EU instruments to develop the European electricity grid

Author: Thomas Sattich

European ambitions on the field of sustainability grew considerably during the last 15 years, finally culminating in the plan for (nearly) full decarbonisation. The development of energy systems technology did, however, not keep up with the growing ambitions. Neither did the deployment of new electricity transmission infrastructure in Europe. But no decarbonisation without the necessary electricity transmission infrastructure. Thus, in order to match technological developments and the deployment of new infrastructure with the ambitious sustainability and decarbonisation targets, the EU implemented a number of programmes to accelerate grid development.

In order to determine whether these measures are sufficient to achieve decarbonisation, this post describes and analyses in more detail what policies the EU implemented: Programmes which aim at better framework conditions for universal grid development, and instruments which aim at the development of specific parts of the European network are treated separately in this analysis. In order to identify gaps between what the sector needs to achieve decarbonisation, and the given EU policy, the overall approach of the European Union towards universal and specific grid development is discussed.

Instruments for universal grid development

In 20th century Europe vertically integrated power companies conducted the planning of the transmission infrastructure. The market position of these companies widely converged with the power transmission infrastructure. In an attempt to increase competition and to stimulate grid and market development, the European Commission therefore proposed full unbundling of network and generation/supply interests (Commission 2007c:6); this would guarantee the independence of transmission systems operators (Eikeland 2011:32), and hence provide new stimuli for grid development in a European, not national or regional context.

More cross-border interconnections and the integration of electricity markets were supposed to be the result (Von Koppenfels 2010:84). Unlike the proposal, the third legislative package for an internal (gas and) electricity market does, however, not provide full ownership unbundling, but offers different models which do not necessarily change the ownership, but only the management and supervision of transmission networks (Eikeland 2011:24-25). Whether these provisions indeed ensure the independence of transmission networks from supply interests remains hence to be seen (Dupont&Primova 2011:11; Helm 2014:30).

Yet unbundling is not the only European policy to develop favourable framework conditions for the development of the power grid: Several EU programmes aim at the exploration of new energy technologies, their market-maturity, and the stimulation of their (potential) markets. Together, these programmes can roughly be categorized in two groups: Top-down demand pull instruments that pull industry towards investments in innovative products, and bottom-up technology push instruments which push European industry towards European targets (Sattich 2014a).

Top-down demand pull

The two Directives on the promotion of renewables are important elements of European policy to stimulate demand for new infrastructure, because they provide that new installations producing electricity from renewable energy sources (should) have priority status in the power system. The passage from the 2001 Directive to the one from 2009 marks an important step in this regard: Whereas the obligation of TSOs to grant RES priority access and priority dispatch remained facultative in Directive 2001/77/EC (Article 7(1); EWIS 2010:146), priority access, dispatch, transmission and distribution became mandatory in Directive 2009/28/EC (Futterlieb&Mohns 2009:24).

The RES Directive from 2009 hence marks a veritable milestone regarding the legally binding commitment for grid development. Regarding the financing of infrastructure projects, the two RES Directives are equally important: Directive 2001/77/EC called member states to implement cost sharing mechanisms for the necessary grid reinforcements, including a mechanism that requires transmission system operators to bear part of the adaptation costs (Directive 2001/77/EC:Article 7(2); Jansen&Uyterlinde 2004:99); the same applies for Directive 2009/28/EC which provides that Member States shall require TSOs to ensure that appropriate grid measures to minimise the curtailment of electricity produced from renewable energy sources are taken (EWIS 2010:154).

Bottom-up technology push

With EU energy technology development programmes such as Intelligent Energy Europe I (IEE 2003-2006), II (IEE 2007-2013), and Horizon 2020 Secure, Clean and Efficient Energy (2014-2020), the European Union also attempts to foster the development of new energy technologies. Main focus of these programmes lies on (market) barriers that hamper the development of new and renewable energy technology, and the transition from demonstration projects to marketing (Decision No 1230/2003/EC). With a multiannual budget of originally 200 million EUR, the Intelligent Energy programme was, however, rather small and supported only a limited number of grid projects .

Yet, in view of the issue’s growing importance, the European Union stepped up its energy technology policy over the past years: Horizon 2020 disposes over an increased budget for energy related projects, and with the Institute for Energy and Transport the European Union also provides its own R&D infrastructure. Moreover, with the Strategic Energy Technology Plan (SET-Plan, see Commission 2006b) the European Union brought the two until then isolated elements of its energy technology policy – market up-take measures and support for basic research – together in one encompassing programme (Commission 2006a:5).

General aim of this SET-Plan is to reinforce international cooperation and the coherence between national, European and international energy research (Commission 2007d:9-11). The European Electricity Grid Initiative is one of the programme’s subcomponents and aims at the creation of an integrated R&D and demonstration network, so as to develop, demonstrate and validate the technologies to enable the transmission and distribution of up to 35 per cent of electricity from renewable sources by 2020, and to make electricity production completely decarbonised by 2050 (European Union 2010:4).

With an estimated multiannual budget of 2 billion EUR, the Grid Initiative is considerably bigger than other European instruments on the field. Due to a lack of coordination and a general lack of practical arrangements to foster interaction between the different research areas, the implementation of the SET-Plan remained, however, below expectations. Missing coordination between the Grid Initiatives and other areas seems to be particularly puzzling (Commission 2013b:8-9). Given these shortcomings, better coordination, financing and commitment of member states is under discussion.

Instruments for specific grid development

With the Priority Interconnection Plan (PIP) of 2007 the European Union reaffirmed its focus on the development of particular parts of the grid (Commission 2007b). This Plan sets out five priorities:

1) Identifying the most significant missing infrastructure and ensuring pan-European political support to fill the gaps;
2) appointing four European co-ordinators to pursue the most important priority projects;
3) agreeing a maximum of 5 years within which planning and approval procedures must be completed for projects of European interest;
4) examining the need to increase funding for European networks;
5) establishing a new Community mechanism and structure for co-ordinated network planning.

Debates about the need for new cross-border electricity exchange capacity in specific bottlenecks of the European grid, are, however, much older than the PIP: First policy papers addressed the issue already in 1988 (Commission 1988:28), and shortly after the signature of the Maastricht Treaty a limited number high priority trans-European projects have been endorsed and asked for rapid implementation (European Council 1994). It remained, however, unclear, how investments in these projects could be stimulated. Thus a debate began about the best lever for public intervention (see Commission 1993:79; and European Council 1994:27), and about the relative importance of two main obstacles for private sector investments in energy networks: Administrative constrains and market conditions.

In order to create favourable framework conditions for grid development in selected parts of the European network, member states agreed on a mix of measures on both issues (Decision No 1254/96/EC). This trans-European energy network programme (TEN-E) has a strong focus on market integration; cross-border power interconnection projects that contribute to the integration of renewables, and the transmission of the generated electricity to major consumption centres and storage sites are, however, also included (Regulation No 347/2013:Article 4). Moreover, TEN-E supports projects to integrate far-off and/or intermittent renewables (Regulation No 347/2013:Annex IV). The priority status for certain infrastructure projects hence does not only apply for interconnection projects necessary for market integration; projects necessary for the integration of renewables are equally entitled for TEN-E support.

TEN-E goes well beyond instruments such as market liberalisation and competition policy which to that date characterised the toolkit of European energy policy: Drawing on Lisbon treaty article 194 which requires member-states to interconnect energy networks, the EU concluded that new support measures for grid development were needed; the TEN-E programme hence does not only include a list of four Priority Electricity Corridors in different parts of the European continent (Regulation No 347/2013:Annex I), but provides particular projects in these corridors with priority status that entitles them for administrative and financial support.

Top-down administrative and market measures

In order to ensure rapid deployment of specific projects, the TEN-E guidelines aim at the reduction of administrative burdens (Justice and Environment 2013:2). One of the starting points in this regard is permit granting: In order to guarantee a process of three years and six months only (Regulation No 347/2013:Article 10(2)), member states are obliged to establish a competent authority responsible for all permit granting processes in a so called one-stop shop (Regulation No 347/2013:Article 8(1)). Moreover, projects of common interest shall be provided with the highest national significance (Regulation No 347/2013:Article 7).

In order to facilitate and speed up coordination between the various parties involved in the implementation of particular projects, the programme guidelines also provide for close cooperation between all relevant groups such as member states, national regulatory authorities, transmission systems operators, the European Commission etc. in regional groups (Justice and Environment 2013:3). Where a project of European interest encounters significant delays or implementation difficulties, the intervention of European coordinators is possible (Regulation No 347/2013:Article 6).

As an additional measure selected TEN-E projects are also entitled for financial support by the European Union (Meeus, Purchala & Belmans 2005:31): For projects which are not viable under the existing regulatory framework and the given market conditions, the TEN-E programme provides a yearly budget of 25 million EUR for tailor-made support in form of grants and financial instruments (Regulation No 347/2013:Article 14(1)), 20 million EUR of which are generally intended for the co-financing of feasibility studies. In this regard it is noteworthy that the TEN-E is increasingly guided by the idea that only projects of ‘European interest’ should get public support (Agt 2011:29).

Bottom-up market regulation

Such financial assistance is, however, exceptional and may not lead to any distortion of competition: According to the TEN-E guidelines market principles have the priority. In fact, TEN-E attempts to limit distortion of competition to a minimum; instead it focuses on regulatory disincentives to invest (THINK 2011:32-33), and the question, how to so organise the market for grid investments that investors can have confidence in the recovery of their costs (Helm 2014:31). Joint system development planning and the allocation of costs and risks of increasing cross-border interconnection are the answers of TEN-E (Commission 2007a:17).

The programme guidelines hence provide the development of a harmonised energy-system wide cost-benefit analysis as the basis for the allocation of investment costs related to particular projects that are not covered by tariffs for network users (Regulation No 347/2013:Article 12(1)). Moreover, where the investment in new cross-border interconnectors involves high primary risks (e.g. non-use and future) such that the investment would not take place, a number of (time-limited) exemptions provide project owners with a certain independence from the regulatory framework (Regulation No 714/2009:Article 17). TEN-E thus gives investors greater control over cash flow (Cuomo&Glachant 2013:18).

With better financing towards decarbonisation?

A densely interconnected European power grid is the necessary backbone of a decarbonised European power system. The European Union hence attempted to create a supportive environment for the development of a power transmission infrastructure which is capable of integrating renewables. Despite these efforts there seems, however, still much work left to do (Monti 2010:48): To this day the various EU programmes seem not to be yet powerful enough to stimulate the development of a power transmission system suitable for the aims of European energy policy (Agt 2011:30). The question therefore is, whether the efforts to develop a complex set of grid development programmes indeed resulted in a consistent and viable mix of instruments.

Some authors blame the Commission’s repeated focuses on specific projects on a bottom-up basis for the limited progress. Given the unbundling efforts of the past years, one might come to this conclusion; moreover it is true that the European Union historically preferred a bottom-up approach to energy policy. Yet unbundling concerns universal, not specific grid development. In view of the largely varying need for interconnection, increasing the interconnection capacity at specific chokepoints is one of the obvious starting points. EU policy towards such single projects changed, however, largely over the past years, and seems to be on the way towards a top-down approach; TEN-E in particular is characterised by a distinct top-down approach (Agt 2011:28-29).

According to Helm (Helm 2014:30-31), grid development does also suffer from the open question how to so organise markets in a way that investors can have confidence that costs will be recovered. The European Commission came to the same conclusion and thus called for a new approach to the planning, construction and operation of electricity transmission infrastructure (Commission 2010b). In its work programme the EU therefore sets out to analyse the optimum balance between public and private financing for projects of European interest which have no or poor commercial viability, and to develop innovative funding mechanisms for the coverage of main risks that improve the investment climate (Commission 2010b).

The EU is hence increasingly inclined to (co-) finance or guarantee the finance of infrastructure projects of European interest (Agt 2011:29). With the European Energy Programme for Recovery, for example, the European Union channelled financial resources from the EU budget directly to selected energy infrastructure projects (Commission 2013b). The connection and integration of renewable energy resources is among the five objectives of this programme (Regulation No 663/2009:Article 4). With a budget of 904 million EUR for grid interconnection measures and 565 million EUR for offshore wind energy , the integration of invested sums are considerable compared to the financial resources of the TEN-E programme.

Compared to the overall investment needs of about 400 billion EUR for distribution networks and smart grids and EUR 200 billion for transmission networks and storage (Tagliapietra 2013), this sum can, however, also be interpreted as limited support (depending on the point of view). Under the Europe 2020 flagship initiative on resource efficiency (Commission 2011a), the European Union therefore developed the Energy 2020 strategy: Support for energy infrastructure projects and the upgrade of Europe’s networks for the integration of renewables have a high priority in this strategy. Increasing certainty for investment and innovation (in grids) is one oft he key elements of this initiative (Commission 2011a).

The Connecting Europe Facility (CEF) is the result of this new reasoning on the support for European energy infrastructure (Regulation 1316/2013). With a multiannual budget of 5.85 billion EUR this new institution supports implementation of energy infrastructure projects defined as common interest (Regulation 1316/2013:Article 5). This support will mostly be granted in form of so called risk sharing instruments for project companies (Annex I, Part 2). The Connecting Europe Facility hence aims at reducing the financial risks for certain infrastructure projects. Greenhouse gas reduction is one of two general objectives in this regard (Article 3); more precisely, the CEF aims at increasing the amount of renewable electricity transmitted from generator to consumption centres/storage sites, and at avoiding curtailment of (intermittent) RES; moreover, the programme includes support for the deployment of smart grids (Article 4).

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