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╇ i

INTRODUCTION TO EU ENERGY LAW

ii
iii

Introduction to EU
Energy Law
KIM TALUS
Professor of European Economic and Energy Law,
UEF Law School, University of Eastern Finland

1
iv

1
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Kim Talus 2016
The moral rights of the author have been asserted
First Edition published in 2016
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
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above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Crown copyright material is reproduced under Class Licence
Number C01P0000148 with the permission of OPSI
and the Queen’s Printer for Scotland
Published in the United States of America by Oxford University Press
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CPI Group (UK) Ltd, Croydon, CR0 4YY
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
╇ v

Preface

Having taught EU energy law in various programmes at my home

universities, the University of Eastern Finland (UEF Law School)
and the University of Helsinki, as well as in countries such as
Germany (the University of Bonn), the United States (the University
of Houston), and Australia (University College London), and given
lectures in this area in many other countries and universities, it
is easy to see that up to now there has been a gap in the litera-
ture on EU law. A basic book on what EU energy law really is has
been missing. Excellent books written by colleagues like Angus
Johnston and Guy Block, and the books I have published with
Oxford University Press and other publishers, are not designed for
entry-╉level students. In order to obtain an overall picture of EU
energy law and policy, one does not need to dwell on the details of
the regulatory framework. One should instead familiarize oneself
with the basic principles of the subject area as laid down in the key
legal instruments and cases. Once this initial work has been done,
a student can move on to the details and intricacies of EU energy
law and policy.
This book, therefore, covers the most essential elements of EU
energy law. It has been written for students of two types. The first
of these is the LLM student from outside the EU who may have
prior knowledge of energy markets and their regulation at either
upstream or downstream level, but lacks knowledge of the EU
legal context. The second type is the student who understands the
way in which the EU works, which is to say that they have previ-
ously taken a course in European law or European studies, but
has not studied energy law in its own right. This book offers the
first group a knowledge of EU energy regulation and its objectives,
and the second an introduction to energy law. It is also suitable for
engineers, economists, and others wishing to understand how EU
energy law and policy work.
A list of further reading is provided at the end of each chapter for
the benefit of those who would like to learn more about a specific
area of EU energy law. To help students with their initial researches
into EU energy law and policy, the section on further reading also
vi

vi Preface

contains a list of the most important judicial and administrative

cases in the given area.
The book covers both the content of sector-​specific energy regu-
lation and the application and impact of general EU law on energy
markets. As far as sector-​specific energy regulation is concerned,
only the most fundamental elements are examined. These include
third-​party access, unbundling, investment in cross-​border net-
works, energy trading, and market supervision. In respect of Treaty
law, the focus is on three areas: the application of general EU com-
petition law on energy markets; the impact of free-​movement pro-
visions in this area; and the application of state-​aid rules, which are
examined both in a separate chapter and in relation to the promo-
tion of renewable energy.
In addition to these market rules, the book also examines sus-
tainability issues, renewable energy, and energy efficiency, as well
as some of the key elements of external energy relations. The final
chapter provides some examples on how EU energy law and policy
interact with other EU policy areas and shows how an understand-
ing of energy law by itself is not enough for practising lawyers.
Instead, practical application of energy law and policy requires
knowledge of other areas like the environment, land planning, ad-
ministrative law, and others.
As the book is intended as a first reader for students of EU energy
law and policy, it restricts itself to covering existing regulations and
policies and does not engage in more speculative discussion about
the future trends of EU energy law and policy.
This book is partly written under the Academy of Finland fund-
ing for the project (276974) ‘Impact of shale gas in EU energy law
and policy; regulatory and institutional perspective’.
╇ vii

Contents

About the Author xi

Introduction: Development of EU Energy Law

and Policy 1
Energy and the Early Development of the EU 1
European Energy Law and Policy 3

1. The Vertical Division of Competences between

the European Union and Its Member States in
the Energy Sector 7
1.1 The Principles Governing the Distribution of Competence 7
1.2 Categories of Competence 8
1.3 The EU’s Competence to Enter
into International Agreements 10
1.4 Competence in the Energy Sector 11
Further Reading 14

2. Sector-╉Specific Regulation of the Energy Market:

Background and General Overview 15
2.1 Introduction 15
2.2 Third-╉Party Access to Electricity
and Natural-╉Gas Networks 19
2.3 Unbundling of Energy Companies 24
2.4. Public-╉Service Obligations in EU Energy Markets 29
2.4.1 Public-╉service obligation 29
2.5 Investment in Trans-╉European Networks 32
2.5.1 Investments in cross-╉border infrastructure
by transmission system operators 33
2.5.2 Private infrastructure investment 37
2.6 Energy Trading 42
2.7 National and EU Energy Market Authorities 48
2.7.1 National energy market authorities 48
2.7.2 The Agency for the Coordination of Energy
Regulators (ACER) 52
viii

viii Contents

2.8 Conclusion 54
Further Reading 55

3. Applying EU Competition Law to

the Energy Markets 57
3.1 Introduction 57
3.2 Article 101 TFEU and Prohibited Cooperation
between Undertakings 58
3.3 Article 102 TFEU and Abuse of a Dominant Position 62
3.3.1 Evaluating a dominant position 63
3.3.2 Evaluating abuse of a dominant position 65
3.4 Energy Infrastructures and EU Competition Law 68
3.4.1 Essential facilities and the energy markets 69
3.4.2 Natural-​gas pipelines and electricity networks
as essential facilities: an overview of the recent
case law in Europe 71
3.4.3 Evaluation of the cases: which commodities
constitute essential facilities? 75
3.4.4 Evaluation of the cases: which activities constitute
abuse of essential facilities? 76
3.5 Energy Contracts and EU Competition Law 76
3.5.1 Long-​term contracts in the energy markets 78
3.5.2 Territorial restrictions in natural-​gas contracts 82
3.6 Conclusion 84
Further Reading 85

4. Treaty Freedoms and EU Energy Markets 87

4.1 Introduction 87
4.2 Free Movement of Goods under EU Law 88
4.3 Free Movement of Goods and Energy 90
4.4 Free Movement of Capital and Energy 100
4.5 Conclusion 102
Further Reading 103

5. State Aid in the Energy Sector 105

5.1 Introduction 105
5.2 State Aid under EU Law: The Four
Cumulative Criteria 106
5.3 State Aid in the Energy Industry 110
ix

Contents ix

5.4 Conclusion 116

Further Reading 117

6. Sustainable Development and EU Energy Law 119

6.1 Introduction 119
6.2 Renewable Energy in Electricity Production 122
6.2.1 Energy regulation at EU level 122
6.2.2 National support schemes for the use
of renewable energy in electricity production 124
6.2.3 Biofuels for transport 126
6.3 Energy Efficiency 127
6.3.1 The Energy Efficiency Directive 129
6.3.2 The energy performance of buildings 130
6.3.3 Provision of information on the energy
consumption of energy-​related products 131
6.4 Emission Reduction and Control in the EU 132
6.4.1 Energy taxation 133
6.4.2 The Industrial Emissions Directive 134
6.4.3 The emission trading scheme 136
6.5 Conclusion 137
Further Reading 138

7. External Elements of EU Energy Law 141

7.1 Introduction 141
7.2 The Energy Community 143
7.3 Energy Investments and the Energy Charter Treaty 145
7.3.1 The Energy Charter Treaty and investment: scope 147
7.3.2 The Energy Charter Treaty: material provisions
on investment 148
7.3.3 Energy disputes under the Energy Charter Treaty 149
7.4 Conclusion 153
Further Reading 153

8. Cross-​Cutting Issues: Examples of Areas Where Energy

Law and Policy Interact with Other EU Policies 155
8.1 Introduction 155
8.2 Waste-​to-​Energy: At the Crossroads of EU Energy
and Waste Policy 156
8.2.1 EU waste and energy law and policy 158
8.2.2 Waste-​based fuels and the EU’s waste hierarchy 159
x

x Contents

8.3 Cross-​Border Pipeline Projects: Applicable Laws,

Required Assessments, and Necessary Permits 164

Conclusion 169

Index 171
xi

About the Author

Kim Talus is a Professor of European Economic and Energy

Law at UEF Law School, University of Eastern Finland. He is
also Codirector of the Center for Climate Change, Energy and
Environmental Law (http://​www.uef.fi/​en/​cceel) and an expert
member of the Finnish Market Court, where he acts in energy cases.
His research and other activities focus on international, com-
parative, and European energy law; more specifically, international
upstream petroleum law and regulation and EU energy law and
policy. He has published widely in these areas and is a frequent
speaker at international conferences. He has held teaching posi-
tions at University College London, the University of Houston, and
Bonn University. He is the Editor-​in-​Chief for Oil, Gas and Energy
Law (www.ogel.org) and a member of the editorial board for the
Journal of World Energy Law and Business.
He works frequently with companies, public authorities, and
governments in various areas of energy law and policy.
xii
1

Introduction
Development of EU Energy Law
and Policy

Energy and the Early Development of the EU

The Second World War left Europe broken and divided. One of
the key ideologies behind rebuilding it was to prevent future wars
or conflicts from ever taking place. Europe had by that point suf-
fered two extensive and disastrous wars and the goal of prevent-
ing the possibility of a new military conflict lay at the very heart of
the establishment of the European Community. French Minister of
Foreign Affairs Robert Schuman’s plan to combine the production
of coal and steel was based on this very idea. Schuman proposed a
new type of political cooperation, which, in his view, would not only
prevent future wars within Europe in principle but also make waging
them impossible in practice. The central plank of the cooperation
Schuman envisaged involved placing coal and steel production in the
Ruhr under common, supranational control. At that time, steel was
needed to build the machinery of war, while coal was the primary
raw material for the production of energy, and therefore both were
vital in driving national economies during wartime as well as in times
of peace.
The European Coal and Steel Community (ECSC) was founded
in 1951. In addition to Germany and France, its original members
included Italy, Belgium, the Netherlands, and Luxembourg. Quite
soon after this, in 1957, the European Economic Community
(EEC) was established under the Treaty of Rome, which concen-
trated on economic integration. The European Atomic Energy
Community was established in the same year on the basis of the
Euratom Treaty.

Introduction to EU Energy Law. First Edition. Kim Talus. ©Kim Talus 2016. Published
2016 by Oxford University Press.
2

2 Introduction

Questions regarding energy have, therefore, formed a central

part of the process of European integration from the very begin-
ning.1 Two of the three founding Treaties focused on energy: the
Coal and Steel Community Treaty and the Atomic Energy Treaty.
With the notorious Costa v Enel case in the European Court of
Justice dealing with electricity, it was also clear from early on that
the European Economic Community Treaty would apply to the
energy sector. That said, in those early days energy was considered
too sensitive and political an issue, and too closely bound up with
national sovereignty, to be effectively regulated at European level.
Today, the European Union (EU), into which the ECSC and
EEC have evolved, is a community of twenty-​eight Member States
committed to economic integration. However, unlike in the 1950s
when the process of European integration was first initiated, the EU
nowadays stands for much more than just economic integration.
Criminal law and social matters, for example, now form part of
the EU’s sphere of competence, and its legal regime also extends to
human rights issues. In many ways, the EU is a moving target. Over
the years, it has undergone continuous geographical expansion.
New Member States join the EU and in some areas, such as energy
through the Energy Community,2 the application of EU laws ex-
tends to new areas beyond its borders. But that is not the only way
in which the EU is changing. There are also constant developments
in law and policy, which push the process of European integra-
tion deeper and deeper: new competences, new institutions, and a
continuous movement towards a more and more federal structure
driven partly by the EU institutions and the Member States, but
also by the Court of Justice of the European Union (CJEU).
In short, the process of European integration, as described above,
began in the 1950s and is still very much ongoing. This fact has af-
fected both the substance and the geographical application of the
EU acquis.3 Despite this, energy remains one of the most important
topics within the EU.4

1 For an overview of the history and development of EU energy law, see K. Talus,

EU Energy Law and Policy: A Critical Account (Oxford University Press, 2013).
2
The Energy Community is examined in Chapter 7.
3
‘EU acquis’ is EU legal jargon and refers to the legal system of the EU.
4
Energy is also one of the priorities of the Commission appointed in 2014. See
http://​ec.europa.eu/​about/​juncker-​commission/​priorities/​index_​en.htm.
3

European Energy Law and Policy 3

European Energy Law and Policy

In theory, the EU’s founding Treaties have been applicable to the
energy sector since the 1950s. As noted above, two of the three
original Treaties specifically concerned energy. However, political
reasons made it almost impossible to apply this primary legisla-
tion in practice. Energy played such a strategic and political role
in respect of national sovereignty that Member States could not
and would not transfer significant regulatory powers to the EU.
For these reasons, energy was consciously excluded from the pro-
cess of European integration.5 For a long time, the energy sector
and national energy monopolies were protected from the effects
of EU law.
In the late 1980s, the EU’s approach to the energy sector
changed. This was largely impacted by the developments in the
United States and the United Kingdom and the positive early expe-
riences of these countries. A state-​controlled sector started slowly
changing into something more market-​oriented. Faith in market
forces was exceptionally strong in the 1980s and 1990s. US com-
panies were advocating the benefits of free competition and the
free-​market approach in the EU and the UK opened its markets to
competition. These positive examples of successful market liber-
alization encouraged other European leaders to begin gradually
opening up national markets to competition. The idea was that,
as a result of such competition, the markets would become more
efficient and consumers would benefit both from lower prices
and from the freedom to choose from a wider range of suppliers.
Additionally, investment in energy infrastructures would be con-
ducted on a market-​oriented basis and at the lowest possible cost.
Governments could step aside and limit their role to ensuring the
proper functioning of the market.6
This is not, however, what happened in practice. In fact, the
amount of market regulation has consistently grown over the years
and European energy markets have been in a constant state of

5 For an overview of the early years of the EU, see T. Daintith and L. Hancher,

‘The Management of Diversity: Community Law as an Instrument of Energy and

Other Sectorial Policies’, 4(1) Yearbook of European Law (1984), pp. 123–​67. The
historical development of EU energy law is examined in detail in Talus n (1).
6
See A. Belyi and K. Talus (eds.), States and Markets in Hydrocarbon Sectors
(Palgrave, 2015); and Talus n (1).
4

4 Introduction

flux since the 1990s. The shift from state-​controlled monopolies

to markets governed by private companies and market power has
engendered the production of a vast quantity of new legislation.
In the 1990s, the various directives constituting the so-​called
First Energy Package were adopted.7 These reflected the political
realities of the 1990s: their content was not very ambitious. The
First Energy Package did, however, lay down a basis for future reg-
ulation of this area. Negotiated or regulated third-​party access and
functional unbundling were among the key issues covered in the
directives. However, it was clear that these first steps were not in
themselves sufficient to create a functioning energy market.
In 2003, the Second Energy Package was adopted.8 Its aim was
to speed up the process of creating competitive gas and electric-
ity markets. The new directives and regulations contained in it
included more detailed sector-​ specific obligations, which were
intended to achieve further liberalization of the European energy
markets. The new legislative instruments included provisions on
national energy market authorities, regulated third-​party access,
and functional and legal unbundling, as well as creating a regu-
latory framework for cross-​border interconnectors. The outcome,
however, was still not sufficient, and so work on the development
of the regulatory framework continued.
The Third Energy Package was adopted in 2009.9 It introduced
a raft of new regulation and included internal market directives

7 This package included Directive 98/​30/​EC of the European Parliament and of

the Council of 22 June 1998 concerning common rules for the internal market in
natural gas (OJ L 204, 21.7.1998, p. 1), and Directive 96/​92/​EC of the European
Parliament and of the Council of 19 December 1996 concerning common rules for
the internal market in electricity (OJ L 27, 30.1.1997, p. 20).
8 This package included Directive 2003/​55/​EC of the European Parliament and

of the Council of 26 June 2003 concerning common rules for the internal market
in natural gas and repealing Directive 98/​30/​EC (OJ L 176, 15.7.2003, p. 57);
Directive 2003/​54/​EC of the European Parliament and of the Council of 26 June
2003 concerning common rules for the internal market in electricity and repealing
Directive 96/​92/​EC (OJ L 176, 15.7.2003, p. 37); and Regulation (EC) No 1228/​
2003 of the European Parliament and of the Council of 26 June 2003 on condi-
tions for access to the network for cross-​border exchanges in electricity (OJ L 176,
15.7.2003, p. 1).
9 Regulation (EC) No 713/​2009 of the European Parliament and of the Council

of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators

(OJ L 211, 14.8.2009, p. 1); Regulation (EC) No 714/​2009 of the European
Parliament and of the Council of 13 July 2009 on conditions for access to the net-
work for cross-​border exchanges in electricity, repealing Regulation (EC) No 1228/​
5

European Energy Law and Policy 5

for electricity and gas, with rules on ownership unbundling, new

powers for national regulators, regulations on access to electric-
ity and gas networks, and regulations on the establishment of a
new, EU-​level energy authority: the Agency for the Cooperation of
Energy Regulators (ACER). In addition to these regulatory instru-
ments, the Third Energy Package created a competence to enact
further legislation in respect of issues relating to the functioning of
the energy markets. This is to be done through a new type of instru-
ment in EU energy law, known as ‘network codes’. These network
codes have already been issued in different subsectors of the energy
markets.
At the same time as the body of market regulations has grown, the
environmental aspects of EU energy law and policy have become
more and more regulated. Emissions into water, land, and air are
today controlled through a body of directives and regulations.10
These are now part and parcel of EU energy law and policy and
their impact must be understood by all actors in the energy sector.
It is already clear that new regulatory packages will be issued for
the EU energy markets. The next one is set to appear in the course
of 2016 and 2017 and will focus on making amendments to the
regulatory frameworks in specific areas such as renewable energy
and energy security.11

2003 (OJ L 211, 14.8.2009, p. 15); Regulation (EC) No 715/​2009 of the European
Parliament and of the Council of 13 July 2009 on conditions for access to the
natural-​gas transmission networks, repealing Regulation (EC) No 1775/​2005 (OJ
L 211, 14.8.2009, p. 36); 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 L 211, 14.8.2009, p. 55);
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 L 211, 14.8.2009, p. 94).
10 From Directive 2010/​75/​EU of the European Parliament and of the Council

of 24 November 2010 on industrial emissions (OJ L 334, 12.12.2010, p. 17)

and Directive 2009/​29/​EC of the European Parliament and of the Council of 23
April 2009 amending directive 2003/​87/​EC in order to improve and extend the
greenhouse gas emission allowance trading scheme of the Community (OJ L 140,
5.6.2009, p. 63) to Directive 2006/​21/​EC of the European Parliament and of the
Council of 15 March 2006 on the management of waste from extractive industries,
amending Directive 2004/​35/​EC (OJ L 102, 11.4.2006, pp. 15–​34) and Directive
2008/​98/​EC on waste (19 November 2008, OJ L 312, 22.11.2008, p. 3).
11
The so-​called ‘Summer Package’ from 2015 indicates that new regulations and
directives will be proposed in the course of 2016. Due to an ambitious timetable, it
could be expected that some will be delayed until 2017.
6

6 Introduction

Due to the large, and growing, amount of regulation in this area,

the terms ‘free market’ and ‘free competition’ do not describe EU
energy markets accurately. The phrase ‘regulated competition’
would perhaps be a better characterization of them. During the
past few decades, EU energy markets have undergone constant
change and new regulatory instruments have been introduced with
varying degrees of success on the strength of what can best be de-
scribed as a trial-​and-​error approach.
It is clear that free markets do not function as perfectly as
they were believed to do during the 1980s and 1990s. On the
other hand, efficiency has improved through competition and, in
that sense, opening up the markets has been a success. Privately
owned infrastructures and investment in them are utilized more
efficiently in competitive markets than is possible in government-​
owned and -​administered systems. The problem, however, has
been the lack of investment. Free markets lack the perseverance
that energy markets, in particular, often require. Instead of quar-
tiles and years, time on the energy markets is measured in decades.
This is due to the fact that gas pipelines or power-​generation fa-
cilities are expected to function for decades and the enormous
investments made in them cannot be recovered over a short time
period. Furthermore, some of the investment made does not gen-
erate profit at all, but is nonetheless essential in order to ensure
security of supply and the proper functioning of the market. For
investment of this type there is no economic rationale which is
required before private investment is made.
It is now clear that the ambitious EU energy and climate goals
will not be realized without significant and direct public funding.
Public power and control over the functioning of the markets has
also been increased. The earlier almost blind faith in the function-
ing of the market has faded and a step back to a more government-​
oriented approach has been taken. This does not, however, mean
that Europe is shifting back to the monopolistic system it once had,
but the shift is rather towards greater public control over competi-
tion. This control is displayed through decisions on licensing and
permitting new network infrastructure and other sections of the
energy value chain. It is also visible in government interference in
energy markets through the provision of state subsidies in respect
of certain types of generation, such as renewable energy or nuclear
energy, or network infrastructure in electricity and gas.
7

1
The Vertical Division
of Competences between the
European Union and Its Member
States in the Energy Sector

1.1 The Principles Governing

the Distribution of Competence
The EU’s competences are determined by the principle of conferral.
Competences not conferred upon it in the Treaties remain with the
Member States. This means that the EU can only act if the Member
States have allowed this in the Treaties, and it can act only within
the limits of the competences conferred upon it by the Member
States in the Treaties to attain the objectives set out therein.1 EU
competences can be exclusive or shared with the Member States.
In addition, Member States have certain exclusive competences.2
In other words, all legislative EU actions must be based on compe-
tence given in the Treaties. Instruments of secondary EU law, such
as directives and regulations, must always identify the source of the
competence on which they are based.
When the EU has exercised its powers and adopted legally bind-
ing Acts within an area of shared competence, this then restricts
the Member States’ right to exercise their competence over the
same issue. Member States cannot adopt legal Acts in relation to a
sector which has been exclusively covered through EU legislation.
Additionally, Member States are not allowed to adopt legal Acts
which conflict with EU law, nor are they allowed to adopt Acts that
endanger the functioning of the internal market.3
1Article 5 of the Treaty on European Union (TEU).
2Articles 3 to 6 of the Treaty on the Functioning of the European Union (TFEU).
3 For example, cases 106/​ 77 Simmenthal SpA [1978] ECR 629; and 218/​85
CERAFEL v Le Campion [1986] ECR 3513.

Introduction to EU Energy Law. First Edition. Kim Talus. ©Kim Talus 2016. Published
2016 by Oxford University Press.
8

8 The Vertical Division of Competences

In addition to defining the extent of EU competences, the Treaties

also define the manner in which these competences can be utilized. In
particular, the exercise of the EU’s competences in the area of shared
competences is subject to the principles of subsidiarity and propor-
tionality. The principle of subsidiarity means that in areas that do
not fall within the EU’s exclusive competence, the EU may act only if
and insofar as the objectives of the proposed action cannot be suffi-
ciently achieved by the Member States, and that decisions should be
made as close to the people affected by them as possible. In practice,
this means that they should be made at the lowest possible level of
governance: at central, regional, or even local level. The EU is only
allowed to act when the scale or effects of the proposed action mean
that it can be better achieved at Union level.4
In other words, the subsidiarity principle requires that two cri-
teria be met before the EU can take action: (1) the objectives of the
proposed action cannot be sufficiently achieved by the Member
States, and (2) they could be better achieved at Union level. Both
criteria have to be met simultaneously.
The objective of the principle of subsidiarity is to control the
exercises of EU competences. In addition to EU institutions and
Member States’ governments, national parliaments and the
European Committee of the Regions supervise compliance with
this principle. National parliaments, in particular, play a central
role in the political supervision of the subsidiarity principle.
The principle of proportionality means that the content and
form of action taken by the EU cannot exceed what is necessary
to achieve the objectives of the Treaties. When there is a choice
between several appropriate measures, recourse must be had to the
least onerous, and the disadvantages caused must not be dispropor-
tionate to the aims pursued.
The following section examines the categories of competence
contained in the Treaties.

1.2 Categories of Competence

The EU’s competences can be exclusive, shared, or supporting.5
When the Treaties confer on the EU exclusive competence in a

4
Article 5 TEU.
5 Articles 3 to 6 TFEU.
9

Categories of Competence 9

specific area, only the EU may legislate and adopt legally binding
Acts, the Member States being able to do so themselves only if so
empowered to do so by the EU or if the purpose of the legislation
enacted is to implement EU Acts in national law.
Under Article 3 of the Treaty on the Functioning of the
European Union (TFEU) the EU has exclusive competence in the
following areas:
1. customs union,
2. the establishing of the competition rules necessary for the func-
tioning of the internal market,
3. monetary policy for the Member States whose currency is
the euro,
4. the conservation of marine biological resources under the
common fisheries policy, and
5. common commercial policy.
When the Treaties confer on the EU a competence shared with the
Member States in a specific area, the EU and the Member States
may legislate and adopt legally binding Acts in that area. However,
in areas of shared competence the Member States may exercise
their competence only to the extent that the EU has not exercised
its competence, and may not adopt legislative measures that might
conflict with those enacted at EU level. When an area has been
extensively regulated, Member States cannot take measures that
contradict or differ from those of the EU. Furthermore, regard-
less of the degree of regulation of the area in question, Member
States cannot take measures that might hinder the execution of
those taken by the EU.
Under Article 4(2) TFEU, shared competence between the EU
and its Member States applies in the following principal areas:
1. the internal market;
2. social policy, for the aspects defined in the TFEU;
3. economic, social, and territorial cohesion;
4. agriculture and fisheries, excluding the conservation of marine
biological resources;
5. the environment;
6. consumer protection;
7. transport;
8. trans-​European networks;
9. energy;
10

10 The Vertical Division of Competences

10. the area of freedom, security, and justice;

11. common safety concerns in public-​health matters, for the as-
pects defined in the TFEU.
It is clear from the list presented above that the category of shared
competences is more extensive than that covering exclusive
competence.
In certain areas and under the conditions laid down in the
Treaties, the EU has the competence to carry out actions to sup-
port, coordinate, or supplement the actions of the Member States
without thereby superseding their competence in these areas.
In these areas Member States may decide that despite national
competence, measures taken at an EU level would have positive
effects, and therefore they may request that the EU take such
measures.
Article 6 TFEU provides that the following areas of such action,
at EU level, are:
1. protection and improvement of human health;
2. industry;
3. culture;
4. tourism;
5. education, vocational training, youth, and sport;
6. civil protection;
7. administrative cooperation.

1.3 The EU’s Competence to Enter

into International Agreements
The EU’s competence to enter into international agreements is first
and foremost based on the fact that it has legal personality, which
is established in the Treaty on the European Union. As a conse-
quence, the EU is capable of assuming, respectively, the benefit and
burden of rights and obligations derived from international law.
One of these rights is the right to enter into international agree-
ments, which is, in practice, determined by the principle of confer-
ral discussed above.6
Article 216 TFEU provides that the Union may conclude an
agreement with one or more third countries or international
organizations:

6 Article 216 TFEU. See also 22/​70 ERTA [1971] ECR 263.
11

Competence in the Energy Sector 11

• where the Treaties so provide;

• where the conclusion of an agreement is necessary in order to
achieve, within the framework of the Union’s policies, one of the
objectives referred to in the Treaties;
• when it is provided for in a legally binding Union act; or
• when it is likely to affect common rules or alter their scope.
The Treaty on the Functioning of the European Union includes pro-
visions on areas in which the EU has exclusive competence to enter
into international agreements. For example, Article 207 TFEU on
common commercial policy provides as follows:
1. The common commercial policy shall be based on uniform principles,
particularly with regard to changes in tariff rates, the conclusion of tariff
and trade agreements relating to trade in goods and services, and the com-
mercial aspects of intellectual property, foreign direct investment, the
achievement of uniformity in measures of liberalisation, export policy and
measures to protect trade such as those to be taken in the event of dump-
ing or subsidies. The common commercial policy shall be conducted in the
context of the principles and objectives of the Union’s external action.
2. The European Parliament and the Council, acting by means of regula-
tions in accordance with the ordinary legislative procedure, shall adopt
the measures defining the framework for implementing the common
commercial policy.
Member States do not participate in negotiations regarding inter-
national treaties if the area in question falls within the exclusive
competence of the EU.

1.4 Competence in the Energy Sector

As described above, the EU’s competences must always be specifically
provided for in the Treaties, which means that legislative provisions
of secondary EU legal instruments must always have a legal basis
in the Treaties. However, the specific legal basis for energy was not
established until the 2009 Treaty of Lisbon. Before that, regulatory
measures in the energy sector were often adopted under the Treaty
provision on internal market competence (to be found in what is now
Article 114 TFEU). In accordance with this provision, the European
Parliament and the Council can, acting in accordance with the ordi-
nary legislative procedure, adopt the measures for the approxima-
tion of the provisions laid down by law, regulation, or administrative
action in Member States which have as their object the establish-
ment and functioning of the internal market. Adopting legislative
12

12 The Vertical Division of Competences

Acts regarding energy on this legal basis was possible because energy
forms part of the pursuit of creating a functioning internal market.
This concerns, in particular, the directives on internal electricity and
natural-​gas markets and the regulations targeting cross-​border ele-
ments of the internal energy market. Regulatory measures in relation
to the energy sector have also been adopted under the Treaty provi-
sion on competence in environmental matters.7 This is the case for
the renewable-energy directives.8 It is therefore clear that the lack of
an energy-​specific legal basis in the Treaty has never stopped the EU
from enacting energy-​sector-​specific secondary EU law.
As noted above, a specific legal basis for the energy sector was
established in the Treaty of Lisbon. Article 194(1) TFEU states that:
In the context of the establishment and functioning of the internal market
and with regard for the need to preserve and improve the environment,
Union policy on energy will aim, in a spirit of solidarity between Member
States, to:
1. ensure the functioning of the energy market;
2. ensure security of energy supply in the Union;
3. promote energy efficiency and energy saving and the development of
new and renewable forms of energy; and
4. promote the interconnection of energy networks.
The European Parliament and the Council, acting in accordance
with the ordinary legislative procedure, can establish the meas-
ures necessary to achieve these objectives. Since the enactment
of the TFEU in 2009, new EU instruments in energy can now be
adopted under Article 194. This has also been done and, because of
point (b) above relating to energy security, it was possible to base
Regulation (EU) No 994/​2010 (the ‘Gas Security Regulation’) of
2010 on Article 194.9 Similarly, due to point (c) on energy efficiency

7 For the significance of Article 194 TFEU, see, for example, A. Guimaraes-​

Purokoski and B. Delvaux, ‘Vertical Division of Competences between the

European Community and Its Member States in the Energy Field: Some Remarks
on the Evolution of the Community Energy Law and Policy’, in B. Delvaux, M.
Hunt, and K. Talus (eds.), EU Energy Law and Policy Issues (Euroconfidentiel,
2008), pp. 7–30.
8 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,
amending and subsequently repealing Directives 2001/​77/​EC and 2003/​30/​EC (OJ
L 140, 5.6.2009, p. 16) and its predecessors.
9 Regulation (EU) No 994/​2010 of the European Parliament and of the Council

of 20 October 2010 concerning measures to safeguard security of gas supply and

repealing Council Directive 2004/​67/​EC (OJ L 295, 12.11.2010, p. 1).
13

Competence in the Energy Sector 13

and energy saving and on new and renewable energy, it was possi-
ble to base Directive 2012/​27/​EU (the ‘Energy Efficiency Directive’)
on the same provision.10 In the same vein, all future EU energy-​
market regulation should now be based on Article 194 TFEU.
Article 194 TFEU also includes exceptions to EU competence in
energy matters. Measures adopted under Article 194 TFEU are not
allowed to affect a Member State’s right to determine the condi-
tions for exploiting its energy resources, its choice between differ-
ent energy sources, and the general structure of its energy supply.
This carve-​out means that despite the competence conferred on
the EU in energy matters, Member States retain the competence
to determine which energy sources they wish to exploit. They may
therefore choose freely between natural gas, nuclear power, coal,
or renewable energy sources. However, this Member State com-
petence is restricted in practice, for example, due to obligations
relating to the promotion of renewable energy. This issue is further
examined in the section on renewable energy (Chapter 6).
In a similar manner to the energy mix, all matters of a primary fiscal
nature are accorded special treatment under the TFEU, and under
Article 194 in particular. Instead of following the ordinary legisla-
tive procedure—​which might be described as the ‘default’ legislative
procedure—​a special legislative procedure is followed in these cases.
This means in practice that instead of the majority voting approach
used in the ordinary legislative procedure, unanimity is required for
all matters of a primarily fiscal nature, and the role of the European
Parliament is reduced to that of a consultative body. This is to ensure
that fiscal matters remain under the control of Member States.
Article 194 TFEU is not the only provision under which regula-
tory measures regarding energy can be adopted. Legislative measures
concerning renewable energy have also been adopted under Article
191 TFEU, which is the legal basis for measures in respect of envi-
ronmental matters. It provides that EU policy on the environment
is intended to contribute to the pursuit of the following objectives:
• preserving, protecting, and improving the quality of the
environment;
• protecting human health;

10 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).
14

14 The Vertical Division of Competences

• prudent and rational utilization of natural resources; and

• promoting measures at international level to deal with regional
or worldwide environmental problems, and in particular com-
bating climate change.
The European Parliament and the Council, acting in accordance
with the ordinary legislative procedure, decide together what action
is to be taken by the EU in order to achieve these objectives. By way
of derogation from this decision-​making procedure, the Council,
acting unanimously in accordance with a special legislative proce-
dure, adopts measures, which significantly affect a Member State’s
choice between different energy sources and the general structure
of its energy supply. In these cases, the European Parliament is
merely consulted. Sector-​specific energy regulation that has been
adopted under the environmental competence includes the above-​
mentioned Renewable Energy Directive as well as Directive 2010/​
75/​EU (the ‘Industrial Emissions Directive’ or ‘IE Directive’) and
the EU emissions trading scheme.11
In the following chapter, the EU’s sector-​specific energy law is
examined.

Further Reading
Cases
C‑204/​12–​C‑208/​12 Essent Belgium NV v Vlaamse Reguleringsinstantie
voor de Elektriciteits-​en Gasmarkt, judgment of 11 September 2014
(not yet published).
C‑573/​12 Ålands Vindkraft AB v Energimyndigheten, judgment of 1 July
2014 (not yet published)

Literature
B. Delvaux, EU Law and the Development of a Sustainable, Competitive
and Secure Energy Policy (Intersentia, 2013)
J. Pielow and B. Lewendel, ‘Beyond “Lisbon”: EU Competences in the
Field of Energy Policy’, in B. Delvaux, M. Hunt, K. and Talus (eds.), EU
Energy Law and Policy Issues (Intersentia, 2012), pp. 261–300
K. Talus, EU Energy Law and Policy: A Critical Account (Oxford
University Press, 2013)

11
Directive 2010/​75/​EU of the European Parliament and of the Council of
24 November 2010 on industrial emissions (OJ L 334, 12.12.2010, p. 17).
15

2
Sector-​Specific Regulation of
the Energy Market
Background and General Overview

2.1 Introduction
This section addresses the most important elements of the sector-​
specific regulation of the energy market: third-​party access, unbun-
dling, and market supervision. Exemptions, which are common in
EU energy regulation, are also examined. However, before covering
these issues, some of the problems that led to the enactment of the
Third Energy Package are discussed. This background is necessary
in order to understand why the current regulatory framework has
been put in place.
In 2005, the Commission initiated a sector inquiry the purpose of
which was to examine different problems relating to energy pricing
and energy markets.1 It was conducted on the basis of Regulation
1/​
2003/​ EC on implementation of the rules on competition.2
Article 17 of Regulation 1/​2003/​EC provides that the Commission
has the right to conduct inquiries into a particular sector of the
economy or into a particular type of agreement across various sec-
tors if the conditions of trade between Member States, the rigidity
of prices, or other circumstances suggest that competition may be
restricted or distorted within the common market. These sector in-
quiries also offer a good means of acquiring information about the
different sectors of the economy and their special characteristics.

1 Final report: Commission Report on Energy Sector Inquiry of 10 January 2007

(SEC (2006) 1724), 10 January 2007.

2
Council Regulation (EC) No 1/​2003 of 16 December 2002 on the implementa-
tion of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ
L 1, 4.1.2003, p. 1).

Introduction to EU Energy Law. First Edition. Kim Talus. ©Kim Talus 2016. Published
2016 by Oxford University Press.
16

16 Sector-Specific Regulation

The sector inquiry concerning natural gas and electricity had sig-
nificant effects on later developments in the energy sector in the EU.
Both the Third Energy Package and a number of inspections and
subsequent cases based on Regulation 1/​2003/​EC were initiated on
the basis of the information that came out of the sector inquiry. The
sector inquiry has had a significant impact on the Commission’s ac-
tions, and the problems it detected have been addressed by adopt-
ing new legislative measures and by exploiting measures available
in existing competition law.
Next, the sector-​specific problems detected in the 2005–​7 sector
inquiry will be examined. The European energy markets are concen-
trated, which means that they are owned and controlled nationally
by just a few large companies. Both gas and electricity wholesale
markets continue to operate nationally through such companies,
and despite the efforts at liberalization the same national players
still control the markets, especially in the natural-​gas sector. This
facilitates market abuse and, for example, the maintenance of arti-
ficially high gas prices. The Commission has attempted to change
the structure of the energy markets by supporting the development
of gas exchanges. This initiative is slowly taking off but the gas vol-
umes traded through the exchanges remain relatively modest. The
wholesale markets in the electricity sector are likewise underdevel-
oped due to market concentration. When only a few producers are
active in a market, they are able to withhold production capacity
from the market in order to raise prices. Furthermore, the function-
ing of both the natural-​gas and electricity markets is complicated
by long-​term contracts (especially in the natural-​gas market, but
also in the electricity market), the vertically integrated nature of
the markets and the small amount of cross-​border interconnection
capacity.
The vertical integration of energy companies and the power of
a few established players to exclude competitors affect the market
negatively. Vertically integrated electricity or gas system opera-
tors can, through discriminatory measures, effectively prevent
new players from accessing the market. A system operator may,
for example, prevent others from accessing the network, limit the
amount of available transmission capacity, or limit the availability
of customer-​related or other information. In the natural-​gas sector,
discrimination can also relate to access to storage areas or access
to natural-​gas regasification terminals. Furthermore, market access
can be prevented through strategic underinvestment, which means
Another random document with
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 THE PRIVATE ENTRANCE
TO THE
IMPERIAL PALACE, PEKING
THE ENTRANCE TO THE
BRITISH LEGATION.

The Legation is a fine old palace, which formerly belonged to a

member of the Imperial Family. The photograph shows the entrance
to the first courtyard. The Legation compound is very extensive, and
contains several courtyards with buildings round each. It is very
highly decorated, the designs shown in this picture being elaborately
wrought in lacquered work of gold and colours. This is the building
recently attacked by the Chinese in their attempt to destroy all
foreigners, including the members of the various European
Legations who took refuge with Sir Claude Macdonald.
THE ENTRANCE TO THE
BRITISH LEGATION
ENTRANCE TO THE COLLEGE
OF THE
STUDENT INTERPRETERS.

Student interpreters are young Englishmen who enter the College

to prepare themselves for the Consular Service. At eighteen they
have to pass their entrance examination. They receive given posts in
connection with one of the various Chinese Consulates. All our
Chinese Consuls are drawn from this College. It stands within the
grounds of the Legation, which is the building shown on the right of
the picture.
ENTRANCE TO THE COLLEGE
OF THE
STUDENT INTERPRETERS
THE STATE CARRIAGE
OF THE
BRITISH LEGATION.

There are practically no carriage roads in China, so that there is

virtually no carriage traffic. This rough, springless cart is the only
carriage drawn by animals at the disposal of the Legation.
THE STATE CARRIAGE
OF THE
BRITISH LEGATION
THE GREAT IMPERIAL STONE
ROAD FROM PEKING TO
CHENGTU, THE CAPITAL OF SZE
CHUAN.

Made more than a thousand years ago, it must have been a gigantic
work at the time of its construction. It was paved throughout with
rough stone flags for about eight feet, or about half its width, and
planted with cedars. It is now very much out of repair, as are most
things in China, the flags disappearing now and again for long
distances; but it is still the object of much official attention, and every
year certain magistrates inspect it and count the cedars, every one
of which is sealed with the Imperial seal. Many of the trees have
died, but many still survive and are grand objects by the roadside.
THE GREAT IMPERIAL STONE
ROAD FROM PEKING TO
CHENGTU, THE CAPITAL OF
SZE CHUAN
A MULE CART.

A typical mode of conveyance in Manchuria, the Northern Province.

The arrangement for carrying luggage is seen at the back of the cart.
It is very similar to the Legation state carriage in construction, being
entirely without springs. It is only possible to use such a conveyance
in such a roadless country, with any security from broken bones, by
adopting the precaution to pad the whole of the interior, bottom, top,
and sides with thick mattresses. In the course of a journey of three
miles only, Mrs. Bishop had the misfortune to be thrown into the top
of the cart in an upset with such violence that her arm was broken
and her head severely cut. In her case, unfortunately, the top of the
cart was not padded.
A MULE CART
A MANCHURIAN
FAMILY TRAVELLING.

Although so risky to life and limb, the mule cart is the more
fashionable mode of moving from place to place in Manchuria. The
poorer people ride on asses, with their belongings slung about in the
manner shown in the picture.
 A MANCHURIAN
FAMILY TRAVELLING