Security of Energy Supply

Security of Energy Supply - State Aid Uncovered SM posts

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 electricity producers to use indigenous sources of fuel, maintenance of excess production capacity, granting of option to large users of electricity to establish small production plants to relieve energy networks during periods of spike in demand, etc. Member States are also allowed to provide subsidies for such purposes. But the subsidies must be compatible with State aid rules and must be notified to the Commission for authorisation.

Normally, obligations to purchase electricity produced from indigenous fuel do not involve State aid. However, when the obligation is imposed on a state-owned company, the payments by that company to the producers of that electricity may constitute State aid.

On 27 January 2022, the Court of Justice, in case C-179/20, Fondul Proprietatea, examined whether prioritised and guaranteed access to the electricity network by two electricity producers using indigenous fuel fell within the scope of Article 107(1) TFEU.

The case, which was a request for preliminary ruling by a Romanian court, arose from a dispute concerning the application of the concept of State aid to the electricity market in the context of a national policy aiming to secure the uninterrupted supply of electricity in Romania.

Romanian authorities adopted rules that, for reasons related to the security of electricity supply, guaranteed access to the electricity grid to electricity produced by certain power plants using indigenous sources of energy.


The full text of the judgment in languages other than English can be accessed at:

CURIA – Case information (europa.eu)


Fondul Proprietatea, a shareholder of S.P.E.H. Hidroelectrica, a hydroelectric producer, brought an action before a national court for annulment of a government decision on the grounds that that decision had granted unlawful State aid to CE Hunedoara and CE Oltenia, two electricity producers using indigenous fuel such as coal. The state owned the majority of capital in those two companies.

The national court that submitted the request for the preliminary ruling asked several questions some of which concerned the interpretation of legislation on the functioning of electricity markets and, in particular, whether Member States would infringe EU law by granting to certain electricity producers a guaranteed access to transmission networks.

Although such issues fall outside the scope of State aid rules, it is worth noting that in this connection the Court of Justice replied that Directive 2009/72 on common rules for the internal market in electricity did not preclude Member States from granting rights guaranteeing access to transmission networks to certain electricity producers whose installations use indigenous sources of energy in order to ensure security of electricity supply. The Court also stressed that such access rights must be based on objective and reasonable criteria and be proportionate to the aim of public policy. [paragraph 81 of the judgment]

With respect to State aid, the overall question that the Court of Justice had to answer was whether guaranteed access, coupled with the obligation for the provision of ancillary or extra services to the system operator, constituted State aid.

Use of state resources

The referring court asked for guidance on the existence and compatibility of State aid.

The Court of Justice noted at the outset that it was not for itself to rule on the compatibility of State aid as that task fell within the exclusive competence of the Commission. However, it could provide guidance to national courts on the concept of State aid. [paras 83 & 85]

An advantage in the meaning of Article 107(1) TFEU must be granted through state resources and be imputable to the state. In order to assess the imputability of a measure to the state, it is necessary to examine whether public authorities were involved in the adoption of that measure. [para 88]

Given that the measures at issue were implemented by legislation they were imputable to the state. [para 89]

The Court also added that an obligation to purchase energy may fall within the concept of aid, even though it does not involve a transfer of resources from a state budget. This is because Article 107(1) TFEU covers all the financial means that public authorities may actually use to support undertakings. It is not relevant that those means may not be permanently in the possession of the state. It is sufficient that the resources remain constantly under public control and therefore at the disposal of public authorities. [paras 92-93]

More specifically, funds financed by compulsory contributions imposed by legislation, managed and distributed in accordance with that legislation, may be regarded as state resources within the meaning of Article 107(1) TFEU, even if they are managed by entities separate from the public authority. The decisive factor, in that regard, is the fact that such entities are mandated by the state to manage those resources and are not merely obliged to purchase electricity using their own financial resources. [para 94]

The Court of Justice went on to observe that in the present case Transelectrica, the sole transmission system operator, was a public undertaking whose capital was majority-owned by the state. That company was obliged to guarantee at all times the functioning of the national energy system and the balancing between the production and consumption of electricity. For that purpose, Transelectrica purchased ancillary [or auxiliary or additional] services on the basis of procurement procedures defining a certain order of precedence [or priority of supply]. However, under the measures at issue, Transelectrica was required to purchase ancillary services from two electricity producers at a price fixed by the national regulator without taking into account the order of precedence, which may have resulted in the purchase of ancillary services at prices higher than the market rate. The Court held that this was a financial burden imposed on Transelectrica that reduced the resources of the state. [para 95]

Existence of advantage

The Court of Justice also considered that the beneficiary electricity producers, CE Hunedoara and CE Oltenia, obtained an advantage as, without the measures at issue, they would not have been able to provide the ancillary services of electricity generated by power plants that ran at higher production costs than other comparable plants. In addition, by being able to run their plants continually and avoid start-up costs from interrupted operations, CE Hunedoara and CE Oltenia obtained another advantage not normally available on the market. [paras 98-99]

Effect on trade and distortion of competition

With respect to affectation of trade, the Court noted that it is not necessary to establish a real impact of the aid on trade between Member States and an effective distortion of competition, but only to examine whether the aid is liable to affect that trade and distort competition. When aid granted by a Member State strengthens the position of an undertaking in relation to other undertakings competing in trade within the EU, the latter must be regarded as being influenced by that aid. In that regard, it is not necessary for the beneficiary undertakings themselves to compete directly with those that do not receive the aid. When a Member State grants aid to undertakings, activity in its domestic market may be maintained or increased, with the consequence that the chances of undertakings established in other Member States of penetrating the market of that Member State are reduced. [paras 100-101]

With respect to distortion of competition, the Court reiterated the well-established principle that aid intended to relieve an undertaking of the costs which it would normally have had to bear in the course of its day-to-day management or normal activities distorts, in principle, the conditions of competition. [para 102]

Therefore, the Court of Justice concluded that, subject to verification of the relevant facts by the referring national court, the measures at issue constituted State aid.

Was it notifiable aid?

The referring court also asked the Court of Justice whether those measures should have been notified to the Commission in accordance with Article 108(3) TFEU.

The Court’s reply was simple and clear. New aid must be notified to the Commission in advance. Non-notified measures are unlawful. Then the Court noted that the Commission had not received any notification from Romania concerning those measures and that the measures appeared not to fall with the scope of bloc exemption regulations. [paras 108-111]

Conclusions

Even if the aid is eventually found by the Commission to be compatible with the internal market, the two electricity producers, CE Hunedoara and CE Oltenia, will at minimum have to pay interest on the aid that they received during the period of illegality.

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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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