Report to the Council and the European Parliament on harmonization requirements - Directive 96/92/EC concerning common rules for the internal market in electricity
Date: 1998-03-16
Institutions: European Commission
Subjects: approximation of laws, competition, electrical energy, renewable energy, single market

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.03.1998 
COM(1998) 167  final 

REPORT TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 
ON HARMONIZATION REQUIREMENTS 

DIRECTIVE 96/92/EC CONCERNING COMMON RULES 
FOR THE INTERNAL MARKET IN ELECTRICITY 

(presented by the Commission) 

REPORT TO THE COUNCIL AND THE EUROPEAN  PARLIAMENT 
ON HARMONIZATION  REQUIREMENTS 

DIRECTIVE 96/92/EC CONCERNING  COMMON RULES 
FOR THE INTERNAL MARKET IN ELECTRICITY 

I. 

INTRODUCTION 

Pursuant  to  Article  25  (1)  of  Directive  96/92/EC1  of  the  European  Parliament  and  of  the 
Council of  19 December  1996 concerning  common rules for the internal  market  in electricity 
"the Commission  shall submit a report to the Council and the European Parliament  before  the 
end  of  the  first  year  following  entry  into  force  of  this  Directive  on  harmonization 
requirements  which  are  not  linked  to  the  provisions  of  this  Directive.  If  necessary,  the 
Commission  shall attach any harmonisation  proposals necessary  for the effective  operation  of 
the internal market in electricity". 

In this  context,  the  issue  of harmonisation  essentially  concerns  the  issues  of  energy  taxation 
and  environmental  considerations.  The  issue  of  taxation  is discussed  for  the  moment  by  the 
Council  in the context of the Commission's proposal2 to set up "a common framework  for the 
taxation  of energy".  The present  report,  therefore,  concentrates  on the  issue  of  environment, 
and  in particular  on the role  of renewable  electricity  production  in the  single  market.  In  this 
respect,  contacts between  the  Commissions  services  and the  Member  States  have  revealed  a 
large variety  of schemes proposed  or already  introduced to support  electricity  produced  from 
renewable  sources.  The  same  variety  has  not  been  revealed  concerning  the  treatment  of 
electricity  from  combined heat and power plants and, therefore,  this report does not treat  this 
issue.  The  co-existence  of  different  schemes  for  renewables  appears  likely  to  lead  to  trade 
distortions  and  limitations.  In the recent  White  Paper3 on renewable  energies, which  stressed 
the  importance  of ensuring  fair  access  for  renewables  to the  electricity  market,  it  was  stated 
that  the  Commission  intends  to  move  forward  quickly  to the  proposition  of a  harmonisation 
Directive  in this  respect  both  for  internal  market  reasons  and  to  support  the  development  of 
renewables. This report marks the first step in the preparation of such a Directive. 

II.  RENEWABLES AND THE INTERNAL MARKET FOR ELECTRICITY 

The  "Third  Conference  of the  Parties  to  the  United  Nations  framework  on  Climate C,hange'', 
was  held  in  Kyoto  in  December  1997.  The  outcome  for  the  European  Union  was  that  the 
Community  agreed to a commitment  of an 8% reduction  of greenhouse gas emissions  for  the 
period  2008 to 2012 compared  to  1990. Major  energy policy  decisions, focusing  on  reducing 
energy  and  carbon  intensity,  need  to  be  taken  in  order  to  achieve  such  reductions  in 
greenhouse  gas  emissions.  Accelerating  the  penetration  of  renewable  energy  sources  in  the 

OJ No L 27/20, 30.1.97 
2 COM(97) 30 final, 12.3.1997, Proposal  for a council  Directive on "Restructuring the Community  Framework  for the 
Taxation of Energy Products" 
3 COM(97) 599, 26.11.97, "Energy  for the Future: Renewable Sources of Energy - White Paper for a Community 
Strategy and Action  Plan". 

-1 -

production of electricity  is seen by the Commission  as a major  potential  area  for action  which 
will enable the EU to meet its commitments in this respect. 

The  importance  of  renewable  energy  has  also  been  stressed  in  the  Protocol  to  the  United 
Nations  Framework  Convention  on Climate  Change. The countries  which  have agreed  to the 
protocol  are  requested  to  promote,  research,  develop  and  increase  the  use  of  new  and 
renewable forms of energy as one important instrument to limit greenhouse gas emissions. 

The Commissions  policy  on renewable energy was recently presented  in the  abovementioned 
White Paper4 on renewable energies. This White Paper provides an overview of the  objectives 
of the Commission  concerning  Community  energy policy, which were dealt  with  in detail  in 
its  White  Paper,  "An  Energy  Policy  for  the  European  Union"5.  Three  key  energy  objectives 
improved  competitiveness,  security  of  supply  and  protection  of  the 
are  identified: 
environment.  Promotion  of  renewables  is  regarded  as  an  important  factor  to  achieve  these 
aims. 

The  White  Paper  on  renewable  energy  includes  a  Community  Strategy  and  Action  Plan  to 
substantially  increase  the  use of  renewables  to  12% in  2010.  Currently,  renewables  account 
for  approximately  6%  of  EU  electricity  production.  These  figures  include  large-scale  hydro 
power, for which the potential exploitation in the European Union, for environmental reasons, 
is very limited. This means that the increases required  in the use of other renewables  in order 
to  meet  the  12%  overall  objective  will  be  substantial.  As  electricity  is  the  single  most 
important energy sector in the European Union, accounting for about 40% of the gross energy 
consumption,  a  substantial  part  of  the  increased  use  of  renewables  must  take  place  in  the 
electricity production. 

At  least  for  the  medium-term,  it  appears  likely  that  electricity  produced  from  renewable 
sources may be more expensive to produce than electricity from competing fuels.  Schemes to 
promote renewable energy will therefore  be necessary. 

Currently,  electricity  produced  from  renewable  sources  may appear  to  be  more  expensive  to 
produce than electricity from  competing fuels  because environmental benefit  of renewables as 
well  as  support  for  competing  fuels  are  not  taken  into  account.  Policies  that  take  this  into 
account and which foster  renewable energies need to be pursued. 

Member  States  are  proposing  or  have  introduced  a number  of  different  schemes  to  increase 
the  use  of  renewables.  These  schemes  include  guaranteed  prices  for  producers,  tax 
exemptions, direct support  schemes per kWh produced etc. In a non-liberalised  market where 
the  electricity  is  sold  to  captive  customers  with  no  other  choice  of  where  to  purchase  the 
electricity, the absence of common rules does not create any distortions of the electricity trade 
between Member States, as trade is limited and strictly regulated. 

In  a  liberalised  electricity  market,  however,  or  even  in  a  partially  liberalised  market,  some 
harmonised  rules on  the  treatment  of  renewables  are required.  The  need  for  co-ordination  in 
this respect can be seen  from  the following two issues that need to be addressed: 

4 See footnote 3. 
- COM(95) 682,  13.12.1995, "An Energy  Policy for the European  Union' 

- 2-

First,  this  will  result  in  distortions  in  trade  for  renewable  electricity.  Assume,  for  example, 
country  X paid  significant  state aid to renewable  producers, but country  Y operated  a system 
of green certificates.  If producers from  X were permitted by country  Y to issue and sell  green 
certificates  in Y, they  may receive double  support.  Producers  in Y selling  in X would, on the 
other hand, receive no support whatsoever. Mechanisms to ensure that this situation would not 
happen can, at least in theory, be set up. However, too bureaucratic and complex  mechanisms 
involving  the  support  schemes  in all  Member  States  should  be avoided  as the  costs  involved 
could be very high. A more simple approach would be preferable. 

Second,  if  the  level  of  support  differs  significantly  between  Member  States,  this  can  also 
result  in  important  distortions  of  more  general  trade  and  competition.  Electricity  from 
renewable sources will cost at least in the medium term more to produce than electricity  from 
"conventional"  (fossil/nuclear)  sources.  Where  renewables  account  for  a  significant 
proportion  of total domestic  electricity  production, this may result  in a significant  increase in 
the  overall  average  cost  of  producing  electricity  in  a  Member  State,  compared  to  a 
neighbouring  country  without  a  developed  renewables  policy,  or  an  Independent  Power 
Producer  (IPP)  producing  from  fossil  fuels.  If  not  all  customers  in  a  given  Member  State, 
eligible  or  not,  participate  in  the  financial  support  of  such  a  renewable  policy  the  eligible 
customers, would, if free  to do so, normally  choose not to pay  for  this "renewables  surplus", 
purchasing  therefore  abroad,  or  from  IPPs.  As  a  consequence,  the  overall  customer  base  in 
question  would  reduce,  meaning  the  additional  cost  of  renewables  per  customer  would 
increase, leading  to higher  domestic  prices, thus  prompting  further,  less  price-elastic  eligible 
customers, to seek supplies elsewhere. In this way markets would be distorted  via a "viscious 
circle", forcing  increasing  numbers of eligible customers out of the domestic system  - not due 
to  inefficient  or  uncompetitive  "conventional"  electricity  production  -  but  simply  due  to  a 
significant  pro-renewables policy. 

Evidently, the  likelihood  and/or  extent  of such an effect  will  depend  on a number  of  factors, 
the additional cost of renewables, the percentage of renewables purchased over total purchases 
etc. 

Thus,  the  issue  arises  how  to  ensure  the  introduction  and  development  of  renewable 
technologies in the context of a single market for Electricity. The ability of eligible  customers 
to purchase throughout the EU raises two basic issues in this respect. 

The  first  concerns  mechanisms  introduced  to  ensure  the  purchase  and  financing  of 
renewables, the second  - a subsidiary  question  to the first one - the possibility  for  customers 
obliged  to  purchase  a  certain  proportion  of  their  electricity  requirements  from  renewable 
sources to acquire these supplies from  abroad ("imports and exports"). 

III.  MECHANISMS TO ENSURE THE PURCHASE AND FINANCING  OF 

RENEWABLES 

In considering  such  schemes, it  is necessary  to examine first the provisions  contained  in the 
Directive, second  the measures  taken  at Member  State level, and  finally  the  compatibility  of 
such schemes with the Directive and EU law. 

1. The  Directive 

The  Directive  provides  only  one explicit  mechanism  for  the  favourable  treatment  of  electricity 
from  renewable  energy  sources, Article  8(3) : 

"A  Member  State  may  require  the  system  operator,  when  dispatching  generating  installations, 
to  give  priority  to  generating  installations  using  renewable  energy  sources  or  waste  or 
producing  combined  heat  and  power". 

This  provides  an  exception  from  the  basic  rule,  established  in  Article  8(2),  that  in  normal 
circumstances  the  "dispatching  of generating  installations  and  the  use  of  interconnectors  shall 
be  determined  on  the  basis  of criteria  (which)... take  into  account  the  economic  precedence  of 
electricity  from  available  generating  installations...". 

This  mechanism  is,  in  fact,  one  followed  by  most  Member  States  prior  to  liberalisation  : the 
transmission  system  operator  (TSO)  purchases  renewable  energy  sourced  electricity  (usually 
at  advantageous  prices),  and  passes  this on  to  its captive  customers,  spreading  the  cost  oi  this 
over the total  captive  consumer  base. 

It  should  be  noted,  however,  that  the  Directive  limits  itself  to  favourable  dispatching.  It  does 
not  cover  schemes  providing  direct  or  indirect  support  schemes  to  renewable  energy  sources, 
and  it  does  not  in se  permit  Member  States  to  authorise  the  TSO  to  oblige  eligible  customers 
to  purchase  "their"  share  of  renewable  energy  - either  directly,  or  via  the  imposition  of  levies 
or green  certificates. 

In reality,  therefore,  the  mechanism  provided  in the  Directive  appears  to  be of  limited  use  - in 
the  absence  of  accompanying  measures  not  explicitly  authorised  by  the  Directive  -  in 
permitting  Member  States  to  develop  or  maintain  a  significant  policy  for  promoting 
renewables. 

Therefore,  if  Member  States  wish  to  support  renewable  energy  beyond  the  favourable 
dispatching,  they  will  have  to  make  recourse  to  two  other  provisions  of  the  Directive:  Article 
3(2)  -  public/environmental  service  obligations,  and  Article  24  -  transitional  regimes. 
Following  a notification  of such  schemes  the Commission  will  then  examine  the  compatibility 
with the Directive. This question  is discussed  in detail  in section  3.2  below. 

2. Schemes  developed  at Member  State  level 

Member  States  have, therefore,  been  reflecting  on  how  to deal  with  this  issue.  Different  types 
of schemes  have  been  implemented  across  the  EU  or are under  consideration  at  Member  State 
level.  It  should  be  noted,  that  certain  of  the  elements  figuring  below  are  (or  can  be)  used  in 
combination  with one  another. 

The  schemes  -  or  elements  of  schemes  -  fall  into  two  basic  categories.  First,  aid  schemes  -
intended  to pay  for  the cost  of these schemes  and  second,  schemes  intended  to  finance  the  aid. 

- 4-

2.1 Support  schemes. 

A large number of difièrent  aid schemes exist, including the following  : 

-  guaranteed purchase obligation at a guaranteed price - often  on an avoided cost basis, or on 
the basis  of a regulatory-based  calculation  as to the necessary  level  of  support  required  to 
generate the desired level of renewable electricity production; 
tax exemptions, in particular from  energy and C02 taxes, but equally from  non-energy 
taxes; 

- 

-  support scheme per kWh produced; 
- other support schemes; support for R&D, capital  investment, etc. These aids may be granted 

either at Member State, or Community level. 

2.2  Schemes intended  to finance  or complement support  schemes. 

Again, a number of variations have been - or are in the process of being - developed. 

-  Levy on all consumers of electricity within a given Member State, characterised as a 

"renewable",  "green"  or  "non-fossil  fuel"  levy.  All  consumers  must  pay,  irrespective  of 
whether  they  actually  purchase  the  electricity  in  the  Member  State  in  question  (but  see 
below,  imports  and  exports).  The  levy  may  be a fixed payment  per  kWh  consumed,  or a 
transparent and separate fee added to the transmission  tariff. 

The  levy  is fixed by  the  Member  State  in question,  and  varies  depending  on  the  level  of 
support  the  Member  State  in question  feels  is necessary  to  generate  the requisite  level  of 
renewables production. 

-  System of Green  certificates. 

In  this  system  the  Member  State  simply  decides  the  level  of  renewable  electricity  that  it 
desires to be produced  (or consumed  - see below, imports and exports) within  its electricity 
system.  It  then  simply  requires  all  consumers  to  purchase  x  %  of  their  electricity 
requirements  from  renewable  sources.  Evidently,  given  the  impossibility  of  separating 
"green"  from  "conventional"  produced  electrons,  it  is  not  possible  for  all  consumers  to 
actually be supplied x % of the electricity that really originates from renewable sources. To 
overcome this, consumers are obliged to purchase "green certificates" representing the x % 
of their  overall  requirements.  Green  certificates  are issued  by  renewable  producers,  under 
the  control  of  the  appropriate  Member  State  authorities.  For  domestic  consumers  the 
certificates  are purchased  by the distributors that supply them. 

In  practice,  therefore,  renewable  electricity  producers  sell  their  electricity  to  the  TSO  at 
normal market prices. The additional  cost of producing renewable electricity  is covered  by 
the price that all, final consumers, eligible and captive, pay for the green certificates.  Thus, 
a secondary  market develops for green certificates, which will be priced at a function  of the 
difference  between  the  market  price  for  electricity  and  the  (average)  cost  of  producing 
renewable electricity  that  is additional  to that market price. 

-5  -

-  Compensation  payments into a renewable  fund 

Distributors  are  legally  obliged  to  dispatch  x  %  of  their  electricity  requirements  from 
renewable  sources.  If they  do not  fulfil  this obligation  they,  alternatively,  have  to  make  a 
compensation  payment  into  a  renewable  fund.  This  fund  is  used  selectively  to  grant 
investment support, e.g. through a tender for renewable based plants. 

-  Obligation  to purchase. 

Consumers  in  a  Member  State  may  be  obliged  to  actually  purchase  "their"  share  of  the 
renewable  electricity  that  the  government  decides  should  be  acquired  by  the  TSO.  They 
would  be obliged  to purchase  this at a supra-market  price, reflecting  the additional  cost of 
producing  renewable  electricity.  This  item  would  be  billed  separately,  such  that  the 
additional cost involved  is transparent. 

-  Other non-financial  measures : 

General possibility for the TSO to refuse  access to eligible customers to the network  for 
TPA/transit  requirements  in the event  that  it became  difficult  for  it to  pass  the  renewable 
sourced electricity that it has been obliged to purchase by the government on to consumers. 

3.  Analysis of these different  approaches : compatibility of community law 

The  schemes  applied  by  Member  States  must  be  analysed  from  different  view  points:  State 
aid,  compatibility  with  the  Directive  and  the  Treaty,  in  particular  the  environmental 
provisions.  Rules  setting  up a common  framework  for  the  support  schemes  would  be  major 
step  forward  as  it  would  clarify  the  room  for  manoeuvre  for  Member  States  and  reduce  the 
distortionary  effects.  This  would  allow  Member  States  to  promote  renewables  more 
efficiently. 

3.1  State aid. 

The state aid  issue  is dealt  with separately  from  the issue of compatibility  with  the  Directive 
and the Treaty articles on which the Directive is based. It is not proposed to discuss this issue 
in the  context  of this  analysis.  However,  it  may  be  noted  that  until  present  the  Commission 
has  taken  a  favourable  approach  regarding  aid  to  renewable  energy  production  examined 
pursuant to point 2.3 of the Community  Guidelines on state aid for  environmental  purposes6. 
This  approach  will  be  pursued,  taking  into  account  the  necessity  to  put  into  place  and  to 
consolidate the internal  market for electricity. 

3.2  Compatibility with  the Directive and EU law. 

The  Directive,  pursuant  to  Article  8(3),  covers  only  priority  dispatching  at  TSO  level  for 
renewables. In se it covers none of the above schemes. 

In  such  circumstances  recourse  to  two  other  provisions  of  the  Directive  becomes  relevant  : 
Article  3(2)  -  public/environmental  service  obligations,  and  theoretically  Article  24 
(transitional  regimes).  It  is  on  the  basis  of  these  provisions,  seen  in  the  light  of  the 

See Community guidelines on state aid  for environmental  purposes. (OJ C72,  10.3.1994, p. 3) 

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Community's  active  policy  of  promoting  renewables  as  outlined  in  the  recent  White  Paper, 
that  compatibility  of measures  with  the  Directive  set out above  will  need  to be  examined. 

In  reality, however,  it  is suggested  that  almost  all  schemes  adopted  in this context  will  need  to 
be  examined  in  the  light  of  the  environmental  service  obligation  provisions  of  Article  3(2). 
Article  24,  transitional  regimes,  are  temporary  support  schemes,  which  will  cease  to  exist  in 
the  foreseeable  future  and  seem  therefore  not  suitable  for  renewables.  On  the  contrary,  these 
renewable  schemes  are  envisaged  to  be  operational  for  the  foreseeable  future.  Nonetheless, 
this needs to be kept  under  regular  review. 

When  examining  whether  any  of  the  abovementioned  schemes  are  compatible  with  Article 
3(2)  of  the  Directive,  it  is  necessary  to  take  account  of  the  principles  laid  down  by  the 
European  Court  of Justice  in  interpreting  Article  90 of the EC  Treaty,  in  combination  with  the 
free  movement  and  competition  provisions  of  the  Treaty.  Whilst  an  exhaustive  discussion  of 
this  jurisprudence  is  not  within  the  scope  of  the  present  examination,  it  is  clear  that  the 
following  basic  principles  will  guide  the  Commission's  analysis  of  any  environmental  service 
obligation  such as those  considered  above. 

First,  the  Commission  will  always  commence  its  examination  by  asking  whether 
the 
underlying  objective  pursued  by  the  Member  State  in  question  is  legitimate  -  i.e.  that  it  could 
permit  derogation  from  the  normal  competition/free  movement  rules.  In  this  context  it  should 
be  noted  that  environmental  protection  has  been  recognised  by  the  Commission  and  Court  of 
Justice as a mandatory  requirement  which  may  limit the application  of Article  30 of the  Treaty 
and  an  objective  that  may  permit  the  exemption  - pursuant  to  Article  85(3)  - of  an  agreement 
restrictive  of  competition7.  Thus,  in  general,  it  is  concluded  that  this  first  test  will  be  met  by 
such  schemes. 

Second,  the  Commission  will  examine  whether  the  measures  in  question  are  reasonable  and 
proportionate  in  order  to  meet  the  objectives  pursued  by  the  Member  States.  Obviously,  each 
scheme  must  be  examined  on  its  own  merits.  However,  it  is  clear  that  one  element  that  is 
fundamental  in  considering  this  question  is  the  contemporaneous  examination  of  comparable 
schemes  all  seeking  the  same  objectives.  In  determining  the  proportionality  of  one  scheme  it 
is  necessary  to  examine  whether  alternatives  exist,  which  are  less  disruptive  of  competition 
and trade  between  Member  States, which  nonetheless  equally meet the objectives  in  question. 

Evidently,  this  aspect  of  the  analysis  is of limited  importance  at present  : the  various  schemes 
are  either  in  their  infancy  or  are  presently  being  conceived.  In  the  future,  once  they  have 
entered  into  force,  this  will  become  increasingly  relevant. 

Finally,  a  further  issue  that  will  require  careful  consideration  in  the  context  of  schemes 
financed  by  a  levy  is  the  question  at  which  level  the  levy  might  be  imposed.  Such  a  levy  may 
be  imposed  either  at  the  production  level,  the  transmission  level,  or,  most  usually,  at 
consumption  level.  Whilst  the  Commission  has  reached  no  final  conclusion  regarding  the 
relative  merits  of  these  different  approaches,  it  does  appear  that  a  number  of  significant 
advantages  attach  to the  imposition  of a levy  at consumer  level.  Such  a  levy  is directly  related 
to  the  amount  of  electricity  actually  used,  and  is  highly  transparent.  If  a  levy  would  be 
imposed  at  transmission  level,  however,  a  number  of  difficulties  would  arise.  First,  the 

See 22nd competition report  1  at paragraph 77. 

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payment  would  not  relate  directly  to  the  amount  of  electricity  consumed  (the  relationship 
between  the  distance  electricity  travels  and  the  amount  consumed  not  being  a  constant).  This 
is  particularly  the  case  regarding  autoproduclion,  which  does  not  go  through  the  network. 
Second,  this  would  represent  an  inevitable  handicap  to  Community  trade  in  electricity.  This 
handicap  would  be  increased  where  electricity  is  traded  across  borders,  as  two  "transport 
levies" would  be  imposed.  The  situation  is still worse  in case of  transit. 

These  difficulties  have  also  been  recognised  in  the  Commission  Proposal  for  a  Directive  on 
restructuring  the  Community  framework  for  the  taxation  of  energy  products  (referred  to  in 
section 
is 
recommended.  That  Proposal  also  makes  provision  for  fiscal  support  for  the  production  of 
electricity  from  renewable  resources. 

than  production  of  electricity 

taxation  on  consumption 

I)  where 

rather 

Furthermore,  the  difièrent  levels  or  methods  of  imposing  a  levy  may  also  lead  to  trade 
distortions. 

It  should  also  be  noted  that  national  schemes  which  support  electricity  generated  from 
renewables  sources  could  have  competition  distortive  effects.  It  is  only,  therefore,  as  an 
interim  arrangement  for  the  time  being  that  the  Commisssion  can  accept  any  such  scheme(s) 
and  that  any  such  acceptance  is  without  prejudice  to  a  re-examination  of  any  such  scheme(s) 
in the future,  e.g.  due to changes  on the  market. 

A  final  issue  also  merits  consideration  here.  Already  at  this  stage  it  may  be  stated  that 
schemes  which  introduce  competition  between  producers  of  renewables  are  likely  to  require 
less  support,  and  are more  likely  to become  fully  competitive  with  "conventionally"  produced 
electricity.  There  are  two  methods  by  which  such  competition  might  be  introduced.  First  a 
regulator  or  other  body  may  periodically  review  the  level  of  support,  with  the  intention  of 
exerting  downwards  pressure  reflecting  technological  advances.  The  level  of  support  would 
therefore  be  regularly  and  automatically  adjusted  on  the  basis  of  a  formula  that  takes  account 
of  reductions  in  the  cost  of  generating  renewable  electricity.  Second,  the  system  of  green 
certificates  by  its very  nature  introduces  competition  for  renewable  electricity  production.  The 
secondary  market  for  green  certificates  will  set  the  level  for  the  price  of  renewables.  New, 
more  efficient,  lower  cost  producers  will  enter  the  market  if  they  can  produce  below  the 
"market price" for  green  certificates. 

As  stated  above  schemes  which  introduce  competition  between  producers  of  renewables  are 
most  likely  to  maximise  the  cost-effectiveness  and  should  therefore  be  encouraged.  It  is  of 
course  too  early  to  state  if a system  of  periodically  review  of the  support  schemes  or  a  system 
of  green  certificates  are  most  likely  to  produce  the  most  rapid  reduction  in  the  cost  of 
renewables.  However, 
it  docs  appear  at  this  stage  that  if  the  system  of  green  certificates 
works  effectively  in  practice,  it  is  likely  to  exercise  a  constant  and  important  downwards 
effect  on the price  for  renewables. 

Furthermore,  whilst  again  it  is too  early  to  state  whether  the  introduction  of  a  scheme  with  no 
mechanism  to  encourage  efficiency  and  price  reductions  whatsoever  would  be  compatible 
with  the  Electricity  Directive,  it  appears  reasonable  at  this  stage  to  assume 
the 
introduction  of  such  a  mechanism  would  be  more  likely  to  ensure  compatibility  with  the 
relevant  EU  rules. 

that 

-x 

IV.  IMPORTS AND EXPORTS 

All  of  the  above  schemes  raise  the  question  of  imports  and  exports  of  electricity  produced 
from  renewable  sources.  Green  certificates  can,  for  example,  be  issued  by  renewable 
producers  outside  the  territory  in question.  Domestic  companies  with the obligation  to  pay a 
levy or which are submitted to a purchase obligation could be exempted  from  this levy if they 
demonstrated  that their  imports were sourced  from  producers with at least the same minimum 
level  of  renewables  as  that  required  by  domestic  legislation.  Whilst  certain  administrative 
measures  would  need  to  be  taken  to  prevent  avoidance  of  the  relevant  renewable  purchase 
obligation,  it  would  be  possible  to  permit  renewable  obligations  to  be  made  up  through 
imports if desired. 

However,  the  decision  whether  or not to permit  imports to  fulfil  this role  is not  simple. The 
cost  of producing  renewable  electricity  varies  according  to the  geographic  area  in  question  -
this  is  particularly  relevant  regarding  large  hydro,  the  marginal  cost  of  which  is  very  low 
during summer months. In such circumstances, at least with respect to certain  countries, over 
time,  an as yet  undetermined  proportion  of the renewable  electricity  for  which  their  citizens 
would  be  paying  through  higher  prices  would  be  sourced  abroad.  The  direct  benefits  of  the 
renewable  production  (e.g.  reduced  emissions  of  C02,  S02,  NOx)  would,  therefore,  accrue 
abroad  (although  especially  the  actual  benefits  of  reduced  C02  are  wider  than  a  limited 
geographic  area).  In  any  event,  it  is  unclear  whether  the  consequent  CO,  reduction  would 
accrue  to  the  paying  country,  or  the  producing  country,  when  the  question  of  meeting  C02 
reduction objectives are considered. 

On the other hand, the prohibition  of imports in this respect would contravene the most  basic 
provisions of the EU Treaty regarding  free  moment of goods. Equally, in terms of overall  EU 
energy  policy,  it makes  considerable  sense  for  renewable  energy  to be encouraged  under  the 
most  cost-effective  conditions.  The different  opportunities  offered  by regional  policy  should 
also be taken into account. 

The Commission  services have reached no conclusions on these issues at present. 

V.  CONCLUSION 

The intention of this report was to present the initial considerations of the Commission  on the 
questions  which  arise  concerning  the  treatment  of  electricity  from  renewable  sources  in  the 
light of the internal  market  for electricity.  This paper represents the first follow-up  measure to 
the  Commission  White  Paper  in  terms  of  electricity  produced  from  renewable  sources.  As 
mentioned  above, this  White  Paper sets a global  objective  for  the  EU  of  increasing  the  share 
of  renewables  of  total  energy  consumption  of  12%  by  2010.  Article  25  of  the  Directive 
requests the Commission  to attach any harmonization proposals if necessary. However,  before 
drawing  up  a  proposal  to  harmonise  the  treatment  of  electricity  from  renewable  sources  the 
different  schemes need to be analysed more thoroughly in terms of advantages and drawbacks. 

Notwithstanding  this, as already  outlined  clearly  in the White Paper on renewable  energies, a 
clear  need  for  common  rules  in  this  area  can  already  be  identified.  The  contemporaneous 
existence  of  different  support  schemes  appears  likely  to  result  in  distortions  of  trade  and 
competition. The role of renewables in the EU will clearly increase in the coming years, given 
the Kyoto commitments. Thus, potential  market  distortions will  accordingly  increase.  Whilst 

the  trade  and  competition  distorting  effects  of  different  renewable  support  schemes  is  rather 
limited  at  present,  given  the  limited  EU  market  share  of  electricity  from  renewable  sources, 
this  negative  effect  appears  likely  to  significantly  increase  in the  coming  years.  In this  light,  it 
is appropriate  to  move  towards  the definition  of  some  common  rules  in this  area  as  rapidly  as 
practicable.  As  mentioned  above,  whilst  at  present  it  is  not  appropriate  to  identify  the  likely 
contents  of  such  a  Directive,  the  White  Paper  on  renewables8  indicates  that  in  addition  to 
those  matters  discussed  above  : 

"Other  issues  to be addressed  will  include  the following  : 

• 

• 

the  way  in  which  transmission  system  operators  should  accept  renewable  electricity  when 
offered  to  them,  subject  to  provisions  on  transport  in  the  internal  market  in  electricity 
Directive; 
the  guidelines  on  the price  to  be paid  to  a generator  from  renewable  source  which  should 
at  least  be  equal  to  the  avoided  cost  of  electricity  on  a  low  voltage  grid  of  a  distributor 
plus  a  premium  reflecting 
the  renewables  '  social  and  environmental  benefits  and  the 
manner  in  which  it is financed:  tax  breaks,  etc.; 

•  on  which  categories  of electricity  purchases  such  measures  fall; 
•  with  regard  to  network  access,  avoiding  discrimination  between  electricity  produced 
solar  radiation,  biomass  (below  20  Mwe),  hydroenergy  (below  10 Mwe)  and  wind.  " 

from 

Next  step 

Presently,  the  Commission  is examining  closely  the different  schemes proposed  or  introduced 
by  the  Member  States.  However,  in order  to  establish  a more  profound  overview  of  the  many 
different  schemes  the  Commission  intends  to  launch  a  series  of  cost/benefit 
and  cost 
effectiveness  studies. 

The  aim  of  these  studies  will  be  to  provide  clear  information,  with  respect  to  each  Member 
State as well  as number  of third  countries  where  such  schemes  are operating, on  the  following 
issues: 

•  detailed  analysis of  the manner  in which  support  is granted 
• 
• 
• 

the costs  involved  for  consumers, producers and  the state  for  the different  schemes 
the C 02  emission  reduced  due to each  scheme  in  force 
the  effectiveness  of  the  different  schemes  in  terms  of  their  success  in  promoting 
renewables. 

As  a  result  of  these  studies  it  should  be  possible  to  get  an  overview  of  the  relative  efficiency 
of  the  different  approaches  taken  by  the  different  countries,  permitting  the  Commission  to 
draw  up  rules  for  the  future  treatment  of  renewable  energy  in  the  light  of  the  Electricity 
Directive. 

The  studies  should  permit  the  Commission  to  -  in  a  final  report  -  give  the  answers  to  the 
following  questions: 

* COM(97) 599, 26.11.97, "linerg\  for the future:  Renewable Sources of Energy - White Paper for a Community 
Strategy and Action  Plan" p.  12. 

10 

• 

• 

• 
• 

the internal  market distorting effects  of the contemporaneous existence of differing  support 
schemes at the Member State level; 
the  relative  costs  of  the  different  schemes  introduced  to  support  the  introduction  and 
development of renewable electricity; 
the effectiveness  of such schemes in terms of cost/benefit  regarding C02  reduction; 
the  level  of  additional  benefits  to  the  EU  of  an  increased  role  for  renewables,  including 
increasing  employment  possibilities,  the  maintenance  of  a  European  lead  in  renewables 
technology  and thus export opportunities, and regional development advantages; 

•  whether  the  introduction  and  development  of  such  schemes  results  in  a  competitive 
handicap  for  EU  industry. In analysing  this consideration  it will be necessary  to determine 
the approach - quantitatively  and qualitatively, of our major trading partners. 

Following  this, the  Commission  will  propose  a  Directive  establishing  common  rules  for  the 
treatment of renewables. The intention is to present this proposal before the end of 1998. 

The  Commission  has  been  concentrating  on  the  co-operation  with  Member  States  on  the 
transposition on the Directive since the Directive entered into force on  19 February  1997. This 
has shown that the treatment  of renewables  is a priority  in most Member  States. The  interest 
in this area is increasing, particularly  in the light of the Commission's recent green and  White 
papers on renewable energy sources, and the EU commitment accepted at Kyoto. Other issues 
may  show  up  in  the  coming  months  and  years.  Therefore,  it  is  the  intention  of  the 
Commission  to  present  a  new  harmonization  report  each  year.  The  next  report  will  be 
presented in February  1999. 

-n-

ISSN  0254-1475 

COM(98)  167 final 

DOCUMENTS 

EN 

12  10  08 

Catalogue  number  :  CB-CO-98-167-EN-C 

ISBN  92-78-32099-4 

Office  for Official  Publications of the European  Communities 

L-2985  Luxembourg 

-  13,  -