Perhaps the most important criterion for the compatibility of State aid with the internal market is the incentive effect. This means that State aid is capable of changing the behaviour of the recipient undertaking. State aid is normally considered not to have an incentive effect when the recipient undertaking is already committed to launch a project or has already invested in a project. Therefore, State aid is not allowed after the “start of works”.
On 12 October 2023, in case C-11/22, Est Wind Power, the Court of Justice had to interpret the meaning of “start of work”. More interestingly, the Court was asked to examine a peculiar provision of the environmental aid guidelines 2014-20 that permitted aid to be granted to an undertaking that had substantially completed a project.
The case originated from a request for a preliminary ruling from the Administrative Court of Estonia. The referring court asked for guidance on the interpretation of paragraph 19(44) and footnote 66 of the Commission guidelines on State aid for environmental protection and energy 2014-20.
Est Wind Power [EWP], an energy company, contested the conclusion of the relevant Estonian authorities concerning the state of progress of an investment project for the construction of a wind farm. Those authorities found that the project did not meet the requirements laid down in the Commission guidelines so that EWP could qualify as an “existing producer” of energy so that it could benefit from grants for the construction of that wind farm.
According to paragraph19(44) of the 2014 guidelines, “start of works means either the start of construction works on the investment or the first firm commitment to order equipment or other commitment that makes the investment irreversible, whichever is the first in time.
Buying of land and preparatory works such as obtaining permits and conducting preliminary feasibility studies shall not be considered as start of works.”
Paragraph 50 of the same guidelines states: “Where the beneficiary starts implementing a project before applying for aid, any aid granted in respect of that project will not be considered compatible with the internal market.”
However, according to footnote 66 of those guidelines, “installations that started works before 1 January 2017 and had received a confirmation of the aid by the Member State before such date can be granted aid on the basis of the scheme in force at the time of confirmation.”
In 2017, the Commission approved an Estonian scheme for the support of electricity produced from renewable sources [SA.47354]. The authorising decision also stated the following: “(42) Footnote 66 might be read as a transposition of the legal principle of “legitimate expectations” and is closely linked to the State aid requirement of “incentive effect”. In practice, this means that the granting authorities should consider as “existing producer” those producers whose project on 1 January 2017 was in such state of development that it would very likely be completed so that they should receive support under the existing support scheme (legitimate expectations). This requires as a minimum that the project developers had obtained the necessary state authorisation for constructing the project, and that they had the legal title to the land on which the project would be developed.”
The 2017 Commission decision further explained that “(43) the “start of works” definition in paragraph 19(44) [of the 2014 Guidelines] provides more details in this respect. Footnote 66 [of the 2014 Guidelines] should thus be read and interpreted by the granting authorities against this background. The Commission notes in this respect that the responsibility for the correct implementation of aid measures remains with the Member States via its relevant authorities.” Furthermore, “(44) in the event that the granting authority would consider that works on a certain project have been started, within the meaning of paragraph 19(44) [of the 2014 Guidelines], prior to 1 January 2017, the Commission is of the opinion that such consideration relates to the project as such.”
The background to the dispute, as recounted in the judgment
For the purpose of installing a wind farm comprising 28 wind turbines, EWP, in April 2004, entered into a connection contract with Elering, a transmission system operator, under which it paid connection fees of EUR 522,814.
In the course of 2008, EWP erected wind measurement masts on that wind farm, incurring costs of EUR 212,002. In May 2010, EWP acquired development rights for the 28 plots of land proposed for the installation of those wind turbines.
In April 2016, the Estonian Ministry of Defence refused to approve the construction plans for that wind farm and, by order of 26 April 2016, the local municipal council refused to grant the construction permits sought by EWP.
In September 2020, EWP applied to Elering for an assessment of the compliance of the investment project with the relevant Estonian law for the support of RES electricity. In April 2021, Elering decided that that project was not compliant on the ground that EWP could not be considered to be an “existing producer” on 31 December 2016. If that had been the case, EWP would have been entitled to obtain aid for the construction of the proposed wind farm on the basis of an existing aid scheme. EWP initiated legal action against that decision. At the centre of the legal dispute was whether EWP was an existing producer.
Interestingly, the Commission submitted an opinion to the Estonian court that was adjudicating the dispute stating that recital 42 of the 2017 decision had to be interpreted as requiring that, on 1 January 2017, “the project developers had obtained the necessary state authorisation for constructing the project, and that they had the legal title to the land on which the project would be developed”. The Commission added that “both those conditions were to be fulfilled, together with one of the three alternatives referred to in the first sentence of paragraph 19(44) of the 2014 Guidelines, for an undertaking to be considered as an ‘existing producer’ and thus to benefit from State aid compatible with the internal market under the 2017 Decision.”
Before the Court of Justice replied to the questions submitted by the referring court, it explained the legal value of Commission guidelines.
Status of Commission guidelines
The Court, first, recalled that “(30) the assessment of the compatibility of aid measures with the internal market, under Article 107(3) TFEU, falls within the exclusive competence of the Commission, subject to review by the Courts of the European Union. In that regard, the Commission enjoys wide discretion, the exercise of which involves complex economic and social assessments. In the exercise of that discretion, the Commission may adopt guidelines in order to establish the criteria on the basis of which it proposes to assess the compatibility with the internal market of aid measures envisaged by the Member States”.
“(31) In adopting such guidelines and announcing, through their publication, that they will apply to the cases to which they relate, the Commission imposes a limit on the exercise of that discretion and cannot, as a general rule, depart from those guidelines, at the risk of being found to be in breach of general principles of law, such as equal treatment or the protection of legitimate expectations”.
“(32) That means that […] if a Member State notifies the Commission of proposed State aid which complies with those rules, the Commission must, as a general rule, authorise that proposed aid”.
However, the Court also stressed that “(33) the 2014 Guidelines are not capable of imposing independent obligations on the Member States”.
The concept of start of works
Then the Court of Justice turned its attention to the most important question which was the meaning of “start of works”.
First, the Court recalled that “(47) in the first and third situations referred to in paragraph 19(44) of the 2014 Guidelines, the concept of ‘start of works’ includes the ‘start of construction works on the investment’ or any ‘other commitment that makes the investment irreversible’. That provision further stipulates that the ‘buying of land and preparatory works such as obtaining permits and conducting preliminary feasibility studies shall not be considered as start of works’.”
Then, the Court made an important observation. “(48) While it thus follows from the wording of that provision that construction works necessary for the operation of the investment project, such as, in the case in the main proceedings, the construction of measurement masts and the installation of electrical connections, do not constitute preparatory works within the meaning of that provision and are therefore capable of being covered by the concept of ‘start of works’ within the meaning of paragraph 19(44) of the 2014 Guidelines if the conditions laid down in that provision are met, it is clear that that provision does not identify precisely the nature of the construction works referred to or of the commitments that make the investment irreversible, nor does it establish a threshold above which the works started must be regarded as satisfying those conditions.”
In other words, even though the installations constructed by EWP went beyond preparatory works, the Court was not sure whether they signified an irreversible commitment to the project. It is as if the Court signalled a grey area between the end of preparatory works and the beginning of the works proper.
However, the Court went on to state that, in the context of this case, “(49) the purpose of the concept of ‘start of work’ is to determine which producers could be granted the status of ‘existing producer’ of renewable energy eligible for State aid under an existing aid scheme.”
“(50) It is apparent from recital 42 that it is the ‘producers whose project on 1 January 2017 was in such state of development that it would very likely be completed’ who may be regarded as ‘existing producers’ by the authorities granting the aid.”
“(51) Since recital 42 requires that, on that date, the project concerned was at a ‘state of development’ such that it appeared ‘that it would very likely be completed’, the view cannot be taken that any start of construction works on an investment project, whatever those works may be, satisfies such a criterion.”
In other words, even if the Court could not be certain that the installations signified the start of works, it was confident that those installations did not prove that the project was close to completion. This is because “(52) the state of progress of the works in question had to be such that, as at 1 January 2017, the investment concerned was made irreversible and that the developer could be treated in the same way as an existing producer of renewable energy.” “(54) Therefore, only a commitment which, on 1 January 2017, brought the investment project to a ‘state of development’ such that it appeared that ‘it would very likely be
completed’, and that the project was therefore, in essence, irreversible, may fall, in that context, within the concept of ‘start of works’.”
“(55) That threshold can be regarded as having been reached on that date only if the preparatory works were completed and if the commitment made was sufficiently significant, having regard to its nature and its cost, compared with the total size of the investment project concerned.”
The reference of the Court to significance of the installations relative to the cost and size of the project is important because this is the criterion that public authorities use to evaluate aid applications in practice.
“(56) The information available to the Court of Justice tends to indicate that, in the present case, the construction of measurement masts and electrical connections to the transmission system did not constitute such a ‘start of works’ allowing EWP to be treated as an ‘existing producer’ of renewable energy, since only the start of construction works for wind turbines producing renewable energy, or even an irreversible commitment relating to those wind turbines which appear to represent the most significant part of the investment project at issue in the main proceedings, could confer such a status.”
Extent of assessment by national authorities
The referring court asked whether national authorities were required, for the purposes of determining the ‘start of works’, to carry out, on a case-by-case basis, an analysis – and if appropriate an economic, in-depth analysis – of the state of development of the investment project concerned and of the likelihood that it will be completed, or whether it may be limited to a purely factual or formal assessment.
The Court of Justice replied that “(59) recitals 42 to 44 of the 2017 Decision state, inter alia, […], that ‘the responsibility for the correct implementation of aid measures remains with the Member States via its relevant authorities’ and that, in the event that ‘the granting authority would consider’ that works on a particular project started, within the meaning of paragraph 19(44) of the 2014 Guidelines, before 1 January 2017, the Commission considers that that assessment relates to that project as such. Those recitals also state that footnote 66 of those guidelines must be ‘read and interpreted by the granting authorities’ taking into account the definition of ‘start of works’ in paragraph 19(44) of the guidelines.”
“(60) Accordingly, it is unequivocally clear from recitals 42 to 44 of the 2017 Decision that, in the context of that decision, the competent authority must carry out a case-by-case review that relates to the question whether the project concerned was, on 1 January 2017, at such a state of development that it appeared very likely that it would be completed. Such an assessment does not lend itself to a purely formal review and may, depending on the case, require an in-depth economic analysis.”
Then the Court of Justice clarified an important difference with respect to the obligations of national authorities under the State aid guidelines and under the GBER. “(61) That finding is not invalidated by the considerations set out in paragraphs 61 and 68 of the judgment of 5
March 2019, Eesti Pagar (C-349/17, EU:C:2019:172). It is true that, in those paragraphs, the Court, in essence, precluded the competent national authorities from carrying out complex economic assessments on a case-by-case basis and limited the power of those authorities to findings of a factual or formal nature. However, such a limitation was found with respect to the application of Article 8(2) of Commission Regulation (EC) No 800/2008 [2008 GBER], which must be applied uniformly across the Member States by means of clear and easily applicable criteria. In addition, those considerations related to a presumed or actual incentive effect of the aid concerned.”
“(62) By contrast, in the present case, the incentive effect of the Estonian support scheme applicable before the modifications referred to in the 2017 Decision was definitively established by the Commission in that decision, with the result that the assessment to be made by the competent national authority relates exclusively to whether or not the developer had a legitimate expectation justifying protection in obtaining support under that support scheme. Such an examination must necessarily be conducted on a case-by-case basis and cannot be regarded as being limited to a purely factual or formal assessment.”
Does obtaining of the necessary licences and authorisations signify the start of works?
The referring court asked whether a project had to be considered as having already started when the investor acquired the necessary authorisations for the construction of wind turbines.
On the contrary, the Court of Justice replied that it was “(65) apparent from paragraph 19(44) of the 2014 Guidelines that ‘the obtaining of permits’ comes under ‘preparatory works’ and therefore does not constitute ‘start of works’ within the meaning of that provision. In addition, recital 42 of the 2017 Decision unequivocally requires that the project developer has ‘obtained the necessary state authorisation for constructing the project’ and that it has ‘the legal title to the land on which the project would be developed’.”
“(66) It follows, first of all, that the concept of ‘start of works’ set out in paragraph 19(44) necessarily implies, in the context of recital 42, that the developer has the right to use the land on which the investment project concerned will be carried out and the necessary state authorisation for constructing that project.”
“(67) Next, given that those provisions refer to ‘state’ authorisation without specifying, […], the type of authorisation required, the concept of ‘state authorisation’ must be interpreted having regard to national law.”
“(69) It follows that the type of authorisation required under paragraph 19(44) of the 2014 Guidelines, read in conjunction with recital 42 of the 2017 Decision, must also permit the inference that, on that date, it appeared very likely that that project would be completed and, therefore, must allow the developer to be treated in the same way as an ‘existing producer’ of renewable energy.”
“(70) As has been pointed out in paragraph 56 above, in the present case, only the start of construction work on wind turbines producing renewable energy or an irreversible
commitment relating to those wind turbines would have enabled EWP to be treated in the same way as such a producer, with the result that the state authorisation required should have allowed that construction work to be carried out.”
“(71) The information available to the Court tends to indicate that, in accordance with Estonian law, urban planning documents do not, in themselves, enable construction works to be carried out in respect of the wind turbines at issue in the main proceedings, but that the execution of those works still requires, by way of final state authorisation, the obtaining of building permits, with the result that it appears that it is those permits which must be regarded as the ‘state authorisation’ required.”
“(73) An undertaking which did not have on that date the necessary state authorisation for constructing the investment project concerned cannot be regarded as justifying, on that date, a legitimate expectation worthy of protection in obtaining aid under an existing aid scheme.”
That is, preparatory works did not indicate the start of works and because EWP needed to obtain additional authorisation to construct the wind turbines, EWP could not be considered as an existing producer because its investment in that project was not irreversible.