Abstract
This article examines the principle of legal certainty in the context of low-carbon investment in the electricity sector. It analyses the interpretation and functions of legal certainty as a constitutional principle of EU law and explores how they operate in the low-carbon transition. The analysis is conducted in the context of conflicting roles of law in the energy transition. On the one hand, the low-carbon transition requires new investment, which demands stable and predictable legal frameworks. On the other hand, the energy transition calls for the continuous development of legal frameworks to respond to the evolving energy sector. This continuous change is detrimental to the investment needed to finance the transition. This article argues that the principle of legal certainty can function as a means of anchoring these evolving and sometimes turbulent legal developments and reconcile the conflicting roles of law required by the energy transition, on the one hand, and investment certainty, on the other.
Introduction
The European Union (EU) energy sector is undergoing structural changes that are referred to as the energy transition. 1 The definitions of the transition vary, but the key drivers are the same: energy production and usage must become sustainable while simultaneously remaining accessible and available to members of society. This complex and consequential global phenomenon requires technological, economical, political and legal efforts.
In the EU, driving the energy transition has involved the establishment and continual development of an extensive legal framework since the 1990s. The origins of the legal framework are to be found in the first and second energy packages, which concentrated on liberalizing the energy markets through sector-specific rules. 2 This evolution of the energy sector has continued not only in the third energy package, adopted in 2009, 3 but also in the legal measures that followed it between 2011 and 2017. 4 The most recent legal instruments concerning the internal electricity market only entered into force in July 2019 and form part of the fourth, so-called Winter Package that promises clean energy for all Europeans. 5 Furthermore, the constitutional backbone of EU energy law was enhanced by the energy-specific primary law provisions adopted through the 2009 Lisbon Treaty. 6 In addition to energy-specific competences, the treaty reform introduced Article 194 TFEU, which establishes the objectives of EU energy policy and is the legal basis for adopting legal instruments in the energy sector.
With the help of these legal developments, the EU aims to be on a path to decarbonize its energy sector. Financing such a transformation in a capital-intensive sector requires significant amounts of private investment. 7 Investment decisions, in turn, correlate directly with predictable and stable legal frameworks. However, the roles played by law in facilitating, respectively, the low-carbon transition and the investment needed to do so, at times conflict with each other. From a legal point of view, the energy transition calls for the continuous development and amendment of legal frameworks to respond to the evolving realities of the energy sector. Conversely, the significant amounts of private capital needed for low-carbon investments tend to be adversely affected by continuously changing legal frameworks that adapt and develop in unpredictable directions. 8 Investors have repeatedly expressed criticism over rapidly changing legal and policy frameworks in the EU. 9 For instance, these changes have encouraged Member States to change the conditions under which they grant financial support to low-carbon investment. 10 Investors have emphasized that states should ‘ensure a stable, reliable and long-term framework for investments – not a situation in which the parameters of the economic environment are changed every couple years.’ 11 Indeed, one of the most influential factors in investment decisions is the level of risk involved. The possibility of unfavourable and unpredictable changes in the legal environment is a key element of such risk. The continuous legal changes needed to facilitate the transition can hinder the investment decisions needed to achieve the transition. 12 Therefore, a complex conflict of the roles of law arises: changes in laws are needed for the energy transition, but continuous legal changes adversely affect investment by increasing the regulatory risks involved. From the point of view of investment, the avalanche of legal changes that has occurred to further the energy transition through the first, second, third and now the fourth energy packages necessarily invites critical questions on continuity, predictability and stability of law, which are key components of legal certainty.
Against this background, the article analyses the principle of legal certainty in the context of low-carbon investment in the electricity sector, and particularly in the light of the Winter Package. There is a clear need for detailed reconciliation of the contradictory roles of law in governing the low-carbon energy transition. The need to decarbonize the energy sector, and the legal responses that reflect this change, have adversely impacted upon the traditional role of law as the sole predictable and solid system of public governance.
This article argues that the principle of legal certainty can function as a means of anchoring these evolving and sometimes turbulent legal developments and reconcile the conflicting roles of law required by the energy transition, on the one hand, and investment, on the other. The research analyses the interpretation and functions of legal certainty as a constitutional principle of EU law and explores how they operate in the low-carbon energy transition. The analysis consists of four steps. The first of these is a contextualization of the conflicting roles of law in the energy transition (Section 2). The second step builds on existing analyses of legal certainty by examining the constitutional underpinnings of and case-law on legal certainty in EU law in the light of the needs of the low-carbon transition in the electricity sector (Section 3). The third step is an assessment of how legal certainty is structurally incorporated into the Winter Package’s framework for electricity and how the constitutional principle of legal certainty functions in that legal setting (Section 4). This third, sector-specific phase of the examination focuses on the Winter Package and its provisions on low-carbon investment in particular. 13 The deadline for adoption of national transposition measures has not yet passed for some of the legal instruments on which the article focuses. 14 Nonetheless, an analysis of these instruments is defensible because while extensive analysis of the third energy package has been carried out, 15 little research is available in relation to the Winter Package. 16 As Member States are in the process of implementing the provisions of the Winter Package in their national legal systems, this article can contribute to filling a gap in the understanding of how the principle of legal certainty should be reflected in national legal solutions addressing the energy transition. The fourth and final step focuses on the outer boundaries of legal certainty from the point of view of low-carbon investment in the electricity sector (Section 5). Finally, conclusions are drawn (Section 6).
Contextualization of the conflicting roles of law in the energy transition
In the EU, the energy transition consists of comprehensive structural changes of the energy sector. Primarily, however, the transition focuses on the urgent measures needed to address climate change, which drive the transition from a fossil-fuel-run economy into a decarbonized one. The measures needed to decarbonize the electricity sector include not only investment into renewable generation technologies but also investment into making sure that the infrastructure of the sector, from electricity networks to the appliances in the homes of final consumers, are equipped to integrate the increase in renewable generation technologies.
The energy transition is, by definition, characterized by change. Therefore, the rules relevant to the transition must also change. As laws change, previously well-established case-law may no longer provide the degree of certainty that it used to under the previous legal frameworks. Nevertheless, laws must evolve to respond to the sector’s current needs or be amended to provide more clarity. 17 This need to respond to the changes in the sector is one of the key reasons for why the Winter Package was adopted.
There are different ways in which law has evolved to respond to the altered environmental, economic and technological realities of the energy transition and address the new legal challenges that have emerged. For example, financial support schemes for renewable technologies, such as feed-in-tariffs or green certificates, have been deployed to facilitate the decarbonization of the electricity sector. These support schemes have resulted in a significant increase in renewable electricity production, and this has changed the structure of the electricity mix. The change has had a knock-on effect on fundamental elements of the electricity markets. These elements include how electricity undertakings recover their costs and how wholesale market prices are formed and, as a result, how, when and under what conditions electricity can be consumed. New ways of balancing intermittency of generation and activating the consumers have emerged to respond to these changed market realities. Law has had a twofold role in this flurry of changes. On some occasions, it has been intentionally facilitative, meaning that changes have followed the adoption of a law. In other instances, it has been restrictive, meaning that technology and practical solutions have developed first and legal frameworks have been adjusted to reflect the changed circumstances. For example, the drafting of the 2009 Electricity Directive made no reference to electricity storage. The importance of electricity storage, however, has since grown immensely as the technology has developed and the share of renewables has increased to the extent that requires new instruments to balance the electricity system. 18 Energy storage has a key role in balancing the intermittency of increasing shares of renewable energy. 19 As electricity storage technologies developed and became more common, the question arose as to how to treat electricity storage from the perspective of unbundling rules, which require the separation of networks from activities of generation and supply. 20 Is electricity storage a network activity or a generation and supply activity? Who can own and exercise control over electricity storage? 21 The drafting of the 2019 Recast Electricity Directive addresses this regulatory gap that arose as the electricity mix and the applicable technologies developed. The Directive contains several provisions that directly address the issue of ownership of electricity storage. 22
In addition to the low-carbon transition, the electricity sector has also undergone a fundamental reshaping of the roles of the state and the markets in governing the sector. 23 Since the 1990s, national and monopolized electricity markets have been gradually merging into a more integrated and competitive European market in which market forces, rather than states, primarily guide investment. EU energy law is built on the premise that an integrated and competitive internal energy market founded on solidarity and trust is the most effective platform for achieving the investment needed by the low-carbon transition. 24
In practice, investment in the electricity sector is generated through price signals, which are determined by supply and demand. In terms of new generation capacity investment, for example, increases in electricity prices indicate scarcity, which leads to new investment. 25 The market structure requires prices to be allowed to rise to a level that signals scarcity. Generally speaking, allowing high electricity prices is politically unfavourable and, therefore, governments tend to cap electricity prices, thus preventing market-based price signals. 26 New legal instruments are, again, needed to ensure investment in a situation where market-based price formation has been impeded. 27
The EU Emissions Trading System (ETS) is an illustrative example of how market-based investment and legal efforts to facilitate the energy transition interact. The purpose of the ETS is to incentivize polluters to reduce their greenhouse gas emissions through capping total emissions and then enabling these polluters to trade their emissions allowances. 28 The price of those allowances, determined by market forces, is expected to constitute an economic incentive that encourages polluters to invest in less polluting activities or methods of production. 29 Due to a surplus of allowances, however, the prices for allowances have been so low that the EU ETS has failed in its task of reducing greenhouse gas emissions to a degree originally expected. 30 To rectify this failure, the EU legislator has amended the system several times to increase the price of emissions allowances and, hence, to increase the incentivicing effect of the ETS. 31 Such frequent state interventions to a market-based system decrease market visibility and can cause investors to withhold their investment decisions, hence risking further delays to the decarbonization process. 32 In other words, the risk of frequent state interventions into the price of carbon allowances increases the overall risk of an investment and makes it less likely for investors to commit to new low-carbon projects because they cannot reliably predict the future economic return on their investment.
These types of regulatory risks increase the overall risk of low-carbon investment. In fact, regulatory risk is widely accepted as one of the most important risks in the energy sector and particularly for renewable energy. 33 As the level of risk is one of the most influential factors in investment decisions, an increase in the overall level of risk can significantly alter whether or not low-carbon investment takes place. 34 The materialization of these risks also commonly leads to legal disputes between the state and the investor. Financial support schemes for renewable energy provide an illustrative example of this. On the basis of EU energy law, most Member States have adopted financial support schemes to encourage investments in renewable energy. Over the past two decades, some Member States have had as many as 20 different types of support schemes for renewable energy and energy efficiency, which they keep amending to find a balance between incentivizing low-carbon investment and avoiding extensive state expenditure. 35 A typical dispute in the renewable energy sector involves a situation where a state retroactively reduces the economic incentives guaranteed to a renewable energy investor in order to limit state expenditure and the investor challenges such a state decision on the grounds that there is breach of the principle of protection of legitimate expectations. 36
In the context of liberalized energy markets driven primarily by market forces, the facilitation of new investment requires sufficient incentives, which law can either provide or restrain. Regardless of the type of incentive involved, whether economic or social, incentivizing new investment requires predictability and stability – characteristics that call for enduring legal frameworks. However, the low-carbon energy transition entails a fundamental and unprecedented shift in how, when and where we produce and consume energy. Such a shift requires legal frameworks that can effectively address the continuously evolving technological, societal, political, environmental and economic realities, as shown by the examples given above. Once we grasp that the energy transition entails a shift in these realities, we must also acknowledge that the shift requires legal structures that allow context-sensitive interpretations. This speaks in favour not only of amending laws to respond to the shifting market but also of developing them in a more flexible direction to facilitate the technological, societal, environmental and economic changes that are inherently a part of the energy transition. However, the continuous development of laws is likely to conflict with the kinds of legal frameworks that have been identified to facilitate investment. In fact, this conflict has been identified as one of the paradoxes of legal certainty. 37 To address that conflict, the concept and role of legal certainty in this complex context is next explored.
Legal certainty in EU law
Legal certainty is one of the founding principles of the EU and a common element in the constitutional traditions of its Member States. 38 Although not explicitly mentioned or defined in EU primary law, the concept of legal certainty is constitutionally derived from the rule of law, which is established as a founding principle of the EU in Article 2 of the Treaty on the European Union (TEU). 39 Much like the rule of law, the principle of legal certainty is a broad, multidimensional concept that includes various elements and serves different functions. As such, it eludes attempts at precise definition. 40 However, certain core features can be identified.
Despite the fact that there are no references to legal certainty in the treaties, the Court of Justice of the European Union (CJEU) has, almost from the outset, treated the principle as if it were part of the EU’s primary law. The first two cases discussing the principle date back to 1961. In Bosch, the Court linked legal certainty to the rule of law and argued its decision on the basis of legal certainty. 41 In the same year, the Court also gave a ruling in Snupat, in which it weighed the importance of legal certainty against that of the principle of legality. 42 Since then, the Court has also specifically ruled that legal certainty is part of the EU legal order and constitutes a general principle of EU law. 43
Legal certainty is an overarching concept that informs the entire legal system. 44 It is closely connected to other founding principles that similarly steer the dynamics between EU powers and the rights of private entities. These principles include, inter alia, legal stability, clarity, accessibility, predictability, legitimacy, non-retroactivity and transparency. 45 The CJEU has established these types of connections by, for example, referring to the principle of legitimate expectations as the ‘corollary’ to legal certainty. 46 The doctrine of legitimate expectations is, like legal certainty, undeniably part of EU law. 47 It defines the extent to which economic agents can rely on the stability and permanence of the actions of a state and extends to any individual with regard to whom an institution of the European Union has given rise to justified hopes. 48 In addition to legitimate expectations, predictability has also been emphasized as an element of legal certainty in legal scholarship. 49 However, none of these related principles are synonyms for legal certainty. Instead, they act as denominators that assist in understanding the concept and boundaries of legal certainty. 50
The principle guides the dynamics between EU powers and the freedom and rights of private entities. 51 It also protects both the private entity and the administration concerned. 52 It can also have an impact in the legal relationship between institutions of the EU and the Member States. 53 In the context of the electricity sector, however, its role in guiding the dynamics between the investor and the legislator is the most relevant.
Overall, the CJEU has handled more than 5,500 cases containing the phrase ‘legal certainty’ by early 2020. 54 Should such a search be extended to related terms such as ‘legitimate expectations’ and ‘legal stability’, the number would undoubtedly be significantly higher.
Over the years, the CJEU has developed its interpretation of the core of legal certainty to mean that legal rules should be clear, precise and predictable as regards their effects, particularly where they may have unfavourable consequences for individuals and undertakings. 55 Legal rules should be predictable by those subject to them. 56 This line of interpretation is repeated throughout the CJEU’s case-law from early on up until recent years. 57 It indicates both that the role of the principle of legal certainty should be emphasized in cases in which the interpretation may have unfavourable consequences for individuals and undertakings and that law should be drafted and applied with certain quality indicators in mind. In other words, the principle of legal certainty imposes quality requirements in respect of the content of existing law and in respect of the procedures and methods used to amend it. In terms of content, existing rules should be understandable, so that those concerned know precisely the extent of the obligations imposed on them. Individuals and private entities must be able to ascertain unequivocally their rights and obligations and take steps accordingly. 58 Furthermore, when law confers certain rights and obligations, of a kind that give rise to legitimate expectations, on an individual or a private entity, amendments to existing legal frameworks must respect these expectations. Both of these forms of quality requirement are highly relevant to the low-carbon energy transition, as is further discussed in Section 4.
A review of the relevant case-law on legal certainty demonstrates that the principle is used in a broad variety of ways and that it has different functions depending on the context. On the one hand, legal certainty has a facilitative function in which it is used by the Court to justify an EU measure or to legitimize a national legal arrangement. 59
On the other hand, legal certainty can be viewed as having a restrictive function in which it is used to reject an argument or to explain why a certain provision cannot be upheld. For example, the CJEU has used the principle of legal certainty to reject arguments made by parties in specific cases. 60 Similarly, it has argued that ‘considerations of legal certainty affecting all the interests involved, both public and private, make it impossible in principle to reopen the question as regards the past’. 61 In other words, it has emphasized that legal certainty can prevent retroactive legal changes where they may have unfavourable consequences for individuals or undertakings.
The principle of legal certainty can also have a coherence function. The Court has used it to interpret a secondary provision of EU law by arguing that preference should as far as possible be given to the interpretation that renders the provision consistent with the principle of legal certainty. 62 Finally, legal certainty can be separately defined with respect to different fields of research and different sectors, such as the energy sector. As a multifaceted, ambiguous principle that defies precise definition, the principle of legal certainty is perhaps best understood in the context of a specific sector. 63 It has aptly been argued that it is the concrete circumstances at hand that define the principle of legal certainty. 64 With that in mind, it is appropriate to examine the way in which the principle of legal certainty has been integrated in the structures of EU energy law.
The functioning of legal certainty in EU energy law
A. The evolution of legal certainty in the sector-specific legal framework
The principle of legal certainty has been explicitly and implicitly integrated into EU secondary law. 65 The electricity sector is no exception.
The current EU legal framework for electricity is the result of progressive development of sector-specific rules since the 1990s. The first legislative initiatives in 1996 and 2003 focused on opening the markets to competition and removing barriers to trade. 66 While these same themes continued in the third energy package in 2009, the emphasis clearly moved toward facilitating the energy transition by, for example, creating a more extensive framework for supporting renewable energy and setting up rules to integrate renewable generation in the overall energy mix. As years went by, however, these rules introduced in the third energy package no longer reflected the needs of the rapidly transitioning sector. This was due to two interrelated reasons. The third energy package already consisted of myriad compromises when it entered into force and, as such, did not address all of the needs of the market that were originally acknowledged in the preparation of the package. 67 Secondly, as the energy transition progressed, new sets of challenges emerged, which had not been envisaged at the time of preparing of the third package, including a remarkable increase in renewable generation and a fast-paced development of clean technologies. 68 In other words, facilitating the energy transition required amendments to the existing laws. In preparing for the Winter Package, furthermore, the need to ‘ensure investor confidence and to attract investments from international funds’ was included as one of the major reasons for revising the sector-specific rules for energy. 69 Because of this background, and the shortfalls of the third energy package, the importance of legal certainty is particularly emphasized in the Winter Package. 70 Interestingly, the adoption of a new set of rules yet again inadvertently reduces legal certainty despite the explicit objective to improve investor confidence in the energy sector.
The amended or new provisions adopted through the legal instruments of the Winter Package are largely a response to the changed needs of the electricity sector. For example, the issue of insufficient price signals and the resulting lack of timely and sufficient generation capacity investment have led to the uncoordinated adoption of capacity mechanisms by Member States. 71 Through these mechanisms, Member States provide state-financed economic incentives to power generators in exchange for greater reliability of the system. 72 These types of state interventions are manifestly against the spirit of EU energy law but no concrete EU legal measures have been available to prevent Member States from adopting them. 73 Several disputes have arisen from these state-driven security guarantees, demonstrating that while capacity mechanisms aim to attract private investment in generation capacities they also create additional market distortions, which further exacerbate the issue of insufficient market-based price signals. 74 To address these uncoordinated state interventions, new provisions have been specifically adopted to address the issue of capacity mechanisms. 75 The investors that first benefited from the state aid schemes awarded under capacity mechanisms are now subjected to a new set of rules, which alters the economic conditions under which the investors can be remunerated.
A careful review of the preparatory documents and the provisions of the Winter Package indicates that there is an increased emphasis on the principle of legal certainty. 76 It is explicitly mentioned in several legal instruments. 77 It is primarily used as an argument or an objective to support the adoption of a specific provision. For example, the original Energy Union communication and the proposals for amending electricity market legislation defended the entire legal reform on the basis of a need for greater legal certainty. 78 Similarly, the Energy Union Governance Regulation states that ‘[f]or the purpose of coherence and legal certainty, nothing in this Regulation prevents the application of the derogations pursuant to the relevant Union sectoral law in the area of electricity and electricity risk preparedness’. 79 The 2018 Renewable Energy Directive (RED II) includes a similar statement in which the definitions of other directives are included as such in RED II ‘[i]n the interests of clarity and legal certainty’. 80
These explicit references to legal certainty may appear to be a collection of fragmented examples of how legal certainty operates in the Winter Package. However, legal certainty presents itself in much more substantive terms in forms other than these explicit references. In fact, it seems to be the overarching theme throughout the provisions of the Winter Package. In addition to the general recognition of the principle of legal certainty, the drafters of the Winter Package also acknowledge the need to develop the sector-specific rules in step with the technological and economic developments in the sector. 81 In other words, the legislator has identified the conflict between the need to develop the legal frameworks to facilitate the energy transition on the one hand and the need to stabilize the regulatory framework in order to attract investment on the other. Much like the CJEU in its case-law, it also recognizes that within the context of the evolving energy sector legal certainty cannot equate to a ban on change in regulatory frameworks and that the necessary private investment will have to be facilitated through other means. 82 The following subsections focus on these means. In particular, the following analysis will demonstrate how legal certainty is structurally integrated in the provisions of the Winter Package and how the principle functions in that legal context. These provisions are classified and analysed in three categories relevant to legal certainty: an open-ended approach through the establishment of a long-term strategy and principles-based regulation, institutional guarantees and transitional provisions that allow investors sufficient time to adapt to the changing legal environment. The analysis in Sections 4.B to 4.D is structured to first explain why these categories contribute to legal certainty and, then, to explore how they are reflected in the individual provisions of the Winter Package.
B. Long-term strategy and a principles-based approach
It has rightly been argued that legal scholarship mostly assumes that strict and detailed rules always increase legal certainty. 83 In the context of low-carbon investment, however, such a claim is not necessarily accurate. While precise and detailed rules increase legal certainty in the regulation of simple phenomena, principles may actually increase the consistency of a legal system in the regulation of more complex phenomena. 84 The more complex the regulated matter, the more reliability the application of principles can provide. 85 As a fundamental and unprecedented shift in how, when and where we produce and consume energy, the low-carbon energy transition clearly constitutes such a highly complex phenomenon. 86
The provisions of the Winter Package impose several obligations on Member States concerning transparency and strategic long-term planning, and establish principles by which market participants must abide. 87 Long-term planning requirements and principles-based regulation are entirely different legislative approaches, but they nevertheless warrant being analysed together because their objective is the same from the point of view of legal certainty. They both mitigate the adverse effects of continuously evolving regulation on investment by providing better and longer-term market visibility and a clearer framework within which future decisions must function and, thereby, respond to the need for more legal certainty. 88 The Winter Package not only establishes principles and obligations for long-term planning but also acknowledges that these approaches are specifically intended to improve legal certainty and, therefore, ensure the facilitation of sufficient investment. 89 A principles-based approach allows the law to adapt to changes in the energy sector. For example, law can be structured in a way that allows the inclusion of emerging technologies or new, innovative ways of balancing the electricity system.
The Recast Electricity Regulation and RED II establish principles designed to improve the predictability not only of the electricity markets but also of the administrative practices governing them. 90 For example, market participants must ensure that long-term hedging products and long-term electricity supply contracts are available in order to ‘mitigate uncertainty on future returns on investment’. 91 Similar statements exist for long-term planning and energy strategy. The Energy Union Governance Regulation, for example, states that ‘[i]ntegrated national energy and climate plans should be stable to ensure the transparency and predictability of national policies and measures in order to ensure investment certainty’. 92
RED II imposes an obligation on Member States to ensure the stability of financial support schemes for renewable energy sources. 93 No such stabilization clause had previously existed. 94 In particular, Member States should ensure that the support granted to renewable energy projects is not revised in a way that negatively affects the rights of the beneficiaries and undermines the economic viability of projects that already benefit from support. 95 This is a direct reference to non-retroactivity. The obligation involves Member States publishing a long-term schedule anticipating the expected allocation, timing and amount of support. 96 RED II also states that establishing a binding Union renewable energy target for 2030 ‘would continue to encourage the development of technologies which produce renewable energy and provide certainty for investors’. 97 The expectation seems to be that these provisions will contribute to legal certainty through establishing a more stable horizon in the long-term for the otherwise turbulent electricity sector. This type of provision aims to concretize the obligation for Member States to protect legitimate expectations, which laws have conferred upon certain investors. 98 In other words, this is a sector-specific wording of the obligation to draft laws so that they are predictable as regards their effects, particularly where they may have unfavourable consequences for individuals and undertakings. 99
C. Institutional guarantees
In addition to independent provisions on governance and the institutional setup of the electricity sector, 100 the Winter Package has two structural features that aim at improving the legal certainty of the sector-specific legal framework for electricity. The first of these was already strongly present in the earlier legal frameworks for electricity: the independence of national regulatory authorities. The second – which amounts to a new approach – is that there is an entire regulation dedicated to governing the EU’s energy and climate goals. 101
The existence of independent regulatory authorities is intended to improve the stability of investment conditions in the EU energy markets. 102 It has been rightly argued that the independence of regulatory authorities protects them from short-term political pressure, thus allowing them to contribute to the long-term stability of investment conditions. 103
The need for a separate governance model for the EU energy sector is recognized in the Energy Union Governance Regulation. Unlike the provisions concerning the independence of national regulatory authorities, the Regulation amounts to an entirely new piece of legislation, which brings together previously scattered provisions on reporting, planning and monitoring responsibilities and tasks of public bodies. Such an approach is intended to improve long-term policy coherence and provide long-term certainty and guidance for investors. 104
The Regulation suggests that systematic monitoring of the sector is needed to improve the predictability of the market for investors. 105 It establishes a legal framework for a reliable, inclusive, cost-efficient, transparent and predictable governance structure to achieve the EU’s energy and climate objectives. 106 It does so through two main measures. First, it establishes a so-called governance mechanism, the objective of which is to contribute not only to greater regulatory certainty but also to greater investor certainty. 107 Second, Article 17 of the Regulation obliges Member States to submit integrated national energy and climate progress reports to the Commission. The content of these reports is extensive, but from the point of view of legal certainty, Article 17(2) and (5) are the most relevant provisions. Article 17(2) provides that the progress reports should include information on the progress accomplished towards reaching the energy and climate objectives and a review of actual investment against initial investment assumptions. The reports should also include information on issues such as progress of renewables, energy efficiency, energy security, internal market and competitiveness as well as updates on policies and measures implemented. Article 17(5) provides that the frequency and scale of the information should specifically be balanced against the need to ensure sufficient certainty for investors. Such a reporting obligation may prove useful not only for the Member States, but also for investors examining the progress and regulatory development of a Member State. Similarly to a long-term strategy and a principles-based approach, the purpose of these institutional guarantees is to stabilize the long-term trajectory for investors by increasing the transparency of expected state actions in the electricity sector, with the explicit acknowledgement that the energy transition inherently involves legal and policy changes in the short term.
D. Specific transitional provisions
Transitional provisions constitute the third and final structural element through which the provisions of the Winter Package support the principle of legal certainty. These provisions give the market and investors time to adjust to the evolving legal environment and to take measures to mitigate the risks arising from changing legal conditions.
The importance of sufficient transitional provisions has been underlined by investors and highlighted in relevant literature. 108 Established case-law on legal certainty has even been interpreted in a way that would require sufficient transitional periods are granted in situations where previous regulatory regime has given rise to legitimate expectations and the legal changes would adversely affect those expectations. 109 This interpretation has been considered particularly important in sectors, which are capital-intensive and require heavy upfront investment. 110
Transitional provisions are included in the Recast Electricity Directive, the Recast Electricity Regulation, the Energy Union Governance Regulation and RED II. 111 The positive effects of adequate transitional provisions on legal certainty have also been emphasized in the CJEU’s case-law. 112 In ASM Brescia, the Court underlined that the principle of legal certainty may not only permit but also require there to be a transitional period which enables parties to adjust to the changed legal environment. 113
Limitations of legal certainty in the electricity sector
The analysis set out in the previous sections paints a picture of an extensive, multidimensional principle, which can be successfully invoked in a broad variety of situations. In reality, the principle of legal certainty is limited in what it can and should achieve in a legal context.
The starting point for examining the limitations of legal certainty in the context of the electricity sector is the character of the energy transition. As identified above, the energy transition is defined by change. As such, legal certainty cannot be taken to mean that the legal frameworks governing the energy transition should remain unchanged in the interest of legal certainty.
The CJEU has addressed the limitations of legal certainty in its case-law. It generally acknowledges the EU’s and the Member States’ broad competence to adopt and amend legislation without this being prevented by the principle of legal certainty. 114 The Court has separately addressed the regulation of markets by stating that ‘in the sphere of the common organization of the markets, whose purpose involves constant adjustments to meet changes in the economic situation, economic agents cannot legitimately expect that they will not be subject to restrictions arising out of future rules of market or structural policy’. 115 The principle can, therefore, only be successfully invoked against EU law to the extent that the EU itself has created a situation which can give rise to legitimate expectations on the part of a private entity. 116 Such a situation is unlikely to occur in the context of the evolving electricity sector. In fact, the legal instruments governing the electricity sector themselves explicitly refer to the fact that the development of the legal frameworks in the sector is, and continues to be, a progressive process. 117 Furthermore, the Court has maintained that the principle cannot be successfully invoked if a prudent and circumspect entity could have foreseen that the adoption of an EU measure would be likely to affect their interests. 118 In other words, an investor cannot legitimately expect a legal framework to remain unchanged. 119 This was confirmed by the CJEU in Berlington, where the applicants argued that the legislation infringed the principle of legal certainty by dramatically increasing the amount of gambling taxes levied on some operators without an appropriate transitional period or compensation for the operators concerned. 120 The Court disagreed and stated that a trader cannot rely on there being no legislative amendments, but can only call into question the arrangements for the implementation of such an amendment. 121
In RWE, the CJEU evaluated unfair contractual terms of a consumer contract, which gave a supplier of natural gas the right to unilaterally vary the terms of the contract. 122 The Court concluded that only exceptional circumstances would allow it to interpret legal certainty in a way that would restrict a person from relying on a legal relationship established in good faith. 123 In VEMW, the CJEU ruled on a dispute regarding preferential access to cross-border capacity to ensure that the company could fulfil its obligations under long-term electricity supply contracts concluded prior to the liberalization of the EU energy markets. 124 A party to the dispute argued that an interruption of the ‘existing contracts would amount to unacceptable interference with the legal certainty of the parties and would also constitute a significant financial loss.’ 125 However, the Court disagreed. It stated that the circumstances in the dispute did not allow any effective reliance to be placed on the principle of the protection of legitimate expectations or on the principle of legal certainty. 126
From a very early stage, the Court has also maintained that legal certainty is not an absolute value but that it must be viewed in its context and be weighed against other principles. 127 In other words, the principle of legal certainty can be weighed against other founding principles, which may also contradict calls for clarity and stability of legal frameworks. The result of such weighing should depend on a comparison between the public interest (of amending or adopting legislation) against the private interest (of maintaining the status quo). 128 For example, one of the public interests the CJEU has used to weigh against legal certainty is the principle of effectiveness. 129 Because of the urgency of climate change and the general favourable approach of the CJEU to environmental protection, it is possible that the Court could consider climate change as a public interest important enough to limit legal certainty in the future.
In addition to the constantly evolving needs of the energy transition, laws are also inherently uncertain because of the need for interpretation and the tendency of written laws to be abstract in nature. 130 Lawmakers will always be unable to predict all real-life circumstances and, therefore, laws will continue to be drafted in a way so as to allow their application to an indefinite number of different cases. 131 The lawmaker will never be able to foresee all possible circumstances.
Consequently, if the principle of legal certainty is not absolute and investors cannot legitimately expect the legal framework governing the energy transition to remain unchanged, what role is left for the principle of legal certainty? Many have argued that its scope of application is, overall, much narrower in practice than in theory. 132 In fact, the number of successful investor claims on the basis of legal certainty remains significantly smaller than the number of unsuccessful ones before the CJEU. 133 The Court has even upheld retroactive measures in situations where it has been necessary to ensure market stability. 134
An assessment of the application of the principle of legal certainty in the context of the energy transition indicates that the objective of the principle is to reduce the risk associated with political and legal change. 135 However, as noted at various points above, change is inevitable in the context of the low-carbon energy transition. Therefore, discussion of legal certainty in relation to the energy transition by reference to stability is not the most useful approach. It is of greater relevance to note that application of the principle and its integration in the electricity sector should be interpreted to offer investors improved visibility as to which matters are likely to remain unchanged and which are not. In practice, this visibility is reflected in the wording of the Winter Package. For example, long-term strategies established by Member States and the obligation to ensure the stability of financial support, as well as to communicate about these plans transparently, can inform investors of the long-term objectives of the electricity sector. This improved visibility is key to reducing the risk associated with political and legal change. 136
Conclusions
This article has analysed the principle of legal certainty in the context of low-carbon investment in the electricity sector. The research has analysed the interpretation and functions of legal certainty in an effort to explore how they operate in the low-carbon energy transition. It first examined the constitutional underpinnings of and case-law on legal certainty in EU law before moving on to assess how legal certainty is structurally integrated into the sector-specific legal framework for electricity. Finally, it explored the boundaries of legal certainty in the energy sector.
The analysis in this article suggests that the principle of legal certainty can function as a means of anchoring the evolving and sometimes turbulent legal developments and reconcile the conflicting roles of law required by the energy transition, on the one hand, and investment, on the other. The need to decarbonize the energy sector has altered the role and functions of legal certainty from that of a stability component to a concept that offers long-term visibility within a transforming sector. Such an interpretation of legal certainty can be used to anchor the needs of investors in an evolving legal environment.
The analysis demonstrated that the multifaceted concept of legal certainty operates independently as a constitutional principle of EU law, but is also structurally integrated into the sector-specific legal framework for electricity. Four key structural elements have emerged as a result of this analysis. First, the most recent sector-specific rules for electricity emphasize the importance of legal certainty. This explicit emphasis can be considered an objective of the overall framework and can prove to have interpretational value in hard cases before the EU courts. In addition to this explicit emphasis, the legal framework has integrated elements that facilitate legal certainty. These include long-term strategies and a principles-based approach as well as institutional guarantees to ensure that the public entities governing the energy transition operate in a way that observes the boundaries of the principle of legal certainty. Finally, the legal framework contains transitional provisions that allow investors time to adapt to the changing legal environment.
Such integrated, implicit approaches to legal certainty can best be described as providing legal certainty through improved market visibility. This means that the principle of legal certainty in the context of the energy transition does not, and cannot, stabilize the legal system but establishes a framework within which changes may occur. The framework provides investors a longer-term view of which matters are likely to change and which ones are not. Determining those factors will require Member States to transpose these provisions on long-term planning and institutional guarantees in a way that contributes to legal certainty. Such an approach facilitates the achievement of the principle of legal certainty by mitigating the adverse effects of continuous – but inherent – legal change in the energy transition.
