On 7 April, the Commission announced that it had started an in-depth State aid investigation into German plans for an electricity capacity reserve. Such measures, introduced by European Union (“EU”) Member States, also called “capacity mechanisms”, constitute financial support granted to electricity producers and consumers to safeguard security of electricity supply.

These EU Member States financial supports to electricity producers have to be assessed on the basis of State aid rules. Under that regime - which is peculiar to the EU only and does not exist in other regimes globally - any form of advantage (e.g. financial support, better terms and conditions) conferred on a selective basis to companies by public authorities of the Member States is illegal unless it has been approved by the Commission. In 2014 the Commission adopted guidelines on State aid for environmental protection and energy, which provide specific compatibility criteria for the assessment of capacity mechanisms.

Because of its current transition to a low carbon, environmentally sustainable energy supply, Germany’s planned capacity reserve measure is intended as a safeguard against unforeseen developments in case demand cannot be met by the electricity market. However, the Commission has identified a number of initial concerns, which it will assess with regard to the compatibility with State aid rules.

In particular, the Commission has raised concerns about the need of the reserve and about the fact that the reserve may continue to exist even if it will no longer be needed in the future. In addition, according to the Commission, the criteria for participation in the reserve may not be sufficiently open for demand response operators and they also exclude foreign capacity providers. Finally, the initial view of the Commission is that all possible market reforms may not have been carried out by Germany so as to ensure security of supply without State intervention - which would be illegal under State aid rules if the German measures were not previously authorized by the Commission.