COMMISSION STAFF WORKING DOCUMENT Guidance note on Directive 2012/27/EU on energy efficiency, amending Directives 2009/125/EC and 2010/30/EC, and repealing Directives 2004/8/EC and 2006/32/EC Article 15: Energy transformation, transmission and distribution Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Implementing the Energy Efficiency Directive – Commission Guidance
Date: 2013-11-06
Institutions: European Commission
Subjects: application of EU law, energy consumption, energy distribution, energy efficiency, energy saving, energy transport, energy use, gas pipeline













EUR-Lex - 52013SC0450 - EN











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52013SC0450

COMMISSION STAFF WORKING DOCUMENT Guidance note on Directive 2012/27/EU on energy efficiency, amending Directives 2009/125/EC and 2010/30/EC, and repealing Directives 2004/8/EC and 2006/32/EC Article 15: Energy transformation, transmission and distribution Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Implementing the Energy Efficiency Directive – Commission Guidance /* SWD/2013/0450 final */









Table of Contents
A.    Introduction.. 3
B.    New roles for the different actors in the
internal energy market and new actors. 5
B1.      National energy
regulatory authorities. 5
B2.
     Transmission system operators (TSOs) and
Distribution system operators (DSOs) 6
B3.
     New actors, including aggregators. 9
C.    Energy efficiency criteria in network tariffs
and regulation.. 10
C1.
     Providing incentives for the deployment of smart
grids. 11
C2.      Energy efficiency criteria for electricity network
tariffs. 12
D.    Measures to enable and develop demand response.. 13
D1.
     Role of national regulatory authorities, TSOs and
DSOs. 15
D2.
     Effective price signals. 15
D3.
     Market access, participation and transparency. 16
E.    Energy efficiency in network design and
operation of the gas and electricity infrastructure.. 17
F.    Other links to the internal energy market.. 18

Article 15: Energy Transformation, Transmission and Distribution
A.     Introduction
1.                 
The
Energy Efficiency Directive[1]
(hereinafter also ‘the Directive’ or ‘the EED’) and the Internal Energy Market
package (hereinafter also the ‘IEM’ or the 'Third Package')[2] are complementary and mutually supportive,
notably as regards the objective of promoting an efficient electricity and gas
network and contributing to improved security of supply.
2.                 
Mechanisms
to promote energy efficiency in network tariffs and regulation and grid
operation and to remove barriers to demand response are sketched in the IEM and in complementary legislation[3] and in the Energy Services Directive
(hereinafter also the 'ESD')[4],
which will be repealed by the EED as of 5 June 2014. 
3.                 
Article
15 on Energy Transformation, Transmission and Distribution of the EED and the
related Annex XI and Annex XII aim at maximising grid and infrastructure
efficiency and promoting demand response. The main obligations for
Member States in Article 15 are to ensure that:
- As
regards network tariffs and regulation,
·       
National
regulatory authorities pay due regard to energy efficiency in carrying out the
regulatory tasks specified in Directives 2009/72/EC and 2009/73/EC;
·       
Incentives
in transmission and distribution tariffs that are detrimental to the overall
efficiency (including energy efficiency) of the electricity system or those
that might hamper participation of demand response in balancing markets and
ancillary services procurement are removed; 
·       
Tariffs
allow suppliers to improve consumer participation in system efficiency,
including demand response, depending on national circumstances; and
·       
Network
regulation and tariffs fulfil the energy efficiency criteria in Annex XI,
taking into account guidelines and codes developed pursuant to Regulation (EC)
No 714/2009[5].
-
Concerning demand response,
·       
National
regulatory authorities encourage demand side resources, such as demand
response, to participate alongside supply in wholesale and retail markets; 
·       
Access
and participation of demand response in balancing, reserve and other system
services markets is promoted, requiring that the technical or contractual
modalities to promote participation of demand response in such markets
–including the participation of aggregators- be defined;
·       
High-efficiency
cogeneration operators can offer balancing services and other operational
services, where technically and economically feasible and subject to the safety
and reliability requirements of the grid; and
·       
Transmission
system operators and distribution systems operators, in meeting requirements
for balancing and ancillary services, treat demand response providers,
including aggregators, in a non-discriminatory manner (this is subject to
technical constraints inherent in managing networks).
- In
the operation and design of the gas and electricity infrastructure,
·       
National
regulatory authorities, within the framework of Directive 2009/72/EC and taking
into account the costs and benefits of each measure, provide incentives for
grid operators to improve energy efficiency;
·       
Rules
relating to the ranking of the different access and dispatch priorities, where
such priorities are granted in their electricity systems, are clearly explained
and published; and 
·       
An
assessment and improvement of energy efficiency in the design and operation of
the gas and electricity infrastructure is undertaken.
4.                 
Article
15 includes provisions that apply exclusively to electricity (last paragraph of
Article 15(1) and the related Annex XI); rules relating to the ranking of
high-efficiency cogeneration priority access and dispatch (Article 15(5)) and
its contribution to balancing and other operational services (15(6)); and
demand response (15(8). The other provisions of Article 15(1) and Article
15(2), (3) and (4) apply equally to gas and to electricity. 
5.                 
This
note provides further information to guide the implementation of measures in
the EED relating to new requirements on energy efficiency criteria for energy
network regulation and tariffs, demand response and energy efficiency in
network design and operation of the gas and electricity infrastructure. Each
section specifies first the relevant provisions of the IEM and subsequently
explains how Article 15 complements those with new obligations. The note
outlines the new requirements that are included in the legislation and the new
roles and duties of Member States, national regulatory authorities (NRAs) and
operators. 
6.                 
This
note aims to provide guidance to Member States on how to apply Article 15 of
the EED. The note states the views of the Commission services, does not alter
the legal effects of the Directive and is without prejudice to the binding
interpretation of Article 15 as provided by the Court of Justice 
B.     New roles for the different actors in the internal energy market and
new actors
B1.      National energy regulatory
authorities
7.                 
The
IEM (Article 3(11) of the Electricity Directive[6]
and Article 3(8) of the Gas Directive[7])
establishes that in order to promote energy efficiency, Member States or, where
a Member State has so provided, the regulatory authority ‘must strongly
recommend that electricity and natural gas undertakings optimise the use of
electricity and gas, for example by providing energy management services,
developing innovative pricing formulas, or introducing intelligent metering
systems or smart grids, where appropriate’.
8.                 
Such
encouragement is reinforced by the general objectives and duties of national
regulatory authorities, which are responsible for promoting a competitive,
secure and environmentally sustainable internal market in electricity/gas
networks, taking into account long-term objectives (Article 36(a) of the
Electricity Directive, Article 40(a) of the Gas Directive). Relevant long-term
objectives are European targets for the share of energy from renewable sources
in final energy consumption, energy efficiency and greenhouse gas emission
reductions. Article 36 of the Electricity Directive and Article 40 of the Gas
Directive list the general objectives of the NRA. The specific duties and
powers that Member States must grant to the NRAs are listed mainly in Articles
37 of the Electricity Directive and 41 of the Gas Directive. The two sets of
provisions are complementary and should be understood in conjunction with each
other: whilst carrying out its duties and exercising its powers, the NRA must
follow the general objectives assigned to NRAs[8].

The
core duties of NRAs include: 
·       
Duties
in relation to tariffs for access to transmission and distribution networks;
fixing or approving, in accordance with transparent criteria, transmission or distribution
tariffs or their methodologies; 
·       
Duties
in relation to unbundling: ensuring that there are no cross-subsidies between
transmission, distribution, liquefied natural gas, storage, and supply
activities;
·       
Duties
in relation to the general oversight of energy companies: ensuring compliance
of transmission and distribution system operators, system owners (where
relevant) and electricity or gas undertakings with their obligations under the
Directive and other relevant European Union legislation, including as regards
cross-border issues;
·       
Duties
in relation to consumer protection: helping to ensure, together with other
relevant authorities, that consumer protection measures, including those set
out in Annex I (to the Electricity and Gas Directives) are effective and
enforced; publishing recommendations, at least annually, in relation to
compliance of supply prices with Article 3 (of the Electricity and Gas
Directives); ensuring access to customer consumption data. 
9.                 
Article
15 of the EED adds a specific objective and duty to pursue energy efficiency,
whereby Member States must ensure that national energy regulatory authorities
pay due regard to energy efficiency in carrying out the regulatory tasks
specified in the Electricity and in the Gas Directive regarding their decisions
on the operation of the gas and electricity infrastructure.
10.             
Furthermore,
Article 15(8) of the EED establishes that Member States must ensure that
national regulatory authorities encourage demand side resources, such as demand
response, to participate alongside supply in wholesale and retail
markets.

11.             
In
addition, it follows from the wording of recital 45 of the EED that Member
States should ensure that national energy regulatory authorities take an
integrated approach encompassing potential savings in the energy supply and the
end-use sectors.
B2.      Transmission
system operators (TSOs) and Distribution system operators (DSOs)
12.             
The
IEM defines the main tasks of the TSOs and DSOs. Article 12 of the Electricity
Directive (and Article 13 of the Gas Directive) on the tasks of TSOs provide
that they must be responsible for ensuring a secure, reliable and efficient
transmission system. In the context of such an electricity system, Article
12(d) of the Electricity Directive specifies that TSOs must be responsible for
ensuring the availability of all necessary ancillary services[9], including
those provided for by demand response. 
13.             
Ancillary
services are commercial services procured by system operators (the TSOs and the
DSOs) from network users. Ancillary services procurement is one of the tools
that enable system operators to ensure the security of supply and quality of
service of the electric system. The availability of appropriate contractual and
technical structures within ancillary services is necessary for the
participation of demand response. Demand response usually provides the same
service as generation. To allow for and encourage its participation,
operational and participation rules are needed. 
14.             
Article
25 of the Electricity and Article 25 of the Gas Directive lay down the tasks of
the DSOs and states that they must carry out their responsibilities with due
regard to energy efficiency. According to Article 25(7) of the Electricity
Directive, DSOs must consider energy efficiency/demand-side management measures
or distributed generation that might supplant the need to upgrade or replace
electricity capacity when planning the development of the distribution network.
In this context, Article 2(29) of the Electricity Directive defines ‘energy
efficiency/demand-side management as a global or integrated approach aimed at
influencing the amount and timing of electricity consumption in order to reduce
primary energy consumption and peak loads by giving precedence to investments
in energy efficiency measures, or other measures, such as interruptible supply
contracts, over investments to increase generation capacity, if the former are
the most effective and economical option, taking into account the positive
environmental impact of reduced energy consumption and the security of supply
and distribution costs aspects related to it’.
Priority
access and dispatch rules for high-efficiency cogeneration
15.             
Article
15(5) of the EED complements the IEM by adding an obligation (with several
exceptions) for TSOs and DSOs to guarantee the transmission and distribution of
electricity from high-efficiency cogeneration, give it priority or guaranteed
access to the grid and give it priority dispatch, when they are in charge of
dispatching (i.e. in those Member States with such a dispatch system is
used). These provisions build on and expand on Article 8 of the Cogeneration
Directive, which already required priority dispatch by TSOs, but not by DSOs.
The priority access and dispatch rights of high-efficiency CHP are without
prejudice to the priority access and dispatch rights of electricity from
renewable sources provided in Article 16(2) of Directive 2009/28/EC[10] on the
promotion of renewable energies and Article 15 of the Electricity Directive
concerning common rules for the internal market in electricity and the need to
ensure continuity in heat supply. In addition to these obligations, TSOs and
DSOs must comply with the requirements set out in Annex XII of the EED (on
energy efficiency requirements for transmission system operators and
distribution system operators). Cogeneration is promoted as one of the
major forms of distributed generation capable of enhancing energy efficiency
also in grids due to its close location to consumers. Furthermore, the
requirement of priority access to the grid is new. This priority should only
apply to high-efficiency cogeneration, i.e. cogeneration that ensures at
least 10% primary energy savings compared to the references of separate heat
and electricity production according to Annex II of the Directive[11].
The upgrading and strengthening of the grid rules in the Cogeneration Directive
for high-efficiency CHP aims to maintain the equality of treatment of
electricity from high-efficiency cogeneration with electricity from renewable
energy sources following the strengthening of the grid rules relating to the
latter in the Renewable Energy Directive[12].
16.             
The
priority rules for high efficiency CHP originate therefore from the need to
ensure the continuity of heat supply as indicated in Article 15(5). Priority
dispatch for high-efficiency CHP is needed in view of the operational
constraints CHP operators face since when they produce heat for their heat
consumers, they must simultaneously produce electricity to achieve primary
energy savings. Therefore, when they have to ensure continuous heat supply,
they have limited flexibility to adjust the production of electricity.
Cogenerators also often do not select when they produce the electricity, since
they are subject to the need of the heat consumers to provide steam for
chemical and industrial plants or to district heating systems during cold
weather. In such circumstances, their electricity should be accepted by the
grid, so as to enable their operation in cogeneration mode. Any curtailment of
their ability to produce electricity may lead to a significant loss of
efficiency and thus would defeat the purpose of cogeneration. For these
reasons, when cogeneration operators have to serve a heat consumer, they should
also be able to feed electricity into the grid and have priority over other
electricity sources that are less efficient or more flexible. 
17.             
Under
EU law, therefore, both electricity from renewable sources and electricity from
high-efficiency CHP enjoy the right of priority dispatch under certain conditions.
Limitations on priority access and dispatch can be applied when this is needed
for the maintenance of the reliability and the safety of the grid and to ensure
its secure operation.
18.             
In
this context of equal priority access and dispatch rights for both electricity
from renewable sources and electricity from high-efficiency CHP, the need to
define the operational conditions for the implementation of these different
priority accesses and dispatch rights arises. The EED therefore requires Member
States to ensure that the rules on how the different rights will be ranked in
their electricity systems are clearly explained in detail and published in view
of the need to maintain the grids' operational security and stability, i.e.
in cases where two or more equal priority access or dispatch rights conflict
with each other. 
19.             
Due
to the characteristics of some renewable energy sources which are not always
available with the same intensity (such as wind or solar energy) and the
limited state of development of storage technologies for the electricity
produced from these variable resources, Member States must in any case ensure
that priority access of dispatch for energy from variable energy sources is not
hampered.  The differentiation made between electricity from variable and
non-variable renewable sources is based on their physical characteristics and
is objective. For other forms of electricity from renewable energy and
high-efficiency cogeneration, all of which have priority, Member States may
establish other rankings. 
Demand
response
20.             
In
the context of the requirement for Member States to promote access to and
participation of demand response, the EED (Article 15(8)) provides that Member
States must require national regulatory authorities, or TSOs and DSOs where the
national regulatory systems so require, to promote access to and participation
of demand response in balancing, reserve and other system services markets.
This requires clarifying, and if necessary changing, what the technical or
contractual requirements for participation in those markets are, e.g. minimum
required capacity, timing and duration of demand response activation, notice
time for activation, etc., in a way that is appropriate for demand side
participation. The promotion of access to and participation of demand response
should also include dedicated provisions organising the relationships between
relevant stakeholders, in particular between demand response service providers
(e.g. aggregators or energy saving companies –ESCOs–) and balance responsible
parties[13].
These may be part of technical or contractual arrangements or any other
participation procedures and be further defined and harmonised taking into
account future network codes developed pursuant to Regulation (EC) No 714/2009.
B3.      New actors, including aggregators
Further
to the definitions originating from the IEM (e.g. TSO or DSO), the Directive
refers to other actors in the energy market such as demand service providers
and defines in Article 2(45) 'aggregator' as a demand service provider that
combines multiple short-duration consumer loads for sale or auction in
organised energy markets. The role of aggregators and their participation
in demand response is further clarified in Article 15(8), which states that
TSOs and DSOs must treat aggregators and other demand response providers in a
non-discriminatory manner and on the basis of their technical capabilities in
meeting requirements for balancing and ancillary services, subject to technical
constraints inherent in managing networks. With regards to the access of demand
response to balancing, reserve and other system services markets, Article 15(8)
establishes that the technical specifications for participation in these
markets must include the participation of aggregators[14]. 
21.             
Some
types of cogeneration may be capable of a mode of operation that technically
and economically enables them to provide flexible generation and storage. These
cogeneration operators, including micro-cogenerators, should be able to
participate in balancing markets, including demand response. Technical
specifications for the participation in balancing, reserve and ancillary
services market should be expanded for the participation of some types
cogeneration installations in accordance with Article 15(6) and (8). 
22.             
In
summary, Member States must do the following things;
1.      Ensure that national
regulatory authorities pay due regard to energy efficiency in carrying out
their regulatory tasks and that they encourage demand side resources, such as
demand response, to participate alongside supply in wholesale and retail
markets.
2.      Provide clear
and transparent rules on how the different priority rights will be ranked in
their electricity systems, which allow TSO and DSOs to (a) guarantee the
transmission and distribution of electricity from high-efficiency cogeneration;
(b) give it priority or guaranteed access to the grid and (c) when they are in
charge of dispatching, give it priority dispatch.
3.      Require national
regulatory authorities, or if the national regulatory system so require TSOs
and DSOs, the definition of technical modalities for demand response
participation in balancing, reserve and other system services markets. These
technical specifications must include the participation of aggregators and
potential actors from cogeneration installations. 
C.        Energy
efficiency criteria in network tariffs and regulation
23.             
The
Electricity Directive (Article 37(1)(a) and (6)) provides that national
regulatory authorities must be given the duty of fixing or approving – in
accordance with transparent criteria – transmission and distribution tariffs or
their methodologies. In carrying out those tasks, national regulatory
authorities should take account of the long-term, marginal avoided network
costs from distributed generation and demand-side management measures while
respecting that the Electricity Directive (Article 37(6a) provides that those
tariffs or methodologies must allow the necessary investments in the networks
to be carried out in a manner allowing those investments to ensure the
viability of the networks. Article 37(8) of the same Directive establishes that
in fixing or approving the tariffs or methodologies and the rules for balancing
services, the regulatory authorities must ensure that TSOs and DSOs are granted
appropriate incentives, over both the short and long term, to increase
efficiencies, foster market integration and security of supply and support the
related research activities. It follows from the text of the Electricity and
Gas Directives that NRAs have the duty of fixing or approving not only network
tariffs or their methodologies, but also methodologies used to calculate or
establish the terms and conditions for connection and access to national
networks, the provision of balancing services and access to cross-border
infrastructures. 
24.             
Article
10(1) of the Energy Services Directive imposed obligations on Member States on
energy efficient tariffs and regulation, requiring the removal of incentives in
transmission and distribution tariffs that unnecessarily increase the volume of
distributed or transmitted energy. In addition, it gave Member States the
possibility of imposing public service obligations relating to energy
efficiency on undertakings operating in the electricity market.  With this
provision, the Energy Services Directive supported regulatory incentives that
encourage energy efficiency gains and lower peak investment needs and the
removal of volume-based incentives, moving from a volume-based model into a
quality and efficiency based model. 
25.             
The
EED builds energy efficiency criteria into the design of network tariffs and
regulation. It also follows from the wording of recital 45 and Article 15(1)
that in the context of the continuing deployment of smart grids, Member States
should ensure that national energy regulatory authorities are able to ensure
that network tariffs and regulations incentivise improvements in energy
efficiency, e.g. via providing incentives to make available system services to
network users. Improvements in energy efficiency include facilitating demand
side participation for instance in reserve markets. A possible incentive may
the inclusion of an incentive in the grid tariff to reward flexibility, for
instance reducing the fee significantly for customers that reduce their load
during peak times and shift it to off-peak. Similarly, adapting the technical
standards for participating in reserves markets in a way that does not increase
the network fee. Stimulating the participation of such flexible loads may
require amendments to the existing regulatory framework, for instance the
network tariff methodology, to avoid excluding flexible loads from the
balancing market and incentivise users to reshape their load profile in line
with network needs.
C1.      Providing
incentives for the deployment of smart grids
26.             
A
common policy view is that regulatory and market structures need to adjust to
the development of renewable energy, electrification of demand (notably
transport), the deployment of smart grids and more generally to a need to
increase flexible capacities. Sources of flexibility can include demand side
resources, distributed generation and energy from cogeneration and storage.
27.             
The
Electricity Directive encourages Member States to deploy Smart Grids, which
should be built in a way that encourages decentralised generation and energy
efficiency. The Smart Grids Task Force (SGTF)[15]
suggested that common criteria to assist Member States in the assessment of
costs and benefits of measures needed to deploy smart grids should be put
forward. The SGTF suggested that these should be based on quantifiable
indicators such as improved energy efficiency and energy savings or lower bills
due to better customer feedback. In this context, guidance and advice for
conducting cost-benefit analysis of smart grids projects was provided in 2012[16].
28.             
The
EED establishes that Member States must ensure that national energy regulatory
authorities, through the development of network tariffs and regulations and
taking into account the costs and benefits of each measure, provide incentives
to TSOs and DSOs to make available to network users (e.g. generators,
retailers, consumers, storage owners, aggregators) system services permitting
them to take advantage of the energy efficiency potential of smart grids
(Article 15(1)). 
29.             
As
the term is undefined in the EED it is necessary to decide how to interpret 'system
services'. Article 2(18) of the Electricity Directive defines ‘system
user’ as ‘a natural or legal person supplying to, or being supplied by,
a transmission or distribution system’. In the light of this, it would seem
sensible to conclude that for the purposes of the EED, the term ‘system
services’ should be understood as everything that relates to supplying to,
or being supplied by, a transmission or distribution system or network and
maintaining the balancing of the system, i.e. supply matches demand.
This could include facilities supplying ancillary services as well as all
services to the system which help to increase its efficiency and/or lower
consumption within organised electricity markets. These services can include
demand response, demand management, management of distributed generation and
decentralized storage and other such services. System services could be
procured by TSOs and DSOs from network users, according to their technical
capabilities.
30.             
The
EED establishes that network tariffs and regulation must not prevent TSOs, DSOs
or energy retailers from offering or making available, as system services, in ‘organised
electricity markets[17]‘
measures listed in Annex XI(2) to: 
i.                        
Shift
customers’ demand from peak to off-peak (taking into account the availability
of renewable energy, energy from cogeneration and distributed generation); 
ii.                       
Induce
customers to reduce demand;
iii.                     
Store
energy; or
iv.                     
Connect
or dispatch electricity from distributed generation.
31.             
The
Commission's Communication on Smart Grids[18]
and its accompanying staff working document on definitions, expected services,
functionalities and benefits of smart grids[19]
provides similar examples of services to be provided in smart grids, such as
the integration of distributed energy resources (both large and small-scale
renewable generation, heat pumps, electric vehicles and storage), allowing
consumers to modify their behaviour according to price and load signals or
promoting the active participation of all actors in the electricity market
through the promotion of demand response programmes.  
C2.      Energy
efficiency criteria for electricity network tariffs
32.             
With
regard to electricity, Article 15(1) requires Member States to ensure that
network regulation and tariffs fulfil the criteria in Annex XI (on 'Energy
efficiency criteria for energy network regulation and for electricity network
tariffs').
33.             
In
this regard, network tariffs must reflect reductions in network costs resulting
from demand management, demand response and distributed generation. This means
that national regulatory authorities must take account of these reduced costs
(and efficiency gains) when fixing or approving tariffs, or the methodologies
underlying the calculation of tariffs. 
34.             
Cogeneration,
like distributed generation, can provide significant grid efficiency
improvement through avoided grid losses. Member States may therefore want to
encourage high-efficiency cogeneration to be sited close to areas of demand by
reducing connection and use-of-system charges, to encourage high-efficiency
cogeneration to be located close to areas of demand. 
35.             
Article
15(4) complements Article 15(1) and Annex XI(1) and (2) by requiring the
removal of network tariff rates for transmission and distribution that are
detrimental to the overall efficiency (including energy efficiency) of the
generation, transmission, distribution and supply of electricity. This requires
assessing tariffs with respect to their efficiency, including energy efficiency,
and the removal of tariffs or part of tariffs that are detrimental from an
efficiency point of view. This could for example mean looking at whether the
tariff design sends price signals that encourage more rather than less energy
consumption or focuses on fixed rather than volumetric charges that do not
encourage customer energy efficiency. Furthermore, demand response is a way to
tap the potential of energy efficient use of infrastructure and therefore
incentives in tariffs and regulations should reflect signals to power saving or
optimal utilisation of energy infrastructure assets resulting from increased
demand side participation, including demand response.
36.             
Repeating
Article 10(2) of the ESD, Article 15(3) of the EED provides that Member States
may permit components of schemes and tariff structures with a social aim for
net-bound energy transmission and distribution, provided that any disruptive
effects on the transmission and distribution system are kept to the minimum and
are not disproportionate to the social aim.
37.             
In
summary, Member States must do the following things:
1.      Ensure that
national energy regulatory authorities provide incentives to TSOs and DSOs to
make available to network users (e.g. generators, retailers, consumers, storage
owners, aggregators) system services permitting them to take advantage of the
energy efficiency potential of smart grids.
2.      Ensure that
network tariffs and regulations fulfil the energy efficiency criteria in Annex
XI and are cost-reflective of cost-savings resulting from demand management,
demand response and distributed generation.  
3.      Ensure the
removal of network tariff rates for transmission and distribution that are
detrimental to the overall efficiency, including energy efficiency, of
generation, transmission, distribution and supply of electricity.
D.    Measures to enable and develop demand response
38.             
Demand
response can be defined[20]
as changes in electricity usage by end-use customers from their normal or
current consumption patterns in response to market signals, such as
time-variable electricity prices or incentive payments, or in response to
acceptance of the consumer's bid, alone or through aggregation, to sell demand
reduction at a price in organised electricity markets. The objective of such
market signals is to induce modulation (increase or reduction) of electricity
usage and to optimise usage and balancing of networks and electricity
production and consumption, for example by consuming less during peak times or
by facilitating the integration of electricity from variable renewable energy
sources and micro-generation. Although sometimes a differentiation is drawn
between different types of demand response (e.g. consumer vs. industrial,
price/load led vs. incentive contracts, etc), demand response includes all
intentional modifications to consumption patterns of electricity of end-use
customers that are intended to alter the timing, level of instantaneous demand
or the total of electricity consumption.
39.             
The
term 'demand response' in the Directive encompasses demand response both
as a result of innovative pricing to stimulate final customers to modulate
their consumption and through load shifting by e.g. industrial customers or
through aggregators.
40.             
Demand
response is at the core of the development of smart grids and the more
efficient management of networks they will bring. Demand response initiatives
can and should also be stimulated without a smart grid. 
41.             
Mechanisms
to remove the barriers to demand response are set out in the Electricity
Directive and in the ESD. The EED builds on both and elaborates further,
promoting its access to and participation in the market and the removal of
existing barriers. Recitals 44 and 45 read as follows:
‘(44) Demand response is
an important instrument for improving energy efficiency, since it significantly
increases the opportunities for consumers or third parties nominated by them to
take action on consumption and billing information and thus provides a
mechanism to reduce or shift consumption, resulting in energy savings in both
final consumption and, through the more optimal use of networks and generation
assets, in energy generation, transmission and distribution.’
‘(45) Demand
response can be based on final customers' responses to price signals or on
building automation. Conditions for, and access to, demand response should be
improved, including for small final consumers. Taking into account the
continuing deployment of smart grids, Member States should therefore ensure
that national energy regulatory authorities are able to ensure that network
tariffs and regulations incentivise improvements in energy efficiency and
support dynamic pricing for demand response measures by final customers. Market
integration and equal market entry opportunities for demand-side resources (supply
and consumer loads) alongside generation should be pursued. In addition, Member
States should ensure that national energy regulatory authorities take an
integrated approach encompassing potential savings in the energy supply and the
end-use sectors.’
42.             
The
Directive, in Article 15(8), gives a mandate to national regulatory authorities
to encourage demand response; requires network operators – TSOs and DSOs – to
treat demand response providers (both individual consumers and third parties
acting on behalf of groups of consumers in aggregate) in a non-discriminatory
way in meeting requirements for balancing and ancillary services; and ensures
that the appropriate technical or contractual modalities for participation of
demand response in balancing, reserve and other system services markets be
defined. 
D1.      Role
of national regulatory authorities, TSOs and DSOs
43.             
Article
15(8) establishes that Member States must ensure that national energy
regulatory authorities encourage the participation of demand side resources,
including demand response, alongside supply in wholesale and retail markets.
This requires the design of operational and participation rules accordingly, to
enable the procurement of flexibility from the market. It also requires the
adaptation of grid connection and access rules for demand side resources to
meet the need for flexibility. Demand-side resources refer to the full range of
consumer or customer-based resources, such as demand response, distributed
generation or end-use energy efficiency, which reduce energy needs. 
44.             
Network
operators – TSOs and DSOs – must ensure that balancing services and other
operational services are part of a services bidding process which is
transparent and non-discriminatory. Member States must also ensure that TSOs and
DSOs treat demand response providers, including demand aggregators, in a
non-discriminatory way and on the basis of their technical capabilities
(Article 15(8)). 
D2.      Effective
price signals
45.             
The
Electricity Directive establishes that in order to promote energy efficiency,
Member States or, where a Member State has so provided, the regulatory
authority must recommend that electricity undertakings optimise the use of
electricity, for example by developing innovative pricing formulas. 
46.             
Effective
price signals are important to encourage efficient use of energy and demand
response.  In this context, recital 45 indicates that Member States should
ensure that national energy regulatory authorities are able to ensure that
network tariffs and regulations support dynamic pricing for demand response
measures by final customers. 
47.             
Furthermore,
and in addition to the measures described in section C2, Annex XI refers to
different possibilities for network and retail tariffs to support dynamic
pricing for demand response, such as: 
a)           
Time
of use tariffs, whereby electricity prices are set for a specific time period
and known in advance;
b)           
Critical
peak pricing, which requires that time of use prices are in effect for certain
peak days, where prices may reflect the cost of generating and/or purchasing at
wholesale level;
c)           
Real
time pricing, also referred to as ‘dynamic pricing’, whereby electricity prices
may change as often as hourly, exceptionally more often; and
d)           
Peak
time rebates, which are monetary rewards in exchange for participating in the
market.
48.             
According
to Article 15(4), Member States must ensure the removal of those incentives in
transmission and distribution tariffs that might hamper participation of demand
response in balancing markets and ancillary services procurement. 
D3.      Market
access, participation and transparency
49.             
As
explained in section C, Article 15(8) establishes that demand side resources
such as demand response should participate alongside supply in wholesale and
retail markets. Recital 45 also indicates that market integration and equal
market entry opportunities for demand-side resources alongside generation
should be pursued. This includes both removing potential regulatory barriers
and more direct interventions to ensure demand side participation Participation
of demand response in wholesale and retail markets shall also be possible via
an aggregator.
50.             
Under
the Electricity Directive, Member States must ensure the possibility of
providing for energy efficiency/demand-side management measures through a
tendering procedure or any procedure equivalent in terms of transparency and
non-discrimination, on the basis of published criteria. It is also provided in
this Directive that transmission system operators should facilitate the
participation of final customers and final customers' aggregators in reserve,
balancing and other ancillary/system services markets. This possibility of
tendering for new capacity or opting for energy efficiency and demand-side
measures is also acknowledged in the Energy Services Directive (and in the
earlier Electricity Directive of 2003).
51.             
The
EED establishes that market access for demand response needs to be enabled by
clear network and market rules. Accordingly, Article 15(8) establishes that
Member States must promote access to and participation of demand response in
balancing, reserve and other system services markets. 
52.             
To
this end, Member States must arrange for the technical modalities to be defined
to promote participation of demand response balancing, reserve and other system
services markets, including the participation of aggregators. This may mean in
practice providing a detailed description of tender specifications and of the
tendering procedure - or any equivalent participation procedure - to be
followed. These participation procedures will be based on the technical or
operational requirements of the balancing, reserves and other system services
markets and the capabilities of demand response. The aim is to guarantee that
technical rules and requirements exist based on which demand response can be
part of the balancing and other system services. Possible examples of technical
modalities to promote participation of demand response could include providing
clarity on the minimum aggregated capacity needed for participation, baseline
measurement methodology, maximum duration of demand response activation, timing
of demand activation, notice time for activation of demand response, frequency
of demand response activation, penalty requirement, tender duration timeframe, long
enough contract terms to incentivize full engagement, the option to bid on
positive or negative capacity as well as clarity on information exchange, when
demand response capacities are activated, between third parties (e.g.
aggregators) and suppliers.
53.             
Depending
on the requirements of the national regulatory system, Member States may
require the definition of the technical modalities for market participation to
be undertaken by national regulatory authorities or by transmission system
operators and distribution system operators in close cooperation with demand
service providers and consumers. 
54.             
In
summary, Member States must comply with the following obligations:
1.      Ensure that
national energy regulatory authorities encourage the participation of demand
side resources, including demand response, alongside supply in wholesale and
retail markets.
2.      Ensure –
subject to technical constraints inherent in managing networks - that TSOs and
DSOs treat demand response providers, including demand aggregators in a non-discriminatory
way and on the basis of their technical capabilities.
3.      Promote -
subject to technical constraints inherent in managing networks - access to and
participation of demand response in balancing, reserve and other system
services markets, requiring that the technical or contractual modalities to
promote participation of demand response in balancing, reserve and other system
services markets - including the participation of aggregators - be defined.
4.      Ensure the
removal of those incentives in transmission and distribution tariffs that might
hamper participation of demand response in balancing markets and ancillary
services procurement.
E.     Energy efficiency in network design and operation of the gas and
electricity infrastructure
55.             
The
Directive requires Member States to incorporate energy efficiency in network
design and operation of the gas and electricity infrastructure. 
56.             
Member
States must ensure that national regulatory authorities pay due regard to
energy efficiency in their decisions on the operation of the gas and
electricity infrastructure (Article 15(1).
57.             
Member
States must also ensure that network operators have incentives to improve the
efficiency of infrastructure design and operation. By June 2015, they must
ensure that the energy efficiency potentials of their gas and electricity
infrastructure are assessed and measures and investments for the introduction
of cost-effective energy efficiency improvements in the network infrastructure
are identified, with a timetable for their introduction (Article 15(2)). This
assessment may look into the balance to be struck between the use of the full
potential for greater flexibility within the grid of distributed generation and
demand side resources (a large share of which will be connected to low and
medium-voltage distribution networks) and grid optimisation, including reduced
grid losses and network reinforcement. This may require a new approach to grid
design, with long term network planning that properly accounts for demand side
contribution to ensuring generation adequacy. 
58.             
In
accordance with Article 15(2) the assessment referred to in the previous
paragraph must look in particular at energy efficiency potentials regarding
transmission, distribution, load management and interoperability and connection
to energy generating installations, including access possibilities for
micro-generators (both for gas and for electricity infrastructure design and
operation). The assessment may therefore explore an optimal utilisation of
energy infrastructure assets, increased energy efficiency measures and demand
side participation and upgraded or modernised infrastructure for the reduction
of technical and operational losses, which in turn could allow reducing the
need for investing in new infrastructure. Additional examples may be found in
connection with CHP and district heating and cooling networks, natural gas
vehicles, optimisation and enhanced automation and monitoring of networks.
59.             
In
summary, Member States have the following obligations:
1.      Ensure that
network operators have incentives to improve the efficiency of infrastructure
design and operation.
2.      By June 2015,
ensure that an assessment is made of the energy potentials of their gas and
electricity infrastructures and measures and investments for the introduction
of cost-effective energy efficiency improvements in the network infrastructure
are identified, with a timetable for their introduction.
F.      Other links to the internal energy market
60.             
When
implementing Article 15 of the EED, Member States, national regulatory authorities
and network operators should be aware of the network codes that are being
developed to implement the IEM legislation and notably those on system
operation, demand connection and balancing. 
[1] Directive 2012/27/EU of the European Parliament and of the Council
of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and
2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC, OJ L 315,
14.11.2012, p. 1.
[2]  Directives 2009/72/EC and 2009/73/EC, Regulations (EC) No
713/2009, 714/2009 and 715/2009.
[3]  Regulation on wholesale market transparency and integrity in
energy, REMIT, and the proposed Regulation on guidelines for trans-European
energy infrastructure.
[4] Directive 2006/32/EC of the European Parliament and of the Council
of 5 April 2006 on energy end-use efficiency and energy services, OJ  L114,
27.4.2006, p.64.
[5] Regulation (EC) No 714/2009 of the European Parliament and of the
Council of 13 July 2009 on conditions for access to the network for
cross-border exchanges in electricity and repealing Regulation (EC) No
1228/2003,  OJ L 211, 14.8.2009, p. 15–35.
[6] Directive 2009/72/EC of the European Parliament  and of the Council
of 13 July 2009 concerning common rules for the internal market in electricity
and repealing Directive 2003/54/EC, OJ L211, 14.8.2009, p.55.
[7] Directive 2009/73/EC of the European Parliament and of the Council
of 13 July 2009 concerning common rules for the internal market in natural gas
and repealing Directive 2003/55/EC, OJ L211, 14.8.2009, p.94.
[8] For additional clarification on the general objectives, duties and
powers of the regulatory authorities, please look at the interpretative note on
Directive 2009/72/EC and Directive 2009/73/EC “The regulatory authorities”, (http://ec.europa.eu/energy/gas_electricity/interpretative_notes/doc/implementation_notes/2010_01_21_the_regulatory_authorities.pdf).
 
[9] According
to Article 2(17) of the Electricity Directive, 'ancillary service' means a
service necessary for the operation of a transmission or distribution system.
Similarly, Article 2(14) of the Gas Directive defines 'ancillary services' as all services necessary for access to and the
operation of transmission networks, distribution networks, liquefied natural
gas (LNG) facilities, and/or storage facilities, including load balancing,
blending and injection of inert gases, but not including facilities reserved
exclusively for transmission system operators carrying out their functions.
[10] Directive 2009/28/EC of the European Parliament and of the Council
of 23 April 2009 on the promotion of the use of energy from renewable sources
and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC 
OJ L 140, 5.6.2009, p. 16–62
[11] The calculation of electricity from high-efficiency cogeneration
must follow the calculation methodologies in Annex I using the detailed
guidelines laid-down in Commission Decision 2008/952/EC and the reference
efficiency values for separate heat and electricity production established in
Commission Implementing Decision 2011/877/EU (see Article 14(10) and Annex I,
last paragraph).
[12] See Interpretative Note on grid rules for high-efficiency CHP in
Article 8 of the Directive 2004/8/EC on the promotion of cogeneration
(SWD/2012/13) available at: http://ec.europa.eu/energy/efficiency/cogeneration/doc/2012swd0013.pdf.

[13] Balance or balancing responsible parties are responsible for
compilation of the balance between supply of energy and anticipated consumption
of energy with any numbers of generators or loads
in its balance area.
[14] The International Energy Agency states that ‘aggregation’ of
flexible energy resources means that a third party collects and implements a
portfolio of flexible energy resources and operates them combined as a flexible
resource on the energy market such as the whole sale electricity market. The
aggregator may also offer the aggregated flexible resources to the market for
system reserves or as ancillary services for the operators of energy
distribution networks. The term Virtual Power Plant has roughly the same
meaning as distributed energy resources aggregation (‘Integration of Demand
Side Management, distributed generation, renewable energy sources and energy
storages. State of the art report’).
[15] The Smart Grids Task Force (SGTF) was set up
by the European Commission (EC) at the end of 2009. The SGTF reached a
consensus over the last years on policy and regulatory directions for the
deployment of Smart Grids. The SGTF has also issued key recommendations for
standardisation, consumer data privacy and security.
[16] JRC reference report “Guidelines for conducting a cost-benefit
analysis of smart grid projects”, 2012 (http://ec.europa.eu/energy/gas_electricity/smartgrids/smartgrids_en.htm
).
[17] For the purpose of this provision the term 'organised electricity
markets' includes over-the-counter markets and electricity exchanges for trading
energy, capacity, balancing and ancillary services in all timeframes, including
forward, day-ahead and intra-day markets. 
[18] ‘Smart grids: from innovation to deployment’, COM(2011) 202 final.
[19] SEC(2011) 463 final.
[20] See for instance the definition by the International Energy Agency,
which says that ‘demand response or demand side response are programs and
activities designed to encourage consumers to change their electricity usage
patterns, including timing and level of electricity demand, covering all load
shape and customer objectives. Demand response includes time-of-use and dynamic
rates or pricing, reliability programs such as direct load control of devices
and instantaneous interruptible load, and other market options for demand
changes (like demand side bidding)’ (‘Integration of Demand Side Management,
distributed generation, renewable energy sources and energy storages. State of
the art report’).