ECJ Ruling on the “Customer System” under German Energy Law

The provisions of the German Energy Industry Act (EnWG) on so-called customer systems (Kundenanlagen) are of considerable practical importance in German energy law because they allow local installations for the distribution of electricity and gas to be operated under certain circumstances outside the regulation for energy supply networks. Accordingly, the concept of customer systems has been the subject of legal discussions repeatedly since its introduction in 2011. In 2022, the Federal Court of Justice (BGH) finally submitted a so-called request for a preliminary ruling to the ECJ to have the conformity with European law examined. On 28 November 2024, the ECJ handed down its awaited judgment (Case C 293/23), the practical implications of which are likely to be considerable.

Background

German energy law is quite clearly structured in one respect: systems for the distribution of electricity and gas are generally to be qualified as (public) energy supply networks, unless, exceptionally, a customer system is in place. The conditions for this are set out in the EnWG in Section 3 No. 24a (general customer system) and No. 24b (customer system for operational self-supply). In order to protect the connected final consumers, it is necessary, among other things, that the customer system is made available to everyone on a non-discriminatory and free-of-charge basis. Accordingly, the operator may not charge any grid fees and must allow the connected final consumers to freely choose their supplier. The decisive advantage in return: unlike the grid operator, the operator of the customer system is exempt from the regulatory requirements of the EnWG, which are demanding in terms of organization. Accordingly, there are countless local supply constellations in Germany, such as industrial plants, holiday parks, shopping centers, residential areas with their own energy center and other commercial properties, etc., in which the operator makes use of this exception.

The problem

What is the problem with this solution, which has worked well in practice? It is a legal one: European law, on which the provisions of German energy law are largely based and which is implemented in Germany through the Energy Industry Act (EnWG), does not actually provide for such an exception to the term “energy supply network”. The German legislator has already had to learn this lesson once, when the ECJ ruled in 2008 that the regulation on the so-called “object network” (Objektnetz), which can be regarded as the “predecessor” of the customer system, does not comply with EU law, so that the corresponding regulation in the EnWG had to be deleted.

Decision of the ECJ

The ECJ now had to decide on a question referred by the Federal Court of Justice in the context of the preliminary ruling procedure, whether European law, namely Directive (EU) 2019/944 (hereinafter “Directive”),

"preclude a provision such as Section 3 No. 24a in conjunction with Section 3 No. 16 EnWG, according to which the operator of an energy facility for the supply of energy is not subject to the obligations of a distribution system operator if it constructs and operates the energy facility instead of the existing distribution system in order to supply, by means of electricity generated in a combined heat and power plant, several blocks of flats with up to 200 rented residential units and with an annual quantity of transmitted energy of up to 1 000 MWh, with the costs of the construction and operation of the energy facility being borne by the end consumers (tenants) as part of a standard monthly basic fee payable for the heat supplied and the operator sells the electricity generated to the tenants?"

The ECJ affirms this question. As a reason for the directive precluding the German regulations on customer systems in the constellation described, the court states, among other things, that the conditions for customer systems regulated in the EnWG are not relevant to the question of whether a distribution system exists within the meaning of the directive. Therefore, they may not be used to define exceptions to the network concept and thus to regulation. Member States are not entitled to exclude from the scope of the directive installations that indisputably serve to transport electricity at high, medium or low voltage for the purpose of sale to customers (see the definition of “distribution” in Article 2(28) of the directive). A company operating such a system is a distribution system operator.

Impact and follow-up questions

We assume that the ECJ decision will have a significant impact. Most of today's customer systems are, from an objective point of view, installations designed to transmit electricity at high, medium or low voltage for sale to customers. In fact, however, these installations differ considerably: they may include anything from a small-scale electricity distribution system in an apartment building to an industrial distribution system on a wide-ranging company premises.

In this context, numerous follow-up questions arise that now need to be analyzed further: Do the ECJ's statements only apply to systems in which (as in the case at hand) generation also takes place or to all customer systems? Are the statements of the judgment also transferable to customer systems for operational self-supply? Which exceptions does the directive itself provide for and can these be applied in individual cases? What applies to customer systems in the gas sector? What risks arise if a system continues to be operated as a customer system contrary to the ECJ ruling? How will the courts and authorities deal with the new findings? How will the legislator react?

Outlook

The ECJ ruling is causing considerable uncertainty in the industry, because the statements made by the ECJ are very broad and general. At the same time, it is simply impossible in practice (at least under the currently applicable regulations) to operate all the installations that are currently regarded as customer systems as distribution networks. It remains to be seen how the Federal Court of Justice will implement the ECJ’s decision and how the regulatory authorities will position themselves. If it is not possible for the authorities to develop a legally sound solution, the legislator would be required to create a legal framework that takes into account the ECJ's decision on the one hand and is practical on the other. We advise all operators of customer systems to follow further developments closely. We will keep you informed and remain available to answer any questions you may have.