On 13 May 2025, the Federal Court of Justice ruled (EnVR 83/20) on how the term “customer system” (Kundenanlage) in section 3, no. 24a Energy Industry Act (Energiewirtschaftsgesetz, “EnWG”) is to be interpreted on a case-by-case basis. The decision implements a November 2024 ruling by the European Court of Justice (ECJ), which held that the German system category “customer system” is incompatible with EU law (click here for further information). The grounds for the Federal Court of Justice’s decision make it clear that the scope of application for customer systems in Germany will be significantly reduced and that the current widespread practice cannot be continued.
Background on customer systems under section 3, no. 24a EnWG
Customer systems have up to now been regarded as unregulated parts of the local network because no regulatory approval has been required to operate them or for them to charge tariffs and they have been exempt from the regulatory requirements of distribution systems. The rationale is that a customer system typically supplies energy to end consumers within narrowly defined areas and must therefore be distinguished from large distribution systems. Over the past 14 years, the customer system has become the standard model in Germany – valued for being practical and unbureaucratic – for “last mile” electricity and gas distribution, but operators of these systems nevertheless often were and still are unaware of their status.
Proceedings before the Federal Court of Justice
The appellant in the case before the Federal Court of Justice – an energy supplier – operates combined heat and power (CHP) plants, district heating networks and energy supply systems at several sites, providing end consumers with heat and electricity. Based on a heat supply contract with a property owner, it supplies heat and hot water to four apartment blocks with 96 units and six apartment blocks with 160 units, using an energy centre connected to a district heating network for each group. The apartment blocks are supplied with electricity via the electricity distribution system of the respondent, the local distribution system operator.
The dispute was triggered by an application to register two separate customer systems with the respondent: According to the distribution system operator, the construction and operation of two CHP plants and two separate power cable systems – to which the tenants living in the apartment blocks were to be connected – did not qualify as a customer system, and it therefore rejected the application.
The ECJ’s ruling
At the end of 2022, the Federal Court of Justice suspended the proceedings and referred the question concerning the interpretation of the Electricity Market Directive (Directive (EU) 2019/944) to the ECJ for a preliminary ruling. We previously reported here on the ECJ’s November 2024 ruling (C-293/23) on the interpretation of the term “customer system” and its compatibility with the Electricity Market Directive. According to the ECJ, the German system category “customer system” and the regulatory privileges it currently enjoys are incompatible with EU law. 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”. The case law and regulatory framework of the Member States must instead be based on the exhaustively defined exceptions provided for in the Directive. It was then up to the Federal Court of Justice to implement the ECJ’s findings in its decision.
The Federal Court of Justice’s decision
As already apparent from the press release of 13 May 2025, the Federal Court of Justice – as expected – dismissed the applicant’s appeal on points of law, implementing the ECJ’s ruling and interpreting the EnWG in line with the Directive. Accordingly, the disputed cable systems did not qualify as customer systems pursuant to section 3, no. 24a EnWG, but were themselves a distribution system. They were therefore not to be connected to the distribution system in the case before the Court.
Key points of the Federal Court of Justice’s decision
A system can only be classified as a customer system if it is not a distribution system. The Federal Court of Justice follows the ECJ in finding that a system must always be considered a regulated distribution system if (i) it is used to transport electricity at high, medium or low-voltage, and that electricity (ii) is intended for sale to wholesale or final customers. According to the Federal Court of Justice, the decisive factor is the nature of the supply from such a system, i.e. that electricity is sold.
While the Court makes it clear that customer systems still have a role to play, they have only a very narrow scope of application, which is to be determined exclusively in accordance with Article 2, nos. 28 and 29 and Article 30 et seq. of the Electricity Market Directive. Based on the Directive’s definition of “customer system”, only cable systems that transport electricity not intended for sale can be classified as such. These include, in particular, self-supply facilities, such as cable systems that are connected to generating installations and jointly operated and used by property owners.
Court abandons previous case law
The Federal Court of Justice has now departed from its past rulings on customer systems under section 3, no. 24a EnWG. It had previously developed its own criteria for identifying systems that are “insignificant from a competition perspective”, such as size or output. The decisive factor was whether the customer system potentially impacted supply-side competition or the position of the distribution system operator (e.g. less than 1,000 MWh per year, not supplying several hundred end consumers). The Federal Court of Justice has now explicitly distanced itself from this approach, instead emphasising that a distribution system within the meaning of EU law can only be defined using the criteria laid down in that law – especially voltage and type of customer supplied. Additional national criteria may no longer be applied.
Exceptions to the (distribution) system
There are other possible exceptions to the (distribution) system, including the closed distribution system within the meaning of section 110 EnWG, as well as citizen energy communities within the meaning of Article 16, small connected and isolated systems within the meaning of Article 66 and direct lines within the meaning of Article 7 Electricity Market Directive. It must be determined on a case-by-case basis whether one of these exceptions applies.
Outlook and consequences
It is clear from the grounds for the Federal Court of Justice’s decision that the scope of application for customer systems will be significantly reduced in future. This is a disappointing outcome for anyone who had initially hoped that interpreting this scope of application “in line with the Directive” would not affect existing practice. Many of the cable systems previously classified as unregulated customer systems – e.g. in residential neighbourhoods, industrial and commercial sites, airports, research facilities or university campuses – will most likely no longer fall into this category. This means that their operators could be classified as distribution system operators in future, with the corresponding statutory obligations. Operators wishing to avoid this could consider breaking up the system by, for example, relying more heavily on direct lines. The local connection network operator may also be prepared to operate the local cable system beyond the current network connection point.
The new ruling jeopardises the economic viability of certain decentralised supply models. Companies that have previously relied on unregulated systems should now check whether there is legal justification for maintaining this unregulated status in their specific case. This could be based on an interpretation in line with the Directive as defined by the Federal Court of Justice, e.g. in the case of supply free of charge to cover the company’s own requirements, or on the application of another type of exception, such as a closed distribution system pursuant to section 110 EnWG or a direct line. Businesses should in any event assess whether they may be operating a customer system or benefitting from the regulatory advantages of such a system.
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