Summary and implications
On 13 January, Ofgem published their “Note on compliance with State Aid de minimis rules” (the Guidance). The basic conclusion to draw is that, where a small scale renewable energy installation has benefited from public funds for the installation, it cannot also receive Feed-In Tariff (FIT) payments other than in very limited circumstances. The Guidance is, unfortunately, slightly ambiguous in its language. However, the main points to note are as follows:
- FIT payments have been deemed to be State Aid by the European Commission. They are, however, permitted and are not, on their own, subject to the €200,000 de minimis threshold above which specific State Aid clearance is required.
- However, the Commission's approval was subject to certain conditions, including the application of the “Cumulation Rules” (i.e. that the de minimis threshold will apply when FIT aid is combined with other forms of investment aid).
The UK Government notified the FIT scheme to the Commission on 11 March 2010, in accordance with Article 108(3) of the Treaty on the Functioning of the European Union (TFEU).
In their Decision of 14 April 2010, the Commission held that the FIT Scheme constituted State Aid within the meaning of Article 107(1) of the TFEU. However, given that the Scheme “concerned operating aid for renewable energy and co-generation”, the Commission held that the compatibility conditions laid down in the Environmental Aid Guidelines applied (i.e. although the Scheme constituted State Aid, it was permitted).
The Commission's decision permitting the FIT Scheme imposed a number of conditions.
The conditions for permitting FIT payments
The key conditions related to the “Cumulation Rules” laid out in the “de minimis Regulation” (EC Regulation No 1998/2006). These rules operate to ensure that, when State Aid is combined with other forms of aid, it will not result in overcompensation.
UK Authorities are, therefore, required to ensure that generators which have already received investment aid will in general not be allowed to receive FITs for the same plant. A person applying for FITs is, therefore, required to declare whether they have received any aid for their generation plant and a grant will disqualify the receipt from also receiving FITs.
There are two exceptions to this rule, the second of which is the subject of the Guidance:
Exception one: where production costs are greater than standardised costs
This exception operates where the costs for a particular installation eligible for FITs are significantly greater than the standardised costs on which the FITs are calculated. Examples include measures to reduce the environmental impact of installations (e.g. measures to protect fish and other wildlife in small hydro schemes).
In any such situation, Ofgem is required to ensure that the applicant demonstrates that the production cost of the electricity generated by the plant (from which the investment aid granted to the plant in question is deducted) is greater than the amount of FIT payment to be received by the generating plant.
Exception two: where FITs combined with other forms of aid do not exceed the de minimis rules
This exception permits generators to receive investment aid combined with FIT payments provided the totality of the aid is within the limits of the de minis rules.
The Guidance issued by Ofgem is intended to flesh out Regulation 8(3)(b) of the Feed-in Tariffs (Specified Maximum Capacity and Functions) Order 2010, which puts this second exception into effect.
The Guidance provides details on how the de minimis rules apply to the FIT Scheme. It provides one limited carve out to the general rule that where an investment grant from public funds covers the cost of purchasing or installation, the de minimis rules apply.
Where the investment grant was not made in relation to the costs of purchasing and installing installations, FIT payments will be available.
The reason for this additional carve out relates to the de minimis Regulation (Article 2(5)) which states that you cannot cumulate aid for the same eligible costs if the aid intensity exceeds the relevant de minimis threshold (i.e. €200,000 over three years).
However, the scope of application of this carve out is likely to be very limited, as there will be few costs covered by an investment grant which will not also be compensated by the FIT.
The Guidance also provides some indication of what will be considered to be an investment grant from public funds, or “public support”. A very broad list, it includes:
- State grants;
- Interest rate relief and preferential interest rates;
- Tax relief, credits and exemptions;
- State provision of goods or services on preferential terms;
- Direct subsidies;
- Acquisition of land or buildings either gratuitously or on favourable terms;
- Provision of goods and services on preferential terms; and
- Capital transfers.
Application to FIT financed projects
Although the Guidance is somewhat misleading in its application (implying, incorrectly, that FITs alone will be subject to the de minimis threshold), the correct interpretation is such that, in order to obtain FITs, a self-assessment form must be completed, assessing whether the project has received any public support and, if it has done so, whether, combined with FITs, the de minimis limit of €200,000 will be breached.
Given the very broad interpretation of what constitutes public support, there is considerable concern that projects, including local authority schemes or local authority backed schemes may be subject to the de minimis threshold and, therefore, unable to take full advantage of the FIT scheme.
For example, roof space of local authority buildings leased at peppercorn rent by that local authority to a generator company for the installation of solar panels (in return for the provision of free electricity and, potentially, some share in FIT revenue) could be deemed to be, in the hands of the generator company, the acquisition of land on favourable terms, so limiting FIT revenue from the scheme to €200,000.
These issues are being raised with DECC and Ofgem and we understand that further clarification may be issued shortly. We will keep you up to date on how this progresses.