Security of energy supply as a derogation from EU law: Castelnou Energia v. Commission

Introduction

In recent years the security of the energy supply has been a growing concern for both the European Union (EU) and several Member States, especially those more dependent on imports from third countries to meet their energy needs, which may be affected by an uncertain international political context. However, the European Commission and the European Courts have always been very reluctant to endorse national measures to safeguard the security of supply derogating from EU law, in particular those rules relating to freedom of movement within the European internal market and State aid.

The recent General Court judgment in case Castelnou v. Commission¹, concerning a Spanish measure to support electricity production from “indigenous” coal, is an interesting example in this context. In this case, a measure characterized as State aid and potentially restrictive of the freedom of movement of goods and the right of establishment was declared compatible with EU law because it concerned a service of general economic interest (SGEI) for safeguarding the security of electricity supply. On the other hand, the Court clarified that when a State aid measure does not pursue an environmental objective, the Commission is not required to take into account EU law provisions on environmental protection².

The Aid Measure to Power Plants using “Spanish” Coal

In 2010 the Spanish Government notified to the European Commission under the State aid rules a measure establishing a mechanism of “preferred dispatch” of electricity produced by ten power plants using “indigenous” coal (i.e. of Spanish origin). The measure provided that such electricity should be purchased in the daily wholesale electricity market preferably to that produced by power plants using imported coal, fuel oil and natural gas. The power plants in question were required to produce certain amounts of electricity from indigenous coal, whose price is higher than imported coal, and benefited from a compensation equivalent to the difference between their additional production costs and the price of the sale of electricity in the daily wholesale market. This measure, which was to be in force from 2010 to 2014, was financed by a fund controlled by the Spanish State, and had an estimated cost of € 400 million per year.

Following an eventful review procedure – in which several electrical companies and a sector association, environmental organizations, Spanish local authorities and MEPs all spoke against the measure – the Commission concluded that the notified national regime constituted State aid pursuant to Article 107 TFEU, but was compatible with EU law, because the obligations imposed on the beneficiaries were related to the operation of a service of general economic interest under Article 106(2) TFEU, and were necessary to ensure the security of the electricity supply³. Castelnou Energia, one of the intervening entities in the procedure before the Commission, appealed against the approval decision (in which it was supported by Greenpeace Spain), invoking several errors in the Commission’s assessment. The appeal was, however, rejected by the General Court, which upheld the contested decision in its entirety.

Protection of Security of Supply as Justification for Services of General Economic Interest (SGEI)

For the Spanish Government, the support scheme was necessary to ensure that between 2010 and 2014 a sufficient reserve of production capacity existed to meet periods of peak demand when meteorological conditions were not favourable for the production of electricity from renewable sources (which in 2013 represented 52% of the total generation capacity in Spain⁴). The availability of “indigenous” coal power plants strengthened the security of energy supply in Spain, as the remaining fossil energy sources for electricity generation (coal and natural gas) were imported. On the other hand, in the absence of the support scheme these power plants would likely be closed, due to the higher costs of “indigenous” coal.

According to case-law, Member States have “wide discretion” in determining the nature and object of a SGEI. Although the exact discretion allowed to Member States has fluctuated over time depending on the circumstances of the case, the Spanish measure at issue found support in the Second Electricity Directive, under which Member States could provide that, for reasons of security of supply, priority is given to the dispatch of generating installations using indigenous primary energy sources⁵. For this reason, and having reviewed in detail the arguments of the Spanish Government and the other interested parties, both the Commission and, on appeal, the General Court acknowledged that the risks to the security of the electricity supply could justify the imposition of the SGEI obligations, and the corresponding compensation, to the plants concerned.

The Court also confirmed that the Commission had not committed a manifest error in concluding for the proportionality of the Spanish scheme. Recalling that, in the field of SGEI, the control of proportionality is limited to verifying that the measure in question is appropriate to achieve its objective, and, on the other hand, is not excessive, the Court examined in any case the detailed arguments put forward by Castelnou Energia, which were nevertheless considered unfounded.

In particular, with regard to possible distortions in the import of natural gas and coal markets caused by the support scheme, the Court considered (following the Commission) that such distortions were inherent to the concept of State aid and were not manifestly excessive regarding the objective pursued. In this regard, and recalling previous case-law on SGEI, the Court stated that the burden of proof cannot be so extensive as to require the Member State to go even further and prove that no other conceivable measure, which by definition would be hypothetical, could enable those tasks under the same conditions.

Internal market: free movement of goods and right of establishment

Invoking an ancient line of case-law on the relation between State aid and free movement of goods provisions, the Commission and the Court avoided concluding that the Spanish scheme also constituted a measure having an equivalent effect to a quantitative restriction on imports prohibited by Article 34 TFEU, notwithstanding that it openly promotes national coal production and harms imports. One cannot help considering this view as somewhat intriguing, given the extremely broad notion of measure having an equivalent effect to a quantitative restriction resulting from the general case law of the Court of Justice further to the Dassonville judgment (which covers all measures that directly or indirectly, actually or potentially, could have a negative effect on imports from other Member States).

In any case, the Court held, citing the Campus Oil case law, that the security of the electricity supply constitutes a reason of public security within the meaning of Article 36 TFEU, which can justify a measure restricting the free movement of goods (as well as the right of establishment), provided that the measure respects the principle of proportionality, which the Court found to be the case.

The Non-applicability of European Legislation on Environmental Protection

Castelnou Energy also held that the adoption of the support scheme in question violated several EU law rules on the protection of the environment. The Court, however, concluded that the Commission was not required to analyse the support scheme under EU environment law, as the national measure did not pursue an environmental objective.

On the other hand, the Court also recalled that the Commission, although bound to ensure overall consistency in the application of EU law, is only required to consider in the assessment of a State aid measure the compliance with other European rules pertaining to the internal market. However, since the “European internal market” is defined in the Treaties as “an area without frontiers in which the free movement of goods, persons, services and capital is ensured”, State aid that may have negative effects on the environment is not in itself contrary to the creation and existence of the internal market.

In any event, the Court analysed (and rejected) Castelnou’s argument that the measure violated the EU Directive on greenhouse gas emission allowance trading, because although the support scheme for power plants using “indigenous” coal could lead to the increase in CO2 emissions from these plants, it would not result in an overall increase in CO2 emissions in Spain.

Conclusion

Although not openly referred to by the Court, the political and social implications of this case were not negligible, not only due to the strong opposition raised from several quarters in Spain, but also because the scheme was essential for the maintenance of the Spanish coal mining industry.

It is therefore not surprising that the Commission and the Court, while formally declaring the limitations inherent to the review of the options made by Member States under the SGEI, have carried out a detailed examination of the arguments presented by both the Spanish Government and by the intervening entities opposed to the measure.

The favourable review, in any event, was greatly facilitated by the fact that the European legislator itself had enshrined in the directives harmonizing the electricity sector the right for Member States to give preference to part of their electricity production from indigenous energy sources, in order to safeguard the security of energy supply. Without such an express provision, one may wonder if the “wide margin” of the Spanish State in this field would not have been more closely scrutinized, and the case could perhaps have had a different conclusion.

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