Clean energy for all Europeans - An overview

In this article we will provide a detailed (text) overview of the Package. For a more graphic overview, please see Peter Willis’ Clean Energy Package chart here.

An update to the energy rules was necessary to keep the European Union on track to meet its 2020 climate targets and set new, ambitious targets for the next decade up to 2030. The changing energy landscape also required a modernisation of the electricity market design to adapt to new market realities: Rising shares of renewable energy generation, decentralised generation and new technologies need to be integrated into the energy system without risking security of supply.

The Clean Energy Package provides a modern framework for the transition towards cleaner and more sustainable energy. The Package establishes a stable environment to stimulate the necessary investments and the modernised rules can also provide the energy industry with new business opportunities and possibly new business models. Further, the Clean Energy Package puts the consumer at the centre of the energy transition and empowers them to actively participate in the market.

The Package consists of numerous communications, preparatory documents, reports and non-legislative initiatives. The eight main legislative files are:

• Energy Performance of Buildings Directive (EU) 2018/844;
• Renewable Energy Directive (EU) 2018/2001;
• Energy Efficiency Directive (EU) 2018/2002;
• Governance of the Energy Union and Climate Action Regulation (EU) 2018/1999;
• Electricity Regulation (EU) 2019/943;
• Electricity Directive (EU) 2019/944;
• Regulation on Risk-Preparedness in the Electricity Sector (EU) 2019/941; and
• Regulation on the European Union Agency for the Cooperation of Energy Regulators (EU) 2019/942.

Measures on ecodesign, bioenergy sustainability, innovation and transport as well as initiatives on coal phase-out, clean energy for EU islands and energy poverty complement the Package. The rules of the Clean Energy Package have now entered into force and Member States are in the process of implementing them. 

I. Energy performance of building directive

The Energy Performance of Buildings Directive aims at achieving a highly energy efficient and decarbonised building stock by 2050 and to create stable investment conditions to foster investments into the renovation of buildings. The Directive encourages the deployment of automation and control systems in buildings for a more efficient operation as well as the rollout of charging points for electric vehicles.

To assist Member States with the transposition of the Directive and to provide for a uniform understanding across Member States, the Commission has published two recommendations on building renovation and building modernisation. Member States have until 10 March 2020 to transpose the Directive into national laws.

II. Renewable energy directive

The original Renewable Energy Directive (2009/28/EC) already set the basis for the promotion of energy from renewable sources and provides for a framework up until 2020. As the use of renewables has significantly increased and new technologies allow for a more flexible integration into the grid, the Renewable Energy Directive was recast as part of the Clean Energy Package. The revised Renewable Energy Directive now sets a new binding renewable energy target of at least 32 per cent by 2030 which can be increased upwards, subject to revision in 2023. The new Directive also updates the targets for the use of renewable energy in the heating and cooling as well as in the transport sector.

To ensure that the Union's targets are met, Member States can put into place support schemes for renewable energy. The schemes have to be non-distortive, market-based and must allow producers to respond to market price signals which would generally be achieved through a market premium. Tenders for the support schemes must be open, transparent, competitive, non-discriminatory and generally technology-neutral. Subject to a cooperation agreement, Member States may open participation of their support schemes to renewable energy producers located in other Member States. 

One of the key objectives of the Clean Energy Package is to put consumers at the heart of the energy transition. To facilitate this goal, the new Renewable Energy Directive gives citizens, who produce their own renewable energy, a clear right to consume, store or sell their generated energy, including through power purchase agreements. Further, the Directive enables participation in so called 'renewable energy communities'. These communities are autonomous legal entities based on open and voluntary participation with the purpose of providing environmental, economic or social community benefits for its shareholders or members rather than financial profits. Like individual citizens, such communities are entitled to generate, consume, store and sell renewable energy. Member States can allow renewable energy communities to be open for cross-border participation.

The provisions of the Renewable Energy Directive have to be transposed into national laws by 30 June 2021.

III. Energy efficiency directive

Putting energy efficiency first was one of the main objectives of the Clean Energy Package. The revised Energy Efficiency Directive sets a binding energy efficiency target of at least 32.5 per cent by 2030 while ensuring that the European Union is also on track to meet its 2020 target of 20 per cent. The 2030 target can be increased subject to a review in 2023.

The revised Energy Efficiency Directive also extends Member States' annual energy saving obligations beyond 2020: Member States have to achieve new energy savings of 0.8 per cent each year of annual final energy consumption for 2021 to 2030. Metering and billing rules, especially for multi-apartment and multi-purpose buildings, have been amended to provide clearer rights for consumers on their billing information. Publicly available rules on the allocation of costs of heating, cooling and hot water consumption in multi-apartment and multi-purpose buildings shall also provide for more transparency for consumers. 
Member States have to transpose the Energy Efficiency Directive into national laws by 25 June 2020, except for metering and billing provisions which have to be transposed by 25 October 2020.

IV. Governance of the energy union regulation

The Governance of the Energy Union Regulation establishes a transparent and predictable governance mechanism to ensure the European Union meets its 2030 climate targets as well as international climate commitments. The Governance Regulation applies to all five dimensions of the Energy Union: Energy security, internal energy market, energy efficiency, decarbonisation and research, innovation and competitiveness.

The governance mechanism takes into account that each Member State can contribute to the goals of the Energy Union in different ways. The mechanism is based on Member States' national energy and climate plans ('NECPs') covering the period from 2021 to 2030. The NECPs set out Member States' objectives, targets and contributions towards the Energy Union, taking into account long-term strategies towards 2050. In November 2018, the Commission has adopted a long-term strategy for 2050 which does not set binding targets but rather aims at providing direction for future climate and energy policy of the Union. 

In June 2019, the Commission has assessed the Member States' draft NECPs and gave recommendations for improvements. In its assessment, the Commission found that the draft plans fall short to reach the Union's renewables and energy efficiency targets. Member States now have until the end of 2019 to finalise their plans and raise their ambitions to make sure that the Union's targets will be met. Reporting and monitoring requirements will ensure the implementation of the NECPs and review the progress made.

Another main objective of the Governance Regulation is to promote cooperation between Member States, the Commission and other actors involved in energy and climate policy such as the European Environment Agency, the Climate Change Committee and the Energy Union Committee.

V. Electricity market design

A key part of the Clean Energy Package concerns the update of existing electricity market rules to reflect new market realities. The new electricity market design aims to integrate the increased share of renewable energy sources and new technologies in a more flexible way while not putting the security of supply at risk. The increasing role of consumers in the clean energy transition is also highlighted by enabling their active participation in the electricity market.

1. Electricity Regulation

The recast Electricity Regulation sets out general principles for the operation of the electricity market, including market-based prices, more flexibility, customer participation and cross-border electricity flows.

a. Balancing

The Regulation establishes that generally all market participants are responsible for imbalances in the system. Balancing capacity must be procured separately from balancing energy. Transmission system operators ('TSOs') have to procure balancing capacity based on market-based principles. Balancing energy has to be settled at marginal pricing and must reflect the real-time value of energy. By 2021, the imbalance settlement period shall be 15 minutes while from 2025 the period shall not exceed 30 minutes.

b. Short-term and long-term markets

The new rules also harmonise trade intervals and gate closure times for day-ahead and intraday markets. In order to enable participation for all market participants, minimum bids of 500 kW or less are allowed. In forward markets, TSOs shall issue long-term transmission rights to allow for cross-border hedging. Price caps or price floors shall not apply to wholesale electricity prices. However, nominated electricity market operators ('NEMOs') can set such limits on clearing prices for short-term market timeframes provided that the limits are automatically adjusted when reached. In setting such prices, NEMOs have to take into account the 'value of lost load' which is an estimation of the maximum electricity price that customers are willing to pay to avoid an outage.

c. Dispatch and redispatch

The new Electricity Regulation establishes that dispatching priority is given to renewable energy sources and high-efficiency cogeneration facilities with an installed capacity of less than 400 kW as well as for demonstration projects for innovative technologies. From 2026, dispatching priority for renewable energy sources only applies to facilities with an installed capacity of less than 200 kW.

Member States can decide not to apply priority dispatch in high-functioning and fully accessible markets. Sources that were subject to priority dispatch before the entry into force of the new Regulation continue to benefit from priority dispatch until there is a new connection agreement or an increase in generating capacity or any other substantial modification. Generally, dispatching and redispatching shall be non-discriminatory, transparent and market-based. However, non-market based redispatching will be possible under certain conditions such as when there is no market-based alternative available or when all market-based resources have been used.

d. Congestion management and capacity allocation 

The revised Electricity Regulation reinforces rules on capacity allocation and congestion, including through a review of bidding zones. Member States have to put in place action plans to remedy congestions based-on non-discriminatory and market-based solutions. Transactions might only be curtailed in emergency situations. Revenues generated from congestion management can be used to maintain availability of allocated capacity or to optimise and develop interconnections.

TSOs have to make capacity available and are considered to be compliant when they make at least 70 per cent of transmission capacity available. Financial responsibility for a failure to comply with the obligation to allocate capacity is borne by TSOs or NEMOs. Other market participants will have to pay if they fail to use capacity they have committed to use and they will also lose their rights to such capacity.

Further, rules on network charges have been reinforced and updated to provide for transparent and non-discriminatory charges. Network charges will not apply to cross-zonal trading. The revised Electricity Regulation also introduces distribution tariffs and provides rules on their calculation methodology.

e. Capacity mechanisms

The recast Electricity Regulation establishes new rules on capacity mechanisms to ensure resource adequacy by remunerating resources for their availability. Member States shall only use capacity mechanisms as a last resort while implementing measures such as removing regulatory distortions and price caps, enabling scarcity pricing, energy storage or demand side measures. Before introducing a capacity mechanism, Member States also have to consult with directly interconnected Member States. Capacity mechanisms shall be temporary, non-distortive, non-discriminatory and open to all types of resources, including storage and demand side management.

From the entry into force of the Electricity Regulation a CO2 emission limit of 550 g of CO2 per kWh for new generation capacity and additionally, from 2025, of 350 kg CO2 on average per year per installed kWe for existing capacity is applied.

Capacity mechanisms have to be open to direct cross-border participation, subject to the maximum entry capacity as calculated by regional coordination centres. Interconnected TSOs have to verify if the foreign capacity is eligible and available.

f. ENTSO-E, TSOs and DSOs

The roles of TSOs and the European Network of Transmission System Operators for Electricity ('ENTSO-E') are strengthened and clarified. In addition to their already existing tasks, TSOs have to establish regional coordination centres by 1 July 2022. The regional coordination centres will be responsible for the coordination of capacity calculation, security analysis, restauration support, adequacy forecasts or for facilitating the regional procurement of balancing capacity.

The recast Electricity Regulation also establishes new tasks for distribution system operators ('DSOs'), including the creation of a European entity for distribution system operators ('EU DSO'). The EU DSO will promote operation and planning of distribution networks, facilitate integration of renewables, distributed generation and storage resources and facilitate flexibility. Further tasks include the support of the development of data management, cyber security and data protection. The EU DSO shall also cooperate with ENTSO-E on the development and implementation of network codes as well as in identifying best practices relevant for the distribution network.

g. Network codes and guidelines

The revised Electricity Regulation refines the rules for developing network codes and guidelines and extends the areas for which the European Commission can establish network codes. In this regard, new network codes can be established for non-frequency ancillary services, demand response, storage, curtailment, data and cybersecurity.

2. Electricity Directive

The recast Electricity Directive of the Clean Energy Package aims at completing the internal electricity market and to address new market challenges. To facilitate the completion of the internal electricity market, Member States have to remove barriers to cross-border electricity trade and consumer participation. Prices will be set on market-based criteria and Member States shall facilitate flexibility and ensure third-party access in a non-discriminatory manner.

a. Empowerment of consumers

An essential element of the new electricity market design is the empowerment of consumers to actively participate in the market. Member States have to put measures in place to allow consumers to participate in the market directly, or through aggregation. Customers can sell self-generated electricity, including through power purchase agreements, and they can choose to take part in in flexibility and energy efficiency schemes. In return, active consumers have to pay network charges and bear the financial responsibility for imbalances they cause. Those customers who own an energy storage facility have the right to be connected to the grid, are not subject to double charges or disproportionate licensing requirements or fees.

The revised Electricity Directive further provides for the possibility to establish so called citizen energy communities ('CECs') based on open and voluntary participation. Member States must enable CECs to access electricity markets without discrimination and DSOs have to cooperate with CECs to facilitate electricity transfers within the CEC. Member States can also grant CECs the right to manage distribution networks in their area of operation. CECs are also subject to network charges and costs for imbalances they cause.

b. Demand response

The new Electricity Directive requires Member States to allow and facilitate demand response measures through aggregation. Aggregation is the combination of multiple customer loads or generated electricity for sale, purchase or auction in an electricity market. Market access for participants engaged in aggregation must be non-discriminatory. Market participants engaged in aggregation are responsible for the imbalances they cause and for financial compensation to other market participants for costs incurred through demand response activities.

c. Dynamic electricity pricing, metering and billing

The revised Electricity Directive encourages Member States to deploy smart meters, subject to a positive cost-benefit analysis. Customers are also granted a right to request a smart meter. Smart meters must meet minimum requirements on function, technology and interoperability, including to measure actual electricity consumption and provide easy access to historical consumption data. Smart meters also have to comply with security, data protection and privacy requirements and Member States have to provide for rules on data management and data exchange. Customers who have installed smart meters are entitled to request a dynamic electricity pricing contract.

For further details on smart meters and on other energy digitalisation measures of the Clean Energy Package see our article here.

Clarified rules on billing and billing information shall ensure a better understanding of bills. Bills also have to be issued free of charge and electronic billing must be possible. The Electricity Directive also gives consumers clearer rights on choosing and switching their suppliers and addresses energy poverty.

d. DSOs, TSOs and national authorities

The recast Electricity Directive establishes new tasks for DSOs, in particular with regard to the procurement of non-frequency ancillary services, flexibility, data management and the integration of electromobility. Procurement of ancillary services shall be market-based, transparent and non-discriminatory. For the procurement of other relevant services effective participation of all market participants shall be made possible, including for those participants engaged in storage, demand response or aggregation. Member States shall incentivise DSOs to procure flexibility services, including the procurement from distributed generation, demand response or energy storage. Regarding the integration of electromobility, DSOs shall facilitate grid connection and can only own, develop, manage or operate recharging points for electric vehicles subject to narrow conditions.

The tasks of TSOs have been slightly extended to include the procurement of ancillary services, the digitalisation of transmission systems and data management. TSOs and DSOs are still subject to unbundling requirements established by the old Electricity Directive (2009/72/EC). They can only own develop, manage or operate energy storage facilities under very limited conditions.

Further, the recast Electricity Directive enhances the role of national regulatory authorities, including their ability to ensure compliance of TSOs, DSOs, ENTSO-E, the EU DSO and regional coordination centres.

Member States have until 31 December 2020 to transpose the provisions of the Electricity Directive into national laws. 

VI. Risk-preparedness Regulation

The Risk-preparedness Regulation aims to establish a framework to prevent, prepare for and manage electricity crises. In order to achieve these objectives, Member States are required to cooperate. The Regulation also aims to establish an effective monitoring system for the security of supply in the Union.

The Regulation requires national authorities of Member States to identify risks relating to the security of supply and develop and implement plans to prevent, prepare for and mitigate electricity crises, including through cross-border measures. Such plans shall be based on methodologies developed by ENTSO-E and approved by ACER. The measures to be taken have to be market-based and non-market based measures as well as transaction curtailments shall only be taken as a last resort.

In the event of an electricity crisis, Member States have to notify the Commission, the competent authority of the relevant Member States within the same region or directly connected Member States. The Regulation requires Member States to cooperate and provide assistance to prevent and manage the electricity crisis. In this respect, Member States have to put in place cooperation agreements setting out necessary technical, legal and financial arrangements for the implementation of crisis management measures. Such arrangements must specify certain measures, including setting out the maximum quantity of electricity to be delivered at regional or bilateral level or establishing provisions on a fair compensation between Member States.

VII. ACER Regulation

The Agency for the Cooperation of Energy Regulators ('ACER') was established through the Third Energy Package from 2009. Originally, ACER's role was limited to coordination, advising and monitoring. With the increase in cross-border cooperation under the new electricity market design of the Clean Energy Package, ACER has been given additional competences in the areas where uncoordinated national decisions with cross-border relevance could impact the functioning of the internal electricity market.

The new ACER Regulation establishes ACER's responsibility to supervise the ENTSOs for electricity and gas, the regional coordination centres, the EU DSO, TSOs and NEMOs and it assists the competent national regulatory authorities in performing their tasks. ACER will also be involved in the development of network codes, guidelines and methodologies and in monitoring their implementation. ACER can further adopt decisions on resource adequacy assessments, methodologies regarding risk-preparedness as well as for cross-border participation in capacity mechanisms. For appeals against ACER decisions, the Board of Appeal now has four months, instead of two, to decide on the appeal.

VIII. Conclusion

By finalising the Clean Energy Package the European Union took a major step in modernising its existing electricity market rules. The new rules take into account market changes through the increased use of renewable resources and the development of new technology. The new rules also reflect the European Union's ambitions towards a climate-neutral economy with new energy efficiency and renewable energy targets while maintaining a framework for economic growth and competitiveness. Consumers will be able to play their part in the clean energy transition through active participation.

It is now up to Member States to ensure that the Clean Energy Package is timely implemented and transposed into national laws to provide the energy industry with a stable legal environment. The energy industry will now have to adapt to the new regulatory landscape and it remains to be seen to what extent the practical application of the new rules will bring new challenges or allow for the emergence of new opportunities and business models.