1. Introduction
The aim of the present article is to illustrate why regulation of energy infrastructure and the unbundling of energy storage facilities are necessary in the European Union energy sector (Section 2) and contains a critical assessment of the Regulation (EU) 2019/943 of the European Parliament and of the Council (the Regulation 2019/943) and of the Directive (EU) 2019/944 of the European Parliament and of the Council (the Directive 2019/944) (hereinafter together referred to as the CEP 2019) from the perspective of the unbundling of, on one hand, energy storage facilities, and on the other hand, transmission system operators (TSOs) or distribution system operators (DSOs) (Section 3).
The European Union energy infrastructure regulation is required for achieving the objective of a complete decarbonised market by establishing rules for effective and efficient use of energy sources, creating incentives for market participants to invest in the production of electricity from renewable sources and in developing new energy services, such as energy storage facilities.
2. Why infrastructure regulation and unbundling of energy storage are necessary in the European Union energy sector
The most vital aspect of infrastructure regulation of the energy sector is that it helps attaining the goal of decarbonisation, by enabling the development of renewable energy sources. In particular, the regulation of the energy storage can serve as a tool for fulfilling the objective of an energy sector fully free of emissions.
It is necessary to ensure the effective and efficient use of energy sources, including storage facilities, by preventing capacity hoarding and delays. In this respect, removing existing barriers to cross-border trade is crucial. Energy regulation aims to ensure the security of the energy market by eliminating congestions and by preventing lost load as well as economic losses caused due to interruptions of electricity.
The security of supply of electricity can be ensured only by a fair competition in the energy market. For this purpose it is necessary to establish a separation of the competitive segments, such as generation, supply and storage, from the segments thar are non-competitive as a result of a natural monopoly, such as transmission (K. Talus, EU Energy Law and Policy: A Critical Account, Oxford University Press, 2013, pp. 192-193).
Undertakings having natural monopolies in the segment of transmission or distribution have an incentive and the ability to exploit their position in favour of their own activities in other segments (T.M. Dralle, Ownership Unbundling and Related Measures in the EU Energy Sector, European Yearbook of International Economic Law, Volume 5, Springer International Publishing, 2018, p. 4).
In this regard, restrictions on the ownership of certain components of the energy system, such as energy storage facilities, are necessary in order to prevent distortion of the competition on the market.
The regulation of unbundling of the networks contributes to ensuring a fair competition by avoiding conflicts of interests, otherwise existing the ability of delivering services or products of lower quality. Solving conflicts of interests may be done effectively by establishing rules on the unbundling of system operators from the functions of generation, supply and storage.
Regulatory certainty is necessary in order to deliver investment incentives for a decarbonised and sustainable electricity system. In a non-competitive market, the incentives to invest are low, because new market entrants are restricted from accessing the market on a fair and equitable basis. Regulation is necessary also to ensure participation in the energy market on equal footing. Particularly, regulation of the ownership over energy storage is required to ensure fair access to energy storage services to all market participants.
Establishing rules on the pricing mechanisms of electricity may effectively provide market-based incentives for investment into flexible energy sources, such as energy storage, thus aiming to ensure the security of the energy market.
In particular, including storage facilities under the unbundling rules eliminates the structural risks of discrimination by system operators in favour of their other investments.
3. Critical assessment of the Regulation 2019/943 and Directive 2019/944 from the perspective of unbundling electrical energy storage facilities
Under the CEP 2019, the regulatory authorities aim, as part of their general objectives, to facilitate the access to the electricity network for new energy storage facilities and to remove the barriers to entrance of new market participants in respect of owning, developing, managing or operating energy storage facilities.
Under the previous rules established by the Directive 2009/72/EC of the European Parliament and of the Council (the Electricity Directive 2009), there was no specific framework on energy storage ownership. However, excluding storage facilities from the unbundling rules would have created the risk of discrimination by the TSOs and DSOs in favour of their investments. According to the European Commission, storage had to be included into one of the categories falling under the Electricity Directive 2009, namely into “generation” of electricity. The European Commission considered that storage and generation are comparable because they can be used to sell the very same services, be active on the same markets, as well as having similar investment costs and market impact. From a technical standpoint, energy storage technologies are able to generate electricity (C. Gissey, G. Dodds, P.E. Radcliffe, Market and regulatory barriers to electrical energy storage innovation, in the Renewable and Sustainable Energy Reviews journal, Volume 82, Part 1, February 2018, pp. 781-790).
Thus, the European Commission treated energy storage as generation, having applied the unbundling requirements to “energy storage” as well as to “reserve energy” (European Commission's Opinion pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10 of Directive 2009/72/EC – Finland (Aland) – Kraftnät Aland Ab, p. 2).
Under the CEP 2019, the function of energy storage is clearly treated separately from the functions of generation, transmission, distribution and supply of electricity – Directive 2019/944, Article 1 (“Subject matter”): “This Directive establishes common rules for the generation, transmission, distribution, energy storage and supply of electricity (…)”.
3.1. Unbundling of energy storage facilities
The Directive 2019/944 provides that transmission or distribution system operators “shall not own, develop, manage or operate energy storage facilities” (Articles 36 and 54 of the Directive 2019/944).
Thus, the CEP 2019 created a separate special regime of unbundling applicable to the ownership, development, management and operation of energy storage facilities.
The traditional unbundling models, the ownership unbundling model, the independent system operator (ISO) model and the independent transmission operator (ITO) model under the CEP 2019 are not applicable, as they do not expressly include storage. The ownership unbundling model provided for transmission system operators by Articles 43 of the Directive 2019/944 refers to control exercised over “an undertaking performing any of the functions of generation or supply”, therefore excluding the function of energy storage, as clearly separated by Article 1 of the Directive 2019/944.
The unbundling of distribution system operators refers in Article 35 of the Directive 2019/944 to DSOs part of a vertically integrated undertaking: “Where the distribution system operator is part of a vertically integrated undertaking, it shall be independent at least in terms of its legal form, organisation and decision-making from other activities not relating to distribution. (…)”.
The vertically integrated undertaking’s definition includes the functions of generation or supply, excluding the separate function of energy storage, under Article 2(53) of the Directive 2019/944: “«vertically integrated undertaking» means an electricity undertaking or a group of electricity undertakings where the same person or the same persons are entitled, directly or indirectly, to exercise control, and where the undertaking or group of undertakings performs at least one of the functions of transmission or distribution, and at least one of the functions of generation or supply”.
Similarly, the ISO and TSO models refer to system operators part of vertically integrated undertakings and excludes the function of energy storage.
In any case, the storage function was included among the main functions regulated by the CEP 2019, among the activities of generation, transmission, distribution and supply of electricity – Directive 2019/944, Article 1 (“Subject matter”): “This Directive establishes common rules for the generation, transmission, distribution, energy storage and supply of electricity (…)”.
By reviewing the conditions established for the unbundling of energy storage facilities, there can be identified differences of treatment between TSOs and DSOs. The differences of treatment may be explained by the fact that transmission may be considered as more important, given that it operates transportation of extra high-voltage electricity at a national level, rather than distribution, which operates the transportation of high-, medium- and low-voltage electricity at a local level. In this respect, a higher standard of verification shall be applied in relation to the function of transmission.
The absence of definitions of the concepts of “own[ership]”, “develop[ment]”, “manage[ment]” and “operat[ion]” may lead to controversial misinterpretations and may give way for a larger possiblity of arbitrary behaviour from the TSOs and DSOs wishing to perform activities in relation to energy storage facilities. As such, the CEP 2019 should have included definitions of at least the concepts of “development”, “management” and “operation”, for a clear and complete interpretation of the applicability of the unbundling regime.
In relation to the understanding of the concept of “ownership” of energy storage facilities by transmission or distribution system operators, there may be considered two interpretations.
The first interpretation is that ownership, in the context of this unbundling regime, refers to both direct owning, where the TSO/DSO owns the storage component as an asset, and to indirect owning, where the entity owns a subsidiary that owns the storage component. Under this interpretation, the indirect ownership of energy storage facilities would be prohibited from the very beginning.
The second interpretation is that ownership, in the context of this unbundling regime, refers only to direct owning, where a TSO or DSO owns the storage component as an asset. This scenario would allow the TSO or DSO to own a subsidiary that owns, develops, manages or operates an energy storage facility, thus being in the presence of a legal separation, provided that it does not exercise any “ownership” rights over the facility and the “daughter” company holding the energy storage facility acts independently from the “parent” system operator, similar to the to the requirement of the ownership unbundling model condition applicable to DSOs, by which they shall be “independent” from other activities not relating to distribution. However, this interpretation should not be regarded as mixing unbundling models, which is prohibited (Interpretative Note on Directive 2009/72/EC concerning common rules for the internal market in electricity and Directive 2009/73/EC concerning common rules for the internal market in natural gas, 22 January 2010, p. 5).
In the author's opinion, the second interpretation should be favoured – by which the transmission or distribution system operators may own an undertaking that owns the energy storage facility, as long as the TSO or DSO itself does not exercise any rights of ownership in relation to the storage facility – for the following arguments.
Firstly, similar to the ownership unbundling model – which provides for a structural separation of generation and supply, on one hand, and transmission or distribution assets, on the other hand –, in the case of energy storage facilities, the legal separation of the undertakings, even if they are part of the same group, can be clear, reliable and easily enforceable, thus being able to avoid the ability or incentive for discrimination by transmission or distribution system operators. Therefore, as long as the structural separation guarantees that the TSO or DSO does not exercise ownership rights over the energy storage facility, then it may be allowed to own an independent undertaking that exercises these rights without involvement from the system operator (A.A. Marhold, Energy in International Trade Law. Concepts, Regulation and Changing Markets, Cambridge University Press, 2021, p. 190).
The storage unbundling regime prohibits also the “development”, “management” and “operation” of the energy storage facilities. Therefore, a legal separation may not be a sufficiently reliable mechanism. The TSO or DSO should be able to demonstrate that it does not develop, manage or operate the energy storage facility.
It is worth noting that ownership is not equivalent to “control” and does not necessary imply the meaning ascribed to it (Judgment of the CJEU of 2 April 2009, Case C-84/95, Bosphorus Hava Yollari Turizm ve Ticaret AS vs. Minister for Transport, Energy and Communications, Ireland and the Attorney General, EU:C:2009:215, para 15).
By comparison with the ownership unbundling model, the concept of control involves a broader sphere of any means by which a transmission or distribution system operator may exercise a decisive influence on an undertaking.
On the other hand, the concept of “independence” may be interpreted as to be found also under the unbundling of the energy storage facilities, considering the need for the absence of the transmission or distribution system operator’s “ownership”, “development”, “management” and “operation” of such facilities. By applying the interpretation given by the European Commission to the concept of “independence”, it may be concluded that as long as the energy storage facility is able to act completely free, to take autonomous decisions and to be shielded from any instructions or external influence that the transmission or distribution system operators would otherwise be able to exercise, then the prohibition may not apply (Judgment of the CJEU of 2 September 2021, Case C-718/18, European Commission v Federal Republic of Germany, EU:C:2021:662, paras 108-109).
Secondly, the European Commission’s opinion is that in order for an undertaking to be considered that it is the “owner” of an asset, there has to be performed an in-depth analysis of the rights and obligations held in relation to the asset (European Commission's Opinion, 2015, pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10(6) of Directive 2009/72/EC and to Article 3(1) of Regulation (EC) No 715/2009 and Article 10(6) of Directive 2009/73/EC - Portugal - Certification of REN Rede Elétrica Nacional S.A. and REN Gasodutos S.A. p. 2). The European Commission has interpreted that an undertaking is considered to be “owning” a network, in the context of Article 43(1)(a) of the Directive 2019/944 , where it exercises the rights of use and disposal as equivalent to those of an “owner”. By applying this interpretation to the concept of ownership of energy storage facilities, an undertaking may be considered to “own” such facilities, in the case that it exercises the rights of use and disposal in relation to it, as equivalent to an owner.
Thirdly, in the case that in the Directive 2019/944 it would have been desired to prohibit both direct and indirect ownership, it would have been expressly provided so therein. By comparison, in the case of the ownership unbundling model, the requirement for the model to apply to transmission system operators is the exercise of a direct or indirect control or of any right over the element subject to unbundling, while in the case of distribution system operators that are part of vertically integrated undertakings, the DSO shall be “independent” from other activities not relating to distribution, without having to comply with the requirement of separate ownership (Judgment of the CJEU of 17 October 2019, Case C-31/18, “Elektrorazpredelenie Yug” EAD v Komisia za energiyno i vodno regulirane (KEVR), EU:C:2019:868, para 66).
However, it is clear that the CEP 2019’s objective was to not expressly exclude any form of ownership, and that its applicability should be interpreted from one case to another.
In conclusion, the prohibition to own an energy storage facility by transmission or distribution system operators should be interpreted as to exercising the rights of use and/or disposal in relation to the facility, either by directly holding the component in their property, or by having the ability to exercise these rights through a special purpose vehicle.
3.2. Derogations under which TSOs and DSOs may own, develop, manage or operate energy storage facilities
The Directive 2019/944 grants the Member States the choice of enacting derogations allowing TSOs or DSOs to own, develop, manage or operate energy storage facilities, under certain conditions.
3.2.1. First derogation – energy storage facilities are fully integrated network components
The first derogation by which Member States may exempt TSOs or DSOs from the prohibition of ownership, development, management or operation of energy storage facilities, applies in the situation where the energy storage facilities are “fully integrated network components” – Article 36(2) and Article 54(2) of the Directive 2019/944.
Fully integrated network components are those components integrated in the transmission or distribution system used for the sole purpose of ensuring the security and reliability of the operation of the system. Moreover, the fully integrated network components contribute to the synchronisation of the system’s elements.
Electricity storage facilities that are used for other purposes than that of ensuring a secure and reliable operation of the transmission or distribution system, such as balancing or congestion management, are not considered fully integrated network components and thus, do not fall under the derogation from the prohibition applicable to transmission or distribution system operators.
In a similar manner, TSO and DSOs shall not be allowed under this derogation to own, develop, manage or operate electricity storage facilities that are used for the sole purpose of gaining an economic profit.
The Directive 2019/944 provides in its recitals with examples of network components that are fully integrated, namely capacitors and flywheels.
In this case of derogation, it is mandatory to obtain the approval of the national regulatory authority for the TSO or DSO to be authorized to own, develop, manage or operate an energy storage facility.
The decision granting this derogation to a TSO shall be notified to the European Commission and to the European Union Agency for the Cooperation of Energy Regulators (ACER). However, the decision granting such derogation to a DSO does not need to be notified.
3.2.2. Second derogation – other market participants cannot own, develop, manage or operate energy storage facilities in a cost-effective manner
The second derogation from the prohibition of ownership, development, management or operation of energy storage facilities by TSOs or DSOs, that Member States may enact, requires three cumulative conditions – Article 36(2) and Article 54(2) of the Directive 2019/944.
Under the first condition, the TSO or DSO shall initiate an open, transparent and non-discriminatory tendering procedure in which other parties participate for the right of ownership, development, management or operation of an energy storage facility. In the case that this tendering procedure fails for whatever reason in granting other parties such right, or if the undertaking that was awarded the tender fails to deliver the service at a reasonable cost and in a timely manner, then the TSO or DSO is able to apply and may be granted the derogation by which it is allowed to own, develop, manage or operate the energy storage facility.
Under the second condition, the energy storage facility must be necessary for the TSO or DSO to fulfil their obligations under the Directive 2019/944 for the efficiency, reliability and security of the system, provided that they are not used to buy or sell electricity.
The Directive 2019/944 includes a variation between the case of TSOs and DSOs, in the sense that even if the energy storage facilities are not necessary for the TSO to fulfil their obligations, in case there exist “non-frequency ancillary services” that are necessary for this purpose, then this condition is fulfilled. On the other hand, the Directive 2019/944 does not allow DSOs to benefit from this derogation in the case that non-frequency ancillary services are the elements necessary for the fulfilment of the said obligations, but the energy storage facilities themselves are not necessary for this purpose. By this difference, the CEP 2019 grants more flexibility to TSOs than to DSOs.
Additionally, the Directive 2019/944 provides under this second condition that energy storage facilities shall not be used “to buy or sell electricity”. This prohibition however is limited to the activities of buying and selling electricity, without falling under this sphere other commercial operations that may be performed in relation to energy storage facilities, for example the lease of the facility. A more complete wording of this prohibition – such as referring to “commercial operations” – would have prevented any other existing or potential commercial operations for the uses that technology may help develop the energy storage facilites in the future. As the European Commission stated, “all reasonably possible uses” and the need to prohibit only those that may raise unbundling issues need to be taken into account (European Commission's Opinion of 2 March 2018, pursuant to Article 3(1) of Regulation (EC) No 714/2009 and Article 10(6) of Directive 2009/72/EC - Germany - Certification of TenneT Offshore 1. Beteiligungsgesellschaft mbH and TenneT Offshore 9. Beteiligungsgesellschaft mbH).
Under the third condition, the regulatory authority is required to assess the necessity of the derogation and to perform an assessment in relation to the tendering procedure mentioned under the first condition above, both in the cases of TSOs and in the cases of DSOs.
On one hand, the assessment performed by the regulatory authority in the case where a TSO applies for a derogation is an ex ante review of the “applicablity” of the tendering procedure for the rights in relation to the energy storage facility. Therefore, this review must be done before the tendering procedure is commenced. The prior nature of the review strenghtens the unbundling regime, as it aims to ensure the strict compliance with the competition-based market tendering rules.
On the other hand, in the case of DSOs, the Directive 2019/944 does not provide for the assessment of the tendering procedure to be done ex ante. Moreover, the Directive 2019/944 provides that the assessment shall be done to the (whole) tendering procedure, not only to its “applicability”. Therefore, in the case of DSOs, this assessment can be done also ex post, situation in which, having had ended the tendering procedure already, the regulatory authority shall review the whole tendering procedure, not only its applicability as in the case of TSOs.
3.2.3. Mechanism of phasing-out TSOs and DSOs from the energy storage activities
The Directive 2019/944 provides for a mechanism of phasing-out TSOs and DSOs, in the case where other market participants are able to own, develop, manage or operate energy storage facilities in a cost-effective manner.
The regulatory authorities are required to perform regular, or at least every five years, public consultations on the existing energy storage facilities. The purpose of such public consultations is to determine whether there exist other parties that may be interested in owning, developing, managing or operating the energy storage facilities.
By exception, the phasing-out shall not apply to fully integrated network components. This exception is in line with the fact that fully integrated network components may be owned, developed, managed or operated by TSOs or DSOs with the approval of the regulatory authority.
Also by exception, the phasing-out shall not apply for the usual depreciation period of new “battery” storage facilities, under certain conditions. According to Articles 36(4) and 54(5) of the Directive 2019/944, in order for the TSOs and DSOs to be exempted from the phasing-out procedure in the case of usual depreciation of storage facilities, these facilities should be (1) connected to the grid within two years after the final investment decision, (2) integrated in the system, (3) used only for the reactive instantaneous restoration, and (4) not used to buy or sell electricity. For this exception to apply, the final investment decision should have been taken until 4 July 2019 in the case a DSO made the investment, according to Article 36(4) of the Directive 2019/944, and until 2024 in the case TSO made or would make such investment, according to Article 54(5) of the Directive 2019/944.
The Directive 2019/944 can be criticized for the fact that it inadvertently refers for the sole time to “battery” storage facilities, instead of “energy” storage facilities.
The difference between battery-type storage facilities and other types of storage that may be developed, such as flywheel and super-capacitor storage, pumped hydroelectric storage, compressed air storage and thermal storage, would be unjustified.
4. Conclusions
Energy infrastructure regulation, in general, and regulation of energy storages in particular, contribute to, among others, achieving the goal of decarbonisation, ensuring the effective and efficient use of energy sources, preventing capacity hoarding and delays, removing existing barriers to cross-border trade, ensuring a fair competition by avoiding conflicts of interests, delivering investment incentives, eliminating the structural risks of discrimination, participation in the energy market on equal footing.
The Regulation 2019/943 and the Directive 2019/944 establish rules on the unbundling between the transmission or distribution system operators, on one hand, and energy storage facilities, on the other hand. The Directive 2019/944 also provides with the possibility of the Member States to adopt derogations under which TSOs and DSOs may own, develop, manage or operate energy storage facilities.
In practice, the provisions of the CEP 2019 may lead to controversies, such as the interpretation of the concept of ownership and the applicability of the mechanism of phasing-out to for the usual depreciation period of all new energy storage facilities, rather than only to “battery” storage facilities.
By Andrei Diaconescu
