European Commission Launches Public Consultation on New State Aid Guidelines for Environmental Protection and Energy

January 10, 2014

On 18 December 2013, the European Commission (the “Commission”) launched a public consultation on a new draft of the Environmental Protection and Energy State aid Guidelines (the “EEAG”). State aid is the EU term used to describe Government support given to a specific company or a sector; it is generally prohibited under EU competition rules but may be allowed where it is in the overall interest of the EU, such as in the case of environmental protection or research and development. The EEAG  set out the conditions under which State aid can be granted for activities which ensure a higher level of environmental protection and optimal use of energy. The EEAG have developed into an important piece of soft legislation for meeting the EU’s environmental protection policy objectives, even more so now that the EEAG explicitly includes State aid measures for energy. In addition, due to the comprehensive aid measures for renewable energy, the EEAG lies at the core of the EU’s future energy policy. 

In its introductory notes, the EEAG makes it clear that State aid may be efficient in correcting market failures residing in the fact that investors, acting in their own interest, do not have sufficient incentives to take on the costs of addressing pollution arising from their choice of generation technology. The principles for approving State aid in the EEAG builds on the well-known “balancing test”, which require that the negative impact of the aid on competition are weighed against the positive externalities claimed by Member States, such as, CO₂ reduction or energy efficiency. Only if the overall balance is positive, can the aid be approved.

In particular, the balancing test requires verifying that there is no other better way to address pollution than with State aid, including sector-specific legislation. In addition, no aid can be granted where the aid beneficiary would already be obliged to undertake the aided action on the basis of national regulatory legislation. Further, the balancing test requires that the aid changes the behaviour of the beneficiary (generally referred to as the “incentive effect”) and that the aid is proportional, that is, it must be limited to the minimum necessary to achieve the objective of lower levels of pollution. Finally, the balancing test requires an in-depth analysis of whether the aid distorts competition to the least possible extent, including assessment of market power and potential effects on the market.

The provisions in the draft EEAG can be grouped into three key areas: (i) investment aid and operating aid for renewable energy production; (ii) aid by means of environmental tax reductions/exemptions; and, (iii) aid by means of electricity charge reductions. Also, a string of other measures are addressed, such as, amongst others, carbon capture and storage, capacity mechanisms, and tradable permit schemes at national level (involving, for example SO2 or NOx schemes).

As regards investment aid for renewable energy production, the Commission unfortunately still relies on the so-called “extra costs” method, which involves a comparison between the renewable energy project and a more polluting alternative. Aid can only be granted to the amount representing the difference between the two. Given that the method involves a comparison with a hypothetical which never takes place (i.e., the more polluting alternative), industry is not only unnecessarily burdened with providing an economic analysis – alien to their business models – but the method also produces arbitrary results. Regrettably the EEAG has not introduced any new method or any improvements to this somewhat outdated and farfetched method which remains at the mercy of a purely theoretical assumption. 

Operating aid for renewable energy production may be granted for an amount representing the difference between the cost of producing such energy, and the market price. However, a distinction is drawn between deployed technologies (which contribute 1-3% of total EU consumption) and less deployed technologies (which contribute less). The former can only receive aid following an open bidding process, whereas aid can be granted to the latter more easily without this step.

A regards State aid by means of tax reductions, the UK has been given a lex specialis: new provisions entitle Member States to grant aid where electricity generators are faced with a new tax and as a result increase the electricity prices. This is clearly aimed at the UK’s recent introduction of a carbon price floor which results in a tax on energy generators that is passed on as a price increase in electricity for customers, including the energy intensive industries.

The EEAG include new provisions on State aid granted by means of electricity charge reductions. These provisions allow aid to be granted by means of lowering the charge paid to support renewable energy production and have also been included as a lex specialis, to target the way Germany operates its electricity charge reduction scheme for energy-intensive industries. Under the EEAG the aid may only be granted to beneficiaries which are at risk of carbon leakage, that is, industries which might re-locate outside the EU due to too high environmental costs of operating inside the EU. The conditions demonstrating that industries are at risk of carbon-leakage are: (i) that the charge (from which a reduction is sought) represents a cost increase of 5% of the gross value added; and (ii) that beneficiaries have trade with third countries in excess of 10%. Finally, beneficiaries must pay a portion of the electricity charge, namely at least 15% until the end of 2017 and 20% thereafter.

New provisions allow the grant of State aid to Carbon Capture and Storage technologies (“CCS”), that is technologies involved in the process of capturing CO₂, transporting and depositing it in a storage site located underground or under the seabed. The novelty here lies in the fact that it is possible to approve aid for CCS on the basis of the EEAG, as opposed to being assessed directly on the basis of the Treaty rules. This, combined with the fact that the Commission has provided for the possibility to grant a generous amount of aid for CCS projects, sends a strong signal on the desire to welcome investment in CCS.

Further novel provisions also allow for the grant of State aid for capacity mechanisms, that is for State aid to energy plants which produce upon demand, in case of an energy shortage, i.e. peak-load generators. The EEAG states that in determining whether aid for capacity mechanisms can be approved, the Commission will pay close attention to the nature and causes of the generation adequacy problem and why the market cannot be expected to deliver adequate capacity without, however, explaining what will tip the balance in this regard. The aid can only be granted as a service fee to remunerate the generator for making capacity available and may neither cover investments in the infrastructure, nor constitute remuneration for the sale of electricity.

The Commission also requires that aid for capacity mechanisms should be based on a national measure that should give preference to low-carbon sources, which can sufficiently address the generation adequacy problem. This means, of course, that renewables are in, but also, in principle, oil and gas, including shale gas. However, given the intermittency of renewables, capacity mechanisms are typically not renewables. Thus, despite attempts in the EEAG to ensure that aid, in general, rewards investments in green energy, aid to capacity mechanisms are likely to favour fossil fuels and/or nuclear sources.

Outlook

First, as regards operating aid to renewables, the distinction between less-deployed and deployed technologies is in principle welcome. However, it is still insufficient to remove the obstacles necessary for fostering investment in renewables in a manner that less-deployed technologies can be relied on post-2020. Certain renewables are well-tested and established, but still need targeted State aid in order to be cost-efficient in time for the 2020 target.  Interestingly, the Commission has included the possibility of dedicated aid for CCS, demonstrating that it is willing to include aid for specific targeted installations.

As regards aid in the form of tax and electricity charge reductions, if what we want to achieve is a system where environmental protection exists in a symbiotic relationship with competition, we must incentivize industry to act in a pro-environmental manner, for example by investments in energy efficiency or energy saving equipment.  Indeed, aid in the form of tax and electricity charge reductions should be granted on the basis of balancing, (i) the objective of attaining the highest level of environmental protection; and, (ii) the objective of protecting industries’ international competitiveness. However, requiring industry to pay a portion of that tax achieves neither of these.

Finally, it is clear that the draft EEAG involves provisions dedicated to schemes from the UK and Germany that are pending the approval of the Commission. Such lex specialis is not in and of itself a bad thing. Since the UK and German scenarios in question do not necessarily involve State aid in the first place, the danger is that the parameters of what qualifies as State aid are artificially extended, and that measures in other Member States will now also be considered to involve State aid. However, given that the approval in the EEAG is aimed at UK and Germany it is uncertain whether other Member States fulfil the conditions to be able to rely on these lex specialis in order to obtain an approval.     

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