The Non-Equivalence of the Various Methods of Supporting Green Electricity

electrical sockets

Introduction

Ever since the judgment of the Court of Justice in 2001 on PreussenElektra [case C-379/98], Member States have been grappling with the question of how to support electricity from renewable resources [green electricity] without granting State aid. In PreussenElektra the Court found that there was no transfer of state resources and no State aid, because the German government imposed an obligation on electricity distributors to buy green electricity without establishing a mechanism that would have allowed it to exercise control over the resources that flowed between users, distributors and producers of electricity.

By contrast, in its judgment on Essent in 2008 [case C-206/06], the Court of Justice concluded that payments to green electricity producers constituted State aid, because the funds for those payments were raised through a levy borne by users, which was established by a decision of the Dutch government. The funds were managed by distributors under instructions by the Dutch government. As a consequence, the Court found that the Dutch government exercised control over those funds.

Legally, the existence of State aid in such contexts has hinged on whether a public authority controls the funds which are used to offset the higher costs of producers of green electricity. Economically, the results of PreussenElektra-type measures and of Essent-type measures appear to be identical or at least very similar. In the end, the higher green electricity costs are ultimately borne by final consumers either through the levy they pay [in Essent-type measures] or through higher prices charged by distributors [in PreussenElektra-type measures].

In this article I review a very recent judgment of the Court of Justice in case Association Vent De Colère and identify the elements that the Court considered to be decisive in classifying funds for supporting green electricity as state resources. In addition, I explain the important legal and economic differences between deceptively similar arrangements for supporting the production of green electricity, such as those in PreussenElektra, on the one hand, and Essent and now Association Vent De Colère, on the other.

The judgment

On 19 December 2013, in response to a request for a preliminary ruling, the Court of Justice rendered its judgment in case C‑262/12, Association Vent De Colère v Ministre de l’Écologie, du Développement durable, des Transports et du Logement. The case concerned a dispute on whether a levy imposed on consumers of electricity in France to compensate for the extra costs of electricity distributors could be considered as State aid to producers of electricity from renewable resources and especially wind farms. The decisive element in the classification of this measure as State aid was again whether the levy and the corresponding compensation constituted state resources.

Under French law, additional costs attributable to the public service tasks assigned to electricity operators are offset in full. The offsetting of those costs, in favour of the operators bearing them, is secured through charges payable by final consumers of electricity.

French law, in the form of a ministerial order, also imposes an obligation on distributors to purchase electricity generated by wind-power installations at a price higher than its market value. There was no disagreement that paying a price above market level conferred an advantage that was liable to affect trade between Member States and to distort competition.

In essence, the Court of Justice had to decide whether the French measure was like the German measure in C-379/98, PreussenElektra or, on the contrary, like the Dutch measure in C‑206/06, Essent. Not surprisingly, in its judgment on Association Vent De Colère, the Court of Justice referred to both PreussenElektra and Essent. It began its analysis by recalling the two fundamental elements of the concept of “transfer of state resources”: i) attribution of the transfer to a decision of the state and ii) control of the resources by the state.

With respect to the first element, it must be shown that public authorities are “involved in the adoption of the measure” in question. [paragraph 17] In this case it was clear that the measure was established by law and therefore was attributable to the state.

With respect to the second element, the Court explained that “the concept of ‘intervention through State resources’ is intended to cover, in addition to advantages granted directly by the State, those granted through a public or private body appointed or established by that State to administer the aid”. [paragraph 20] “Article 107(1) TFEU covers 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. Therefore, even if the sums corresponding to the measure in question are not permanently held by the Treasury, the fact that they constantly remain under public control, and therefore available to the competent national authorities, is sufficient for them to be categorised as State resources”. [paragraph 21]

In this case the sums intended to offset the additional costs arising from the obligation to purchase green electricity were collected from consumers of electricity in France by entities controlled by the state. Moreover, the amount of the charge imposed on consumers of electricity was determined annually by the Minister for Energy.

The case law makes it clear that funds financed through compulsory charges imposed by Member States and managed according to rules laid down by Member States are regarded as state resources, even if they are managed by entities separate from public authorities. What was different in this case was that in the French system the funds collected from the levy on consumers were paid into a special account of the Caisse des dépôts et consignations and then transferred to distributors of electricity. But the Caisse des dépôts et consignations operated under a mandate from the state and their boards were appointed by the state. There was no doubt that they came under the control of the state.

Lastly, the Court of Justice explained that the difference between PreussenElektra and Essent was that in the former distributors were obliged to buy green electricity using their “own financial resources” while in the latter distributors “managed a State resource”. [paragraph 35] “Consequently, the funds at issue [in PreussenElektra] could not be considered a State resource since they were not at any time under public control and there was no mechanism … established and regulated by the Member State, for offsetting the additional costs arising from that obligation to purchase and through which the State offered those private operators the certain prospect that the additional costs would be covered in full.” [paragraph 36]

Important legal and economic differences between PreussenElektra and Essent

Ever since the judgment in PreussenElektra policy makers and especially energy regulators have struggled to understand why government intervention in one case resulted in the granting of State aid with all the consequent legal implications while in another with very much similar economic effects there was no State aid. Below I provide a legal and an economic explanation to resolve this conundrum.

Legally, government intervention that consists only of an obligation imposed on electricity distributors to buy green electricity creates no burden on the budget of the state. It is true that such intervention confers an advantage to producers of green electricity, but the fact remains that it does not create any additional budgetary burden for the state.

A frequent response to this view is that mechanisms for compensation of distributors through levies on consumers do not create any additional budgetary burden because the extra costs of purchasing green electricity are borne by consumers. Indeed the funds raised from levies are normally managed by non-state entities and remain wholly outside the state budget. Moreover, the purpose of electricity levies is to support the production of green electricity, so the state does not have to divert its own resources from other uses. However, the argument that the state would not have used these funds for any other public policy purpose has had no impact on the thinking of EU courts. For EU courts, it is irrelevant that the state is not diverting any of its other resources or that the state does not intend to use the proceeds from the levies in the pursuit of other policy objectives. Perhaps this is the correct way of looking at this issue for the simple reason that it is impossible to be sure that a government would not be tempted to use funds from electricity levies, which are essentially tax revenue, for other purposes. Therefore, EU courts are right that the decisive element should not be whether other resources could be used or how funds are used or managed at a particular point in time but whether the state can exercise control over them.

Economically, it seems that both the PreussenElektra-type arrangements and the Essent-type arrangements generate the same results: Green electricity producers are able to sell more expensive electricity which eventually is paid by users. In PreussenElektra-type arrangements, the extra costs incurred by distributors are passed on to users through higher prices. In Essent-type arrangements, prices to users are raised by the amount of the levy and the extra revenue is used by distributors to offset the extra costs of buying green electricity. The effects are apparently similar.

However, for the first time in the case law, the Court of Justice in its judgment in Association Vent De Colère appears to identify an economic difference as well. The Court observed in paragraph 36 of its judgment that in Essent [and now in Association Vent De Colère] “the State offered those private operators [i.e. the distributors] the certain prospect that the additional costs would be covered in full.” It seems that the Court believes that under Essent-type arrangements, distributors bear no or little risk while under PreussenElektra-type arrangements distributors bear more risk. It remains to be proven whether this is true in reality.

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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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