On 28 November 2024, the European Court of Justice (ECJ) handed down a key judgment for German distribution systems, declaring customer systems (Kundenanlagen) in their current form to be incompatible with EU law. The decision will have far-reaching consequences for decentralised energy supply facilities in Germany, as it is not only industrial, business and commercial networks that are often operated as customer systems but also the electricity and gas networks of universities, hospitals, shopping centres and other facilities with various end consumers within a geographically confined site. Companies now need to take stock of their network situation and assess whether they may be the operators or end consumers of a customer system and what advantages this classification currently brings.
Background to the decision
Simply put, Germany currently has three types of system at local level: (i) fully regulated distribution systems, (ii) partially regulated closed distribution systems (section 110 Energy Industry Act (Energiewirtschaftsgesetz, “EnWG”)) and (iii) unregulated customer systems (general customer systems under section 3, no. 24a EnWG and customer systems for the undertaking’s own supply under section 3, no. 24b EnWG). Customer systems were introduced into the EnWG in 2011. They are considered unregulated because no regulatory approvals are required to operate them or for them to charge tariffs and they are not subject to the strict organisational requirements of distribution systems.
Since their introduction, customer systems have primarily played a role in the final stage of electricity and gas distribution. They draw electricity or gas from the (public) distribution system and distribute this to end consumers within a closed site. Industrial, business and commercial sites at the smaller end of the scale are therefore typically operated as customer systems. Customer systems have become increasingly widespread in recent years, triggering various rulings – including from the Federal Court of Justice – about how they are to be classified. In its landmark decision of 12 November 2019, the Federal Court of Justice laid down various criteria for distinguishing between customer systems and closed distribution systems (EnVR 65/18, headnote 2, para. 32). It found that the classification of customer system did not apply if the following criteria were met: (i) several hundred end consumers are connected to the system, (ii) the system supplies an area significantly larger than 10,000 m², (iii) the annual quantity of transmitted energy is likely to significantly exceed 1,000 MWh and (iv) more than one building is connected to the system. In 2023, a similar situation led to the Federal Court of Justice requesting a preliminary ruling from the ECJ on whether a residential neighbourhood that was previously classified as a distribution system and to which around 200 residential units and a combined heat and power (CHP) plant were connected could be a customer system.
Key points of the ECJ’s ruling
In its judgment of 28 November 2024 (C-293/23), the ECJ found that the German statutory provisions on customer systems as a system category – namely section 3, no. 24a and 24b EnWG – are incompatible with EU law and conflict with Directive (EU) 2019/944 (Electricity Market Directive) in particular. The ECJ argues that Member States are not permitted to introduce additional criteria other than those laid down in EU law to exclude certain system types from the concept of “distribution system”, as this undermines the autonomous and uniform interpretation of Article 2, point 28 of the Electricity Market Directive.
The Court takes a clear line in the grounds for its decision: Member States may not define their own exceptions to the distribution system provided for in EU law. It points out that the Electricity Market Directive does not allow the classification as a distribution system to be made dependent on (i) the date on which such a system was put in place, (ii) a special supply or generation scenario within the customer system, (iii) the number of connected end consumers, (iv) the legal form of the customer system operator, (v) the size of the area supplied or (vi) the electricity transmitted. In doing so, the ECJ clearly restricts the criteria laid down in the aforementioned ruling from the Federal Court of Justice, according to which – inter alia – the electricity transmitted, the number of connections and the size of the area supplied can all be used as a basis for such a classification.
The ECJ makes it clear that any connection infrastructure used to transport electricity at high-, medium- or low-voltage and intended for the sale of electricity to customers is to be classified as a distribution system. Member States may only make use of the exemptions already provided for in the Electricity Market Directive, which relate in particular to (partially regulated) closed distribution systems, systems managed by citizen energy communities and interconnected systems. It will however be difficult to fit the current, widespread use of customer systems into these categories.
Affected customer systems
The ECJ’s judgment affects a large number of decentralised energy supply systems in Germany that are currently classified as customer systems. What makes this especially problematic is that they were classified as customer systems by their operators without any involvement of or decision by the authorities. In many cases, customer systems were connected to the distribution system without the operators of the customer systems having actively grappled with the issue of the type of system being run by them and the privileges enjoyed by customer systems.
Due to the widespread use of customer systems in Germany, a large number of facilities involving small-scale electricity and gas distribution within a geographically confined site are involved – spanning all sectors across the country. In addition to the industrial, business and commercial sites already mentioned, many hospitals, research facilities, airports, university campuses, residential neighbourhoods, shopping centres and campsites are also affected.
Consequences
To date, customer systems have been exempt from the comprehensive regulatory requirements for distribution systems and have also benefited from economic incentives such as exemption from network charges and network-related levies (including CHP and offshore surcharges) if electricity was generated and distributed within the customer system. Network charges and network-related levies give rise to considerable costs and exemption from them for transmission within the customer system was an important economic incentive for setting up generating installations (especially CHP plants and PV systems) within these systems.
In addition, some energy subsidy mechanisms, such as landlord-to-tenant electricity as specified in section 21(3) Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz), stipulate that the public grid must not be used. These subsidy mechanisms are based on the widespread customer system model, with the legislature assuming that no network transmission takes place within residential neighbourhoods or industrial and business sites, for example. The ECJ’s judgment now challenges this classification and could – if customer systems are redefined as distribution systems – lead to such subsidy mechanisms no longer applying, thereby impairing the economic viability of generating and storage installations in (former) customer systems.
The judgment also harbours the risk that most of the existing customer systems will have to be transferred to a regulated environment and will need to meet the regulatory requirements for (closed) distribution systems. This would require additional organisational resources, as distribution systems must, for example, meet unbundling requirements and levy network charges.
What can companies do?
The ECJ’s ruling has caused considerable uncertainty. Although the Court has so far only ruled on one individual case, the extremely clear grounds for the decision offer little hope of the widespread use of customer systems nevertheless being legally compliant. However, the Federal Court of Justice must now first decide the case originally referred to the ECJ. The regulatory authorities could also provide interpretation guidelines for the transition period, as they have done in similar situations in the past.
Companies should now take stock of their own network situation and assess at which sites they operate a customer system or use such a system as an end consumer, and what advantages and disadvantages this may bring. This analysis can then be used to draw up a plan of action, e.g. adapting the local supply situation, transforming the customer system into a (closed) distribution system or amending (group) site contracts. When making decisions on whether to invest in local networks, and especially in decentralised electricity solutions like PV systems or CHP plants, companies should factor in the ECJ’s ruling as well as the far-reaching restrictions on German customer systems that are likely to follow.
Conclusion
The ECJ’s judgment of 28 November 2024 poses significant economic challenges for operators of and end consumers connected to customer systems and will put an end to the widespread use of this unregulated type of system. The current economic incentives, such as the exemption from network charges and network-related levies, as well as energy subsidies and tax relief, may be withdrawn. This affects not just industrial, business and commercial networks but all systems involving small-scale electricity and gas distribution. While operators of and end consumers using customer systems should reassess their current network situation, it remains to be seen how the regulatory authorities and legislature will react to the judgment and what specific changes will have to be implemented in practice.
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