Energy communities: Legal challenges for consumers and investors protection
This is the fourth installment of our Topic of the Month: Legal Challenges for Peer-to-Peer Energy Trading and Energy Communities
The expression energy community and its numerous variations refer to collective action in the field of energy, mostly associated with electricity generation from renewable energy sources. Energy communities do not represent an absolute novelty in the sustainable energy debate.[1]
Since the 1970s, the term community has been linked to the adoption of alternative technologies for local, small-scale, and bottom-up approaches to sustainable energy generation and against traditional centralised energy systems built around large-scale power plants and energy utilities. However, it is only in recent years that energy communities have gained unprecedented attention in the European Union, a development that translated in the introduction of a new legal framework in the context of the Clean Energy Package.
What is the Clean Energy Package? Read more
Both the Renewable Energy Directive (RED II) and the Internal Electricity Market Directive (IEMD) define renewable and citizens energy communities as legal entities, based on the open and voluntary participation of civil society, which own and/or control the assets used in activities such as generation, distribution, supply, consumption, aggregation, energy storage, energy efficiency, or charging services for electric vehicles. Taken into account the minimum harmonisation of the abovementioned Directives, we argue that the transposition and implementation of the new European legal framework for energy communities is not shielded from legal disputes involving corporate law, consumers, and investors protection rules.
Based on the EUI RSC Working Paper series, the fourth and last installment of our Topic of the Month deals with the potential legal disputes related to the implementation of energy communities concerning: (i) the mutual recognition of its legal forms between the Member States, (ii) the compatibility (or incompatibility) of community members being considered partners and natural consumers simultaneously, and (iii) their risk liability.
1. The varieties of legal forms of energy communities and the obligation of Member States to mutual recognition
The distinguishing feature of energy communities in the EU is that they must be constituted as legal entities. This has twofold consequences. On the one hand, a community initiative not constituted as a legal entity would not be recognised as an energy community by the legal system. On the one hand, Member States have the discretion to regulate whether energy communities must have a certain legal form and, if so, which one. Energy communities have been constituted as co-operatives, (limited) partnerships, companies with community interest, foundations, non-profit organisations, social enterprises, associations, and public-private partnerships.
The decision to not harmonise a specific legal form for energy communities at the European level has advantages and disadvantages. On the advantage side, Member States can use their discretion to decide which existing legal forms are most appropriate for energy communities according to their national company law.[2] National company laws may diverge in the treatment of legal entities in terms of decision-making, liability, tax advantages, start-up costs, or administrative burdens. On the disadvantage side, the Member States that diverge in the choice of the legal form may have to mutually recognise each other’s legislation in order to avoid discrimination against energy communities incorporated in another Member State. The absence of such mutual recognition might preclude the geographic enlargement of an energy community and the decision to enter into cross-border operations.
2. Energy community members as partners, investors and natural consumers
The variety of ways in which individuals can interact with energy communities raises a challenge concerning the application of consumer protection rights to natural persons who are engaging in community activities as shareholders or members and, at the same time, as final customers.
Both the RED II and IEMD establish that the Member States must ensure final customers, in particular household customers, are entitled to participate in energy communities while maintaining their rights and obligations as final customers. However, this requirement does not imply that those individuals are entitled to consumer protection rights granted in general consumer law, such as legal protection against unfair commercial practices. Any preliminary finding on the legal nature of energy community members needs to converge with EU consumer law and, eventually, national consumer laws.
There are various ways in which energy communities interact with their members or shareholders. For instance, hypothetically, a natural person can inject capital into an energy community to jointly finance renewable generation projects and become, therefore, one of its shareholders or members. Also, the same individual could benefit from the energy generated by the energy community and receive energy supply services. In this case, that individual is a final customer and investor simultaneously. If the service provided is framed as a separate contractual agreement between that individual and the energy community, the nature of the consumer might be preserved. Otherwise, we step into the field of legal uncertainty. Individuals who opt-in to energy communities to engage in energy sharing or self-consumption energy schemes within the energy community might lose their identity as natural consumers. If so, this needs to be clarified in advance. The context matters and the application of consumer protection rights need to be interpreted in each case.
3. Energy community members as investors and their risk liability
As a market participant, an energy community must be financially responsible for the imbalances that it causes in the electricity system unless it delegates its balancing responsibility to third parties.[3] Considering the high costs of contracting a third party to balancing, a community can indeed be subject to liability claims for damages before system operators and final customers when licensed as retail electricity suppliers. However, could an energy community participant, be it a shareholder or ordinary member, be equally responsible for imbalances?
One of the most contesting legal issues concerns whether shareholders or members can be financially responsible for energy communities’ debits. The answer depends mainly on the type of legal entity that frames the energy community and, above all, the applicable national laws. Each type of legal entity may have different rules concerning shareholder liability, which usually ranges from liability for debts up to the value of shares to greater risks. Therefore, energy communities have to comply with their obligation of informing their shareholders and members about their risks before opting in compliance with the investors’ protection rules enshrined in the Markets in Financial Instruments Directive (MiFID II).
Learn More
Peer-To-Peer Trading and Energy Community in the Electricity Market: Analysing the Literature on Law and Regulation and Looking ahead to Future Challenges by Lucila de Almeida, Viola Cappelli, Nikolas Klausmann and Henri van Soest (15 March 2021).
The Future of Renewable Energy Communities in the EU: an investigation at the time of Clean Energy Package by Stefano Verde, Nicolò Rossetto, Alberto Ferrari and Fonteneau Thibaut (28 September 2020)
Acknowledgment: the publication is part of the work of the Global Observatory on Peer-to-Peer, Community Self-Consumption and Transactive Energy Models (GO-P2P), part of the User-Centred Energy Systems Technology Collaboration Programme (Users TCP) run under the auspices of the International Energy Agency (IEA). GO-P2P benefits from the support of Australia, Belgium, Ireland, Italy, The Netherlands, Switzerland, the United Kingdom and the United States.
[1] Walker G. et al. (2007), ‘Harnessing Community Energies: Explaining and Evaluating Community-Based Localism in Renewable Energy Policy in the UK’, Global Environmental Politics, 7 (2), 64-82.
[2] REScoop and ClientEarth, ‘Energy Communities under the Clean Energy Package: Transposition Guidance’ (2020) <https://www.managenergy.eu/node/980> accessed 3 September 2020.
[3] Internal Market for Electricity Directive, art 16 (1)(a).
