Competition and regulation in the EU energy sector* Jose Manuel HERNANDEZ First Secretary, Competition policy and energy markets EU Delegation to Ukraine Kiev, 3 March 2017 (*) All views expressed are personal and do not bind the EU Delegation

Main features of each instrument EU Antitrust Law (Art. 101; 102, 106) Ex post enforcement Focus on infrastructure and supply markets Investigative powers Behavioural and structural remedies Sanctions Lessons from cases serve as input for regulation EU State Aid control (Art. 106 and 107) Ex-ante control Avoid market distortion Pursue efficient use of taxpayers' money Enabler of energy policies such as renewables EU Regulation (Third package) Ex-ante intervention Focus on infrastructure and cross-border interfaces 'towards everyone' measures

The electricity supply chain Power Generation (Competition) Transmission (Regulated) Distribution (Regulated) Consumers (Competition) MWh MWh MWh € € Supplier Wholesale market Retail market

The EU Regulatory framework Unbundling energy suppliers from network operators Regulated, third party access to the networks Independent regulatory oversight Set of network codes aimed at seamless cross-border integration (day-ahead markets, intraday markets, balancing markets, congestion management, etc) Latest proposals (December 2016): Upgrade wholesale market rules Strengthen EU preparedness (security of supply) Empower consumers Improve regional cooperation

Antitrust enforcement sample Withholding generation capacity: German wholesale electricity market (2008) Network foreclosure: RWE gas (2008) Pre-emptive booking networks: CEZ (2013) Long term contracts with consumers: EdF, 2010 Long term capacity bookings: GdF gas (2009) and EON gas (2010) Limiting cross-border capacity: SvK, 2010 Market sharing agreement (Power exchanges, 2014) Discrimination: EON balancing (2008), OPCOM (2014) Territorial restrictions in wholesale electricity contracts (BEH, 2015)

State aid modernisation (2012-2014) Objectives Foster growth in a strengthened, dynamic and competitive internal market, by encouraging “good aid” and discouraging useless or counter-productive aid Focus enforcement on cases with the biggest impact on internal market Streamline rules and faster decisions Energy New Guidelines in force since 2014. Major overhaul: support schemes for renewable energy, capacity mechanisms, reductions for energy intensive users, energy networks. No effect on rules for closing coal mines, stranded assets, etc

RES-e support: Rules under EEAG Integrating RES into the market (n/a small RES) From 2016: Sell electricity directly on the market (aid as premium on top of the market price) Balancing responsibilities (if liquid intra-day market) No incentives to generate with negative prices. Minimising risk of overcompensation (n/a small RES) 2015-2016 From 2017 Competitive bidding for at least 5% of the planned RES capacity. Competitive bidding for 100% of the planned RES capacity Open to all RES technologies Flexible criteria

State aid sector inquiry capacity mechanisms Capacity mechanisms = Member States' measures to ensure that electricity supply can match demand in the medium and long term State aid sector inquiry on capacity mechanisms launched on 29 April 2015 and concluded on 30 November 2016 Scope: 11 Member States

CM Sector inquiry: Types identified

CM Sector inquiry: : 35 measures in 11 States

CM Sector inquiry: Recommendations Establishing need Market reforms first Economic adequacy assessment and reliability standard Choosing an appropriate CM Long term? Market wide Short term? Reserve Local issue or need for DR? Ensuring proportionality 'Capacity payments' not acceptable – need competitive price setting Protecting trade and competition Open to all technologies, small sizes Open across borders (market wide)

CM Cases: Enforcement record Strategic Reserves Germany (network reserve) Interruptibility schemes Germany (ABLAV) Greece Italy Capacity payments Greece (Flexibility mechanism) Tenders France (Brittany) Croatia (Plomin C) Market wide mechanisms UK France

Wrapping up: Application to Ukraine DCFTA: Aims at the same EU energy model and competition law framework => Ukraine can benefit from the wealth of case practice ECJ: Antitrust law enforcement is independent from Regulation ECJ: Compliance with Regulation does not hinder antitrust enforcement Antitrust is stricter than Regulation and remedies can be more far reaching e.g. ownership unbundling, releasing bookings) Big challenge: align today's practice of subsidies in the energy sector with State aid rules Strict State aid control in UKR would significantly reduce public spending and reduce competition distortions.