Are the EU Institutions and the Member States Undermining the Energy Transition?

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In my latest article How the European Commission, the European Court of Justice and Member States are Scaring Away Investors in the Energy Sector I argue that the energy transition may be at risk from its own authors. In order to substantially decarbonise the energy sector by 2050 (with a target of 80% decarbonisation) the EU will require approximately $2 trillion worth of capital investment into the energy sector.

In order for that capital to be levered into Europe’s energy markets it is vital that investors are provided with a stable, predictable and transparent markets into which they can safely invest. It highly unlikely that state capital resources on their own can ever be deployed on the scale necessary to achieve the scale of decarbonisation required by the EU and the Member States.

Despite the need for huge capital flows and the inability of the public sector to deliver them on its own the EU and the Member States have not shown any great willingness to encourage such flows. In Slovakia v. Achmea at the beginning of March, the ECJ, threw doubt on the legality of all intra-EU bilateral investment treaties (and potentially all bilateral investment treaties). It is not unreasonable to say that at least there is a significant difference in the quality of court systems across the Member States. The ECJ in one fell swoop undermined the one type of mechanism that operated across the Union to protect investment flows. Meanwhile not to be outdone in Decision 2017/442 the European Commission sought to argue that arbitration awards in cases involving subsidy regimes could constitute payments of non-notified state aid-further undermining the investment arbitration system.

The Member States have lent a helping hand to the EU institutions in undermining investment flows. In Germany, Berlin dragged its heels over compensation for the sudden decision to close its nuclear power station fleet. It was only after being brought before the German supreme court did Berlin agree to negotiate a compensation package. Spain’s equally sudden decision to revise its RES subsidy regime, has resulted in a flood of cases to the courts and arbitration panels, with a further 30 cases waiting in the wings. In the Netherlands, the energy sector has been subject to a double whammy, of new coal fired power stations being closed down without any immediate prospect of compensation. And in the Groningen gas field, rapid production cuts have been imposed on a field that still has significant potential, and raise again concerns over compensation.

Given the Paris Agreement, the oil and gas sector will be substantially phased out between now and 2050. However, if coal power stations are encouraged to be built and not compensated, then the consequence is likely that as a result investors are also less likely to invest in renewables as well. They may well take the view that renewable investment that is welcomed today, will be deemed an albatross tomorrow and end up being treated like the coal fired power stations of yesterday.

The Member States in particular need to recognise the reality of protecting investment flows. Take the Groningen Field. It is true that the reason for ordering production cuts were the tremors caused by production from that field. The danger here is that an over-reaction reinforces the sense that the Member States do not really appreciate the impact of their decisions on future investment flows. The particular danger here is that decision, combined with the preemptory closure of the coal-fired power stations may undermine the capacity of the Dutch state to ensure continued investment flows.

Without a recognition that the energy transition requires a stable, predictable and transparent investment climate, it will be impossible for the EU as whole to deliver on its ambitious environmental goals.

Author: profalanriley1

Professor Alan Riley, specialises in energy law, energy security, antitrust and EU law. He is a Senior Fellow at the Institute for Statecraft, London and a Non-Resident Senior Fellow at the Atlantic Council, Washington, DC. He can be contacted at ariley@statecraft.org.uk

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