The Court of Justice of the European Union (CJEU, EuGH) has clarified the scope of the Services Directive in relation to the generation of electricity from hydropower (CJEU, judgment of 3 September 2026 – C-653/24). Accordingly, plants whose sole or at least principal activity consists of generating electrical energy do not fall within the scope of Directive 2006/123/EC. This applies in particular to small hydropower diversion plants.
Dispute over the term of small hydropower concessions
The proceedings arose from legislation enacted by the Italian region of Emilia-Romagna concerning concessions for small-scale water diversions used for hydropower generation. The plants concerned had an average annual rated capacity not exceeding 3,000 kilowatts.
Under the relevant Italian Royal Decree, diversions are classified as large if they supply plants with an average annual rated capacity exceeding 3,000 kilowatts. By contrast, diversions with a capacity not exceeding 3,000 kilowatts are classified as small.
Time limits on concessions under Italian law
Under Italian law, concessions for water diversions used for hydropower generation are granted for a limited period. Their term may not exceed 30 years. Upon expiry, they may be renewed subject to the conditions laid down by law.
Article 3 of Emilia-Romagna Regional Law No. 17 of 28 December 2023 contains a supplementary provision concerning small-scale water diversions used for hydropower generation. Where the concession holder had been granted financial support for hydropower generation, the term of the concession was, at the holder’s request, to be aligned with the funding period. The maximum term of 30 years could not be exceeded.
Proceedings before the Italian Constitutional Court
On 23 February 2024, the President of the Italian Council of Ministers initiated proceedings before the Corte costituzionale (Italian Constitutional Court) to review the constitutionality of this regional provision. In his view, Article 3 of the Regional Law infringed the Italian Constitution, read in conjunction with Article 49 TFEU (Treaty on the Functioning of the European Union) and Article 12(1) and (2) of Directive 2006/123/EC.
He argued that the Services Directive also covered concessions for small-scale water diversions used to generate electricity. The statutory extension of the concession term therefore amounted to automatic renewal.
The Emilia-Romagna region countered that the provision in question did not permit concessions to be extended. It also argued that energy generation by small hydropower diversion plants did not fall within the scope of the Services Directive. In its view, the production of electrical energy involved the manufacture of an intangible good rather than the provision of a service.
The Corte costituzionale stayed the constitutional review proceedings and requested a preliminary ruling from the CJEU.
Relevant provisions of the Services Directive
Article 2(1) of Directive 2006/123/EC provides that the Directive applies to services supplied by providers established in a Member State.
Under Article 4(1) of the Directive, a service means any self-employed economic activity, normally provided for remuneration, as referred to in Article 57 TFEU.
Selection where the number of authorisations is limited
Article 12(1) of the Directive concerns cases in which the number of authorisations available for a particular activity is limited because of scarce natural resources or limited technical capacity. In such cases, Member States must apply a selection procedure that guarantees, in particular, impartiality, transparency and adequate publicity.
Article 12(2) lays down further requirements for such authorisations:
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The authorisation must be granted for an appropriate limited period.
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Automatic renewal must not be permitted.
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The previous holder must not receive any other advantage upon expiry of the authorisation.
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The same applies to persons having particular links with that holder.
The initial decisive question was therefore whether electricity generation in small hydropower diversion plants could be classified as a service within the meaning of the Directive at all.
Electricity generation is not a service
The CJEU relied on its previous case law concerning the classification of electrical energy. According to that case law, electricity is merchandise, a good and a product. An activity through which a product is manufactured cannot, in itself, be regarded as a service.
The generation of electrical energy therefore does not constitute a service. A plant whose sole or at least principal activity consists of generating electricity does not fall within the scope of Directive 2006/123/EC.
Ancillary activities do not alter the classification
According to the judgment, the mere fact that electricity generation is associated with other activities does not warrant a different assessment. If those activities remain subordinate to energy generation, they do not transform the principal activity into a service.
The Italian Government had pointed out that operators of small hydropower plants must fulfil various obligations. These include, in particular, limiting water abstraction to a level compatible with the recharge of the aquifer concerned and taking measures to protect the public interest in water resources and preserve the hydrogeological balance.
The CJEU found that this did not justify a different classification. Obligations to protect public health or the public interest do not transform the production of a good into the provision of a service.
Even if the management of the flow rate and the preservation of the hydrogeological balance could, in themselves, be regarded as services, they would merely constitute activities ancillary to the principal activity of generating electricity. The operator cannot provide them independently as a separate principal economic activity normally carried out for remuneration. Moreover, those activities are inextricably linked to the right to divert public water from its natural course in order to generate hydropower.
Grid balancing remains a subordinate activity
In the CJEU’s view, any grid-balancing services likewise do not lead to a different conclusion. The principal activity of a large or small hydropower diversion plant remains energy generation.
A temporary increase in production to meet exceptional demand does not alter the nature of that activity. In the case of small hydropower diversion plants, the discussions at the hearing indicated that this was, in any event, only an occasional activity.
Power plant operation and electricity generation must be distinguished
The CJEU also considered the argument that power plant operation is classified as a service in the Common Procurement Vocabulary. That classification was not decisive for the ruling.
Operating a power plant and generating electricity are distinct activities. The same legal rules do not necessarily apply to both. An electricity producer may, where appropriate, entrust the operation of its plant to a third party, which thereby provides a service. However, this does not deprive the producer of its status as a manufacturer of electrical energy. Nor does it, for that reason alone, create a service concession or a public service contract.
Earlier decision concerning state-owned land not transferable
The CJEU’s decision in Joined Cases C-458/14 and C-67/15 likewise did not support a different assessment. That decision does not mean that the Services Directive applies to all concessions that enable an economic activity to be carried out on state-owned land.
Rather, the decisive issue remains whether the activity carried out with the use of state-owned land constitutes a service within the meaning of Article 4(1) of the Directive. The earlier proceedings concerned the use of state-owned land for tourism and leisure purposes. Those activities could be classified as services.
By contrast, the concessions at issue in the Italian main proceedings concern the generation of electrical energy using diverted public water. Their subject matter is therefore the production of a good.
CJEU finds that the Directive does not apply
According to paragraph 33 of the judgment, Article 2(1), Article 4(1) and Article 12(1) and (2) of Directive 2006/123/EC must be interpreted as meaning that the Directive does not apply to plants whose sole or, in any event, principal activity consists of generating electrical energy. Small hydropower diversion plants fall within this category.
In view of this answer, the CJEU did not need to examine the two further questions referred by the Corte costituzionale. In particular, the following issues therefore remained unresolved in these proceedings:
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whether the distinction between large and small diversion plants constitutes a permissible general criterion for assessing the scarcity of water resources;
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whether Article 12(2) of the Directive precludes aligning the term of a concession with the period for which financial support was granted, up to a maximum term of 30 years.
The judgment therefore does not itself permit the automatic renewal of hydropower concessions. It establishes only that the Services Directive does not apply to plants devoted exclusively or at least principally to electricity generation. The CJEU was not required to rule on whether the Regional Law was compatible with other requirements of EU or national law.
The decision on costs in the main proceedings, which remain pending before the Corte costituzionale, is a matter for the Italian court. Costs incurred by other parties in submitting observations to the CJEU are not recoverable.
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