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Cross-Border Energy Projects in Times of Crisis: Is EU State Aid a Solution for Green Transition? | Morgan Lewis

The European Union remains committed to its Green Deal.[1] Despite all odds, geopolitical concerns and the energy crisis may actually accelerate the EU green transition[2] and trigger a reduction of fossil fuel imports, with the additional objective of securing the European Union’s energy independence. The share of renewables in the EU electricity mix is expected to grow from 37% in 2021 to 69% in 2030.[3]

The 2022 State of the Energy Union report published by the European Commission (EC) outlines what the EU has done to tackle geopolitical challenges and the energy crisis in 2022, and how its current actions will reshape the future climate strategy for the old continent.

To achieve clean energy transition and increase Europe’s energy independence, the EU will require a mix of private investment and public funding. On the one hand, the EU has pledged the largest share of its current budget to helping build a greener and more resilient Europe.[4] On the other hand, the EU state aid rules provide investors with a variety of tools to support industry investments in the green transition and the resilience of the EU economy. These include the Important Projects of Common European Interest (IPCEI) mechanism, the Climate, Energy, and Environmental Aid Guidelines (CEEAG), and the Recovery and Resilience Facility (RRF) under the REPowerEU Plan. Key features of EU state aid options available to energy projects are outlined below.

EU STATE AID: WHEN INVESTORS CAN BENEFIT FROM IT

As a matter of principle, the EU prohibits state aid (Article 107 of the Treaty on the Functioning of the European Union (TFEU)) unless exceptionally exempted or considered compatible with the EU’s internal market (Articles 107(2) and 107(3) of the TFEU). The main rationale is that there needs to be some sort of market failure that requires public funding to help support, and not distort, the normal forces of competition on the market.

EU member states serve as the intermediary and must notify the EC regarding each investment or investment program they seek to (co)fund, if from the national budget, or for which they seek funding, in the case of EU funding.

EU state aid can take many forms, such as direct grants, loans, guarantees, direct investment in the capital of companies, and benefits in kind.[5],[6] A positive transfer is not obligatory—waiving revenue that would otherwise have been paid to the state (as tax contributions) constitutes a transfer of state resources. State aid can be granted under horizontal or sectoral instruments.

With regard to green transition, the following mechanisms are of particular relevance:

  • REPowerEU Plan including the RRF
  • Green projects initiatives (IPCEI and CEEAG)
  • Compensation of energy-intensive companies for indirect emission costs (ETS Guidelines)
  • Temporary Crisis Framework

REPOWEREU AND RRF

REPowerEU is a comprehensive plan to address the geopolitical and energy crisis challenges with a view to accelerating EU’s clean energy transition and increasing Europe’s energy independence.

The REPowerEU plan’s priorities include (1) diversifying and finding alternative energy supplies; (2) green transition and investment in renewable energy; and (3) energy saving and efficiency.

The RRF is key to the REPowerEU Plan implementation as it provides related subsequent EU funding. The EU member states submit national Recovery and Resilience Plans (RRPs) in which they set out intended investments and therefore must comply with state aid rules,[7] criteria of compatibility,[8] and channel investments in line with the REPowerEU objectives.

Compatibility assessments should be based on (1) Article 107(2) of the TFEU when an intervention shall be compatible with the internal market, and (2) Article 107(3) of the TFEU when it may be considered as compatible with the internal market.

The first type (i.e., under Article 107(2) of the TFEU) includes (1) aid having a social character, granted to individual consumers, provided that such aid is granted without discrimination related to the origin of the products concerned; and (2) aid to make good the damage caused by natural disasters or exceptional occurrences.

The second legal basis (i.e., under Article 107(3) of the TFEU) enumerates

  • aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment, and of the regions referred to in Article 349, in view of their structural, economic, and social situation;
  • 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;
  • aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest;
  • aid to promote culture and heritage conservation where such aid does not affect trading conditions and competition in the EU to an extent that is contrary to the common interest; and
  • such other categories of aid as may be specified by decision of the Council on a proposal from the EC.

As an illustration, in the decision SA.101723, the EC has approved a €390 million ($414 million) Romania scheme to support the production of electricity and heat from high-efficient cogeneration installations connected to district heating networks in Romania based on Article 107(3)(c) of the TFEU.

Moreover, some of the measures might be exempted from the prior notification obligation as they will fall within the scope of block-exemption rules, in particular, the General Block Exemption Regulation (GBER); they will fulfill de minimis thresholds;[9] or they will be granted on the basis of the preexisting schemes accepted by the EC.

IMPORTANT PROJECTS OF COMMON EUROPEAN INTEREST

EU companies also have an opportunity to seek investment support under the Important Project of Common European Interest (IPCEI) framework.

The IPCEI allows member states to assist large and highly innovative projects of common European interest. For purposes of green transition, Commission supports the development of an innovative and sustainable European hydrogen industry.

Since January 2022, a revised version of the IPCEI communication is applicable. It sets out the criteria for the EC to assess the EU member state support for the cross-border projects that “overcome market failures and enable breakthrough innovation in key sectors and technologies and infrastructure investments, with positive spill-over effects for the EU economy at large.”

An example of IPCEI implementation includes €5.4 billion ($5.74 billion) of public support by 15 EU member states for an IPCEI in the hydrogen technology value chain (so-called IPCEI Hy2Tech).

The 2021 state aid IPCEI Communication[10] sets out the criteria under which member states can support cross-border projects of strategic significance for the EU under Article 107(3)(b) of the TFEU. The potential IPCEI project needs to (1) contribute to a common objective by supporting key value chain for the future of Europe; (2) aim to develop technologies and processes that go beyond what the market currently offers; (3) be a public support that provides necessary incentives to companies; and (4) ensure that the measure does not distort the competition.

GUIDELINES FOR STATE AID FOR CLIMATE, ENVIRONMENTAL PROTECTION, AND ENERGY

The Guidelines on State aid for climate, environmental protection and energy (CEEAG) establish further criteria by which the EC assesses whether environmental and energy state aid may be authorized.

Adopted in 2022, the CEEAG revised the Energy and Environmental aid guidelines (EEAG) applicable from 2014 through 2020. The CEEAG is aligned to the “Green Deal” objectives and focuses on energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, and protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.

State aid under the CEEAG can be granted if positive and negative assessment criteria under Article 107(3)(c) of the TFEU are met.

Considering the positive conditions,[11] the EC has to

  • identify if the economic activity being facilitated by the measure will support the green economy or will increase its sustainability, and the expected benefits of the aid for environmental protection;
  • examine whether the aid induces the beneficiary to change its behavior to engage in more environmentally friendly economic activity; and
  • ensure that there is no breach of any relevant provision of EU law.

Under the negative condition,[12] the EC will evaluate

  • the need for state intervention;
  • the appropriateness of the aid; for instance, whether the objective can be achieved by an alternative measure or less distortive aid instrument;
  • the proportionality of the aid (its limitation to the minimum necessary to meet the objective of the aid measure);
  • whether the aid is well published to preserve the transparency; and
  • whether the aid will generate or threaten to generate distortions of competition and have an effect on trade between member states.

Annex 1 provides examples of state aid for climate, environmental protection, and energy.

COMPENSATION OF ENERGY-INTENSIVE COMPANIES FOR INDIRECT EMISSION COSTS

Guidelines on certain State aid measures in the context of the system for greenhouse gas emission allowance trading post-2021 (the ETS Guidelines) constitute another framework for state aid relevant for energy projects.

The EST Guidelines allow EU member states to compensate a certain number of companies in sectors with high electricity consumption (electro-intensive users) for part of the higher electricity costs arising from the EU emissions trading scheme. This financial intervention minimizes the risk of carbon leakage, which occurs when emission costs cause EU companies to relocate their production to third countries that have less ambitious climate measures.

Annex 2 provides examples of state aid for compensation of energy-intensive companies for indirect emission costs.

TEMPORARY CRISIS FRAMEWORK

The Temporary Crisis Framework offers ad hoc solutions targeting side effects of the Ukraine conflict on the EU companies. (Visit our centralized portal for insights and analyses on maintaining business continuity in light of the Ukraine conflict.)

The Temporary Crisis Framework allows member states to grant specified amounts of aid to companies affected by the current crisis or related sanctions and countersanctions, to ensure that sufficient liquidity remains available to businesses, and to compensate companies for extra costs incurred due to exceptionally high gas and electricity prices.

It specifies that member states are able to

  • set up schemes for a limited amount of aid for companies affected by the crisis;
  • provide liquidity support in the form of state guarantees and subsidized loans; and
  • partially compensate companies, in particular, energy-intensive users, for additional costs due to exceptional gas and electricity price increases.

The state aid Temporary Crisis Framework is based on Article 107(3)(b) of the TFEU, and the EC applies case-by-case assessments.

Although the national schemes may differ from one from another, the Framework includes general safeguards:[13]

  • Proportionality: there should be a link between the amount of aid that can be granted to businesses and the scale of their economic activity and exposure to the economic effects of the crisis
  • Eligibility conditions: businesses for which the purchase of energy products amount to at least 3% of their production value[14]
  • Sustainability requirements: the aid should help businesses to tackle the current crisis while at the same time laying the ground for a sustainable recovery

Furthermore, for each type of scheme, the EC enumerates specific requirements. For instance, aid in respect of the additional reduction of electricity consumption[15] requires that (1) the aid provides financial compensation only where the amount of electricity consumed is lower than expected; (2) the aid contributes to reaching the targets of reducing electricity consumption in peak hours or overall; (3) the aid is granted after a competitive bidding process; (4) beneficiaries are selected based on the lowest unit cost of additional consumption reduction; (5) beneficiaries will commit to not increase their overall gas consumption and to not consume off-peak more than a certain proportion of the compensated electricity consumption reduction in peak hours.

The state aid provided under the Temporary Crisis Framework is not specific to energy projects.[16] However, many energy projects benefit from it as a matter of fact. Further, the Temporary Crisis Framework envisages two specific types of aid measures in line with the REPowerEU plan: (1) measures accelerating the rollout of renewable energy and (2) measures facilitating the decarbonization of industrial processes.

The Temporary Crisis Framework also invites member states to consider setting up requirements related to environmental protection or security of supply when granting aid for additional costs due to exceptionally high gas and electricity prices. The aid should therefore help businesses tackle the current crisis while at the same time laying the groundwork for a sustainable recovery.

Annex 3 provides examples of energy-focused state aid under the Temporary Crisis Framework.

CONCLUSION

Despite geopolitical and economic challenges, the EU remains committed to implementing its long-term EU climate plan by financing measures accelerating the rollout of renewable energy and measures facilitating the decarbonization of industrial processes.

The EU presents unique opportunities for energy companies. Investors in energy projects have at their disposal a variety of state support tools across the EU. In early December 2022, European Commission President Ursula von der Leyen called for “new and additional funding at the EU level” to encourage local investment in clean tech that should co-exist with member state funds, a so-called “EU sovereignty fund.”[17] Navigating the funding landscape requires expertise at the EU level and in multiple member state jurisdictions.

The EU is not the only jurisdiction to use public funding in furtherance of a green transition. China has boosted its industry for many years, and the United States approved generous investment incentives, coupled with local production requirements, through the Inflation Reduction Act.

Receiving state subsidies in a third country can, however, expose energy companies to subsequent challenges under the upcoming EU Foreign Subsidy Regulation. We will cover this in the next issue of Empowered.

Law clerk Maciej Plotka contributed to this article.


[1] A package of European policy initiatives that aims to set the EU on the path to a green transition, with the goal of reaching climate neutrality by 2050.

[2] The 2022 State of the Energy Union report highlights challenges as of 18 October 2022; see also IEA: Energy crisis can accelerate green transition (Nov. 1, 2022).

[3] 2022 State of Energy Union report, key figures point 10.

[4] Among other things, €3 billion ($3.2 billion) in innovative clean tech projects to deliver on REPowerEU and accelerate Europe’s energy independence from Russian fossil fuels; about 2 billion ($2.1 billion) for innovative low-carbon technology, focusing on the demonstration of environmentally safe carbon capture and storage and innovative renewable energy technologies on a commercial scale within the EU in the NER 300 programme; and €21 billion ($22.3) from the Important Projects of Common European Interest mechanism and the Recovery and Resilience Facility in the 2022 State of Energy Union report, key figures point 12.

[5] As indicated in Recital 8 of the Regulation (EU) 2021/241 of the European Parliament and of the Council of 12 February 2021 establishing the Recovery and Resilience Facility, OJ L 57, 18.2.2021.

[6] A positive transfer is not obligatory—waiving revenue that would otherwise have been paid to the State (as tax contributions) constitutes a transfer of State resources.

[7] As specified in the Commission Staff Working Document Guidance to Member States Recovery and Resilience Plans, Brussels, 22.1.2021 SWD(2021) 12 final.

[8] As explained in Practical guidance to Member States for a swift treatment of State aid notifications in the framework of the Recovery and Resilience Facility.

[9] Aid not exceeding €200,000 ($212,420) per undertaking over any period of three fiscal years (€100,000 ($106,210) in the road transport sector) constitutes an exception to mandatory notification.

[10] Communication from the Commission, Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest, C/2021/8481 OJ C 528, 30.12.2021.

[11] Point 3.1 of the CEEAG.

[12] Point 3.2 of the CEEAG.

[13] Point 32.

[14] The definition of energy intensive users is set by reference to Article 17(1)(a) of the Energy Taxation Directive.

[15] Point 2.7 of the Framework.

[16] As it is designed to enable member states to continue to use the flexibility foreseen under State aid rules to support the economy in the context of the Ukraine conflict.

[17] A new EU sovereignty fund was first mentioned by EC President von der Leyen in her September 2022 State of the Union address to the European Parliament.

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