Uncertainty-Related Transaction Costs in EU Law for Entrepreneurs Developing and Operating Microgrids

As an integral part of the European Green Deal, the European Union has set the goal of achieving climate neutrality by 2050, with net-zero greenhouse gases emitted into the atmosphere. In pursuit of this goal, microgrids are increasingly being discussed as a building block for a more sustainable future. By enabling energy to be generated and distributed independently of the main grid, microgrids have the potential to positively influence the transition to a sustainable energy mix, in particular when they incorporate energy from renewable sources. Given the relatively recent emergence of microgrids in the EU, it remains uncertain how the EU’s legislative framework governing the electricity sector applies to them. This is problematic because a clear and coherent regulatory framework reduces transaction costs, which can benefit the development of microgrids. However, incomplete regulation can have the opposite effect, as argued by entrepreneurs who are developing and operating microgrids. This chapter analyses the claim by energy entrepreneurs that legal uncertainty and the resulting transaction costs limit the use of microgrids. It provides a law and economics analysis of transaction costs in the development and operation of microgrids, focusing on the 2019 Electricity Directive and several Network Codes in the EU. The analysis suggests that legal uncertainty and complexity indeed generate direct and indirect transaction costs, in particular information and negotiation costs. By analyzing the EU regulatory framework from the perspective of transaction cost theory, this analysis provides an entrepreneurial understanding of the legal challenges associated with the development and operation of microgrids. This serves as a crucial first step to ultimately strengthen legal certainty for both microgrid developers and operators.