Today we are gathered in this beautiful auditorium of Abreu Advogados – being under the watchful and attentive gaze of the owls by Bordalo II,[1] to celebrate the inauguration of the Abreu Chair in ESG Impact, the result of a partnership between the NOVA School of Law and the Knowledge Institute powered by Abreu Advogados. This chair, which I have the honour to hold first (and hopefully for many years!) was created with a clear purpose. Its purpose is to enhance the research and education in the field of law and sustainability with a focus on environmental and energy law. This project could not be more timely.
On top of the undeniable global climate emergence – today, Europe is facing the worst energy crisis in 50 years. Although the crisis emerged to the surface because – allow me to use appropriate words with no euphemism – of Russia’s ‘weaponisation’ of oil and gas dominance over Europe to get political results in its unlawful invasion of Ukraine, its core has deeper roots. The energy crisis has its core and deep roots dug into the challenges of designing a regulatory framework for the EU internal market that puts the environment and society first (or at least not enough!).
And for my students in this room, don’t get me wrong! When I speak about the regulatory framework and the consequent market reforms, it all is done through a complex plethora of EU legislations. Therefore, we are speaking about – to quote Professors Mauro Cappelletti and Joseph Weiler – ´integration through Law´.[2]
Notwithstanding the challenges we face with the current energy crisis, I do not doubt that the way out of this crisis passes through the three letters given to the title of this Abreu chair: ESG, namely E Environmental, S Social, and G governance standard to ensure green transition with no social exclusion.
The title of the inaugural lecture of today could not be different: the ESG – the Environmental, social and governance – transformations to weather the energy crisis. The title introduces the metaphor that best pictures the energy crisis. The energy crisis is a storm; as with any storm, we could have noticed its signals. The wind blew strongly before the first drop of water hit the floor. How to weather the storm? It brings me vivid memories of sitting in the hills of Florence–either in person or online due to COVID–and while the wind was starting to blow stronger, I heard for the first time, with his straightforward politeness, from Professor Jorge Vasconcelos, ‘it is time to look back and think critically’.[3] Yes, it is!
This inaugural lecture has two parts. First, I will reflect critically on how we did get into the storm from the environmental, social and governance points of view, building on my own and my colleague’s scholarship. Second, I will present the main ideas that will inform my tenure as Abreu Chair in ESG Impact based on the outcomes of this inaugural lecture.
- How did we get into the storm? And how weather it?
The Governance
First, governance! [slide 2] To understand where we stand, we have to look back to look forward briefly–and for the purpose of this inaugural lecture–briefly enough to avoid the risk of being lost in time. It all started in 1996. The European project of building a fully integrated internal energy market started in 1996, when national energy monopolies were gradually opened up to more competition. This is what the energy community calls the first energy package. The second package followed in 2003 and the third one in 2009.
At the end of 2009, we also saw the European Union taking a social outlook with the Lisbon Treaty entering into force, introducing a specific legal basis for the energy field with the approval of Article 194 TFEU. In line with the past, the EU has to ensure the functionality of the internal market [Art. 194(a)], which implies the promotion of the interconnection between Member States [Art 194 (d)], and the security of supply [Article 194(b)]. The great innovation was that the Union policy on energy should promote renewable forms of energy and energy saving [Article 194(c)].
Until 2009, one of the key objectives of EU energy law was to speed up the integration of electricity and gas markets by harmonising trading practices on organised wholesale markets, thus fostering cross-border competition. The package was further complemented by a ´huge´ set of Commission implementing regulations (namely, network codes and guidelines). These network codes and guidelines were needed to specify harmonised market rules, grid operation and grid connection rules. To manufacture this huge amount of rules at the EU level, a new law-making process was implemented with the creation of a European Union Agency for the Cooperation of Energy Regulators (ACER) place, that co-exists with the European Network of Transmission System Operators for Electricity (ENTSO-e) and Gas (ENTSO-g). At this point, I must admit my enthusiasm for this new governance model. I did not hide this enthusiasm when I wrote a chapter for the Oxford Handbook of Institutions of Internal Economic Governance and Markets, which – like me – is not aging badly at all.[4]
Also, an important addition to the third electricity package was the Regulation on wholesale energy market integrity and transparency (REMIT). REMIT created a framework for monitoring wholesale energy markets, to detect and deter market manipulation. Alongside a regulatory framework that pushed the trade of energy from long-term contracts to spot trade in ‘Power’ exchanges with price fluctuation in, first, day-ahead and, after, intraday markets, the EU provided the legal instruments to punish market manipulation. I still believe the REMIT is one of the most beautiful pieces of EU Regulation because provides a strong legal instrument to promote fairness in the wholesale market; of course, if – as I wrote in 2020[5] – properly monitored and enforced.
All It is said, the Europe Union is – and still is – the most well succeed project in building an internal free market, building on the economic assumptions that more competition, price disclosure, and an organized market would promote efficiency and consumer welfare,[6] a concept that Professor Fabrizio Esposito taught me and convinced me fits with the EU legal order, which as the title of our article from 2018 suggests,[7] is a shocking truth for many economists and lawyers. His book on the consumer welfare hypothesis is a must-read book.
However, nothing better to test an experimental model than a ´stress test´, to borrow the word given by Professor Josephine van Zeben inserted in our latest article.[8] The COVID crisis, followed by the Russian invasion – as I said, unlawful invasion – of Ukraine, exposed the fragilities of the internal energy design (by law) in three steps – its governance, social, and environmental fragilities.
From the governance perspective, with the crisis, we learned that our energy market was not as shielded from a shock crisis as we believed. It is not, in words we are all terribly familiar with by now, very resilient. [slide 3]
Putting it in simple words, when the price of MWh of gas increased by 100 Euros, a new normal in 2022, the price of electricity produced from natural gas increased by 200 EUR per MWh, and so too all the electricity traded in power exchanges. This happens because of the wholesale pricing rules called ´marginal prices´. In other words, the power exchanges are designed to set the price corresponding with the highest accepted bid. Since mid-2021, the highest bidder is very frequently a gas-operated power plants, 200 EUR MWh. Whether energy is produced by renewables or other cheaper means of producing electricity, the set price is 200 EUR MWh. Here is the governance explanation for the frenetic escalation of energy prices.
Whether there have been producers abusing markets and manipulating prices, this is yet a chapter to be seen. However, the recent report of the European Court of Auditors, with telling title ´complex legal architecture, delays and weakness in governance´, [9] suggests that there are a lot of known-unknowns and room for improvement in market surveillance at the EU level. This is also what we – I together Professors Esposito and van Zeben – found while digging into the methodology and data collection methodology of the EU´s Retail Energy Market Barrier Index, alarming ´Pitfalls´ as our title suggests.[10]
The Environment
Second, the environment [slide 4]! With the crisis, we learned that the energy consumed in Europe was not as green as some believed. On top of the already-known dependence on gas to heat our buildings, the crisis exposed the not-so-well-known dependence on natural gas to produce electricity, and sadly Russian gas in particular. 40% of the total EU´s gas consumption relied on imported gas from Russia, with dependence rising to 65% in Germany. Shockingly, 31% of the electricity produced in Mainland Portugal comes from burning gas.[11]
In the last years, the holophotes have shed more light on promised targets than the status quo. Here I am speaking about the Fit for 55, which proposed a reduction of 55% in GHG Emission by 2050, and increased the target in the Renewable Energy Directive to 45% by 2030 – less attention was given to the long trajectory, to where we stand now until we reach the ambitious targets. According to the last numbers of Eurostat, renewable energy is still representing 21.8% of the energy consumption.[12]
[slide 5] The solution to this complex puzzle is far from trivial. If electrification is the way out, with the growth of wind and solar, there are infrastructure bottlenecks. This can be seen in the growth of capacity scarcity in the electricity network system. For the most part, this is for engineers to figure out. But they cannot do it on their own. Canalizing public or private funds to expand infrastructure capacity or the environmental impact assessment of those projects are – undoubtedly – legal challenges. On this point, I can give as an example the very recent approved Decree-Law on flexibilizing the environmental impact assessment in Portugal for energy projects. This subject certainly deserves separate and entire research dedicated to it. If the solution is promoting a green transition through a multi-sector and multi-level governance solutions, providing a coherent approach to different energy vectors – meaning electricity, gas, heating and cooling, electrical transportation, and waste-to-energy, in our recent work, Professor Josephine van Zeben and I found that the incoherences between policies and regulations in waste and energy sector suggest that the fragmentations of institutions that regulate waste or energy position us in silos, a word and concept used by Professor Hans Micklitz in many of his works.
The Social
Last and – with no excitation – most important, the social [slide 6]! We, the people – as put by Professor Miguel Maduro, and [not less important!] the Constitution of the United States.
In any case, with the energy crisis, we learned – in the hardest and most costly way – the negative effects of pursuing a regulatory framework that ensures consumers access to markets but not much ´access justice´, the justice concept coined by the person I am proud to call my mentor (but also normally ‘Hans’ – for a German, it is not a small thing!) Professor Hans Micklitz in 2011.
A few years ago, I called Professor Micklitz’s theory a Grand Theory, and 12 years after his ERC Grant, the energy crisis came to prove he was right. For access justice, one should understand that the European Union must grant access justice to those who are excluded from the market or to those who face difficulties in making use of market freedom, namely vulnerable consumers who deserve, as human beings, to be protected from ´energy poverty´. With energy poverty I mean, as the landmark work conducted by colleagues at NOVA School of Science & Technology at the CENSE, Center for Environment and Sustainability Research, those with a high share of energy expenditure in income (2M) or are unable to keep their homes adequately warm.
The energy crisis proved that we, the consumers, were far from being shielded from shocks. Since the first package for the internal energy market, the EU has pushed a series of legal/regulatory reforms in which consumers would be free to switch suppliers or have access to contracts indexed to variable prices, sometimes indexed to wholesale prices [without even knowing the meaning of wholesale energy price]. Consequently, a large portion of energy consumers – in the blink of an eye – became vulnerable consumers, on the brink of energy poverty.
The skyrocket of prices in the wholesale market could have hit consumers badly. If energy poverty is declared when a consumer spends more than 10% of their income paying for her energy consumption, the majority of consumers would be now living in energy poverty. Luckly this did not happen as badly as it could have been. Actually, it was not luck, but emergency measures that channelled the public budget into subsidising consumption, that are costing close to 700 billion Euros, almost equivalent to the post-Covid extraordinary recovery instrument given by the ordinary European budget. Whether this money is returning to public savings through ´windfall taxes´, is yet to be seen. Be this as it may, the emergency measures show that the EU and its member states acted upon their duty to ensure ´access justice´ even in a moment of crisis.
II – Main takeaways for the Abreu Chair in ESG Impact
I am getting close to the conclusion. So, how will this ESG Abreu Chair contribute to weathering the energy crisis? [What shall I write on Twitter?] [slide 7]
I would say that there are three clear takeaways – Embracing complexity, Embracing multidisciplinary, and Teamwork.
First, embrace complexity! To understand how to weather the energy crisis, one needs to distinguish emergency measures from structural reforms clearly. Emergency measures, such as windfall taxes or price caps, are not here to stay. We need to rethink critically how we want energy markets to work for the long run. This is a complex matter, and we shall be weary of simple and easy solutions to such a foundational challenge.
Second, embracing multidisciplinary! My experience, especially at the Florence School of Regulation and Wageningen University & Research, has proven to me many times already that research in the energy, environment, or climate, must be multidisciplinary or it will fail to have positive environmental and social impact. If you do not believe me, the coming panel will serve as a proof of concept. I have no doubts that at my both houses, na Universidade NOVA de Lisboa na Abreu Advogados, I will find new colleagues in other faculties with open doors to build multidisciplinary research, as much as Professor Julia Seixas opened her door and generously donate hours [in plural] of her time to me already; as much as Dr Ines Sequeira Mendes, Dr. João Pedro Matos Fernandes, Dr. José Eduardo Martins did not hesitate in accepting the invitation to be here today.
Last but not least, teamwork [slide 8]! Luckily, I am not alone in this journey! We, of the NOVA Green Lab, our knowledge centre, have committed to breaking the disciplinary barriers and conducting research that is innovative, multidisciplinary and with social impact. I am sincerely thankful to the previous coordinator who founded and brilliantly led the NOVA Green Lab, namely my colleagues Professor Filipe Brito Bastos, Professors Tiago Melo Cartaxo, Professor Francisco Pereira Coutinho e Professor Vera Eiro. And I am excited to work with so many bright minds of the next generation of leaders that the NOVA School of Law is educating, and many of them are here today.
Haven reached the end of my inaugural lecture, let me dedicate a few words to thank those who deserved to be thanked [slide 9]. Since the day the inaugural lecture was scheduled, the words of Socrates have constantly hit my head – I only know that I know nothing – so what would I say? If now, I might be convinced that I know little, It is because I was lucky to encounter people who were immensely generous and patient to share their wisdom and kindness, and taught me to be kind! Be kind!
I am grateful to my official and non-official mentors, Professors Hans Micklitz and Jean-Michel Glachant; to my colleagues and co-authors, who have always demonstrated immense patience with my chronic optimistic bias; to my family, and allowed me to speak in Portuguese [a minha familia, quem embora não sejam da academia e desconhecerem as dificuldades da carreira, apoiaram e apoiam, vide que qui estão]; to my husband and my kid, Fabrizio and Lorenzo, who has been my mains source of energy not to give up, and last but not least, thanks for those who trust in my work. Looking forward to the forthcoming years at the NOVA School of Law under the leadership of Prof. Margarida Lima Rego, and at the Knowledge Institute of Abreu Advogados, led by the care hands of Professor Luis Barreto Xavier, and the magnific team of council and lawyers of Abreu Advogados.
[1] Bardallo II is a Portuguese artist who uses residues as raw material to create sculptures of animals so as to warn people about the environmental risks of pollution and al types of dangerous species. https://eco.sapo.pt/especiais/aqui-turista-nao-entra-um-auditorio-com-vista-para-a-arte-urbana-de-bordalo-ii/
[2] ´Integration through law´ was the title of a breakthrough project led by Professors Mauro Cappelletti and Josephj
[3] Vasconcelos, Jorge. ´EU Electricity Reform´, May 2022. https://fsr.eui.eu/wp-content/uploads/2022/05/eu_electricity_reform_may2022.pdf
[4] Almeida, Lucila de. ‘Market Access, Harmonization, and Governance in Network Industries: The European Union and the World Trade Organization Compared’. In The Oxford Handbook of Institutions of International Economic Governance and Market Regulation, edited by Eric Brousseau, Jean-Michel Glachant, and Jérôme Sgard, Oxford University Press.
[5] Almeida, Lucila de. ‘Standardization of Standard Contracts: Fairness in EU Energy Exchanges’. In The Role of the EU in Transnational Legal Ordering Standards, Contracts and Codes, edited by Marta Cantero Gamito and Hans-W. Micklitz, 155–79. Edward Elgar Publishing, 2020.
[6] Esposito, Fabrizio, and Lucila de Almeida. ‘A Shocking Truth for Law and Economics: Consumer Welfare Explains the Internal Market for Electricity Better Than Total Welfare’. In Energy Law and Economics, edited by Klaus Mathis and Huber Bruce H., 101–33. Economic Analysis of Law in European Legal Scholarship. Springer, Cham, 2018.
[7] Esposito, Fabrizio. ´The Consumer Welfare Hypothesis in Law and Economics´, Edward Elgar Publishing, 2022.
[8] Van Zeben, Josephine, Lucila de Almeida, Mirta Alessandrini. ´Stress testing of the European Green Deal: the securitisation of the energy, food, and climate. EU Law Live, 2022.
[9] European Court of Auditors, Complex legal architecture, delays, weaknesses in governance and incomplete market surveillance, hamper full achievement of the ambitious objective (2023).
[10] Almeida, Lucila de, Fabrizio Esposito, and Josephine van Zeben. ‘When Indicators Fail Electricity Policies: Pitfalls of the EU’s Retail Energy Market Barrier Index’. Energy Policy 165 (1 June 2022): 112892.
[11] https://www.apren.pt/en/renewable-energies/production
[12] https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Renewable_energy_statistics#:~:text=In%202021%2C%20renewable%20energy%20sources,and%2032.1%20%25%2C%20respectively)
