Hello there regulation! Implications operators of self-consumption facilities must now deal with following the latest ECJ judgement

On 28 November 2024, the European Court of Justice (ECJ) issued a decision declaring that the self-consumption facilities, cf. in German Kundenanlagen, are incompatible with the Directive on the internal electricity market. As a consequence of this judgment, current regulatory privileges granted to self-consumption facilities under German law are in violation of EU legislation – which is likely to have substantial consequences for those affected. 

The German Law notion of self-consumption facilities

A self-consumption facility (or “customers installation”) within the meaning of section 3 no. 24a of the German Law on the Energy Industry (Energiewirtschaftsgesetz, EnWG) refers to an energy installation which final consumers in a specific geographic all find at their disposal, free of charge, in order to ensure their electricity supply. By way of section 3 no. 16 EnWG, self-consumption facilities are explicitly excluded from the defined scope of energy supply networks. The underlying aim of the provisions dealing with self-consumption facilities is the clear and marked distinction between regulated networks on the one hand and non-regulated energy installations on the other.

Under the EnWG framework, self-consumption facilities are not subject to regulation as – unlike distribution grids – they have no significant impact on competition in the energy supply market. In addition, self-consumption facilities are exempt from grid fees, enhancing their appeal as decentralised energy supply solutions.

Background of the judgment

The ECJ judgement (Case C-293/23) follows up on a request referred by the Federal Supreme Court of Germany (Bundesgerichtshof, BGH). The initial case concerned the categorisation of a self-consumption facility used for residential purposes.

The energy supplier ENGIE Deutschland GmbH intended to supply electricity to two neighbouring areas with several blocks of flats using two combined heat and power plants. These plants were to be connected to the energy supply grid as self-consumption facilities. While the first instance court was of the opinion that both sub-systems formed a single unit, the BGH considered them to be two separate systems. Individually, these systems did not meet the threshold values of section 3 No. 24a EnWG, decisive for determining the need for regulation. However, due to the overall size of the self-consumption facilities, the BGH doubted the legitimacy of the German provision under European law.

Decision of the ECJ

The ECJ had to determine whether article 2 no. 28 and no. 29, as well as articles 30 to 39 of the Internal Electricity Market Directive (EU) 2019/944, conflict with the German provisions in section 3 no. 24a read in conjunction with no. 16 EnWG regarding self-consumption facilities. The aforementioned provisions of the Directive address the concept and operation of distribution networks. 

‘Distribution networks’ are not explicitly defined in the Directive. However, the ECJ ruled that the definition should be based exclusively on the criterion of transmission at a certain voltage level (at least low voltage) and the category of customers to whom the electricity is transmitted. The ECJ derives this interpretation from its understanding of article 2 No. 28 of the directive as referring to this only. In the absence of a reference to the law of the member states, an autonomous interpretation based on EU law of the term distribution network is required. 

Member states are thus not permitted to set criteria that deviate from such definition. Factors such as the time of construction and size of the network, and electricity consumption are not decisive. Therefore, a distribution network is defined as a system used to transmit electricity at high, medium, or low voltage for sale to wholesalers and final customers.

Companies operating such energy systems are classified as distribution system operators and are therefore subject to regulation. The ECJ determined that self-consumption facilities meet the criteria for distribution networks, making them in principle subject to comprehensive regulatory obligations.

However, the Directive allows for certain exceptions, for example for citizen energy communities or closed distribution systems. The ECJ clarified that these exemptions are exhaustive and cannot be extended at will by the member states. The self-consumption facility in question does not meet the criteria for these exemptions and is thus to be treated as a distribution network.

In the grounds on which this judgment is based the ECJ states the importance of the uniform application and interpretation of EU law, as well as its practical effectiveness. An extensive understanding of the exemptions would undermine the Directive’s objectives, particularly the completion of the internal electricity market and the creation of integrated electricity markets. A national provision like section 3 no. 24a EnWG could exclude operators of a significant number of facilities from the scope of the obligations incumbent on distribution network operators, even though these facilities indisputably transmit high-, medium-, or low-voltage electricity intended for sale to customers.

Consequences of the judgment

At this point, the practical effects on the German energy sector and regulation in the EnWG are difficult to predict. While authorities and courts will undoubtedly consider the ECJ judgment in future decisions, amendments to the EnWG regarding self-consumption facilities in section 3 no. 24a EnWG are to be forthcoming. Given the upcoming elections, this legislative change may take some time. It is nevertheless inevitable. The German legislator is now tasked with creating legal certainty, aligning national provisions in the EnWG with EU law and the directive, and making the best possible use of any remaining margins for flexibility.

While it is almost certain that the self-consumption facility in section 3 no. 24a EnWG will be amended or possibly abolished, the effects of the ECJ judgement on for example the company self-consumption facility (in German betriebliche Kundenanlage) in section 3 no. 24b EnWG however are less predictable. Since this section also involves the transmission of energy to final consumers, closed distribution networks may be the only remaining option for companies to avoid some regulatory obligations. Alternatively, could the onward transmission to ‘customers’ be avoided through restructuring?

It is crucial for operators of self-consumption facilities to monitor ongoing developments, assess the potential impact on their operations, and prepare for upcoming changes. This is all the more relevant in cases in which effective compliance with the requirements for a self-consumption facility was already in question.

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