ECJ: German exemption for customer installations is contrary to European law

On November 28, 2024, the European Court of Justice (ECJ, case no. C-293/23) ruled that the German regulations on the infrastructure category of customer installations pursuant to Section 3 No. 24 a) EnWG are not in line with EU law. The ruling may have an impact on accounting, the need to calculate grid fees and the obligation to connect third-party renewable energy generation facilities to their own production sites. Affected companies may also face the loss of (energy) tax relief.

The supply infrastructure in German energy law

German energy law regulates energy industry activities regardless of whether a company carries out energy supply as a core activity or requires it as a prerequisite for its production activities. As a result of this principle, companies of all sizes and from all sectors have to deal with the question of the extent to which their energy industry activities trigger legal consequences and regulation. This affects, for example, companies that operate combined heat and power plants, PV systems, supply infrastructure such as lines and transformers at production sites or that supply energy to group or third-party companies. Even before the ruling, this was a complex and dynamic task, as the legal framework continues to evolve and a series of official and court decisions require action at short notice. The ECJ has now declared an important classification of supply infrastructure in German energy law to be inadmissible and thus a way of preventing far-reaching regulation. Affected companies should now redefine the situation in the short term and derive short and medium-term options for action.

This previously applied to customer installations in Germany

Under current German energy law, a customer installation is downstream of an energy supply grid and largely exempt from regulatory obligations. Customer systems are separate from the energy supply grid in regulatory terms, with the result that operators do not need to implement comprehensive grid regulatory requirements. In practice, not only decentralized supply districts but also a number of large production and industrial sites have benefited from this. The list of possible applications can be extended indefinitely: Hospitals, university locations, data centers, research facilities, shopping centers or campsites are also users of this infrastructure category. In addition to the reduction in regulatory requirements, there are also economic incentives for classification as a customer facility. For both residential areas and industrial sites, it was previously more cost-effective to generate, distribute and consume electricity at the location “behind” the grid connection. This electricity is not subject to grid charges or grid-side levies and surcharges (such as CHP and offshore surcharges, etc.). The classification of an electricity distribution infrastructure as a customer installation is also a mandatory requirement in various support mechanisms, such as tenant electricity in accordance with Section 21 (3) EEG, as corresponding support surcharges are only granted if the grid is not used.

The question referred by the BGH

The background to the now decided referral by the Federal Court of Justice (BGH) was the classification of a customer installation used for residential purposes. This consisted of two separate energy systems, one comprising four blocks of flats with 96 residential units and the other six blocks of flats with a total of 160 residential units. The blocks of flats were supplied with 288 MWh/a and 480 MWh/a of electricity on a decentralized basis. The BGH was of the opinion that the two energy distribution systems used for residential purposes had to be considered separately from each other, meaning that two customer systems pursuant to Section 3 No. 24a EnWG had to be assumed. Due to doubts arising from the size of the customer installations, the BGH referred the question to the ECJ as to whether EU law requirements regarding the distribution of energy and distribution system operators preclude classification as a customer installation. The ECJ answered in the affirmative. The German regulation was therefore in breach of EU law. The operative part of the decision does refer to the specific individual case presented with detailed information. Nevertheless, the ECJ’s legal assessment in the grounds of the decision goes beyond the individual case and will be of fundamental importance for the legal and regulatory classification of supply situations in residential areas as well as at many industrial locations in the future.

ECJ: Member states may not exclude customer installations from the distribution network category

In its grounds for the decision, the ECJ states that the Member States were not entitled to assume that a certain type of network is to be excluded from the definition of “distribution system” within the meaning of Directive 2019/944 by relying on an additional criterion to those provided for in EU law (ECJ judgment of 28.11.2024, case C-293/23, para. 61). Member states may not use any additional criteria to define the term “distribution system” other than the voltage level and the category of customers to whom the electricity is passed on. Otherwise, the autonomous and uniform interpretation of Art. 2 No. 28 of Directive 2019/944 could be impaired (ECJ judgment of 28.11.2024, case C-293/23, para. 61). Furthermore, the ECJ states that the member states are not entitled to exclude an entity that falls under the term “distribution system operator” within the meaning of Directive 2019/944 from the scope of the directive. Otherwise, it would be possible to circumvent the scope of Directive 2019/944 or the practical effectiveness of the terms “distribution” and “distribution system” would be impaired (ECJ judgment of 28.11.2024, case C-293/23, para. 67). According to the ECJ, the answer to the question referred is to be applied mutatis mutandis to situations that fall within the scope of the predecessor Directive 2009/72, as the terms “distribution” and “distribution system operator” were taken over from the previous directive.

Operators of customer systems should initiate measures promptly

The ruling has far-reaching consequences for all operators of customer installations. Not only the companies that operate the supply infrastructure are affected, but often also the companies affiliated with these companies, which in turn carry out energy-related activities, such as the operation of a PV system on the administration building, central purchasing of energy for the group or the supply of energy to a canteen or a security service. According to the reasons for the ruling, the effects are individual to each company. The ECJ does not have the authority to repeal German energy law and thus the concept of customer installations. However, any assessment by authorities or courts will have to be based on whether the current situation in individual cases complies with the requirements of EU law. For operators of customer installations, it will now be important to promptly review the respective individual case constellation against the background of the reasons for the ruling and, if necessary, initiate individual measures. These may include

• Legal, economic and tax analysis of the location and consideration of alternatives
• Derivation of impending legal consequences and evaluation of the changes, for example implementation of accounting unbundling and disclosure of business results
• Short-term initiation of countermeasures such as submitting an application for approval of a closed distribution network
• Calculation (and approval) of grid fees and changes to price structures for energy procurement at locations
• Adjustment of (intercompany) contractual relationships at affected locations
• Rethinking business models and the supply concept
• Separation of site infrastructures through to the sale of assets