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23 Eur. Energy & Envtl. L. Rev. 76 (2014)
Legal and Policy Issues for Capacity Remuneration Mechanisms in the Evolving European Internal Energy Market

handle is hein.kluwer/eelr0023 and id is 76 raw text is: 76 European Energy and Environmental Law Review June 2014 Capacity Mechanisms in the European Energy Market Legal and Policy Issues for Capacity Remuneration Mechanisms in the Evolving European Internal Energy Market Kaisa Huhta,* James Kroeger,** Tade Oyewunmi*** and Piti Eiamchamroonlarp**** I Introduction Recent regulatory and policy developments in the European energy sector have witnessed a general paradigm shift from a framework which primarily promotes competition and liberalization' to one which focuses more on environmental and consumer protec- tion and security of supply within the internal energy market (IEM).2 The liberalization agenda requires the unbundling of vertically integrated utilities, the introduction of third party access (TPA) to gas and electricity networks and the strengthening of market forces rather than state intervention to tackle any anomalies or challenges arising in respect of energy production and supply. Policies aimed at ensuring security of supply and protecting the environment have been developed in parallel with this shift. These include subsidizing the use of renewable energy sources (RES) in the EU energy mix, the emissions trading scheme and the implementation of the EU 20- 20-20 targets,3 which require a greater level of state intervention in the administration of the IEM. The economic effects and implications of these parallel developments, especially in the context of recent change in global energy market trends through the shale oil and gas revolution in North America, have led to significant distortions in the energy market and rendered conventional power generation, based on fossil fuels (natural gas), uneconomic; thus leading to concerns about the medium and long-term adequacy of the European energy supply. Operators of energy utilities argue that while coal- fired plants are being hit by tougher pollution regulations due to the climate change agenda, the economics of gas-fired producers are also being impacted by a combination of factors, including the over-subsidization of RES and the relatively high price of wholesale gas when compared with cheap coal supplies exported from the US.4 As a result, conven- tional energy utilities are considering freezing required investment and taking existing power generation capacity offline. The problem has been aggravated by the decision of Member States like Germany to phase out nuclear power generation. Furthermore, there is growing concern that a regulated energy-only market may prove unable to generate adequate investment signals to assure sufficient long-term capacity. All these factors prompt a move towards introducing policy and regulatory interventions through capacity remuneration mechanisms (CRM), which, in essence, aim at rewarding power generators for committing to having a certain amount of energy capacity available in the future. In view of the above, this article examines the *Energy Law Coordinator, University of Eastern Finland (kaisa.huhta@uef.fi). **Doctoral Researcher, Institute for Environmental and Planning Law, University of Minster (james.kroeger@ uni-muenster.de). ***Doctoral Researcher, University of Eastern Finland Law School (oyetade.oyewumni@uef.fi). ****Doctoral Researcher, University of Aberdeen (rOlpel2@ abdn.ac.uk). 1 The agenda to introduce a competitive (including compe- titive energy pricing and cross-border competition by utilities within the EU) and liberalised energy market through the following: (1) the First Energy Package, comprising Directive 96/92/EC concerning common rules for the internal market in electricity (OJ L27120, 30.1.1997) and Directive 98/30/EC concerning common rules for the internal market in natural gas (OJ L 204, 21.07.1998); (2) the Second Energy Package, principally comprising Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC, (OJ L 176, 15.7.2003) and Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (OJ L 176, 15.7.2003); and (3) the Third Energy Package of IEM Directives in 2009, comprising (a) Directive 2009/72/EC concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ L 211/55, 14.8.2009), (b) Directive 2009/73/EC concerning common rules for the internal market in natural gas and repealing Directive 2003/ 55/EC (OJ L 211/94, 14.8.2009), (c) Regulation (EC) No 714/2009 on conditions for access to the network for cross- border exchanges in electricity and repealing Regulation (EC) No 1228/2003 (OJ L 211/15, 14.8.2009), (d) Regulation (EC) No 715/2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 (OJ L/211/36, 14.8.2009), (e) Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators (OJ L/211/1, 14.8.2009). 2 Angus Johnston and Guy Block, EU Energy Law (OUP 2012) pp. 25 & 28-31. 3 The EU sets three key objectives for 2020: a 20% reduction in EU's greenhouse gas emissions (GHG) from 1990 levels; raising the share of EU energy consumption produced from renewable resources to 20%; and a 20% improvement in the EU's energy efficiency. 4 The US is experiencing a surge in domestic oil and gas production due to the shale boom, thus leading to a diversion of surplus coal to other markets like the EU.

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