The Security of Electricity Supply and Infrastructure Directive the right aims but the wrong means

1
The Security of Electricity Supply and
Infrastructure Directive- the right aims but
the wrong means?

• European energy markets from a Nordic
  perspective,
• Helsinki 15 November 2007
• Henrik Bjørnebye
• Research fellow
• henrik.bjornebye_at_jus.uio.no

2
Introduction

• Directive 2005/89/EC concerning measures to
  safeguard security of electricity supply and
  infrastructure investment (SoS Directive)
  adopted 18.01.2006
• Scope and objective
• Safeguard security of electricity supply and to
  ensure
• an adequate level of generation capacity
• an adequate balance between supply and demand
• an appropriate level of interconnection between
  MS
• Is the Directive suitable to reach these aims?
• Particular focus on new electricity generation
  capacity investments

3
Presentation overview

• EU security of supply challenges
• The legislative context and the scope of the SoS
  Directive
• the objectives of the Directive
• The means to promote investments in new
  electricity generation capacity
• Obligations to facilitate a stable investment
  climate
• The right to intervene in the market in the
  security of supply interest
• Conclusions

4
EU security of supply challenges

• The overall objectives of EU energy policy
• Sustainable, competitive and secure internal
  energy market
• The main security of supply challenges of the
  internal electricity market
• Geopolitical challenges Primary fuel import
  dependency
• Market based challenges The ability to attract
  sufficient investments
• Integration challenges Cooperation and
  harmonisation of operational standards

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Context and scope overview
ERGEG
ACER?
EC Treaty provisions
Florence Forum
Electricity Directive
Electricity Regulation
RES Directive
Directive 2006/32/EC
Inter alia Directive 96/57/EC, 2000/55/EC,
2002/91/EC, 2005/32/EC
CHP Directive
Source Norwegian MPE, Faktaheftet 2006
SoS Directive
- an adequate level of generation capacity - an
adequate balance between supply and demand - an
appropriate level of interconnection between MS
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The objectives of the SoS Directive (1)

• Safeguard security of electricity supply and to
  ensure
• an adequate level of generation capacity
• an adequate balance between supply and demand
• How to define the concept of security of supply?
• Underlying problem Does security of supply
  include the objective of providing uninterrupted
  supplies to end-users only, or also the objective
  of providing these supplies at reasonable prices?

Energy security is a term that applies to the
availability of energy at all times in various
forms, in sufficient quantities, and at
affordable prices, without unacceptable or
irreversible impact on the environment, UNDP
World Energy Assessment, 2004
security of electricity supply means the
ability of an electricity system to supply final
customers with electricity, as provided for under
this Directive Article 2(b) of the SoS Directive
7
The objectives of the SoS Directive (2)

• What is an adequate level of generation capacity
  and an adequate balance between supply and
  demand?

balance between supply and demand means the
satisfaction of foreseeable demands of consumers
to use electricity without the need to enforce
measures to reduce consumption, Article 2(d) of
the SoS Directive (my emphasis)
The public service obligations of the Electricity
Directive should not result in the creation of
generation capacity that goes beyond what is
necessary to prevent undue interruption of
distribution of electricity to final customers,
first paragraph of the preamble to the SoS
Directive
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The objectives of the SoS Directive (3)

• The supply-side objective of the Directive to
  ensure sufficient generation capacity investments
  to avoid interruptions in end-user supplies, i.e.
  to avoid enforced electricity rationing
• Electricity prices as such not a relevant
  security of supply concern under the SoS Directive

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The means to promote investments in electricity
generation capacity

• Regulatory point of departure
• investments in new generation capacity to be made
  by market participants based on price signals
  communicated by functioning electricity wholesale
  markets
• The principal means of the SoS Directive (Art
  3(1))
• MS to define the roles and responsibilities of
  authorities and market actors in relation to
  security of supply
• MS shall take the necessary measures to
  facilitate a stable investment climate

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The obligation to define security of supply roles
and responsibilities

• The Electricity Directive already goes far in
  designating roles and responsibilities
• Public authorities The tasks of the independent
  regulator
• Market actors The tasks of TSOs and DSOs
• TSO responsibility for generation reserve
  capacity the most important contribution of the
  SoS Directive in this respect?
• Article 5(1)(b)
• But how to perform the task?

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The obligation to facilitate a stable investment
climate

• A mere declaration of policy or a Member State
  obligation of results?
• The preamble of the Directive (paragraph 12)
• Positive obligation?
• E.g. an obligation to alleviate market failures,
  such as lack of supply-side competition?
• Negative obligation?
• E.g. obligation to avoid price regulation in
  wholesale markets and other regulatory action
  detrimental to new investments?

Without prejudice to Articles 86, 87 and 88 of
the Treaty, it is important for Member States to
lay down an unambiguous, appropriate and stable
framework which will facilitate security of
electricity supply and is conducive to
investments in generation capacity and demand
management techniques
12
Market intervention in the security of supply
interest

• Background Market actors will not always provide
  the necessary investments in absence of public
  incentives/requirements
• Geopolitical and energy mix considerations
• Market imperfections
• Regulatory imperfections
• The reserve capacity problem

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Public subsidies as investment incentives the
practical rule rather than the exception?(all
amounts in billion Euro)

• Accumulated investment needs in electricity
  generation, EU-27 towards 2030
• Fossil fuels 261
• Gas 148
• Oil 19
• Nuclear 141
• Renewables 327
• Total 897

• Attempt to estimate total energy subsidies in
  EU-15 for 2001, measured by primary fuels in
  electricity generation
• Fossil fuels gt 13,0
• Oil and gas gt 8,7
• Nuclear gt 2,2
• Renewables gt 5,3
• Total gt 29,2

Source The Commission, EU Energy Policy Data,
SEC(2007) 12
Source European Environment Agency, Energy
Subsidies in the European Union (report 1/2004)
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The SoS Directives regulation of market
interventions

• The directive does little to clarify the line
  between market facilitation and market
  interventions in the security of supply interest
• Example Article 5(2)
• The right to intervene in the market primarily
  defined by other parts of Community legislation

• Without prejudice to the EC Treaty State aid
  provisions the Member States may take
• additional measures to maintain a balance
  between electricity demand and supply,
• including but not limited to
• provisions facilitating new generation capacity
  and the entry of new generation companies to the
  market
• (f) Tendering procedures or any procedure
  equivalent in terms of transparency and
  non-discrmination in accordance with Article 7(1)
  of Directive 2003/54/EC

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Conclusion the right aims but the wrong means?
(1)

• The aims of the Directive not controversial
• But has the Directive contributed to promote
  these aims?

The energy policy of the Community rests on an
appropriate combination of the play of market
forces, observed in particular by the internal
market provisions, and the political measures
guaranteeing or providing for Community
supplies.
There will therefore still be a role for the
public authorities but it is evident that the
very spirit of the large market presupposes that
the responsibilities in question will
increasingly be exercised in a Community
perspective and less and less simply on the basis
of domestic considerations.
) Commission Working Document The internal
energy market, COM(88) 238 final, 2 May 1988, p. 8
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Conclusion the right aims but the wrong means?
(2)

• The Directive recognises the regulatory point of
  departure that investments should be market
  based, but
• Generally vague and policy oriented provisions
• What does it mean that MS are required to
  facilitate a stable investment climate?
• In what situations can MS intervene in the market
  by providing incentives/requiring investments in
  the security of supply interest?
• The new and stricter reporting obligations of the
  Directive may well prove to be its most important
  long-term contribution to security of EU
  electricity supplies