The Åland case and the future of renewables in Europe

The case that could have changed Europe’s renewables support schemes forever – and possibly the whole renewables sector with it.

The Åland case – what is that, and why is it so important? The semi-autonomous Finnish archipelago Åland is located in the Baltic Sea, right in the middle between Finland and Sweden. In the 2000s, a Finnish company named Ålands Vindkraft AB set up a wind farm there named Oskar. The electricity from this installation was used on Åland, but also distributed to Sweden through its only mainland power link. Electricity from wind farms had not reached grid parity at the time, so more or less all wind farms built had to get public support to be economically beneficial for their investors (reaching grid parity means when an electricity source costs the same or less than the electricity on the national energy market when all costs of construction, etc. are included in the calculation).

Thus, the Finnish company wanted that Sweden, which used the electricity, would also support the wind farm with its own support mechanism for renewable energy, the green certificate system of 2003. A green certificate market means that the electricity companies are obliged to have a certain share of renewable electricity in their power supply. To achieve this, producers of renewable electricity are given certificates for the amount of power they produce, typically one certificate per MWh, which the electricity companies then can buy on an open market where the demand decides the price.

The arguments for and against

Your first impression is that that sounds just fair, doesn’t it – that electricity used should be supported without taking into account of the origin of the good. The Swedish Energy Authority (Energimyndigheten), did however not agree to this reasoning, and did not accept the application in 2009. Why should it support production of renewable energy within another country? If Energimyndigheten accepted one application, they could possibly in principle not refuse applications from other foreign producers delivering renewable electricity to the Swedish market either, which could mean that Swedish energy customers would finance renewable energy production in the neighbouring countries.

A possible opening up for supporting producers of renewable energy in other countries opened up for a row of complicated practical, legal, political and economic issues. Examples: Not only would such a system possibly have very low popular legitimacy. It would be harder for the national energy authorities to plan and manage their already increasingly complicated national energy systems. And, who could write the renewable energy production on their quota: the financing country or the country where production is located?

So, what would be the arguments for Energimyndigheten giving support to Ålands Vindkraft AB? The electricity market and the electricity sector in Europe are becoming increasingly Europeanized. The grids in the different European states are also increasingly connected. Moreover, with the completion of the EU internal energy market being set to 2014, equal treatment of different producers would theoretically fit well with the ideal of free flow of energy between different markets. Completely free flow of energy, is however more an ideal than the case today, as pointed out also by the EU Commission. One of the reasons is that there is a large need for better and more interconnections within and between countries. More interconnections between different energy markets (e.g. electricity and gas grid lines) are also important for security of energy supply, which has reached the top of the EU agenda again with the Ukraine crisis, because of EUs high dependency on import of Russian oil, gas and nuclear fuels.

Åland Vindkraft AB did not find the response from the Swedish Energy Authority satisfactory. Thus, it complained to the Swedish court of Linköping, which asked the EU Court of Justice in Luxembourg about help. This specific action, unique to the EU, is termed as a preliminary ruling. This is a mechanism allowing cooperation between the European and national courts in order to question the way in which EU law should be interpreted. Ålands Vindkraft AB argued that when it contributed to electricity in the Swedish market, where other renewables production sites were supported by green certificates, this unequal support violated the EU rules of fair competition and the free movement of goods between the suppliers of products sold in the common market. According to Article 34 in TFEU (Treaty of the Functioning of the European Union, the “EU constitution”), goods are granted free movement. Thus, the company complained to the EU Court of Justice that it wanted to get support on equal terms and be included in the certificate market. It sounds like they had a good case, doesn’t it? Why should, after all, renewable energy be treated differently than other goods in the common European market?

Swedish-Norwegian renewables cooperation
When Norway was to implement the EEA relevant Renewables Directive, it re-started negotiations with Sweden about joining their green certificate market. The countries agreed, and the world’s first international green certificate market was introduced 1. January 2012.

As the tradition has it, the Advocate-General is deemed to issue a conclusion, e.g. a suggestion on how EU law should be interpreted prior to the formal judgment of the case. The Advocate-General, Yves Bot, supported Ålands Vindkraft AB, through the conclusion that was launched in January 2014. The judgment was rendered by the Court of Justice of the European Union 1 July 2014, where the case went as a grand chamber ruling. The Commission awaited the judgment in order to see whether or not the Court did push for more extensive streamlining of European state aid and support schemes. In parallel to this case, there have been quite some remarkable developments in other areas of EU law in relation to renewable energy production. For the first time, the fields of energy and environment were included in the EU guidelines on state aid, the “EEAG energy and environment state aid guidelines”. These were applicable from 1 July 2014, which represents increased EU competence in a field that has been marked by more or less total national self-determination for the member states. Does all this sound complicated? Yes, you are right, this is indeed a complicated field.

Back to this fascinating case: Now, the entire energy sector in Europe waited, holding its breath. If Åland Vindkraft AB was given support in the complaint, all renewables support schemes in Europe would potentially have to be harmonized or be mutually beneficial. In addition some provisions regarding the freedom of member states to determine the support of renewable energy in other Member States within the Renewables Directive was deemed to be revised within a 2-year time frame. The unexpected revision proposed by the Advocate-General triggered a quite fierce debate. According to the general wording of the Renewable Energy Directive (Renewables Directive, RED, Directive 2009/28/EC), Article 2 and Article 3(3) and seen in parallel with recital 25, Member States were granted the freedom to choose the way in which they were to achieve their ways of achieving increased renewable energy production domestically within 2020. Such national independence was a key and very controversial issue in the negotiations leading to the Renewables Directive. For the debate and its outcome, see FNI Report no 10-2012(pdf). Every member state and the countries in the European Economic Area have individual targets for renewable energy as part of consumption. Together, the EU’s aim is when all these are combined; EU will reach at least 20 percent energy consumption from renewable energy sources by 2020.

What was at stake, really?

That a country should give support also to producers of renewable energy located in other countries that supply to the national market may sound like a likeable idea, if you do not know the underlying tensions and controversies regarding the renewables policies in Europe very well. Because such support would mean that the producers applied for support where it was the highest, the countries would harmonize their support mechanisms and levels of support in the longer run to avoid supporting more than other countries. This would also indicate the establishment of a system of guarantees of origin, or green certificates, as pointed out by the law firm Arthur Cox (pdf) and others.

Harmonization of renewables support mechanisms is something long wanted by for example Business Europe, one of the interest groups for European businesses with the lowest ambitions in the climate and energy policies. Critics would argue: such harmonization would likely mean that the least ambitious nations could set the standard for level of support. The consequence of this would likely be a far slower renewables growth than what has been the case the last decade. Further, the reasoning goes: lower growth of renewable energy would imply fewer stimuli for innovation, fewer virtuous innovation cycles; slower energy transition and ultimately that the targets of reaching a level of 20 % renewable energy of total energy consumption by 2020 and 80-95% reduction of emissions of greenhouse gases by 2050 would be much harder to reach.

In addition, it would easily mean that only the most mature technologies, e.g. wind energy onshore and solar cells, some types of bioenergy and some small scale hydro power would be supported. Moreover, a ruling supporting Ålands Vindkraft AB could easily lead to less investor security. To invest in renewable energy, renewables investors must know that the market conditions are fairly stable, and that they will get a reasonable return on their investment. This is deemed crucial to keep up the pace of renewables investment, as pointed out by for example Norwegian authorities and Norwea, the Norwegian association for renewable energy.

If there was no harmonization, but still granted access to other countries’ support schemes, developers would strategically seek support from the most beneficial support schemes. Theoretical example in case: Norwegian authorities have said that it will not support offshore wind before after 2020. Now, companies wanting to build out offshore wind could do it in the Norwegian waters, but nearby the borders to United Kingdom, feed the electricity into the UK grid and be supported by the solid support mechanisms there instead. This would potentially be extremely unpopular in the UK. Another theoretical example: Polish companies near the German border, wanting to set up solar energy or wind production sites, could do it and apply to the more generous German feed-in schemes.

The legal case

There were several legal tensions within this debate. Underlying the case is also the continuous political fight between member states and the Commission about competence in energy policy. In the field of energy policy, the EU member states have the main competence to decide themselves, because it is perceived to be an issue of key national interest and the wording of the directive itself did underline that member States were free to choose whether and how to support renewable energy from other Member States.

In order to understand the actual reasoning of the Advocate-General, the European hierarchy of norms must be explained. The EU law consists of primary law provisions within the Treaties as well as the legal principles of EU law. The latter are often unwritten and have evolved due to the Court’s practice. However, the case at hand raised a question whether a directive and the consequent derogations from the general free movements of goods within primary law could be justified. The Court verdict would be conducted by applying a proportionality test where the Court balances whether the national scheme is appropriate for obtaining a legitimate objective, such as the promotion of renewable energy within the context of environmental protection in Europe.

The judgment of 1 July 2014

However, the EU Court upheld in its ruling that “The Swedish support scheme promoting green energy production in the national territory is compatible with EU law”. In other words, Sweden could limit its support scheme to Swedish producers to ensure its effectiveness, although it presents a barrier to free electricity trade. This is also underlined by the ECJ when assessing the wording of Article 3(3) of the Directive. The Court further emphasized the importance of environmental protection as a justification for the potential hindrance of trade the national support measures may actually or potentially represent. The Court upheld that “as the EU law currently stands, such a territorial limitation may in itself be regarded as necessary in order to attain the legitimate objective pursued in the circumstances, which is to promote increased use of renewable energy sources in the production of electricity”.

However, environmental protection is not listed in the Treaty under the overriding requirements justifying a barrier to the free movement of goods. This creates a very important legal question both on the methodology and reasoning of the Court. Thus, the Åland case elevates environmental protection to new heights within EU law practice. In other words, the Åland case may be viewed as a case where environmental protection is seen as predominant and where the ECJ create a more nuanced path towards the legitimate objective concerning the promotion of renewable energy in Europe. Thus, the EU shows that it is more than merely a protector of free movement of goods or competition and the Court’s reasoning may be seen as a starting point for further legal development and political evolution of the EU when dealing with environmental protection.

The reactions from the European energy industries

The European energy industries can be divided into the utilities industry and the renewables industry. The Åland case might be seen as a continuation of the controversial and year-long debate about a Europe-wide green certificate system. There, the utilities industry and their interest organization Eurelectric has long worked for such a system together with the interest organizations European Federation of electricity traders (EFET) and Renewable Energy Certificate System (RECS). These organizations were all disappointed, as indicated in their press releases. EFET called it “a missed opportunity to help Europe find a more efficient way to support RES-E and restore the integrity of the single electricity market”.

Hans Ten Berge, secretary general of Eurelectric, the umbrella organization for the European electricity producers, stated in a press release: “We call on the European Commission to further support cooperation between Member States. Efforts should now continue to develop a European approach to cost-effective deployment of renewables through an increased use of cooperation mechanisms and better market integration in line with the energy and environment state aid guidelines that enter into force today.”

RECS stated: “RECS International is disappointed with today’s rulings. The ECJ has allowed the continuation of protectionist electricity support schemes which encourage electricity producers to go for the highest subsidies and not the most cost-efficient new renewables”.

The renewables industry, on the other hand, was very content. Frauke Thies, former Greenpeace activist on renewable energy and now Policy Director in EPIA (European Photovoltaic Industry Association), for example wrote: “Attack defeated, European Court of Justice confirms Renewable Energy Directive” in the heading of the editorial commenting on the case. EREF, the European Renewable Energy Federation calls it “great news for the European renewable energy sector” (pdf).

Deputy Executive Officer in EWEA, The European Wind Energy Association, Justin Wilkes supports the judgment: “The ECJ’s ruling shows that the Renewable Energy Directive is compatible with the free movement of goods principle in the EU Treaty. This will provide added clarity for investors in the wind industry and reinforces stable regulatory frameworks, which are of paramount importance”.