The European Commission (Commission) has recently tabled a proposal for “Guidelines on State aid for climate, environmental protection and energy 2022”. This post explores the context of this proposal (at 1.), the changes it introduces to the existing rules (at 2.), a deep dive into the new rules on aid for the reduction of greenhouse gas emissions (at 3.), and an outlook for the future (at 4.).
1. What is the context of this proposal?
In December 2019, the Commission published its roadmap for the “European Green Deal” (EU Green Deal) – a document setting out highly ambitious targets to tackle climate change with the overarching aim to make Europe the first climate neutral continent by 2050. However, one of the most pressing questions on the EU Green Deal remains: who will pay for the green transformation of the EU’s economy? The EU Green Deal specifically sets out that EU State aid rules should be revised to reflect the EU’s sustainability objectives while at the same time ensuring a level-playing field in the internal market.
The Commission has now presented a bold proposal for “Guidelines on State aid for climate, environmental protection and energy 2022” (CEEAG) which is open for feedback in a public consultation until 2 August 2021. The CEEAG are envisaged to enter into force on 1 January 2022 and replace the Commission’s Guidelines on State aid for environmental protection and energy 2014-2020 (EEAG).
The new CEEAG proposal estimates that achieving the increased 2030 climate and energy targets as set out in the EU Green Deal will require EUR 350 billion of additional annual investments.
The new name of the CEEAG indicates the increased focus on climate protection. At approximately 100 pages, the CEEAG are twice as long as the EEAG and the proposal ‘loosens’ the EU’s State aid rules for green projects significantly.
2. What’s new in the CEEAG Proposal?
With nearly 7 years between the adoption of the EEAG and the proposal of the new CEEAG, the Commission has proposed several material changes to activate the potential of State aid to foster more green investments in the future.
The two main buildings blocks of the CEEAG are:
a. an extension of the scope of the EEAG to new areas (e.g. clean mobility, biodiversity, new renewable energy sources such as hydrogen), allowing higher aid amounts (up to 100% of the funding gap) and new aid instruments such as Carbon Contracts for Difference; and
b. increasing flexibility and streamlining of aid spending, by introducing a simplified assessment under a single section of the CEEAG (4.1) and eliminating the requirement for individual notifications of large green projects within aid schemes previously approved by the Commission.
In principle, the EU allows Member States to regularly fund up to 100% of the project cost for decarbonization projects provided (i) there is a change in behaviour by the beneficiaries leading to accelerated decarbonization that the market would not have delivered and (ii) there is no overcompensation for the beneficiaries.
(i) The categories of aid permitted under the CEEAG Proposal
The CEEAG are divided into 13 categories of aid. These include aid for the reduction and removal of greenhouse gas emissions including through support of renewable energy (4.1), aid for clean mobility (4.3), aid for resource efficiency and for supporting the transition towards a circular economy (4.4), and aid in the form of reductions from electricity levies for energy-intensive users (4.11).
The CEEAG also cover aid for infrastructure projects for hydrogen and other low-carbon gases. As such, the proposal is generally open to further innovative technologies aimed at cutting greenhouse gas emissions. The general principle of technology-neutrality now applies across all categories of aid.
(ii) Paradigm shift: moving away from maximum aid intensities towards competitive bidding and more flexible assessment of the funding gap
In addition to extending the categories of aid, the Commission has revised the aid intensities under the CEEAG (see our summary here). The EEAG limited the maximum aid intensities (i.e. the maximum amount of aid Member States are permitted to pay out) for a wide variety of environmental aid measures.
The CEEAG maintain the principle that State aid measures must be limited to the minimum necessary for carrying out the subsidised activity. If the aid corresponds to the net extra cost (funding gap) necessary to meet the objective of the aid measure, compared to the counterfactual scenario in the absence of aid, this requirement will be considered as met.
Contrary to the EEAG, the CEEAG only contain few references to maximum aid intensities permitted. Instead, they move away from pre-defined limits for State aid towards a more flexible system of ‘competitive bidding’.
The CEEAG propose that a detailed assessment of the ‘net extra costs’ will not be required if aid amounts are determined through a competitive bidding process. The competitive bidding process is assumed to provide a reliable estimate of the minimum aid required by potential beneficiaries. The criteria for such a bidding process inter alia, mirror those set out for public tenders under the market economy operator (MEO) test laid down in the Commission’s Notice on the Notion of State aid as they require an open, clear, transparent and non-discriminatory process based on objective criteria (see para. 48 CEEAG). In addition:
a. the process must be published sufficiently far in advance of the deadline for submitting applications to enable effective competition;
b. the budget or volume related to the bidding process must be a binding constraint in that it can be expected that not all bidders will receive aid; and
c. the expected number of bidders must be sufficient to ensure effective competition; the design of undersubscribed bidding processes during the implementation of a scheme must be corrected to restore effective competition as soon as possible.
For most State aid measures covered by the CEEAG, competitive bidding processes are the default mechanisms for awarding aid and setting the level of aid.
Only in certain cases, where implementing bidding procedures would not be appropriate, Member States can use other methods for setting aid amounts. In those cases, Member States will have to provide the Commission with a sophisticated assessment of the funding gap which again mirrors the requirements under the MEO test: Member States must provide, inter alia, the estimated weighted average cost of capital of the beneficiaries to discount future cash flows, as well as the net present value for the factual and counterfactual scenarios, over the project lifetime.
The CEEAG also clarify that aid for decarbonisation can take the form of contracts for difference, i.e. contracts which entitle the beneficiary to a payment equal to the difference between a fixed and a reference price. This is especially relevant for Carbon Contracts for Difference (CCfD) used in electricity generation, which have already been employed frequently by Member States as aid instruments. It is not entirely clear, however, whether CCfD are an alternative route to the bidding process or whether the two can be combined.
(iii) Requirement for a public consultation
For some categories of aid, e.g. aid for the reduction and removal of greenhouse gas emissions including through support for renewable energy, the CEEAG proposal provides that Member States must consult publicly on measures (section 4.1 CEEAG). The aim of the public consultation is generally to verify the necessity of aid.
The public consultation usually requires the publishing of the consultation questionnaire as well as a summary of the responses received on a public website. In some cases, an independent market study may be sufficient, e.g. for assessing the necessity of aid for the deployment of recharging and refuelling infrastructure for zero-emission and clean transport vehicles.
(iv) Relationship with existing State aid instruments and other regulations
Similar to the rules in the General Block Exemption Regulation, cumulation of aid is not prohibited. The CEEAG clarify that aid may be awarded concurrently under several aid schemes or cumulated with ad hoc or de minimis aid in relation to the same eligible costs, provided that the total amount of aid for an activity or project does not lead to overcompensation or exceed the maximum aid amount allowed by the CEEAG.
While the Commission’s proposal for a regulation on foreign subsidies seeks to prevent the distortion of the internal market by foreign subsidies, the CEEAG proposal considers that there is a risk of so-called sectors of energy-intensive users (EIUs) moving outside the EU to locations where environmental objectives are not or less ambitiously pursued.
3. Deep dive into the new rules on aid for the reduction of greenhouse gas emissions including through support for renewable energy (section 4.1)
The new section 4.1 CEEAG replaces section 3.3 EEAG on “aid to energy from renewable sources”. As the name suggests, the new section is a catch-all provision focusing on aid measures primarily aimed at reducing greenhouse gas emissions, including aid for the production of renewable and low carbon energy, aid for energy efficiency including high-efficiency cogeneration, aid for carbon capture, storage and use, and aid for the reduction or avoidance of emissions resulting from industrial processes. It also covers support for the removal of greenhouse gases from the environment.
(i) Broader scope
The scope of section 4.1 is extended to all technologies that reduce greenhouse gases and improve energy efficiency. While support for renewable energy is still fully covered, section 4.1 deliberately avoids mentioning specific technologies as the intention is to capture all technologies and projects that can contribute and ensure that the guidelines are as future-proof as possible.
To demonstrate that aid is necessary, Member States must show that the project would not be carried out without the aid, in which case a variety of instruments, including direct grants, may be used. Member States are required to provide reasons for any aid measures which do not include all competing technologies and projects – for example all projects operating in the electricity market, or all undertakings producing substitutable products and which are technically capable of contributing efficiently to greenhouse gas emissions reductions.
Section 4.1 also mirrors the requirement of a competitive bidding process to grant aid as well as a public consultation on the main features of the envisaged scheme under certain circumstances.
The subsidy per tonne of CO2 equivalent emissions avoided must be estimated for each beneficiary or reference project (see para. 98 CEEAG). In order to avoid undue negative effects on competition and trade, Member States will have to clearly identify the cost of all supported project types compared to the climate protection attained (€/tCO2 equivalent reduced).
4. What is the impact of this proposal?
In light of the Commission’s previous call for contributions on “Competition policy supporting the Green Deal”, the current CEEAG proposal is a crucial step forward in ensuring increased flexibility and a wider scope of the EU State aid rules in support of the EU Green Deal objectives. The approach to calculate aid amounts based on bidding procedures limits overcompensation and creates incentives for companies to optimise their cost structure and efficiently compete in the bidding process. It remains to be seen, however, how flexible the Commission is on cases with few participants and limited competition in the process. The technology neutrality principle can be a door opener for new innovative environmentally friendly projects and technologies which have not yet reached the market. The CEEAG will doubtlessly trigger a lot attention over the consultation period and we will see a revised form for adoption later this year.