Support for the Decarbonisation of the Electricity Sector through Storage Capacity

Support for the Decarbonisation of the Electricity Sector through Storage Capacity - Untitled design 1


Romania notified a scheme to support investment in large-scale electricity storage. The Commission approved it in decision SA.102761.[1] The scheme was part of the national Recovery and Resilience Plan [RRP] of Romania and was co-financed by the EU’s Recovery and Resilience Facility.

By supporting investment in electricity storage, Romania aimed to reduce carbon emissions generated by the energy sector, encourage the growth of renewable energy sources [RES] and stabilise energy supply.

As explained in the Commission decision, “(7) storage facilities participate in the electricity markets notably performing a price arbitrage function, i.e. absorbing and storing electricity when electricity market prices are low, and injecting it back into the grid when electricity market prices are high. As such, storage facilities effectively substitute expensive electricity generated by high-cost units for low-cost, clean electricity available during high RES generation conditions, thus generally facilitating RES integration and reducing RES curtailments during over-generation periods.” In this way, by increasing the usefulness of RES electricity, the scheme indirectly incentivised investment in RES electricity production and supported the “decarbonisation” of energy generation.

Studies commissioned by Romania had shown that in order to reach the national RES targets for 2030, the national energy system would need at least 3 GW of electricity storage. At the same time, by 2030 Romania was expected to develop new RES capacity between 10 and 12 GW. If this capacity would not be coupled with storage capacity, the risk of instability in the energy sector would be very high. However, the scheme was approved by the Commission, Romania had hardly any battery storage.

Budget and sources of funding

The total budget of the scheme was EUR 104 million. EUR 80 million, or 77%, was to be contributed by the RRF while the remaining EUR 24 million, or 23%, would be paid from the national budget.

Form of the aid and aid ceilings

Beneficiary undertakings had already been selected through a competitive bidding process. The tender was launched on 28 November 2022 but there was a stand-still clause until the Commission would approve the scheme.

The aid could cover up to 100% of the funding gap of the project, but it could not exceed EUR 15 million per undertaking, per investment project, or EUR 167 000/MWh of storage installed capacity.

Selection criteria

Bids were ranked according to the ratio of requested aid per MWh of installed storage. Bids with the lowest ratio of aid per MWh were selected until the available budget was exhausted. The aid would be paid as a reimbursement of the eligible expenditures incurred and could not exceed the requested aid.

As explained, “(54) tendered projects [were] ranked based on the amount of aid requested per MWh of storage installed capacity (EUR/MWh). The project with the lowest value [got] a maximum score (100 points) and the application with the highest value [had] zero points, with a linear decrease of the score for the intermediate values. The total score related to the application [was] between 0 and 100 points.”

Applicants had to submit, in addition to other documents, a feasibility study, a cost-benefit analysis and a declaration regarding compliance with the do-no-significant-harm [DNSH] principle including an environmental impact assessment [EIA]. Successful applicants would be obliged to complete their projects by 31 December 2025.

Funding gap

According to the Commission decision “(49) the funding gap of the project is defined as the difference between the economic revenues and costs (including investment and operating costs) related to the aided project and those related to the alternative project that the aid beneficiary would credibly achieve in the absence of the aid (the counterfactual scenario).”

Normally, the funding gap [FG] is defined as follows:

FG = NPV [(Operating revenue – operating costs) – initial investment]

where, NPV is net present value

The maximum State aid that may be granted is – FG.

In this particular case, however, the FG was defined differently:

FG = (NPV of the aided project – NPV of the alternative project)

To appreciate the difference between the two methods consider the following numerical example. Assume that the NPVs of the two scenarios are,

Factual investment:                                       100

Factual net operating revenue:                     85

Counterfactual investment:                           70

Counterfactual net operating revenue:        75

The alternative project is smaller but profitable. Since, the factual project is larger but loss-making, no rational investor would carry it out without State aid. A FG analysis that examines only the factual project would result in State aid of 15 [= – FG = 85 – 100]. However, by defining FG as the difference between the NPV of the two scenarios, the maximum amount of State aid is larger. In this case it is 20 [= – (85 – 100) – (75 – 70) = – (– 15 – 5)]. In other words, it also includes the forgone profit of the counterfactual project.

The funding authority had also calculated the FG of a reference project of a 20-50 MW electric storage and estimated the capital costs as given by the weighted average cost of capital [WACC]. “(57) The expected range for the WACC is reported between 6.5 and 9.6% and is based on the IEA Clean energy transitions in emerging economies. Key components for the calculation of the WACC are the cost of equity in a range of 10.9 to 14.5% and a share of project debt between 40 and 50%. Other assumptions for the calculation of the WACC is the debt base rate after tax of 0.3% and the debt risk premium after tax of 1.9%.” In other words, the cost of debt was 2.2%.

According to those calculations “(60) the net present value (“NPV”) ranges from EUR -166.98 to -187.6 per kW.” “(61) The numbers presented by the Romanian authorities for the reference project, result in funding gaps between 43% and 48% under the assumptions provided.”

“(64) The counterfactual consists in the beneficiary not carrying out the project and the NPV of the counterfactual is zero.”

Existence of State aid

The notified Romanian scheme did constitute State aid. With respect to the advantage conferred on the selected undertakings, the Commission noted that competitive selection did not eliminate the advantage granted through state resources because, under normal market conditions, no private investor would be willing to finance a project that was loss making. “(81) The measure will provide an economic advantage to the beneficiaries, as they will obtain an investment grant for their storage facilities, which they would not have obtained under normal market conditions, i.e. in the absence of the State intervention.”

Compatibility with the internal market

“(89) The Commission notes that the measure aims at the promotion of the establishment of battery electric storage (BES) facilities in Romania, which qualify as energy storage facilities under point 19(33) CEEAG. According to point 377 CEEAG, section 4.9 CEEAG also applies to energy storage facilities, connected to transmission or distribution lines irrespective of the voltage levels, for schemes approved no later than 31 December 2023.”

Therefore, the Commission assessed the compatibility of the scheme on the basis of the general compatibility provisions in section 3 of the CEEAG and the specific compatibility criteria for aid for energy infrastructure in section 4.9 of the CEEAG.

Positive condition: The aid must facilitate the development of an economic activity

First, the Commission confirmed that the scheme identified correctly the aided economic activity.

Second, it verified the presence of an incentive effect. “(98) According to point 26 CEEAG, aid can be considered as facilitating an economic activity only if it has an incentive effect. An incentive effect occurs when the aid induces the beneficiary to change its behaviour, to engage in additional economic activity or in more environmentally-friendly economic activity, which it would not carry out without the aid or would carry out in a restricted or different manner. The aid must not support the costs of an activity that the aid beneficiary would anyhow carry out and must not compensate for the normal business risk of an economic activity (point 27 CEEAG).”

“(99) Proving an incentive effect entails the identification of the factual scenario and the likely counterfactual scenario in the absence of aid (point 28 CEEAG). For aid to infrastructure, the counterfactual scenario is presumed to be the situation in which the project would not take place (point 381 CEEAG).”

“(100) Romania submitted that, in the absence of the aid, investors would not have the appropriate incentive to undertake the material investments required for the establishment of the required storage capacity (see recital (16)). The analysis provided by Romania shows that without the aid measure, the storage facilities would not be constructed because the expected market revenues do not suffice to ensure viability of the storage projects, leading to a negative NPV (see section 2.7.1). Without the aid, the facilities could not materialise and contribute to ensure stable RES integration and provide benefits to the electric system.”

“(103) Taking into account the above considerations, it can be concluded that the measure has an incentive effect, as it induces the beneficiaries to engage in an economic activity that they would not carry out without the aid or would carry out in a restricted or different manner.”

Third, the Commission checked that the aid would not lead to a breach of any relevant provision of Union law.

Negative condition: The aid measure must not unduly affect trading conditions to an extent contrary to the common interest

First, the Commission confirmed that the aid was necessary in the sense that the market could not deliver on its own the needed storage capacity.

“(112) Energy infrastructure is typically financed through user tariffs and the granting of State aid is a way to overcome market failures that cannot be fully addressed by means of compulsory user tariffs (points 379 and 380 CEEAG).” “(113) The Commission notes that, based on Romania’s analysis of the Romanian electricity market, in the absence of a support scheme, the market revenues of storage projects and in particular the reference BES project would not suffice to ensure viability of the storage projects, leading to a negative NPV (see section 2.7.1).”

Second, the Commission found the measure to be appropriate. “(117) The proposed aid measure must be an appropriate policy instrument to achieve the intended objective of the aid, that is to say there must not be a less distortive policy and aid instrument capable of achieving the same results.”

“(118) The Commission recalls that, according to point 380 CEEAG, the granting of State aid is a way to overcome market failures that cannot be fully addressed by means of compulsory user tariffs.” “(122) Unlike classical energy infrastructure, pursuant to Article 54 Directive 2019/944, storage is in principle not part of the asset base for transmission or distribution system operators. As such, it cannot be financed by general transmission or distribution tariffs.”

Third, the aid had to be proportional in the sense that it was kept to the minimum necessary for each project. “(125) According to point 381 CEEAG, proportionality is assessed on the basis of the funding gap principle, as set out in points 48, 51, and 52 CEEAG.” “(127) Thus, in order to assess proportionality, it is necessary to assess both the tender process and the assumptions underpinning the calculation of the funding gap of the reference project.”

“(128) Aid is considered as limited to the minimum needed for carrying out the aided project or activity if the aid corresponds to the funding gap necessary to meet the objective of the aid measure, compared to the counterfactual scenario in the absence of aid. The counterfactual scenario in the case of the measure corresponds to the situation in which a storage project would not be realised, in line with point 381 CEEAG.”

“(129) Concerning the tender process, the Commission notes that the tender process foreseen in the measure is transparent and based on clear rules which have been made available to all participants more than nine months in advance of the application deadline, in line with point 49 CEEAG and in particular footnote 43 (see recitals (30) and (41)). The eligibility criteria are reasonable and non-discriminatory in view of the objectives of the measure, which is to prepare the Romanian electricity system for increasing levels of penetration of RES electricity and make it more flexible and decentralised.”

“(130) The criteria to evaluate the bids have also been established upfront in an objective and transparent manner. The bidders requesting the lowest aid amount per MWh of installed storage capacity will have the highest chance of being selected (see recital (54)).”

“(131) In addition, the number of participants is expected to be high and sufficient to ensure effective competition. According to Romania, based on informal information from market participants on expected projects under development and considering the allocated budget, the estimated number of beneficiaries is between 5 and 20 out of 22 to 30 anticipated applications (see recital (46)). Moreover, should subsequent rounds of tender be organised, Romania will ensure that there will be sufficient competition (see recital (41)), in line with point 49(c) CEEAG.”

“(133) Moreover, the bid caps based on the funding gap of the reference project (EUR 167 000/MWh installed storage capacity) and based on the funding of the individual projects will also limit the risk of overcompensation (see analysis below).” “(134) Finally, the cap of EUR 15 million per project, per undertaking (see recital (51)), which reduces the potential for an entity with a large bid to negatively influence the result of the tender, will reinforce the competitiveness of the tender process.”

The Commission also noted approvingly that the FG calculation was robust and based on realistic assumptions.

Fourth, the Commission checked that there were no undue negative effects on competition and trade.

In this respect, the Commission recalled that “(146) in line with point 382(a) CEEAG, […] aid for energy infrastructure that is subject to full internal market regulation does not have undue distortive effects. In the present case, the storage facilities will indeed be subject to full internal market regulation (see recital (35)).”

Then, it also reiterated that “(147) according to point 382(d) CEEAG, for support to electricity storage facilities, the Commission will in particular assess the risks of distortion of competition which may arise in related services markets as well as on other energy markets.” “(148) The Commission notes that only limited battery storage facilities have been installed in Romania so far (see recital (16)(15)).” “(150) In addition, competition will also be fostered by ensuring that a sufficient number of projects belonging to independent entities will eventually be operating in the market. This will be enabled through the EUR 15 million cap in the tender (see recital (51)). The Commission further notes, that Romania considers this first tender a pilot project to collect experience for further storage projects, if required (see recital (33)).”

“(151) Since, once awarded, the support is independent from market revenues, there is a clear incentive to maximise market revenues also compared to other storage installations. Combined with the EUR 15 million cap applied in the tender, the measure is expected to incentivise several market participants to actively compete on the Romanian balancing services markets. Battery storage is technically in a very competitive position on balancing markets in several Member States and the creation of battery storage facilities in Romania is thus expected to result in a significant increase in the number of total facilities capable of competing on the balancing market and other system services markets. There is currently virtually no battery storage in Romania, and very limited storage in hydro-pumped units (see recital (15)). The measure is thus expected to improve rather than reduce competition on the concerned services markets.”

Weighing of the positives and negatives of the aid

As a last step in its assessment of compatibility, the Commission weighed the positive effects of the aid against the negative effects on competition and trade.

In this respect, it reiterated its earlier findings that the measures had positive effects. Then it noted that “(156) the Romanian authorities have designed the measure in such a way as to minimise the potential distortion of competition arising from the measure.”

On the basis of the summary of the likely positive and negative effects, it concluded that “(157) the positive effects of the measure outweigh any potential negative effects on competition and trade. On balance, the measure is in line with the objectives of Article 107(3)(c) TFEU as it facilitates the development of electricity storage in Romania, where such aid does not adversely affect competition to an extent contrary to the common interest.”

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



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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