EU looks at energy state aid

Europe has just published draft guidelines on state aid, with explicit reference to energy. Now is your last chance to influence policy development, say Gordon Downie and Joanne McDowall.

For many involved in the energy sector little regard will have been paid to European Union state aid rules, until relatively recently. Given the various developments in this area, it seems unlikely this will continue to be the case.
State aid rules are designed to prevent distortions of competition between member states, so where member states intend to support certain undertakings or industries (such as renewable generators), they are only permitted to do so in a manner compatible with the state aid rules. Significantly, it is the European Commission that determines what support is compatible with the state aid rules, not individual member states.
On 18 December 2013, the European Commission published for consultation draft guidelines on environmental and energy aid for 2014-20. The guidelines set out the conditions under which aid will be permitted. The scope of the guidelines has, for the first time, been expanded to explicitly include energy aid (see box) as well as environmental aid – given the huge impact that the energy sector has on environmental protection. The consultation is open until 14 February 2014 and it is expected that the guidelines will come into force in the second half of this year.
There have been some timely reminders of the Commission’s supremacy in this area. On the day the draft guidelines were published, the Commission opened an in-depth investigation into a support scheme in Germany for energy-intensive companies benefitting from a reduced renewables surcharge and an investigation into the UK’s proposed support scheme for Hinkley Point C. The following day, a judgement was issued from the European Court of Justice confirming that an obligation on electricity distributors in France to purchase renewable wind energy was caught by the state aid rules and as such, not permitted unless and until it was approved by the Commission. This provides clear evidence of the significance and impact of the state aid rules in the energy sector and indeed, the need for the UK to get the Commission “on-side” with its Electricity Market Reform proposals.
The guidelines seek to provide transparency for member states as to what will be permitted, and hence to help ensure their support schemes are compatible with EU rules. Failure to do so will have clear detrimental effects on investor confidence.
To decide if aid should be approved, the Commission will consider it against the terms of the guidelines and the relevant criteria. In this regard, the guidelines list the “common assessment principles” (including how these are to be assessed) and the specific conditions for certain categories of aid.
The general principles include the need for: i) a contribution to a common objective (for the energy sector this is ensuring a competitive, sustainable and secure energy system in a well functioning European energy market); ii) a genuine market failure; iii) the aid to be the appropriate way to address the failure; iv) is proportionate in that it will be no more than what is required to achieve the desired outcome.
The Commission’s investigation into the proposed support for Hinkley Point C is seeking to establish whether there is a genuine market failure and if so, whether the level of support is the minimum necessary.
The guidelines helpfully provide further detail in respect of a number of categories of aid including (among others) aid to energy from renewable sources, aid to energy infrastructure and aid for generation adequacy.
Aid to energy from renewable sources can be granted in the form of investment aid or operating aid and the aid schemes can be authorised for a maximum period of ten years. If the schemes are to be maintained after this period (as would be the case for contracts for differences in the UK), they will need to be re-notified.
Significantly, the guidelines are clear there will be no obligation on member states to open up their renewable support schemes to other member states, although this is on the condition that an explanation is given as to why there is no co-operation mechanism in place (allowing for cross-border support).
The guidelines are clear that aid for energy from renewable sources should be granted as part of a competitive bidding process and all generators from renewable sources should be able to bid on a non-discriminatory basis. Member states are permitted to specify a minimum number of different renewable sources and are permitted to exclude electricity in certain geographical areas if necessary to secure grid stability.
The preferred form of aid is by way of a feed-in premium or tariff, and generators should be subject to standard balancing responsibilities. Aid will be permitted in the form of green certificates. However, the evidence required from member states is more challenging and does not permit different levels of support (banding) for deployed technologies.
The extent of any aid (or the so-called permitted aid intensity) is set out in the annex to the guidelines and varies according to the size of the undertaking receiving the aid. The aid intensities are proposed as follows: small enterprises (65 per cent); medium enterprises (55 per cent); and large enterprises (45 per cent).
Given the impact these guidelines will have in shaping energy regimes and their attractiveness to industry and investors, there is no doubt that key stakeholders in all member states will be scrutinising the detail of the guidelines and submitting appropriate responses to the consultation. Indeed, this could be viewed as the most meaningful (and arguably, last) opportunity to influence policy in this area for a number of years.
Gordon Downie and Joanne McDowall are solicitors in the Energy and Natural Resources Group of Shepherd and Wedderburn LLP