The EU’s Emergency Energy Measures.

INTRODUCTION

The EU has taken a whole series of measures to address the issue of high energy prices over the last year. They are innovative, far reaching and interconnected. This note explains what they seek to achieve and highlights some of the legal issues that they create. It does not cover the various sanction measures adopted against Russia. Although the emergency energy measures also arise out the war in Ukraine, they address prices and security of supply in the Union rather than seeking to bring about a change of behaviour in Russia.

The European Commission in particular was initially reluctant to interfere with market forces and was also concerned that action to constrain energy prices would hinder progress to its climate goals, including achieving net zero emissions by 2050. The measures adopted under the pressure of events show a clear evolution towards increasing intervention.

THE REPOWER-EU COMMUNICATION AND PLAN

Energy prices started rising in the EU well before the invasion of Ukraine and the Commission reacted to growing pressure to act by adopting guidance to Member States in the form of a Communication in October 2021 entitled ‘Tackling rising energy prices: a toolbox for action and support‘. This set out the measures that EU Member States could take under the existing legislative and State aid frameworks as well as signalling that the Commission would pursue existing policies of market integration, energy efficiency and emission reductions as well as international cooperation. It also announced plans to improve energy storage and to explore the “potential benefits and design of a voluntary joint procurement of reserve gas stocks, in line with energy market regulation and the EU competition rules”.

Once the war had started the Commission issued a more far-reaching Communication called REPowerEU: Joint EU action for more affordable, secure and sustainable energy Re-Power EU which was immediately endorsed by the European Council in its Versailles Declaration. This was followed in May 2021 by the REPower EU Plan designed to reduce EU dependence on Russian fossil fuels by accelerating the “clean transition”.

The REPower EU Plan has been implemented in particular with the following measures:

• A measure on minimum natural gas storage levels
• A measure on demand reduction for natural gas
• Establishment of voluntary platforms for the joint purchase of natural gas, which has been given concrete form through a demand aggregation mechanism
• Amendment of existing environmental legislation to allow accelerated deployment of renewable energy projects
• Adoption of an “emergency intervention to address high energy prices” which aims to reduce energy demand, caps the revenues of electricity generators and introduces a “solidarity contribution”
• Adoption of a “market correction mechanism” that allows the application of a dynamic price limit to gas prices.

DESCRIPTION OF THE MARKET INTERVENTION MEASURES

Three of these measures, the facilitation of joint purchasing, the intervention to address high energy prices and the market correction mechanism, are a departure from the usual approach of the Commission of giving maximum scope to market mechanisms. They all rely on Article 122(1) of the Treaty on the Functioning of the European Union (“TFEU”) which allows the Council (representing EU Member States) to decide, without the intervention of the European Parliament, “in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy”. These measures are adopted on the basis of powers concerning economic policy and considered to be time-limited measures taken to respond to an emergency, thus justifying the use of qualified majority voting and the absence of a role for the European Parliament.

The facilitation of joint purchasing

Joint purchasing arrangements are normally considered to be anti-competitive and Member State involvement to raise public procurement concerns. Council Regulation (EU) 2022/2576 of 19 December 2022 entitled “enhancing solidarity through better coordination of gas purchases, reliable price benchmarks and exchanges of gas across borders” does not actually organise joint purchasing of natural gas but provides for the establishment of a “demand aggregation platform” designed to moderate prices for natural gas and LNG in the EU. Purchasers are then enabled to engage in joint purchasing on the basis of these offers if they wish.

The Regulation is based on Article 122(1) TFEU and the recitals insist on the exceptional circumstances prevailing in the energy market as a result of the war in Ukraine. It is stated to be a temporary emergency action and is set to expire in one year. However, the elaborate structures that are set up, including the aggregation mechanism and steering committee of Member State representatives, as well as the statements that it should also apply to the procurement of hydrogen, suggest that it could be become permanent (although presumably on a different legal basis).

In this regard, it is noteworthy that the recent proposal of the Commission for a “Critical Raw Materials Act” which is based on the usual internal market legal basis of Article 114 TFEU also features the facilitation of joint purchasing.

The emergency intervention to address high energy prices

Council Regulation (EU) 2022/1854 pursues a number of objectives:

1. reducing electricity consumption in the EU through a mixture of voluntary and mandatory targets
2. introducing a cap on market revenues that producers of electricity otherwise than from natural gas receive and providing that Member States are to redistribute the excess revenues to consumers in a targeted manner
3. enabling Member States to apply measures of public intervention in the price setting for the supply of electricity for household customers and SMEs
4. introducing a “mandatory temporary solidarity contribution” of 33% on “surplus profits” (that is, more than 20 % above the average of the taxable profits in last the four fiscal years) on companies with activities in the crude petroleum, natural gas, coal and refinery sectors. The proceeds of the solidarity contribution are to be employed by Member States for a series of energy related objectives and can be shared.

The market correction mechanism

Council Regulation (EU) 2022/2578 introduces a temporary market correction mechanism that aims to limit European gas prices below a dynamic “safety shield” as it is described in the recitals. This safety shield is termed a “dynamic bidding limit” in the operative part of the regulation and limits the prices that may be accepted on the Amsterdam Title Transfer Facility (TTF) and other linked regulated markets. It comes into effect automatically if a “market correction event” occurs – that is, if the front-month TTF settlement price published by ICE Endex B.V. (the Netherlands) should be above €180/MWh and 35 EUR/MWh above a published reference price for three days. The reference price is calculated and published daily based on the available prices of several spot and settlement prices by the EU Agency for the Cooperation of Energy Regulators (“ACER”).

Once activated, the dynamic bidding limit will vary according to market developments but cannot fall below €180€/MWh (so it will be ineffective if market prices are lower). The market correction mechanism continues until it is automatically disactivated once the reference price falls below €145 for three consecutive working days.
The measure is rather complex and amendments and an extension to other benchmarks are foreseen. The market correction mechanism can also be suspended by the Commission if one of a series of adverse effects become apparent.

To date the market correction mechanism has not had any significant impact on the gas market since market prices have remained well below the threshold. It has led ACER to issue an interesting report on anticipated problems and possible improvements. There is a separate report by the European Securities Market Authority (“ESMA”)

LEGAL CONSIDERATIONS

Article 122(1) TFEU states that:

Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.

There is little precedent to guide the interpretation of the scope of Article 122(1) TFEU. The available statements from the Court of Justice of the European Union (CJEU) suggest that it should be read narrowly.

First, in Pringle, a case concerning measures taken to respond to the Eurozone financial crisis, the CJEU held that

Article 122(1) TFEU does not constitute an appropriate legal basis for any financial assistance from the Union to Member States who are experiencing, or are threatened by, severe financing problems….

Subsequently in Anagnostakis, a dispute over the rejection of a citizens’ initiative seeking authorisation for Greece to declare a state of necessity and not repay all of its debt, the CJEU held that

Article 122(1) TFEU does not apply to measures whose main objective is to alleviate the severity of a Member State’s financing difficulties

These precedents do at least indicate that, despite its potentially wide language, the context of this provision in the TFEU and the exceptional procedure that it provides for the adoption of measures require Article 122(1) to be applied restrictively. One might therefore argue that:

• The non-legislative character of the provision means that it is intended to authorise Union action and cannot be used to impose obligations on individuals. In this connection it is noteworthy that the European Central Bank insisted that the Council could not impose obligations on it under this legal basis)
• The words “in a spirit of solidarity between Member States” indicate that Article 122(1) can only be used to impose obligations on Member States to help other Member States, not to assist some citizens at the expense of others (or of companies)
• The reference to “supply difficulties” indicates that the objective of any measure should be to mitigate supply difficulties, not to reduce prices or profits that may create a disincentive to increase or improve supply
• The words “without prejudice to any other procedures provided for in the Treaties” mean that where other provisions provide for powers to act (for example in taxation), the powers in Article 122(1) should not be used to circumvent their conditions (including a requirement of unanimity or approval by the Parliament).

These propositions will not necessarily be accepted by the Court of Justice of the European Union but they do illustrate the wide range of arguments that could be brought.

LITIGATION

The emergency measures that we have briefly described are having major impacts on economic operators and there have been a number of legal challenges.

In particular, Poland has contested the demand reduction measure mentioned in the introduction and one of the grounds for its case is the choice of Article 122(1) TFEU as a legal basis.

More recently there have been challenges to the capping of electricity revenues and at least four direct applications for the annulment of the solidarity contribution (the best known of which is brought by ExxonMobil). These cases allege an incorrect legal basis as well as discrimination and breach of various other fundamental principles. There are also a number of challenges to the solidarity contribution in Spain and Italy and more can be expected as tax payments come due. Eventually, the Court of Justice of the European Union will no doubt have to rule on the matter, potentially as the result of a reference for a preliminary ruling.

For further information, please contact:

Lode Van Den Hende, Partner, Herbert Smith Freehills

lode.vandenhende@hsf.com