Introduction
A fundamental rule of State aid is that no aid may be granted after a project has already started. This rule is repeated in every Commission regulation or set of guidelines. Aid to a project that has already started lacks incentive effect and as such it is a pure waste of public money.
However, in December 2022, the Court of Justice surprised us when it ruled, in case C-470/20, Veejaam & Espo, that aid to a project that had already been implemented could still have an incentive effect if, in the absence of aid, the project would be closed down or abandoned. In a recent decision, the Commission used similar reasoning, without however referring to that judgment, to conclude that additional Romanian aid to support the modernisation of the district heating network of Bucharest had an incentive effect, despite the fact that work had already started.
Background
In 2021, the Commission approved investment aid to the Municipality of Bucharest to modernise its district heating network which is the largest in the EU [SA.57425].[1] The existing network was very inefficient. The pipes were old and the infrastructure was crumbling, resulting in leaks, loss of energy, frequent disruptions and more pollution from the need to produce more energy to make up for the leaks and losses.
The aid was approved on the basis of the then State aid Guidelines on Environmental Protection and Energy [EEAG] concerning district heating and cooling network with cogenerated heat exceeding 70%.
The total eligible costs [i.e. costs minus VAT] were EUR 278.3 million. They included the costs of: planning/design fees, plant, machinery and equipment, supervision during construction, technical assistance and project management, project audit, publicity, and contingencies.
The net present value [NPV] of the project was minus EUR 254.2 million resulting in a funding gap of 91.3% [i.e. 254.2/278.3]. The NPV was calculated with a WACC of 4%. The IRR was lower than WACC at 1.7%.
The amount of State aid was EUR 254.2 million, i.e. 100% of the funding gap. EU structural funds would contribute 85% of that amount [EUR 216.1 million] and Romania 15% [EUR 38.1 million]. The recipient of the aid was the Municipality as the legal owner of the network.
Need for additional aid
As a result of the Russian invasion of Ukraine energy, construction and material prices increased unexpectedly and significantly and the project became uneconomic. In April 2024, Romania notified additional aid to the project, which was approved a year later in April 2025 [SA.113596].[2] The problem, of course, was that the project had already started and that, in the meantime, the compatibility rules also changed, as the Commission had replaced EEAG with the State aid Guidelines on Climate, Environmental Protection and Energy [CEEAG].
The total eligible costs jumped from EUR 278.3 million to EUR 296.4 million, an increase of EUR 18.1 million or 6.5%. The requested amount was also revised upwards by 6.5% from EUR 254.2 million to EUR 270.8 million, corresponding to an additional amount of EUR 16.6 million. The revised NPV calculation showed a funding gap of minus EUR 248.8 million. The additional aid would reduce the funding to minus EUR 13.5 million. That is, the additional amount of aid would not eliminate completely the funding gap.
However, as is well-known, a fundamental principle of State aid rules is that aid must have an incentive effect. That is, it must be able to change the behaviour of the recipient. Aid that is granted after a project started has no incentive effect because it does not change the behaviour of the recipient.
Justification by Romania
The aid for project, as approved in 2021, had an incentive effect. But in 2024, when the notification for the additional aid was submitted, the project was already underway. So, it appeared that the additional aid lacked incentive effect.
The Commission decision outlines the following reasons that, according to Romania, justified the granting of additional State aid.
“(10) The aim of the notified measure is to account for higher-than-expected investment costs […], which were out of the beneficiary’s control and were not expected in the initial project plan.”
“(11) […] In particular, several unpredictable events – namely the value chain impact of the COVID-19 pandemic, further exacerbated by Russia’s invasion of Ukraine and the energy crisis – led to significant cost increases in the construction sector, creating a need for additional financial support.”
“(17) The Romanian authorities explain that the Municipality of Bucharest is not able to finance the additional investment costs resulting from the conclusion of the public procurement procedures from own resources due to significant financial constraints. In particular, the co-financing provided by the Municipality of Bucharest in accordance with the provisions of the financing contract already creates significant financial pressure on its budget, which is burdened by numerous obligations for the subsidization of public services, as well as a decrease in subsidies from the State budget. As a result, it is not able to cover the additional expenses necessary for carrying out the rehabilitation works for the district heating network, without additional public financing.”
“(18) Romania further submits that any postponement of works would have led to significant impacts on consumers, as accessibility of district heating services is essential for the health and well-being of the population. Furthermore, even a small delay in the start of works could create important further delays in the execution of the project as the modernisation and rehabilitation work in the district heating system needs to be predominantly carried out outside the heating season, between 15 March and 15 November. Finally, any further postponement of the start of works would have also impacted the activities of other public network holders/operators, as the rehabilitation works of the district heating network must account for the presence of multiple public utility networks on site: water networks, sewage, natural gas, public lighting, electricity transmission/distribution networks, telecommunications, traffic lights, etc.”
“(48) According to the Romanian authorities […], the overall operation of the Bucharest DHS would not generate sufficient income to cover the investment costs, and the project would not therefore be financially viable without support.”
“(49) […] the tariffs applied by the public service operators are fully regulated, and these tariffs and their planned potential increase, are not sufficient to cover the cost of the project. The Romanian authorities explain that an increase in tariffs beyond the 7% annual increase already envisaged for households is a measure that would have a major social impact. Moreover, the Romanian system prevents the passing on of the rehabilitation costs- publicly funded- on the final heat/electricity consumers.”
Therefore, the justification can be summarised as follows:
- Costs increased unexpectedly due to unpredictable events.
- The increase was beyond the control of the Municipality.
- The cost increase made the project unviable.
- Delay or abandonment of the project would negatively impact citizens.
- The increased costs could not be covered by higher prices to consumers, as they would cause social harm.
- The Municipality did not have sufficient resources to absorb the cost increase. [In this connection, the Commission decision refers to budgetary constraints and unwillingness or inability of the central government to provide additional funds. But the Commission decision is silent on whether additional municipal or central funds would not also constitute State aid. Even if the Municipality would take out a loan from a commercial bank, given the financial deficit of the project, it would have to repay the loan with revenue from taxation. That would constitute State aid too.]
In other words, the justification hinged on the unpredictability of the cost increase and the fact that the Municipality could neither abandon the project, nor finance the deficit itself.
Assessment of the incentive effect of the aid
According to point 29 CEEAG, “the Commission considers that aid does not have an incentive effect for the beneficiary in cases where the start of works on the project or activity took place prior to a written aid application by the beneficiary to the national authorities.”
However, point 31 CEEAG also states:
“In certain exceptional cases, aid can have an incentive effect even for projects which started before the aid application. In particular, aid is considered to have an incentive effect in the following situations:
- the aid is granted automatically in accordance with objective and non-discriminatory criteria and without further exercise of discretion by the Member State, and the measure has been adopted and is in force before work on the aided project or activity has started, except in the case of fiscal successor schemes, where the activity was already covered by the previous schemes in the form of tax advantages;
- the national authorities have published, before the start of works, a notice of their intention to establish the proposed aid measure, conditional upon the Commission’s approval of the measure as required by Article 108(3) of the Treaty. That notice must be made available on a public website or other publicly accessible media with comparably broad and easy access and clearly state the type of projects that the Member State proposes to be eligible and the point in time from which the Member State intends to consider such projects eligible. The proposed eligibility must not be unduly limited. The beneficiary must have informed the granting authority prior to the start of works that the proposed aid measure was considered as a condition for the investment decisions taken. Where it relies upon such a notice to demonstrate an incentive effect, the Member State must provide, as part of its State aid notification, a copy of the notice and a link to the website on which it was published or respective proof of its availability to the public;
- operating aid granted to existing installations for environmentally-friendly production where there is no ‘start of works’ because there is no significant new investment. In these cases, the incentive effect can be demonstrated by a change to operate the installation in an environmentally-friendly way rather than an alternative cheaper mode of operation that is less environmentally friendly.”
It appears that none of the three situations described in the CEEAG apply to the Romanian case. Nonetheless, the Commission, after repeating its findings in the 2021 decision, took into account several extra considerations as follows:
“(84) Based on the quantification of the factual and counterfactual scenarios provided by Romania, it appears that the updated funding gap of the project is negative in the absence of aid”.
“(85) The Commission therefore considers that without additional aid, the project would not be carried out and that the additional investment aid has the potential to incentivise the beneficiary to make the planned investments in the network.”
“(86) According to point 29 CEEAG, aid does not have an incentive effect for the beneficiary in cases where the start of works on the project or activity took place prior to a written aid application by the beneficiary to the national authorities. In cases where the beneficiary starts implementing a project before applying for aid, any aid granted in respect of that project will, in principle, not be considered compatible with the internal market. Point 31 CEEAG however states that in certain exceptional cases, aid can have an incentive effect even for projects which started before the aid application.”
“(88) […] The funding gap calculated at the time was based on market estimates and was credible given the economic circumstances prevailing at the time, but which have fundamentally changed since then due to the global supply chain bottlenecks following the Covid-19 pandemic and the Russian invasion of Ukraine which resulted in cost increases in the price of construction works as well as price inflation. This situation could not be foreseen at the time of the initial decision.”
“(91) In light of the exceptional circumstances brought forward by Romania, the Commission accepts the argument that the additional notified aid is necessary to preserve the beneficiary’s incentive to continue the project as planned and considers that the additional aid has an incentive effect even though the project started before the aid application for the additional aid.”
A comment
The problem with the Commission’s conclusion is that it does not really address the applicability of point 31 CEEAG. Nor, does it examine critically the Romanian claim that, despite the urgent need for the project, the Municipality could not afford to absorb the increased deficit by committing an additional EUR 16.6 million. Yet, the revised the NPV calculation showed that after the aid the project would still have a deficit of EUR 13.4 million that presumably would somehow have to be covered by the Municipality. Of course, it is possible that the Municipality could afford to pay for the additional EUR 13.4 million, but not for EUR 16.6 million. But this inability has to be proven, not presumed.
[1] The full text of the 2021 Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202117/286196_2268986_132_2.pdf
[2] The full text of the 2025 Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202521/SA_113596_58.pdf
