Legal regulation of the functioning of energy communities under IEMD and RED

Under the IEMD and RED, energy communities are provided with a list of rights allowing them to engage in specific activities as well as with obligations. These rights and obligations of energy communities are described in articles 16 of IEMD and article 22 RED and also throughout both directives and are going to be analysed in the following subsections of this research. The rights are mostly similar for both types of energy communities, though there are some remarkable dif-ferences that need to be pointed out. In the beginning, the reminder that RECs will have an addi-tional scope of operation where energy that is not electricity is concerned.²⁸⁵

Thus, Both CECs and RECs are entitled to produce, consume, store and sell energy, including renewable energy.²⁸⁶ For the case of RECs though it would be limited to only renewable energy.

They are also entitled to arrange within the community the sharing of electricity that is produced by the production units owned by the community, while maintaining the rights and obligations of

284 Lowitzsch Renewable Energy Law and Policy Review (RELP) 2019, p. 22.

285 Lowitzsch Renewable Energy Law and Policy Review (RELP) 2019, p. 25.

286 Article 2(11) of IEMD; Article 22(2) (a) of RED.

the energy community members as customers.²⁸⁷ Moreover, energy communities are also pro-vided with the access to all suitable energy markets both directly or through aggregation in a non-discriminatory manner.²⁸⁸

In addition to that, it is stated in the IEMD that CECs may engage in distribution, aggregation, energy efficiency services or charging services for electric vehicles or provide other energy ser-vices to its members or shareholders.²⁸⁹ Regarding engagement of CECs in distribution though, it is important to emphasize, that it is optional for Member States whether to grant CECs with the right to own, establish, purchase or lease distribution network and to autonomously manage dis-tribution networks.²⁹⁰ The implications of leaving this up to Member States will be further dis-cussed in this chapter.

The following subsections will contain detailed analysis of the right to manage distribution net-works, the right to electricity sharing and the right to have access to electricity markets. These activities of energy communities, in the author’s opinion, are the most controversial from the legal point of view and, hence, require legal analysis in terms of this research. However, before turning to these specific rights, the general characteristics of enabling frameworks provided by the Directives for CECs and RECs as well as their main differences will be discussed.

3.3.2. Enabling framework provided for CECs and RECs

Both Directives require Member States to put in place “enabling frameworks” for energy com-munities.²⁹¹ However, the aims for providing enabling frameworks for RECs and CECs differ.

For CECs, these enabling frameworks aim to ensure energy communities can participate across the electricity market subject to non-discrimination and proportionate regulatory treatment.²⁹² The RED goes further requiring Member States not only to guarantee and equal playing field, but to “promote and facilitate the development of renewable energy communities”.²⁹³ The RED also

292 Article 16(1) of IEMD; Article 22(4) of RED.

293 Article 22 (4) of RED.

requires Member States to take RECs into account “when designing their national renewable support schemes in order to allow them to compete for support on an equal footing with other market participants”.²⁹⁴ Recital 26 of the RED provides guidance for the Member States on how to do this. In particular, it is stated that member states should be allowed to take measures such as providing information, providing technical and financial support, reducing administrative re-quirements, including community-focused bidding criteria, creating tailored bidding windows for renewable energy communities, or allowing renewable energy communities to be remunerated through direct support where they comply with requirements of small installations.²⁹⁵

Therefore, it would be true to say that the RECs are provided with more favorable framework.

This follows from the very nature of these two directives, as they generally serve different pur-poses: IEMD defines electricity markets’ roles and responsibilities, while RED supports the de-ployment of renewables in the EU.²⁹⁶ Economic incentives that are provided specifically for RECs will be discussed further in this chapter.

Member States are also obliged to “ensure that citizen energy communities are treated in a non-discriminatory and proportionate manner with regard to their activities, rights and obligations as final consumers, producers, suppliers, distribution system operators or market participants en-gaged in aggregation”.²⁹⁷ In general, non-discriminatory treatment means that in comparable setting they must not be treated differently than other electricity undertakings and in different circumstances they must not be treated in the same way as other electricity undertakings unless such treatment is objectively justified.²⁹⁸ Because of the lack of professionalization, energy communities often experience difficulties navigating complex administrative procedures.²⁹⁹ Therefore, taking into consideration the non-professional, local, citizen-oriented and innovative

294 Article 22 (7) of RED.

295 Recital 26 of RED.

296 Jasiak European Energy & Climate Journal 2020, p. 50.

297 Article 16 (3) (b) of IEMD.

298 “It must be noted, in that regard, that according to settled case-law, the principle of equal treatment requires that comparable situations must not be treated differently and that different situations must not be treated in the same way unless such treatment is objectively justified” - The Court of Justice of the European Union, 4 June 2015, C579/13 P, S v. Commissie Sociale Zekerheid Breda, College van Burgemeester en Wethouders van de gemeente Amstelveen, EU:C:2015:369, paragraph 41.

299 Roberts European Energy Journal 2019, p. 16.

character of the communities, non-discriminatory and proportionate treatment should reflect the-se specific characteristics of energy communities.³⁰⁰

3.3.3. Access to electricity markets

The main aim of the CEP’s provisions on CECs and RECs is to ensure that they have a right to engage in all potential activities and access all potential energy markets on the basis of non-discrimination and equal treatment.³⁰¹ By and large all energy communities aiming to sell energy on the market need to have a connection with the centralized electricity network. In this regard both IEMD and RED require Member States to ensure that the relevant distribution system oper-ator cooperates with energy communities to facilitate energy transfers within communities.³⁰² While at the same time Member States are obliged to make sure that energy communities that supply energy or provide aggregation or other commercial energy services are subject to the pro-visions relevant to such activities.³⁰³Moreover,energy communities are expected to contribute in an adequate, fair and balanced way to the overall cost sharing of the system in line with a trans-parent cost-benefit analysis of distributed energy sources by the competent national authori-ties.³⁰⁴ It therefore seems clear that the Directives do not intend to stimulate the uptake of com-munity energy whatever the cost.³⁰⁵ Thus, the question that would arise during the implementa-tion of these provisions is how to design the grid access rules so that they would make invest-ments in energy communities resilient and cost-effective in the long run.³⁰⁶

3.3.4. The right to electricity sharing

Recent technological developments such as Internet of Things (IoT)³⁰⁷ and blockchain technolo-gy³⁰⁸, brought along the opportunity for electronic communication based on decentralised

300 Jasiak European Energy & Climate Journal 2020, p. 51.

301 Article 16 (3) (a) of IEMD; Article 22 (2) (c) of RED; Roberts European Energy Journal 2019, p.19.

302 Article 16(1) (d) of IEMD; Article 22 (4) (c) of RED.

303 Article 16(1) (e) of IEMD; Article 22 (4) (b) of RED.

304 Article 16(3) (e) of IEMD; Article 22 (4) (d) of RED.

305 Savaresi Journal of Environmental Law 2019, p. 503.

306 Ibid., p. 503.

307 The Internet of things (IoT) is a system of interrelated computing devices, mechanical and digital machines

pro-vided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human-to-human or human-to-human-to-computer interaction.

308The term "blockchain technology" typically refers to the transparent, trustless, publicly accessible ledger that allows us to securely transfer the ownership of units of value using public key encryption and proof of work meth-ods. [https://support.blockchain.com/hc/en-us/articles/211160223-What-is-blockchain-technology-]

action no longer necessarily assisted by intermediaries, such as electricity companies. These de-velopments open perspectives for trade between small-scale energy producers.³⁰⁹ The new rights for consumers, who are at the same time small-scale electricity producers, to own storage facili-ties and to sell the excess of the electricity they produce open a field for development of the

‘sharing’ economy in the electricity market. These changes in electricity market structure and functioning are in line with a broader phenomenon of ‘sharing’ economy which is currently gain-ing positions and often replacgain-ing the traditional economy approach. Shargain-ing economy is de-scribed as an economy of direct exchange between people.³¹⁰ Sharing economy is also known as the ‘gig’ economy, ‘peer-to-peer (P2P)’ economy, ‘collaborative’ economy, ‘access’ economy and others³¹¹. The best known examples of sharing economy are Airbnb (apartment lending), which now compete with hotels, and Uber (car sharing), which dominate the taxi market, as well as plenty of freelancing sites and co-working spaces which are becoming more and more popular now all over the world.

Electricity sharing opportunities are leading to the necessity of redesigning the regulation of electricity market.³¹² These new opportunities are reflected in both IEMD and RED. The right to electricity sharing, provided to energy communities, constitutes one of the most interesting and important communities-related novelties in the European regulatory framework.³¹³ Neither IEMD nor RED defines this right.³¹⁴ An explanation on the nature of electricity sharing is set out in the recital 46 IEMD, which states that “electricity sharing enables members or shareholders to be supplied with electricity from generating installations within the community without being in direct physical proximity to the generating installation and without being behind a single meter-ing point”. The right to arrange within the energy community the sharmeter-ing of electricity that is produced by the production units owned by the community is provided by both IEMD³¹⁵ and RED³¹⁶. Community member’s rights and obligations as customers should be retained.³¹⁷

309 Lowitzsch Renewable Energy Law and Policy Review (RELP) 2019, p. 26.

310 Leal-Arcas – Lasniewska – Proedrou Netherlands Yearbook of International Law 2017, p. 145.

311 Leal-Arcas – Lasniewska – Proedrou Netherlands Yearbook of International Law 2017, p. 145.

312 Zepter Energy & Buildings 2019, p. 163.

313 Jasiak European Energy Journal 2018, p.35; Jasiak European Energy & Climate Journal 2020, p. 52.

314 Jasiak European Energy & Climate Journal 2020, p. 53.

315 Article 16 (3) (e) of IEMD

316 Article 22 (2) (b) of RED.

317 Article 16 (3) (e) IEMD.

over, electricity sharing should be organised without prejudice to applicable charges, tariffs and levies, in line with a transparent cost-benefit analysis of distributed energy resources.³¹⁸

The direct energy trading among consumers and prosumers is known as peer-to-peer (P2P) ener-gy trading, which is developed based on the sharing or ‘P2P’ economy concept.³¹⁹ A peer in the P2P energy trading refers to one or a group of local energy customers, including generators, con-sumers and procon-sumers.³²⁰ The peers buy or sell energy directly to one another without any inter-mediaries such as conventional energy suppliers.³²¹ In contrast to the conventional energy trad-ing which is mainly unidirectional, the P2P energy tradtrad-ing encourages multidirectional tradtrad-ing within a local geographical area.³²² P2P energy trading has become possible due to the recent technological developments.³²³ RED grants renewable self-consumers the right to enter into peer-to-peer contracts.³²⁴ The Directive defines peer-to-peer contract as a contract with pre-determined conditions governing the automated execution and settlement of the transaction³²⁵.It is also stated that the right to conduct peer-to-peer trading shall be without prejudice to the rights and obligations of the parties involved as final customers, producers, suppliers or aggregators.³²⁶ While many technical and practical details will need to be worked out at the national level, there is no doubt that energy sharing provides numerous opportunities for citizens living in the same areas (e.g. apartment or shared buildings, neighborhoods) to innovate with renewables and other flexible clean energy technologies like storage and to take advantage of these technologies.³²⁷

3.3.5. The right to manage distribution networks.

As follows from IEMD, it will be optional for Member States whether to grant energy communi-ties with the right to own, establish, purchase or lease distribution network and to autonomously manage distribution networks.³²⁸ It means that Member States may allow distribution network

327 European federation for renewable energy cooperatives (REScoop) 2019, Europe’s new energy market design.

328 Article 16 (2) (b), Article 16 (4) of IEMD.

management by energy communities. However, taking into consideration the optional character, many Member States are likely to ignore this opportunity.³²⁹ It can be expected, that in remote rural areas which are less attractive for DSOs, it is more likely that Member States will grant energy communities the right to manage distribution networks.³³⁰

Once an energy community is granted the status of a distribution system operator, it should be treated as, and be subject to the same obligations as distribution system operator.³³¹ For those energy communities that would be provided by Member States with the right to manage distribu-tion networks, the IEMD introduces some detailed rights and obligadistribu-tions. Firstly, energy com-munities are provided with a possibility to contract a distribution system operator (DSO) or transmission system operator (TSO) to run the operation of the grid on their behalf.³³² Secondly, the IEMD obliges energy communities to pay network charges at the connection points between the network managed by the community and distribution network the community is connected to.³³³ Moreover, it is stated that the rights of distribution system users that are not community members (ex: former members) should be guaranteed.³³⁴

The IEMD empowers Member States to allow energy communities to become distribution sys-tem operators either under the general regime or as ‘closed distribution syssys-tem operators’ in ac-cordance with article 38 of IEMD.³³⁵ As follows from the article 38 of IEMD, a system may be classified as a closed distribution system if it distributes electricity within a geographically con-fined site.³³⁶ Taking into account requirements under the article 38 of IEMD, Member States may apply to energy communities the same privileges as to the closed distribution systems.³³⁷ In this case, energy communities can be exempted from procurement requirements³³⁸, from the or-dinary tariff regime³³⁹, as well as from the requirements not to own, develop, manage or operate

329 European federation for renewable energy cooperatives (REScoop) 2019, Europe’s new energy market design.

330 Lowitzsch Renewable Energy Law and Policy Review (RELP) 2019, p. 30.

331 Recital 47 of IEMD

recharging points for electric vehicles and energy storage facilities³⁴⁰. This is a serious exception for energy communities since Article 38 IEMD generally excludes the qualification as closed distribution networks if household customers are supplied.³⁴¹