Tenacity pays dividends for RE/SOURCED - ZOOM IN

RE/SOURCED aimed to create a new energy community on the former TRANSFO site. TRANSFO was a derelict coal fired power station within Zwevegem municipality. As with many urban regeneration and renewal projects, investment in Transfo was governed by the topology or footprint of the site which has an area of 25 acres and accommodates offices, sporting facilities, event halls, outdoor amenity space, a brewery and 70 residential units.

The aim was to create a novel and innovative renewable generation system that would serve all energy customers within the site’s boundary. RE/SOURCED would take the form of a local electricity SMART microgrid, so that electricity generated and stored within the district would be available to those located there. The SMART microgrid would have access to the public electricity network so that it could “import” electricity when local production fell short of the district’s demand needs and that it could “export” in times of surplus.

The SMART microgrid’s governance would be delivered by users based within the site.

At first sight, the aspiration to improve the amenity for the benefit of local users would appear to be an aspiration that is typical to many urban regeneration activities – areas are improved for the benefit of those who live and work in the area.

However, it will be seen from this note that while this is a core attribute of urban regeneration and improvement projects, the aspiration did not align well with the workings of the energy markets, in particular energy market regulators. This Zoom-In note focuses on the regulatory barriers in particular as these have emerged as the most significant hurdles for the project. They are also the most likely ‘trip points’ for other cities and municipalities and public bodies considering projects of this kind – and given the current energy crisis facing Europe, there are significant opportunities to support such projects.

The project encountered a number of fundamental hurdles and the partners have had to step back, think, and identify how best to respond so as to keep the core vision for the project alive, while accommodating the feedback from industry stakeholder organisations in particular. 

In this regard, the experience of RE/SOURCED partners is likely to be very relevant to all organisations that are engaged in area improvement and regeneration and who are considering supporting locally based renewable electricity generation by their residents and businesses.   

Reading through detailed aspects of legislation is challenging for those who are not legal or policy experts but it is necessary to cover the key aspects of legislation here as the scope of legal definitions and the regulatory environment for local energy production in Europe are critical. Three key bodies of legislation are: the Clean Energy For All Europeans Package including the Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast); and the EU’s Energy Directive (EU) 2019/944 on common rules for the internal market of electricity amending Directive 2012/27/EU. These legislative updates recognise that there are still internal barriers to the effective operation of a true internal market in Europe for energy and they aim to address these constraints. They have a strong focus on protecting domestic and small business consumer interests and ensuring they can benefit from a diverse supply base. The legislative package recognises the growth of small-scale electricity production and wishes to encourage its growth. It introduced the concept of an active customer[1] – who is anticipated to generate small scale energy for their own use(rs) but should be able to export excess energy to the public grid.

It is clear that the Energy Directive (EU) 2019/944 foresees a strong engagement of citizens in the operation of their energy markets. Although designed in advance of the Energy Directive’s publication, RE/SOURCED placed the effective and active engagement of local users in the governance of the local Smart GRID at the heart of the project. The partners had the creation of an Energy Community as central to the project’s design. This mirrored the aspiration of the Energy Directive, with Clause 43 identifying the key role that Citizens Energy Communities can play:

• “‘citizen energy community’ means a legal entity that: (a) is based on voluntary and open participation and is effectively controlled by members or shareholders that are natural persons, local authorities, including municipalities, or small enterprises; (b) has for its primary purpose to provide environmental, economic or social community benefits to its members or shareholders or to the local areas where it operates rather than to generate financial profits; and (c) may engage in generation, including from renewable sources, distribution, supply, consumption, aggregation, energy storage, energy efficiency services or charging services for electric vehicles or provide other energy services to its members or shareholders;

• Clause 44 notes that a Citizen Energy Community should be open to all categories of entities. However, the decision-making powers within an energy community should be limited to those members or shareholders that are not engaged in large scale commercial activity and for which the energy sector does not constitute a primary area of economic activity.

Support for citizens and small businesses, and for local energy production through ensuring that barriers are not put in place by existing large-scale producers or the distribution networks are all central to the Energy Directive’s thrusts.

RE/SOURCED is a multi-faceted project but three goals are worth noting with respect to the challenges that were subsequently encountered:

• To create an Energy Community that engages households and commercial businesses as members

• To create a local SMART microgrid comprising Solar PV, Wind and micro-hydro electricity generation and storage technologies including second life batteries and flywheel storage and where the SMART microgrid is connected by a single node (Point of Common Coupling, PCC) to the Distribution Grid so energy can be exported or imported. It also added a CHP plant for district heat which has the potential for electricity production if needed. 

• To create, while adopting circular principles (minimizing the use of primary resources and maximizing reuse and repurposing of materials), a smart micro-grid for an urban regeneration heritage site that uses solar PV and wind as production sources and energy storage technologies including second life batteries.

The RE/SOURCED project has at its heart, the formation of an Energy Community that represents all local users (households and businesses) in a way that would enable local users to have a say in how the energy produced on site is utilised and managed.

Given the timing of the project (whose genesis pre-dated the publication of the updated Energy Directive (EU) 2019/944) and its novelty, it was anticipated that a Regulatory Sandbox, which is allowable under regulations in Flanders, could be pursued and that the project could proceed as planned. The Regulatory Sandbox allows projects such as RE/SOURCED, that do not comply with current legislation or previous precedent, to be supported and ‘tested’[1]. It will be seen below that despite positive feedback gained during initial stakeholder consultations at the project design stage, the idea of using a Regulatory Sandbox as an appropriate mechanism quickly emerged as impractical, although recent developments look more positive.

While the Energy Directive set out clearly the legal and regulatory framework at an EU level, as with all EU Directives, the laws governing implementation are drafted by each member state (when member states “adopt” Directives within their legislature).

It was a challenge for RE/SOURCED to find a legal mechanism for energy distribution within a SMART microgrid at the level of the Transfo site, thereby preventing the project from operating as proposed. RE/SOURCED was aiming to:

• Produce renewable energy at reasonable scale “off grid” for the benefit of a defined set of users located on the Transfo site and comprising citizens and businesses

• Distribute renewable electricity produced on site to these users over a SMART microgrid network

• Use an Energy Community, comprising both business and residential users, to oversee the operation of the network

• Export excess electricity to the public grid where income would benefit the Energy Community who would agree how this income might be used.

• The concept of using circular principles to construct a SMART microgrid and to design a novel grid with a DC backbone on which all of the renewable generation and storage systems are connected, led to a very innovative project design. In addition, having an Energy Community governance structure comprising both businesses and private citizens was also considered to be novel. These project design parameters are “normal” for Urban or Regional Authority-led urban development projects - Authorities identify a geographic area in need of regeneration, usually with a clearly marked physical boundary and make their investments to improve the target areas. These areas may comprise residential dwellings, offices, industrial businesses, all of which need to be actively engaged in the regeneration activity if the project is to be a success.

However, while these project parameters are normal for Urban Regeneration projects, they do not align well with Energy legislation which tends to be structured around on the legal forms of energy producers and consumers (active customers). Specifically, while the framework within legislation for an individual “active customer” is well developed and operationalised as "behind the meter", the concept of “collective active customers”, as is the case with RE/SOURCED, are not widely agreed. This lack of agreement introduced significant challenges for Leiedal in its implementation of the project.

There are three recognised types of distribution grids (public grid, closed distribution system and direct line). In Flanders, the establishment of a SMART microgrid by a group of collective active customers within a geographically defined border, is not presently fully supported within legislation, notwithstanding the provisions in Art.1 (8) and Art.15 of the EU directive that ask the member states to ensure it is. Consequently, the Flemish Energy Regulator, VREG, has limited legal options open to it. VREG is influenced significantly by earlier precedents which are limited to the three distribution grid types described above.

The Regulatory Sandbox was at first deemed inappropriate for a project of this kind by the DSO who indicated that the Regulatory Sandbox would not accommodate the range or breadth of activities proposed by RE/SOURCED – it was concluded that the scope of activities that can be undertaken within a Regulatory Sandbox is very limited. This posed a significant problem for the project partners as the Regulatory Sandbox was the “vehicle” through which the novel aspects of the project, and the accommodation of the Urban Regeneration aims and legislative conditions, would be achieved. Leiedal’s consultations with VREG, Distribution System Operator (Fluvius, the DSO) and the Flemish Government’s Energy and Climate Agency (VEKA) uncovered significant hurdles to finding a solution. The challenge for Leiedal was that solutions put forward by one stakeholder were not supported by the others:

• The DSO suggested that the DC backbone could be classified as a private line. It was also suggested that it could be categorised as an intra park line but the Energy Regulator opposed this classification while legal advice indicated that this would only be allowable where the “line” connected two users, not many users as proposed with RE/SOURCED. 

• Through further detailed consultation with VEKA, it was suggested that RE/SOURCED could be a Closed Distribution System (as described in Article 38 of the Directive) and that this would be a good solution – although it would be a significant compromise for Leiedal and its partners as Closed Distribution Systems cannot supply household (domestic) customers. Thus, pursuing this approach would preclude a key user group (and a core constituency of the RE/SOURCED regeneration concept) from benefitting from the renewable energy produced on site. Domestic energy users located within the project area would not benefit from the project.

• However, the creation of Closed Distribution System must be approved by the Energy Regulator (VREG) who, in this case, did not support RE/SOURCED being classified as a CDS. To be eligible, VREG would expect the legal entity of the energy community itself being the major energy consumer, not the members of the energy community. It is understood that VREG had previously only granted CDS status to industrial projects or projects that were already established and operating. RE/SOURCED was not an “industrial” project nor was it established (it would lead to the creation of new generation capacity on a new, SMART microgrid). Separately Fluvius, the DSO was not supportive of the proposal being classified as a CDS.

• The possibility of categorizing RE/SOURCED as a Public Distribution Grid was investigated, but the technical requirements, administrative requirements and procedures are very demanding and are not appropriate for a SMART microgrid of the size proposed. Moreover, it is currently not legally possible to use this definition for Transfo as the Flemish Energy Decree requires a Public Distribution Grid to have a minimum of 200,000 connections - Transfo is much smaller so could not comply.

• Having an Energy Community acting as a Governance and oversight organisation was not acceptable to VREG. The VREG would expect at least 80% of the energy produced to be consumed by the producer. As an Energy Community is not a single consumer, this proposal failed one of the VREG’s appraisal criteria (it should be noted that VREG uses an indicator related to consumption, instead of an indicator related to distribution such as the number of connections and/or the capacity delivered). There were also challenges in defining an acceptable tariff methodology for the range of users that would be created through RE/SOURCED at Transfo

• If electricity is to be shared, stakeholders suggested that this should be done through the public GRID – the only remaining option in Flanders.

• Having renewably generated electricity that comprises both AC and DC being distributed to users introduces an additional regulatory complexity - DC is assumed by the Energy Regulator to result from small scale renewable energy generation, AC is assumed to be limited to larger producers – this observation highlighted a complication for how AC electricity, generated from the CHP plant, could be distributed.

At this point, the project was at an impasse and its implementation looked very likely to stall.

With the prospect of being unable to operate the facility as planned once it was constructed, Leiedal Intermunicipal Association on behalf of the project partners, drafted an Interpretative Question for DG Energy. This was a detailed, technical, professionally prepared submission of around 30 pages. It posed two specific questions to DG Energy:

• “Does the proposed concept for a Closed Distribution System (CDS) at the Transfo site in Zwevegem (BEL) meet the conditions to be recognized as a Closed Distribution System conform the definition of Article 38 of the DIRECTIVE (EU) 2019/944 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU?”

• And a sub-question “To what extent can key stakeholders (DSO, energy regulator, Flemish Energy Agency...) refer to – or deviate from – the answer of DG Energy in order to justify their decisions to accept or refuse a formal request of the RE/SOURCED partnership for a CDS?”

The document explained that RE/SOURCED was an innovative project and that similar proposals might be expected from other Municipal and Urban Authorities in the future as they implement measures to reduce their cities’ carbon footprints and meet the challenges of the Climate Crisis.

The response from DG Energy noted the clauses of Article 38 but concluded that “the provisions of Article 38 of Directive (EU) 2019/944 are to be transposed by Member States.” 

They also concluded “that the Commission is not in a position to assess whether a specific concept meets the conditions listed in Article 38(1) of the Directive (EU) 2019/944. The competence to classify a system as a CDS lies with the regulatory authority or competent authority as designated by a Member State.”

In effect, these responses suggested that a resolution lay in reaching an agreement on the design and operation of the SMART microgrid by key stakeholders within Flanders. 

While the reply from DG Energy did not provide a specific answer to Leiedal’s two questions, it made clear that the Commission saw the resolution to these questions falling within the competence of the Member State’s regulator and other energy related institutions. 

Separately, by preparing the interpretive question, Leiedal raised the profile of RE/SOURCED and showed publicly that it was committed to taking the project forward and in finding a resolution to the challenges it faced.

The submission of the interpretative question to DG Energy allowed Leiedal to pursue a more strategic conversation with partners. They engaged VEKA, the Regulator, at a policy level and also presented the project to the DSO (Fluvius) as a strategic initiative. This shift in focus proved effective. It led to a different type of conversation with stakeholders, one that saw them being more open to the novelty of RE/SOURCED and to seeing the project implemented successfully.

At the time of writing, it has been agreed that the original proposal from Leiedal, of using a Regulatory Sandbox, was sound. VEKA considers that this is an acceptable mechanism and that Leiedal should work up a detailed proposal for the Regulatory Sandbox’s specification. What’s more, it has also been agreed that this specification should be developed jointly by Leiedal and the DSO, so as to design-out potential future conflict areas. This is a significant and positive development.

A Regulatory Sandbox lasts for 10 years. However, once specified, its scope cannot easily be changed so it is essential to get the design right first time.  

In the period while the project was being designed, Energy Community legislation had been evolving at an EU level.  All of the Flemish stakeholders were aware of these developments. Indeed, during consultations, individual representatives suggested that the Energy Community legislation should solve the problems. However, these statements were made without the full knowledge of what the Energy Community legislation was proposing. By supporting RE/SOURCED through the Regulatory Sandbox provisions, partner stakeholder organisations and industrial players will be able to identify key design and operational parameters on how Energy Communities might be used for projects of this kind.  

Implementing RE/SOURCED has not been straightforward. In addition to technical challenges (which have been encountered but overcome) that were anticipated at the outset due to creating an innovative system of this kind, the project faced more significant hurdles with stakeholder acceptance, regulatory interpretation and the inherent inflexibility of the energy system’s operation. This inflexibility is not unique to Flanders but is a common characteristic across Member States.

The project sees Urban and Regional Authority-led urban development organisations initiating an energy project for the benefit of their citizens. In form, structure and focus it is typical of other urban-regeneration projects that are catalysing the local generation of renewable energy in their communities. There have been few, if any, challenges associated with aligning the project’s partners’ priorities, rather the issues relate to how the urban regeneration project “fits” within existing energy generation, distribution and regulatory models.

The Energy Directive (EU) 2019/944 promotes the engagement of citizens in the production of energy and the governance of new energy generation and use models through the introduction of the “active customers” definition (individual or collective). However, its focus differentiates between the different types of energy generator and consumer – with a distinct demarcation between private citizens/residential consumers and commercial/industrial consumers. The engagement of Energy Communities, as defined by the Directive, is in its early stages and all Member States are transposing their integration in subtly different ways.  Their role will become clearer in time.

RE/SOURCED has faced a specific challenge in being caught “in the middle” of the preferences of the key energy stakeholders (government, distributor and the regulator), coupled with inconsistently aligned regulations: within the Directive (which lacks a clear concept/type for distribution of energy within the confined boundaries of a collective group of active customers); within the Flemish Energy Decree; and between the Directive and Decree. By submitting an interpretative question to DG Energy, Leiedal raised the profile of the project and the partners’ commitment to seeing the project delivered in the way it was originally envisaged.  Recent improvement and alignment in the views of these stakeholders, and the anticipated acceptance of using a Regulatory Sandbox, shows that Leiedal’s tenacity has paid off and that the project has a much greater likelihood of being implemented as planned. This outcome will benefit not just Flanders and Belgium, but all EU Member States through breaking new ground, showing what is possible and in the process, contributing to the development of better legislation. It also shows how pioneering and innovative the original RE/SOURCED concept proved to be.