The Energy Regulation and Markets Review: European Union

This article is an extract from The Energy Regulation and Markets Review, 11th Edition. Click here for the full guide.

i Overview

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, the Treaty on the Functioning of the European Union, the Treaty establishing the European Atomic Energy Community and the Charter of Fundamental Rights of the European Union. Other treaties include the Energy Charter Treaty, the Energy Community Treaty, the United Nations Framework Convention on Climate Change and the 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. It 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. 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 189 of the 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 on all EU 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. EU competition law has an essential and complementary role in achieving these objectives, with free market provisions being enforced in coordination with energy regulators.

The Energy Union was introduced by the Juncker Commission (2014–2019) and ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ was adopted in February 2015. The European Commission set itself the priority of establishing the Energy Union as a grand strategy for European energy policy, which was to go beyond the concept of the internal energy market.

In November 2016, the European Commission published the proposal for the Clean Energy Package (known formally as the Clean Energy for All Europeans Package), a legislative package that largely updated the previous one, the Third Energy Package, and other key EU environmental legislation.

On 11 December 2019, the European Green Deal was introduced by the current von der Leyen Commission (2019–2024). This elaborates on the Energy Union and sets a clear focus on climate, sustainability and biodiversity conservation for all policy areas of the Commission. The main aim of the Green New Deal is to achieve no net emissions of greenhouse gases by 2050.

While an update to the EU gas legislative regime was notably absent from the Clean Energy Package, at the time of writing the European Commission is preparing proposals for the updated gas legislative package, which is expected to bring the 2009 Gas Directive and Gas Access Regulation in line with the EU’s commitments under the Paris Agreement.

There is therefore a substantial body of legislation regulating the European energy markets. For the purposes of this chapter, the main provisions of key secondary energy legislation are presented.

II European electricity and gas regulatory system

The Clean Energy Package was fully enacted in June 2019 and set out a new regulatory regime for electricity that develops further the 2009 Third Energy Package. It consists of the following legislation:

1. the Energy Performance in Buildings Directive (EU) 2018/844;
2. the recast Renewable Energy Directive (EU) 2018/2001;
3. an amended Energy Efficiency Directive (EU) 2018/2002;
4. the new Regulation on the Governance of the Energy Union (EU) 2018/1999;
5. the recast Electricity Directive (EU) 2019/944;
6. the recast Electricity Access Regulation (EU) 2019/943;
7. the recast ACER Regulation (EU) 2019/942; and
8. a new Regulation on Electricity Sector Risk-Preparedness (EU) 2019/941.

The regulatory system for the European energy markets is effectively divided into two tiers: the national level and the European Union level. At the national level, the Electricity Directive and the Gas Directive 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. At the European Union level, the ACER Regulation provides for the establishment and legal status of the Agency for the Cooperation of Energy 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 recast ACER Regulation includes provisions on new tasks and restructuring to reflect the enhanced role ACER is to play in the Energy Union, and 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.

III Electricity

i Electricity 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.

Furthermore, transmission systems and TSOs must be unbundled from generation and supply because of the natural monopoly conferred by transmission and distribution ownership; 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 also be unbundled. The Directive provides for their designation by Member States, their tasks and confidentiality obligations, and 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 in Section II, the 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 recast Electricity Directive sets out 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, clarification of the roles of TSOs regarding energy storage and regional coordination centres, and clarification of the role of DSOs regarding energy storage and recharging points for electric vehicles.

ii Electricity 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 recast Energy Access Regulation sets out provisions on core market principles, in particular:

1. that electricity prices are formed based on demand and supply and forbidding caps or floors on wholesale prices;

1. the introduction of rules on balancing markets;
2. the non-discriminatory and market basis of power generation and demand-response dispatching;
3. the introduction of a definition of bidding zone borders; and
4. the introduction of a European cooperation platform for DSOs.

iii Network codes

Network codes2 are technical rules designed to address key priorities specified by the European Commission.3 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.

The electricity network codes are grouped into three categories:

1. connection codes, which set requirements for the connection to the transmission grids of both generators and large customers;
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.

To date, eight – and thereby all the originally planned electricity network codes – have entered into force. The network code on capacity allocation and congestion management (CACM)4 sets out methods for allocating capacity in day-ahead and intraday 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 allocation5 sets out methods for allocating capacity in the forward markets and aims to:

1. promote effective long-term cross-zonal trade with long-term cross-zonal hedging products for market participants;
2. optimise the calculation and allocation of long-term cross-zonal capacity;
3. provide non-discriminatory access to long-term cross-zonal capacity;
4. ensure fair and non-discriminatory treatment of TSOs and market participants; and
5. enhance the transparency and reliability of information.

The network code on electricity balancing6 sets out:

1. provisions on terms and conditions or methodologies of TSOs and their approval;
2. roles and responsibilities of TSOs in the electricity balancing market;
3. the establishment of European platforms for the exchange of balancing energy from:
   • replacement reserves;
   • frequency restoration reserves with manual activation; and
   • frequency restoration reserves with automatic activation;
4. the establishment of a European platform for the imbalance netting process;
5. the procurement of balancing services;
6. cross-zonal capacity for balancing services, balancing settlement and balancing algorithms; and
7. reporting obligations.

The network code on emergency and restoration7 sets out:

1. provisions on regional coordination;
2. the development of a system defence plan and a restoration plan;
3. the development of rules and procedures for the suspension and restoration of market activities;
4. information exchange between TSOs; and
5. compliance testing with obligations under the code.

The network code on demand connection8 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 connections9 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 generators10 provides requirements for newly constructed generators, notification procedures and compliance provisions.

The network code on system operation11 sets out:

1. provisions on operational security requirements;
2. data exchanges between different market participants;
3. compliance with system operator provisions;
4. 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;
5. the availability and provision of ancillary services;
6. scheduling;
7. the implementation and operation of an ENTSO-E operational planning data environment; and
8. load-frequency control and reserves.

iv Regulation on risk preparedness

The Commission published the Regulation on Risk-Preparedness in the Electricity Sector, setting out measures for risk assessments and risk preparedness, and the management of any electricity crisis situations in the Union. In particular, the Regulation sets out methodologies to assess electricity security of supply and to identify crisis situations at the level of both Member States and their regions.

IV Natural gas

i Gas Directive

At the time of writing, the natural gas sector is still governed by the 2009 Third Energy Package, specifically the Gas Directive12 and the Gas Access Regulation.13 The Gas Directive was amended by Directive (EU) 2019/692 to extend the EU regulatory regime to apply to interconnectors linking EU Member States to third countries.

The Gas Directive has a scope and structure similar to that of the 2009 Electricity Directive, upon which the current Electricity Directive is based, and sets 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. The Directive regulates 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.

In 2019, the Gas Directive was amended, which led to the extension of EU rules to pipelines that connect Member States and third countries. The objective of the amendment was to ensure that the rules governing the EU’s internal gas market apply to gas transmission lines between a Member State and a third country, up to the border of the Member State’s territory, on land or sea.

ii Gas 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.

iii Network codes

Network codes for natural gas14 follow the same principles as those for electricity, and have near-identical key priorities.15 To date, five gas network codes have been adopted.

The network code on capacity allocation mechanisms (CAM)16 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 further regulates the bundling of cross-border capacity, incremental capacity, interruptible capacity and capacity booking platforms.

The network code on gas balancing in transmission networks17 sets out detailed provisions for a gas balancing system, trade notifications and allocations, operational balancing procedures, and on nomination and renomination procedures. The balancing procedures include provisions on short-term standardised products and the establishment of a trading platform for their procurement, and incentives for TSOs to undertake efficient balancing actions.

The network code on interoperability and data exchange18 regulates interconnection agreements, providing that adjacent TSOs mutually agree on 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 and provisions for gas quality and odorisation.

The network code on tariff harmonisation19 aims to homogenise gas transmission tariffs within the European Union, promoting fair and objective tariffs, providing methodologies on reference prices, reserve prices, clearing prices and payable prices, provisions on reconciliation of revenues, pricing of bundled capacity and capacity at virtual interconnection points, consultation and publication requirements, and tariff principles for incremental capacity.

Congestion management procedures20 are fundamentally guidelines that address 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. They also set out the technical information necessary for network users to gain effective access to the system.

Further 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.

iv Gas Security of Supply Regulation

The Gas Security of Supply Regulation21 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:

1. the establishment of a Gas Coordination Group;
2. the development of a robust infrastructure network across the European Union;
3. the development of a gas supply standard to ensure that vulnerable consumers have a supply under certain extreme circumstances;
4. the performance of a regular risk assessment by ENTSOG and coordinators of regional cooperation Member State groups;
5. the establishment of preventive action plans and emergency plans, different supply crisis levels, regional and Union emergency responses;
6. 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;
7. information exchange, and handling of confidential information by various market participants and authorities; and
8. cooperation with the Energy Community Contracting Parties.

V Petroleum

i Oil and Gas Licensing Directive

The Oil and Gas Licensing Directive22 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 economic and technical points 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 for publication 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.

ii Oil Stockholding Directive

The Oil Stockholding Directive23 sets out rules to mitigate an oil supply crisis in the European Union. It also sets out obligations for Member States to maintain emergency stocks, including a methodology for calculating stock levels, and 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 provide support in meeting 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 as a provision against a major supply disruption.

VI Trans-European Energy Infrastructure Regulation

The Trans-European Energy Infrastructure Regulation (TEN-E)24 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 EU 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; the fourth PCI list25 was published on 31 October 2019. It includes 151 projects, of which more than 70 per cent are electricity and smart grid projects, mirroring the increasing role of renewable electricity in the energy system and the need for network reinforcements enabling the integration of renewables and more cross-border trade. Receiving PCI status increases the attractiveness of a project 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 carbon dioxide 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 regarding reporting and evaluating PCIs, and information and publicity obligations.

On 15 December 2020, the European Commission adopted a proposal to revise the TEN-E that will restrict PCIs to projects between Member States only, and provide for a new regime for Projects of Mutual Interest (PMIs) for projects connecting Member States and third countries. The revised TEN-E is, at the time of writing, under discussion by the European Parliament and the Council.

VII Renewable Energy Directive

The recast Renewable Energy Directive (RED II)26 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 32 per cent of its total energy needs with renewable source energy by 2030, and comprising measures for the different sectors to make it happen. This includes provisions for enabling self-consumption of renewable energy, an increased 14 per cent target for the share of renewable fuels in transport by 2030 and strengthened criteria for ensuring bioenergy sustainability.

The RED II requires Member States to set mandatory national targets and measures for the use of energy from renewable sources, and to adopt national renewable energy action plans. 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, costs and energy efficiency of renewable source energy to consumers, builders, architects and equipment suppliers. The Directive further regulates access to and operation of the transmission and distribution grids, the sustainability criteria for biofuels and bioliquids and verification of their compliance. The Commission is additionally required to monitor and report the origin and effects of biofuels.

Another key aspect of RED II concerns guarantees of origin (GOs) of electricity, heating and cooling produced from renewable energy sources. The GO system was established under the original Renewable Energy Directive (RED)27 to ensure that the origin of electricity produced from renewable energy sources could be guaranteed; it then developed under Renewable Energy Directive I (RED I),28 which redefined the scope of the GO system to provide proof to final customers of the share or quantity of energy from renewable sources in an energy supplier’s energy mix. RED II extended the purpose of GOs from the RED I position both to include supply fuel mix disclosure and to expressly evidence the consumption of renewable source energy by consumers.

Under RED II, GOs have been opened up beyond renewable source electricity to include renewable source gas and hydrogen. RED II additionally opened up national support schemes (including those involving mandatory renewable energy certificates) to include generation in other EU Member States, thus permitting Member States to support renewable generators in other Member States. Moreover, new qualifications for accounting for GOs issued to generators receiving support are provided for, and the right of consumers generating their own electricity (known as renewables self-consumers) to sell any excess while retaining their rights as consumers is secured.

VIII Energy efficiency

i Energy Efficiency Directive

The original Energy Efficiency Directive29 aimed to promote energy efficiency across the European Union to meet the European Union 2020 goal of a 20 per cent target on energy efficiency, thereby removing barriers that limit efficiency in the supply and use of energy. Introduced under the Clean Energy Package, the amended Energy Efficiency Directive updates the policy framework to 2030 and beyond. It entered into force in December 2018, and Member States had until 25 October 2020 to make amendments in accordance with the current Energy Efficiency Directive.

The key element of the amended Directive is a headline energy efficiency target for 2030 of at least 32.5 per cent. The target, to be achieved collectively across the EU, is set relative to the 2007 modelling projections for 2030. The amended Directive further updates the energy savings obligation for Member States and extends consumer rights, in particular regarding billing and energy consumption information through smart metering systems.

The amended 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 have 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, to provide final consumers with meters, cost-free access to metering and billing information and information on energy, and to 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 amended 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 small and medium-sized enterprises, and are permitted to set up an energy efficiency national fund and other financing and technical support to increase energy efficiency in different sectors.

ii Energy Performance in Buildings Directive

The Energy Performance in Buildings Directive30 aims to promote the improvement of the energy efficiency of buildings within the European Union. Introduced under the Clean Energy Package, the amended Energy Performance in Buildings Directive31 entered into force in December 2018 and had an implementation deadline of 10 March 2020.

Some of the key elements introduced by the amended Energy Performance in Buildings Directive are an obligation for Member States to establish long-term renovation strategies, aiming to decarbonise the national building stocks by 2050 (with indicative milestones until then), as well as an obligation to develop minimum energy performance requirements for residential and non-residential buildings, such as installing recharging points for electric vehicles, and details on heating systems and air-conditioning systems. Further, all new buildings must be nearly zero-energy buildings from 31 December 2020, and Member States must ensure that energy performance certificates are issued when buildings are sold or rented. The new Energy Performance in Buildings Directive promotes smart technologies, including through requirements of building automation and control systems, and on devices that regulate temperature at room level.

In October 2020, the Commission presented its renovation wave strategy, which contains an action plan with concrete regulatory, financing and enabling measures to boost building renovation. The objective of the renovation wave strategy is to (at least) double the annual energy renovation rate of buildings by 2030 and to foster deeper renovation.

IX Decarbonisation

i Emissions Trading Directive

The European greenhouse gas emissions allowance trading scheme (the Emissions Trading Scheme (ETS) was established by the Emissions Trading Directive32 with the aim of significantly reducing greenhouse gas emissions through a cap-and-trade scheme. Operators of installations in certain energy-intensive sectors (including manufacturing facilities and power plants) as well as aircraft operators are required to surrender an equal number of emission allowances as the total carbon dioxide emissions produced from the installation for that year. These emission allowances can be sold to or bought from one another as needed, and can be purchased in auctions. The limit on the total number of allowances available ensures that they have value.

Where an operator cannot surrender enough allowances to cover all its emissions, penalties are imposed. Operators reducing emissions to a level below their limit can bank the surplus of allowances to cover its future needs or else sell the surplus allowances to another operator that is short of allowances. The number of allowances is reduced over time, thus ensuring that the total emissions produced gradually fall.

The Emissions Trading Directive notably regulates:

1. greenhouse gas emissions permits and their application procedure;
2. notification obligations for installation operators;
3. the development of a national allocation plan;
4. allocation methods for allowances;
5. the transfer, surrender and cancellation of allowances throughout the European Union;
6. the validity of allowances;
7. guidelines for monitoring and reporting of emissions; and
8. verification of reports submitted by operators.

Allowance allocation decisions are to be made available to the public, and Member States must establish allowance registries; Member States are further subject to reporting obligations. The Commission is required to designate a central administrator to maintain an independent transaction log, recording the issue, transfer and cancellation of allowances.

The Emissions Trading Directive is supported by additional legislation,33 such as the Registry Regulation34 (updated and supplemented in 201935), which sets out 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.

The ETS is divided into phases. Since 1 January 2021 the ETS has been in Phase IV, which will cover the period 2021 to 2030. The ETS Phase IV Directive36 makes several significant changes to the EU ETS compared with the Phase II regime, including:

1. strengthening the EU ETS as an investment driver by increasing the pace of annual reductions in allowances to 2.2 per cent as of 2021, and reinforcing the mechanism established by the EU (known as the Market Stability Reserve), which aims to reduce the surplus of emissions allowances in the carbon market and improve the EU ETS’s resilience to future shocks;
2. ensuring that the rules for determining free allocation of allowances are more focused and reflect technological process; and
3. helping the industry and the power sector to meet the innovation and investment challenges of the low-carbon transition via several low-carbon funding mechanisms.

X The Carbon Capture and Storage Directive

The Carbon Capture and Storage Directive37 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:

1. the composition of carbon dioxide streams and their acceptance procedure;
2. the monitoring of storage facilities;
3. reporting obligations of the storage operator;
4. inspections of the facilities;
5. closure and post-closure obligations;
6. the provision of financial security by operators for storage permits; and
7. a financial mechanism for the competent authority.

The competent authority is to be designated by the Member State to fulfil its duties under the Directive, and 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 and regular updates to the Commission on the implementation of the Directive.

XI Energy markets

Following the global financial crisis of 2008–2009, the European Union adopted a number of legislative instruments to stabilise the financial markets, to limit price volatility of commodities and to 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.38

With the Third Energy Package, Clean Energy Package and REMIT,39 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.

XII Future developments

Two main external factors are likely to direct European Union energy policy in the future: the Paris Agreement (including its implementation through successive conferences of the parties to the United Nations Framework Convention on Climate Change) and the need to diversify and secure energy supply, which at the time of writing has become a key priority for the EU in light of Russia’s invasion of Ukraine.

The European Green Deal, which was introduced in December 2019 under the current von der Leyen Commission, elaborates on the Energy Union introduced by the previous Juncker Commission and seeks to transform the European Union into the first climate-neutral continent.

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 Third Energy Package, and the Clean Energy Package reinforced by the European Green Deal makes an increased commitment from the European Union and its Member States to decarbonise the economy.

With the entry into force of RED II, the cross-border trade in biomethane and renewable source hydrogen has formally moved from a mass balance to a book-and-claim evidentiary system, whereby, similarly to renewable source electricity, GOs may now in principle be traded without evidencing the flows of the underlying gas. While many EU Member States allow free cross-border trading of renewable source electricity GOs through the European Energy Certificate System (EECS) of the Association of Issuing Bodies (AIB), biomethane and renewable source hydrogen GOs (renewable gas GOs, RGGOs) have in practice remained a nationally traded instrument since coming into existence as of 1 July 2021. It remains to be seen whether RGGOs will be incorporated into the EECS system or whether a parallel system will be established, and whether, despite not being required under RED II, the mass balance evidentiary system will be incorporated into any EU cross-border RGGO trading scheme.

With effect from 1 January 2021, the United Kingdom formally withdrew from the EU following a four-year negotiation period. The relationship between the EU and United Kingdom is governed by the EU–UK Trade and Cooperation Agreement (TCA). While the TCA allows for a certain degree of continuity in respect of energy cooperation and trading between the EU and the United Kingdom, the TCA energy chapter will expire on 30 June 2026, subject to mutually agreed extensions in one-year intervals. This may be understood as implying that there exists political will to negotiate a separate dedicated energy cooperation agreement in the near future. It is possible that this may allow for greater integration of Great Britain into the EU internal energy market, including the reintroduction of implicit allocation between Great Britain and the EU and mutual recognition of guarantees of origin.

While the energy chapter of the TCA is subject to a large number of caveats for individual Member States, at least at a provisional level, the TCA facilitates the continued flow of electricity and gas between the United Kingdom and the European Union by:

1. ensuring that UK–EU interconnectors continue to work effectively by stipulating rules for the efficient use of interconnectors and providing for the development of a new electricity trading model to be implemented by April 2022;
2. providing for cooperation in respect of security of supply, the integration of renewables and the development of hybrid projects that integrate offshore wind farms; and
3. ensuring open and fair competition through the following established market principles: competitive markets, independent regulators, market integrity (prohibition of market manipulation and insider trading on wholesale markets), third-party access, and system operation and TSO unbundling.

The United Kingdom also no longer participates in the ETS of the European Union, and it launched its own ETS on 1 January 2021, which also works on the cap-and-trade principle and shares similar characteristics with the EU ETS. It is possible that the UK ETS will be linked to the EU ETS in future, which will most likely rebalance the absence of the United Kingdom. However, there is no indication of there being political will to undertake this at the present date.

The exact nature of the full effects of the United Kingdom’s withdrawal on the EU energy sector have yet to be seen. However, with the TCA in place, a degree of cooperation in key areas of energy trading and infrastructure appears to have been secured.

The scope of future potential cooperation between the EU and the United Kingdom will play a material role in the development of the European energy markets. While the TCA governs cooperation at a broad level, further bilateral agreements would be necessary for deeper cooperation, including addressing areas such as implicit allocation over EU–UK interconnectors, the mutual recognition of renewable origin GOs between the EU and the United Kingdom, and a potential linking of the EU and UK ETS. It remains to be seen whether the United Kingdom will remain in alignment with or diverge from EU energy policy, and the direction taken will provide an indication of the extent of potential cooperation areas.