks, and the option for Member States to designate closed distribution systems.

The Directive further regulates system access, specifically third-party access, access to storage, access to upstream pipeline networks, refusal of access, new infrastructure, market opening and reciprocity, and the possible designation of direct lines. It includes provisions on retail markets, safeguard measures and the level playing field.

The Directive requires Member States to establish NRAs, and sets out their objectives, duties and organisational structures.

The Directive is to be amended in due course following a proposal of the European Commission in November 2017. This amendment will extend the rules set out under the current Gas Directive to gas transmission infrastructure running between Member States and third countries.

iiGas Access Regulation

The Gas Access Regulation establishes the European Network of Transmission System Operators for Gas (ENTSOG), the sister organisation of ENTSO-E, which cooperates in the same manner with ACER.

As with the Electricity Access Regulation, the Gas Access Regulation establishes network codes (see Section IV.iii). In addition, it establishes the free and non-discriminatory access of third parties to gas transmission networks on the European natural gas markets, thereby enforcing the principle of free competition.

The Regulation in particular provides for the transparency of tariffs and calculation methodologies for access to networks, third-party access services, the principles of capacity-allocation mechanisms and congestion management procedures, transparency requirements, balancing rules and imbalance charges, trading of capacity rights, guidelines on the minimum degree of harmonisation, compliance of regulatory authorities and reporting obligations from Member States to the Commission.

iiiNetwork codes

Network codes for natural gas18 follow the same principles as those for electricity, and have near-identical key priorities.19 At the time of writing, five gas network codes have been adopted.

The network code on capacity allocation mechanisms (CAM)20 was recast in March 2017, updating the previous regulation to include the offer of incremental capacity and removing provisions on tariffs that have been included in a separate network code. The CAM regulates the principles of cooperation between TSOs in adjacent EU Member States, and the allocation of firm capacity. Allocation provisions are divided into allocation methodology, standard capacity products and capacity auction systems over different time frames. It furthermore regulates the bundling of cross-border capacity, incremental capacity, interruptible capacity and capacity booking platforms.

The network code on gas balancing in transmission networks21 sets out detailed provisions for a gas balancing system, trade notifications and allocations, operational balancing procedures, and on nomination and re-nomination procedures. The balancing procedures include provisions on short-term standardised products and the establishment of a trading platform for their procurement, as well as incentives for TSOs to undertake efficient balancing actions.

The network code on Interoperability and Data Exchange (INT)22 regulates interconnection agreements, providing that adjacent TSOs mutually agree upon rules for flow control, measurement principles for gas quantity and quality, rules for gas quantity allocation, and communication procedures in the case of exceptional events. It further provides for a dispute resolution system, and sets out a common set of units, as well as provisions for gas quality and odorisation.

The network code on tariff harmonisation23 aims to homogenise gas transmission tariffs within the European Union, promoting fair and objective tariffs, providing methodologies on reference prices, reserve prices, clearing price and payable price, provisions on reconciliation of revenue, pricing of bundled capacity and capacity at virtual interconnection points, consultation and publication requirements, and tariff principles for incremental capacity.

Congestion management procedures24 are fundamentally guidelines addressing third-party access services concerning TSOs, the principles of capacity-allocation mechanisms and congestion management procedures, and their application in the event of contractual congestion, as well as setting out the technical information necessary for network users to gain effective access to the system.

Remaining priority areas include network security and reliability rules, network connection rules, third-party access rules, data exchange and settlement rules, emergency operational procedures and transparency. These are currently under consideration by ACER.

ivGas security of supply regulation

The Gas Security of Supply Regulation25 aims to prevent a disruption of natural gas supply to the European Union and to ensure a coordinated response if necessary. Its fundamental principle is that security of gas supply is the shared responsibility of natural gas undertakings, Member States and the Commission.

It provides for the establishment of a Gas Coordination Group; the development of a robust infrastructure network across the European Union; the development of a gas supply standard to ensure that vulnerable consumers have gas supply under certain extreme circumstances; the performance of a regular risk assessment by ENTSOG and coordinators of regional cooperation Member State groups; the establishment of preventive action plans and emergency plans, different supply crisis levels, regional and Union emergency responses; the solidarity principle whereby in a severe crisis neighbouring Member States are to help ensure that gas supplies to households and essential social services receive a continued supply of gas; information exchange, handling of confidential information by various market participants and authorities; and cooperation with the Energy Community Contracting Parties.

VPetroleum

iOil and Gas Licensing Directive

The Oil and Gas Licensing Directive26 sets out common rules that aim to ensure competitive and non-discriminatory access to third parties to prospect, explore and produce hydrocarbons within the territories of the Member States.

Authorisations must be granted in a transparent and non-discriminatory manner to all interested parties. The evaluation of authorisations is based on criteria relating to the technical and financial capabilities of the applicant and the manner in which it proposes to exploit the area.

The boundaries of authorisation areas must be determined in such a way that the entity can act in the most efficient manner from an economic and technical point of view. This is intended to encourage the most efficient means of exploitation, as in some cases several entities can do so more effectively than single entities.

Member States are obliged to submit information pertaining to the authorisation to be published in the Official Journal of the European Union. This information includes the duration of the authorisation, the specific area, and selection criteria. Furthermore, Member States are obliged to submit an annual report on the areas opened, authorisations granted, details of entities holding the authorisations and information regarding the reserves available in their territory.

iiOil Stockholding Directive

The stocks of crude oil and petroleum products directive27 sets out rules to mitigate an oil supply crisis in the European Union. The Directive sets out obligations for Member States to maintain emergency stocks, including a methodology for calculating stock levels, and the obligation to ensure the availability and accessibility of stocks. Member States must maintain a register of emergency stocks and submit an annual report to the Commission. Member States may set up a central stockholding entity to support it in these obligations.

The Directive imposes regulations on economic operators, and permits Member States to maintain and manage a minimum level of specific oil stocks, providing methodologies to calculate summaries of stocks. Furthermore the Directive sets up a coordination group for oil and petroleum products, permits the Commission to review emergency preparedness and stockholding, and requires that Member States have emergency procedures in place in case of a major supply disruption.

VITEN-E Regulation

The trans-European energy infrastructure regulation (TEN-E)28 complements the aims of the Third Energy Package, establishing the concept of projects of common interest (PCIs). These are infrastructure projects that would significantly contribute to the development of the internal market and the achievement of the European Commission’s 2020 goals, namely a 20 per cent cut in greenhouse gas emissions (from 1990 levels), achieving 20 per cent of European Union energy from renewables, and a 20 per cent improvement in energy efficiency by 2020.

TEN-E regulates in particular the selection, implementation and monitoring of PCIs, as well as permit granting procedures, public participation, the regulatory treatment of PCIs, financing eligibility criteria and guidance for the awards criteria of financial assistance.

PCIs may benefit in a number of ways, including through accelerated and more efficient permit granting procedures; improved regulatory treatment on the national level; streamlined environmental assessment procedures; increased public participation via consultation; and access to grants from the Connecting Europe Facility.

A list of PCIs is established by the European Commission every two years. In November 2017, the third PCI list was published.29 It includes 173 projects, of which 110 are electricity and smart grids projects, 53 are gas projects and six are oil projects. A total of €1.6 billion is available in grants to PCI projects for works and studies, and receiving PCI status furthermore increases the attractiveness to external investors.

An applicant project must meet a series of criteria to be considered a PCI, in that it has to have significant benefits for at least two Member States; contribute to market integration and further competition; enhance security of supply for the European Union; and reduce CO2 emissions.

TEN-E grants the Commission the ability to nominate PCIs by means of delegated acts, and sets out the conditions of its exercise. TEN-E further sets out obligations on reporting and evaluation of PCIs as well as information and publicity obligations.

VIIRenewable Energy Directive

The Renewable Energy Directive (RED)30 is a key directive for the European Union’s commitment to renewable energy generation and consumption, setting out the specific aim of fulfilling at least 20 per cent of its total energy needs with renewable source energy by 2020, and a mandatory target of a 10 per cent share of energy from renewable sources in the transportation sectors of Member States by 2020.

The Directive requires Member States to set mandatory national overall targets and measures for the use of energy from renewable sources, as well as to adopt national renewable energy action plans. In order to achieve these targets, the Directive provides for statistical transfers, joint projects between Member States or third countries, and joint support schemes between Member States.

Member States are required to provide information and training on support measures and details on the benefits, cost and energy efficiency of renewable source energy to consumers, builders, architects and equipment suppliers.

One important aspect of the Directive is the establishment of guarantees of origin of electricity, heating and cooling produced from renewable energy sources, which is a system to ensure that the origin of electricity produced from renewable energy sources can be guaranteed.

The Directive furthermore regulates the access to and operation of the transmission and distribution grids, as well as sustainability criteria for biofuels and bioliquids and verification of their compliance, and specific provisions related to energy from renewable sources in transport. The Commission is additionally required to monitor and report the origin and impact of biofuels.

Member States are required to regularly report the progress of the promotion and use of renewable source energy, and the Commission is required to establish an online public transparency platform to facilitate and promote cooperation between Member States.

In December 2018, the recast Renewable Energy Directive (REDII)31 entered into force, and it is to be implemented by Member States as of 1 July 2021, upon which date RED is to be repealed. REDII includes provisions on a minimum target of 32 per cent for the share of energy from renewable sources in the Union’s gross final consumption of energy in 2030, the opening up of support schemes to projects in other Member States (permitting Member States to support renewable generators in other Member States), new qualifications for accounting for guarantees of origin issued to supported generators, extending the use of guarantees of origin to non-renewable projects, and the right of consumers generating their own electricity (known as renewables self-consumers) to sell any excess while retaining their rights as consumers.

VIIIEnergy Efficiency

iEnergy Efficiency Directive

The Energy Efficiency Directive32 aims to promote energy efficiency across the European Union in order to meet the European Union 2020 goal of 20 per cent target on energy efficiency, thereby removing barriers that limit efficiency in the supply and use of energy.

The Directive requires Member States to set national energy efficiency targets and a strategy to mobilise investment for improving the energy efficiency of buildings, whereby public bodies are to set an exemplary role. It regulates public procurement with regard to energy efficiency, requires Member States to set up energy efficiency obligation schemes and sets out a number of consumer obligations.

Member States are required to encourage the use of energy audits and energy management systems for final consumers; provide final consumers with meters, cost-free access to metering and billing information and information on energy; and implement a consumer empowerment programme.

Member States are additionally required to perform a comprehensive assessment of the potential for the application of high-efficiency cogeneration and efficient district heating and cooling, and to ensure that, in the performance of their duties, NRAs take account of energy efficiency measures. The Directive provides for a system of qualification, accreditation and certification schemes for providers of energy services, energy audits, energy managers and installers of energy-related building elements should the Member State consider itself not to have the required technical competence.

Furthermore, Member States are required to promote energy services markets for SMEs, and are permitted to set up an energy efficiency national fund and other financing and technical support to increase energy efficiency in different sectors.

In December 2018, the amended Energy Efficiency Directive33 entered force, and the amendments to the current Energy Efficiency Directive are to be made by Member States by 25 June 2020 (with some provisions to be implemented by 25 October 2020). The amendment sets out a binding 32.5 per cent minimum energy efficiency target for 2030, building on that of 20 per cent for 2020, updates the energy savings obligation for Member States, and extends consumer rights in particular regarding billing and energy consumption information through smart metering systems.

iiEnergy Performance in Buildings Directive

The Energy Performance in Buildings34 aims to promote the improvement of the energy efficiency of buildings within the European Union.

The Directive sets out a common general framework to develop a methodology to calculate the energy performance of buildings and building units, minimum requirements on the energy performance of new and existing buildings, a national plan for increasing the number of nearly zero-energy buildings, rules on energy certification of buildings or building units, and on independent control systems for energy performance certificates and inspection reports.

In December 2018, the amended Energy Performance in Buildings Directive35 entered force, and the amendments are to be made by Member States by 10 March 2020. The amended Directive introduces an obligation for Member States to establish a long-term renovation strategy and develops requirements for residential and non-residential buildings, such as installing recharging points for electric vehicles, and details on heating systems and air-conditioning systems.

IXDecarbonisation

iEmissions Trading Directive

The European greenhouse gas emissions allowance trading scheme (the Emissions Trading Scheme (ETS)) was established by the Emissions Trading Directive36 with the aim of significantly reducing greenhouse gas emissions through a cap-and-trade scheme.

The Emissions Trading Directive notably regulates greenhouse gas emissions permits and their application procedure; notification obligations for installation operators; the development of a national allocation plan; allocation methods for allowances; the transfer, surrender and cancellation of allowances throughout the European Union; the validity of allowances; guidelines for monitoring and reporting of emissions; and verification of reports submitted by operators. Allowance allocation decisions are to be made available to the public, and Member States must establish allowance registries, and they are further subject to reporting obligations. The Commission is required to designate a central administrator that is to maintain an independent transaction log, recording the issue, transfer and cancellation of allowances.

The Emissions Trading Directive is supported by additional legislation,37 such as the Registry Regulation,38 which sets up the registries system and regulates the creation, deletion and suspension of accounts, verification of emissions and compliance, the performance of transactions, permissible allowances, trading mechanisms, general technical requirements, and links with other greenhouse gas emission trading schemes.

XThe Carbon Capture and Storage Directive

The Carbon Capture and Storage (CCS) Directive39 provides a legal framework for the environmentally safe geological storage of carbon dioxide, regulating the selection of storage sites, conditions on exploration permits and storage permits, and operation obligations. These operating obligations include the composition of carbon dioxide streams and their acceptance procedure; the monitoring of storage facilities; reporting obligations of the storage operator; inspections of the facilities; closure and post-closure obligations; the provision of financial security by operators for storage permits; and a financial mechanism for the competent authority.

This competent authority is to be designated by the Member State to fulfil its duties under the Directive, as well as to facilitate trans-boundary cooperation and maintain a registry of permits and closed storage sites.

The Directive further regulates third-party access to transport network and storage sites, and requires Member States to provide information to the public regarding storage operations as well as regular updates to the Commission on the implementation of the Directive.

XIEnergy Markets

Following the global financial crisis of 2008/09, the European Union has adopted a number of legislative instruments to stabilise the financial markets, limit price volatility of commodities and ensure that markets have sufficient capital. It is not the aim of this chapter to discuss financial regulations; however, while not energy-specific, it should be kept in mind that the energy market is affected by European financial markets legislation.40

Along with the Third Energy Package and REMIT,41 this legislation has introduced additional obligations for energy markets including reporting obligations, transparency requirements, the treatment of certain types of energy or emissions allowances as financial instruments or derivatives, organisational requirements for markets, the introduction of new trading venues, the mandatory use of regulated markets for certain products and a clearing obligation for certain trades.

XIIFuture developments

Two main external factors are likely to direct European Union energy policy in the future: the need to diversify and secure energy supply, and the Paris Agreement (including its implementation through successive conferences of the parties to the United Nations Framework Convention on Climate Change. The Juncker Commission has made significant commitments to the Energy Union, which promotes the diversification of energy sources and the tightening up of bilateral agreements between Member States and third states.

The European Union has already set mandatory targets to increase the share of renewable source energy in the European energy mix, which are in line with the target of the Paris Agreement. Following the ratification of the Paris Agreement, the Clean Energy for All Europeans package would appear to make an increased commitment from the European Union and its Member States to decarbonise the economy. Individual acts under the Clean Energy for All Europeans package are currently passing through the ordinary legislative procedure, and subject to further negotiation, the acts are expected to be enacted during the second half of 2018; however, the entry into force dates for these acts as well as the transposition deadlines of the directives remain unclear.

On 29 March 2017, the United Kingdom triggered Article 50 of the TEU following the result of the Brexit referendum in June 2016. This started a two-year negotiation window for the EU and UK to agree on the terms of UK withdrawal and potentially the EU–UK cooperation mechanism. On 19 March 2018, the European Union and UK made a significant step in the Brexit negotiations, agreeing upon the ‘Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community’ (the Draft Agreement).42 While the Draft Agreement is still subject to negotiation and the acceptance of the UK Parliament, it provides for a transition period until 31 December 2020. Under the Draft Agreement, the UK would remain subject to EU law and would remain part of the internal market; however, the UK would cease to be involved in the EU legislative procedure unless invited by the Member States.

Of possible relevance to the energy sector, the Draft Agreement provides on a high level for the movement of goods placed on the market prior to the end of the transition period, and on ongoing customs procedures. Neither the Draft Resolution nor the current status of negotiations, however, provide any clarity as to the impact of Brexit on the energy sector. It is unclear whether the UK government will continue with its intention of pursuing a ‘hard’ Brexit, whereby membership of the European Economic Area Agreement would be excluded, and whether this may take the form of simply withdrawing from the EU without any withdrawal or cooperation agreement (i.e., the future relationship between the EU and UK being governed by World Trade Organization rules).

Notwithstanding the effects of Brexit on the UK energy sector, the regulatory landscape in the EU is likely to remain largely unchanged; however, certain issues may arise as part of the proceedings. These may include the adaptation of the ETS to account for the withdrawal of the EU’s second-largest emitter, as well as issues involving connection to the newly established UK energy sector. The Brexit negotiations will doubtless be complex, and the exact nature of any possible effects on the EU energy sector remains unclear; however, based on the Draft Agreement, it would appear that these effects may be delayed until 31 December 2020.


Footnotes

1 Charles Morrison, Natasha Luther-Jones and Andreas Gunst are partners at DLA Piper International.

2 Regulation (EC) No. 713/2009 establishing an Agency for the Cooperation of Energy Regulators.

3 Directive 2009/72/EC concerning common rules for the internal market in electricity.

4 Directive 2009/73/EC concerning common rules for the internal market in natural gas.

5 Regulation (EC) No. 714/2009 on conditions for access to the network for cross-border exchanges in electricity.

6 Regulation (EC) No. 715/2009 on conditions for access to the natural gas transmission networks.

7 Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action.

8 As established for the electricity market by the Electricity Access Regulation.

9 Network codes are initiated as non-binding ‘framework guidelines’ set out by ACER, outlining the aims and content to be achieved. Through consultation with stakeholders and the public, ENTSO-E drafts network codes based on these framework guidelines. These are subsequently evaluated by ACER to ensure their adherence to the framework guidelines. The draft network codes are then accepted through the process of comitology, and are finally published by the European Commission, commonly as binding regulations.

10 Commission Regulation (EU) 2015/1222 establishing a guideline on capacity allocation and congestion management.

11 Commission Regulation (EU) 2016/1719 establishing a guideline on forward capacity allocation.

12 Commission Regulation (EU) 2017/2195 establishing a guideline on electricity balancing.

13 Commission Regulation (EU) 2017/2196 establishing a network code on emergency and restoration.

14 Commission Regulation (EU) 2016/1388 establishing a network code on demand connection.

15 Commission Regulation (EU) 2016/1447 establishing a network code on requirements for grid connection of high-voltage direct current systems and direct current-connected power park modules.

16 Commission Regulation (EU) 2016/631 establishing a network code on requirements for grid connection of generators.

17 Commission Regulation (EU) 2017/1485 establishing a guideline on electricity transmission system operation.

18 As established for the gas market by the Gas Access Regulation.

19 The development process for natural gas network codes is identical to that for electricity; however, ENTSOG is tasked with performing the stakeholder consultations and drafting of the network code based on the framework guidelines.

20 Commission Regulation (EU) 2017/459 establishing a network code on capacity allocation mechanisms in gas transmission systems.

21 Commission Regulation (EU) No 312/2014 establishing a Network Code on Gas Balancing of Transmission Networks.

22 Commission Regulation (EU) 2015/703 establishing a network code on interoperability and data exchange rules.

23 Commission Regulation (EU) 2017/460 establishing a network code on harmonised transmission tariff structures for gas.

24 Commission Decision (EU) 2015/715 amending Annex I to Regulation (EC) 715/2009 on conditions for access to the natural gas transmission networks.

25 Regulation (EU) 2017/1938 concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No. 994/2010.

26 Directive 94/22/EC on the conditions for granting and using authorisations for the prospection, exploration and production of hydrocarbons.

27 Directive 2009/119/EC imposing an obligation on Member States to maintain minimum stocks of crude oil or petroleum products.

28 Regulation (EU) No. 347/2013 on guidelines for trans-European energy infrastructure.

30 Directive 2009/28/EC on the promotion of the use of energy from renewable sources.

31 Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources.

32 Directive 2012/27/EU on energy efficiency.

33 Directive (EU) 2018/2002 amending Directive 2012/27/EU on energy efficiency.

34 Directive 2010/31/EU on the energy performance of buildings.

35 Directive (EU) 2018/844 amending Directive 2010/31/EU on the energy performance of buildings.

36 Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community.

37 Since its adoption, the Emissions Trading Directive has undergone a series of amendments: (1) Directive 2004/101/EC amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in respect of the Kyoto Protocol’s project mechanisms; (2) Directive 2008/101/EC amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community; (3) Regulation (EC) No. 219/2009 adapting a number of instruments subject to the procedure referred to in Article 251 of the Treaty to Council Decision 1999/468/EC with regard to the regulatory procedure with scrutiny; (4) Directive 2009/29/EC amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community; (5) Decision No. 1359/2013/EU amending Directive 2003/87/EC clarifying provisions on the timing of auctions of greenhouse gas allowances; and (6) Regulation (EU) No. 421/2014 amending Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Community, in view of the implementation by 2020 of an international agreement applying a single global market-based measure to international aviation emissions.

38 Commission Regulation (EU) No. 389/2013 establishing a Union Registry pursuant to Directive 2003/87/EC and Decisions No. 280/2004/EC and No. 406/2009/EC.

39 Directive 2009/31/EC on the geological storage of carbon dioxide.

40 These include Directive 2014/65/EU on markets in financial instruments (MiFID II), Regulation (EU) No. 600/2014 on markets in financial instruments (MiFIR), Regulation (EU) No. 648/2012 on OTC derivatives, central counterparties and trade repositories (European Market Infrastructure Regulation – EMIR), Regulation (EU) No. 596/2014 on market abuse (Market Abuse Regulation – MAR), Directive 2014/57/EU on criminal sanctions for market abuse (Market Abuse Directive – MAD), and Directive 2013/36/EU on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (Capital Requirements Directive – CRD IV).

41 Regulation (EU) No. 1227/2011 on wholesale energy market integrity and transparency.