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23.01.2024 | Swiss Federal Council and European Commission present draft negotiating mandates

Switzerland – EU electricity agreement: breakthrough in 2024?

Eberhard Röhm-Malcotti

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On 15 December 2023, the Swiss Federal Council published its draft negotiating guidelines for the electricity agreement, together with other proposals. If adopted following successful consultations, the guidelines will form the basis for the reorganisation of Swiss-EU electricity relations. The guidelines contain thirteen specific negotiation objectives, with the core element being Switzerland’s full integration into the EU’s internal electricity market. Adoption of the guidelines is expected to take place in March or April, with negotiations commencing thereafter. The aim is to conclude negotiations by the end of 2024.   

In May 2021, the Swiss Federal Council broke off negotiations with the EU concerning a framework agreement, known as the ‘Institutional Agreement’ (InstA). Two and a half years later, it is now presenting its new negotiating mandate. Instead of a framework agreement, it is now talking of a ‘package approach’. The new proposal is the result of a multitude of meetings held with the European Commission, which is representing the European Union in the negotiations. 

The electricity agreement is one of several elements of the package being negotiated between Switzerland and the European Commission:

Source: FDFA

Package approach/institutional issues

While in 2021 the aim was to regulate institutional issues in an overarching section of the framework agreement, the plan is now to integrate them directly into each of the market access agreements, such as the electricity agreement. However, these general rules are to be identical in all sectoral agreements.  

The institutional issues are some of the overarching topics that are key to the negotiations’ success:

  • Dynamic alignment: Each element of the agreement must be continuously adapted to evolving EU law. This is particularly true for market access agreements. The EU’s internal electricity market, for example, is being completely overhauled as part of the ‘Fit for 55’ package and the recently completed reform of the EU’s electricity market design.  

  • Uniform interpretation: Assuming that the market access agreements are based on EU law and that their purpose is to guarantee the same conditions for all market participants, the relevant EU law must also be interpreted uniformly. In the EU, the European Court of Justice (ECJ) has the right to conclusively interpret EU law. The EU is extending this prerogative to Switzerland. 

  • Dispute settlement: Where the parties disagree regarding the application and interpretation of an agreement, a solution shall be found via judicial proceedings. This would be a departure from the current dispute resolution procedure as part of the ‘Joint Committees’: in the Joint Committees, outstanding issues are being resolved through negotiations, but without the ruling of a court. The package approach would introduce an arbitration court that both parties could call on. Since the ECJ has exclusive authority with respect to interpreting EU law, the arbitration court would have to refer legal issues concerning EU law to the ECJ and take its interpretation into account in its arbitration award. 

The purpose of these three further developments is to supplement the five existing internal market agreements; they should also be included in the two new market access agreements to be negotiated, e.g. the electricity agreement (see the FDFA diagram above).

 

The Federal Council’s negotiating guidelines for the electricity agreement

The ‘draft supplementary negotiating guidelines for the electricity agreement’ (electricity negotiating guidelines) is an annex to the overarching negotiating guidelines published by the Swiss Federal Council on 15 December 2023. The negotiating guidelines for the electricity agreement contain thirteen potential negotiation objectives for the electricity sector, e. g. on partial market liberalisation.  

 

The EU’s negotiating directives 

On 20 December 2023, the European Commission published its draft negotiating directives for adoption by the European Council (the chamber representing EU member states) along with an explanatory report. It is noteworthy that both documents focus on institutional issues and do not contain details on a potential electricity agreement. Only the explanatory report on the draft negotiating guidelines contains a general statement on the electricity sector: 

‘The agreement on electricity should aim to foster trade in electricity, increase social welfare, ensure grid stability and security of supply, and facilitate the transition to a net zero energy system.’

 

Common Understanding between Switzerland and the EU

Switzerland and the Federal Council’s Common Understanding was also published on 15 December 2023. It is dated 27 October 2023 and summarises the results of the exploratory talks. However, it is not binding for the upcoming negotiations. 

When comparing the Federal Council’s negotiation objectives according to the electricity negotiating guidelines with the statements set out in the Common Understanding on the electricity agreement (‘NEW AGREEMENT ON ELECTRICITY’) it can be noted that Switzerland and the European Commission seem to agree on the following topics:

  • Switzerland shall become part of the EU’s internal electricity market. This should include the participation in the EU’s trading platforms in all timeframes and in other bodies and processes relevant for regulatory coordination, security of supply and grid stability, as far as possible under the agreed governance framework. 

  • To the extent that they are compatible with EU law, it should be possible to adopt necessary, proportionate and non-distortive national measures to preserve security of supply at all times, including through national generation reserves. 

  • The electricity agreement should allow national consumer protection measures which provide for a right for households and enterprises below a certain consumption threshold to benefit from the services of a supplier of last resort (“universal service provider”), whilst respecting EU law. 

  • The application of EU state aid rules should aim at preserving security of supply in Switzerland and the EU at all times and should consider the specificities of the power generation structure, such as the role of hydro reserve and reserve power plants in Switzerland.

However, the Common Understanding does not contain any statements on the Federal Council’s following objectives: 

  • Proportionate unbundling of distribution system operators (DSOs).

  • Safeguarding of Switzerland’s most important existing state subsidies in the electricity sector. 

  • Exclusion of further EU environmental law from the scope of the negotiations.

  • Respecting the Cantons’ sovereignty. 

  • Balanced compensation for replacing priority access of existing long-term supply contracts.

  • Sufficiently long deadlines for implementation. 

It remains to be seen whether an agreement could not be reached with the European Commission concerning these objectives, or whether these objectives were not included in the Common Understanding for other reasons.

 

Next steps

The Federal Council is currently holding consultations with the Parliament, the Cantons, trade unions, employers’ associations and representatives of the industry concerned. The Federal Council could adopt the draft negotiation guidelines in March or April 2024. If the negotiations with the European Commission are successful and – as set out in the Common Understanding – are concluded by the end of the year, legalisation would then have to take place via the Parliament. It is unclear whether the agreement as a whole is subject to a mandatory or only to an optional referendum. 

On the European Union’s side, the draft negotiating directives must be approved by the European Council, which is likely to happen. According to the negotiating directives, a special committee liaising with the European Commission is to be appointed. The European Council is also responsible for ratifying the outcome of the negotiations; all decision would be taken by qualified majority. The European Parliament plays a secondary role. It has to be kept informed at all stages and must either approve the ratification or at least be consulted. It is to be noted that in October 2023, the European Parliament had spoken out in favour of a better integration of Switzerland into the EU’s internal electricity market in an own initiative report (so-called Mandl report).

Concluding the negotiations between Switzerland and the European Commission by the end of 2024 seems quite ambitious, particularly in light of the European Parliament elections in June 2024 and the subsequent shake-up in the European Commission. 

 

Impact

Stable relationships and close cooperation between Switzerland and the EU in the electricity sector are key to system stability in both Switzerland and Europe. An electricity agreement can contribute to strengthening security of supply in Switzerland, by improving Switzerland’s integration into the EU’s cross border capacity calculations, by involving Switzerland in the work of the relevant EU bodies and through the unrestricted participation of Swiss market participants in the EU’s various electricity balancing platforms.  

Switzerland is dependent on electricity trading with the EU. Especially in winter, Switzerland’s domestic electricity production is inadequate to meet demand. Functioning electricity trading and sufficient cross-border capacities would promote security of supply in Switzerland and lead to lower electricity prices. 

The electricity negotiating guidelines is a welcome development. The objectives it contains should be reflected in the final agreement, in its implementation into Swiss law and its application. 

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