Capacity mechanism in France: Council of State requests a preliminary ruling on its conformity to EU free movement rules

Following its decision of 9 October 2015, the French Council of State (Conseil d'Etat) has lodged on 19 October a request for preliminary ruling to the Court of Justice of the European Union (EU) concerning the conformity of the French capacity market mechanism to primary EU law, and in particular Article 34 and 36 of the Treaty on the Functioning of the EU (TFEU) on free movement rules. The question referred to the Court will be a new opportunity for the latter to pronounce itself on restrictions to the free movement of goods based on nationality for the purpose of security of energy supply. Parallels can be drawn with the 2014 decision of the Court in the Ålands Vindkraft case in relation to another certificates market (the French scheme being by design a trading scheme) - although based on another justification ground, i.e. environmental protection - (see my comment here) and to refresh its case law in Campus Oil decision related to public security and security of energy supply (Case 72/83). 

Case background

The decision of the Council of State to refer the question to the Court of Justice was taken as part of a litigation case raised by the ANODE association of alternative retail energy providers in France which gathers Eni gas & power France, Gaz de Paris, Lampiris, Planète OUI and Poweo Direct Energie. ANODE seeks the annulation of Decree no 2012-1405 of 12 December 2012 which defines the principle of the creation of a capacity mechanism in France. The rules of the capacity mechanism are further detailed in a Decree of 22 January 2015. The principle of a capacity market mechanism is defined in the Energy Code, Articles L. 335-1 to L. 335-7. The French capacity mechanism is set to enter into function on 1 January 2017.

The two other questions raised by the case: qualification as state aid and abuse of dominant position

The Council of State had also to assessed two other questions related to:

1. the qualification of the French capacity mechanism under state aid rules. The Council of State concludes that the mechanism does not involve state resources, and therefore cannot be qualified as "state aid" pursuant to Article 107 of the TFEU.

2. to which extent the French capacity mechanism meets the requirement set in the 2009 Electricity Directive, 2005 Security of Electricity Supply Directive and primary EU law as to the purpose (security of energy supply) and the proportionality and necessity of the measure. The Council of State deems the capacity mechanism as being "subsidiary" compared to the existing alternatives for new generation capacity, limiting its effects on the electricity generation market, and so the possible distorting effects created by the alledged dominant position that Electricité de France (EDF) could get. The Council underlines that "all capacities" are covered to that respect. It also refers to the additional instruments created by the French scheme to ensure transparency on the "capacity guarantees" market.

The question addressed to the Court of Justice: free movement of goods, measure equivalent to a quantitative import restrictions, discrimination based on nationaly, security of energy supply objective, and propotionality.

While both precedent questions were dismissed, the Council of State chose to refer the question of conformity with free market rules to the Court of Justice. Indeed, the Council of State finds that the mechanism is equivalent to a quantitative restriction to the free movement of goods, here electricity, based on the limitation put on the nationality of operators. Indeed, only operators located in France (Metropolitan territory) can be certified and so get access to the capacity market, while interconnections to other European markets has to be taken into account in the calculation of the capacity level. "Foreign" generation is de facto excluded from the national scheme. The Council of State raises the question of the alledged objective of the measure - security of supply -  and its proportionality. The comparison is drawn with alternative models for capacity mechanisms.

Parallel processes

The French capacity mechanism is already under the scrutiny of the European Commission services after the launch by the European Commisison of a sector inquiry under the state aid rules in April 2015 (link to press release). In total, eleven EU countries are concerned and have received questions from the Commission. The sector inquiry is closely linked to the process of implementing the 2014 Guidelines on state aid for environmental protection and energy (EEAG) as well as the recent legislative proposal on electricity market design and the  EU Energy Union Strategy.

Case reference: C-543/15, ANODE