The New Guidelines on State Aid for Environmental Protection and Energy, 2014-2020

It was therefore with much excitement and slight trepidation that the new Commission guidelines were received on 9 April 2014, the date on which the Commission published the final version after months of consultations with the Member States. What is immediately noticeable from the title of the new guidelines is that they are broader, as they also cover energy infrastructure and energy efficiency. In this article I review the main provisions of the guidelines and assess a novel feature that has attracted significant attention.^[2]

The scope of the guidelines

The environment and energy guidelines [EEG] apply to all sectors, except in the following cases:

1. The design and manufacture of environmentally friendly products [the manufacture of products which are good for the environment may be itself very polluting].
2. The financing of environmental protection measures for infrastructure in all modes of transport [there are special provisions in the various guidelines for different modes of transport].
3. Stranded costs in electricity generation [there are other guidelines for stranded costs].
4. Research&Development&Innovation [it is covered by the R&D&I framework].
5. Firms in financial difficulty [this is a standard exclusion from all guidelines].
6. Undertakings subject to an outstanding recovery order [because they have to repay incompatible aid before they can receive new aid].
7. Non-severable violations of EU law [such as energy levies on imported products (contrary to Article 30 on removal of border duties and Article 110 on prohibition of excess taxation of foreign products)].

The EEG allow aid for the following purposes:

1. Investment to go beyond EU standards or to increase the level of environmental protection in absence of EU standards [including transport vehicles].
2. Investment in early adaptation to future EU standards.
3. Investment & operating aid for energy from renewable sources.
4. Investment in environmental studies.
5. Investment & operating aid for energy-efficiency.
6. Investment & operating aid for cogeneration installations.
7. Investment in district heating and cooling systems.
8. Investment in resource efficiency and waste management.
9. Investment in remediation of contaminated sites.
10. Operating aid in the form of tradable emission permits.
11. Investment in carbon capture and storage.
12. Operating aid in the form of reductions in or exemptions from environmental taxes.
13. Operating aid in the form of reductions in funding support for electricity from renewable sources.
14. Investment in energy infrastructure.
15. Investment & operating aid for generation adequacy measures.

The last three categories are new.

Notifiable aid

Although the EEG do not express it in the same terms, all aid that does not fall within the scope of the environmental provisions of the General Block Exemption Regulation must be notified. In addition, the EEG explicitly lay down thresholds for the notification of individual aid granted on the basis of a scheme that has been previously authorised or has been implemented on the basis of the GBER, provided that such aid is not granted through a competitive bidding process. In other words, individual aid that is granted within the context of an approved scheme does not have to be notified even if it exceeds the specified thresholds when the aid recipients bid for it competitively. This is because a competitive bidding process is presumed to keep aid to the minimum necessary.

The thresholds for individual notification are as follows:

1. Investment aid: EUR 15 million for any one undertaking.
2. Operating aid for the production of renewable electricity and/or combined production of renewable heat: Generation capacity per site exceeds 250 MW.
3. Operating aid for the production of biofuel: Production exceeds 150,000 tonnes per year.
4. Operating aid for cogeneration: Capacity exceeding 300 MW.
5. Aid for energy infrastructure: EUR 50 million for any one undertaking, per investment project.
6. Aid for carbon capture and storage: EUR 50 million per investment project.
7. Aid in the form of generation adequacy capacity: EUR 15 million per project per undertaking.

There is no requirement for individual notification of measures concerning tax exemptions or reductions from environmental taxes.

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Common assessment principles

Like all the other guidelines that have been adopted so far, the EEG too will use a common set of principles to determine the compatibility of State aid with internal market. The Member States will have to show in their submissions how the notified measures conform to these principles.

The common principles are the following:

1. Contribution to a well-defined objective of common interest.
2. Need for state intervention [i.e. existence of market failure].
3. Appropriateness of the aid measure [i.e. not possible to use a regulatory measure with the equal effectiveness].
4. Existence of incentive effect [i.e. the aid must be capable of changing the behaviour of the recipient].
5. Proportionality of the aid [i.e. aid must be kept to the minimum necessary].
6. Avoidance of undue negative effects on competition and trade between Member States.
7. Transparency of aid [Member States must publish the names of the aid beneficiaries and the amounts they receive. However, they are relieved from this requirement when individual awards are less than EUR 0.5 million. Apparently, more than 80% of individual awards of environmental aid in the EU do not exceed EUR 0.5 million].

In addition, Member States will be required to carry out ex-post evaluation of large measures with novel features after four (4) from their approval. Evaluation plans must be submitted together with the ex-ante notification.

Eligible costs

What has always been unique to environmental aid is the method for determining the costs that may be subsidised, i.e. the eligible costs. Normally, in other types of aid, the eligible costs include 100% of the costs of the investment undertaken by the beneficiaries. However, it is not so in the case of environmental aid. The eligible costs are the costs of an identifiably separate environmental investment, or the investment costs with the aid minus the investment costs without the aid.

This is based on the same logic as that of the method which is defined in the current environmental guidelines, but it is much more flexible and, at the same time, less abusable. Under the current guidelines, eligible costs are the difference between the extra costs of investing in environmentally friendly technology or process and the costs of investing in a conventional technology or process.

The problem with the current method of defining eligible costs is that, because it is possible to identify a conventional technology or process that can serve as a comparator of what the aid recipient would have bought or invested in had it not undertaken the environmentally friendly project, it does not necessarily follow that the recipient would actually buy it or invest in it. Although the new method appears to be very similar to the current one, in fact it comes closer to identifying the real costs of the various options of the beneficiary. And this is closely linked to the most important aspect of the EEG which is the incentive effect of aid.

Incentive effect of aid

The EEG define in much more detail and more rigorously the incentive effect that must be present in all aid measures. At the barest minimum, aid may not be granted after the start of works or a project.

More importantly, aid has an incentive effect when it leads to extra environmental protection or energy utilisation in relation to the counterfactual situation. This is the situation without the aid. When they apply for aid, potential beneficiaries must explain the counterfactual [this requirement is waived in the case of competitive bidding for aid] and large enterprises must submit documentary evidence. Granting authorities must perform a “credibility check” [which again is waived in the case of bidding]. In the counterfactual situation, that is in the situation without the aid, not only must the environmental protection or the energy efficiency be lower, but there must also be credible evidence that the investment or project would not happen because it would generate a lower than normal rate of return or the net present value would be negative. In other words, the EEG impose a twofold requirement: not only must aided investment benefit the environment but also without the aid the investment would not take place. It is now obvious that the important difference between the current guidelines and the EEG is that the current guidelines allow aid to be granted to environmental friendly projects that could be undertaken in the absence of aid. Indeed they may encourage the protection of the environment, but they may also result in unnecessary waste of public resources.

The Member States must also take into account production advantages [e.g. quality, efficiency, increased capacity, productivity, etc] and other non-profit related benefits. Such advantages make it more likely that the environmental project can be undertaken without aid. In other words, the presence of these advantages weakens the incentive effect of aid.

Proportionality of aid

The general principle is that for individually assessed measures the amount of aid must be less than the eligible costs. As explained above, the eligible costs are the net extra investment costs. These extra costs are the investment and operating net costs with aid minus the counterfactual net costs [i.e. without aid].

The EEG also contain a simplified method for measures which are not subject to individual assessment. The aid amount must also be less than the eligible costs. But under the simplified method, the eligible costs are the net extra costs which, in turn, are equal to just the investment costs with the aid minus the counterfactual investment costs. That is, operating costs and revenue are ignored.

If aid is granted after competitive bidding, then aid can go up to the amount determined by that bidding.

However, in all eventualities outlined above, the aid intensity [measured as a percentage of eligible costs] may not exceed the maximum rates set by the EEG. This means that aid must be kept below the lower of the two limits: the maximum aid intensities defined in advance in the EEG and the derived amount of aid which calculated of the basis of the counterfactual in each individual case.

Maximum aid intensities

Cumulation

Aid from several sources is allowed to be granted to the same project, provided the total amount of aid does not exceed the specified aid intensities. No cumulation of de minimis aid is permitted if the maximum aid intensity is exceeded.

The EEG explain that funding provided directly by the Commission is not State aid and therefore must not be considered for the purpose of complying with the notification thresholds and the rates of aid intensity. This funding does not fall within the scope of Article 107(1) because it does not come under the control of a national authority and for this reason it is not classified as State aid.

A special issue: Reduction of levies in support of green electricity

Member States impose special levies on the consumption of electricity to generate revenue which they use to support the production of electricity from renewable sources of energy. These “green levies” and the associated revenue constitute State aid in favour of electricity producers from renewable resources.

Certain energy-intensive industries cannot bear the extra electricity costs because they face stiff competition from companies based in other regions of the world where no such green levies are charged. For this reason, the Commission has decided to allow for the possibility of aid in the form of reduction of green levies. That is, this is a subsidy within a subsidy and at first sight it appears to be self-contradictory: green levies encourage environmentally friendly energy production, while reduction of green levies supports heavy energy users which on the whole are heavy polluters.

However, the logic here, as with all exemptions or reductions from environmental taxes, is that without the exemption or reduction it would be impossible to have a high enough levy. Or, if the levy would be uniformly high, the energy-intensive industries would close down and relocate in the regions of the world without any environmental regulations or taxes. In the end, that would harm the global environment and climate even more.

The EEG require that the choice of beneficiaries is made on objective and non-discriminatory criteria. The beneficiaries must be either in sectors listed in an Annex and assumed to have electro-intensity of 10% and trade intensity of 10%, or, if they are not listed in that Annex, they must have electro-intensity of at least 20% and trade intensity of at least 4%. Electro-intensity is calculated according to this formula:

electro-intensity = [(electricity consumption x [price + levy])/Gross Value Added].

The beneficiaries must pay at least 15% of the levy. However, Member States may limit the amount of the levies paid by beneficiaries to only 0.5% of their Gross Value Added, if their electro-intensity exceeds 20%. This means that the most energy-intensive users – which often are the biggest polluters – will end up paying hardly anything. One does not need to do any complex calculations to wonder whether 0.5% of GVA is worth the hassle. Moreover, it is questionable whether the competitiveness of the beneficiaries would be harmed by a levy that would exceed just 0.5% of their GVA. This suggests that these industries have no margin left in their costs and/or their products are indistinguishable from those of their competitors in terms of quality so that no one is willing to pay even a slight price increase for any extra quality. Under these conditions, the inevitable question is why these industries are subsidised with public money, since they are doomed anyway.

Lastly, the EEG allow for retroactive application of the exemption in case aid was granted before the coming into force of the guidelines. Given that such aid would be unlawful, the retroactivity of the EEG is an unusual concession to Member States and may still be challenged before EU courts.

^[1] The statistics are from the European Commission’s State aid Scoreboard. It can be accessed at:

http://ec.europa.eu/competition/state_aid/scoreboard/index_en.html

^[2] The new guidelines can be accessed at:

http://ec.europa.eu/competition/sectors/energy/eeag_en.pdf