Green Energy Certificates

Green Energy Certificates - State Aid Uncovered photos 3

Introduction

Certificates that confirm that an undertaking has bought a certain amount of electricity from renewable sources do not normally involve State aid because they are not traded. However, when they are tradeable and are granted by a public authority for free or for a fee that falls below their market value, they normally involve State aid as they confer a selective advantage that is funded through forgone state resources.

In its decision on SA.63176, the Commission found that the granting of “green energy certificates” [GEC] in Wallonia, Belgium, constituted State aid.[1] GECs are normally issued to users of electricity who are obliged to purchase a certain amount of green electricity. In this case, however, they are granted to suppliers of electricity from renewable sources [RES electricity] who can then sell them.

The GEC scheme

Paragraph 5 of the Commission decision describes how the scheme operates:

“(a) On one side, RES producers receive GECs for the electricity they produce from RES […];

(b) On the other side, Walloon electricity suppliers and distribution system operators (‘DSOs’) must transfer to the Walloon authorities a certain number of GECs at the end of each quarter (the ‘quota obligation’). To meet their quota obligation, they can buy GECs from RES producers […]

(c) Alternatively, RES producers can also sell their GECs to the Belgian transmission system operator (‘TSO’), Elia Transmission Belgium (‘Elia’), which has an obligation to buy them at a fixed price (the ‘purchase obligation’)”.

The beneficiaries of the GECs scheme are the RES producers. Different RES technologies are eligible for support under the GECs scheme for varying periods of time, reflecting their costs and the time needed for recoupment of the initial investment:

Photovoltaic: 10 years.

Biomass, biogas and biomethane: 15 years.

Wind power: 20 years.

Hydroelectricity: 25 years.

Geothermal energy: 25 years.

The scheme supports the construction of new installations, the extension of existing installations and investments to prolong the operation of existing installations.

Also interestingly, “(19) in order to alleviate any possible issues of compliance with Articles 30 and 110 TFEU, Belgium committed to allowing installations located in the territory of other Member States of the European Union to receive support under the scheme subject to the following conditions:

(a) there is a cooperation agreement with the Member State where the installation will be located;

(b) the agreement establishes a reciprocity system and the modalities by which proof of physical import of electricity to Belgium is provided;

(c) the installations comply with the same requirements applicable to installations located in the Walloon region.”

The grant rate for GECs

Under the scheme, RES producers may apply for GECs whose number per applicant is determined on the amount of renewable electricity produced, a CO2 performance factor and a grant rate. The grant rate is expressed in GEC/MWh and ranges between 0 and 2.5. For each installation entering the scheme, an initial grant rate is calculated based on reference values according to the technology and size of the installation. More specifically, the initial grant rate is determined for each reference project based on the difference between the “Levelised Cost of Electricity” [LCOE] and the revenue from the renewable electricity produced over the economic lifetime of the installation.

The decision provides in paragraph 28 a table, reproduced below, that indicates the data on which the grant rate is calculated for different technologies.

Photovoltaic Wind turbines

(up to 100m)

Hydroelectricity
Operating hours/year 956 1910 3942
Electricity power kWc 500 500 5
CAPEX [eur/kWc] 700 1910 12500
OPEX [eur/kWc] 12 57 248
Lifetime 20 years 20 years 35 years
WACC 4.6% 5.9% 5.9%
LCOE [eur/MWh] 77.06 105.53 296.92
Total revenue [eur/MWh] 102.57 96.08 97.73
Extra costs* [eur/MWh] -25.51 9.45 198.88
GEC price [eur/MWh] 67.49 67.49 67.49
Grant rate [GEC/MWh] 0 0.14 2.50

* Extra costs = LCOE – Total revenue

The grant rate is roughly equivalent to the ratio between the extra costs and the total revenue.

Control mechanism

“(37) Every year and for each beneficiary, the applicable grant rate is adjusted according to market price fluctuations in relation to the values used to set the initial grant rate, and in particular the evolution of the market price of electricity, GECs as well as the costs of fuels (where relevant). The adjusted grant rate for year n is the one used to calculate the number of GECs granted to the installation in relation to year n.”

The sale of GECs

RES producers can sell their GECs either on the market to electricity suppliers or DSOs, or to Elia [the TSO], at a minimum price of EUR 65/GEC.

At the same time, suppliers and DSOs are obliged to submit a certain number of certificates corresponding to their quota obligation to the Walloon authorities. They can obtain the GECs by producing renewable electricity themselves or by purchasing them from RES producers. The quotas are calculated on the basis of electricity consumed by the supplier or DSO. Suppliers and DSOs failing to achieve their annual quota must pay an administrative fine to the Walloon authorities. The amount of the fine is set at EUR 100 for each missing GEC. This arrangement means that, first, suppliers and DSOs are incentivised to buy GECs and, second, the GEC price is effectively capped at EUR 100. Final consumers are likely to bear the cost of the GECs through higher electricity prices although there is no legal obligation on suppliers to pass on the financial burden to end customers.

Public service obligation

The relevant electricity law imposes a number of public service obligations on DSOs and on the TSO, in particular as regards GECs. Elia, in particular, “(50) has, inter alia, the public service obligation to purchase the GECs granted to RES producers, at the price of EUR 65/GEC set by the Walloon authorities […], if these producers ask to benefit from this purchase obligation.”

“(52) Elia finances this obligation through a regional surcharge legally imposed on and due by final consumers applied to the electricity drawn by final customers connected at a voltage level below or equal to 70 kV. Each year, Elia submits to the national regulatory authority (Commission de Régulation de l’Electricité et du Gaz (‘CREG’)) a tariff proposal for its purchase obligation for review and approval. For 2023, the tariff was set at 10.38 EUR/MWh.”

Existence of State aid

As described above, there is no doubt that the GEC scheme confers a selective advantage that is attributed to a decision of a public authority. Since electricity is extensively traded, the scheme does effect trade and distort competition. The question here is whether the scheme is financed by state resources.

First, the Commission recalled the relevant case law. “(76) In order to determine, […], whether the aid was granted directly or indirectly through State resources, it is important to bear in mind that the distinction made in Article 107(1) TFEU between aid granted ‘by a Member State’ and aid granted ‘through State resources’ does not mean that all advantages granted by a Member State, whether financed through State resources or not, constitute aid. That distinction simply seeks to prevent the rules of the TFEU in connection with State aid being circumvented merely through the creation of autonomous institutions charged with allocating State aid.”

“(77) Accordingly, the resources covered by the prohibition laid down in Article 107(1) TFEU include all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector.”

“(78) They include, first, those which are directly under the control of the State, that is to say, all the means which are assets of the State and, second, those which are indirectly so, inter alia because they form part of the assets of public or private bodies established or designated by the State to administer aid. Thus, resources of public undertakings may be regarded as State resources where the State is capable, by exercising its dominant influence over such undertakings, of directing the use of their resources in order to finance advantages to the benefit of other undertakings. Similarly, where entities distinct from the public authority manage and apportion, in accordance with State legislation, funds financed through compulsory charges imposed by that legislation, those funds may be regarded as State resources where such entities are appointed by the State to manage those resources and are not merely bound by an obligation to purchase by means of their own resources.”

Then, the Commission applied the above principles to the GEC scheme. “(79) In the case at issue, the State confers market value to an asset handed over to RES producers: the Walloon authorities award GECs, free of charge, to RES producers and Elia then has to buy the GECs, under a public service obligation, from the RES producers.”

“(80) It is by virtue of administrative provisions […] Elia shall buy GECs at a guaranteed price of 65 EUR/GEC whenever RES producers so request”.

“(81) This public service obligation to purchase GECs at a guaranteed price ensures that the level of support for RES producers is not undermined by market conditions (such as, an oversupply of GECs).”

“(82) Elia’s public service obligation to purchase GECs at the guaranteed price is, under mandatory Belgian legislative and administrative provisions, financed by a regional surcharge owed by end consumers, covered by Elia’s tariff and paid into Elia’s accounts to enable it to fulfil such public service obligation”.

“(83) The State controls Elia through its parent company, Elia Group. Elia Group holds 99.99% of Elia and the State holds 48% of the shares of – and voting rights in – Elia Group through municipal holding companies Publi-T and Publipart. ‘Other free float’ shares represent 37.4%.”

“(84) Accordingly, a reduction of the resources under the control of the State as a result of the purchase by Elia of GECs under Elia’s public service obligation is sufficiently directly linked to the advantage constituted by the free of charge award of those GECs to RES producers, as these producers would not sell the GECs on the market for less than the minimum price.”

“(85) As a result, GECs purchases in the scheme appear to be carried out by an entity that can be assimilated to the State, on the basis of the mandate conferred on it by the Belgian legislation and administrative acts, using the revenue from a tariff component legally imposed on and paid by consumers for that purpose.”

“(86) In light of the above, the Commission concludes that the scheme, of which the public service obligation on Elia to purchase GECs is an integral part, involves a transfer of State resources within the meaning of Article 107(1) TFEU.”

Rather surprisingly, the Commission decision makes no mention of the forgone revenue from the granting of free GECs to RES producers, except wind power installations. These GECs have a certain market value that may fluctuate between a minimum of EUR 65 and a maximum of EUR 100. Even though, as we see immediately below, the Commission decision identifies a selective advantage for suppliers and DSOs, it instead focuses on the effect of the PSO imposed on Elia without examining whether RES producers may also enjoy an advantage. [In this respect, see also paragraph 132 of the Commission decision quoted later on.]

“(87) Under the GECs scheme, the State grants free of charge GECs to RES producers. The State confers on the GECs an economic value by ensuring their tradability to the economic advantage of RES producers – first, by authorising RES producers to sell the GECs and, second, by requiring from suppliers, DSOs and Elia that they purchase the GECs, the State thereby agreeing to the creation of a market for the GECs.”

“(88) Moreover, Elia’s public service obligation ensures that RES producers can sell the GECs on the market above a minimum guaranteed price.”

“(89) The advantage granted by the scheme is selective, since it is awarded only to certain undertakings, i.e. RES producers […], while other undertakings in a comparable legal and factual situation within the electricity production sector or other sectors (considering that all economic operators should in principle cover their own costs) are not eligible for aid and thus will not receive the same advantage.”

“(90) The GECs scheme therefore grants a selective advantage, favouring only certain undertakings producing electricity.”

Compatibility of the aid with the internal market

The compatibility of the aid was assessed on the basis of the Climate, Environmental Protection and Energy Aid Guidelines [CEEAG]. “(95) The Commission has therefore assessed the GECs scheme on the basis of the applicable general compatibility provisions of the CEEAG (set out in its Section 3), as well as the specific compatibility criteria for aid for the reduction and removal of greenhouse gas emissions including through support for renewable energy and energy efficiency (set out in Section 4.1 CEEAG).”

Incentive effect

“(102) The GECs scheme includes many technologies and categories. For each category, the Walloon authorities have identified a reference project […] For each reference project, the Walloon authorities calculate the net extra cost of the project, which is the difference between the LCOE of the project and the expected revenues from the electricity produced […] The Commission notes that the calculations include all main investment costs and operating costs of the project. The WACC used differs depending on the technology and is calculated based on a formula that takes into account the relative share between sources of financing (equity and debt), the cost of borrowing on the markets and the risk premiums specific to each plant category.”

“(103) The calculations provided by the Walloon authorities to the Commission for 2024 show that for the reference projects with a grant rate above 0, the reference projects present a net extra cost. It is therefore unlikely that these projects will be carried out without aid. These projects, without the aid, are not financially viable. […] The Commission considers that, when the project presents a net extra cost, the most likely counterfactual scenario in the absence of aid would be the beneficiary not carrying out the project.”

The Commission concluded that the scheme had an incentive effect.

No breach of any relevant provisions of Union law

“(110) Belgium confirmed […] that the aid complied with the relevant requirements of the Renewable Energy Directive”.

“(111) Furthermore, any levy that has the aim of financing a State aid measure and forms an integral part of that measure needs to comply in particular with Article 30 and 110 TFEU.”

“(112) According to the case law, for a levy to be regarded as forming an integral part of an aid measure, it must be hypothecated to the aid under the relevant national rules, in the sense that the revenue from the charge is necessarily allocated for the financing of the aid and has a direct impact on the amount of the aid and, consequently, on the assessment of the compatibility of that aid with the common market. In particular, the charge at issue must be levied specifically and solely for the purpose of financing the aid at issue.” Here the Commission should have added that hypothecation, as defined in the case law, also means that the no other source of revenue is used to finance the aid measure.

“(113) In the present case, part of the scheme will be financed through the purchase obligation. The purchase obligation is financed by the revenues from a levy on electricity consumption.” This refers to Elia’s regional surcharge on final consumers.

“(115) According to the case law, a charge which is imposed on domestic and imported products according to the same criteria may nevertheless be prohibited by the Treaty if the revenues from such a charge are used to support activities which specifically benefit the taxed domestic products. If the advantages which those domestic products enjoy wholly offset the burden imposed on them by the charge, the effects of that charge are apparent only with regard to imported products and that charge constitutes a charge having equivalent effect to custom duties, contrary to Article 30 TFEU. If, on the other hand, those advantages only partly offset the burden borne by domestic products, the charge in question constitutes discriminatory taxation for the purposes of Article 110 TFEU and will be contrary to this provision as regards the proportion used to offset the burden borne by the domestic products.”

“(116) However, in the present case, […], the scheme is accessible to both domestic and other Member States’ RES producers. Thus, the revenues from the levy […] which bear on electricity from both domestic and other Member States’ producers, may be used to support the activity of Walloon RES producers and RES producers from other Member States alike.”

“(117) Therefore, that levy constitutes neither a charge having equivalent effect to custom duties (Article 30 TFEU), nor a discriminatory taxation (Article 110 TFEU).”

Proportionality of the aid

“(130) Pursuant to point 47 CEEAG, environmental aid is considered to be proportionate if the aid amount per beneficiary is limited to the minimum needed for carrying out the aided project or activity. Point 103 CEEAG states that aid for reducing greenhouse gas emissions should, in general, be granted through a competitive bidding process.”

“(131) However, as an exception to the requirement to grant the aid through a competitive bidding process, point 108 CEEAG stipulates that ‘Member States may also use competitive certificates or supplier obligation schemes to establish the aid amount and allocate aid, provided that:

(a) demand in the scheme is set below potential supply;

(b) the buyout or penalty price that applies to a consumer or supplier that has not bought the number of certificates required (that is to say, the price which constitutes the maximum that would be paid for support) is set at a sufficiently high level to incentivize compliance with the obligation.”

“(132) In line with point 108 CEEAG, the price of GECs is not fixed in advance but depends on market supply and demand. The GECs scheme is a State aid scheme with market-based system elements. The beneficiaries sell their electricity on the market in the normal market way, subject to competitive pressure from other market participants. They receive GECs that they can sell on the GECs market to obtain additional revenues (the supply side). The demand side of the GECs market results from the ‘quota obligation’ on Walloon electricity suppliers and DSOs, that have to transfer to the Walloon authorities a certain number of GECs at the end of each quarter. For that purpose, they buy GECs from RES producers on the GECs market”.

“(133) The price of the GECs is not fixed in advance but their floor and ceiling is set forth in by the law which establishes a minimum price of GECs (being the price at which Elia has to buy the GECs, […]) and a maximum price (being the established price of the fine, […]), respectively.”

“(134) In light of the above, the Commission considers that the GECs scheme constitutes a ‘competitive certificates or supplier obligation’ scheme as per point 108 CEEAG.”

Then the Commission noted that the method of calculating the number of GECs prevented overcompensation. This is because for each installation the initial grant rate is calculated on the basis of reference values according to the technology and size of the installation. The initial grant rate is determined for each reference project according to the difference between the LCOE and the revenue from the renewable electricity produced over the economic lifetime of the installation.

Avoidance of undue distortion of competition

The Commission confirmed that the GEC scheme did not distort competition to an undue extent and that the overall benefits of the scheme outweighed the negative effects.

Ex post evaluation

Because the budget for the GEC scheme exceeds EUR 150 million per year or EUR 750 million in total, the Commission also examined an ex post evaluation plan that was submitted by requested the Belgian at the same time when the scheme was notified. The Commission approved the methodology of the plan and requested Belgium to submit an interim report by 31 March 2025 and a final evaluation report by 30 June 2027.

[1] The full text of the Commission decision can be accessed at:

https://ec.europa.eu/competition/state_aid/cases1/202422/SA_63176_88.pdf

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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.

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