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

The Court of Justice Conflates Objective Justification with Policy Objective, in the context of Public Support of Green Electricity - State Aid Uncovered SM posts

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 from the fact that the Court of Justice has ruled that individual measures that confer an advantage are automatically selective, this particular measure is also selective in at least two levels. At a higher level it relieves the company from part or all of the cost of an investment and at a lower level it relieves it from the cost of investment in solar panels. In other words, selectivity can arise in comparison of the aid recipient to non-aided undertakings at different levels.

Now suppose that the purpose of the measure is to enable the company that owns the building to construct a special structure to house the solar panels. This is because the building has a very complex roof with too many facets. Without this special structure, the installation of the panels is impossible. But the cost of the structure makes the investment of panels unprofitable. Therefore, State aid becomes necessary. Moreover, this measure is implemented in the context of a broader policy of including all companies in the transition to green energy. Is now the measure objectively justified and therefore not selective because the company is not in the same situation as other companies that have to install solar panels and because without aid the company cannot transition to green energy?

Well, on 7 March 2024, the Court of Justice, in case C-558/22, Autorità di Regolazione per Energia Reti e Ambiente v Fallimento Esperia, in effect ruled that a measure is not selective when, in the context of a broader policy, it is necessary to achieve the objective of that broader policy.[1] This is a new and questionable definition of selectivity.

Autorità di Regolazione per Energia Reti e Ambiente (ARERA) [the Italian Regulatory Authority for Energy Networks and Environment] had initiated legal proceedings against Fallimento Esperia, an insolvent company, requesting payment of a financial penalty of EUR 2.8 million it had imposed on Esperia for failure to purchase the required certificates [green certificates] confirming that the electricity it had imported into Italy in 2010 had been generated from renewable energy sources [RES]. Esperia used to import electricity into Italy and resold it at wholesale or retail level.

Under the relevant Italian law at the time, importers of electricity from other Member States who did not demonstrate, on the basis of certificates of origin, that the imported electricity was from RES were required to buy green electricity or green certificates from national producers equivalent to the amount of electricity they had imported. Failure to do so resulted in a financial penalty.

That requirement was part of a national scheme supporting the production of green electricity. Under that scheme, electricity importers and generators of electricity from non-RES had to feed a certain amount of green electricity into the national grid on an annual basis. They were obliged either to produce green electricity themselves or to buy green electricity or green certificates from national producers. In addition, under that scheme, the Italian authorities issued green certificates free of charge to the national producers of green electricity according to the amount of electricity they could generate so that they could resell them to the producers and importers who were subject to that obligation.

The referring Italian court asked the Court of Justice of the EU [CJEU] for clarification of a number of issues concerning the interpretation of Articles 18, 28, 30, 34 & 110 TFEU, as well as Articles 107 & 108 TFEU. The referring court also asked for guidance on the interpretation of Directives 2001/77 and 2009/28 concerning the promotion of electricity from RES. Both of those Directives have been repealed and the currently applicable Directive is 2018/2001.

This article reviews in detail only the CJEU’s interpretation of Articles 107 & 108 and their application to this case.

The roles of national courts and the Commission

Given that this case was a request by a national court for a preliminary ruling, the CJEU began its analysis by recalling the respective rights and obligations of national courts and of the Commission.

“(60) Under the system established by those provisions for the supervision of State aid, both the national courts or tribunals and the Commission have jurisdiction to find that there is an aid scheme or aid measure within the meaning of Article 107(1) TFEU. Since the Court has jurisdiction to give the national courts or tribunals full guidance on the interpretation of EU law in order to enable them to determine the issue of compatibility of a national scheme or measure with that law for the purposes of deciding the cases before them, it may provide them with guidance on interpretation in order to enable them to determine whether a national scheme or measure may be classified as ‘State aid’ under EU law. However, the assessment of the compatibility of that scheme or measure with the internal market falls within the exclusive competence of the Commission, subject to review by the Court”.

Then, the CJEU recalled the criteria of Article 107(1) which determine whether a public measure constitutes State aid and proceeded to make the following observation.

“(63) Before providing the referring court with guidance on the interpretation of each of those four conditions [of Article 107(1) TFEU], it is important to note that the scheme at issue in the main proceedings, […], is, in principle, liable to confer two economic advantages on Italian producers of green electricity, namely the advantage of being able to sell their electricity without having to buy green electricity or green certificates, and the advantage of being able to sell the green certificates that they received free of charge in proportion to the green electricity that they produced to producers or importers of electricity produced from non-renewable sources.”

Effect on trade between Member States and on competition

Next, the CJEU examined whether the criteria of Article 107(1) TFEU were applicable, starting with the affectation of trade and distortion of competition.

The CJEU recalled that “(64) for the purpose of categorising a national measure as ‘State aid’, it is not necessary to establish that the aid has a real effect on trade between Member States and that competition is actually being distorted, but only to examine whether that aid is liable to affect such trade and distort competition”.

“(65) In the present case, the importers and producers of electricity operate on a market which, following its liberalisation, is open to competition. The grant of the advantages referred to in paragraph 63 above to national producers of green electricity is therefore liable to affect competition between those national producers and importers of electricity that have not obtained exemption from the obligation to purchase green electricity or green certificates. Moreover, since that purchase obligation is imposed on importers of electricity that have not obtained exemption, it is liable to affect trade between Member States.”

Intervention by the state or through state resources

Then, the CJEU examined whether the Italian scheme was funded by state resources.

In order for a public measure to be considered as State aid, it must be funded directly or indirectly with state resources and must be attributed or imputed to a decision or action of a public authority.

“(68) In order to assess, in the first place, whether a measure may be attributed to the State, it is necessary to examine whether the public authorities were involved, in one way or another, in the adoption of that measure”.

“(69) In the present case, both the measure at issue in the main proceedings and the support scheme to which it belongs were introduced by legislative texts, […] [therefore] that measure and that scheme must 8[…] be regarded as attributable to the State”.

“(71) The resources covered by the prohibition laid down in Article 107(1) TFEU include all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector”.

“(72) They include, first, those which are directly under the control of the State, that is to say, all the means which are assets of the State and, second, those which are indirectly so, inter alia because they form part of the assets of public or private bodies established or designated by the State to administer aid […] Thus, resources of public undertakings may be regarded as State resources where the State is capable, by exercising its dominant influence over such undertakings, of directing the use of their resources in order to finance advantages to the benefit of other undertakings […] Similarly, where entities distinct from the public authority manage and apportion, in accordance with State legislation, funds financed through compulsory charges imposed by that legislation, those funds may be regarded as State resources where such entities are appointed by the State to manage those resources and are not merely bound by an obligation to purchase by means of their own resources”.

“(73) It should however be noted that the requirement that the aid be granted directly or indirectly through State resources implies that the granting of the aid must affect those resources. There must therefore be a sufficiently direct link between, on the one hand, the advantage conferred by that aid and, on the other hand, a reduction of those resources, or a sufficiently concrete economic risk of burdens being placed on those resources”.

In other words, no state resources are transferred when the state, for example, imposes an obligation on companies to buy green electricity and as a result they make less profit and pay less tax. In this situation there is no direct connection between the measure and the reduction in tax revenue.

“(74) The referring court must assess, in particular, first, whether the free of charge provision of green certificates to national producers of green electricity is liable to mobilise State resources. In that regard, it must be noted, first of all, that that provision does not appear to entail a transfer of resources controlled by the State to Italian producers of green electricity. Indeed, it is not apparent from the documents before the Court that that provision entails any economic exploitation on the part of bodies that can be assimilated to the State. Those green certificates appear to have an economic value only because of the legal obligation on certain producers and importers to buy them. However, when those producers and importers comply with that obligation by purchasing them from producers of green electricity, the sums received by the latter do not appear to be under the control of the State within the meaning of the case-law referred to in paragraphs 71 and 72 above, since the financial redistribution at issue in the main proceedings appears to take place between two private entities, without any further intervention by the State. The advantage represented by the awarding of these certificates to national green electricity producers thus appears to be financed solely by resources from the producers or importers obliged to purchase those certificates, without there being any State control over those resources.”

I find the statement of the CJEU in the above paragraph very surprising. According to past case law, the decisive element is that the green certificates are tradeable assets. They have value which the Italian state forgoes by granting them for free. It is the same situation when the state transfers land for free to a company which it then sells to a third party.

“(75) Second, it will be for the referring court to assess whether the mechanism provided for by the scheme at issue in the main proceedings in order to ensure that green certificates have a certain value involves State resources. In that regard, it appears that that scheme does not only require conventional electricity producers and importers to purchase those certificates when they do not produce or purchase green electricity in order to meet the quota of green electricity that they have to feed into the national grid. It also appears […] that that scheme ensures, for the benefit of Italian producers of green electricity, that those green certificates retain a minimum economic value. Indeed, that provision seems to require GSE, an entity controlled by the Italian Ministry of Economic Affairs, to buy green certificates where they exceed the number required by the operators obliged to purchase them. This possible intervention by GSE thus prevents an oversupply of green certificates from undermining support for national green electricity producers.”

This mechanism too results in transfer of state resources. But even without this mechanism, there is still a transfer of state resources in the form of free tradeable green certificates.

“(76) It is apparent […] that the resources available to GSE for the purchase of surplus green certificates derive from the revenue obtained under the A3 tariff component, a pecuniary charge imposed by Italian legislation on Italian electricity consumers that is paid into GSE’s accounts in order to enable it to make that purchase. Accordingly, a reduction of the resources under the control of the State as a result of the purchase by GSE of surplus green certificates appears to be sufficiently directly linked to the advantage constituted by the free of charge award of those green certificates to national producers of green electricity so that they can resell them on the market.”

“(77) As a result, […], the purchase of surplus green certificates appears to be carried out by an entity that can be assimilated to the State, on the basis of the mandate conferred on it by the Italian legislation, using the revenue from a tariff component paid by consumers for that purpose.”

On the basis of the above reasoning, the CJEU concluded that the measure in question involved transfer of state resources.

The selectivity of the advantage

Next, the CJEU proceeded to examine whether the measure was selective. The existence of selectivity is established by a comparing the aid recipient to other undertakings in a similar situation. Whether they are in a similar situation is derived from the objective of the measure. But, as explained at the beginning of this article, the objective of a measure can result in selectivity at different levels. As we will see below, the CJEU examined the presence of selectivity only at one level.

“(80) The assessment of [selectivity] requires a determination as to whether, under a particular legal regime, a national measure is such as to favour ‘certain undertakings or the production of certain goods’ over others which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and which are accordingly subject to different treatment that can, in essence, be classified as discriminatory”.

Then the CJEU went on to define what constitutes the reference framework in relation to which a measure can be considered to be selective.

“(81) Since the examination of a selective advantage must be carried out within the context of ‘a particular legal regime’, that examination in principle requires prior definition of the reference framework within which the measure concerned fits, it being noted that that method is not limited solely to the examination of tax measures”.

“(82) The reference framework stems from the national law of the Member State concerned. It must consist of legal rules in a domain which has not been the subject of exhaustive harmonisation at the level of EU law and those rules must pursue an objective compatible with EU law”.

“(83) In addition, that reference framework must not itself be incompatible with EU law on State aid”. In other words, the broader legal context cannot itself be State aid.

“(84) The determination of that reference framework must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under the national law of the Member State concerned […] Following that examination, the reference framework identified must have its own legal logic and specific objective and cannot form part of a consistent body of rules external to that measure. Where a measure is clearly severable from a general system, it cannot be ruled out that the reference framework to be taken into account may be more limited, or even that it may equate to the measure itself, where the latter appears as a rule having its own legal logic and it is not possible to identify a consistent body of rules external to that measure”.

It should be noted that the cases cited by the CJEU in paragraph 84 concerned tax issues for which it is especially important to define the reference framework, given that Member States are free to determine their tax systems and to levy different taxes for different purposes [e.g. income redistribution, discouraging consumption of substances deemed harmful, etc]. Therefore, it is impossible to determine the selectivity of a tax measure without, first, identifying the reference framework and, second, whether the measure is a deviation from that framework. Although for non-tax measures it is still necessary to identify the undertakings which are in a comparable situation, it is not necessary in this exercise to be confined by the formal objective of the measure. For example, a measure that promotes the development of the poorest region by supporting agricultural SMEs is selective at three levels. It differentiates among sectors, among companies and among regions. If it supported all undertakings of any size in all sectors in that region, it would still be selective in relation to undertakings in other regions even if its stated aim was to promote the development of the poorest region determined by objective criteria.

“(85) The determination of that reference framework is carried out, in principle, without regard to the objective pursued by the national authority when adopting the measure under examination as regards the applicable State aid rules. In addition, the regulatory technique used by the national legislature for that determination is not decisive. Lastly, that determination cannot result in a reference framework consisting of some provisions that have been artificially taken from a broader legislative framework”.

Furthermore, as is well-established in the case of tax measures, “(86) the concept of ‘State aid’ does not refer to State measures which differentiate between undertakings and which are, therefore, prima facie selective, where that differentiation arises from the nature or the overall structure of the system of which they form part”.

It follows that the differentiation cannot be justified by objectives which are external to the logic of the system.

The CJEU added that “(87) the objective pursued by State measures is not sufficient to exclude those measures outright from classification as ‘aid’ for the purposes of Article 107 TFEU 8 […] even if environmental protection constitutes one of the essential objectives of the European Union, the need to take that objective into account does not justify the exclusion of selective measures from the scope of Article 107(1) TFEU […] Moreover, [the Court] ruled out the possibility of [a] derogation applying to a measure differentiating between undertakings which, despite being based on an objective criterion, is inconsistent with the system of which it forms part and, accordingly, cannot be justified by the nature and general structure of the latter”.

The reference system in the case of support for green electricity

Next, the CJEU applied the principles it elaborated above to the case at hand.

“(89) In order to constitute a reference framework, the referring court must assess whether those rules [on green electricity] are capable of constituting a consistent and autonomous body of rules. In that regard, it is necessary to note that those rules concern the production and placing on the market of green electricity in order to promote the consumption of energy from renewable sources. It must therefore be determined whether those rules can be linked to all those governing the production, distribution and marketing of electricity, the objective of which is to create and ensure the proper functioning of a competitive electricity market.”

“(90) If the referring court were to conclude that the reference framework in question in the main proceedings is the general system regulating the production, marketing and consumption of electricity in Italy, it would have to be held that the measure at issue in the main proceedings confers in principle a selective advantage on national producers of green electricity. Indeed, with regard to the objective pursued by that regulatory framework, namely to create and ensure the functioning of a competitive electricity market, those producers are in a legal and factual situation comparable to that of importers of electricity that have not demonstrated that the electricity they import is green, since each of those operators offers electricity for sale on the Italian electricity market. They thus contribute to achieving the objective of having an electricity market in Italy governed by the law of supply and demand.”

“(91) However, as is apparent from paragraph 86 above, prima facie selective measures do not constitute State aid where the differentiation between undertakings introduced by State measures results from the nature or the overall structure of the system of which they form part.”

It should be noted that the case law of CJEU has not applied the reasoning in paragraph 91 to non-tax measures. So, the CJEU is breaking new ground in the present case.

“(92) In the present case, if it appears that, in the absence of the support scheme at issue in the main proceedings, there may not be any supply of green electricity on the Italian electricity market, the differentiation between producers of green electricity and producers and importers of electricity from non-renewable sources may be justified by the nature and general scheme of the general system regulating the production, marketing and consumption of electricity in Italy. Indeed, the proper functioning of a competitive electricity market in Italy pursued by that general system may require that there be a competitive supply of green electricity on that market. The adequacy of the functioning of the market may indeed be defined by the Italian legislature taking into account the need to ensure protection of the environment.”

The statement of the Court in paragraph 92 above is bewildering. It goes against the letter and spirit of Article 107(1) TFEU. It is as if the Court says that if the desired policy outcomes cannot be achieved by the market itself, subsidies by Member States to some market operators can be objectively justified! Yet, in numerous cases the CJEU has ruled the opposite. The aims of public measures are irrelevant for the purpose of classifying them as State aid. Tax exemptions may be objectively justified by the nature and general scheme of the reference tax system when they concern activities or products that should not be taxed, according to the purpose of the tax. In the present case, what aspect of the reference system justifies the aid to green electricity? Despite the finding in paragraphs 90 & 92 that the objective of the scheme is the “functioning of a competitive electricity market”, the CJEU nonetheless infers without any explanation that that objective may justify subsidies to green electricity. The standard understanding of a competitive market is absence of state intervention. But even if we suppose that the state has to intervene to correct market failure, it does not necessarily follow that market correction can only be achieved by subsidies to increase the supply of green electricity. Moreover, “the need to ensure protection of the environment” is a policy objective which, although legitimate, is certainly extraneous to the reference framework.

The CJEU went on to add another confusing comment. “(93) If the higher production cost of green electricity compared with that of electricity from non-renewable sources hinders the competitive supply of that commodity on the market, the difference in treatment between producers of green electricity and producers and importers of electricity produced from non-renewable sources created by the scheme at issue in the main proceedings could be justified by the need to overcome that market failure. Such justification is possible, however, only if the support conferred by that scheme is strictly limited to what is necessary to overcome that market failure and is allocated in a manner that is entirely consistent with the general system at issue in the main proceedings.”

This statement is even more bewildering than the previous one. It says that if companies cannot by themselves produce the results that public measures seek to achieve, then subsidies would be objectively justified. This is exactly how the compatibility of State aid with the internal market is assessed. But it is State aid in the first place.

The CJEU concluded that “(95) if the referring court concludes that the advantage conferred on producers of green electricity by the measure at issue in the main proceedings is justified by the nature and general scheme of the reference system of which it forms part, Articles 107 and 108 TFEU must be interpreted as not precluding such a measure.”

Concluding comment

This is a judgment that appears to deviate from established principles of the case law on State aid. Perhaps it is because it is a preliminary ruling. I wonder how the referring court will make a sense of it.

 

[1] I am grateful to Péter Staviczky for comments on an earlier draft.

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

https://curia.europa.eu/juris/document/document.jsf?text=&docid=283527&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=1082015

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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 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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