In Short
The Development:The European Commission (“Commission”) has adopted new regulations Guidelines for State Aid for Climate, Environmental Protection and EnergyOn 27 January 2022, the “CEEAG” was established. The CEEAG revision criteria that the Commission will apply to determine if EU Member State funding to private companies in climate, energy, and environmental protection is compatible with EU law are now being applied by the Commission.
Background: The CEEAG replaces the Guidelines for State Aid for Environmental Protection and Energy (2014)-2020 (“EEAG”) The CEEAG aligns the State aid rules with European Green Deal, which details the EU strategy for climate and environmental-related challenges and targets no net emissions of greenhouse gas in 2050.
Looking ahead: The Commission intends to update the CEEAG in order to facilitate State aid measures supporting technology and investments that contribute towards the EU’s climate policies objectives.The end of support for fossil fuels.” Since environmental and energy projects account for the majority of EU State aid spending, businesses looking to finance public projects must ensure they conform to the new rules.
Background
EU rules prohibit “State Aid” unless the Commission approves the aid as compatible the EU Treaties. State aid is a Member State funding measure that is imputable to the State. It is funded through State resources and benefits an undertaking (i.e. an entity engaged in an economically active activity). It affects trade between EU Member States by causing distort or threat to distort competition and providing a benefit on a selective basis.
EU rules recognize that government support may be necessary in certain circumstances for an equitable and well-functioning economy. The Commission can authorise aid that is compatible to the EU Treaties, if the positive effects are greater than the negative impact on competition. EU Member State must notify the Commission of new state aid measures. Measures can only be implemented if approved by the Commission unless covered in a block exclusion regulation.
CEEAG provides guidance on how the Commission will assess the compatibility between environmental, climate protection and energy aid measures that are subject to the notification obligation. The CEEAG works alongside the General Block Exemption Regulation (“GBER”) that provides certain compatibility conditions for Member States to be able to implement specific categories state aids without having to notify the Commission. The Commission is also Revisingpertinent sections of the GBER to address CEEAG and facilitate aid measures supporting its green transformation policies.
Large range of Aid Measures Available
The CEEAG covers many new categories of State Aid measures that are relevant to the European Green Deal. These include the reduction and elimination of greenhouse gas emissions, building energy performance and resource efficiency, transition towards a “circular economic”, remediation of environmental damage, biodiversity, reductions in electricity levies for energy intensive users, and the closure of power stations using coal, oil shale, or peat.
Nuclear energy is still not included in the CEEAG. Therefore, the Commission will continue to assess State aid measures that involve nuclear energy under the general rules for State aid. A useful precedent is the 2014 Commission decision in The Hinkley Point CThe Commission ruled that EU State Aid rules allowed measures to support the construction and operation a new nuclear power station. This decision was later upheld by the EU Courts.
The CEEAG does not include State aid for research and development or innovation (“RDI”) as it is not covered by the CEEAG. The RDI Framework is separate guidelines that govern state aid involving RDI. These guidelines are set by the Commission. Revising.
General Compatibility Criteria
The CEEAG’s first section describes the compatibility criteria the Commission applies to all categories of energy aid and environmental protection measures. The Commission will check that the aid meets at least two conditions: one positive and one negatively.
A positive condition is one that requires that the aid facilitates the development of economic activity. The Commission will examine whether the notified assistance is:
- Contributes to the success of EU climate, energy, and environmental policy implementation;
- It has an incentive effect, inducing the beneficiary change in its behavior or to engage in economic activities that are in line with EU policy. This may be possible without the aid.
- It does not violate EU law.
A negative condition means that the aid must not adversely impact trading conditions in a way that is contrary to the common interests. To determine whether this condition has been met, the Commission will assess whether the notified assistance is:
- Is necessary. Basically, state aid is required to achieve environmental objectives. The market will not achieve them on its own.
- Is appropriate, i.e. no other policy or aid instrument will achieve the same result without less impact on trade, and competition
- Transparent: The Member State must publish the entire text of the approved measure of aid and information on each aid award above EUR 100,000;
- Is proportionate: This means that the amount of State aid required to accomplish the project or activity is minimal. Aid is proportionate in principle if it meets the net cost (“funding gaps”) that is necessary to achieve the objective of the aid measure. If the State determines the amount to be provided, however, it is not necessary to do a detailed assessment of this funding gap. CEEAG believes that competitive bidding is a reliable method of estimating the minimum amount of aid that beneficiaries may need.
CEEAG places more emphasis on competitive bidding. For example, it recommends that states use competitive bidding as their default mechanism for granting aid to reduce greenhouse gas emissions and for clean transportation. CEEAG allows for aid amounts that exceed 100% of the funding gap in those cases.
If the State doesn’t grant aid through a competitive bidding procedure, the Commission determines the proportionality. In cases where it is difficult or impossible to identify the benefits and costs for the beneficiary, the Commission bases the aid on the funding gap analysis. - Does not unduly interfere with competition or trade. When a State grants aid for projects that only provide a temporary benefit but which lock out better technologies for the long term, distortive effects can be especially important.
Final step: The Commission balances the negative effects of the aid measure for competition and trade against the positive effects on the supported economy activities, including the contribution to the EU’s energy policy and environmental protection objectives. The Commission will only approve of State aid measures that have positive outcomes that outweigh their negative effects.
The Commission pays special attention to the “do no significant harm“The principle of the EU Taxonomy RegulationThis is a standard criterion for EU State aid law. This principle states that the Commission must assess whether economic activity has a significant impact on the EU’s objectives in respect of climate change, sustainability, waste prevention and recycling, pollution prevention, control, and biodiversity. The CEEAG states that the Commission is unlikely not to conclude that aid to fossil fuels has a net beneficial effect. This applies to new investments in natural gaz unless the Member States can demonstrate that the aid does NOT lock the State into natural-gas technology.
Specific Compatibility Criteria
The CEEAG’s second technical section outlines the compatibility criteria for each of the 13 categories of aid it covers. These categories cover a wide variety of energy and environmental topics, as we have already noted. The new section on aid to the reduction and elimination of greenhouse gas emissions is one of the highlights. The CEEAG broadens the definition of aid to include financial support for all technologies that can contribute towards the reduction of greenhouse gases emissions. This includes aid for the production of low-carbon fuels (such as hydrogen), energy efficiency, high-efficiency cogeneration, energy storage, carbon capture, demand response, and energy storage. It also covers the reduction or avoidance emissions from industrial processes and electrification.
CEEAG requires Member States to hold a public consultation about the competitive impact and proportionality large aid measures that are notified under this category. Public consultations are meant to increase stakeholder participation in designing those measures and enhance transparency and inclusiveness. A competitive bidding process should be used to grant aid to reduce greenhouse gas emissions.
Aid for reducing greenhouse gas emissions may come in many forms. This includes upfront grants and “contracts to difference,” or CfD. These contracts compensate the beneficiary for any difference between a fixed price and a price on the market. This ensures predictable and stable revenue streams. These contracts could include a market-linked price to the EU Emissions Trading System or ETS. This would be called “carbon contracts for differentiation” or CCfD.
CEEAG also states that aid to reduce greenhouse gas emissions should not be used to lock in technologies or displace investments in cleaner alternatives. CEEAG’s rules direct the Commission to ensure that aid measures do not encourage or prolong fossil-based fuel consumption and energy. This is consistent with EU’s stated policy objectives. CEEAG states that measures involving new investments into what it considers the “most polluting fossilfuels such as coal diesel, lignite and oil peat” will not be considered positive for the environment due to incompatibility with EU climate targets.
According to the Commission, natural gas is a “”special case“Acting as a bridge on a path to more renewables. CEEAG permits the Commission approval of measures involving new natural gas investments if the Member States can demonstrate that the investments help achieve the EU 2030/2050 climate targets. This demonstration may include binding commitments by the beneficiary, for example, to replace natural gas using renewable energy or to close down the plant in a timeframe that is consistent with EU climate targets.
Three Key Takeaways
- Member States will need to make large investments in environmental and energy projects in order to achieve the EU’s Green Deal policy goals. CEEAG offers guidance to aid recipients and Member States about structuring and analyzing publicly funded projects for approval by the Commission under EU State aid rules.
- The CEEAG covers many areas that Member States may support, including the reduction or elimination of greenhouse gases emissions and the energy and environment performance of buildings and clean mobility.
- The CEEAG rules are complex and technical. Companies that plan ahead, and make sure their funding requests and projects are consistent with the CEEAG, will likely be ahead of the rest both when Member States decide which projects to fund and when the Commission reviews them.