Network Codes & Guidelines. A legal perspective.
by Lavinia-Petronela Tanase
Network Codes versus Guidelines
Pursuant to the 3rd Energy Package, the aims of market integration, decarbonisation, competitiveness and security of supply are to be achieved through the correct implementation of the electricity network codes (NCs) and guidelines (GLs). The electricity market and transmission system are regulated via eight regulations, four NCs (Demand Connection Code, Requirement for Generators, High Voltage Direct Current, Emergency and Restoration) and four GLs (Capacity Allocation and Congestion Management, Electricity Balancing, Forward Capacity Allocation, System Operation). These EU Regulations are very innovative pieces of legislation, directly applicable and enforceable within the Member States. They deal with cross-border and market integration issues and they shall be without prejudice to the Member States` right to establish national network codes which do not affect cross-border trade.
NCs and GLs are technical rules, adopted by the European Commission through the Regulatory Procedure with Scrutiny (`RPS`), also known as the `Comitology Procedure`. The European Commission resorts to a specialised electricity cross-border committee to issue a positive or a negative opinion on the draft NC or GL. Then, the European Parliament and the Council play an important part in the adoption process, as they will scrutinize the draft Regulations and express their veto rights on three grounds only: (i) the draft NC exceeds the implementing powers offered to the Commission through the Third Energy Package or (ii) that the draft is not compatible with the aim or content of Regulation 714/2009 or (iii) the draft Network Code does not respect the principles of proportionality and subsidiarity. Basically, either the EP or the Council can block the measure, in approximately 3 months after the electricity cross-border Committee has approved the proposed NC or GL.
Even though they follow the same adoption procedure, the differences between the two are manifold, as follows:
- Different legal basis: NCs are adopted pursuant to the provisions of Article 6 of Regulation 714/2009, whereas GLs are to Article 18 of the same. Article 6 provides all the steps that the institutions involved, namely the European Commission, the Agency for the Cooperation of Energy Regulators (`ACER`) and European Network for Transmission System Operators for Electricity (`ENTSO-E`) shall take in order to develop the draft regulation. Article 18 contains obligations of a more general nature, hence not they less explicitly outline the specific steps that the EC shall follow in the development process.
- Different development process: according to Article 6(1) of Regulation 714/2009, the EC shall trigger the development process of a future NC pursuant to the establishment of an annual priority list which identifies the areas to be included in the development of NCs (ie. network security and reliability, network connection, third-party access, data exchange and settlement, interoperability, operational procedures in the emergency, capacity allocation and congestion management, rules for trading related to the technical and operational provision of network access services, system balancing rules). The EC can also develop Guidelines on the same topics, however, the EC can look beyond that list and touch upon other topics as well, as per Article 18 of Regulation 714/2009 (ie. details for determining which transmission system operators are liable to pay compensation for cross-border flows, appropriate rules for the progressive harmonisation of the underlying principles which set the charges applied to producers and consumers under national tariff systems, details of rules for the trading of electricity, details of investment incentive rules for interconnector capacity). Overall, it can be observed that EC might value wider discretion when it comes to the adoption of GLs, under the overarching purpose of ensuring a well-functioning Internal Energy Market.
- Different amendment process: the amendment procedure for NCs is clearly set out in Article 7 Regulation 714/2009, whereas the prerogative to amend a GL is provided for in Article 18(5). In the case of NCs, Article 7 of Regulation 714/2009 establishes the right of ACER to submit draft amendments to the EC, by its own initiative or at the request of any other interested person (ie. TSOs, ENTSO-E, system users and consumers). The EC can also propose amendments. ACER thus will organise an extended consultation period, after which will make reasoned proposals for the amendment to the EC. In this particular situation, the EC will have to follow the same Regulatory Procedure with Scrutiny and submit the draft proposals for amendments to the Comitology. On the other hand, as for the amendment of Guidelines, according to Article 18(5) Electricity Regulation: it shall be done directly by the EC, without the direct involvement of ACER, ENTSO-E or other stakeholders, or by amending its subsequent methodologies. The amendment of the Guidelines is a much more opaque process, as (i) the regulation does not set out a specific, clear process and (ii) the EC can directly adopt amendments, by-passing thus the specific rules for the involvement of stakeholders, laid out for amendment of NCs.
- Flexibility: NCs, on the one hand, regulate topics mainly related to the reliability of the transmission network, whereas, on the other hand, the GLs deal with market and operation issues, closer to real-time operation of the market. Thus, one can assume that while the topics of the NC are fixed, and a bit rigid in substance (ie. emergency and restoration protocols, requirements for generators, demand connection), the GLs expand on details of the fast-paced development of the electricity markets in different timeframes (ie. day-ahead, intraday, forward capacity allocation). Hence, the GLs can be seen as a means to foster the flexibility of the regulatory framework to meet the rapid technological and market advancements.
All in all, these differences between the two types of legal instruments do not change their legal value: remember, they are EU regulations, directly applicable and enforceable in the Member States. What is important to note though is that the market and operation GLs enshrine even more flexibility through the adoption of further Terms Conditions and Methodologies (TCMs). These TCMs are used to regulate detailed aspects of the market and system operation. For this reason, we are going to focus on the role, adoption process and the importance of these documents.
Implementation Challenges: Terms, Conditions and Methodologies.
The EU Electricity Network Codes and Guidelines deal with cross-border and electricity market integration issues. The guidelines (GLs) are the legal instruments that ensure that the regulatory framework is up-to-date with the fast progress of the Internal Energy Market (IEM). But, the GLs do so mostly through their provisions, which support the emergence of further regulatory instruments, called Terms, Conditions, and Methodologies (TCMs). Currently, the Balancing (EBGL), Capacity Allocation and Congestion Management (CACM GL), Forward Capacity Allocation (FCA GL) and System Operation (SOGL) guidelines are to be further implemented through more than 100 regional or European TCMs.
Topics of the TCMs
The flexible regulation of the electricity market and operation of the system is performed under the provisions of the guidelines. Each of the GLs contains specific provisions that mandate the adoption of various TCMs, on specific topics. To name a few, the CACM GL imposes the adoption of methodologies on the definition of cross-border capacity calculation regions (Article 15), short– term (day-ahead and intraday) cross-border capacity calculation methodologies (Article 20), coordinated redispatch and countertrading (Article 35), while the FCA GL proposes the adoption of methodologies on the splitting of long-term cross-zonal capacity (Article 16), as well as on harmonised cross-zonal capacity allocation rules for long-term transmission rights (Article 52). The EBGL requires the drafting of methodologies on pricing balancing energy and cross-zonal capacity used for the exchange of balancing energy (Article 30), as well as methodologies that set out the frameworks for the establishment of European platforms for the exchange of balancing energy (Article 20–22). Ultimately, Article 75 SOGL mandates the adoption of methodologies for coordinating the operational security analysis.
Regionality of the decision-making process
Since the TCMs are built around market and system operation topics, the Transmission System Operators (TSOs), as the main technical experts of the Internal Energy Market (IEM), were appointed as the main drafters, through the provisions of the GLs. Other market players, as well, such as the Nominated Electricity Market Operators (NEMOs) (in the case of the CACM GL) may be under obligations to draft TCMs. After the drafting, the TCMs shall be approved by the National Regulatory Authorities (NRAs). The approved TCMs will become binding on the TSOs and all other addressed parties, once each NRA has adopted a national decision to implement the TCM, within its own national jurisdiction. In this way, one can observe that, while the drafting and approval are performed at a regional or EU-wide level, the implementation and monitoring of the implementation is done, firstly, at national level. The national decision of the NRA represents the legal basis through which any interested party can challenge the actions of a TSO or NRA in regards to the potential incorrect implementation of a certain TCM.
In this way, the regulation of the market becomes more decentralised. The EU legislators are not directly involved, but the NRAs and ACER were granted important decision-making powers. In addition, it can be observed that the decision-making process is separated among the regional and European level. The NCs and GLs define the splitting of the IEM in several regions. For example, the CACM GL mandates the definition of capacity calculation regions (CCR), while the Requirements for grid connection of generators NC (RfG NC) refers to synchronous areas and the SOGL to load-frequency control areas (LFC).
All EU TSOs or TSOs from a concerned region will have to cooperate and draft a methodology on a specific topic, as required by the provisions of one of the Guidelines. They are obliged to submit a proposal for a methodology by a certain deadline. The TSOs shall submit the proposal to all NRAs from the EU or to the NRAs from the concerned region, depending on the impact area of the topic dealt with in the methodology. For instance, a proposal for a common capacity calculation methodology, issued under Article 15(1) CACM GL will be drafted by the TSOs from a certain CCR and shall be submitted for approval to all NRAs from the same CCR. On the contrary, a proposal for a methodology establishing the methods to distribute the congestion income among TSOs shall be developed by all EU TSOs and submitted for approval to all EU NRAs.
Once the regional or all EU NRAs receive a proposal for a methodology, they shall approve it with unanimity. The approval will be done through an All/Regional NRAs Framework Agreement. This multinational agreement needs to be further transposed at national level through an individual national decision of each of the NRAs involved in the approval. Given that the methodologies bear uneven distributive effects on the states involved, the NRAs might find it difficult to reach an agreement. In these situations, or at the joint request of the NRAs, ACER will be asked to issue a decision settling the matter. Once again, pursuant to ACER`s decision, each NRA will take a national decision on the implementation of the TCM in question.
Legal value of TCMs
Initially envisaged by the European Commission as technical documents with a legal value similar to the one of the Guidelines themselves, the TCMs have developed into documents whose legal nature remains unclear. Certainly, they are regulatory documents crossing several jurisdictions, aiming to create trans-national legal standards that ought to be further implemented by each MS, separately. The question that still needs to be answered is: how can one qualify these methodologies, from a legal perspective, so as to ensure their swift enforcement at a cross-border level? After all, while we talk about market integration, could we not also add judicial integration to the discussion?
And now we move to the second type of implementation challenges: private agreements.
Implementation challenges. Private agreements
Last week, the blog post tackled the topic of the electricity Network Codes and Guidelines being implemented via further Terms, Conditions and Methodologies (TCMs). In addition to these TCMs, though, what is very interesting is the fact that the Guidelines contain a mandatory electricity market regulatory framework which obliges transmission system operators, NEMOs and other market players to enter into private agreements.
For example, the CACM GL lays down a `robust, reliable and non-discriminatory Union governance framework for the single day-ahead and intraday coupling`. This implies that the Guideline in itself creates obligations for the TSOs and NEMOs to enter into agreements for: NEMO-TSO cooperation, information exchange and non-disclosure of confidential information or on the intraday operation of the market coupling.
It is only through seamless cooperation, that the EU-wide market coupling goal can be achieved, in the day-ahead and intraday time frames.
In addition, while performing the Market Coupling Operator function, the NEMOs shall be bound by a contractual framework which contains, among other contracts: operational agreements for the day-ahead and intraday market coupling processes, and cooperation agreements between NEMOs. Importantly, the CACM GL, in Article 7(3) also makes reference to the contracts that the NEMOs shall conclude with third parties. These contracts can be service agreements concluded with the day-ahead or intraday service providers.
The novelty in the implementation of the Guidelines comes from the fact that, under Article 7(5) of the CACM GL, the Agency for the Cooperation of Energy Regulators (ACER) has been granted prerogatives to (i) monitor the NEMOs` progress in establishing and performing the market coupling operator function and (ii) analyse if the contractual and regulatory framework is effective and efficient. For this purpose, the NEMOs must send the draft agreements to be concluded among themselves and with third parties to ACER. ACER thus has continuous monitoring powers over this contractual framework of the NEMOs and between the NEMOs and third parties.
ACER shall report to the European Commission if these obligations have been fulfilled or not. In the latter case, ACER will inform the EC and may recommend any further measures. Curiously, the EC has direct intervention powers, in case the NEMOs do not fulfil their obligation to submit the draft agreements and, according to Article 7(6) CACM GL, the EC can even request an amendment of the Guideline itself.
In the case in which the real agreements concluded between the NEMOs or between them and third parties depart from the text of the draft agreements, ACER will again notify the EC and recommend further measures.
Given the fact that market coupling is one of the founding blocks of the Internal Energy Market, the NEMOs` agreements with other NEMOs and/or with third parties concluded for this purpose, are subject to the careful monitoring of national regulators, ACER and ultimately, the EC. The extensive powers of ACER and the potential direct intervention of the EC in the private understanding of two parties show that the electricity market is regulated to its core and that the decision-making process is steered from a higher-up level, in almost all situations.
This essay was originally published as a series of fully referenced blog posts on the FSR website which can be read here.
