A First Commission Decision on Natural Gas Storage

Compensation that guarantees a normal or fair rate of return eliminates risk that is inherent in market transactions and therefore confers an advantage in the meaning of Article 107(1) TFEU.

Introduction

On 23 March 2022, the European Commission announced plans to mitigate the spike in energy prices caused by the war in Ukraine. Chief among those plans were proposals for joint gas purchases and gas storage. Increase in storage capacity has been a strategy followed by several Member States to safeguard their energy security.

Consequently, the Commission, in decision 2022/444, assessed positively the compatibility with the internal market of a French State aid measure to support natural gas storage.[1] The gas in this case is stored in underground facilities. Although the measure in question was adopted before the war in Ukraine broke out, presciently its purpose was to stabilise demand and supply of gas in the event of a significant supply disruption.

What makes this measure particularly interesting is that it is the first time that the Commission had to assess the compatibility of aid to support natural gas storage.

The aid measure supports operators of storage infrastructure through a so-called “regulatory mechanism” that makes up the difference between the revenue that the energy regulator determines as adequate for these operators and the actual revenue that they generate from market sales. The funds for the regulatory mechanism are raised through tariffs that are levied on users of the gas network.

Before the Commission reached its decision it opened the formal investigation procedure because it had doubts as to the proportionality of the regulatory mechanism and the extent of its impact on competition.

Existence of State aid

In this case, the funds mobilised by the aid measure come from users of the gas network. For this reason the Commission stressed in its decision that “(240) funds financed through compulsory


[1] The decision is published in OJ L90, 18 March 2022. It can be accessed at:

Publications Office (europa.eu)


contributions imposed by State legislation, and managed and apportioned in accordance with the provisions of that legislation, may be regarded as State resources within the meaning of Article 107(1) TFEU, even if they are administered by institutions distinct from the public authorities. It is not necessary to make a distinction between institutions governed by public or private law. The decisive factor, in that regard, consists of the fact that such institutions are appointed by the State to manage a State resource and are not merely bound by an obligation to purchase by means of their own financial resources. […] Moreover, […] the detailed rules for calculating those contributions may be determined precisely by regulation or by decision of a public body, such as the national regulatory authority, without, however, ruling out the classification of ‘compulsory contributions imposed by the legislation of the State.”

The storage operators obtain an advantage because they “(249) receive a guaranteed income, the ‘authorised revenue’, set by the [regulator] in such a way as to guarantee that their costs are covered, in so far as they correspond to those of an ‘efficient operator’, and that they receive a normal return on the capital invested (see recital (21) above). This authorised revenue is made up of the income directly received by operators and, where this income is lower than the authorised revenue, the storage compensation paid by the transmission system operators. Thus regulated storage operators, who would be compensated for any losses, are no longer subject to the uncertainty inherent in normal market conditions.”

With respect to the selectivity of the measure, the Commission found that “(254) even if the existence of a selective advantage were examined at national level and concerned only natural gas storage infrastructure, […], the Commission considers that the measure at issue would confer a selective advantage as this advantage is reserved for operators of the essential storage infrastructure”.

Since gas is widely traded, the Commission concluded that the measure would also affect trade and distort competition and that, consequently, it fulfilled all of the criteria of Article 107(1) TFEU.

Compatibility with the internal market

Because no Commission guidelines provide for this type of measure, the Commission assessed its compatibility directly on the Treaty and in particular, Article 107(3)(c). As the Court of Justice ruled in the Hinkley Point C judgment [C-594/18 P, Austria v Commission], compatibility with the internal market on the basis of Article 107(3)(c) requires that two conditions are satisfied:

  • the aid facilitates the development of certain economic activities and that
  • it must not adversely affect trading conditions to an extent contrary to the common interest.

Condition 1: Facilitating the development of an economic activity

The economic activity to be developed

The aid “(270) must act as an incentive for the undertaking or undertakings concerned by changing their behaviour in such a way as to facilitate the development of an economic activity which, without the aid, would not be carried out or would be carried out in a limited or different manner. The aid must not subsidise the costs of an activity that an undertaking would have engaged in in any case, and must not compensate for the normal business risk of an economic activity.” “(271) In this case, the economic activity developed by the aid is the storage of natural gas in France.”

Incentive effect of the aid

“(272) The regulatory mechanism is intended to change the economic behaviour of natural gas storage operators. The French authorities said that, if France had not put in place the regulatory mechanism and had abolished the previous system of storage obligations, the price charged by storage operators would be very close to the spread of natural gas sales prices. Spreads have in fact been decreasing since 2009. As a result, the prices charged no longer allowed storage operators to cover their costs before the reform was introduced. […] France then identified a real risk that operators would further reduce the storage capacity offered to the market and placed additional storage sites on standby.”

“(275) In a counterfactual scenario, without the introduction of the regulatory mechanism there would have been a risk of a significant reduction in the development of the economic activity of natural gas storage in France.”

Compliance of the aid scheme with other provisions of EU law

“(277) The Commission would point out that the measure at issue and the economic activity developed comply with the provisions of EU law.”

“(278) In the field of energy, any charge intended to finance a State aid measure must comply in particular with Articles 30 and 110 TFEU. In the present case, the storage charge is hypothecated to the support granted to storage operators (see recital (246)). A charge which is imposed on domestic and imported products according to the same criteria may nevertheless be prohibited by the TFEU if the revenue from such a charge is intended to support activities which specifically benefit the domestic products subject to the charge.”

“(279) In the present case, the storage charge is paid by shippers using the natural gas transmission network, in which almost all of the gas is imported, irrespective of whether the shippers are French or not (see recitals (98) to (100)). On the other hand, the beneficiaries are the operators of the natural gas storage infrastructure. French and foreign shippers have non-discriminatory access to the auctions organised by natural gas storage operators (see recital (20)). It is therefore not a situation in which the charge specifically benefits the domestic products on which it is levied. Articles 30 and 110 TFEU are therefore complied with.”

Condition 2: The adverse effects resulting from the aid do not affect trading conditions to an extent contrary to the common interest

Need for state intervention

“(292) The Commission considers that State intervention is necessary if, in a given situation, such intervention can bring about a significant improvement which the normal functioning of the market alone would not bring about, for example, by correcting a well-defined market failure.”

(293) As stated in recital (10), spreads have decreased since 2009 and storage operators are no longer able to cover their costs. There was a risk that the economic activity of natural gas storage in France would be significantly reduced. Since the implementation of the reform, the rate of storage of natural gas in France has in fact increased.” “(294) Therefore, the Commission concludes that the reform was necessary to facilitate the development of the economic activity of natural gas storage in France.”

Appropriateness of the aid

“(295) Aid is an appropriate policy instrument to facilitate an economic activity where it is not possible to achieve the same result through other policy instruments that cause fewer distortions of competition.”

“(296) Several alternative instruments were envisaged by France, but these would not facilitate the development of the economic activity of natural gas storage in France in the same way or guarantee the same level of security of supply for the following reasons.”

“(297) First, maintaining the previous system of storage obligations imposed on suppliers would not have ensured security of supply. As the spread has become significantly lower than the cost of storage capacity, incentives to suppliers to reserve capacity have significantly decreased, resulting in three sites being placed on standby. Placing other sites on standby would have been problematic since it emerged from the assessment of the need for storage that all facilities were necessary to ensure security of supply in the event of a prolonged cold spell. Furthermore, the overall storage cost under the storage obligation system was higher”.

“(298) Second, strengthening the gas network and interconnectors would not be a credible alternative either because of the high cost of these measures compared to using existing storage infrastructure. In any case, this type of investment would not address potential shortages of natural gas in the event of a cold spell and would not be available in the medium term.”

“(300) Third, France explained that a purely administrative system of penalties imposed on suppliers for failure to supply natural gas to final customers could not be regarded as a satisfactory alternative either. This kind of system presents a feasibility problem as the balancing of European gas markets takes place on a daily basis. The load-shedding measures implemented by the system operator in the event of a critical drop in pressure in the network would lead to a subsequent trade in natural gas that would make it extremely difficult to identify the supplier initially in default. Similarly, the customers cut off are not necessarily the customers of the defaulting supplier. In this context, France argues that ex ante measures are preferable to ex post penalties.”

“(302) In view of these factors, the Commission considers that the regulatory mechanism is an appropriate instrument to facilitate the development of natural gas storage activity and to ensure security of supply.”

Proportionality of the aid

“(303) Aid is regarded as proportionate when it is confined to the minimum amount necessary to limit the effects on the internal market.”

“(304) In the present case, under the regulatory mechanism, storage operators benefit from a guaranteed income. To assess the proportionality of the regulatory mechanism, it is necessary to assess the proportionality of the method for calculating the authorised revenue of storage operators described in recitals (59) to (81).”

“(306) Although this valuation is mainly based on gross accounting value and depreciation of assets, France and the beneficiaries were able to demonstrate that the CRE carried out a thorough revaluation of the original RAB on 31 December 2016. The CRE checked that the depreciation periods requested by the operators corresponded to the periods indicated in their historical accounts and to standard industry data observed in other countries. In particular, the CRE questioned the depreciation period of cushion gas. As stated in recital (73), the CRE rejected the request for a depreciation period of 250 years, instead setting the depreciation period for cushion gas at 75 years. The CRE hired external economic consultants to assist it in defining the initial RAB. The Commission notes that, following these reviews, the CRE selected an initial RAB of EUR 4,8 billion for the three operators, a drop of 13 % compared to the RAB requested by the operators (see Table 4 in recital (77)).”

“(310) The Commission would also point out that the storage tariff is intended to compensate operators for their costs, in so far as those costs correspond to those of ‘efficient operators’. To this end, the CRE reviews the compensation requested by operators at the beginning of each tariff period and checks the investments envisaged by operators on an annual basis (see recital (82)). The compensation also comprises a clawback mechanism.”

“(312) The Commission therefore concludes that the remuneration method established by the CRE, and in particular the valuation of regulated assets, results in proportionate compensation which limits the impact of the aid scheme on the internal market.”

Transparency of the aid

“(313) The Commission considers that the commitments by France listed in recital (111) ensure the transparency of the aid scheme.”

Prevention of negative effects on competition and trade

“(314) The Commission considers that an aid measure minimises the negative effects on competition and trade between Member States where those effects are sufficiently limited for the overall balance of the measure to be positive.”

“(316) In the present case, the Commission does not consider that the aid scheme distorts competition between French suppliers and suppliers of natural gas from other Member States on the natural gas supply markets, since the auctions are open to all natural gas suppliers, under similar conditions, whether they are located in France or in another Member State. In addition, some interested parties confirmed in their comments that, for the same delivery service, the same tariff is charged to French suppliers and suppliers from other Member States for use of the natural gas transmission networks. The Commission was therefore unable to find any distortions of competition between French natural gas suppliers and those from other Member States.”

“(317) Moreover, as regards distortions of competition between storage operators and suppliers of alternative flexibility instruments in France, the French authorities and interested parties consider that the other instruments are imperfect substitutes for the storage of natural gas since they operate within varying timeframes and may be needed in different situations.”

Balancing test: positive and negative effects of the aid on the internal market

As required by the Hinkley Point C judgment, in order for the Commission to authorise the aid, it must ensure that the positive effects outweigh the negative effects.

“(326) The overall balance of the effects of a State aid scheme must be positive: the scheme must avoid adversely affecting trading conditions to an extent contrary to the common interest.”

“(327) The Commission would point out that, in the present case, the aid scheme facilitates the development of an economic activity, namely the storage of natural gas in France. It also notes that the regulatory mechanism contributes to the security of natural gas supplies. Moreover, the appropriateness, necessity and proportionality of the aid limit its impact on competition and trade. The Commission concludes that while an impact on competition between French natural gas storage operators and those from other Member States cannot be ruled out, it seems that the negative effects of the aid are sufficiently limited for the overall balance of the aid scheme to be positive until the end of the current PPE in 2028, provided that there are no significant changes in competition on the natural gas markets listed in recital (110) ( 99).”

“(328) In light of the above, the Commission concludes that the positive impact of the aid on the development of the economic activity in question outweighs the potential negative effects on competition and trade, at least until 2028. Competition and trade will therefore not be affected to an extent contrary to the common interest until then.”

[1] The decision is published in OJ L90, 18 March 2022. It can be accessed at:

Publications Office (europa.eu)

Tags

About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

Related Posts

19. Apr 2022
State Aid Uncovered by Phedon Nicolaides

Injection of Capital in a Postal Operator

The resources of a public undertaking necessarily count as “state resources”, regardless of the degree of autonomy of the public undertaking. However, not every decision of a public undertaking can necessarily be “imputed” to the state. A prudent investor may take into account authorised State aid. A prudent investor may tolerate short-term losses if it can realise sufficient profits in […]
05. Apr 2022
State Aid Uncovered by Phedon Nicolaides

Intra-State Transfers and the Discretion of Public Authorities

Resources transferred from one public authority to another for the purpose of being used to subsidise undertakings do not fall within the scope of Article 107(1) TFEU if the recipient authority has discretion in their disbursement. Introduction A public authority that carries out economic activities becomes an undertaking that is subject to the prohibition of Article 107(1) TFEU. When the […]
22. Mar 2022
State Aid Uncovered by Phedon Nicolaides

I. Vouchers for SMEs II. Funding of Aid with Revenue from Levies Imposed on the Aid Beneficiaries

State aid rules apply both to direct and indirect beneficiaries of aid. Introduction This week’s article reviews a Commission decision and a judgment of the Court of Justice. The Commission decision concerns Italian vouchers for SMEs to pay for the use of fast broadband services. The judgment deals with a German measure supporting milk quality tests. In both cases an […]
01. Mar 2022
State Aid Uncovered by Phedon Nicolaides

Security of Energy Supply

Guaranteed supply of electricity at fixed prices to a state-owned network operator involves a transfer of state resources to the supplier. Guaranteed supply of electricity at fixed prices confers an advantage to the supplier. Introduction Member States are allowed to take measures to ensure the security of energy supplies. There is a variety of such measures: imposition of obligations on […]
22. Feb 2022
State Aid Uncovered by Phedon Nicolaides

Compensation for Damage and De Minimis Aid

Compensation for damage caused by protected animals is State aid. Member States may categorise compensatory payments as de minimis aid and refuse to make payments in excess of the de minimis threshold. Introduction Advantage in the meaning of Article 107(1) TFEU is any benefit granted by the state that is not available under normal market conditions. Normal market conditions are […]
11. Jan 2022
State Aid Uncovered by Phedon Nicolaides

Private Creditor and the Ability of the Debtor to Repay

There are no rules as to the promptness with which a private creditor must act in order to enforce its claims. However, a hypothetical private creditor need not demand that a debtor be declared insolvent as soon as it fails, without taking any account of its longer-term potential. Introduction When the state accepts to restructure debt owed to it or […]
09. Nov 2021
State Aid Uncovered by Phedon Nicolaides

Compensatory Payments and State Resources

Funds used in compensation mechanisms mandated by the state become state resources Introduction The Court of Justice has stressed repeatedly that any resource over which the state can exercise control becomes a state resource, regardless of whether it is managed by a public authority or a private entity. Member States, however, keep inventing novel and complicated arrangements in which mandated […]
02. Nov 2021
State Aid Uncovered by Phedon Nicolaides

Market Economy Operator

Comparing prices charged by different airports is not a suitable method for detecting the existence of selective advantages. Introduction Airports enter into complex agreements with airlines. When airports are in public ownership or operate under a mandate by the state, their agreements with airlines may contain State aid. It is, however, very difficult to detect State aid in these agreements […]
26. Oct 2021
State Aid Uncovered by Phedon Nicolaides

Legitimate Expectations and the “Right” to State Aid

Legitimate expectations can only be created by EU institutions giving unambiguous and unconditional assurances. No undertaking enjoys a right to State aid. Member States may reduce the amount of State aid they grant. Introduction As the process of transition to green economy accelerates, Member States have been reducing the subsidies they promised to grant to the early investors in the […]
24. Aug 2021
State Aid Uncovered by Phedon Nicolaides

It is Difficult to Challenge a Commission Decision Opening the Formal Investigation Procedure

The assessment of the Commission in an “opening decision” is only provisional. The Commission is not required to prioritise its investigations or to extend them to anyone who may be in a similar situation. The right of non-discrimination is not violated when the Commission chooses to investigate some instead of all possible cases of State aid. An individual measure that […]