Mortensen, Bent Ole Gram Mortensen --- "Green certificates in a Danish and EU context" [2001] NZYbkNZJur 3; (2001) 5 Yearbook of New Zealand Jurisprudence 25

Last Updated: 12 April 2015

Green Certificates in A Danish and EU Context

BY BENT OLE GRAM MORTENSEN*

Introduction

Environmental protection has in recent years become a continuously more important part of European energy policy. This development has been driven primarily by the wish to reduce anthropogenic emissions of greenhouse gases such as CO₂.' At the same time most European states have changed their regulatory regime for the electricity supply sector in order to achieve liberalisation introducing a market approach.² This liberalisation has called for more market-based instruments in environmental policy, including a change in the instruments used to promote renewable energy (RE), which are considered as an important part of the reduction of CO₂ emissions.

Feed-in tariffs for RE-based electricity have been a commonly-used instrument; however, they are only to a certain degree compatible with market-based regulation of the electricity supply sector, so other options have been considered. One such option is a separate market for RE; another is the issuing of green or RE certificates. The idea of such certificates is to split electricity as a commodity into two parts, the electricity itself, as a physical phenomenon, and a marketable RE certificate (replacing aid through feed-in tariffs) granted to electricity

Dr Gram Mortensen is Associate Professor of Law at the University of Southern Denmark.

The political process of the 1997 Kyoto Protocol seems to be important for this development. The EU is committing itself to reductions. See Council Decision 2002/358/CE of 25.04.2002 concerning the approval, on behalf of the European Community, of the Kyoto Protocol to the United Nations Framework Convention on Climate Change and the joint fulfilment of commitments thereunder.

2 A description of a market approach in comparison to a political or regulatory

approach can be found in Barton, B 'Does Electricity Market Liberalization Contribute to Energy Sustainability?' in Bradbrook, AJ and Ottinger, RL (eds) Energy Law and Sustainable Development (Cambridge: IUCN Publications, to be published 2003).
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producers using techniques considered as especially environmentally desirable (the environmental benefit).

Green or RE certification can be seen as an attempt to internalise environmental costs' and to deal with the fact that electricity is a homogeneous good, the quality of which does not reflect its way of production. Through the issuing of RE certificates, RE generators can be made part of the competitive electricity market and will further be part of a more or less competitive RE certificate market. In the coming years this instrument is meant to replace the more traditional state aid to RE electricity producers.' The reasons for such aid are basically environmental⁵ but also include security of supply.⁶ The interest in replacing more traditional subsidies with RE certificates is to create competition and thereby, it is hoped, more efficiency in the production of RE electricity. Such a scheme allows RE electricity and RE certificates to be traded fully independently.

In this article the legal nature of — and the problems following — an RE certificate scheme are analysed by using the planned Danish RE certificate system as an example. Other European regulatory regimes

Negative environmental costs of energy production are primary related to waste and air emission. A number of technologies create anthropogenic emissions of substances such as CO₂, which it is believed could cause negative environmental effects due to an increased greenhouse effect.

4. At national level the EU member states operate different mechanisms of support for RE sources, including RE certificates, investment aid, tax exemptions or reductions, tax refunds and direct price support schemes.
5. The environmental interest is to replace electricity production methods believed to cause negative environmental effects with technology not having such effects, or at least not to the same extent. This may be seen as an indirect way of dealing with CO₂ emission problems since no limits to CO₂ emissions are set.
6. Security of supply is achieved by increasing domestic energy production, increasing diversity in energy supply, and replacing production based on limited resources. Dependency of the EU member states on energy imports has remained unchanged at around 48% since 1990 but is expected to rise to 70% by 2030 if current trends persist. Security of supply has become an important part of the political agenda in Europe.

2001 Green Certificates in A Danish and EU Context 27
are mentioned, but no comparative study is planned.' Many of the legal problems arise out of the regulation issued by the European Union. The wish to create a common European market includes the electricity sector, but so far a common European RE market has not been developed. The Danish RE certificate scheme is therefore a national scheme, which might be in conflict with the EU regulation, especially the prohibition against state aid. This will be the main issue within this article. The intention is to demonstrate some of the problems connected with the use of RE certificates within a regime, which tries to avoid disturbance of competition by its members. This article does not intend to evaluate the efficiency (in an economic sense) of RE certificates to achieve political objectives, even though certain problems related to such efficiency are mentioned.

EU regulation

The Treaty establishing the European Community (EC Treaty) includes a number of provisions that limit the legislative freedom of the individual member states. Many of these provisions must be seen in connection with the wish to create an internal market within the European Union.' The Treaty's provisions include limitations in the granting of state aid (article 87 of the EC Treaty) and different prohibitions of discriminatory behaviour based on nationality within the common market.'

7. A number of EU member states have developed or are in the process of developing national RE certificate schemes. See Crookall-Fallon, C & Crozier-Cole, T 'Europe plans trading in "greenness"' (2000) Environmental Finance, October.
8. According to the EC Treaty, the internal market can be characterised as 'an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions' of the Treaty.
9. This includes prohibitions against quantitative restrictions on imports and exports and all measures having equivalent effect (articles 28-30) and discriminatory internal taxation (article 90) between member states. The question of whether RE schemes may violate these provisions is not dealt with in this paper.

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According to the EC Treaty the European Community has a certain competence within the field of energy.10 Some of the secondary legislation (directives) concerning the establishment of an internal energy market has been issued according to that competence. This includes the Council Directive 96/92/EC of 19 December 1996 concerning common rules for the internal market in electricity (the electricity market directive)." Through this directive a minimum demand for competition within electricity supply has been introduced. Further elements of the directive are third party access to the grids, introduction of a system operator and unbundling of accounting levels between natural monopolies (the grids) and competitive elements (trade and generation), and a minimum level of market opening.¹²

More recently the European Parliament and the Council have issued Directive 2001/77/EC of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market (the RE directive)."

The RE directive is meant to promote the use of RE sources within the European Community. So far it has not been politically possible to

10. The competence is shared by the European Community and the member states and is therefore not exclusive. However, member states cannot issue regulation contrary to EC regulation.

i i For general comments to this directive, see further Cameron, P Competition in Energy Markets: Law and Regulation in the European Union (Oxford: Oxford University Press, 2002) 144-165.

12. A text for a new electricity market directive was accepted by the EU Council on 25 November 2002. The new directive is still to be passed by the European Parliament and is expected to be issued in 2003. This new text demands unbundling at organisational level and calls for a total market opening not later than 2007.

13 For a general description of the European energy regulation, see Roggenkamp, M, Ronne, A, Redgwell, C & del Guayo, I Energy Law in Europe: National, EU and International Law and Institutions (Oxford: Oxford University Press, 2001) and Cameron, supra n 11. On 9 December 2002 the EU Council decided on a directive establishing a scheme for greenhouse gas emission allowance trading, promoting another market-based instrument in European environmental policy. This directive is expected to be passed by the European Parliament in 2003.
2001 Green Certificates in A Danish and EU Context 29
create an internal market for RE electricity or RE certificates. The RE directive merely requires the member states to set national indicative targets for the consumption of RE electricity. Further, the directive demands a national certification of RE electricity (guarantees of origin), which is to be distinguished clearly from exchangeable RE certificates. However, the member states themselves can develop national schemes, individually or in groups." A number of national schemes are issued or under way. One example is the British renewable obligation certifications (ROCs).15 Other examples of RE certificate systems are found in the Netherlands, Flanders (part of Belgium) and Italy.¹⁶

Danish electricity supply market and regulation

The Danish Electricity Supply Sector yearly generates 34.722 GWh (2000). Supplying a population of 5.3 million it may not seem so different from New Zealand (yearly production around 37.000 GWh). However, Danish electricity production is mainly based on fossil fuels, i.e. coal and natural gas, with no hydropower and geothermic resources of any significance. Further Denmark is, with Germany, Sweden and Norway, part of a North European electricity market. In dry periods

14. According to article 4 of the RE directive, the Commission shall evaluate the application of mechanisms in member states according to which a producer of electricity, on the basis of regulations issued by the public authorities, receives direct or indirect support and which could have the effect of restricting trade. Depending on the attitude of the Commission, this article could be used as 'pressure' to promote RE certificate schemes.
15. It is a system to mandate licensed electricity suppliers in the UK to deliver 3% of all electricity as renewable by 2003. They can comply with this obligation by delivering physical renewable electricity or by redeeming ROCs with an average price of £65 per MWh or by paying a `buy-out' penalty of £30 per MWh. For a discussion see Smith, A & Watson, J 'The challenge for tradable green certificates in the UK' ENER Bulletin 25.02.
16. These systems are described in van Sambeek, E 'The European Dimension of National Renewable Electricity Policy — The Dutch Experience' ENER Bulletin 25.02; Verbruggen, A & Couder, J 'Tradable green certificates in Flanders' ENER Bulletin 25.02; and Lorenzoni, A 'Leaving REFIT for the green certificate market: a jump in the dark?' ENER Bulletin 25.02.

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especially, the Norwegian hydropower system cannot supply the home market and the Danish sector acts as back-up.17

Soon after the electricity market directive was issued, its demands were included in the Danish Electricity Supply Act 1996. In 1999 a more basic reform followed, leading to the present Electricity Supply Act." The Danish electricity supply sector is owned by consumers and municipalities, the state not being involved. Liberalisation in the sector in accordance with the directive rules regarding eligible customers has called for third party access to the grids, the introduction of a system operator, and unbundling between the grids, which are natural monopolies, and trade and generation, which are now exposed to competition. The Danish legislature provided for a part of the municipality-owned sector to be corporatised, but privatisation was not intended. Municipalities may, however, themselves start to sell their activities.

As part of the Kyoto Protocol, Denmark has promised to reduce its emissions of greenhouse gases° by 21% in the period 2008-12 compared with the level in 1990. This focusses attention on the electricity-generating sector, which counts for 38.4% of the anthropogenic CO₂ emissions (2001). In order to cut down on these CO₂ emissions, the Government has in recent years promoted renewable energy and the use of combined heat and power by using different kinds of subsidies. In 2001 12.1% of the electricity generated in Denmark came from wind power. Another 6% came from the use of biomass, biogas and waste incineration, the last mentioned accounting for 3.5%. The political goal is that 20% of electricity consumption shall be supplied by RE electricity (excluding waste incineration as a source) by the end of 2003.

Denmark in the times of monopoly built up a large extra capacity with a
number of mothballed plants, which can be put back into operation. Many
of these plants are coal- or even oil-fired. They are heavily contributing to
the Danish CO₂ emissions.

Act No. 375 of 2 June 1999 with later amendments.

H4^,2 HFCs,PFCs,H2 0 and SF_6'

CO2.'
2001 Green Certificates in A Danish and EU Context 31

The Danish state RE scheme consisted until 1 January 2003 of a guaranteed minimum price (feed-in tariffs) in combination with a cash subsidy per kWh. However, the Electricity Supply Act affords the possibility of changing the pricing system for RE electricity by replacing prices currently fixed by law with market-fixed prices as soon as the RE certificates for the production in question are issued. This system has now been replaced by a market price plus a cash subsidy, the total of which has a limit. The sale of RE electricity is at present guaranteed, as the distribution companies together with the transmission system operator (TSO) are obliged to purchase RE electricity.²⁰ Whether this guarantee will still apply during a new regime of green certificates is not yet known. This scheme has been successful, to the extent that wind power capacity has grown enormously. Almost 75% of the present capacity has been built since the mid 1990s. Developments in technology have improved wind turbine efficiency, making investment attractive. The scheme, however, is not without its problems. Aid has resulted in many wind turbines being located on land. Inefficient turbines (often 10 to 20 years old) are not being replaced by new turbines because planning law now calls for fewer turbines on land and the present owners of the old wind turbines cannot necessarily count on approval for the replacements. Turbines have even been placed in areas with poor wind conditions, so beneficial have the aid schemes been. The Government has lately reduced the level of aid several times. Factors such as interim periods and a difference in the size of aid calculated as per the date of establishment and the size of the wind turbine have resulted in a very complex aid scheme. Also, Danish system operators now face periods when RE and CHP' (local combined heat and power production, which has increased) can not only cover all demand (in certain areas) but also produce a surplus. The surplus often has to be sold by systems operators on a stock exchange for a price close to zero, and the loss is passed on to consumers.

20. The consumer is obliged to buy a proportional share of the RE electricity. Only for the remaining part of the consumption can the consumer freely choose a supplier.

21 In 2001 around 53% of the domestic electricity supply was based on CHP.
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Implementation of the RE certificates system

RE certificates were introduced in the Electricity Supply Act 1999 in order to support renewable energy and replace the system of feed-in tariffs. The part of the Electricity Supply Act containing the RE certificate rules entered into force as of 1 November 2000, shortly after the European Commission had approved the rules pursuant to the provisions of the EC treaty on state aid (approval of 3 October 2000, N 416/1999). The date for the entry into force is still to be decided by the responsible minister. Until then the present production subsidy will continue to exist. Originally, a 1999 report from the Danish Energy Authority considered that the RE market would be functional in 2001. However, the report also stated that the number of RE certificates would not be sufficient to cover the basic cost of the trade before 2002. However, the new Danish government wants to reform the Energy Supply Act in early 2003, and has entered into an agreement with part of the Opposition to postpone the RE market until agreement can be reached with a number of EU member states regarding a common certificate market. A number of Danish politicians fear that a Danish national trade market for RE certificates will be too small, especially in the interim period granted to already-existing RE producers. If an RE certificate market is to be implemented in Denmark, the Energy Authority still needs to make prescriptions for a register and to decide what kind of marketplace the certificates can be traded in.²²

Subsidy

The obligation to purchase RE certificates is to replace the present production subsidy given to certain types of RE technologies (mainly wind turbines), sometimes only for a limited period. The prices of the RE certificates shall be market based.

The rules concerning RE certificates relate to electricity produced by wind, sun, waves, biogas and biomass, as well as hydro power from power stations having a capacity under 10 MW. Electricity produced from these sources is referred to in the Danish Electricity Supply Act

22 In principle the certificates can be traded over the counter but to get a

transparent market price, an exchange such as Nord Pool can be relevant.

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as 'RE electricity' .²³ Excluded from RE electricity is primarily electricity produced by nuclear power, fossil fuels and waste, the latter not coming within the term 'biomass' .²⁴ The term 'renewable energy' is also used in the electricity market directive (articles 8 and 11) although no definition is given. However, a definition is to be found in the new Community guidelines of 3 February 2001 on state aid for environmental protection, OJ 2001 C 37/3. 'Renewable energy sources' are defined as

renewable non-fossil energy sources, viz. wind energy, solar energy, geothermal energy, wave energy, tidal energy, hydroelectric installations with a capacity below 10 MW and biomass, where biomass is defined as products from agriculture and forestry, vegetable waste from agriculture, forestry and the food production industry, and untreated wood waste and cork waste.

This definition was copied from a proposal to an RE directive (OJ 2000 C 311/320). In the adopted RE directive a slightly different definition is used:

`renewable energy sources' shall mean renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydro-power, biomass, landfill gas, sewage treatment plant gas and biogases).²⁵

One might notice that the 10 MW limit for hydropower did not survive from the proposal of the RE directive to the actual directive. Large hydro power plants are considered competitive with traditional technologies. Further, the 10 MW limit was intended to be effective regarding only the issuing of RE certificates, not national objectives

23 In Danish: VE-elektricitet.

24 L 234: Proposal of 29.04.1999 for an Electricity Supply Act. Electricity produced by hydro power plants with a capacity over 10 MW is not covered

by the term. In Denmark there are no hydro power plants of that size.

25. According to the above-mentioned Community guidelines, as soon as the directive has been adopted by the Parliament and the Council, the Commission will use the definition given in the final text. In the text for a new electricity market directive as accepted by the EU Council on 25 November 2002 the same definition is used.

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and guarantees of origin. Instead the guarantees of origin shall indicate the capacity in the case of hydroelectric installations.

Characteristics of RE certificates

RE certificates certify that a certain amount of electricity has been produced from renewable energy sources. Great differences exist between different systems of certification. For instance, participation can be voluntary or not; obligations to purchase a certain quota can be put on consumers or on other market participants; and requirements can be fulfilled by buying certificates internationally or only nationally. However, the tradability of certificates is a common feature of the systems.

RE certificates are exchangeable and can be considered as securities. However, that does not necessarily mean that they are covered by the general Danish securities trading regulation. This question seems not to have been considered by the legislators. The Danish Securities Council has in a decision excluded RE certificates from the regulation of the Danish Securities Trading Act. From that decision it follows that everybody can participate in the trade in RE certificates, even though trading in securities demands a licence. Further, the electricity sector does not have to adjust to the other administrative systems and codes that exist in the financial sector.²⁶

Basically, an RE certificate is not necessarily a guarantee of origin according to the RE directive. According to article 5 of the directive the member states shall no later than 27 October 2003 ensure that the origin of electricity produced from renewable energy sources can be guaranteed by issuing a guarantee of origin. This guarantee is meant to facilitate trade in electricity produced from renewable energy sources and to increase transparency for consumers choosing between electricity from non-renewable and from renewable energy sources.

26 Danish RE certificates are considered as physical goods. Financial instruments such as options in relation to RE certificates are governed by the Securities Act. However, specific rules etc. must to a certain extent be issued in order to govern the necessary administrative and security-related routines concerning RE certificates.

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The certificates shall be recognised by the other member states as proof of origin. However, the directive does not require member states to recognise the purchase of a guarantee of origin from other member states or the corresponding purchase of electricity as a contribution to the fulfilment of a national quota obligation.

According to the Danish Electricity Supply Act, all producers of RE electricity receive for free RE certificates proportional to the amount of electricity produced. Each certificate is expected to represent RE production of 1 MWh of electricity. However, the responsible minister can decide to differentiate between different RE technologies, in which case the kWh produced in order to get one RE certificate would vary.

In order to secure demand for RE certificates, once the RE scheme is implemented end consumers will be obliged to purchase a certain quota according to article 61 in the Electricity Supply Act. This quota is to be bought by end consumers themselves (self-administrators) or administrated by the balance-responsible system operator affiliated with the supplier of the consumer." The responsible minister fixes the size of the obligation annually as a minimum quota, expressed as a percentage of total electricity consumption. The quota will probably be set in advance each year together with provisional quotas for the next five to ten years. Changes in the provisional quotas can only be made in extraordinary cases. According to the Danish Energy Authority 'extraordinary cases' include changes in political objectives regarding the size of RE production."

Consumers who have not fulfilled their quota or have been unable to purchase enough certificates to fulfil the quota must pay a fine of DDK²⁹ 0,27 per kWh quota not fulfilled according to the Electricity Supply Act. The fine is paid to the benefit of the Treasury. Nothing in the

27. A consumer can overfulfil the quota requirement; excess certificates will be managed separately and deposited in the customer's account in the RE certificate register. There are no limits to such overfulfilment.
28. Danish Energy Authority The Green Certificate Market in Denmark. Status of Implementation September 2001.
29. 100 Danish kroner (DKK) are as per 17 January 2003 equal to NZ$23.98, US$13.92 or 13.23 EURO.

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Electricity Supply Act ensures that the amount received from fines will benefit RE producers. The fines will be collected by the system operator, which will be responsible for the entire quota control process, i.e. comparison of the RE certificates paid with the actual electricity consumption for each balance-responsible actor and self-administrator.

The RE certificate is expected to become an electronic document in a register. In accordance with the RECS Basic Commitment'⁾ RE certificates are expected to contain a unique serial number, a reference to the issuing body, a reference to the RE production plant that generated the electricity, the time of issuing, the energy source/technology, an indication whether any public investment and/or production support is currently received or has been received in the past, and information about the installed capacity. The task of the register will probably include the accreditation of RE producers, the registration of certificates, their ownership, transfers of ownership, and the final redemption. It is expected that the register will be managed by a joint subsidiary of the two system operators.' Fees on transactions, statements of account etc. shall finance the register.

The regulation regarding RE certificates, together with the other parts of the Electricity Supply Act, has been reported to and approved by the European Commission (approval of 3 October 2000, N 416/1999). In the following the focus will be on two elements of the approval: state aid and discriminatory taxation.

Aid granted by states according to the EC Treaty

According to article 87(1) of the EC Treaty, state aid is basically considered incompatible with the common market:

30 <http://www.recs.org/downloads/BCReleasel.PDF> . RECS is described below.

31 The Electricity Supply Act in general gives the two Danish system operators

a number of tasks and authorities lying in the grey area between private and public law. However, both system operators are undertakings organised in the form of private companies. A question still to be dealt with is to what extent these undertakings are to operate under the normal principles of administrative law.
2001 Green Certificates in A Danish and EU Context 37

Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the common market.

This clause contains the elements 'aid granted by a Member State', 'distort competition' and 'affects trade between Member States'. If these criteria are not met, no case of state aid exists in the sense of article 87(1). As the clause is formulated it is not an absolute prohibition against state aid. However, according to the case law of the Court of Justice (within the EU), the expression 'incompatible with the common market' is to be understood as a prohibition.³²

The extent of the term state aid³ is stressed by the expression 'any aid granted by a Member State or through state resources in any form whatsoever' . The term is not defined in article 87. The Court of Justice seems more interested in the effect of the aid scheme than in its pu rpose.³⁴

12 See Arnull, AM, Dashwood, AA, Ross, MG & Wyatt, DA Wyatt & Dashwood's European Union Law 4th ed. (London: Sweet & Maxwell, 2000) 680, and the reference to the judgment from the Court of Justice of 22.03.1977 in case 78/76, Firma Steinike & Weinlig v. Germany.

43. See Wyatt & Dashwood (supra n 32) 681-682, where a reference to a list of forms of aid is given. See also the judgment of the Court of Justice in case 48/84, Germany v. the European Commission, section 17.
14. See also the judgment of 2 July 1974 from the Court of Justice in case 173/ 73, Italy v. the European Commission, section 27; judgment in the case 61/ 79, Amministrazione delle finanze dello stato v. Denkavit, and in relation to the Treaty establishing the European Coal and Steel Community (ECSC), the judgment in case 30/59, De gezamenlijke Steenkolenmijnen in Limburg v. the European Commission, in which the term 'state aid' according to the Court not only covers 'positive benefits' such as subsidies themselves, but also interventions which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which, without, therefore, being subsidies in the strict meaning of the word, are similar in character and have the same effect.

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Article 87 does not explain the meaning of 'State resources in any form'. However, it is clear that not all benefits granted by the state are covered by article 87(1). The case law of the Court of Justice shows that only benefits granted directly or indirectly through state resources are to be considered aid within the meaning of article 87(1). The distinction made in the provision between aid granted 'by a Member State' and aid granted 'through State resources' does not signify that all benefits granted by a state, whether financed through state resources or not, constitute aid but is intended merely to bring within that definition both benefits which are granted directly by the state and those granted by a public or private body designated or established by the state. ³⁵

Article 87 about state aid shall be interpreted in conjunction with the provision in article 3(1)(g) of the EC Treaty according to which the activities of the Community shall include a system ensuring that competition in the internal market is not distorted. However, state aid is not excluded as an instrument to secure the fulfilment of policy objectives of the European Community, including environmental policy obligations.

Articles 87(2) and (3) deal with the circumstances under which aid is to be considered compatible with the common market and thereby excepted from article 87(1). Assessment of the compatibility of aid measures with the common market falls within the exclusive competence of the European Commission, subject to review by the Court of Justice.³⁶ According to the case law, the frames for interpretation do not seem very narrow.'" There is no legal demand for a dispensation: a concrete consideration is made. For RE schemes, the

35. See the judgment from the Court of Justice in the case C-379/98, sections 58-64. This case is discussed further below.
36. Article 88 of the EC Treaty contains provisions regarding notification and standstill regarding plans to grant or alter aid.
37. See the judgment of 21 March 1991 from the Court of Justice in the case Italy v. the European Commission, section 39 and the judgment of 17 September 1980 in the case 730/79 Philip Morris Holland v. the European Commission, sections 17 and 24.

2001 Green Certificates in A Danish and EU Context 39
possibility that aid can be excepted from the prohibition" must be found in article 87(3)(c):

aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

This clause was used by the European Commission in the 1994 Community guidelines on State aid for environmental protection as the basis for considering environmental interests.³⁹ Section 2.3 underlines the promotion of renewable energy.⁴"

The European Commission used the 1994 guidelines when they approved the Danish RE certificates scheme of the Electricity Supply Act. Subsequently the 1994 guidelines were replaced by new guidelines in 2001.⁴' In the new 2001 guidelines, promotion of renewable sources of energy is deemed equivalent to environmental promotion. RE certificates are mentioned as a legal instrument supporting renewable energy with operating aid that will be calculated on the basis of the external costs avoided (section E.3.3.3).

18. The member states shall according to article 88 (3) inform the Commission in sufficient time to enable it to submit its comments on any plans to grant or alter aid.

39 Guidelines of 10 March 1994, OJ 1994 C72/3, extended to 31 December 2000, OJ 2000 C 184/25, referred to as the 1994 guidelines. For comments, see Kramer, L EC Environmental Law (London: Sweet & Maxwell, 2000) 90 et seq. and Jans, JH European Environmental Law (Groningen, Netherlands: European Law Publishing, 2000) 302 et seq.

40. For a description of the provisions in relation to electricity supply, see Gram Mortensen, BO Elforsyning (Electricity Supply) (Copenhagen, Denmark: DJOF Publishing, 1998) 127 et seq. More general descriptions are found in Steiner, J & Woods, L Textbook on EC Law 7th ed. (London: Blackstone Press, 2000); Weatherrill, S & Beaumont, P EU Law 3^rd ed. (London: Penguin Books, 1999) 1018 et seq.; and Wyatt & Dashwood (supra n 32) 679 et seq.
41. Community guidelines of 3 February 2001 on state aid for environmental protection, OJ 2001 C 37/3.

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The ownership or purchase of an RE certificate is a valuable benefit due to its exchangeability. The guaranteed minimum price and the obligation to purchase, especially, bear similarities to state aid.

Purchase obligation for RE certificates

The obligation in article 61 of the Electricity Supply Act to purchase exchangeable RE certificates (issued on the basis of actual RE electricity production) can be compared with an obligation to purchase RE electricity. The effect of either regime is to secure an income for RE producers. The European Commission has regarded a direct purchase obligation for the consumers concerning RE electricity as state aid (operating aid) covered by article 87(1) of the EC Treaty.⁴²

According to articles 8(3) and 11(3) of the electricity market directive, a member state may require the system operator, when dispatching generating installations, to give priority to generating installations using renewable energy sources (or waste or production combining heat and power). However, these clauses cannot be interpreted so that they cover financial aid too.

The granting of exchangeable RE certificates can also be seen as compensation for the extra production costs that follow from RE electricity production and as a method to internalise external costs of electricity generation. The minimum price is (in the Danish scheme) seen as a compensation for a general CO₂ tax (see below). The Community guidelines on state aid for environmental protection are applicable to these sorts of subsidies. In the approval from the European Commission in the state aid case N 416/1999, the 1994 guidelines were used. The subsidy is to be considered similarly to operating aid. According to section 1.5.3 of the guidelines, exceptions may be made in the form of subsidies designed to reflect the positive environmental benefits of certain technologies, including grants or cross-subsidies to cover the extra production costs of renewable kinds of energy. Operating

42 In the approval of 10 March 2000 of the European Commission in the state

aid case, N 416/1999, sections 3.1.1 and 3.1.2. However, see below regarding the possible consequences of the judgment in the case C-379/98 (PreussenElektra AG v. Schleswag AG).
2001 Green Certificates in A Danish and EU Context 41
aid is under normal circumstances not recommendable, considering its effect on competition.

In its approval the European Commission has said that where the polluter pays principle is not applied, a member state can have the right to introduce a purchase obligation in order to stimulate demand for RE electricity. According to article 174(2) of the EC Treaty, the community policy on the environment shall be based on the principle that the polluter should pay. Seen in connection with the prohibition against state aid, article 174(2) could indicate a ban against environmental state aid. However, not all types of environmental aid are necessarily in contradiction to the polluter pays principle. In cases where no internalisation of environmental costs is made, state aid can be considered an efficient instrument of environmental policy. The use of state aid belongs to the selection of instruments in the fifth environmental action program' (section 7.4). Promotion of RE certificates is part of the objectives of the European Union.⁴⁵

Operating aid is under normal conditions approved for a short period only; however, this seems to apply only partly to the Danish scheme. No time limit is included in the rules approved by the European Commission. In the approval from the European Commission in the state aid case N 416/1999, the European Commission argues that the demand for a time limit is based on the intention to give incentives to the producer himself to contribute to the avoidance of environmental pollution or to achieve an efficient use of resources more rapidly. Since

4t For a general comment on the 'polluter pays' principle, see Jans (supra n 39) 37-39 and Kramer (supra n 39) 19-20. For the use of the principle in connection with electricity supply, see Gram Mortensen (supra n 40) 67 et seq.

44. Resolution of the Council and the Representatives of the Governments of the Member States, meeting within the Council of 01.02.1993 on a Community programme of policy and action in relation to the environment and sustainable development — 'A European Community programme of policy and action in relation to the environment and sustainable development', OJ 1993 C138/1.
45. Communication from the Commission — Energy for the future: renewable sources of energy — White Paper for a Community strategy and action plan, COM (97) 599 final.

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the RE certificate scheme is excepted to give an incentive for more efficiency, the European Commission did not see any reason to demand that the purchase obligation be limited until such time as Danish political objectives regarding the use of RE sources have been achieved. The reason for the RE certificate scheme to include such incentives is to create a separate demand side market for RE certificates. RE producers are expected to fight for market shares. However, the Danish government has promised to maintain the purchase obligation only until Danish political objectives of promoting RE sources have been achieved. In the 2001 guidelines the European Commission states that the Commission intends to authorise aid systems such as RE certificates for a period of only ten years, after which the system will have to be assessed. Had the Danish RE certificate scheme been tested after the 2001 guidelines only a time-limited approval could have been given.

In connection with export of RE electricity the decision does not seem so obvious. A Danish RE producer may have a competitive advantage compared to a non-Danish competitor, if the latter has not received exchangeable RE certificates or a similar sort of aid. A granting of RE certificates based on generated electricity to be exported would mean a distortion of competition. The approval by the European Commission must be seen in the light that the Danish government (during the discussions) promised not to issue RE certificates on the basis of RE electricity to be exported. This promise cannot be found in the Electricity Supply Act or in the bill. As already mentioned, the RE directive and the guarantees of origin scheme do not require member states to recognise the purchase of a guarantee of origin from other member states or the corresponding purchase of electricity as a contribution to the fulfilment of a national quota obligation."

Minimum price for RE certificates

According to article 65 in the Electricity Supply Act as notified to the European Commission, unsold RE certificates should be purchased at

46 Recent changes to the Dutch RE certificates scheme have resulted in the non-acceptance of foreign RE certificates if the producers receive another form of subsidy. This will properly result in non-acceptance of Danish RE certificates as long as Danish RE producers are guaranteed a fixed purchase price for RE electricity. For a description of the Dutch scheme, see <http:// www.greenprices.com/n1/ImportNL.pdf> .
2001 Green Certificates in A Danish and EU Context 43
a price between DKK 0,10 and DKK 0,27 per kWh. The minimum price is equal to an already existing part of the production aid for RE electricity. The intention with the existing aid scheme of DKK 0,10 per kWh is to refund RE producers for a general CO₂ tax. In the approval of the European Commission in the state aid case N 416/1999, the European Commission came to the conclusion that because the DKK 0,10 refund had already been approved in an earlier state aid case (N 4/92), an equal minimum price for RE certificates could not be against the prohibition in article 87 of the EC Treaty, as long as the CO₂ tax remained the same. The approval in the state aid case N 4/92 concerned among other matters a production aid of DKK 0,10 per kWh for electricity produced from RE sources or natural gas. This aid scheme should reimburse RE producers for a general CO₂ tax placed on all electricity regardless of its origin and calculated on the basis of the CO₂ emission caused by a coal-fired plant. This reimbursement to the benefit of renewable energy sources must be considered together with the understanding of RE electricity production as a CO₂-neutral production.⁴⁷

The European Commission does not discuss the fact that not all owners of RE certificates are guaranteed the minimum price. The purchase obligation of the RE Fund according to article 65 is limited to the number of RE certificates representing the difference between the total national quota and the numbers already sold. As soon as the total national quota is consumed RE certificate owners cannot be sure of receiving the minimum price. The minimum and maximum prices do not apply to purchases other than those mentioned in article 65. Other persons or organisations can agree on whatever prices they like with the RE producers. However, the price frame can be expected to have a major influence on market price for consumers.

47 However, the production of electricity from thermal natural gas-fired plants

cannot be considered as CO₂ neutral. The European Commission argues in its approval that natural gas as a fuel results in much less CO₂ emission than the use of coal. This argument does not seem very persuasive. Furthermore, the Commission argues that the use of natural gas was already met with an indirect CO₂ tax. Article 65, and thereby the purchase obligation, is expected to be deleted from the Electricity Supply Act as a result of the postponement of the Danish RE certificate system.
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As per 1 January 2003, article 65 has been removed from the Electricity Supply Act and a minimum or maximum price no longer exists. Until RE certificates are issued a cash subsidy of between DKK 0,10 per kWh is paid.

Maximum price for RE certificates

From the minimum price of DKK 0,10 to the maximum price of DKK 0,27 per kWh is a difference of DKK 0,17. That leaves the purchaser, according to article 65, to regulate the aid to the RE producers with up to DKK 0,17 per kWh. The present aid scheme for RE electricity production contains, as mentioned above, aid of DKK 0,17 per kWh. The European Commission in the state aid case N 4/92 approved this amount. The production aid was considered covered by the prohibition of article 87(1) of the EC Treaty, since it stimulated the production of RE electricity and could have influence on the export to and import from other member states. However, the subsidy was approved in accordance with the exception clauses because of the community's interest in increasing its share of CO₂-neutral production in order to reduce global warming. The approval in the case N 4/92 did not refer to any specific provision.

In the approval of the European Commission in the state aid case N 416/1999, the European Commission refers only to the former approval and makes the remark that the maximum price of DKK 0,27 shall be seen in the light that the RE producers must not be overcompensated. This must be understood as if the European Commission considers a subsidy up to DKK 0,17 per kWh as a compensation for extra production costs connected with RE electricity production. The subsidies mentioned in the 1994 guidelines section 1.5.3 include this sort of benefit.

The judgment regarding an obligation to purchase electricity at minimum prices

On 13 March 2001 the Court of Justice made its judgment in the case C-379/98 (PreussenElektra AG v. Schleswag AG) regarding statutory provisions of a member state, which requires private electricity supply undertakings to purchase electricity produced in their area of supply from renewable energy sources. By an order referred to the court for a preliminary ruling under article 234 of the EC Treaty, the regional
2001 Green Certificates in A Danish and EU Context 45
court of Kiel in Germany (Landgerichts Kiel) raised a question regarding the legality of the Stromeinspeisungsgesetz, the German law on feeding electricity from renewable energy sources into the public grid." This law placed an obligation on any public electricity supply undertaking⁴⁹ to purchase electricity exclusively generated from hydraulic energy, wind energy, solar energy, gas from waste dumps and sewage treatment plants, or products or residues and biological waste from agriculture and forestry work. In addition, the German law described a minimum price for the above-mentioned production forms. This minimum price was higher than the real economic value of that type of electricity.

One of the questions asked by the German regional court was whether article 92 of the EC Treaty (now article 87) was to be interpreted so that the underlying concept of aid also covers national rules which merely govern the apportionment of the costs between undertakings at the various production levels which have arisen through purchase obligations and minimum prices, where the legislature's approach in practice creates a permanent burden for which the undertakings affected obtain no consideration. The clause in question (article 2 in the Stromeinspeisungsgesetz) requires public electricity supply undertakings to purchase the electricity produced from RE producers in their area of supply at a price fixed in article 3 of the same Act. According to this a minimum price is differentiated on the RE sources. The minimum price is based on a percentage of the average sales price per kWh of electricity supplied to all end-customers.'

Regarding the prohibition against state aid, the Court of Justice has established that statutory provisions of a member state which, first,

48. As of 1 April 2000 the Stromeinspeisungsgesetz was replaced by the Gesetz zu erneuerbaren Energien.
49. Public electricity supply undertakings' cover both private undertakings and undertakings belonging partially or wholly to the public sector.

0. For a German commentary on the judgment, see Smeddinck, U & Witthohn, A `Rtickblick auf das Stromeinspeisungsgesetz — Das PreussenElektra-Urteil des EuGH, HbE 521' in Beck, Brandt & Salander (eds) Handbuch Energiemanagement (Heidelberg, Germany: C. F. Muller Verlag, 2002).

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require private electricity supply undertakings to purchase electricity produced in their area of supply from renewable energy sources at a minimum price higher than the real value of that type of electricity and, second, distribute the financial burden resulting from that obligation between those electricity supply undertakings and upstream private electricity network operators, do not constitute state aid within the meaning of Article 87(1) of the EC treaty. The German purchase obligation was as such not considered state aid.

By this judgment the European Commission's understanding of state aid was overruled. However, this was only a minor surprise. Six months earlier the Advocate-General came to the same conclusion.⁵' In sections 133 and 150-159 the Advocate-General argues that financing through state resources is a constitutive element of the concept of state aid. Further, in sections 160-179 the Advocate-General argues that neither potential loss in tax revenue, conversion of private resources into state resources nor reduced earnings of publicly-owned undertakings can make the scheme in question be covered by 'State resources in any form whatsoever'.

As a preliminary observation the Court of Justice noted that there was no dispute that an obligation to purchase electricity produced from renewable energy sources at minimum prices confers a certain economic advantage on RE producers since it guarantees them, with no risk, higher profits than they would make in its absence.⁵² However, the Court of Justice found (section 59) that the obligation placed on private electricity supply undertakings to purchase electricity produced from RE sources at fixed minimum prices did not involve any direct or indirect transfer of state resources to undertakings which produce

51. Advocate-General Francis G. Jacobs 'Opinion delivered on 26.10.2000, Case C-379/98, PreussenElektra v. Schleswag' at <http://www.curia.eu.int> .
52. The Court of Justice notes in section 58 that the distinction in article 92(1) of the EC Treaty between 'aid granted by a Member State' and aid granted `through State resources' does not signify that all advantages granted by a state, whether financed through state resources or not, constitute aid. The distinction is intended merely to define both advantages which are granted directly by the state and those granted by a public or private body designated or established by the state.

2001 Green Certificates in A Danish and EU Context 47
that type of electricity. The Court of Justice concluded that the allocation of the financial burden arising from that obligation for those private electricity supply undertakings as between them and other private undertakings cannot constitute a direct or indirect transfer of state resources either (section 60). The Court of Justice did not find that the circumstances of the purchase obligation (that the obligation was imposed by statute and conferred an undeniable advantage on certain undertakings) could confer upon it the character of state aid within the meaning of article 87(1) of the EC Treaty."

In light of this judgment the question arises whether a purchase obligation for RE certificates also would be excluded from the understanding of state aid in article 87(1) of the EC Treaty. The European Commission argued in the court case C-379/98 that the German scheme constituted state aid. Further, the European Commission, as mentioned above, in the approval in the state aid case N 416/1999 took the position that the purchase obligation for Danish RE certificates was covered by article 87(1) of the EC Treaty. In combination with the free granting of RE certificates, the purchase obligation for RE certificates results in certain RE electricity producers, through an obligation placed by legal statute on private parties (the consumers), receiving a certain economic advantage without this advantage involving any direct or indirect transfer of state resources to RE electricity producers. It is thus very doubtful whether the purchase obligation for RE certificates still can be considered as state aid covered by article 87 of the EC Treaty.

Interim period

It was thanks to the existence of the present production aid that some RE facilities were established. Some of those producers may not be

51 The Court of Justice did not find that this conclusion could be undermined

by the circumstance that the financial burden arising from the obligation to purchase at minimum prices was likely to have negative repercussions on the economic results of the undertakings subject to that obligation and therefore entail a diminution in tax receipts for the state. For a commentary on the judgment, see Groossens, A & Emmerechts, S 'Case C-379/98, PreussenElectra AG v. Schleswag AG, Judgment of the Full Court of 13 March 2001', (2001) 38 Common Market Law Review 991-1010.
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able to survive under an RE certificate regime: for them, an interim period can be seen as necessary to avoid stranded costs.⁵⁴ The regime notified to the European Commission consisted of fixed prices for RE electricity combined with a production aid of DKK 0,27 per kWh. The basic aid regime in the interim period for existing wind turbines consists of a fixed price of DKK 0,33 per kWh. Furthermore, a cash production aid of DKK 0,10 per kWh is granted.⁵⁵ This DKK 0,33 plus 0,10 price will continue ten years after the wind turbine has been connected to the grid. However, this interim scheme will not expire for any such wind turbine before 1 January 2003. After the ten years' interim period RE certificates will be issued. In addition, a DKK 0,17 subsidy is granted to existing wind turbines until a fixed number of calculated maximum production hours is reached (between 12,000 and 25,000 hours of calculated maximum production depending on the size of the wind turbine).⁵⁶ Because of this calculated minimum production quota system, it is uncertain when the different existing wind turbines will be transferred to the RE certificate scheme. New wind turbines connected to the grid before 31 December 2002 will receive a fixed price of DKK 0,33 for the first 22,000 hours of calculated maximum production plus a production aid of 0,10 per kWh until the RE certificate scheme is carried into effect.⁵⁷ Existing small RE plants using biomass

54. Stranded costs are costs which firms must bear because of commitments they have made and are no longer able to honour as a result of liberalisation of the sector in question. This definition can be found in the 2001 guidelines, footnote 18.

55 An existing wind turbine is one purchased by a binding contract without conditions, not later than 31 December 1999. See the Danish ministerial order No. 187 of 16 March 2001.

56. RE plants owned by the traditional production undertakings can receive such subsidies only until the end of 2003 regardless of the number of calculated maximum production hours. No longer covered by the interim period, new rules grant the spot market price plus a cash subsidy for a limited amount of time to a maximum of DKK 0.36.
57. Offshore wind turbines will be governed by a special scheme depending on their ownership.

2001 Green Certificates in A Danish and EU Context 49
are to be guaranteed a price of DKK 0,50, and other types of RE producers 0,40, per kWh, and will receive RE certificates from the first day.⁵⁸

According to these interim provisions a relatively large part of the RE production capacity will not have its ordinary production aid replaced with RE certificates for a number of years yet. In an up front small market this may result in a situation where the market volume is not large enough to ensure a true price fixed on market conditions. Further, in such a small market the transaction costs may be very high when calculated per kWh.

Testing RE certificate schemes

The Renewable Energy Certificate System (RECS) was initiated in 1999. It represents a co-operation among more than 170 organisations, bringing together the electricity industry, trade associations, environmental organisations and governmental organisations mainly from Europe. ⁵⁹ All EU member states except Greece participate. Switzerland, Japan, the USA and New Zealand also participate.⁶" The idea is to open an international market for RE certificates (RECS certificates) in order to harmonise conditions and remove any physical barriers to trading in renewable energy benefits between regions and nations. It is hoped that the RECS will ensure better exploitation of renewable generation opportunities while competition between producers will lead to lower prices. In the beginning of 2001 a two-year test phase began which aims to test international issuing, trade and redemption of these RECS certificates. Each RECS certificate at present constitutes proof of the energy source, technology and granted aid per MWh produced. The RECS has already proven operational

58 Further cuts must be expected.

59. For a description, see Crookall-Fallon & Crozier-Cole (supra n 7) and Groscurth, H-M, Beeck, H & Zisler, S 'Renewable energy in liberalized markets' at <http://www.recs.org/downloads/basispaper_e2.pdf> . See also the home page <http://www.recs.org> and <http://www.recs.org/downloads/ BCReleasel.PDF> .

60 From New Zealand, M-co New Zealand, Wellington has joined the RECS.
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with more than 15 million certificates issued. By November 2002, 90 companies in 11 countries had opened trading accounts. The certificates are managed by one of the different systems connected to RECS. Some of the parties have created a banking system, giving each producer and trader an account. In Denmark both transmission system operators (TSOs) have participated in the RECS and the banking system. When the Danish green certificate system is enforced, the RECS will be available as an operational system.

Market price settings are not meant to be tested by RECS. However, the certificates are de facto traded between the participants. So far, this has been done on a bilateral basis. Due to the low usefulness of RECS certificates, low prices are expected. The result of the test phase is expected to have a major influence on the practical implementing of the coming European RE schemes.

Final remarks

Promotion of RE electricity is an important part of EU environmental policy. Feed-in tariffs have in Denmark resulted in a growth in the use of RE sources in power production. However, this system seems to have been too generous. In general the advantages of RE certificates are considered to ensure that efficiency improvements of new RE technologies will show up directly as lower RE certificate prices and thus in a lower payment to the owner of renewable plants. Further, in comparison with a feed-in tariff system it is much easier to keep the burden of subsidising renewable technologies within the expected limits.

Among the disadvantages two can be mentioned. Only the most economic competitive renewable technologies are promoted. Further, in an international market for RE certificates those countries most ambitious in setting high RE-quotas will have to buy certificates from the less ambitious ones.⁶' However, both problems may be solved by regulation that would separate different RE technologies in different markets or grant a different number of RE certificates, and by harmonising quotas.

61 Morsthorst, PE 'A green certificate market for developing renewable energy

technologies — pros et cons', ENER Bulletin 25.02.
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With an increasing number of states invoking RE certificate schemes an internal market is possible. The future possibility of an international or at least pan-European common market for RE certificates demands some harmonisation. However, the new RE directive contains no provisions regarding a common market. Each RE certificate market, of Denmark or any other European country, should therefore be seen as only a national aid scheme, which is prepared or can be altered for integration with other national or transnational RE certificate schemes.

So far the lack of harmonisation may be a barrier to further international trade and the efficiency which it is hoped comes from such trade.⁶² The Danish RE certificates scheme provides a good example of the legal problems that will have to be dealt with at EU level (and in other trade regimes). A national RE certificate scheme seems in itself to be a factor which can create distortion of the internal electricity market in the EU. However, with the latest judgment in the PreussenElectra case it is doubtful whether an obligation to purchase RE certificates can be considered as state aid in the sense of the EC Treaty. Consequently, such distortions of the internal electricity markets in the course of meeting political environmental objectives cannot be prevented.

An RE certificate market on an EU level seems an obvious solution. An internal market will automatically result in a larger market volume, which again would lower the transaction cost per kWh equivalent certificate. It is debatable whether a market the size of Denmark's will be large enough for an individual RE certificate scheme. However, no thorough analysis has yet been carried out on this subject.° Danish electricity production in 2000 was 34,722 GWh plus a net import of 556 GWh.M The same applies to the New Zealand market, which is around the same size.

Further, a more rational location of RE producers will take place if investors are not shopping around among different RE certificate

62. It has been discussed whether an RE scheme will contribute to the reduction of CO₂ emissions without being connected to a CO₂ quota system; see Morsthorst, supra n 61.

63 Ibid.

64 See <http//:www.ens.dk>.
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schemes. The RE directive did not result in an RE certificate scheme on the EU level. Whether the European Commission will use its evaluation mandate in article 4 of the RE directive to promote national or even bilateral RE schemes is still to be seen. In the meantime, more private regimes such as the RECS might be ahead of the politicians. At the same time this already-tested system provides Denmark as well as other EU member states with an easy solution of having RE certificates issued. The member states will in any case be obliged to issue guarantees of origin from October 2003.