The Common European Interest and the Environmental Impact of State Aid: The Case of Nuclear Power

I am grateful to Peter Staviczky for comments on an earlier version.


The possible negative impact of State aid on the environmental is taken into account when the aid measure violates directly the relevant EU law.

The Commission protects the interests of other Member States by ensuring that the negative effects of State aid are kept to the minimum possible.

Update on Temporary Framework:

Number of approved and published covid-19 measures, as of 23 October 2020: 306*

Legal basis: Article 107(2)(b): 32; Article 107(3)(b): 259; Article 107(3)(c): 23

– Average number of measures per Member State: 11

– Median number of measures per Member State: 12

– Mode number of measures per Member State: 7

* Excludes about 100 amendments of previously notified measures

Introduction

On 22 September 2020, the Court of Justice upheld the judgment of the General Court in the very unusual case C‑594/18 P, Austria v Commission.[1] The case is very unusual because it is exceedingly rare for a Member State to challenge a Commission decision authorising aid granted by another Member State. It was also one of the very few times that the Court of Justice dealt with State aid for a nuclear power station.

The importance of the case is indicated by the fact that it was heard in the grand chamber and that six Member States intervened in support of the Commission. Only one Member State supported Austria. Interestingly, Germany, the largest grantor of State aid to green energy, did not intervene on Austria’s side, even though it had also decided to phase out nuclear energy.

Austria appealed against the judgment of the General Court in case T‑356/15, Austria v Commission. Austria questioned the validity of Commission decision 2015/658 which approved State aid in favour of Hinkley Point C nuclear power station in Somerset in the UK. The judgment of the General Court was reviewed here on 18 September 2018 and 25 September 2018:

https://www.lexxion.eu/en/stateaidpost/the-compatibility-of-state-aid-with-the-internal-market-lessons-from-hinkley-point-c-part-i/

https://www.lexxion.eu/en/stateaidpost/the-compatibility-of-state-aid-with-the-internal-market-lessons-from-hinkley-point-c-part-ii/

The aid was granted in 2013 to the operator of Hinkley Point C, NNB Generation Company [NNBG], a subsidiary of French EDF. The aid was in three parts. The first part was a “contract for difference”, which was intended to ensure price stability for electricity sales during the operational phase of Hinkley Point C. The second part was an agreement between the investors in NNBG and the UK Ministry for Energy and Climate Change, guaranteeing compensation in the event of an early shutdown of the nuclear power station on political grounds. The third part consisted of a credit guarantee by the UK on bonds to be issued by NNBG. The purpose of the guarantee was to ensure the timely payment of principal and interest of qualifying debt.

Must State aid support an objective of common European interest?

After the Fukushima disaster in Japan several Member States such as Austria and Germany decided to phase out their nuclear power plants. Austria argued that in view of its impact on the environment, nuclear power was not in the common European interest.

First, the Court of Justice explained that “(19) in order to be capable of being considered compatible with the internal market under [Article 107(3)(c) TFEU], State aid must meet two conditions, the first being that it must be intended to facilitate the development of certain economic activities or of certain economic areas and the second, expressed in negative terms, being that it must not adversely affect trading conditions to an extent contrary to the common interest.”

“(20) Unlike Article 107(3)(b) TFEU, which provides that aid to promote the execution of an important project of common European interest or to remedy a serious disturbance in the economy of a Member State may be declared compatible with the internal market, Article 107(3)(c) TFEU therefore does not make the compatibility of aid dependent on its pursuing an objective of common interest, without prejudice to the fact that decisions adopted by the Commission on that basis must ensure compliance with EU law.”

The first limb of Article 107(3)(b) is the only provision in Article 107 that refers to pursuit of an objective of common interest. It is not clear why the Court of Justice ignored the other provisions which are in the majority.

At any rate the Court went on to point out that “(21) contrary to the Republic of Austria’s contentions, in the judgments cited by it the Court of Justice placed no reliance on the existence of a condition requiring the aid to pursue an objective of common interest. […] [Although] the Commission has a discretion the exercise of which involves complex economic and social assessments, […] which must be made in an EU context, the Court […] did not hold that the Commission must establish whether the planned aid pursues an objective of common interest.”

That is, the Commission has to balance the interests of other Member States by ensuring that aid does not cause excessive harm to them but does not have to determine whether the aims of the aid are shared by all Member States.

“(23) The Republic of Austria refers to a Commission document entitled ‘Common principles for an economic assessment of the compatibility of State aid under Article 87.3’, which envisages a method of analysis whose first stage consists in examining whether the aid at issue is aimed at a well-defined objective of common interest.”

“(24) However, even on the assumption that such a document may be seen as a framework or communication from which the Commission in principle cannot depart without being found, where appropriate, to be in breach of general principles of law such as equal treatment or the protection of legitimate expectations […], the Commission cannot in any event, by those instruments, improperly reduce the scope of Article 107(3)(c) TFEU by providing for that provision to be applied in a manner that is incompatible with what has been stated in paragraph 20 of the present judgment”.

This explanation, of course, leaves unanswered the question whether the Commission’s reference to “common interest” is invalid. As the General Court explained better and more convincingly in its own judgment, the common interest in Commission guidelines and documents is not the same as Austria’s understanding of common interest. The Commission uses that term to mean a legitimate objective of public policy as defined by the aid-granting Member State, which is not necessarily an objective that is shared or endorsed by all Member States.

“(26) Since Article 107(3)(c) TFEU does not require planned aid to pursue an objective of common interest in order to be declared compatible with the internal market”, this part of the appeal was rejected, but the Court of Justice missed the opportunity to clarify the meaning of common interest.

Interestingly, the General Court, in case T-457/09, Westfälisch-Lippischer Sparkassen- und Giroverband v Commission, clearly stated that the “(184) difference in wording […] between Article 87(3)(c) EC, which allows the authorisation of some aid provided that it ‘does not adversely affect trading conditions to an extent contrary to the common interest’, and Article 87(3)(b) EC, which lays down no such condition, cannot lead to the conclusion that the Commission cannot assess the impact of aid authorised under the latter provision on the relevant market or markets in the European Union as a whole” (emphasis added). This means that it falls within the discretion of Member States to define the objective of the aid [i.e. the positive effects pursued by the aid measure] but the “common interest” that is protected by the Commission is the minimisation of the negative impact of the aid on other Member States.

Does the Euratom Treaty allow State aid for nuclear energy?

Austria argued that Euratom Treaty does not provide a legal basis for the granting of State aid to nuclear energy. The Court of Justice, first, noted that “(32) the rules of the FEU Treaty apply in the nuclear energy sector when the Euratom Treaty does not contain specific rules. Accordingly, since the Euratom Treaty does not contain rules concerning State aid, Article 107 TFEU may be applied in that sector”. “(33) Second, […] the objectives pursued by the Euratom Treaty cover the construction of nuclear power stations or the creation of new nuclear energy generating capacity, with the result that the grant of State aid for them is not contrary to those objectives.”

Consequently, the Court of Justice dismissed as well this part of Austria’s appeal.

Is aid to nuclear energy contrary to the environmental principles of the EU?

Austria contended that the aid was contrary to the principle of protection of the environment, the precautionary principle, the polluter-pays principle and the principle of sustainability.

The Court of Justice observed that “(42) Article 37 of the Charter, which states that ‘a high level of environmental protection and the improvement of the quality of the environment must be integrated into the policies of the Union and ensured in accordance with the principle of sustainable development’, Article 11 TFEU, according to which environmental protection requirements must be integrated into the definition and implementation of the Union’s policies and activities, in particular with a view to promoting sustainable development, and Article 194(1) TFEU, according to which Union policy on energy must have regard for the need to preserve and improve the environment. Accordingly, the requirement to preserve and improve the environment, expressed in both the Charter and the FEU Treaty, as well as the principles relied on by the Republic of Austria, which flow from it, are applicable in the nuclear energy sector”. “(43) The same is true of provisions of secondary EU law on the environment.”

“(44) Furthermore, the Court has already held that State aid which contravenes provisions or general principles of EU law cannot be declared compatible with the internal market”. [At this point, the Court cited case C‑390/06, Nuova Agricast, paras 50 and 51].

But the provisions and the principles must be clear enough so that their contravention by State aid is unambiguous. Supporters of nuclear energy argue that it is safe, clean and sustainable. Others dispute that vehemently. It is not obvious that State aid to nuclear energy would necessarily infringe Treaty provisions and general EU principles.

The Court inferred from the above that “(45) since Article 107(3)(c) TFEU applies to State aid in the nuclear energy sector covered by the Euratom Treaty, State aid for an economic activity falling within that sector that is shown upon examination to contravene rules of EU law on the environment cannot be declared compatible with the internal market pursuant to that provision.”

“(46) The General Court therefore wrongly rejected, in paragraph 517 of the judgment under appeal, the Republic of Austria’s argument that the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability preclude the grant of State aid for the construction or operation of a nuclear power plant on the ground that such an interpretation would be contrary to Article 106a(3) of the Euratom Treaty.”

However, the Court of Justice did not annul the judgment of the General Court because “(48) first, Article 194(1)(a) and (b) TFEU provides that, in the context of the establishment and functioning of the internal market, Union policy on energy aims to ensure the functioning of the energy market and security of energy supply in the Union. The Court has already observed that Article 194(1)(b) TFEU identifies security of energy supply in the European Union as one of the fundamental objectives of EU policy in the field of energy […]. Second, the second subparagraph of Article 194(2) TFEU provides that the measures adopted by the European Parliament and the Council are not to affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, and does not preclude that choice from being nuclear energy.”

“(49) Thus, since the choice of nuclear energy is, under those provisions of the FEU Treaty, a matter for the Member States, it is apparent that the objectives and principles of EU environmental law and the objectives pursued by the Euratom Treaty […] do not conflict, so that, contrary to the Republic of Austria’s contentions, the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability cannot be regarded as precluding, in all circumstances, the grant of State aid for the construction or operation of a nuclear power plant.”

In other words, the Treaty provisions on the environment and energy are rather general so that it is not possible to say unambiguously that State aid to nuclear energy is contrary to them.

For this reason, the Court of Justice concluded that “(50) the error of law committed by the General Court […] has no effect on the soundness of its rejection of the Republic of Austria’s argument”.

Did aid support the development of “certain economic activities”?

The Court of Justice, first, clarified that for the application of Article 107(3)(c), the aid must support the development of certain economic activities [or areas] without being necessary to define the relevant market for those activities.

“(60) It is clear from Article 107(3)(c) TFEU that […] [it] does not require the product market within which the economic activity falls to be identified, as identification of that market is relevant only for examining whether the planned aid does not adversely affect trading conditions to an extent contrary to the common interest, which is the second condition upon which the provision makes the compatibility of aid dependent.”

“(61) The General Court held that the Commission did not err in finding that the purpose of the construction of Hinkley Point C was to develop an activity within the meaning of Article 107(3)(c) TFEU, while noting, in particular, that it was apparent from the decision at issue that its construction was intended to replace ageing nuclear energy generating capacity that was scheduled for closure, and that the technology to be used in that reactor was more advanced than that used in existing power stations.”

“(63) Those measures were such as to develop the generation of nuclear energy, which does indeed constitute an economic activity within the meaning of Article 107(3)(c) TFEU.”

Is market failure a necessary condition?

The Court reiterated established case law [see cases T-162/13, Magic Mountain v Commission & T-693/14, Hamr-Sport v Commission] that the presence of market failure is a corroborating factor but not a necessary condition for the compatibility of aid.

“(66) Even though the Commission may consider it necessary in the context of Article 107(3)(c) TFEU to examine whether the planned aid enables a market failure to be remedied when determining whether that aid is compatible with the internal market, the existence of such a failure nevertheless does not constitute a condition for declaring aid to be compatible with the internal market under that provision.”

“(67) While the existence of a market failure may be a relevant factor for declaring State aid compatible with the internal market, the absence of such a failure does not necessarily mean that the conditions laid down in Article 107(3)(c) TFEU are not satisfied.” “(68) Article 107(3)(c) TFEU does not contain a condition requiring such a failure. Furthermore, […] without the United Kingdom’s intervention, investment in new nuclear energy generating capacity would not have been delivered within a reasonable time is an assessment of a factual nature”.

It would have been good if the Court of Justice had added in paragraph 67 that a decisive issue concerning the compatibility of aid is its necessity for the “development of certain economic activities or areas”.

Were the measures proportional?

In addition to the necessity of the aid, Member States have to show that the amount of aid is proportional in the sense that it is the minimum necessary to achieve the objective of the aid measure. Austria claimed that the aid measures were disproportional in a different sense. It argued that the Commission should have examined whether and to what extent there were other more proportionate means of covering electricity needs in the UK.

The kind of proportionality underpinning Austria’s argument is part of the standard test that has been used by EU courts to determine whether restrictions in the internal market can be justified for reasons of overriding public interest. But is this a condition for the application of Article 107(3)(c)? Admittedly, the Commission in its compatibility assessment also examines whether aid is “appropriate”, meaning that other policy instruments are more distortionary or less effective. However, in practice it finds State aid to be appropriate in the vast majority of cases. Only in a handful of cases over the past two decades has it found aid to be inappropriate on the grounds that other policy instruments were more effective and less distortionary [e.g. regulating instead of subsidising the switching from analogue to digital tv].

First, the Court of Justice reviewed the reasons for the construction of Hinkely Point C. “(77) [The aid measures] were part of a set of energy policy measures taken by the United Kingdom in the context of the reform of the electricity market, designed to ensure security of supply, diversification of sources and decarbonisation, […] it would not be possible to address the future gap in energy generating capacity caused, on the one hand, by the increase in demand and, on the other, by the closure of existing nuclear power stations and coal-fired power stations by relying solely on renewable energy sources.” “(78) The intermittent nature of many renewables technologies did not allow them to be a suitable alternative to a baseload technology such as nuclear energy”. “(79) The project to build Hinkley Point C was intended solely to prevent a drastic fall in the contribution of nuclear energy to overall electricity needs and that, in the light of the United Kingdom’s right to determine its own energy mix and to maintain nuclear energy as a source in that mix, […] the decision to maintain nuclear energy in the supply structure could not be considered to be manifestly disproportionate having regard to the positive effects of the measures at issue.”

Then the Court concluded that “(80) it is apparent from those findings and considerations that, contrary to the Republic of Austria’s contentions, the General Court examined the proportionality of the measures at issue not in the light solely of the objective of creating new nuclear energy generating capacity but in the light of the United Kingdom’s electricity supply needs, whilst rightly pointing out that the United Kingdom is free to determine the composition of its own energy mix.”

The Court of Justice reached its conclusion here by mostly repeating the views of the Commission and the General Court. The Commission may have seen studies proving the need of the UK to build a new nuclear power plant, but the point is that the Court of Justice did not refer to any objective proof. In the end it simply stated that the UK, as a Member State at the time, was free to choose its energy sources. But it is still unclear how this choice is linked to proportionality. Having the right to choose between different policy options does not necessarily mean that the actual choice is proportional. Did the Court mean that the UK’s freedom of choice was not subject to proportionality test? More importantly, how can the test of proportionality be applied to different policy options? What is the common denominator? Distortion of competition, affectation of trade or something else? Must the negative impact on other policies be minimised? Should the environmental impact be minimised, since as acknowledged earlier, State aid measures have to take account of environmental concerns?

Must the Commission consider the wider effects of aid such as the precedent it creates?

The Court rejected unequivocally the contention of Austria that the Commission should also assess the effect of the aid on future policy choices.

“(84) For the purpose of applying Article 107(3)(c) TFEU, it is incumbent upon the Commission to examine whether the second condition upon which the compatibility of aid is dependent under that provision is fulfilled by seeking to ascertain whether the planned aid does not adversely affect trading conditions to an extent contrary to the common interest.”

“(85) It follows that the examination to be conducted by the Commission relates only to the effects of the planned aid, […] and cannot be based on speculation as to the precedent effect of the decision that it is called upon to adopt or on other considerations relating to the cumulative impact of that aid and other aid plans that may arise in the future.”

The Court of Justice also dismissed for lack of proof a plea by Austria that there was disproportionate discrimination against other technologies. [para 91]

Balancing of the effects of the aid

Austria claimed that the General Court failed to confirm the proportionality (in the conventional sense) of the aid measures by weighing their positive effects against their negative effects, in particular their negative impact on the environment.

First, the Court of Justice noted that “(96) the General Court examined and rejected all the arguments put forward by the Republic of Austria challenging the Commission’s weighing up in the decision at issue of the positive and negative effects of the measures at issue.”

It also noted that “(97) as regards the argument […] that the Commission did not sufficiently take into account the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability, the General Court stated, in paragraphs 515 to 517 of the judgment under appeal, that, since the measures at issue were not specifically intended to give effect to those principles, the Commission was not obliged to take them into account when identifying the advantages that flow from those measures.”

The Court of Justice cited the views of the General Court that, “(98) in the context of the application of Article 107(3)(c) TFEU, the Commission must weigh up the advantages of the measures at issue and their negative impact on the internal market. It held, however, that, although protection of the environment must be integrated into the definition and implementation of EU policies, particularly those which have the aim of establishing the internal market, it does not constitute, per se, one of the components of that internal market, defined as an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured.” “(99) When identifying the negative effects of the measures at issue, the Commission did not have to take into account the extent to which those measures were detrimental to the implementation of the principle of protection of the environment, and this applied equally to the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability”.

The Court of Justice endorsed the views of the General Court. “(100) The requirement to preserve and improve the environment, expressed inter alia in Article 37 of the Charter and in Articles 11 and 194(1) TFEU, and the rules of EU law on the environment are applicable in the nuclear energy sector. It follows that, when the Commission checks whether State aid for an economic activity falling within that sector meets the first condition laid down in Article 107(3)(c) TFEU, […] it must […] check that that activity does not infringe rules of EU law on the environment. If it finds an infringement of those rules, it is obliged to declare the aid incompatible with the internal market without any other form of examination.”

“(101) As regards, however, the question whether such State aid meets the second condition laid down in Article 107(3)(c) TFEU, […] under which that aid must not adversely affect trading conditions to an extent contrary to the common interest, this condition, as the General Court correctly held, entails weighing up the positive effects of the planned aid for the development of the activities that that aid is intended to support and the negative effects that the aid may have on the internal market. Article 26(2) TFEU states that that market ‘shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’. Therefore, examination of the second condition laid down in Article 107(3)(c) TFEU entails the Commission taking into account the negative effects of the State aid on competition and trade between Member States, but does not require any negative effects other than those to be taken into account.”

“(102) Accordingly, the General Court did not err in law in holding that, when identifying the negative effects of the measures at issue, the Commission did not have to take into account the extent to which those measures are detrimental to the implementation of the principle of protection of the environment, the precautionary principle, the ‘polluter pays’ principle and the principle of sustainability.”

“(103) Nor did the General Court err in law in rejecting […] the argument that the Commission failed to take the costs of storing nuclear waste into consideration by referring to the finding […] that the aid measures declared compatible in the decision at issue relate only to the construction and operation of a nuclear power station and not to any State aid intended to cover expenditure related to the management and storage of that waste.”

This part of the judgment is very important but it is also confusing. One the one hand, the Commission may not declare aid to be compatible with the internal market if it “infringes rules of EU law on the environment”. On the other, it does “not have to take into account the extent to which those measures are detrimental to the implementation of the principle of protection of the environment […]”. This apparent contradiction can be resolved in the following way. The objective of the aid measure and the rules which are inseparable from it [e.g. eligibility] may not infringe other EU rules. However, any indirect negative effects, other than the impact on trade and competition, can be ignored.

Were the aid measures incompatible operating aid?

Austria argued that the aid measures were operating aid and therefore incompatible aid under Article 107(3)(c) TFEU because operating aid, by definition, does not support the development of new activities.

The Court of Justice recalled that, in its decision, “(111) the Commission stated that measures involving operating aid were, in principle, incompatible with Article 107(3)(c) TFEU, but that the measures at issue had to be regarded as being equivalent to investment aid, since they allowed NNBG to commit to investing in the construction of Hinkley Point C. The Commission found in particular in that regard that, ‘from a financial modelling point of view, the net present value of the strike price payments could be thought of as the equivalent of a lump sum payment which allowed NNBG to cover construction costs’.”

“(112) In those grounds, the General Court first of all pointed out, […] that, according to settled case-law, aid intended to maintain the status quo or to release an undertaking from costs which it would normally have had to bear in its day-to-day management or normal activities cannot be considered compatible with the internal market, because it does not facilitate the development of an economic activity, within the meaning of Article 107(3)(c) TFEU.”

“(113) Next, […] the General Court noted that the Commission had not called that case-law into question, but had found that it did not apply to the measures at issue because of the specific features of the project and the fact that those measures were intended to allow NNBG to commit to investing in the construction of Hinkley Point C. The General Court held that that approach was not incorrect, as there is nothing to preclude an aid measure which satisfies the requirements of Article 107(3)(c) TFEU from being declared compatible with the internal market under that provision, irrespective of whether it has to be characterised as ‘investment aid’ or ‘operating aid’.”

“(114) Finally, […] the General Court held in particular that the measures at issue cannot be regarded as aid that is limited to maintaining the status quo or as aid that does no more than lower the usual ongoing operating expenditure which an undertaking would have had to bear in any event in the course of its normal business, while observing that, without them, no investment in new nuclear energy generating capacity would be made within a reasonable time and that they have an incentive effect, by reducing the risks associated with investment with a view to ensuring that the latter would be profitable.”

The aid measures in question aimed to make the investment less risky through price and demand stability, thereby incentivising private investment.

The Court of Justice agreed with the General Court which had concluded that “(121) the measures at issue had to be regarded as equivalent to investment aid”.

The GGE of the aid in the form of guarantees and the application of the Guarantee Notice

Austria claimed that the Commission had failed to determine the GGE of the aid that was involved in the state guarantee that had been granted to NNBG.

First, the Court of Justice agreed that the determination of the GGE of the aid was necessary and noted that “(129) it was only after quantifying the precise amount of the grant equivalent of the measures at issue that the Commission could have determined their compatibility with the internal market under Article 107(3)(c) TFEU.”

However, the Court of Justice found Austria’s reasoning to be incomplete and ineffective because its appeal did not identify specifically the errors of law that the General Court supposedly committed. [paras 130-131]

Austria also argued that the General Court did not check whether the Commission had applied the criteria of the Guarantee Notice correctly. Again, the Court of Justice rejected that plea because Austria merely repeated the same arguments that it had put before the General Court and failed to indicate how the General Court had erred. [paras 143-150]

Since none of the pleas of Austria was successful, the Court of Justice dismissed the appeal in its entirety.


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

http://curia.europa.eu/juris/document/document.jsf?text=&docid=231405&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=3581239

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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 presently holds positions at the College of Europe and the University of Maastricht. 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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