Supreme Court Refers Energy Market Compensation to Europe

The Supreme Court has referred questions to Europe’s highest court concerning the interpretation of provisions of the EU Electricity Regulation. The central issue concerns electricity market compensation for energy generators. Our Construction, Infrastructure & Utilities team examines the background to the case, the questions the Supreme Court has referred, and the next steps in the litigation.

What you need to know

• The EU Electricity Regulation establishes rules for wholesale electricity markets. It provides for compensation to be paid to electricity generators who are ‘dispatched down’, or instructed to reduce their output by the transmission system operator.
• Dispatch down happens when there is a physical congestion or constraint, or when a curtailment is necessary for system-wide reasons.
• The regulatory authorities in Ireland and Northern Ireland adopted a decision in 2022 seeking to implement the compensation provided for in the EU Electricity Regulation.
• Wind farm operators brought proceedings to quash the regulators’ decision, arguing that it unlawfully restricted their entitlement to compensation. The High Court quashed the decision concerning compensation in 2023. The regulator has appealed that judgment.
• There is a significant dispute over the meaning and effect of the relevant provisions of the EU Electricity Regulation. The Supreme Court has asked the Court of Justice of the European Union to rule on how these provisions should be construed and applied.
• Because the case raises “issues of systematic importance” for wholesale electricity market, the Supreme Court has asked the European court to give it “as much priority as possible”.

Introduction

The Supreme Court has asked the Court of Justice of the European Union (CJEU) to give rulings on key legal issues impacting the compensation generators are entitled to be paid when the transmission system operator instructs them to produce less electricity or to shut down.

These legal issues arise from a dispute between the Commission for Regulation of Utilities (CRU) and wind farm operators over the meaning and effect of Article 13(7) of the EU Electricity Regulation.[1]

Article 13(7) entitles generators to be paid compensation when they are instructed to reduce their output due to “non-market based redispatch”. In the context of the electricity market in Ireland, this occurs when renewable generators are instructed to ‘dispatch down’, or produce less electricity, by the transmission system operator. ‘Dispatch down’ instructions occur during periods of constraints or curtailments on the grid.

The CRU, acting through the SEM Committee, published a decision paper in March 2022 on the implementation of the EU compensation entitlement.

The applicants in this case are two wind farm operators. They brought proceedings against the CRU in the High Court challenging the legality of the decision and the CRU’s approach to compensation. The applicants argued that compensation must make the operator “indifferent to redispatch”. The CRU, however, contended that it was entitled under the EU Electricity Regulation to consider a range of factors, in the context of the market as a whole, to ensure that compensation was justifiable.

High Court judgment

In a judgment delivered in November 2023[2], the High Court quashed significant elements of the CRU Decision. The High Court decided, amongst other things, that:

• The compensation system established by the CRU decision was “fundamentally flawed”.
• The CRU could not lawfully defer implementation of the EU Electricity Regulation.
• The CRU had overreached in its role as a regulator by seeking to introduce various matters which extend beyond what is permitted by the EU Electricity Regulation.

We examined the High Court judgment in detail in our briefing note, which you can register for below.

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Reference to the CJEU

The CRU was granted permission to appeal to the Supreme Court. All parties agreed that the Supreme Court should refer certain questions to the CJEU.

The preliminary reference procedure allows national courts to refer questions on the interpretation of EU law to the CJEU where necessary to decide a case. The Supreme Court, comprising 7 judges, decided this threshold was met and referred 11 questions to the CJEU.

The questions referred concern the meaning and effect of the EU Electricity Regulation, including:

• The correct approach to compensation under the EU Electricity Regulation.
• The legal status of the compensation provision – is it directly effective? Or does it require or permit national measures to implement the scheme of compensation?
• If it is not directly effective, can the compensation provision still be used in the Irish Courts to challenge the legality of a CRU decision that goes against it?
• Is the CRU permitted to defer the payment of compensation?

Comment

Renewable generators are frequently dispatched down at a rate which has increased in recent years.

The correct approach to calculating the compensation payable to renewable generators is one of huge commercial significance. Referring the questions to the CJEU, the Supreme Court observed that the case raises issues of “systemic importance” to the functioning of the electricity market. The Supreme Court therefore asked the CJEU to give the case “as much priority as possible”.

The CRU’s appeal will not progress until after the CJEU answers the questions referred to it. It usually takes on average 15 - 17 months for the CJEU to give a ruling, but the precise timing will depend on the priority ultimately given to the case, and the workload of the CJEU. The High Court orders are expected to remain stayed pending the outcome of the Supreme Court appeal.

For more information, please get in touch with a member of our Construction, Infrastructure & Utilities team.

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The content of this insight is provided for information purposes only and does not constitute legal or other advice.

[1] Regulation (EU) 2019/943

[2] [2023] IEHC 620