Key Contacts: Niall Donnelly – Partner | Alice Whittaker – Partner | Alison Hardiman – Consultant | Max Bail – Associate
The Irish Supreme Court has recently submitted a request for a preliminary ruling to the Court of Justice of the European Union (“CJEU”) on the meaning and effect of Article 13(7) of the EU Internal Market in Electricity Regulation 2019/43 (“EU Electricity Regulation”). Article 13(7) provides for the payment of financial compensation by the system operator for generation or demand response units that are redispatched (deemed in Ireland to be due to curtailment and constraints) through a non-market based mechanism.
The reference relates to an appeal brought by the Commission for Regulation of Utilities (“CRU”) of the High Court’s decision to quash the purported implementation of certain parts of the EU Electricity Regulation through the SEMC’s Decision Paper on Dispatch, Redispatch and Compensation Pursuant to Regulation (EU) 2019/943 (SEM-22-009) (“Decision”).
Clarity on the entitlement to financial compensation in these circumstances is a matter of significant importance to the energy industry in Ireland and in other Member States. We have set out a brief update on this latest development in this note.
Brief background to the proceedings
Renewable energy is an increasingly important source of electricity generation in Ireland. However, broad power system limitations, known as curtailments, and local network limitations, known as constraints, may result in the downward redispatch of renewable generators. When EirGrid issues a dispatch down instruction, it is essentially telling the generator to produce less power or cease producing power entirely. In 2023, the dispatch down level of all renewables was 9.5% on the island of Ireland.1 This level is set to increase as more renewables come online. The availability of compensation for downward redispatch is an important commercial consideration for project developers and their investors and financiers. High levels of dispatch down also generally results in greater emissions as fossil fuel generators tend to replace the redispatched renewable project.
The EU Electricity Regulation establishes rules for the functioning of the internal market for electricity. Article 13(7) requires that where non-market based redispatching occurs “it shall be subject to financial compensation by the system operator requesting the redispatching to the operator of the redispatched generation … except in the case of producers that have accepted a connection agreement under which there is no guarantee of firm delivery of energy”.
Article 13(7) requires that the financial compensation shall be at least equal to the higher of the additional operating cost or net revenues on the day ahead market that would have been generated, or a combination of both if applying the higher would lead to “unjustifiably low or unjustifiably high compensation”. Article 71(2) of the EU Electricity Regulation provides that, subject to exceptions that are not material to the dispute, the Regulation shall apply from 1 January 2020.
On 22 March 2022, following a consultation process, the Single Electricity Market Committee (“SEMC”) acting for the CRU adopted the Decision. The Decision sought to implement the relevant requirements of the EU Electricity Regulation by, amongst other things, deferring financial compensation for non-market based redispatch due to curtailments until the 2024/25 tariff year and separated compensated revenues under foregone government support associated with renewable support schemes in Ireland and Northern Ireland from costs associated with lost revenues in the market. The Decision also provided that the governments of Ireland and Northern Ireland could separately decide the level of compensation for foregone financial support.
The Decision also excluded compensation for generators that do not participate in the day ahead ex-ante markets, (which captures many de minimis generators), provided that units commissioned prior to 2019 would generally receive lower levels of compensation and excluded certain revenues from corporate power purchase agreements (“CPPAs”) lost due to redispatch in calculating compensation.
Two windfarm developers Greencoat and Energia (“Applicants”) successfully challenged the Decision in the High Court under judicial review proceedings. They successfully argued that aspects of the Decision were incompatible with Article 13(7).
Appeal to the Supreme Court by the CRU
The Supreme Court granted the CRU leave to appeal the High Court decision. Amongst their submissions, the CRU argued that the reference to “unjustifiably low or unjustifiably high compensation” permitted broad discretion to implement Article 13(7). Therefore, the compensation requirement did not have direct effect and Article 13(7) cannot be relied on to disapply the Decision. The CRU also submitted that enforcement is a matter for the European Commission not Irish courts. The CRU also argued that Article 13(7) allows Member States to have regard to issues of market policy and organisation including the investment expectations of generators and the interests of consumers, in determining how compensation is to be calculated.
In response the Applicants argued that Article 13(7) did have direct effect as the Article was sufficiently precise even if it contains undefined or indeterminate concepts such as “unjustifiably”. The Applicants also, amongst other points, argued that even if the SEMC had discretion, it could not exceed the limits on the discretion conferred by the EU Electricity Regulation and the Irish Courts may review the SEMC’s implementation of the EU Electricity Regulation.
Referral to the CJEU
The Supreme Court noted that the question of whether Article 13(7) has direct effect is a matter of significant dispute between the parties. In particular, this question is foundational to the Applicant’s ability to challenge the Decision. Similarly, many of the specific disputes between the parties follow from their different understandings of the meaning and effect of Article 13(7). These disputed areas relate to the timing for payment of compensation for curtailment, limitation of compensation to generators who participate in the ex-ante market, deferral of an outcome on recovery for foregone financial support, treatment of compensation levels depending on whether they were installed prior to or after 4 July 2019 and exclusion of CPPA revenues to the extent they are greater than net revenues that would have been received from the sale of power on the ex-ante market.
The Supreme Court noted that the proper interpretation of Article 13(7) is an issue of significance in its own right and may have a significant bearing on the issue of whether it is of direct effect and/or whether it may be relied on by the Applicants to challenge the Decision. The Supreme Court held that the interpretation of Article 13(7) is not so obvious as to leave no scope for reasonable doubt.
As a result, the Supreme Court referred to the CJEU the following questions (broadly summarised below):
- Does Article 13(7) require generators with firm access who are dispatched downwards by the system operator to be fully compensated for the revenue lost as a result of being redispatched?
- What is meant by the words “unjustifiably low or unjustifiably high compensation” and by reference to what criteria is the assessment of whether compensation is “unjustifiably low or unjustifiably high” to be made? Can entitlement to compensation be distinguished depending on priority dispatch or not?
- Is Article 13(7) directly effective in national law? To what extent does it require or permit the adoption of national measures of implementation or application?
- If it is not directly effective, can Article 13(7) be used to challenge the Decision?
- Was it permissible to defer a payment of compensation to 2024?
- Was it permissible to defer the decision as to whether (and if so to what extent) compensation should be payable under Article 13(7) in respect of foregone financial support?
- Does Article 13(7) restrict compensation to generators participating in the day ahead market, include compensation to electricity suppliers (who may be intermediaries) rather than generators and include compensation for the loss of any payments that would have been payable under a CPPA if the strike price exceeds relevant market price?
Comment and next steps
The outcome of this referral is of vital importance to the energy industry in Ireland. With levels of dispatch down expected to increase alongside increased renewable energy deployment, it is critical that clear guidance emerges on the entitlement to compensation in these circumstances. Continued uncertainty may deter investment in renewable energy in Ireland at a time when a significant uptake is required to meet Ireland’s 2030 targets.
Given that the appeal raises issues of systematic importance for the functioning of the electricity market in the island of Ireland the Supreme Court requested that the CJEU give the referral as much priority as possible. We eagerly await the outcome.
If you require any further information, please contact a member of our Energy team below.
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