In recent months, Dutch grid operators have reported the troubling news that the electricity grid has reached its limit and that reinforcement is required.
Currently, ten out of the Netherland's twelve provinces are either experiencing or expecting capacity shortages. As a result, many renewable energy projects are awaiting a grid connection or a transport capacity offer. Grid operators, however, have been refusing to provide the requested connection and transport capacity, stating there is no capacity available. Market parties (both renewable producers and large users of electricity) oppose this position, arguing that grid operators are legally obliged to connect them and to provide transport capacity. In anticipation of promised legislative amendments that should clarify the grid operators’ legal duties to connect and transport electricity, recently published case law now sheds light on this dilemma.
Exception for physical congestion
Pursuant to Section 23 of the Electricity Act 1998 (E-Act), grid operators are obliged to connect parties that request a grid connection. This obligation is unconditional. It does not allow for exceptions. In addition, Section 24 E-Act obliges grid operators to provide transport capacity to anyone making the request. Transport capacity can only be refused where no transport capacity is reasonably available (Transport Exception). When this situation is deemed to occur has been the subject of debate and conflicting opinions between grid operators and their customers, but has now been clarified in recent case law.
In 2018, greenhouse horticultural company Schenkeveld brought a case before the Dutch regulator, the Authority for Consumers & Markets (ACM), after Liander denied it an increase in its contracted transport capacity. In a 6 December 2018 ruling, the ACM emphasised that providing a connection to the grid and ensuring the availability of sufficient transport capacity are not only statutory duties of grid operators contained in the E-Act, but are also the essential elements of an effectively functioning electricity market. In short, providing a grid connection and transport capacity are among the key tasks of a grid operator. A grid operator is expected to undertake far-reaching efforts to fulfil these tasks and to use all possible means to transport the requested electricity, which means the Transport Exception is to be applied restrictively.
The ACM ruled that a grid operator must provide all available transport capacity to parties making this request until the physical integrity of the grid can no longer be safeguarded (which is referred to as physical or technical congestion). According to the ACM, unlike physical congestion, contractual congestion (i.e. when the contracted capacity equals or exceeds the maximum grid capacity) does not jeopardise the integrity of the grid since not all contracted capacity may actually be in use. Hence, contractual congestion does not entitle a grid operator to invoke the Transport Exception.
In the Schenkeveld case, the ACM took the view that the mere occurrence of physical congestion is not sufficient to successfully invoke the Transport Exception. The grid operator should demonstrate that it has tried (without success) to resolve the congestion by means of congestion management.
After a judgment favourable to Schenkeveld, Liander attempted to apply congestion management, but it was unsuccessful because no parties volunteered to participate. As a consequence, Schenkeveld was not provided with transport capacity and initiated court proceedings. In its judgment, the Court elaborated on the manner in which grid operators should apply congestion management.
Congestion management aims to prevent the occurrence of a situation in which the grid operator has to refuse requests for transport capacity by invoking the Transport Exception. If during a certain period, physical congestion is foreseen on the grid (such congestion being referred to as structural congestion), the grid operator must adhere to the Grid Code, which requires it to make an official announcement of the expected congestion on its website and on the website of TenneT, the Dutch transmission system operator. It must then investigate the possibility of applying congestion management in the area concerned. Congestion management is deemed possible if the investigation reveals that the implementation of congestion management is feasible from a technical and operational perspective, the structural congestion is expected to last between one and four years and potential participants for congestion management exist in the relevant area (see Grid Code, Sections 9.4 and 9.5). If this is the case, congestion management will have to be applied, which means that parties that have entered into transport capacity contracts with the grid operator will be requested to decrease demand or production in return for financial compensation. If, however, congestion management cannot be applied, the grid operator will publish this on its website. Only then can it successfully invoke the Transport Exception.
In the Schenkeveld case, the court ruled that where congestion management on a voluntary basis is not possible, the Grid Code entitles the grid operator to require parties to participate in the congestion management bidding system. The court took the view that although congestion management on a voluntary basis is not possible, this does not mean that the grid operator has used all means to meet transport requests and that the Transport Exception can be successfully invoked.
The court also indicated in its decision that Liander's inability to invoke the Transport Exception does not mean that Schenkeveld will receive the entire requested transport capacity. As grid operators are not allowed to discriminate between customers, they cannot distinguish between existing and new customers in the allocation of available transport capacity. Consequently, in case of a capacity shortage, the available capacity will need to be divided between existing and new customers.
This has been confirmed in more recent case law (Pottendijk vs Enexis), which concerned an application to the Court of East-Brabant by Energiepark Pottendijk (Pottendijk) for interim relief to obtain a connection and transport capacity for a wind and solar park. In this case, the court took the view that grid operator Enexis had not demonstrated that there was reasonably no grid capacity available. The court ruled in favour of Pottendijk and obliged Enexis to make Pottendijk the requested offers without any contractual transport restrictions. The court also did not agree with Enexis that the discrimination prohibition does not apply between existing customers and parties that submitted a request for transport capacity (and as such were not yet customers). Instead, it took the view that the allocation of scarce transport capacity on the basis of the "first come first serve" principle, which Enexis applied to distinguish between these two parties, violates the discrimination prohibition.
This means that parties with existing contracted transport capacity have no guarantee that their contracted transport rights will not be affected during congestion due to contracts concluded by the grid operator with new customers.
Enexis appealed this decision, but since it was obliged to comply with the judgment during the appeal proceedings, Enexis offered Pottendijk a grid connection and indicated that an offer for transport capacity would be subject to the results of its pending investigation into the possibilities of congestion management. Pottendijk considered this to be a violation of the court decision and started interim relief proceedings for the second time.
On 14 January 2020, the court judgment regarding the second interim relief proceeding stated that Enexis was indeed in violation of the earlier decision since its new offer included contractual restrictions. From this judgment, it appears that such restrictions may include the following examples: a connection is made conditional to a customer's acceptance that it will not receive transport capacity, the provision of transport capacity is made subject to the results of the grid operator’s investigation into congestion management or a connection and transport agreement (referred to as ATO) needs to be sealed after the acceptance of the grid operator’s offer for connection and transport capacity, which ATO could include transport restrictions.
The Pottendijk ruling is also interesting because (according to Enexis' website) at the time of the second Court judgment, the grid operator’s investigation into the possibilities of congestion management had already been completed and it was concluded that congestion management would not be a solution in that area. This begs the question: did Enexis fail to put forward the results of the investigation in the second interim relief proceeding? If it did provide these results, did the court then decide that those results were not sufficient to demonstrate physical congestion? No answers appear in the judgment, but should the latter be the case, this may undermine the clarity on the use of the Transport Exception that was provided in the Schenkeveld case. This may also mean that the Court advocates a more stringent interpretation of the Transport Exception in favour of customers that apply for transport capacity.
Enexis’ appeal against the first interim relief is still pending and when concluded, a judgment may provide further clarity. At the same time, the Ministry of Economic Affairs and Climate Policy is preparing a new Energy Bill for early 2020 that will also address the ways grid operators respond to congestion. The new Bill is being drafted to provide grid operators more flexibility, but will it also provide more certainty for customers?
For more information on this bill and the Dutch energy sector, contact your regular CMS advisor or local CMS experts: Cecilia van der Weijden or Marcellina Rietvelt.