Executive Summary:
- Member States may impose public service obligations on energy providers to ensure security of supply.
- The continuous operation of an LNG terminal may be necessary to ensure security of supply.
- The direct award of a contract without a competitive procedure may be justified on grounds of protection of essential public interest as provided by Article 14 of Directive 2004/18.
Table of Contents:
- Introduction
- The LNG project
- Compatibility with the internal market
- Genuine SGEI
- Act of entrustment
- Duration of entrustment
- Compliance with public procurement requirements
- Amount of compensation
- Appropriateness of the cost allocation methodology for the period 2016-2018
- Application of the cost allocation methodology for the years 2016-2018
Introduction
In November 2013, the European Commission authorised state aid for the construction and operation of a floating liquefied natural gas terminal [LNG terminal] in the Klaipėda port in Lithuania. In 2016 Lithuania made some amendments to the project. In July 2016, Achema and Achemos Grupė submitted a complaint to the Commission claiming that the amendments constituted unlawful and incompatible state aid. In October 2018, the Commission found the funding for the amendments to be compatible aid. In September 2021, following an action for annulment by Achema, the General Court partially annulled the Commission’s 2018 decision [T-193/19, Achema v Commission]. Consequently, in December 2022, the Commission opened the formal investigation procedure. This article reviews Commission decision 2026/2114 that concluded that investigation with a positive finding [see OJ L, 24 September 2026].[1]
The LNG project
The purpose of the LNG Terminal was to diversify Lithuania’s gas sources away from complete dependence on Russia’s Gazprom, increase security of supply and introduce more competition in the Lithuanian gas market.
The measures that were approved by the Commission in its 2013 decision were:
- Investment and operating aid to the owner and operator of the LNG Terminal, Klaipėdos Nafta [KN]. The aid was financed by a levy collected by the Lithuanian gas transmission operator from users of natural gas for a duration of 55 years [the LNG Supplement].
- State guarantees to KN, covering 100% of the loans for the construction of the LNG Terminal.
- An obligation on certain electricity and heat producers to purchase a minimum mandatory amount of gas imported through the LNG Terminal [the Purchase Obligation]. The purpose of the Purchase Obligation was to ensure that the LNG Terminal remained operational at all times.
Subsequent market developments made the operation of the Terminal less cost efficient. Between 2011 and 2018, demand for natural gas decreased dramatically which meant that the cost of maintaining the Terminal operational increased significantly. Therefore, the obligation imposed on certain large users to buy a minimum fixed amount of gas in order to maintain the Terminal operational also became more costly. Lithuania then decided to spread the cost on all consumers of natural gas who were benefiting from the security of supply guaranteed by the LNG Terminal.
As a result, the main amendments implemented by Lithuania were abolition of the purchase obligation and the designation of gas supply as a service of general economic interest [SGEI]. The net costs of the operation of the SGEI were compensated through a new component of the LNG Supplement levy.
The recipient of the compensation was Litgas that was the designated SGEI provider of gas. Litgas was founded in December 2012 by KN. In October 2016 the state-owned energy company Lietuvos Energija [LE] became the sole shareholder of Litgas. In the meantime, Litgas was merged into LDT, another LE-owned company.
Therefore, the purpose of the new Commission decision was to determine the compatibility of the SGEI compensation.
Compatibility with the internal market
After finding that the SGEI compensation constituted state aid, the Commission clarified before its assessment of compatibility that the aid was unlawful as it had not been notified for authorisation before the measure was implemented. Then, the Commission proceeded to assess its compatibility on the basis of the 2012 SGEI Framework.
Genuine SGEI
Member States enjoy a wide margin of discretion in defining what they consider as SGEI, but the Commission is competent to determine whether they commit a manifest error. Such an error is committed when the market can adequately provide the service that is designated as SGEI. Moreover, Member States have to comply with secondary legislation, such as the Directive on common rules in the natural gas market [Directive 2009/73].
More broadly, the Commission stated that “(126) the entrustment of a particular public service task implies the supply of services which, if it were to consider its own commercial interest, an undertaking would not assume or would not assume to the same extent or under the same conditions. Applying a general interest criterion, Member States or the Union may attach specific obligations to such services.”
“(127) The Commission notes that, according to Article 3(2) of the Gas Directive, security of supply is an objective that might justify a public service obligation.”
“(128) As explained in recital 208 of the 2013 Decision, the mere construction of the LNG Terminal would not ensure security of supply in Lithuania. In order to meet this objective, it would require maintaining the LNG Terminal operational at all times.”
“(131) Furthermore, the Commission notes that annual capacity bookings or spot bookings were not sufficient to ensure stable operation of the LNG Terminal. … Therefore, the Commission asserts that some LNG quantities must be delivered on an even basis throughout the year in accordance with a fixed schedule, including the periods when the demand for natural gas is low.”
“(132) In the light of the assessment above, the Commission concludes that Litgas’s obligation to keep the LNG Terminal operational by delivering the LNG Mandatory Quantity at a fixed schedule to the LNG Terminal constitutes a genuine SGEI as referred to in Article 106 TFEU.” In fact, this was also confirmed by the General Court in case T-193/19, Achema v Commission.
Act of entrustment
Then the Commission recalled that “(133) the concept of SGEI within the meaning of Article 106 TFEU means that the undertaking or undertakings in question have been entrusted with the operation of the SGEI by way of one or more official acts.”
“(134) These acts must specify, in particular (i) the precise content of the SGEI and its duration; (ii) the undertakings and territory concerned; (iii) the nature of any exclusive rights assigned to the undertakings concerned; (iv) the parameters for calculating, controlling and reviewing the compensation; and (v) the arrangements for avoiding and recovering any overcompensation.”
Commission concluded that the Lithuania measure that formed the act of entrustment complied with the requirements of the 2012 SGEI Framework.
Duration of entrustment
Normally, a public mission should be entrusted for not longer than ten years, unless the amortisation of the main asset of the SGEI provider requires a longer time period. The Commission verified that the entrustment did not exceed ten years.
Compliance with public procurement requirements
The 2012 SGEI Framework requires that the entrustment of a public mission must comply with the applicable EU public procurement rules.
In this respect, the Commission considered that “(154) the contract would in principle fall within the material scope of Directive 2004/18/EC”. Directive 2004/18 regulates the award of public works contracts, public supply contracts and public service contracts.
“(155) The LNG Terminal project is a project of major importance for Lithuania and the appointment of AB Klaipėdos Nafta as the operator of the LNG Terminal by the Lithuanian government was exempted from the public procurement rules on grounds of protection of the essential interests of a Member State as provided by Article 14 of the Directive 2004/18/EC.”
“(156) The Commission considers that the appointment of Litgas as the Designated Supplier is subject to the same principles as the appointment of AB Klaipėdos Nafta in this respect. As in the case of AB Klaipėdos Nafta, the contract by which Litgas was appointed as the Designated Supplier is therefore also covered by the exemption provided in Article 14 of the Directive 2004/18/EC.”
“(157) This is due to the fact that the task of keeping the LNG Terminal operational through deliveries of the LNG Mandatory Quantity must be considered as essential for Lithuania’s security of gas supply. Any disruption in the delivery of the LNG Mandatory Quantity would jeopardise the operation of the LNG Terminal and thus the supply of LNG into the Lithuanian gas market and thus ultimately Lithuania’s security of supply. In particular, given the structure of the Lithuanian gas supply market an entrustment of the Designated Supplier’s tasks via a public procurement procedure pursuant to Directive 2004/18/EC would risk conferring the genuine SGEI to an undertaking linked to the former single gas supplier. In addition, an undertaking selected through the procedure under Directive 2004/18/EC without being controlled by the State could have (at the time of the tender or later) developed ties with the former single supplier that would allow the latter to influence its market behaviour in a way that could negatively affect the fulfilment of its SGEI mission.”
“(158) In the Commission’s view thus adopting a different approach towards the Designated Supplier than the operator of the LNG Terminal (AB Klaipeda Nafta) would jeopardise the essential interests invoked in the 2013 Decision. Therefore, the appointment of Litgas as the Designated Supplier by the Ministry of Energy should be exempted from the public procurement rules on grounds of protection of the essential interests of a Member State as provided by Article 14 of the Directive 2004/18/EC.”
“(159) In this context the Commission also notes that, irrespective of the applicability of the Article 14 exemption, in 2014 Lithuania conducted a selection process for the appointment of the Designated Supplier. The selection criteria were approved by the Ministry of Energy on 3 January 2014 and made public. The tender evaluation criteria were established in the secondary legislation … In order to take into account the above security concerns, participation in this tendering procedure was only open to undertakings meeting the following selection criteria:
- 2/3 votes of the shareholders general meeting should be held directly or indirectly by the State; and
- the Designated Supplier should not be involved in activities related to the transmission and (or) distribution of gas.
“(160) Litgas took part in the call for tender and was selected as the winner. Consequently, by the order of the Minister of Energy …, Litgas was appointed as the Designated Supplier.”
“(161) Based on the above and as confirmed by the General Court in its judgment, the Commission considers that point 19 of the 2012 SGEI Framework is complied with.”
Amount of compensation
The amount of the compensation must not exceed what is necessary to cover the net cost of the SGEI, plus reasonable profit’.
Next the Commission stated that “(162) the amount of compensation can be established on the basis of either the expected costs and revenues or the costs and revenues actually incurred or a combination of the two … Where the compensation is based, in whole or in part, on expected costs and revenues, they must be specified in the entrustment act. They must be based on plausible and observable parameters concerning the economic environment in which the SGEI is being provided and rely, where appropriate, on the expertise of sector regulators or of other entities independent from the undertaking. Member States must indicate the sources on which these expectations are based”.
“(163) The net costs necessary, or expected to be necessary, should be calculated using the net avoided cost methodology where required or possible … Although the Commission regards the net avoided cost methodology as the most accurate method for determining the cost of a public service obligation, there may be cases where the use of that methodology is not feasible or appropriate. In such case, where duly justified, the Commission can accept alternative methods for calculating the net cost necessary to discharge the SGEI, such as the methodology based on cost allocation”.
“(164) The compensation granted to Litgas for the SGEI took into account Litgas’s revenues resulting from the LNG sold at regulated prices to the Obligated Purchasers and on the free market, all Litgas’s costs stemming from its activities as the Designated Supplier and a regulated profit margin. It was calculated, in essence, on the basis of the following three factors: (i) the difference between the LNG price paid, upstream, by Litgas to Statoil and the price at which Litgas sold, downstream, to the obligated purchasers and to the free market; plus (ii) a compensation for the ‘justified’ costs incurred in connection with the SGEI, namely the operating costs, boil-off gas costs, balancing costs and the costs of financing a long-term State guarantee; plus (iii) a profit margin determined by the NRA”.
Following the imposition of a delivery obligation on Litgas and the abolition of the purchase obligation both of which created market risks for Litgas, “(165) the compensation granted to Litgas for the SGEI was calculated, in essence, on the basis of the following two factors: (i) the difference between the LNG price paid, upstream, by Litgas to Statoil, and the actual average price of gas imported into Lithuania, calculated by the NRA; to which was added, (ii) compensation for part of the boil-off gas costs and the costs of financing a long-term State guarantee. The boil-off gas costs incurred by Litgas were compensated in full during the periods when Litgas was the only user of the LNG terminal and for the part exceeding the average of boil-off gas costs experienced by other LNG Terminal users during the periods when Litgas was not the only user of the LNG terminal”.
“(166) It follows, in particular, that while all the boil-off gas costs and balancing costs incurred by Litgas were included in the compensation for the SGEI during the period from 2016 to 2018, Litgas was compensated … for only part of the boil-off gas costs and not at all for the balancing costs that it incurred.”
“(167) In the Opening Decision, the Commission questioned whether Lithuania correctly compensated the boil-off and balancing costs in 2016-2018 in view of this difference”.
“(168) In its reply, Lithuania put forward that this difference was justified by the fact that Lithuania used the cost allocation methodology to calculate the amount of compensation in 2016-2018, while from 2019 it used the net avoided cost methodology … Lithuania considers that the use of the cost allocation methodology in the period 2016-2018 was justified”.
“(169) The Commission has therefore assessed whether i) the use of the cost allocation methodology rather than the net avoided cost methodology for the period 2016-2018 was indeed justified and ii) whether the cost allocation methodology was applied correctly.”
Appropriateness of the cost allocation methodology for the period 2016-2018
As noted earlier, the 2012 SGEI Framework requires that the net costs of the SGEI provider should in principle be calculated using the net avoided cost methodology. The net avoided cost methodology requires Member States establish ex ante a counterfactual scenario indicating the net cost or profit of the provider without the public service obligation.
“(172) First, the Commission notes that the LNG Terminal was the first in Lithuania, and one of the first floating terminals in the EU, and that there was no developed market expertise in LNG procurement and trading. Lithuania had therefore not yet acquired know-how and could not have acquired it from other EU countries”.
“(173) Second, the Commission considers that at the time when Lithuania had to decide which methodology to use, the LNG market in Lithuania was not sufficiently developed as until then Gazprom was the only supplier and Lithuania did not know whether the terminal would actually be used by private companies. It was not possible for Lithuania to develop a counterfactual scenario due to lack of knowledge of how Litgas would behave as a standard user of the floating LNG Terminal and what costs it would incur without the SGEI obligation.”
“(174) Based on the above, the Commission considers that the use of the net avoided cost methodology was neither feasible nor appropriate in the period 2016-2018 and that the application of the cost allocation methodology was justified for the assessment of the 2016 Amendments.”
Application of the cost allocation methodology for the years 2016-2018
Under the cost allocation methodology, the net cost of the SGEI is simply the difference between the costs and the revenues of the provider. As acknowledged in the decision, “(184) under the cost allocation methodology, all the costs necessary to operate the SGEI can be compensated and not only that part of costs which the provider would not have incurred in the absence of the SGEI.”
In this respect, the Commission observed that, in addition to operating costs, the compensation covered boil-off gas costs, balancing costs and state guarantee costs. However, it then found that all the costs for the boil-off gas and balancing were inherent in the operations of Litgas and, therefore, necessary for the provision of the SGEI. In relation to the state guarantee costs, “(188) the Commission considers that these long-term guarantee costs are justified costs incurred in direct connection with the SGEI, as these costs are related to the long-term nature of the contract that Litgas concluded with Statoil to fulfil its SGEI mission.”
As for the revenue, the Commission accepted that the whole of revenue of Litgas from the sale of gas could be allocated to the SGEI.
An SGEI provider is also entitled to reasonable profit which may be included in the amount of compensation. “(194) The Lithuanian authorities explained that the profit margin for sales of LNG on the market established by the 2016 Amendments was well below the average profit margin earned by suppliers active on the Lithuanian gas supply market which historically amounted to 3,2%. For the period from 2016 to 2018, Litgas profit margin was in the range from 1,1% to 1,5%.”
The Commission considered that profit rate “reasonable”, but the decision did not explain whether the risk borne by Litgas was similar to that of other gas suppliers. Lower risk can be compensated with lower profit.
The SGEI Framework also requires that SGEI providers are subject to “efficiency incentives”; i.e. incentives to reduce their costs over time. The methodology used by Lithuania “(199) contained a mechanism for the SGEI provider to perform assigned obligations efficiently. For a certain number of operating expenses (repairs, maintenance, personnel, insurances, marketing and administrative costs, etc.), the [methodology] established a ceiling for the price of the regulated service. Costs going beyond that limit were not compensated.”
“(200) Moreover, incentives for efficient operation also related to the adjustment to inflation. The costs that were taken into account for setting the LNG Supplement and the compensation were increased only by half of the inflation coefficient and not more than 3%”.
“(201) The Commission considers that the 2016 Amendments introduced new mechanisms positively incentivising Litgas not only to maintain its efficiency but also to increase it. Based on the 2016 Amendments, Litgas had 1) the possibility to increase profitability by reducing OPEX exceeding the … established benchmark and 2) the possibility to keep part of the profit from the sale of surplus LNG Mandatory Quantity”.
On the basis of the above findings, the Commission concluded that the compensation was compatible with the internal market on the basis of Article 106(2) TFEU.
[1] The full text of the Commission decision can be accessed at:
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=OJ:L_202602114
