The European Union’s Single Market. Integration towards the European Energy Union

Table of contents

1 Introduction

2 Controversies In The Academic Debate

3 The Governance Regulation’s Energy And Climate Reporting

4 Analytical Framework
4.1 THE SITUATION OF ENERGY POLICY IN GERMANY AND POLAND
4.2 OPERATIONALISING LIBERAL INTERGOVERNMENTALISM

5 A Liberal Intergovernmentalist View On The Governance Regulation
5.1 ECONOMIC INTERESTS
5.2 PREFERENCE FORMATION
5.3 REDUCTION OF BARRIERS
5.4 REDUCTION OF TRANSACTION COSTS

6 Conclusion
6.1 LIMITATIONS AND AVENUES FOR FUTURE RESEARCH

7 Bibliography

Abstract

The Regulation on the Governance of the Energy Union and Climate Action is a legislative act aiming to improve the governance structure of the internal energy market. The Regulation has been subject to academic dissensus and it remains unclear whether it has to be interpreted as a step towards renationalisation of the European Energy Policy or as increasing the powers of the Union’s institutions. The discussion is caused by the Regulations’ formulation which leaves room for interpretation and its effects are not sufficiently clear. This research aims to explain why the Governance Regulation materialised with ambiguous formulations. The issue is approached using Liberal Intergovernmentalist theory to explain this outcome. The theory can be used to explain regional integration and particularly European integration well and is based on intergovernmentalism but also includes aspects of realism and neo-liberalism which broadens the scope of the analysis. Concluding this contribution, it is found that the ambiguity of the Regulation was necessary due to cleavages among the Member States and to meet the smallest common denominator which allows for a first step of a common governance in European Energy Policy.

1 Introduction

The energy policy of the European Union has manifested to be of particular challenging and sometimes contradictory nature. Situated at the centre of early integration approaches during the foundational negotiations drafting of the Treaties of the Union, energy policy has demonstrated to be a “special case of Europeanisation” (Andersen, 2000). European Energy governance started long before the Lisbon Treaty reform in 2009 as its early roots can be identified as reaching as far back as to the Union for the Coordination of the Transmission of Electricity agreed upon in 1951 (Van Baal, 2019; and Szulecki, 2019, p. 2). Since then, the European Coal and Steel Community (ECSC, Paris, 1951) and the Rome I Regulations that founded the European Economic Community and the European Atomic Energy Community (Euratom, Rome, 1957) highlight the significance of the energy sector for European integration. This policy-area has been of particular interest because controlling it was identified to be crucial in order to maintain peace, stability, solidarity and cooperation between states (Szulecki, 2016, p. 549).

More recently, the European Commission found itself in a peculiar situation where a cleavage between the Western and Eastern Member States along the lines of energy security and energy sustainability had been manifest. In this difficult situation the Winter package was concluded, and it codified the structure of coordination of the European Energy Union in accordance with the mid-term energy strategy laid out by the 2030 Framework for climate and energy (COM (2014) 0015) which concerns the period of 2020 to 2030. The aims of these legislative acts were to overcome the discrepancy of the limited scope of the European Councils’ powers which only allowed it to agree in Union-wide policy targets in the areas of renewable energy and energy efficiency which would not be covered by national measures. This left the European Commission with insufficient control over the process, which the “Winter package” of 2016 aimed to correct (Knodt, 2019, p. 182). The Regulation on the Governance of the Energy Union and climate action (hereafter: Governance Regulation) is a part of the Winter package’s legislative acts. It has been subject to an extensive academic debate where the opposing camps argue that the Governance Regulation was either to be understood to confer more powers to the Union or to be interpreted as an act of renationalisation of energy policy. This debate shows that there is a considerable room for interpretation and uncertainty about the effects of the regulation. This may be the case, because in some aspects the Governance Regulation’s provisions are not formulated sufficiently clear. Therefore, this contribution will answer the research question: Could the Governance Regulation have intentionally been concluded with ambiguous formulation?

Prior to the drafting of the Regulation, the European Energy governance method has been described as experimental, meaning forms of governance with a less hierarchical structure (Rangoni, 2019, p. 78). The Governance Regulation stipulates procedural and substantial legal foundations which provide for rules on the monitoring of climate and energy targets. It aims to create a structured and transparent process based on cooperation of the European Commission and the Member States whilst increasing the horizontal integration. The drafting and submission of the integrated National Energy and Climate Plans from the Member States to the European Commission is regulated by the Governance Regulation and subject to discussion in regard to its interpretation. The integrated National Energy and Climate Plans have to be submitted to the European Commission in order for the institution to scrutinize them, give opinions and recommendations and monitor the longer-term development, including regional cooperation and corresponding European Commission action (Art.1 (1) Governance Regulation 2018/1999).

Influenced by the East-West cleavages, diverging interests of the Member States and complicated political situations, the Governance Regulation has not materialised in a clear and concise form but leaves room for interpretation. Particularly its effects on the power distribution in European Energy Policy are unclear. Also, diverging interests between smaller and larger Member States may have led to the Governance Regulation being unclear and ambiguously formulated. In the past, reforms of the energy-sector that have led to a consistent increase of integration, as most other policy-areas have similarly experienced. However, these reforms not always have led to more power-conferral to the Union. Other policy-sectors such as environment which is subject to the Emissions Trading Scheme also have a direct influence on the European Energy Policy. The Emissions Trading Scheme only is partially subject to national exemptions which allows the Union a wider discretion than in other energy-related fields (2003 /87 /EC). So has the reform of the Emission Trading Scheme increased the European Union’s authority whilst the support schemes for renewables accompanied a closer coordination of national intervention.

In the area of European Energy Policy, economic interests, domestic politics, political motives, global and regional power demonstrations have created a difficult to navigate web of interdependencies and interrelations that are complicating the development of a proposed common European Energy Policy. The Governance Regulation is the most interesting legislative act from the perspective of this contribution. It aims to provide for rules of governance of the proposed common Energy Union which predetermines the cooperation between the Member States and the terms and conditions to which they are bound. Further complicating the subject are national energy policies and strategies, existing investment- contracts of Member States in their infrastructure, the Union’s governance of the internal market and third countries’ influence on the European Union, the European Energy policy and the Member States themselves.

In order to develop an answer to the research question, the theoretical framework will be operationalised to allow for the subsequent application to empirical observations. This contribution will look for proof which may explain whether the legislative act has been intentionally concluded with ambiguous formulation and why this outcome may have materialised. In order to do so, relevant empirical observations will be analysed and the theoretical framework of Liberal Intergovernmentalism will be used to reach a conclusion. This thesis explains how the Governance Regulation has evolved by applying operationalized assumptions of Liberal Intergovernmentalism to the legislative act concerned. In a first section, an overview of the academic discussion and scholarly contributions towards this question are presented to lead to this contributions’ puzzle it intends to solve. The literature review aims to allow the reader a sufficiently comprehensive overview of the academic debate and where this contribution fits in. The subsequent analytical framework operationalises the assumptions of Liberal Intergovernmentalism to allow their use in the analysis. The empirical observations are then applied to each assumption, and an answer to this contribution’s research question is developed throughout the analysis. This thesis will be concluded by answering to the research question, providing for avenues for future research and explaining the limitations of this research.

2 Controversies in the academic debate

In the scholarly debate, the discussion revolves around the nexus of renationalisation of further delegation of powers and competences to the Union. This research will contribute by taking a different approach to this issue by discussing whether the Governance Regulation was intentionally designed to be formulated ambiguously. In the past decade, academic discourse and scholarly research has largely overlooked the European Union’s energy policy as a research field due to its non-comprehensiveness and low degree of centralisation of governance structures and coherence (Szulecki, 2019, p. 1). Scholars have identified an urgent need for a comprehensive approach in energy policy (Tagliapetra, 2014; Hix, 1999), but the Member States are hesitant to reallocate the competences to the Union as provided for in Artt. 2 to 6 TFEU. This conferral of powers, Szulecki argues, is required and necessary to develop an efficient European Energy governance. Proving this, his research focusses on a case-study of two EU-Member States in order to develop scenarios for the future of the European energy market and its potential paths for further integration and development of a common energy governance (Szulecki, 2016, p. 548). Furthermore, the concept of the Energy Union was identified as the most significant policy idea which aims to reform the European energy governance. Its comprehensive approach including policies, regional cooperation and streamlining the long-term climate goals of the Energy Union which are closely tied to energy production necessitate these reforms (Szulecki, 2016, p. 565).

By adaptation to the governance mechanism of the European Energy Policy, the academic literature is divided on the issue whether the Governance Regulation increases national discretion over the energy sector or whether the European Commission has gained significant substantive powers which reduces the national authority. This discussion is rooted in contradictory developments during the evolution of the drafting process of the Governance Regulation such as when Germany pushed for the inclusion of sustainable energy targets and backed off just a day before the initial signature (Euractiv, 12.06.2018). Prior research has focussed on the assessment of the new governance methodology of the European Union e.g. whether the Governance Regulation is still a soft governance mechanism. When a legislative act of the European Union is concerned, a harder governance mechanism implies more centralisation of powers to the Union whilst softer governance mechanisms allow for more discretion for the individual Member States (e.g. Knodt, 2018).

It may be argued that the Governance Regulation has to be understood as a step towards renationalisation of European Energy policy by softening the governance mechanism and increasing the Member States’ discretion and autonomy over the energy sector. Historical research analysing European energy systems have found that national energy regulation was preceded by transnational governance and mechanisms consisting of cross-border coordination (Lagendijk, 2008; Schot, 2008). Over time the supranational approach to energy governance gained importance in the academic discourse, but the control over energy market policies still rests with the Member States. They appear to support an intergovernmental understanding of power relations between themselves and the Union’s institutions (Eikeland, 2011). The increasing fragmentation and renationalisation of energy-related issues and policies threaten the advancements of integration in the European Union’s energy and climate policies (Dupont, 2012).

The European Council meetings between 2008 and 2011 have reflected and advanced the common approach and shaped the focus of the European Energy Policy, although none of them have equipped the European Commission with new substantive competences (Thaler, 2016, p. 577). Only after the Lisbon treaty, the European energy governance was moved from being carried out through secondary legislation without regulating energy policy under primary law to be a standalone policy area. Due to this change in the Treaties, the European Union’s energy policy no longer remained a policy-field exclusive to national administrations. The Treaties today recognise the policy area of energy to be a shared competence of the European Union and codifies the subject in a dedicated Energy Title (XXI). Article 194 TFEU acts as the contractual basis for European Energy policy and defines common objectives at Union-level, which explicitly shall be pursued in a spirit of solidarity between the Member States. It is a good example for the hesitance of Member States to confer powers to the Union in the energy sector (Tagliapietra, 2014, p. 4). Eikeland analysed the European Commission’s proposals for the three Internal Energy Market Packages and found, that these attempts to establish a European supranational energy governance have failed in all three occasions because of the reluctance of the Member States to confer powers and preferred to remain in charge (2011, p. 258). For this reason, the article clarifies, that “such measures shall not affect a Member State's right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply” (Art. 194 (2) TFEU). This provision pronounces the national sovereignty over the national energy policy and composition of the energy mix.

Other scholars have argued that the Governance Regulation has to be interpreted as a legislative act which has the effect of centralising the powers towards the European Commission. The European Union has displayed political and institutional ambitions to integrate priorities of climate policy into the European Union’s energy governance. This objective was recently further manifested by the European Union’s legislative acts tendency to further integrate in the energy sector (Szulecki, 2019, p. 3). The Governance Regulation increases the pre-existing European Union’s 2030 Framework’s degree of stringency and bindingness by creating substantive as well as procedural obligations for the Member States (Oberthür, 2019, p. 24). Although the European Union’s 2030 Framework leaves much room for individual Member State’s discretion, the Governance Regulation’s provisions are introducing higher degrees of accountability which in turn allow for more effective implementation. Knodt identified a change in the European Union’s governance from softer to harder governance and the European Commission’s role, which resulted from past negative experiences with softer governance mechanisms (2019, p. 180). The introduction of mechanisms that allow for harder intervention at the European level are created to allow for better horizontal coordination between the Member States. In order to do so successfully, the European Commission has taken on a new role which can be described as a ‘policy shaper with harder surveillance’ (Knodt, 2019, p. 180). The 2030 Framework advances the obligations and requirements significantly when compared to the 2015 Paris Agreement, which lacks the mechanisms of the Governance Regulation for monitoring and effective implementation by the Member States under scrutiny of the European Commission. The formal status of the legal provisions of the 2030 Framework and the Paris Agreement are of similar nature, but the substantial nature of the obligations is dissimilar. The 2030 Framework is clearer and more precise, which allows for more effective scrutiny and monitoring (Oberthür, 2019, p. 25). The obligations arising from the Governance Regulation increase the European Commission’s discretion significantly by allowing it to initiate infringement proceedings in case of ambition gaps or implementation gaps.

These potential shortcomings or insufficient measures are monitored by the European Commission and allow for a close monitoring and scrutiny, including the issuing of recommendations and close guidance for the planning of the Member States’ national integrated Energy and Climate Plans (Oberthür, 2019, p. 24). The 2030 Framework and the Governance Regulation can be understood as forms of “harder soft governance” compared to the preceding arrangements (Knodt, 2019).

In order to contribute to the scholarly debate, this research will look at the observable outcome (Governance Regulation) and will explain why the outcome has materialized by extracting and applying explanatory factors of Liberal Intergovernmentalist assumptions. In the following section, the Governance Regulation’s Energy and Climate reporting mechanism is briefly presented and discussed to allow for the development of the analytical framework in the subsequent section. Liberal Intergovernmentalist assumptions have to be operationalised in order to allow for the application to the Governance Regulation and explain its materialisation. In the subsequent section the analytical framework will be utilised to explain the outcome of the Governance Regulation to allow for the discussion in order to find an answer to the research question.

3 The Governance Regulation’s Energy and Climate reporting

The Governance Regulation creates a structure for governing the proposed Energy Union and can be divided by their time-scope in (a) long-term planning and (b) short-term reporting (Ringel, 2018, p. 213). The strategic and long-term energy and climate planning is composed of two elements. These are the integrated National Energy and Climate Plans which have a ten-year perspective and the long-term Low Emissions Strategies which have a fifty- year perspective. The integrated National Energy and Climate Plans (Artt. 3 - 13 Governance Regulation) are the main method of reporting. The provisions encompass a general procedure how the integrated National Energy and Climate Plans shall be drafted, which national stakeholders shall be mandatorily consulted, and which Member States based on regional cooperation in climate and energy policy must be involved and on which basis. The integrated National Energy and Climate Plans must contain a comprehensive description of the domestic objectives, targets and contributions towards the Energy Union. The Member States further shall include potential areas of regional cooperation whilst exploring national measures to meet these objectives. Furthermore, the analysis of the current domestic status of the dimensions of the Energy Union must be undertaken by the Member States individually and must include projections of the employed and planned national measures’ effects on how they would contribute to meeting the objectives laid out as well as an impact assessment of those planned policies.

The Low Emissions long-term Strategies (Art. 15 Governance Regulation) envisage a timeframe of fifty-years and aim to create coherent policies on Union and Member State level to meet the greenhouse gas reductions in accordance with the Paris agreement of 2015. The Low Emissions Strategies cover the reduction of greenhouse gas emissions, emissions reductions specified per sector (electricity, industry, transport, buildings and agriculture), projected progress of the Member States towards a green economy (low emission economy) and links to further domestic long-term planning and strategies affecting this area or the covered policy-areas. The short term-reporting mechanism as laid out in Art. 26 and 27 of the Governance Regulation complements the long-term Strategies of Art. 15 Governance Regulation and takes place in either annual reporting of biannual progress reports. These reports are drafted in the form of strategy documents and submitted to the UNFCCC and the European Commission. The European Commission is empowered to issue recommendations which must be processed and respected by the Member States’ pursuant report updating the current one. The annual cycle of reporting has certain parallels to the European Semester which further substantiates the governance cycle (Ringel, 2018, p. 215). The annual reports serve as compliance-enforcing mechanisms to bind the Union and the Member States to international commitments such as those agreed upon under the UNFCCC framework. The integrated Energy and Climate Plan reports are assessed by the European Commission. The assessments are published in the context of the State of the Energy Union reports and thus accessible for the other Member States.

Complementary to the planning and reporting provisions, the Governance Regulation also contains provisions which govern the monitoring and progress tracking with the Energy Union. The European Commission assesses the progress in regard to the energy and climate objectives Member States have made based on the reports submitted and will respond with a recommendation. This recommendation may include proposals for corrective action if the ambitions of the Member State concerned are insufficient. These recommendations must be respected by the Member State when drafting the next report in the following cycle. Articles 29 to 36 of the Governance Regulation provide for the empowerment to take corrective action of the European Commission to assess the Member States efforts. This competence is within confined spaces and only two cases can trigger this process: ambition gaps and implementation and delivery gaps. In case a Member States' ambition falls short of the legislation's requirements, the European Commission may undertake corrective action to achieve compliance with the Energy Union's objectives. These can be assessed in manifest inconsistencies, insufficient progress in national planning or lacking ambition if the integrated National Energy and Climate Plans, although there are not binding targets laid out to the compliance the European Commission could test them. The integrated National Energy and Climate Plans indicate the Member States national contributions towards reaching the objectives and aims laid out in the binding national 2020 renewable energy targets and the Energy Unions' objectives which are the references for the European Commission’s assessment. However, in the field of renewable energy the Renewable Energy Directive (Council of the European Union 10308/18) and the Governance Regulation both set a binding target, but no target has been agreed upon in the area of energy efficiency. The European Commission summarises the national reference points which combined create the European Union reference points for compliance with the Energy Union's objectives. The Governance Regulation provides for a reallocation mechanism of the missing percentage points of Member States included in Annex Ia in case the reference points are expected to not be met (Articles 29 to 36). These Member States are required to implement further national measures in the following year to cover the gap identified by the European Commission following the "gap-filling" process (Ringel, 2018, p.8).

The European Commission assesses the implementation of national measures and policies in accordance with the integrated National Energy and Climate Plans provided by the Member States. In case the implementation or delivery is not met, the European Commission assesses Implementation Gaps or Delivery Gaps respectively. In case a Member State only insufficiently complies with the Regulation's provisions and requirements, the European Commission will issue recommendations which have a binding character since these recommendations must be followed by the Member States in the drafting on the subsequent years' reports and Plans. The Member State concerned may justify the deviation, bearing the burden of proof. Oberthür found that a limited decrease of substantive obligations compared to prior legislative acts has been balanced by a furthering procedural obligations and powers of the European Commission to ensure the effective implementation (Oberthür, 2019, p. 24).

Allowing for an efficient and comprehensive scrutiny and monitoring of the European Commission, the Governance Regulation combined energy and climate reporting for the first time (Ringel, 2018, p. 219). This streamlined process contributes to significantly improving the economic efficiency of the reporting and monitoring process since the combined reporting requires less resource-intensity. This led to increased cooperation between the European Commission and the European Council which translates into a more efficient procedure. This process leads to improved policy harmonisation mechanisms by allowing for more open exchanges and creates efficiencies on the European level which serves as incentive for each Member State to participate and confer competences and powers to the Union (Art. 5 TEU and Artt. 2 to 6 TFEU).

The Governance Regulation’s provisions allow for interpretative margins. This leaves some of the legislative acts’ effects unclear and how Member States will react and what kind of measures they will take to meet the objectives laid out and to comply with the Regulation. To allow for the utilisation of Liberal Intergovernmentalism, the subsequent section will develop the analytical framework by operationalising the theoretical framework’s assumptions. These operationalised assumptions will in the subsequent section be applied in order to explain why the Governance Regulation materialised as it can be observed.

4 Analytical Framework

The academic dissensus concerning the Governance Regulation is rooted in the discussion among scholars on how the legislative act has to be interpreted, as it leaves room for interpretation and the outcome to result from the Regulation is unclear. This contribution takes the theory of Liberal Intergovernmentalism into account to explain how and why the Governance Regulation has materialised in its current form. In order to achieve this, at first the most important aspects of Liberal Intergovernmentalism for this research will be presented, discussed and briefly connected with the issue of interest. This theory is the most adequate theoretical framework for this analysis, because the theory was developed to explain European Integration, regional integration and more wide-ranging transformation processes. The theory is based on intergovernmentalist theory but includes neo-liberal and realist aspects as well. Its main rationale follows the idea that the complexity of European integration would require a more encompassing approach rather than the narrower viewpoints most theories take into account. The inclusion of approaches and aspects of other theoretical frameworks allows the theoretical framework to comprehensively explain the integration process generally as well as integration of policy-sectors, such as the Governance Regulation which concerns the integration in European Energy Policy.

Liberal Intergovernmentalism assumes that states are the primary actors whilst the European Union is perceived as an international institution which allows the Member States to gain control over the anarchic international system by bargaining and negotiating agreements. The theory focusses on these agreements, since the bargaining and negotiation process is crucial for the outcomes in the form of legislative acts which shape and form the Union, the Member States and the relationships between them and the different governance levels. It is assumed that Member States’ bargaining powers are important in the bargaining and negotiation process of European integration and European institutions are seen as means to create trustworthy and dependable obligations for national governments which can be relied upon and enforced if required. Contrasting neo-functionalist assumptions which argue that supranational institutions are of great importance in the integration process, liberal intergovernmentalists only assign limited influence on these institutions.

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