Case C-204/12, Essent – can Flemish green electricity certificates resist green electricity in free movement? [judgment 2014, ECLI:EU:C:2014:2192]

If an energy regulator will only accept green electricity certificates for electricity produced from renewable sources within a region, and it refuses to accept certificates in respect of green energy produced in: (i) another region of the same Member State; (ii) another Member State; and (iii), an EEA State (Norway); then is the regulator not in breach of Article 5 of the EU’s former Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market? Similarly, is it not acting in breach of the principle of equal treatment, and the prohibition of discrimination enshrined in Article 18 TFEU, and Directive 2003/54/EC on common rules for the internal market in electricity?

Facts
The claimant company Essent Belgium supplies gas, electricity, heating and energy services. Since it was trading in the Flanders region of Belgium, it was subject to a rule in a Flemish administrative decree which obliged it to produce a number of green electricity certificates every year. Each certificate represented 1 Megawatt hour of electricity produced by a source of renewable energy – those sources being further identified and defined in the Flemish administrative degree.

Every year from 2003 onwards, Essent Belgium should have submitted their certificates to the VREG – the Flemish-Belgian regulator of the Electricity and Gas Market (Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt).

For the year 2005, Essent Belgium not only submitted 10 165 green electricity certificates to the VREG but also expressed its belief that it had satisfied the relevant quota. Of the more than ten thousand certificates:

• 5828 came from green electricity certificates originating from producers located in Flanders
• 2 guarantees originated from Dutch companies producing electricity by wind-energy
• 4332 certificates originated from Norwegian hydro-power companies
• 2 certificates came from Walloon wind-energy companies; and,
• 2 certificates came from a company in the region of Brussels that generated electricity from biomass.

The VREG rejected Essent’s claim to have satisfied the quota. It would not accept any of the certificates for green electricity relating to the generating plants of the last four of the above five categories. In other words, the VREG would only accept the 5828 certificates from the producers in Flanders. And since 4337 certificates were in effect missing, the VREG decided to fine Essent five hundred thousand euro.

Essent challenged the VREG’s decision before the Brussels District Court of First Instance. It claimed that the VREG’s decisions constituted a barrier to trade contrary to rules governing Belgium’s internal economic and monetary union. Even accounting for the fact that Belgium’s regions enjoyed discretion to create certification systems, and that would entail variations in how that discretion was exercised, in Essents’ view the VREG’s decisions were protectionist.

Essent pointed out that green certificates could be legally assigned – like any other intangible property. As such, they could be traded freely. Thus they fell within the rules governing the free movement of goods inside Belgium. And whereas the Flemish Electricity Decree made no formal distinction between goods from Flanders and those from other regions in Belgium, Essent submitted that any measure whose nature restricted trade inside Belgium’s economic union was a measure with equivalent effect to a quantitative import restriction.

The Brussels District Court of First Instance pointed out that such a barrier to free movement could still be permitted where this was justified by mandatory requirements in the public interest and provided that the rule was not disproportionate to the aims pursued. In that context, the referring court noted that the certificates of green electricity were generally intended to encourage the production of electricity from renewable sources.

On the significance of the certificates of green electricity, the parties’ submissions differed considerably. On the one hand, the VREG pointed out that it could not accept certificates originating from the other regions in Belgium because there was no decision of the Region of Flanders’ government that granted them the power to do this. On the other hand, there was Article 25 of the Electricity Decree which did allow the Region of Flanders’ government to accept certificates of green energy that came from outside of the Region – but the regional government had failed to take the necessary steps to make Article 25 operational, and it had failed to do this over a period of no less than ten years. Certificates from other regions of Belgium could therefore not be used to satisfy the Flemish quota rules. Therefore, the Brussels District Court of First Instance held that the Flemish rules constituted a measure that was disproportionate to the aim pursued and was contrary to the principle of Belgian economic union.

The VREG’s refusal to accept the certificates from other regions in Belgium was a barrier to free movement which therefore needed to be justified. The only justification which had been submitted to the Brussels’ court was that of protecting the environment. But as that  court pointed out, the submission had to fail. The court recalled the words of Advocate General Jacobs’ Opinion in Case C-379/98, PreussenElektra, para 236 where he had said:

In relation to the Commission’s first argument I cannot see why electricity from renewable sources produced in another Member State would not contribute to the reduction of gas emissions in Germany to the same extent as electricity from renewable sources produced in Germany. In both cases the domestic production of electricity from conventional sources, and the attendant pollution, will be reduced to the same extent. In that respect the limitation of the purchase obligation to electricity produced in Germany does not seem proportionate.

Applying Advocate General Jacobs’ observation here led the Brussels District Court of First Instance remarking that it could not see why electricity which had been produced from renewables in regions other than Flanders would not contribute equally to a reduction in gas emissions from electricity that had been produced by conventional sources – irrespective of whether those renewables were located in Flanders or elsewhere. Moreover the environment was by definition transnational, and the environment would not be better protected simply because the energy had been produced from renewables located in Flanders. The Brussels District Court of First Instance therefore held that the measure was disproportionate.

The Brussels District Court of First Instance also noted that the VREG had sought to distinguish Preussen Elektra from the facts in the present case. But the court observed that the relevant goal was not that of the Flemish green electricity certificate system but rather to identify the goal of the measure that restricted free trade between the regions of Belgium. And as noted above, it was a restriction that could not be justified on the basis of protecting the environment since other certificate systems were also being run in the other regions of Belgium and those schemes were also pursuing the same goal.

EU Free Movement of Goods
Besides the major submission made in respect of Belgium’s economic and monetary union, Essent also invoked EU law and claimed that the measures had an equivalent effect to a quantitative import restriction.

This allegation was denied by the VREG. It pointed out that the claimants had not proved that its decisions not to accept Norwegian and Dutch certificates as part of the Flemish quota rules, constituted a barrier to intra-community trade.

It was a denial that failed to convince the Brussels District Court of First Instance, however. An impediment to intra-community trade could be inferred from the fact that the green energy certificates were offered to the VREG for purchase, and that certificates from other regions would not be accepted. Here was a prima facie case of a measure with equivalent effect to a quantitative import restriction – both within the meaning of Article 34 TFEU and Article 11 EEA.

The court also went on to dismiss the VREG’s submissions as to the correct interpretation of the EC’s Directive 2001/77 on the recognition of guarantees of origin. The VREG had submitted that there was a fundamental difference between the Flemish green energy certificate system, and Article 5 of Directive which defined guarantees of origin.

Article 5 stated:

Guarantee of origin of electricity produced from renewable energy sources
1. Member States shall, not later than 27 October 2003, ensure that the origin of electricity produced from renewable energy sources can be guaranteed as such within the meaning of this Directive according to objective, transparent and non-discriminatory criteria laid down by each Member State. They shall ensure that a guarantee of origin is issued to this effect in response to a request.
2. Member States may designate one or more competent bodies, independent of generation and distribution activities, to supervise the issue of such guarantees of origin.
3. A guarantee of origin shall:
- specify the energy source from which the electricity was produced, specifying the dates and places of production, and in the case of hydroelectric installations, indicate the capacity;
- serve to enable producers of electricity from renewable energy sources to demonstrate that the electricity they sell is produced from renewable energy sources within the meaning of this Directive.
4. Such guarantees of origin, issued according to paragraph 2, should be mutually recognised by the Member States, exclusively as proof of the elements referred to in paragraph 3. Any refusal to recognise a guarantee of origin as such proof, in particular for reasons relating to the prevention of fraud, must be based on objective, transparent and non-discriminatory criteria. In the event of refusal to recognise a guarantee of origin, the Commission may compel the refusing party to recognise it, particularly with regard to objective, transparent and non-discriminatory criteria on which such recognition is based.
5. Member States or the competent bodies shall put in place appropriate mechanisms to ensure that guarantees of origin are both accurate and reliable and they shall outline in the report referred to in Article 3(3) the measures taken to ensure the reliability of the guarantee system.
6. After having consulted the Member States, the Commission shall, in the report referred to in Article 8, consider the form and methods that Member States could follow in order to guarantee the origin of electricity produced from renewable energy sources. If necessary, the Commission shall propose to the European Parliament and the Council the adoption of common rules in this respect.

In that context, the VREG submitted that the purpose of the guarantees of origin were not designed to support the trade in electricity produced from renewable energy sources but primarily to help the end user increase the choice for an end-user between electricity produced from traditional on the one hand, and renewable energy resources on the other.

The VREG also pointed out that the EC’s rules in Article 5 were not exhaustive. The VREG referred in particular to the opening sentence to Recital 10 of the Directive, which states:

This Directive does not require Member States to recognise the purchase of a guarantee of origin from other Member States or the corresponding purchase of electricity as a contribution to the fulfilment of a national quota obligation. However, to facilitate trade in electricity produced from renewable energy sources and to increase transparency for the consumer’s choice between electricity produced from non-renewable and electricity produced from renewable energy sources, the guarantee of origin of such electricity is necessary. Schemes for the guarantee of origin do not by themselves imply a right to benefit from national support mechanisms established in different Member States. It is important that all forms of electricity produced from renewable energy sources are covered by such guarantees of origin.

In other words, there was no obligation on the VREG to recognise the purchase of a guarantee of origin as contributing to the fulfilment of a national quota obligation.

The VREG’s submission was rebuffed by Essent. It recalled that the Flemish rules had failed to define guarantees of origin. They were nowhere to be found in the Flemish Electricity Decree. However, the definition of a green electricity certificate in the Flemish Decree was sufficiently broad in its definition to cover guarantees of origin as they had been defined in the Directive.

On hearing this, the Brussels District Court of First Instance felt the need for clarification on whether the Flemish rules complied with Articles 34 and 36 TFEU on the free movement of goods.

EU principle of non-discrimination
Essent also claimed that the Flemish rules also infringed the principle of non-discrimination as enshrined in Article 18 TFEU, Article 4 EEA, Article 3 of Directive 2003/54/EC, Article 5 of Directive 2001/77, and turning to national law, Articles 10 and 11 of the Belgian Constitution, and turning to regional law, Article 25 of the Flemish Electricity Decree.

More generally, Essent recalled that the greatest barrier to the completion of the internal market was the existence of discriminatory rules and practices whereby the governments of the Member States sought to protect their own producers from foreign competition. As a response to this, Essent recalled the specific provisions of EU law; namely, Article 3(1) of Directive 2003/54 which had clearly required the Member States to avoid discrimination in the institutional organisation of the electricity market. And it referred the Brussels District Court of First Instance to Directive 2001/77/EC which also required the Member States to devise a system of guarantees and only to refuse the guarantees of other Member States on the basis of transparent and non-discriminatory criteria.

Questions Referred
According to the Curia website, the Brussels District Court of First Instance has asked:

1. Is a national rule, such as that embodied in the Flemish Decreet van 17 juli 2000 houdende de organisatie van de elektriciteitsmarkt (Decree of 17 July 2000 on the organisation of the market in electricity), as implemented by the Besluit (Decision) of the Flemish Government of 5 March 2004, as amended by the Besluit of the Flemish Government of 25 February 2005 on the promotion of the generation of electricity from renewable energy sources, where
- an obligation is imposed on the suppliers of electricity to final customers connected to the distribution network or the transmission network, to submit a certain number of green certificates annually to the Regulatory Authority (Article 23 of the aforementioned Decreet);
- an administrative fine is imposed by the Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt (VREG) on the suppliers of electricity to final customers connected to the distribution network or the transmission network when the supplier has not submitted a sufficient number of green certificates to fulfil a quota obligation which has been imposed in respect of green certificates (Article 37(2) of the aforementioned Decreet);
- the Regulatory Authority cannot or will not take into account any guarantees of origin originating from Norway and the Netherlands, and that being in the absence of implementing measures on the part of the Flemish Government, which has acknowledged the equality or equivalence of those certificates (Article 25 of the aforementioned Decreet and Article 15(1) of the Besluit of 5 March 2004), without that equality or equivalence being investigated by the Regulatory Authority in concrete terms;
- in fact, during the whole time that the Decreet of 17 July 2000 was in force, only certificates for the production of green energy generated in the Flemish Region were taken into account when ascertaining whether the quota obligation had been fulfilled, whereas for the suppliers of electricity to final customers connected to the distribution network or transmission network there was no possibility whatsoever of demonstrating that the guarantees of origin submitted met the condition of the existence of equal or equivalent guarantees regarding the granting of such certificates,
compatible with Article 34 of the Treaty on the Functioning of the European Union and Article 11 of the EEA Agreement and/or Article 36 of that Treaty and Article 13 of the EEA Agreement?’

2. Is a national rule as referred to in subquestion 1 above compatible with Article 5 of the then Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market?

3. Is a national rule as referred to in subquestion 1 above compatible with the principle of equal treatment and the prohibition of discrimination as embodied inter alia in Article 18 of the Treaty on the Functioning of the European Union and Article 3 of the then 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?