The European Commission adopted its revised Environmental and Energy Aid Guidelines (EEAG) yesterday, setting out the criteria that State aid must fulfill in order to be authorised by the Commission. The controversial nature of the EEAG was reflected in the consultation process, which received an unprecedented number of often conflicting responses from a wide variety of stakeholders.  Its impact on Member States' energy policies beyond 2020 (when the EEAG expires) should not be underestimated; in the UK it is likely to have significant implications for the government's Electricity Market Reform (EMR).  The Commission has had the difficult task of balancing the divergent views of the EU Member States, each with its own unique distinct generation profile and security of supply concerns.

What has changed?

The new EEAG represents a substantial departure from the 2008 guidelines and a stricter position on renewable energy than the draft guidelines which were consulted on.  It states that renewable energy sources should become grid-competitive between 2020 and 2030, suggesting that subsidies should be phased out in time.  This reflects the Commission's growing aversion to support for renewables and its desire for competitive bidding in order to ensure that State aid is proportionate and its distortion of the market is limited.  The EEAG includes a 10 year limit on authorisation for funding for aid schemes, after which time measures should be re-notified by the Member State to the Commission. 

The EEAG criteria also extend beyond the 2008 guidelines in terms of scope. The EEAG now encompasses not only State aid for environmental protection, but also support for energy infrastructure projects, generation adequacy measures and energy intensive users.  

The Commission's expansion of the EEAG to apply to generation adequacy measures is in response to proposals in a number of Member States (including the UK) for capacity markets.  This is particularly relevant in the UK to the EMR (see below).

Another interesting development in the EEAG is in relation to Member State charges to consumers for the cost of renewables, either imposed directly on top of the electricity price or indirectly through additional charges on electricity suppliers.  The EEAG now permits Member States to grant reductions in these charges levied on certain energy intensive industries (such as coal mining and the manufacture of paper and glass), meaning that certain industries will be permitted to receive support for their use of renewable energy, provided they pay at least 15% of the cost.  This is of particular relevance to Germany and France, both of which have recently had in-depth investigations into similar State aid measures opened by the Commission.     

Implications for UK energy policy

The EEAG will come into force on 1 July 2014.  It is likely that the EMR State aid package (consisting of contracts for difference (CfDs) and a capacity market) will be assessed under this new EEAG, depending on when it is notified by the UK.  

The proposals for CfDs would be assessed by the Commission under the seven general EEAG criteria. Accordingly, it would only be considered compatible with State aid rules if it:

  1. contributes to a well-defined objective;
  2. remedies a well-defined market failure;
  3. is an appropriate measure to address the objective;
  4. sufficiently incentivises undertakings;
  5. is limited to the minimum amount of aid necessary;
  6. avoids major undue negative effects; and
  7. is transparent.

In relation to the capacity market proposals, the EEAG sets out specific guidance under each of the broad criteria above.  For example, the Commission is particularly keen to ensure that capacity mechanisms are only implemented where there is truly a risk of insufficient electricity generation capacity which cannot be addressed by other means. Thus, in order to target a well-defined objective of common interest, the EEAG states that alternative measures to achieve generation adequacy (such as facilitating demand side management and increasing interconnection capacity) should be considered.  The EEAG also states that capacity mechanisms should be designed to avoid distortions and negative effects, for example by being open to both existing and new capacity on non-discriminatory terms. 

It is worth noting that the government's Hinkley Point C (HPC) proposals (which are currently subject to an in-depth Commission investigation) will not be assessed under the EEAG; the Commission has clearly stated that the proposals will be considered under the principles of the Treaty and it resisted lobbying from Member States to include aid for nuclear energy within the EEAG.  The Commission is acutely aware that HPC may be the first on a number of EPR power stations built by the private sector with government funding and is mindful that, given its lack of experience of aid to nuclear power plant, any decision on HPC will be setting an example for the near future.     

Given the exclusion of nuclear, the UK's EMR package is therefore likely to be among the first State measures to be assessed under the EEAG, giving the Commission the opportunity to set a precedent for other Member States, particularly in relation to the capacity market proposals.