Norton Rose Fulbright: 10 Things To Know About The New EU Guidance On State Funding In The Energy Sector

Introduction

On 9 April, the European Commission adopted a new set of guidelines: the “Guidelines on State aid for environmental protection and energy – 2014-2020”.1 These Guidelines are intended to assist the EU Member States to design State schemes that help them reach their climate change and energy sustainability targets without threatening to distort competition in, or otherwise fragment, the EU market. The Guidelines update and replace the 2008 guidelines on State aid for environmental protection2; they have also been extended to cover certain types of aid to the energy sector.

As a general rule, any aid granted directly or indirectly through State resources in favour of a particular undertaking or the production of certain goods which distorts or threatens to distort competition and affects trade between EU Member States is prohibited under EU law.3 Such aid may, for example, take the form of subsidies, grants, favourable tax treatment or guarantees in favour of a particular business. Not all State aid is unlawful, however, as EU law provides for certain grounds on which State aid will or may be permitted. Unless the aid comes within the scope of one of the available exemptions, State aid needs to be notified to the European Commission, which determines whether the aid is permitted. Failure to comply with this obligation renders the State aid illegal.

In its new Guidelines, the European Commission sets out the conditions with which certain types of aid in favour of energy and environmental projects will have to comply to be individually approved as compatible with the EU State aid rules.

This briefing identifies 10 key points in relation to the new Guidelines that are relevant for projects in the energy sector.

Types of aid covered by the Guidelines

The Guidelines apply to the following types of State benefit requiring notification to and approval by the European Commission:  

  1. Investment aid exceeding €15 million per company;
  2. Operating aid for:
  1. renewable electricity generation installations with a generation capacity exceeding 250 MW;
  2. biofuel production installations producing more than 150,000 tonnes per year; and
  3. cogeneration installations with a cogeneration electricity capacity exceeding 300 MW;
  • Aid for energy infrastructure exceeding €50 million per company per project;
  • Aid for carbon capture and storage exceeding €50 million per company per project; and
  • Aid in the form of a generation adequacy measure exceeding €15 million per company per project.

Where the aid in question has been granted following a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria, however, it will be automatically permissible and will not need to be individually reviewed by the European Commission. In such cases, the Guidelines will not apply.

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General assessment criteria are the same for all sectors

The Guidelines adopt the same general criteria as other State aid guidelines for determining whether to approve a notified aid in favour of a particular energy project to align the way in which the European Commission assesses State benefits. State benefits in the energy sector must:

  1. Contribute to an “objective of common interest”, principally ensuring a competitive, sustainable and secure energy system in a well-functioning EU energy market.
  2. Be required to bring about a significant improvement to the EU energy market that the market is not capable of delivering itself, for instance because of diverging interests and incentives among investors.
  3. Be appropriate, in that the same improvement to the EU energy market cannot be achieved through other less anti-competitive policies, e.g. regulation and market-based instruments, and/or aid measures.
  4. Have an incentive effect on the beneficiary, encouraging the company to change its behaviour to improve the functioning of the energy market. It needs to be demonstrated that without the aid the company might not have done so, or it might have done so in a more restrictive or different way. However, the aid should not subsidise the costs of an activity that a company would incur in any event and should not compensate for the normal business risks of an economic activity.
  5. Be proportionate, in that the amount of aid per beneficiary is limited to the “minimum needed” to achieve the objective. As a general rule, aid will be considered “limited to the minimum necessary” if the aid corresponds to the net extra costs incurred to meet the objective compared with the costs of the project the company would have carried out in the absence of any State benefit.
  6. Not adversely affect competition and trade between EU Member States. Any negative effect of the aid measure on competition between Member States must be limited and outweighed by its positive contribution towards a competitive, sustainable and secure energy system.

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State aid to energy infrastructure projects is often beneficial

The European Commission considers that a modern energy infrastructure is essential for Europe's internal energy market to function properly. The Commission recognises, however, that market operators may lack incentives to invest in energy infrastructure, particularly in the case of cross-border projects where benefits accrue outside the country making the investment; smart grids; or infrastructure projects in less developed areas of the EU.

The Commission is therefore inclined to consider that such energy infrastructure projects may need to be supported by State funding. An important factor for such aid to be approved, however, is that the infrastructure project is open to access by third parties and subject to tariff regulation, so that all users may benefit from the infrastructure.

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State aid ensuring generation adequacy should only remunerate the availability of generation capacity, not the sale of any electricity produced

A number of EU Member States are contemplating providing State funding, e.g. to electricity generators, to ensure that there is sufficient generation capacity available. As a result of the increase in renewable energy projects and the phasing out of environmentally harmful power plants, many EU Member States are facing a shift from a relatively stable and continuous supply of electricity to a system with more numerous, small-scale and variable electricity suppliers. This in turn raises issues of whether the amount of electricity generated at any given time is enough to satisfy demand.

The European Commission considers that EU Member States may implement certain aid measures to deal with capacity shortages, provided that (i) the Member State has carefully analysed the causes for the shortage of generation capacity and removed any obstacles preventing the market from delivering the right incentives for investment in generation capacity; and (ii) the aid will not have a negative effect on competition and trade in the EU energy market.

Any State benefit should, for example, be available to both existing capacity (e.g., retrofitting plants) and new capacity, as well as to operators from other EU Member States where such participation is physically possible. The proposed aid should include alternative measures to address the capacity shortage, such as better interconnection with other EU Member States, electricity storage and a more flexible or reduced electricity consumption. Finally, the aid should only reward the availability of capacity, not the sale of electricity.

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Intensive users of energy may be (partially) compensated for renewable energy levies

The European Commission recognises that companies active in energy-intensive sectors, such as the chemicals, paper, ceramics or metals sectors, shoulder a large proportion of the levies charged for supporting renewable energy projects, since they are heavy users of electricity. This puts companies that are trading globally at a competitive disadvantage with regard to competitors from outside the EU where electricity prices are lower.

To preserve the competitiveness of these companies and sectors, the new Guidelines allow Member States to grant reductions to companies in certain industries on the charges levied to support renewable energies. To ensure that these reductions do not go beyond what is strictly necessary, however, any reduction should be only partial, and at least 15 per cent of the levies should not benefit from a reduction.

Within each eligible industry sector, Member States are required to ensure that the beneficiaries of levy reductions are chosen on the basis of objective, non-discriminatory and transparent criteria and that the same reductions are granted to all similarly situated beneficiaries in a particular sector.

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Renewable energy projects expected to move to a more competitive bidding process

The Guidelines aim to better integrate renewables into the internal electricity market in a gradual way, introducing competition between different technologies. Feed-in tariffs will be progressively replaced by competitive bidding.

In 2015-2016, Member States will start implementing competitive bidding procedures for a small share of their new capacity from renewables.

From 2016, generators will need to sell their electricity in the market and be subject to balancing responsibilities (an obligation on producers to compensate for short-term deviations from their previous delivery commitments). Member States will also be obliged to use as support instruments market premiums – a top-up on the market price – or certificates in order to promote the better integration of renewable energy into the market.

From 2017 on, Member States must set up tenders to grant support to all new installations.

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Approved aid may need to be kept under review

The European Commission may require that any approved aid measure is reviewed after a given time (normally four years or less) to ensure that any negative effects on competition in the EU energy market will be limited. To avoid placing a disproportionate burden on EU Member States and/or smaller aid projects, however, such review requirements should be limited to State benefits with large budgets or unusual characteristics or to cases where significant market, technology or regulatory changes are foreseen.

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No guidelines on State aid to nuclear power projects

The Guidelines do not cover aid to nuclear energy projects. Therefore, any proposed aid in relation to a nuclear energy project will need to be assessed by the European Commission on a case-by-case basis under the general EU State aid rules as set out in Articles 107 and 108 of the Treaty on the Functioning of the European Union.

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Guidelines will come into force on 1 July 2014

From 1 July, the European Commission will assess any new and pending notified State aid measures in accordance with the criteria set out in the Guidelines.

Certain types of environmental and energy aid, e.g. measures to promote renewable energies, clean up contaminated sites, promote district heating or improve buildings’ energy efficiency, will be included in the revised General Block Exemption Regulation (GBER). This means that where the aid measure in question complies with the criteria in the GBER, the aid will automatically be deemed compatible with the EU State aid rules and will not need to be notified to, and approved by, the European Commission. The revised GBER is expected to be adopted in May 2014 and will enter into force at the same time as the Guidelines, on 1 July.

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Existing aid schemes will benefit from a year’s transitional period

EU Member States will have one year from the publication of the Guidelines in the EU’s Official Journal to bring existing aid schemes in line with the new Guidelines, except for schemes for operating aid for renewable sources and cogeneration. Such schemes will only need to be brought in line if they are prolonged or adapted. From 1 January 2016, support to new renewable energy installations should gradually begin to be based on market conditions.

This briefing provides short general guidance only. Please contact one of the members of the Norton Rose Fulbright EU antitrust energy team in relation to a specific legal issue or a particular project.

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Footnotes

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