European Union: National Energy Support Schemes Under EU State Aid Scrutiny

Keywords: National Energy Support Schemes, EU,

Increasing industrial and personal demand for electricity, uncertain supplies and an urgent need to combat global warming are significant challenges. In order to tackle these challenges, the EU decided, a few years ago, to issue legislation to promote and increase the use of renewable energy. In 2007, the European Council agreed on an Energy Policy for Europe and endorsed, as a mandatory target, a 20 percent share of energy from renewable sources in overall EU energy consumption by 2020.

As a consequence, in 2009, the EU adopted the Renewable Energy Directive (2009/28/EC) to establish a common framework for the promotion of energy from renewable sources. The Directive sets out mandatory targets for each Member State, requiring them to reach a certain percentage of energy from renewable sources in gross final consumption by 2020. To achieve their goals, Member States may introduce support schemes to promote the use of energy from renewable sources. The support can be granted either by reducing the cost of producing energy from renewable sources or by increasing the sales price or volumes of such energy. This may be done through investment aid, tax exemptions or reductions, renewable energy obligation support schemes and direct price support schemes, such as feed-in tariffs and premium payments.

However, whenever governments decide to support certain companies financially, e.g., by reducing their tax burden, these companies may gain an advantage over competitors, which can trigger concerns regarding the compatibility with the EU State aid rules. Under Article 107 Treaty on the Functioning of the European Union (TFEU), all State aid measures are prohibited unless explicitly authorized following prior notification by the Member State concerned. Non-notified aid is deemed illegal and, like unauthorized aid, must be recovered from the beneficiaries by the national governments.

To facilitate the assessment of what constitutes illegal aid and what can still be authorized, on 9 April 2014 the European Commission (Commission) adopted non-binding State aid guidelines (the EEAG) in the energy and environmental sectors covering the years 2014-2020. These guidelines are meant to support Member States in reaching their 2020 climate targets by setting out a method for addressing market distortions resulting from certain support measures for renewable energy sources. The EEAG include certain criteria under which energy intensive companies can be relieved from additional charges for the support of renewable energy.

During 2014, the Commission has carried out several significant and highly political State aid investigations against Member States, including Germany and the United Kingdom, that have supported certain industry players by reducing the financial burden caused by the support for the generation of renewable energy. In addition, the European Court of Justice (ECJ) has recently issued its ruling in a case on the Swedish support scheme for renewable energy, the benefit of which was limited to renewable energy produced in the Swedish territory.

German Renewable Act

On 18 December 2013, the Commission opened an in-depth investigation into certain provisions of the German Renewable Energies Act (EEG-2012) to examine whether they were compatible with the EU State aid rules. The German law aims at increasing the share of renewable energy sources in electricity supply, while fossil fuels are set to be phased out by 2050. In order to finance the promotion of renewable energy sources in Germany, electricity providers are entitled to a specific surcharge on all electricity consumers, industrial or household. The exact amounts depend on a number of factors, including the type of renewable energy.

However, to avoid choking the power-intensive industry in Germany with additional financial burden, certain companies—mainly in manufacturing sectors such as metals, cement, glass and chemicals—were granted significant reductions of this surcharge when they exceeded certain levels of electricity consumption and costs. A reduction of the surcharge was also granted when an electricity supplier procured at least 50 percent of its electricity portfolio from domestic (i.e., German) renewable electricity sources (so-called "green electricity privilege").

The Commission's concerns in the State aid investigation were focused on two aspects of the EEG-2012: First, the surcharge reductions for energy-intensive companies appeared to provide the beneficiaries with a selective advantage that was likely to distort competition within the EU internal market and, thus, was contrary to Article 107 TFEU. Second, the "green electricity privilege" was seen as resulting in discriminatory tax treatment, thus violating EU's internal market rules.

The Commission's investigations were accompanied by high-level German political interventions. Chancellor Merkel warned that the Commission might slow down the EU's most successful and competitive economy in the name of preserving fair competition. Vice-Chancellor Gabriel claimed that the EU proposals would force many important industrial producers to close down their businesses or to relocate to countries outside the EU. Competition Commissioner Almunia for a long time insisted on the fact that the EEG-2012 had to be modified and brought in line with the EEAG. Due to extensive political debates, the adoption of the EEAG was delayed several times.

However, right after the adoption of the EEAG in April 2014, Germany amended the EEG-2012 and notified the new draft (EEG-2014) to the Commission. Following heavy discussions, the Commission approved the new rules on 23 July 2014, concluding that the EEG-2014 was in line with the new guidelines. The new law still provides for reductions of the EEG-surcharge for certain energy intensive companies. However, the number of beneficiaries has been reduced to those companies that are exposed to international trade. Additionally, the new law provides that the aid will be progressively allocated through tenders which will gradually be opened to operators located in other Member States. Following its approval by the Commission, the EEG-2014 has entered into force in August 2014.

However, the Commission has also indicated that the investigation into the above-mentioned reductions from the surcharge under the EEG-2012 is still ongoing. Under the EEAG, such surcharges can be authorized if a number of specific conditions are fulfilled. If these conditions are not met, however, the Commission may adopt a formal decision requesting Germany to recover from the benefitting companies any amounts qualified as illegal State aid for 2013 and 2014. Such a decision is expected before the end of 2014. It could have an enormous impact on many energy-intensive industrial users in Germany if they might have to pay the full amount of the surcharge retrospectively. The difficult issue to be addressed by the German government after such a decision will be how to handle these additional payments. Under the terms of EEG, the surcharges are not to be paid into the public budget, but rather to the network operators, and shall ultimately benefit the producers of renewable energy.

Swedish Renewable Energy Support Scheme

The German position regarding EEG-2012 and EEG-2014 was indirectly supported by a recent ECJ judgment of 1 July 2014 (case C-573/12, Ålands Vindkraft v. Swedish Energy Agency). Similar to the German "green energy privilege" model, the ECJ was faced with the question whether imported electricity produced from renewable sources outside of Sweden had to be considered equally within the Swedish renewable support scheme. This scheme promoted green energy by awarding green electricity production installations with "green certificates" which could be sold to other energy suppliers or users under the obligation to hold a specific amount of such certificates. In that way, the Swedish scheme enabled producers of green electricity to receive additional income.

However, the Swedish green certificates were only granted if the production installation was located in Swedish territory. For this reason, Ålands Vindkraft's application for such certificates was refused; the company operated a wind farm in the Åland archipelago belonging to Finland. Ålands Vindkraft challenged the decision before the Swedish courts and claimed that the Swedish support scheme infringed the fundamental principle of free movement of goods in the TFEU. The Swedish administrative court referred the matter to the ECJ for a preliminary ruling and asked whether the Swedish electricity certificates scheme was compatible with EU law.

The ECJ held that the Swedish support scheme is compatible with the Renewable Energy Directive, which does not require Member States to extend their scheme to cover green electricity produced on the territory of another Member State. The court also held that although the support scheme is capable of hindering imports of electricity from other Member States, the restriction is justified by the public interest objective of promoting the use of renewable energy sources in order to protect the environment and combat climate change. The Swedish support scheme was therefore regarded as consistent with the principle of free movement of goods.

UK Support to Nuclear Power Plant

The Commission recently also applied the State aid rules for the first time in the nuclear sector. On 18 December 2013, an in-depth investigation was opened to examine whether the UK plans to subsidize the construction and operation of a multibillion-euro nuclear power station at Hinkley Point C in Somerset infringes EU State aid rules.

If this project is completed, it will be the first newly built British nuclear reactor since 1995. Its scheduled start of operations is 2023, and it is the first investment framework in a new generation of UK nuclear power stations, marking a significant moment in the revitalization of the UK's nuclear power industry.

The UK government intends to establish a system ensuring that the plant operator receives stable revenue ("strike price") for 35 years, independent from price f luctuations of the electricity wholesale price. When the electricity market price drops below the strike price, the difference will be paid by the government. When the market price is above the strike price, the plant operator will pay the difference to the government ("contract for difference"). This system is set to guarantee the plant operator a fixed level of revenues without exposure to the market risks. Furthermore, the operator will get a State guarantee covering all loans the operator seeks to obtain on the financial markets to fund the construction of the plant.

In its investigation, the Commission examined whether the construction of a nuclear power plant could not be achieved by market forces alone, without any State intervention. The Commission expressed doubts that the project suffered from genuine market failure, in which case public support is contrary to the EU State aid rules. However, the Commission's position changed after the UK significantly revised its plans supporting the project. On 8 October 2014, the Commission concluded that the modified UK measures to support the project are compatible with the EU rules, as the State aid provided remains proportionate to the objective pursued.

The UK authorities managed to demonstrate that the support measure in question addresses a situation of genuine market failure. The guaranteed fee to be paid by the operator to the UK Treasury was significantly raised with the result that the State support was reduced by more than 1 billion pounds. In addition, the gains generated by the project will be shared with UK consumers as soon as the overall profits exceed a given level. The profit-sharing mechanism will remain in place for the entire lifetime of the project: 60 years.

At the time of this approval, Commissioner Almunia felt the need to underline that investments in the nuclear power sector receive less aid than comparable investments in the field of renewable energy. In the EU, the highest amounts of public support in 2012 went to energy produced from renewable sources, such as solar (€14.7 billion), onshore wind (€10.1 billion) and biomass (€8.3 billion). For conventional power generation technologies, the largest amounts of support went to coal (€10.1 billion), natural gas(€7 billion) and nuclear (€5.2 billion). In the UK, the strike price of electricity produced by the Hinkley Point C nuclear plant is 92.5 pounds per megawatt hour, while for offshore wind plants it is 155 pounds per megawatt hour.

Nevertheless, the opponents of nuclear power fear that the Commission's approval in this case might set a precedent running counter to the policy to promote renewable energy in the EU. Indeed, Bulgaria, the Czech Republic, Finland, Lithuania, Poland, Romania, Slovakia and Sweden are also considering new investments in nuclear power plants. Austria, which has no nuclear power stations, has declared that it will prepare legal action against the Commission decision before the ECJ, claiming that such subsidies for nuclear power plants are not in line with the EU State aid rules. Austria stresses that the Commission's decision on the Hinkley project set a bad precedent, because guaranteed feed-in tariffs had previously been reserved for renewable energy, while nuclear power is not regarded as sustainable or as a good option to combat climate change.

Conclusions

Each Member State is free to choose its own energy mix as long as it is compatible with EU State aid rules. There is no general EU competence to set out binding rules in this regard, but the EU has an impact on the energy mix through its powers in other policy areas, e.g., environment. The EU Renewables Directive is a good example for such shared competence and the State aid rules apply on top of them, either horizontally through the EEAG or in individual cases.

Within the existing legislative framework, as described, Germany and Sweden have recently decided to promote renewable energy sources, while the UK has more focused on supporting a nuclear energy project and other Member States are likely to follow in the same direction. As State aid investigations often affect economically sensitive areas, especially in the energy sector, national governments and the Commission have the difficult task to find the right balance between national industries' interests and compliance with the EU internal market and competition rules.

Originally published Winter 2014

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