The European Commission's emergency interventions in the energy market: Legal basis disputable

On 14 September 2022 the European Commission ("EC") published a proposal for a Regulation on an emergency intervention to address high energy prices ("Emergency Intervention Regulation" or "EIR"). The EIR requires EU Member states to implement three different measures: (i) Reduction in demand for electricity, (ii) Capping market revenues for the generation of electricity from inframarginal technologies (renewables, nuclear and lignite), and (iii) Collection of a monetary solidarity contribution from the fossil fuel industry. The EC says that the intervention measures can be based on Art 122 of the Treaty of the Functioning of the European Union ("TFEU") which establishes a competence for crisis intervention in the energy sector. However, it is questionable if the EC's view is going to withstand a judicial review since Art 122 TFEU has a very limited scope of application and some of the proposed intervention measures appear to go far beyond that scope.  

Renewable energy producers and fossil industry will probably consider taking legal action against proposed market interventions

The EC claims that Art 122(1) TFEU provides a legal basis for adopting the emergency intervention measures described above. It is therefore worth looking into this treaty provision in more detail: Pursuant to Art 122(1) TFEU, the European Council "may decide […] upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy". Art 122 TFEU therefore appears to establish a legislative competence of the European Council to adopt specific measures to manage a (energy) crisis. However, it can be argued that Art 122 TFEU does not refer to any kind of energy crisis. It is rather limited "to severe difficulties in the supply of certain products, including energy". Also, Art 122 TFEU explicitly refers to measures which are to be set in the "spirit of solidarity between Member States". This could restrict the application of Art 122 TFEU to a situation in which one or more Member States face security of supply issues whereas other Member States could help to resolve or mitigate those issues. In any case, when interpreting the scope of Art 122, it is important to consider that Article 122(1) is the only basis for binding measures in the field of economic policy. It is therefore an exception to the general rule according to which the economic policy remains within the competence and responsibility of the EU Member States (Art 120, 121 TFEU). The exceptional character of Art 122 TFEU requires a restrictive handling.

Against this background it is questionable if the fact of soaring prices within the EU gives enough reason to apply Art 122 TFEU and to impose the proposed measures in the form of a Council Regulation (without the involvement of the European Parliament). Of course, the current increase of electricity prices will harm the European economy. Financially weak households and vulnerable customers are massively hit by the current price developments. However, Art 122 TFEU explicitly addresses difficulties in the supply of energy and the wording of Art 122 TFEU appears to exclude measures to compensate for soaring energy prices. Currently, there is no physical supply shortage or immediate threat of such shortage which would require immediate action to safeguard consumers from being cut-off from supply. On the other hand, it can be argued that there is a risk of supply shortages in the upcoming winter and, therefore, the proposed emergency measures to reduce electricity demand in winter is necessary to prevent or mitigate the risk of a supply crisis. Thus, the proposed measures to reduce demand for electricity might be in line with Art 122 TFEU (although we believe that such measure could also be based on another provision of the TFEU, namely Art 194 TFEU, which regulates the competences of the EU in the field of energy policy). However, the above reasoning does not work for the proposed introduction of revenue caps and solidarity contributions since they do not directly address the formation of energy prices. Prices will remain and develop as always, with or without revenue caps and solidarity contributions. Also, the demand in electricity and natural gas will not change by introducing revenue caps and taxes on market revenues. Whereas capping and taxing and subsequent re-distribution of revenues to final consumers may be perceived appropriate from a social point of view, it is however debatable from a legal point of view, if such measures can be introduced based on Art 122 TFEU. And even if these measures can be based on Art 122 TFEU, it remains to be seen if the principle of proportionality is properly observed since Art 122 TFEU allows for "appropriate" measures only. A proportionality assessment is also mandatory as the revenue cap imposed on renewable energy producers interferes with the fundamental right to property.

Conclusion

The legal basis of the proposed revenue caps and solidarity contribution appears to be disputable. Renewable energy producers and companies active in the fossil fuel industry are recommended to conduct a thorough analysis in order to assess if there is a (strong) case to appeal the proposed intervention measures.

author: Bernd Rajal