New rules

As stated by the European Commission, 2016 is set to be a ‘year of delivery’ in light of the proposal to re-write most of the EU energy legislation by adopting the Energy Security Package. Massimo Merola explains the significance

This Package aims to update legislation on the security of gas supply, enhance transparency and the Commission’s role within intergovernmental energy agreements, and outline new strategies for LNG and gas storage, and for heating and cooling. The Package is composed of two legislative proposals (the Security of Gas Supply Regulation and Intergovernmental Agreements) and two non-legislative documents (the LNG and Storage Strategy, and the Heating and Cooling Strategy).

The Package includes two key instruments for assessing investments in European gas infrastructures: the Security of Gas Supply Regulation and the LNG and Storage Strategy. The first mainly addresses the external challenges ofEuropean energy security, whereas the second focuses mostly on the internal ones.

Natural gas is ‘the bridge between coal and renewables’ and plays a central role in this recent proposal by the Commission, as gas will remain a key element of the energy mix for at least the next 20 years, despite the ongoing decarbonisation strategy. The first key instrument, the proposed Regulation, therefore specifically addresses the security of gas supply throughout the EU and is essentially based on gas stress tests carried out after the European Energy Security Strategy was adopted in May 2014. These tests analysed the potential consequences of a disruption in Russian gas supplies. The Commission’s main aim with the Security of Gas Supply Regulation is therefore to introduce: (a) a solidarity principle that prioritises households and essential social services during an emergency situation, (b) a mandatory regional preventive action, (c) emergency plans rather than national plans, and (d) changes in terms of reverse gas flows. The proposed Regulation also envisages enhanced reporting requirements concerning contractual terms between market operators. These reporting requirements will apply to long-term supply contracts (i.e., over 12 months), which account for more than 40 per cent of natural gas consumption in each member state.

In terms of the LNG and Storage Strategy, which is the second key instrument for investors, the Commission understands that the EU does not need significant additional LNG import capacity but better interconnections between neighbouring member states, particularly with those that already have direct or indirect access to LNG import terminals or trading hubs. Figures show that LNG terminals are used at an average rate of 22 per cent and additional LNG terminals are now under construction. The focus will therefore be on prioritising infrastructure projects to reinforce interconnections. The main projects that will receive support from the EU are those in the Baltics, South Eastern Europe and the Iberian Peninsula.

In light of these objectives, the Commission is expected to prioritise projects involving investments to remove bottlenecks, enable reverse flows for the bi-directional use of pipelines, diversify supply sources and connect already existing networks. The Commission will also prioritise investments to reduce energy waste, given the objectives of the Heating and Cooling Strategy.

At the same time as the Energy Security Package, another security of supply initiative that investors need to continue monitoring concerns Projects of Common Interests (PCIs), which still require an adequate regulatory framework at national level.

As to the regulatory risks to be managed by investors, it should be kept in mind that public support for energy infrastructures is, in principle, classified as State aid under the Commission Communication on the Notion of State aid.

Under the modernisation package on State aid control, projects receiving limited public support can now be immediately implemented without any notification obligation if the amount granted does not exceed EUR 50 million and certain regulatory conditions are satisfied (to be checked on a case-by-case basis). However, for large projects that require a notification, investors can take comfort in the fact that the Commission included more favourable rules for PCIs in the Commission’s Communication on the new 2014 Guidelines on State aid for environmental protection and energy. These Guidelines also introduced clear criteria to assess the compatibility of other infrastructure projects with State aid rules.

These two communications from the Commission have resulted in greater legal certainty and have cut red tape for public authorities and companies, thus encouraging the development of energy projects. It is now up to the investors to: (a) ensure that their projects comply with the new set of rules; and (b) obtain confirmation of this compliance in the form of a comprehensive self-assessment.

Moreover, as regards the commercial operation of energy infrastructures, investors should be aware of the need to implement an effective competition compliance programme. The Commission has enforced EU competition rules in this sector in the past, as seen a few years ago with the case involving GDF Suez, in which commitments were imposed regarding French entry points for natural gas.

In conclusion, the European Commission has clearly stated the main priorities of the European energy market. Now it is investors’ turn, and their real challenge is to devise ambitious projects capable of translating the Commission’s view into reality, whilst complying with EU competition law rules.

BonelliErede
Massimo Merola is a partner in the BonelliErede Energy & Infrastructure Focus Team. BonelliErede is a top Italian law firm, formed in 1999 when the Genoa-based Bonelli e Associati merged with the Milan-based Erede e Associati and the Brussels-based Pappalardo e Associati.

For further information please visit: belex.com/en/