Intervention sans frontieres

The European Commission has some advice for member states on support schemes for renewables, capacity mechanisms and consumer incentives, with a view to making them work across borders.

On 5 November the European Commission published guidance to member states on the design and reform of national support schemes for renewables, the design of capacity mechanisms to ensure continuous supply of electricity when generation fluctuates, and enhancing the role of consumers with incentives to use electricity when it is cheapest and most plentiful.
A recurring theme is the need to overcome barriers to the internal energy market created by national support schemes with, for example, co-operation mechanisms between member states. Also, the Commission intends to deepen its analysis of comparative costs of different electricity generation technologies in its upcoming report on drivers for energy prices, which will be followed by an in-depth study on full costs and subsidies of the various technologies by June next year.
The guidance covers not only renewable support schemes but also best practice in managing any process for reforming the support on offer. The Commission recognises the difficult balancing act required to benefit from cost reductions for delivering renewables while providing investor certainty. It highlights long-term legal commitments on timing and phasing out of support, the announcement of automatic reductions in support, planned review periods, wide and public consultation on scheme design, and stable scheme financing linked to consumption and off-budget financing.
The guidance covers various support schemes including feed-in tariffs and green certificates. It emphasises the Commission’s wish to see feed-in tariffs replaced with what are described as feed-in premiums (which would appear to include the sort of contracts for difference mechanism envisaged under Electricity Market Reform (EMR), particularly for technologies approaching maturity.
The Commission also puts forward best practice guidance towards the “Europeanisation” of support schemes, including the acceptance of energy supply from other member states in national support schemes or through the creation of cross-border support schemes. The Irish Energy Bridge, which seeks to connect 5GW of offshore wind in the Irish Sea to the UK transmission system, appears to be a perfect example.
The Commission provides guidance (and a checklist) for member states to use both to justify intervention and to choose the intervention mechanism. Member states are encouraged to address regulatory or market failures that cause or may exacerbate generation adequacy concerns, such as the effects of wholesale and retail price regulation; the potential for modifications of renewable support mechanisms to help ensure generation adequacy; the potential to help ensure generation adequacy by implementing effective intraday, balancing and ancillary services markets and removing obstacles for demand side and storage participation in those markets; and structural solutions to address problems of market concentration leading to underinvestment.
In a further nod to cross-border participation, the Commission says capacity mechanisms should be designed to be open to all capacity that can effectively contribute to meeting generation adequacy standards.
On choice of instrument, the Commission says a strategic reserve or a credible one-off tendering procedure is normally less distortionary and easier to implement than market-wide capacity mechanisms unless there is clear evidence that they are unsuitable. It also suggests that mechanisms based on capacity payments do not ensure that the identified adequacy gap is filled and create significant risks of overcompensation.
Finally, on allocation of costs, the Commission says costs of capacity mechanisms should be allocated, in a transparent and non-discriminatory manner, to consumers in proportion to their contribution to demand during periods of scarcity or system stress.
The Commission plans to launch a public consultation on the draft text for the revised EU guidelines on state aid in environmental and energy cases for 2014-20 (EEAG) shortly, and the outcome of the debate launched by the guidance as well as responses to the consultation will be taken into account in finalising the EEAG later in 2014. In parallel, the UK will be trying to obtain approval from the Commission on elements of its EMR programme under EU state aid rules.
Gordon Downie and Joanne McDowall are solicitors in the Energy and Natural Resources Group of Shepherd and Wedderburn