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.

Tags

Über

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.

Zusammenhängende Posts

18. Jun 2024
State Aid Uncovered von Phedon Nicolaides
Obligations Imposed by the State Cannot Justify Tax Exemptions - State Aid Uncovered photos 18

Obligations Imposed by the State Cannot Justify Tax Exemptions

Introduction Over the past decade or so, the European Commission has found that multiple port operators have benefitted from State aid in the form of tax exemptions. This aid was in all cases found to be incompatible with the internal market, despite the claims of the port operators that the state had imposed on the public service obligations or that […]
04. Jun 2024
State Aid Uncovered von Phedon Nicolaides
Special Tax Treatment for a Major Infrastructure Project - State Aid Uncovered photos 16

Special Tax Treatment for a Major Infrastructure Project

Introduction In April 2013, the Commission received a complaint alleging that State aid had been granted to the Oresund fixed link. The link is a major transport infrastructure project consisting of a bridge, an artificial island and tunnels between Denmark and Sweden. In October 2014, the Commission concluded that the public funding of the hinterland road and rail connections was […]
07. Mai 2024
State Aid Uncovered von Phedon Nicolaides
Public Procurement and State Aid - State Aid Uncovered photos 2

Public Procurement and State Aid

Introduction A faulty public procurement procedure or the use of discriminatory selection criteria can confer an advantage on the chosen undertaking that may constitute an advantage in the meaning of Article 107(1) TFEU. The result will be infringement of both public procurement rules and State aid rules. A recent Commission decision, SA.47650, is instructive on how Member States should design […]
23. Apr 2024
State Aid Uncovered von Phedon Nicolaides
Pricing of Access to Infrastructure for the Treatment of Waste Water - State Aid Uncovered photos 10

Pricing of Access to Infrastructure for the Treatment of Waste Water

Introduction It is not unusual for EU courts to refer to the Commission’s 2016 Notice on the Notion of State Aid as a means of shedding light to the more obscure aspects of that notion. What is very unusual is for EU courts to treat the Notice as if it has the same status as the guidelines that bind the […]
09. Apr 2024
State Aid Uncovered von Phedon Nicolaides
An Innovative Risk-Sharing Tool for the Support of an LNG Terminal - State Aid Uncovered photos 8

An Innovative Risk-Sharing Tool for the Support of an LNG Terminal

Introduction The Commission, in decision SA.102163, authorised State aid for the construction of a terminal for liquefied natural gas [LNG] in Brunsbüttel, Germany.1 The project consists of an LNG import, storage and distribution facility with annual capacity of about 10 billion m3. The project is carried out by the German LNG Terminal GmbH [GLNG] which has three shareholders: the Dutch […]
02. Apr 2024
State Aid Uncovered von Phedon Nicolaides
The Court of Justice Conflates Objective Justification with Policy Objective, in the context of Public Support of Green Electricity - State Aid Uncovered SM posts

The Court of Justice Conflates Objective Justification with Policy Objective, in the context of Public Support of Green Electricity

Introduction Suppose a Member State subsidises the installation of solar panels on the roof of a corporate building situated at number 5 on Main Street. Is this a general measure because there is no other building in the whole country with the same address? Of course, it is not a general measure. The uniqueness of the address is irrelevant. Apart […]
05. Mrz 2024
State Aid Uncovered von Phedon Nicolaides
State Aid and Arbitration of Disputes - State Aid Uncovered photos

State Aid and Arbitration of Disputes

Introduction On 22 February 2024, the Court of Justice [CJEU] delivered its judgment in joined Cases C-701/21 P and C-739/21 P, Mytilinaios v DEI & European Commission. Mytilinaios, a Greek company, and the Commission appealed against the judgment of the General Court in case T-639/14 RENV, DEI v Commission, concerning arbitration of a dispute between Mytilinaios and DEI, the main […]
20. Feb 2024
State Aid Uncovered von Phedon Nicolaides
Another Case of Indirect State Aid - State Aid Uncovered photos 4

Another Case of Indirect State Aid

Introduction On 19 May 2021, the General Court, in case T-643/20, Ryanair v Commission, annulled Commission decision SA.57116 by which it authorised State aid in favour of KLM in the context of the measures implemented by the Dutch government to address the covid-19 pandemic. In July 2021, the Commission re-adopted its original decision without the errors that had been identified […]
13. Feb 2024
State Aid Uncovered von Phedon Nicolaides
State Resources, Control and Imputability - State Aid Uncovered photos 1

State Resources, Control and Imputability

Introduction A public measure can be classified as State aid only when it is funded from state resources. Measures funded from the budgets of public authorities are always considered to be supported by state resources. However, measures not funded from state budgets may still be supported by state resources. This is because, rather counterintuitively, the concept of state resources covers […]
19. Dez 2023
State Aid Uncovered von Phedon Nicolaides
Indirect Advantage - Untitled design 30

Indirect Advantage

Introduction It is an established principle in the State aid case law that Article 107(1) TFEU applies both to direct and possibly indirect aid beneficiaries. Yet, it is not always easy to identify any indirect beneficiaries. On 15 November 2023, the General Court, in case T-167/21, European Gaming and Betting Association v European Commission, faulted the latter for failing to […]