Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment {SEC(2003) 1368}
Date: 2003-12-10
Institutions: European Commission
Subjects: electrical energy, energy policy, energy supply, investment, security of supply

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 10.12.2003
COM(2003) 740 final

2003/0301 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

concerning measures to safeguard security of electricity supply
and infrastructure investment

(presented by the Commission)

{SEC(2003) 1368}

EN

  EN

EXPLANATORY MEMORANDUM

1.

BACKGROUND

The European Union is in the process of creating the largest competitive market for electricity
and gas in the world. This integration of  energy markets will both lead to  greater efficiency
and contribute to security of supply. The internal market forms a key part of the Community
strategy on security of supply, as discussed in the Green Paper “Towards a European strategy
for security of energy supply”, COM(2000) 769. In order to do this, however, it is important
that  the  correct  incentives  are  in  place  on  market  participants  and  that  a  stable  framework
exists. This applies to generators, network operators and consumers. This Directive seeks to
ensure that a stable framework exists.

A  truly  functioning,  integrated  electricity  market  requires  significant  investment  in
transmission  networks.,  Interconnections between  Member  States are a  particular  priority  in
order  to  allow  for  a  higher  level  of  competition  between  existing  companies.  Without
additional  interconnectors,  the  principles  of  market  opening  may  become  meaningless  as
companies  consolidate  their  position  in  particular  regions  of  the  European  Union  and  the
market becomes segmented. This was recognised in the conclusions of the Barcelona summit
in March 2002 where, in response to the Commission’s Communication on European Energy
Infrastructure,  COM(2001)  775,  Heads  of  State  and  Governments  endorsed  the  idea  of  a
target  for  electricity  interconnection  equivalent  to  10%  of  installed  generation  capacity.
Investment in transmission networks is also needed to ensure that the network can cope with
additional  demand  without  European  citizens  and  businesses  falling  victim  to  frequent
interruptions  in  supply  or  blackouts.  Although  no  system  can  be  100%  reliable,  the
expectations of electricity consumers are that such incidents are minimised as far as possible.

Finally, a large proportion of new generation investment is expected to come from generation
based  on  renewable  energy  sources  and  distributed  generation  based  on  CHP.  This  in  turn
requires new investment to allow electricity networks to be reconfigured. The spread of, for
example, offshore wind generation will require new interconnections and reinforcement of the
network to be made at various locations. Distributed generation will require the low voltage
networks to be upgraded.

The  internal  market  also  needs  to  ensure  that  a  balance  between  supply  and  demand  is
maintained. Current trends, whereby electricity consumption in the enlarged EU continues to
grow  unsustainably  are  unacceptable  and  a  significant  effort  is  required  to  deliver  energy
savings.  However,  the  expected  closure  of  a  significant  proportion  of  existing  plant  also
means  some  investment  in  new  generation  is  likely  in  the  medium  term.  However  both
demand  management  and  generation  capacity  require  investment  and  any  business  or
household making such investments need to know that a stable regulatory framework exists as
to how electricity prices will be determined.

In this context, it is important to remember that electricity is unlike any other products. It has
no  real  substitutes  and  cannot  be  stored.  Furthermore,  network  security  has  some
characteristics  of  a  public  good  since  failures  in  the  supply  of  electricity  tend  to  have  a
general effect on all consumers.  There is therefore an ongoing need, now that the competitive
market will soon be in place, to provide the correct framework for long term investment in the
electricity sector both on the demand and the supply side in the EU.

2

 
2.

NETWORK PERFORMANCE STANDARDS

The network has to be operated at all times within acceptable frequency, voltage and current
limits.  Due  to  the  physical  nature  of  electricity  and  the  constantly  changing  pattern  of
production and consumption, it is very difficult to predict accurately the  amount of flows at
any  given  point  in  the  network.  Control  of  these  critical  energy  infrastructures  is,  in  turn,
highly  dependent  on  the  security  and  reliability  of  the  monitoring  and  controlling  ICT
infrastructures.

To  deal  with  this  uncertainty,  network  operators  adopt  rules  to  ensure  that  the  network  has
enough  spare  capacity  so  that  the  grid  can  be  operated  safely  in  a  variety  of  extreme
circumstances.  This  affects,  for  example,  how  much  capacity  between  one  control  area  and
another can be safely used.

Electricity  network  systems  are  made  of  a  huge  number  of  components.  The  system  is
designed to resist reasonably probable faults in the system. The general standard used for the
operation  of  the  electricity  of  the  network  is  the  so-called  “n-1”  rule.  This  states  that  the
network should continue to function in the event that any one individual failure has occurred
in a specific part of the network. Not all contingencies are covered, since the costs associated
in dealing with all possible events would be prohibitive.

These  rules,  as  well  as  other  requirements  on  information  provision  and  scheduling
timetables,  are  currently  dealt  with  through  voluntary  guidelines  between  the  Members  of
TSO organisations for example UCTE and Nordel. UCTE are  currently preparing  an update
of  their  operational  handbook  which  they  intend  to  make  contractually  binding  on  their
Members.  There  is  also  the  possible  scope  for  incorporating  further  technical  rules  into
guidelines that will be agreed under the Regulation on Cross Border electricity exchanges.

As  well  as  the  operational  rules  discussed  above,  there  is  also  scope  for  regulators  to  set
performance targets on both transmission and distribution system operators. Such targets will
encourage  the  companies  concerned  to  continue  to  maintain  the  network  and  not  to  cut
corners in on operation. Of course the actual level of targets should be set at the discretion of
Member  States.  Specifically,  regulatory  authorities  are  expected  to  establish  such  targets  as
part of the process of approving the methodology for setting network access charges. Article
4,  therefore  gives  Member  States  the  duty  to  ensure  that  transmission  and  distribution
companies comply with co-operation such as the UCTE initiative.

3.

BALANCING SUPPLY AND DEMAND

As already established in the Commission’s Green Paper on Security of Supply1, this issue is
also an ongoing concern for the EU. In spite of the fact that the demand of energy has been
decoupled from the economic growth, energy demand is still expected to grow in the coming
years.

Current  trends  however  are  unacceptable  and,  in  this  regard,  the  first  priority  for  Member
States  should  be  to  ensure  that  policies  are  in  place  to  control  growth  in  demand.  Such  an
approach is cheaper, works faster and is in line with the commitments of the European Union
relating  to  emissions  of  greenhouse  gases.    Demand  management  must,  therefore,  be  at  the
centre  of  any  Member  State’s  policy  to  maintain  security  of  supply.  A  policy  of  projecting

1

COM(2000) 769 final, 29 November 2000

3

 
                                                
demand on the assumption of “business as usual” and then using this as a basis for forecast
the additional generation requirement is not a policy that is sustainable, either at national or
Community level.

However, at the same time, a large number of power stations are due for closure over the next
few  years  and  some  new  investment  in  generation  plant  is  likely  to  be  required,  if  only  to
renew  some  of  the  existing  stock  .  Must  of  the  new  generation  plant  to  be  constructed  is
expected  to  be  renewable  capacity  or  distributed  generation  based  on  CHP  plant.  The
Renewables  Directive2  sets  specific  targets  for  Member  States  to  increase  the  share  of
renewable  generation.  Similar  measures  for  CHP  generation  are  already  being  discussed  at
Council. The question is, therefore, whether any other measures are necessary in this context.

One of the favourable consequences of a  competitive market is that  it removes the  inherent
tendency  to  over-investment  in  generation  capacity  that  is  characteristic  of  a  centralised
planned  electricity  industry.  This  is  particularly  true  where  demand  can  be  made  more
responsive  to  prices.  Competition,  however,  also  makes  the  maintenance  of  the  balance
between supply and demand more delicate.

In  a liberalised market, as  with other products,  private investors are expected to ensure  that
sufficient capacity is available to meet demand. In general terms, the price mechanism is the
way that this is expected to be achieved in the competitive market. As prices rise investment
will  become  viable  and  either  more  capacity  will  come  on  stream,  or  demand  will  be
constrained. In order for this mechanism to work properly, investors need to be certain about
the scope for government intervention in the electricity market. If not, regulatory uncertainty
may  prevent  investments  taking  place  whether  this  is  in  generation  capacity  or  demand
management technology. A second issue however, is whether investors are prepared to invest
in peaking  capacity to cover  the  very  highest  periods  of  demand  or  incidents  where  a  large
proportion of other generation is not available. Some believe such investment will not occur
because such  events are infrequent and their  occurrence  is  unpredictable.  Accordingly  there
may  be  a  case  for  governments  to  provide  further  measures,  in  addition  to  market
mechanisms,  to  ensure  adequate  capacity  is  available.  This  may  be  achieved  through  a
combination  of  setting  targets  for  the  level  of  reserve  capacity  or  equivalent  measures,  for
instance on  the  demand side, and  by taking  measures  to  ensure  these  targets  are met, either
through incentives or obligations on electricity undertakings. This issue is covered in Article 5
of the proposed Directive.

In a number of cases, the security of supply issue goes beyond national borders and requires
careful  co-ordination  between  the  Member  States  concerned.  Other  than  particular
emergencies, the single market needs to  function at all times. This means that firm capacity
made  available  between  Member  States  should  never  be  interrupted  for  reasons  other  than
“force majeur”. For example, Member States should not be permitted to interrupt cross border
flows  due  to  trends  in  local  wholesale  prices.  At  the  same  time,  however,  Member  States
should exercise a degree of caution when evaluating the extent to which imported energy will
be available at times of peak demand  and they should take into account the development of
the reserve capacity position in other Member States, especially those on whom it is expecting
to rely on for imported energy.

A  second  consideration  is  that  Member  States  need  to  adopt  policies  relating  to  security  of
supply  which  are  reasonably  consistent  with  each  other.  Reserve  capacity  can  add

2 

2001/77/EC

4

 
                                                
significantly to the overall costs of electricity supply. There may therefore be a temptation for
one Member State to adopt a very low target for reserve capacity and “free-ride” from other
countries  with  a  more  cautious  approach.  Similarly,  any  mechanisms  used  to  support
generation should be reasonably consistent to avoid distorting the electricity market.

4.

INTERCONNECTOR CONSTRUCTION

Without new investment in interconnection between Member States, the internal market will
not  function  properly  and  both  security  of  supply  and  the  efficiency  of  the  industry  will  be
affected. New infrastructure is increasingly important as the industry undergoes consolidation,
particularly  if  concentration  is  high  at  Member  States  level.  Increased  interconnection  also
allows for the possibility of Member States to share reserve capacity since it is unlikely that
peak levels of demand will occur at the same time in more than one Member State. This will
improve  the  level  of  security  of  supply  and  potentially  lead  to  reduced  costs.  However  the
main argument in favour of new interconnection is the need to complete the internal market
and allow for greater competition.

Investors, in order to have the confidence to build new infrastructure, need to be faced with a
clear  regulatory  regime. Therefore,  although  it is primarily  the  role  of  TSOs  to  put  forward
infrastructure projects, it is clear that the regulatory authority also needs to be involved in the
planning process given that these authorities will have a clear jurisdication over the tariffs that
network operators can charge. Likewise, regulators in neighbouring Member States need also
to co-operate when deciding which investments should be approved.

National regulators need to ensure that TSOs are adequately rewarded for the investments that
are  made.  The  return  on  capital  on  new  investments  should  at  least  be  equal  to  the  cost  of
capital of the company concerned, taking into account its financial structure. In some cases, a
higher return for new infrastructure could be contemplated.

In the event  that,  for  whatever  reason,  the  TSO  fails  to  make  sufficiently  rapid  progress  on
important  infrastructure  projects,  then  the  regulatory  authority  should  have  certain  rights  to
ensure that work takes place. In the extreme, the regulatory authority should have the right to
arrange for the work to be carried out by another party, and for the costs to be borne by the
TSO. Article 6 of the proposed Directive sets out this process.

5.

CONCLUSIONS

Investment  in  adequate  transmission  capacity  is  crucial  for  the  future  security  and
sustainability of electricity provision in the EU. New interconnections within Europe are also
needed to foster competition, particularly where existing companies have a dominant position.
Without  such  investments  Member  States  may  be  inclined  to  take  more  interventionist
measures such as divestment or capacity release. It is important, therefore, that decisions on
investments  are  made,  and  this  requires  Member  States  to  face  up  to  the  issues  concerned
rather than continuously postpone important investment decisions.

Action is also necessary on the issue of maintaining the balance between demand and supply.
The  first  priority  here  is  the  need  for  the  unacceptable  trends  in  energy  consumption  to  be
constrained.  Where  new  generation  investment  is  necessary  this  should,  to  a  large  extent,
come from renewables and co-generation facilities. However developers of such technologies,
as well as any other investors in the sector, need to have a stable framework. Member States
must therefore have a clearly defined approach to the supply demand issue which is published

5

 
in advance and constant. If not, the position will continue to deteriorate and governments may
be tempted by other interventionist measures, incompatible with competition  with  an  undue
bias in favour of increased generation capacity.

The  attached  draft  Directive  therefore  proposes  that  Member  States  must  adopt  a  stable
regulatory  framework  in  support  of  the  necessary  investment  and  that  this  should  be
reasonably consistent between Member States, while also respecting the need for subsidiarity.

6

 
2003/0301 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

concerning measures to safeguard security of electricity supply
and infrastructure investment

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article
95 thereof,

Having regard to the proposal from the Commission3,footnote

Having regard to the opinion of the European Economic and Social Committee4,

Having regard to the opinion of the Committee of the Regions5,

Acting in accordance with the procedure laid down in Article 251 of the Treaty6

Whereas :

(1)

(2)

3

4

5

6

7

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/EC7    has  made  a  very  important  contribution  towards  the  creation  of  internal
market  for  electricity.  The  guarantee  of  a  high  level  of  security  of  supply  is  a  key
objective  for  the  successful  operation of  the  internal  market  and  that  Directive  gives
the Member States the possibility of imposing public service obligations on electricity
undertakings,  inter  alia,  in  relation  to  security  of  supply.  These  public  service
obligations  should  be  defined  as  precisely  and  strictly  as  possible,  and  should  not
result  in  the  creation  of  generation  capacity  that  go  beyond  what  is  necessary  to
prevent undue interruption of distribution of electricity to final customers

A  competitive  single  EU  electricity  market  necessitates  transparent  and  non-
discriminatory security of supply policies compatible with the requirements of such a
market.  The  absence  of  such  policies  in  individual  Member  States,  or  significant
differences  between  the  policies  of  the  Member  States  would  lead  to  distortions  of
competition.  Definition  of  clear  roles  and  responsibilities  of  all  market  actors  is
therefore  crucial  in  safeguarding  the  well-functioning  of  the  internal  market  and

OJ C […], […], p. […].
OJ C […], […], p. […].
OJ C […], […], p. […].
OJ C […], […], p. […].
OJ L 176, 15.7.2003, p. 37.

7

 
                                                
security of electricity supply while at the same time avoiding creating obstacles to new
entry,  distortions  of  the  internal  market  for  electricity  or  significant  difficulties  for
companies with small market shares.

(3)

(4)

Cooperation  between  national  transmission  system  operators  in  issues  relating  to
network  security  including  definition  of  transfer  capacity,  information  provision  and
network modelling is vital to the development of a well functioning internal market. A
lack of co-ordination regarding network security is detrimental to the development of
equal conditions for competition.

Transmission and distribution  operators  should be  required to deliver  a high level of
service  to  final  customers  in  terms  of  the  frequency  and  duration  of  interruptions  to
customers.

(5) Without  prejudice  to  Articles  86,  87  and  88  of  the  EC  Treaty,  it  is  important  that
Member States lay down an unambiguous framework which will facilitate security of
supply  and  is  conducive  to  investments  in  generation  capacity  and  demand
management  techniques.  It  is  also  important  that  appropriate  measures  are  taken  to
ensure a regulatory and fiscal framework to encourage investment in new transmission
interconnection, especially between Member States. These incentives should develop
harmoniously  throughout  the  Community  if  distortions  to  competition  are  to  be
avoided.

(6)

(7)

(8)

(9)

The European Council at Barcelona agreed on a target for the level of interconnection
between Member States corresponding to 10% of installed generation capacity in each
Member State in order to improve security of supply and facilitate competition.  Low
levels of interconnection have the effect of fragmenting the market and are an obstacle
to the development of competition. The existence of adequate physical interconnection
capacity  is  crucial  but  it  is  not  a  sufficient  condition  for  competition  to  be  fully
effective.  It  also  required  that  the  transmission  system  operator  is  prevented  from
withholding capacity to create artificial scarcity. In that respect greater transparency of
the capacity calculation and allocation procedure in the transmission system should be
ensured.

Transmission  system  operators  need  an  appropriate  regulatory  framework  for
investment.  Such  a  framework  should  create  regulatory  certainty  and  incorporate  a
reasonable rate of return on those investments, at least covering their cost of capital. It
should also contribute both to security of supply and the effectiveness of competition
in the internal market.

Member States should lay down rules on penalties applicable to infringements of the
national  provisions  adopted  pursuant  to  this  Directive  and  ensure  that  they  are
implemented. Those penalties must be effective, proportionate and dissuasive.

In  accordance  with  the  principles  of  subsidiarity  and  proportionality  as  set  out  in
Article 5 of the Treaty, the objectives of the proposed action, namely the creation of a
fully  operational  internal  electricity  market,  based  on  fair  competition  and  secure
electricity  supplies,  cannot  be  sufficiently  achieved  by  the  Member  States  and  can
therefore,  by  reason  of  the  scale  and  effects  of  the  action,  be  better  achieved  by  the
Community.  This  Directive  confines  itself  to  the  minimum  required  in  order  to
achieve those objectives and does not go beyond what is necessary for that purpose.

8

 
HAVE ADOPTED THIS DIRECTIVE:

Article 1
Subject Matter and Scope

This  Directive  establishes  measures  aimed  at  ensuring  the  proper  functioning  of  the  EU
internal market for electricity by safeguarding security of electricity supply and  by ensuring
an adequate level of interconnection between Member States.

It establishes a framework within which Member States shall define general, transparent and
non-discriminatory policies on security of electricity supply compatible with the requirements
of a competitive single market for electricity.

Article 2
Definitions

For the purposes of this Directive, the following definitions shall apply:

“generation” means the production of electricity;

“transmission” means the transport of electricity on the extra high-voltage and high-
voltage  interconnected  system  with  a  view  to  its  delivery  to  final  customers  or  to
distributors, but not including supply;

“transmission  system  operator”  means  a  natural  or  legal  person  responsible  for
operating, ensuring the maintenance of and, if necessary, developing the transmission
system in a given area and, where applicable, its interconnections with other systems,
and for ensuring the long-term ability of the system to meet reasonable demands for
the transmission of electricity;

“distribution”  means  the  transport  of  electricity  on  high-voltage,  medium-voltage
and low-voltage distribution systems with a view to its delivery to customers, but not
including supply;

“distribution  system  operator”  means  a  natural  or  legal  person  responsible  for
operating, ensuring the maintenance of and, if necessary, developing the distribution
system in a given area and, where applicable, its interconnections with other systems
and for ensuring the long-term ability of the system to meet reasonable demands for
the distribution of electricity;

“interconnectors” means equipment used to link electricity systems;

“projects  relating 
transmission”  covers  both
interconnectors  and  internal  connections  which  increase  the  scope  for  cross  border
transactions;

to  cross  border  electricity 

“interconnected  system”  means  a  number  of  transmission  and  distribution  systems
linked together by means of one or more interconnectors;

“supply” means the sale, including resale, of electricity to customers;

9

 
“renewable  energy  sources”  means  renewable  non-fossil  energy  sources  (wind,
solar,  geothermal, wave, tidal,  hydropower,  biomass, landfill  gas,  sewage  treatment
plant gas and biogases);

“distributed  generation”  means  generation  plants  connected  to  the  distribution
system;

“regulatory  authority”  means  the  regulatory  authorities  in  Member  States,  as
designated in accordance with Article 23 of Directive 2003/54/EC;

“new  market  entrant”  means  a  company  generating  or  supplying  electricity  in  a
Member State which has started its operations in that Member State since the entry
into force of Directive 96/92/EC;

“company with a small market share” means either a generator with less than 5% of
the generation capacity in the relevant market, or a supplier with a share of less than
5% in its relevant market.

Article 3
General Provisions

1.

In establishing their general policies with respect to ensuring high levels of security
of  electricity  supply,  Member  States  shall  define  and  publish  the  roles  and
responsibilities of different categories of market actors, respectively:

a)

b)

transmission system operators;

suppliers;

in  achieving  these  policies  and  specify,  where  appropriate,  the  minimum  standards
that must be complied with by the actors on the electricity market in question.

2.

In developing those measures, Member States shall take the utmost account of:

a)

b)

c)

d)

e)

f)

the  internal  market  and  the  possibilities  for  cross-border  co-operation  in
relation to security of electricity supply;

the  need  for  reductions  in  the  trend  rate  of  growth  of  electricity  demand  in
order to meet the Community’s environmental commitments;

the importance of ensuring continuity of electricity supplies;

the need to ensure adequate levels of reserve generation capacity or equivalent
measures on the demand side;

the need to promote the use of electricity generated from renewable sources in
line with Directive 2001/77/EC;

the need for a degree of diversity in electricity generation in order to ensure a
reasonable balance between different primary fuels;

10

 
3.

1.

2.

1.

g)

h)

i)

j)

the need to encourage energy efficiency and the adoption of new technologies,
in particular demand management technologies, renewable energy technologies
and distributed generation;

the need for continued operation of the network in the event of system failure
at an individual point or points in the network and the cost related to mitigate
such supply disruption;

the need for ongoing renewal of the transmission and distribution networks to
maintain the performance of the network;

the need for a cost effective provision of electricity.

Member States shall ensure that any measures adopted in accordance with paragraph
1 do not place an unreasonable burden on new market entrants and companies with
small market  shares. Member States shall also evaluate  the  impact  of  the  measures
on the cost of electricity for final consumers.

Article 4
Network Security

Member  States,  in  consultation  with  their  neighbouring  countries,  shall  ensure  that
minimum operational standards on network security are observed by the transmission
system operators.

The  regulatory  authorities  in  Member  States  shall  set  performance  standards  for
terms  of  occurrence  of
transmission  and  distribution  system  operators 
interruptions of final customers as a result of transmission network incidents. Those
standards shall be published by the regulatory authorities.

in 

Article 5
Maintaining Balance between Demand and Supply

Without  prejudice  to  Articles  87  and  88  of  the  Treaty,  Member  States  shall  take
appropriate measures, in the light of Articles 4 and 7 of Directive 2003/54/EC, and
including  the  encouragement  of  the  efficient  use  of  energy  as  well  as  the
encouragement of new generation companies to enter the market, to ensure that there
is  a  balance  between  the  demand  for  electricity  and  the  availability  of  generation
capacity.

In particular, Member States shall require transmission system operators to ensure an
appropriate level of reserve capacity or by adopting equivalent measures, for instance
relating to the real-time control of peak demands.

In  addition  to  the  measures  provided  for  in  the  second  sub-paragraph,  and  without
prejudice  to  Articles  87  and  88  of  the  Treaty,  Member  States  may  take  additional
measures to achieve these objectives, including but not limited to:

a)

b)

promotion of demand management

interruptible customers 

11

 
c)

d)

obligations on suppliers and\or generators

establishment  of  a  wholesale  market  framework  with  a  sufficient  number  of
competitors 
investment  and
consumption.

that  provides  suitable  price  signals 

for 

2.

1.

2.

1.

2.

Member States shall publish the measures taken pursuant to this Article ensuring the
widest possible dissemination among actual and potential investors in generation and
electricity consumers.

Article 6
Network Investment

Member States shall ensure that, for both the transmission and distribution network,
investment  decisions  are  taken  such  that  increased  demand  side  management
measures  are  prioritised  in  so  far  as  they  may  supplant  the  need  for  network  or
generation investment.

Member States shall ensure that investment decisions take into account of the  need
for:

a) 

b) 

c)

increased possibilities for connecting renewable electricity, in view of meeting
the indicative targets  as set out in the Directive 2001/77 on the promotion of
electricity  from  renewable  energy  sources  and  in  the  Directive  200x/xx  on
cogeneration;

increased opportunities for customers to exercise their rights to choose supplier
as set out in Directive 2003/54.

the  need  to  ensure  a  high  quality  service  at  a  reasonable  price,  in  line  with
Directive 2003/54/EC, Article 3(3), in  particular  for  customers in  remote  and
isolated regions.

 Article 7
Interconnector Construction

Transmission  system  operators  shall,  on  a  regular  basis,  submit  a  document  setting
out  their  investment  intentions  for  the  provision  of  adequate  level  of  cross-border
interconnection capacity to the regulatory authority.

The document referred to in paragraph 1 may cover one or more calendar years and
shall, take account of

a) 

existing and planned generation, transmission, distribution and supply,

b)

c)

d)

expected patterns of consumption allowing for demand management measures,

the need to promote distributed generation

the need to promote renewable generation

12

 
e)

regional, national and European sustainable development objectives, including
those projects forming part of the Axes of Priority European Interest provided
for  in  Decision  XXX  of  the  European  Parliament  and  of  the  Council  [laying
down guidelines for trans-European networks…]8.

The  regulatory  authority  shall  consult  on  the  proposed  investment  documents  with
the  Commission.  The  Commission  will  consult  on  the  aggregate  effect  of  the
proposed  investment  strategies  with  the  European  Regulators  Group  on  Electricity
and Gas established by the Commission Decision 2003/796/EC.

The regulatory authority shall endorse the transmission system operator’s plan or an
alternative  plan  after  having  made,  in  consultation  with  the  transmission  system
operator,  suitable  amendments  as  a  result  of  the  process  in  paragraph  3  and  the
priorities as defined in paragraph 2 and Article 6.

The regulatory authority shall take account of the investment strategy endorsed under
paragraph 4 when approving, pursuant to Article 23(2) of Directive 2003/54/EC, the
methodology for network access tariffs.

Without prejudice to Articles 87 and 88 of the Treaty,  it shall in particular  provide
positive  incentives  for  investment  by  allowing  a  rate  of  return  on  investment  that
compare to the average cost of capital for investment with similar risk.

In  case  of  delay  or  default  caused  by  the  transmission  system  operator  in
implementing  the  projects  identified  under    paragraph  4,  the    regulatory  authority
shall have the necessary means at its disposal to ensure that progress on the approved
strategy is satisfactory, in particular by:

a)

b)

c)

imposing  financial  penalties  on  transmission  system  operators  whose
projects fall behind schedule;

issuing  of  an  instruction  to  the  TSO  to  undertake  work  by  a  certain
date;

arranging  for  work  to  be  undertaken  by  a  contractor  through  a  tender
process. 

Article 8
Penalties

The Member States shall lay down the rules on penalties applicable to infringements
of  the  national  provisions  adopted  pursuant  to  this  Directive  and  shall  take  all
measures necessary to ensure that they are implemented. The penalties provided for
must be effective, proportionate and dissuasive.

The  Member  States  shall  notify  those  provisions  to  the  Commission  by  the  1
December  2005  at  the  latest  and  shall  notify  it  without  delay  of  any  subsequent
amendment affecting them.

13

3.

4.

5.

6.

1.

2.

8 

 
                                                
Article 9
Transposition

1.

2.

Member  States  shall  bring  into  force  the  laws,  regulations  and  administrative
provisions necessary to comply with this Directive before 1 January 2006. They shall
forthwith inform the Commission thereof.

When  Member  States  adopt  those  measures;  they  shall  contain  a  reference  to  this
Directive  or  be  accompanied  by  such  a  reference  on  the  occasion  of  their  official
publication. The method of  making  such references  shall  be  laid  down  by  Member
States .

Article 10
Reporting

The  Commission  shall  monitor  and  review  the  application  of  this  Directive  and  submit  a
progress report to the European Parliament and the Council no later than 31 December 2007.

Article 11
Entry into Force

This Directive shall enter into force on the twentieth day following that of its publication in
the Official Journal of the European Union.

Article 12

This Directive is addressed to the Member States.

Done at Brussels, […]

For the European Parliament
The President
[…]

For the Council
The President
[…]

14

 
LEGISLATIVE FINANCIAL STATEMENT

Policy area(s): Energy and Transport

Activity(ies): Energy Industry and Internal Market

Title  of  action:  Proposal  for  a  Directive  of  the  European  Parliament  and  of  the  Council  on
electricity infrastructure and security of supply.

1.

BUDGET LINE(S) + HEADING(S)

2.

2.1

2.2

Not applicable

OVERALL FIGURES

Total allocation for action (Part B):

Period of application:

Annuelle

2.3

Overall multiannual estimate on expenditure: 0,5 M€

a) Schedule of  commitment  appropriations/payment appropriations  (financial intervention) (see
point 6.1.1)

€ million (to 3rd decimal place)

2005

2006

2007

2008

2009

Total

Commitments

Payments

b) Technical and administrative assistance and support expenditure(see point 6.1.2)

Non  Applicable

Commitments

Payments

Subtotal a+b

Commitments

Payments

15

 
c)  Overall  financial  impact  of  human  resources  and  other  administrative  expenditure
(see points 7.2 and 7.3)

0,108

0,108

0,108

0,108

0,108

0,540

Commitments/
payments

TOTAL a+b+c

Commitments

0,108

0,108

0,108

0,108

0,108

0,540

Payments

0,108

0,108

0,108

0,108

0,108

0,540

Compatibility with the financial programming and the financial perspective

(cid:1) Proposal compatible with the existing financial programming

(cid:1) This proposal will entail reprogramming of the relevant heading in the financial 

perspective

(cid:1) This may entail application of the provisions of the Interinstitutional Agreement.
Financial impact on revenue9:

2.4

(cid:1) No financial implications (involves technical aspects regarding implementation of

a measure)

OR

(cid:1) Financial impact – the effect on revenue is as follows:

Note:  All details and observations pertaining to the method of calculating the effect on
revenue should be included in a separate annex.

Budget line    Revenue

€ million (to 1 decimal place)

Situation following action

Year n

n+1

n+2

n+3

n+4

n+5

Prior to
action
(Year
n-1)

a) Revenue in absolute terms

b) Change in Revenue

 (cid:1)

(Please state each budget line involved, adding the appropriate number of rows to the table if
there is an effect on more than one budget line)

9 

For further information see a separate guidance paper

16

 
                                                
3.

BUDGET CHARACTERISTICS

Type of expenditure

New

EFTA
participat
ion

Participation
applicant
countries

Heading
Financial
Perspective

Comp/
Non-comp

Diff/
Non-diff

Non-Comp

Diff

4.

LEGAL BASIS

YES/ NO

YES/NO

YES/NO

No  3

Yes

Yes

Yes

The Treaty establishing the European Community, in particular Article 95.

5.

5.1

DESCRIPTION AND GROUNDS

Need for Community intervention 10

5.1.1

Objectives pursued

The  market  opening  for  electricity  makes  it  increasingly  important  that  investment  in
both transmission and generation is maintained. A competitive market changes the way
such investments are decided and implemented and Member States need to clarify their
policies in this regards.

In  particular,  on  transmission,  the  introduction  of  regulated  third  party  access  means
that,  in  effect,  the  decisions  of  regulator  on  access  tariffs  affect  the  availability  of
finance for infrastructure investment. Unless regulators are embedded into the decision
being made, confusion and paralysis will result.

Regarding  the  supply  demand  balance,  a  competitive  framework  implies  investment
decisions  responding  to  price  signals  rather  than  being  planned  by  governments.
However  the  nature  of  electricity  may  make  prices  volatile  and  there  are  some  public
good  features  to  security  of  supply  which  imply  the  possibility  of  government
intervention. If this is to occur then the approach of Member States should be clearly set
out in advance in order to avoid creating a climate of uncertainty.

5.1.2

 Measures taken in connection with ex ante evaluation

a) Explain how and when the ex ante evaluation was conducted (author, timing, and where the
reports are available) or how the corresponding information was gathered

Events in electricity markets during 2002-03 demonstrated some of the problems that might be
caused through inadequate investment. Blackouts in both the EU and US highlighted the need for
clear operational standard for  transmission  networks  and  the  need  for  correct  maintenance  and
development of the network.

10 

For further information see a separate guidance paper

17

 
                                                
Generation adequacy was also tested by both a cold winter in the Nordic region and a very hot
summer  all  over  Europe.  Although  the  supply  chain  actually  performed  well  in  these
circumstances the need for investment in generation and demand management is clear. A stable
regulatory framework is needed for this.

b) Describe briefly the findings and lessons learnt from the ex ante evaluation.

There is a need for  this  measure in order  to  correct come of  the undesirable and  unsustainable
trends in the EU electricity  industry.  Increased  interconnection  is  necessary  chiefly  in  order  to
support the development of competition and to ensure that there is a real internal EU market. To
the extent that new interconnection helps achieve this, there will be substantial benefits to the EU
economy of up to €5 billion per annum. Without these investments, the possibility for customers
to choose their supplier will be constrained and these benefits will also be reduced. Transmission
investment  is  also  expected  to  yield  some  benefits  in  terms  of  security  of  supply  since  a
reinforced network is better able to cope with the additional and sometimes unpredictable flows
that  have  been  brought  about  by  the  introduction  of  cross  border  competition.  Finally  new
investment  will  contribute  to  the  environmental  goals  of  the  Community  to  the  extent  that
renewable electricity generation can be connected to the network and achieve its potential. Some
of the investments being put forward will also help make better use of the Community’s hydro
electric  resources.  The  existing  framework  for  investment  needs  to  be  reformed  in  order,  in
particular, to recognise the role of regulatory authorities in such decisions.

The measures on security of supply, especially greater co-ordination of network operators and a
clearer framework for the electricity wholesale market, will also be of benefit to the Community.
large  scale  blackouts  can  be  costly  to  the  EU  economy.  Estimates  of  the  effect  of  a  one  day
interruption    in  a  large  Member  State  run  to  around  5-10  billion  Euro.  Action  to  reduce  the
likelihood  of  such  incidents  is  to  be  welcomed.  This  will  be  best  served  by  a  clear  regulatory
framework  which  allows  both  customers  and  generators  to  respond  to  economic  price  signals
without government intervention. It is not clear that such an environment exists in a number of
Member States and the Directive and the proposed measure seeks to remedy this situation.

5.1.3 Measures taken following ex post evaluation

Following the evaluation and consultation process, the drafting of the proposal seeks to give an
appropriate  balance  between  measures  on  the  demand  side  and  those  on  the  supply  side.  Ever
since the publication of the Green Paper on Security of supply, the Community’s policy has been
to  emphasise  the  considerable  potential  of  demand  management  for  both  security  and
sustainability  reasons.  However  demand  management  also  requires  investment  decisions  to  be
made and the same points about regulatory stability still apply.

A  need  was  also  identified  to  examine  the  consequence  of  the  proposals,  particularly  on
transmission  infrastructure,  for  the  fuel  mix  of  electricity  generation  in  the  EU.  Generally
speaking  new  interconnectors  may  have  some  impact  in  that  a  strong  network  may  favour  the
dispatch of generation will a low marginal cost, notably nuclear and hydro. This effect was not,
however  thought  to  be  particularly  significant  considering  that  only  a  modest  increase  in
interconnection is being proposed.

5.2

Actions envisaged and arrangements for budget intervention

Not applicable

18

 
5.3

Methods of implementation

All  of  the  work  will  be  carried  out  internally  by  the  Commission;  including  the  receipt  of
Member  States’  submissions  on  the  subject,  monitoring  and  the  preparation  of  appropriate
reports and evaluation.

6.

6.1

FINANCIAL IMPACT

Total financial impact on Part B - (over the entire programming period)

(The method of calculating the total amounts set out in the table below must be explained by the
breakdown in Table 6.2. )

6.1.1

Financial intervention

Commitments in € million (to the 3rd decimal place)

2004

2005

2006

2007

2008

Total

Breakdown

Action 1 : Studies to prepare
guidelines

Etc.

TOTAL

6.1.2

Technical  and  administrative  assistance,  support  expenditure  and  IT  expenditure
(Commitment appropriations)

Year N

N + 1

 N + 2

N + 3

N + 4

Total

N + 5 and
subs.
Years

Non Applicable

1) 
administrative assistance

Technical 

and

Technical 

a) 
offices

assistance

b)  Other 
administrative assistance:

technical 

and

- intra muros :

- extra muros :

of  which  for  construction
and 
of
maintenance 
computerised  management
systems

Subtotal 1

19

 
2) Support expenditure

a) Studies

b) Meetings of experts

c) Information and
publications

Subtotal 2

TOTAL

6.2

Calculation  of  costs  by  measure  envisaged  in  Part  B  (over  the  entire
programming period)11

not applicable

Breakdown

TOTAL COST

Commitments in € million  (to the 3rd decimal place)

Type
of outputs
(projects, files )

Number of
outputs

Average unit
cost

(total for years
1…n)

Total cost

(total for years
1…n)

1

2

3

4=(2X3)

7.

7.1

IMPACT ON STAFF AND ADMINISTRATIVE EXPENDITURE

Impact on human resources

Types of post

Staff to be assigned to management of the
action using existing and/or additional
resources

Number of
permanent posts

Number of
temporary posts

Total

Description of tasks deriving
from the action

Permanent
officials 
Temporary staff

or

A

B

C

Other human resources

Total

1

1

11 

For further information see a separate guidance paper

20

1.

Monitoring of the implementation
by  Member  States  and  reporting
on the effect of the Directive.

 
                                                
7.2

Overall financial impact of human resources

Type of human resources

Amount €

Method of calculation *

Officials

Temporary staff

Other human resources

108.000

1*108.000 €

(give budget line)

Total

108.000

The amounts are total expenditure for twelve months.

Other administrative expenditure deriving from the action

Amount €

Method of calculation

Budget line

(number and heading)

Overall allocation (Title A7)

A0701 – Missions

A07030 – Meetings

A07031 – Compulsory committees (1)

A07032 – Non-compulsory committees (1)

A07040 – Conferences

A0705 – Studies and consultations

… Other expenditure (state which)

Information systems (A-5001/A-4300)

Other expenditure - Part A (state which)

Total

The amounts are total expenditure for twelve months.

 (1) Specify the type of committee and the group to which it belongs.

I.

II.

III.

Annual total (7.2 + 7.3)

Duration of action

Total cost of action (I x II)

108.000€

not limited

108.000€/year

The  requirements  in  terms  of  human  and  other  administrative  resources  are  to  be  met
within  the  resources  made  available  to  DG  TREN  in  the  framework  of  the  annual
allocation process.

21

 
8

FOLLOW-UP AND EVALUATION

8.1

Follow-up arrangements

The result of the measures foreseen in the draft Directive will be assessed in the light of
the future development of investment. This will be recorded in the  reports envisaged in
the Directive based on Member State submissions.

Specifically the required outputs of the Directive will be monitored at two levels:

i.

ii.

completion of individual projects of European Interest as defined by the TENS
guidelines

use of an indicator for each Member State of the % of interconnection relative to
domestic installed generation capacity with reference to the target of 10% agreed
by Heads of State at the Barcelone Summit March 2002.

The  collection  of  this  information  will  be  carried  out  using  the  existing  reporting
mechanisms  for  TENs  and  the  “benchmarking”  report  on  the  implementation  of  the
electricity and gas Directives.

8.2

Arrangements and schedule for the planned evaluation

It  is  believed  that  a  detailed  review  of  the  effectiveness  of  the  approach  set  out  in  the
Regulation  in  developing  common  rules,  as  well  as  the  effectiveness  of  the  financial
actions taken by the Commission to support this effort, should take place two years after
the entry into force of the Regulation.

9. ANTI-FRAUD MEASURES

Reimbursement of experts and payment of experts for studies carried out will be made in
compliance with applicable financial rules.

22