For the first time, the European Commission has decided on comprehensive rules for the assessment of State aid in the energy sector. The new text adopted on 9 April 2014 will create the framework for the ability of EU Member States to grant State aid in this sector up until 2020. Of particular relevance are the rules regarding generation adequacy, public support for producers of renewable energy and energy-intensive companies that face a risk to their competitive position due to increasing electricity prices. Owing to complex provisions on their applicability, the new rules will not only have consequences for companies that want to receive State aid in the future, but can also affect companies that benefitted from public support in the past.  

On 9 April 2014, the European Commission (Commission) adopted its revised Environmental and Energy Aid Guidelines (the guidelines). The text will in particular affect energy producers, transmission and distribution network operators, energy-intensive companies and public authorities in the European Union. Owing to complex provisions on the applicability of the guidelines, the new rules will not only have consequences for the ability of EU Member States to support companies in the future, but can also affect companies that benefitted from public support in the past.

The guidelines introduce a number of important changes compared with the current 2008 guidelines. The three most significant innovations relate to public support for energy from renewable sources, energy price reductions for energy-intensive companies and public support to ensure adequate energy generation.

Before examining these changes, it should be recalled that EU Members States are prohibited from granting public support that qualifies as State aid without prior approval by the Commission. The guidelines set out the criteria that the Commission will apply when assessing State aid in the environmental protection and energy field.

Support for Energy from Renewable Sources

As the market does not always deliver the level of renewable energy desired by public authorities, EU Member States may support its production. Such measures regularly qualify as State aid and therefore need to be approved by the Commission. The guidelines introduce important changes to the ability of EU Member States to grant operating aid to the producers of renewable energy.

Most importantly, State aid may only be granted as a premium on top of the wholesale prices as of 1 January 2016. Fixed feed-in tariffs that fully shield the producers of renewable energy from the prices on the energy market will in principle no longer be in line with State aid law. Alternative ways to award State aid are possible, as long as these are truly market-based.

During a transitional period over 2015 and 2016, at least 5 per cent of the planned new electricity capacity from renewable sources will have to be subject to a competitive bidding process, in which the beneficiaries and the amount of State aid to be awarded are defined. From 1 January 2017, a competitive bidding process must in principle be conducted for the award of all public support.

It is important to note that the Commission will apply the new rules to all notified aid measures on which it must take a decision after 1 July 2014. In order to increase legal certainly for producers of renewable energy, existing aid schemes concerning operating aid in support of energy from renewable sources only need to be adapted to the new rules when EU Member States prolong or change their existing schemes. Whenever a beneficiary has received confirmation from an EU Member State that it will benefit from State aid under such as scheme for a predetermined period, such aid can be granted for the entire period under the conditions laid down in the scheme at the time of the confirmation.

Energy Price Reductions for Energy-Intensive Companies

The support for energy from renewable sources regularly leads to an increase in electricity prices, for example through a specific charge that is levied on electricity consumers on top of the regular electricity price. Certain companies may be exposed to a risk to their competitive position, especially if they require a large amount of energy for their activities and are exposed to international competition. EU Member States may choose to partially exempt these companies from additional energy costs. Such exemptions regularly qualify as State aid and need to be approved by the Commission under the guidelines.

The guidelines include an exhaustive list of sectors that can potentially benefit from an exemption. Only companies belonging to one of these sectors may benefit from a reduction in the funding of support for energy from renewable sources and only under strict conditions may EU Member States include in their national schemes companies from a sector not mentioned in the list annexed to the guidelines. Companies eligible for aid must nevertheless pay a certain proportion of the additional energy costs themselves.

EU Member States will have to fully comply with these requirements at the latest by 1 January 2019. Member States will have to draw up an adjustment plan that shows how their aid schemes will be progressively adjusted to the new rules until the end of 2018. These adjustment plans need to be approved by the Commission.

The guidelines will have a significant effect on the ability of EU Member States to exempt companies from additional energy costs in the future. The new rules also apply to reductions granted in the past without approval by the Commission. However, the Commission considers that all State aid granted in form of reductions prior to 1 January 2011 can be approved. For the period after 1 January 2011, there is an opening clause that might allow room for negotiation with the Commission.

Adequate Energy Generation

The increasing share of energy from renewable sources raises new challenges for EU Member States to ensure adequate energy generation. Member States may therefore grant support to generators for the mere commitment to be available to deliver electricity under the conditions set out in the guidelines.

EU Member States will have to demonstrate that the market is not able to deliver adequate capacity in the absence of State intervention. Even if this is the case, Member States must first consider alternative ways of achieving generation adequacy, such as facilitating demand-side management and increasing interconnection capacity. The beneficiary should earn a reasonable rate of return which, according to the Commission, can best be guaranteed by choosing the beneficiary in a competitive tender. In any case, the State aid should not include any remuneration for the sale of electricity, but only compensate the commitment to be available to deliver electricity.

Practical Application and Outlook

For the first time, the Commission has adopted comprehensive rules for the assessment of State aid in the energy sector. Even within the Commission, the guidelines were highly controversial until the last moment. The guidelines introduce a number of important changes that will affect the ability of EU Member States to support the production of renewable energy and to handle the consequences that arise from the increased share of energy from renewable sources. These consequences are manifold and in particular include the increase of energy prices for (industrial) consumers and the impact on the competitiveness of other energy sources.

The guidelines will officially enter into force on 1 July 2014, but in practice the new rules will be applied by the Commission before as, for example, in the cases concerning the German (see OTS of December 18, 2013) and French (see OTS of March 31, 2014) schemes for the exemption of energy-intensive companies from renewable energy surcharges.

The guidelines will only apply until the end of 2020, but the Commission has stated explicitly that they should prepare the ground for the period 2020 to 2030. According to the Commission, it is to be expected that established renewable energy will develop in that period to be able to operate on the market without public support, implying that public support for renewable energy producers should be phased out degressively. For now, the guidelines set the framework for the ability of EU Member States to support the production of renewable energy and to deal with the accompanying challenges.

The guidelines introduce some degree of legal certainty for EU Member States and past and future aid beneficiaries. All companies active in the energy sector or qualifying as an energy-intensive company should urgently consider the consequences that the new rules will have for their business, especially as some provisions of the guidelines leave room for interpretation.

Katharina Dietz, a paralegal at McDermott Will & Emery’s Brussels office, also contributed to the article.