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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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