As part of a wider initiative to modernise the State aid rules, the European Commission ("the Commission") has released both a consultation on the new draft Guidelines ("the Guidelines") on allocating support for energy and environmental projects, which closes on 14 February 2014, and a consultation on the Notice on the notion of State aid, which closes on 14 March 2014.
This briefing tracks this change in the Commission's approach and examines the measures proposed in the Guidelines.
The full Guidelines can be found here.
The consultation on the Notice on the notion of State aid can be found here.
1. Commission changes gear as renewable technology matures
The Commission accepted the transition to low carbon
07 FEBRUARY 2014
Table of Contents
1. technology matures 1
4. resources 3
5. carbon capture and storage, biomass
and bioliquids 4
treated as State aid 5
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generation would require State aid both to make it financially attractive / viable for generators and to ensure that the 2020 targets are met, despite the distortions this would cause to the internal market. However, the Commission now believes the stage has been reached where the support offered to certain technologies should be reduced or altered. It is unclear which technologies will be targeted first but recent reports suggest the Commission has told ministers in the Member States that they will seek reductions in the support given to onshore wind and solar p.v. by the end of the decade. It is worth noting that some Member States may seek to oppose these measures. The Guidelines have been written with reference to the 2020 renewables targets and, since publication, the Commission has announced the introduction of a pan-European carbon emissions cutting target of 40% by 2030. As these targets partly inform the Commission's view on the necessity and therefore permissibility of State aid, it is likely that this change will affect their approach.
Another point of interest is that although the Guidelines do seek to support developing technologies, they expressly state that they are not applicable to projects that are covered by the Community Framework for State aid for research, development and innovation.
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15 aid targets
The Guidelines set out 15 areas that the Commission believes merit support whether in the form of investment aid, operating aid or both. The areas and the appropriate types of aid are set out below:
• early adaptation to future EU standards;
environmental studies; district heating and cooling; resource efficiency and waste management; remediation of contaminated sites; CCS; energy infrastructure;
• in the form of tradable permits;
in the form of reductions in or exemptions from environmental taxes; in the form of reductions in or exemptions from levies imposed on energy consumers intended to fund electricity from renewable sources;
Investment and operating aid
• renewable energy;
energy efficiency; cogeneration; generation adequacy measures (these can include capacity mechanisms); and aid for exceeding EU Standards for environmental protection.
It should be noted that where the area may be entitled to both investment and operating aid there is a rule preventing double recovery / over compensation in both mechanisms. To achieve this, the investment aid entitlement should be taken into consideration when deciding on the level of operating aid.
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Market sensitive support mechanisms
The Guidelines advocates two alternative mechanisms that, when applied according to specified criteria, the Commission believes will provide the support required while minimising market distortion. These are:
Market Premiums – providing generators with a supplement on top of the wholesale price; and
Certificate Schemes – involving the creation of a market of certificates that are tradable between suppliers of renewable energy and generators.
In the Guidelines, under both of these models the Commission differentiates between deployed technologies (counting for between 1-3% market share) and less deployed technologies. Additional allowances are made for the first commercially scaled installations and some small scale installations. This differentiation on the grounds of maturity allows for technologies to be treated differently under the Guidelines. The dual-pronged objective is targeted to address energy market distortion by reducing support for mature / more commercially viable technologies while continuing to give new technologies the high levels of seed investment that they require to become viable in the market place.
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Treatment of energy from renewable resources
The Guidelines acknowledge that State aid may prove a vital tool in achieving the environmental targets mandated by law given the comparatively low cost of conventional generation and the need to protect consumers from unsustainable price rises. The Guidelines do not require a phasing out of support (whether in the form of investment or operation aid, or a combination of the two) but the Commission's permission will last for a period of 10 years at which point authorization would have to be reapplied for. This time limit reasserts the ultimate objective of the long-term, support-free viability of renewable energy as does the inclusion of the statement that all aid should be granted with a view to facilitating the integration of renewable technology into the market.
An increasingly critical approach is taken when assessing technologies. Different renewable technologies are treated on their own merits in the Guidelines. Hydro, CCS (carbon capture and storage), bioliquids and biomass are all individually commented on. With these technologies the Commission appears to assess them by relating the potential environmental good against the potential environmental damage. Given the different environmental considerations between technologies and between projects, it is likely that the emphasis of the assessment criteria will shift on a case by case basis.
Guidelines regarding operating aid
Market premiums: the treatment of "deployed" and "less deployed" technologies
Deployed technologies – operating aid in the form of feed-in-premiums may be granted provided that each of the following criteria are met:
there is a non-discriminatory and competitive bidding process; all renewable generators are permitted to bid on a non-discriminatory basis with the exception of biomass which may be excluded or limited on the grounds of the effect it may have on the raw materials market and save for any requirement by the Member State to split the aid between different technologies; the aid is granted by a feed-in-premium or equivalent measures that involve direct sales of power to the market and a premium paid by a public body; those receiving the aid continue to participate in the balancing regime where competitive intra-day balancing markets exist; aid is stopped when the plant is fully depreciated save for where there is a stated exception such as for biomass; and investment aid already given is deducted from the operating aid allocated.
Less deployed technologies – operating aid will be deemed compatible if either it meets all of the developed technology criteria (set out above) or all of the following are met:
the aid received does not exceed the difference between the total levelized costs of production and the market price of the energy and the production costs are updated at specific points; aid is by feed-in-premiums or equivalent measures involving direct marketing of power produced; those receiving the aid continue to participate in the balancing regime where competitive intra-day balancing markets exist aid ends when the plant is fully depreciated; and investment aid is deducted from the production costs.
Support by certificates: deployed and less deployed technologies
The Commission are happy with this measure which guarantees demand at a market price above that of conventionally generated electricity, provided the following conditions are met:
the support is essential for the on-going viability of the source; the support does not result in overcompensation; and the support does not disincentivise renewable producers from increasing their competitiveness and therefore reducing the need for support.
However, again the differentiation is made between deployed and less deployed technologies which is set out below.
Deployed technologies – a uniform level of support must be applied between the technologies meeting the following criteria
aid is granted to all renewable technologies on a non-discriminatory basis save for any requirement by the Member State to split the aid between different technologies;
Member States may also exclude biomass from the mix given the effect that it may have on the raw materials market; those receiving the aid continue to participate in the balancing regime where competitive intra-day balancing
markets exist; and
previously received investment aid must be deducted from the operating aid.
Less deployed technologies – different levels of support may be applied provided that:
each different level of the scheme does not result in overcompensation; those receiving the aid continue to participate in the balancing regime where competitive intra-day balancing markets exist; and investment aid received is deducted from the operating aid already granted.
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The treatment of different technologies: carbon capture and storage, biomass and bioliquids
CCS –although the best form of this technology is yet to be settled on, the Guidelines recognise that CCS may make a significant contribution to the future energy mix in the EU and also the need for more development investment. Therefore the following State aid criteria have been set out:
any aid that is given must be targeted at the capture technology on the generating station; the support is for the funding gap taking into account other green entitlements that may be available; and the distortive effect of the aid is considered in the light of beneficial effects such as knowledge sharing agreements, third party accessibility and any positive effect that the technology may have on other fossil fuel powered plants owed by the beneficiary.
In recent CCS funding rounds of development the Commission has engaged in a process of matched funding with the Member States where the project is situated.
Biomass – throughout the Guidelines it is notable that biomass is singled out for unique treatment. Broadly speaking, both mechanisms set out that Member States have the option to exclude it from support regimes on the grounds of raw material consumption. However, the market premium mechanism also allows for the Member State to apply to the Commission for permission to continue providing support after plant depreciation has occurred. Given the size of the contribution that biomass makes to the clean energy mix in certain countries, the Commission sees this as necessary to offset the risk of a reversion to cheaper fossil fuel generation or co-generation once support has ended. However, in order to get this permission the Member State must apply to the Commission proving either that the operating costs after depreciation are higher than the market price of energy or that the that the use of fossil fuels is economically advantageous. In many ways both of these elements are two sides of the same coin as demonstrated by the fact both permissions are subject to the same three conditions:
that the aid is only granted on the basis of the energy generated from renewable sources; that the support is structured to ensure that the compensation only covers the difference between the variable operating costs and the market price; and a monitoring mechanism is in place to ensure that the support is only given when the variable operating costs are higher than the market price.
However, the fossil fuel condition is augmented by the additional requirement credibly to demonstrate that the absence of aidwould cause the installation to switch to fossil fuels.
∧ Bioliquids – given concerns surrounding food shortages the Guidelines set out that bioliquids should not receive support post 2020 unless they meet the sustainability criteria. Bioliquids and advanced bioliquids (those produced from crops other than starch rich crops, sugars and oil crops) are subject to the same permission criteria for aid unless the alternative criteria for advanced bioliquids is applicable.
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Tax exemption and reduction to be treated as State aid
In the Guidelines the Commission sets out that, in some cases, it will regard reductions to and exemptions from environmental tax as permissible State aid. Though it reiterates its support for the reduction of emissions through taxation, it recognises that the overriding objective in all environmental legislation is environmental protection which, on balance, may not be best served by blanket tax on emissions. Similarly to other measures in the Guidelines, the Commission's permission will be reviewed after a period of ten years. As set out in the Guidelines, the full extent of the technologies caught by this is unclear.
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The Guidelines do not include provisions on State aid to nuclear power. While there had been a section on nuclear in an earlier (leaked) internal version of the Guidelines, the Commission decided ultimately to omit nuclear due the lack of existing precedents in this area. The Commission wants to develop its criteria for assessment in the context of actual decision-practice.
This means that State aid for nuclear will be assessed on a case-by-case basis under the general State aid rules.