The European Commission has proposed new European legislation that could put Europe’s distribution system operators in a powerful position to bend market rules to their own advantage, writes Julie Finkler of NGO ClientEarth. According to Finkler, this could seriously hamper other market players, like community energy initiatives, renewable energy producers and aggregators. She calls on the European Parliament and the Member States to ensure this will not happen.

The European Parliament’s industry and energy committee (ITRE) recently adopted its position on reforming the EU’s internal energy market. This position forms part of the negotiations on the Commission’s ‘Clean Energy for All Europeans’ package.

The committee supported new rules on electricity distribution system operators (DSOs) that could change the design of Europe’s electricity market. They include creating a new EU-level entity for DSOs, an “EU DSO body”.

This body would promote coordination amongst the Europe Union’s approximately 2,750 DSOs and pave the way for them to take on more tasks to ensure their grids are smarter, flexible and capable of integrating more renewable energy resources.

Without the right legal framework, however, the EU DSO body has the potential to hinder, rather than facilitate, the transition to a renewable energy future, as it would let DSOs create their own rules and largely police themselves.

The risks of self-regulation

The EU DSO body will provide technical expertise in developing rules and best practices to promote a more flexible, clean and decentralised energy system.

The new body will also be responsible for drafting regulations known as ‘network codes’. Network codes are binding legal instruments that aim to harmonise the internal electricity market. They are key to improving competition within the internal energy market and ensuring that renewables and demand response are properly embedded in the market.

Under the Third Energy Package, the organisation ENTSO-E representing electricity transmission operators (TSOs) was granted similar powers to draft its own network codes. It has since been criticised for lacking a clear separation between its roles

Worryingly, however, these network codes would not only govern the conduct of the DSOs themselves but other market participants as well.  This puts DSOs in a position to draft regulations that may facilitate their business interests, while disadvantaging those of their competitors.

For example, under EU law, DSOs can remain closely connected to their parent utilities. This creates the potential for DSOs also to attempt to influence the content of the regulations in a manner that gives their parent utilities an unfair advantage over new market players, such as small-scale renewables, energy communities, or third-party aggregators. The risk of self-dealing is high.

What’s more, the drafting process for the regulations could be drawn out if the EU DSO tried to secure agreements from all of the potential 2,750 members and may result in ambition being diluted.

Reinventing the wheel

This is not the first time such a policy mistake has been made. Under the Third Energy Package – the current legislation governing the EU internal electricity market – the organisation ENTSO-E representing electricity transmission operators (TSOs) was granted similar powers to draft its own network codes. It has since been criticised for lacking a clear separation between its roles as a lobbyist, drafter, implementer, and overseer of network codes.

What makes matters worse is that, as the Commission’s proposal currently stands, the body would also be able to effectively monitor itself with little regulatory oversight

As proposed by the Commission, the EU DSO body risks reproducing this fundamentally flawed governance structure. This could easily compromise the EU DSOs’ ability to act independently and in the public’s interest when carrying out their work.

What makes matters worse is that, as the Commission’s proposal currently stands, the body would also be able to effectively monitor itself with little regulatory oversight.

Given the central role of DSOs in facilitating the transition to a renewable energy future, which is essential to achieving the Paris Agreement’s climate ambition, the Commission’s proposal simply doesn’t work.

Enabling a cleaner energy system and effective competition

Through its position, the ITRE committee attempts to improve some of the EU DSO body’s governance issues by:

• Requiring the EU DSO body to act independently from the interests of its members to ensure effective competition in energy markets;
• Ensuring robust regulatory oversight of the EU DSO by ACER – the European Agency for the Cooperation of Energy Regulators; and
• Clarifying that independent regulators – national regulators and ACER – will oversee the implementation of and compliance with network codes, not the industry itself.

These measures correct the flaws in the Commission’s proposal. However, almost paradoxically, the European Parliament appears to undermine these improvements by also proposing to open up the EU DSO body’s membership to existing EU-level associations who represent DSOs. Many, however, also represent the interests of energy utilities, which may try to protect and advance their interests over potential competitors and new market players.

This is clearly at odds with the obligation of DSOs to act as neutral market facilitators. If the interests of these stakeholders are reflected in the best-practice reports, recommendations and network codes drafted by the EU DSO body, the market may become biased.

If the proposed safeguards are too weak, there is a danger that the EU DSO body and the regulations it drafts will hinder the integration of renewables, storage and demand response into the grid

The European Parliament and the European Council will soon enter into trilogues and it is imperative that the outcome of the negotiations on this matter increase the EU DSO body’s legitimacy and ensure its proper functioning. The Parliament and the Council must guarantee that the new entity plays a positive and proactive role in transforming Europe’s energy system and supports further deployment and integration of renewable energy.

If the proposed safeguards are too weak, there is a danger that the EU DSO body and the regulations it drafts will hinder the integration of renewables, storage and demand response into the grid. This may ultimately delay and increase the costs of the transition to a smarter, more flexible and decarbonised energy system and jeopardise the European Union’s commitments to address climate change.

Editor’s Note:

Julie Finkler is Law and Policy Advisor at ClientEarth. She joined ClientEarth’s London office in December 2014. She holds a Master’s degree in Energy and Environment Economics from Grenoble University, France.

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