This is an extract from a recent briefing by Clifford Chance titled “New EU guidelines on State aid for climate, environmental protection and energy: Which sectors could benefit”
On 1 January 2022, the revised Guidelines of the European Commission on State aid for climate, environmental protection and energy (CEEAG) entered into force, extending the scope of the previous Guidelines to new areas in order to achieve the goal of reaching climate neutrality by 2050.
Expanding scope of EEAG to decarbonisation/clean technologies
In 2014, the European Commission (the Commission) adopted the guidelines on State aid for environmental protection and energy measures (EEAG) as part of its modernisation agenda, which facilitated the adoption of State aid to support energy efficiency and environmental protection oriented projects across the EU. However, since the adoption of the EEAG, the energy and climate policy landscape has changed radically. In 2019, the EU adopted the “Clean Energy for all Europeans” package to move away from fossil fuels and deliver on its Paris Agreement commitments to reduce greenhouse gas emissions (GHG), while in July 2021 the Commission presented the “Fit for 55” package, a set of legislative proposals to revise the entire EU 2030 climate and energy framework in line with the EU Green Deal 2050 carbon neutrality goals. In light of these developments, the CEEAG adapt the conditions which must be met and the processes which must be followed for the Commission to consider state support compatible with EU State aid rules.
Substantive changes to aid compatible categories
Removal of greenhouse gas emissions – in particular through renewable energy
The revised Guidelines are generally technology-agnostic but they continue to endorse renewable energy and energy efficiency support schemes under an overarching category of aid referred to as aid for the reduction and removal of greenhouse gas emissions. Aid for nuclear energy has been explicitly excluded from the scope of CEEAG.
The Guidelines cover energy generation from renewable energy sources in line with the Renewable Energy Directive 2018/2001 (RED II) including support for biofuels, bioliquids, biogas and biomass fuels, renewable / low-carbon hydrogen and energy produced from waste. They also address aid to support electrification using renewable or low-carbon electricity as well as all technologies that contribute to the reduction of GHG emissions such as aid for carbon capture and storage or use.
As of 1 July 2023, for renewable energy projects or reforms, Member States must organise, prior to any aid notification, a public consultation on the competition impact and proportionality of the proposed measures. The duration of this consultation must be of at least six weeks for aid exceeding EUR 150 million per year and of at least four weeks if the aid is less than EUR 150 million per year and no competitive bidding processes are used.
Competitive bidding should be the default mechanism for the granting of aid. This will not be required only if: (i) there is insufficient potential supply or number of potential bidders to ensure competition; (ii) the beneficiaries are small projects (e.g., less than 1MW of installed capacity); or (iii) the project has been selected following an open call to form part of a large integrated cross-border project and either it applies an innovative technology or it is amongst the early adopters of an innovative technology in its sector.
In the absence of a bidding process, the net extra cost must be determined by comparing the profitability of the factual and counterfactual scenarios.
The Commission for the first time makes explicit reference to “contracts for difference” as a form of aid for decarbonisation specifying that they may be a “useful tool for bringing to market breakthrough technologies that may be necessary to achieve industrial decarbonisation.” These contracts entitle the beneficiary to a payment equal to the difference between a fixed ‘strike’ price and a reference price – such as a market price, per unit of output.
Clean mobility is one of the new sectors covered by the CEEAG comprising aid for the acquisition or leasing of clean vehicles, retrofitting, refitting and adaptation of vehicles or mobile service equipment especially where it is necessary to allow vessels and aircraft to use or increase the share of biofuels and synthetic fuels. The revised Guidelines make specific reference to zero emission aircraft as eligible for aid giving the Commission the right to require that the aid beneficiary decommissions an equivalent number of less environmentally-friendly aircraft of a similar take-off mass as the aircraft acquired or leased with State aid.
In addition, aid may be granted for the construction, installation, upgrade or extension of recharging or refuelling infrastructure and in particular new recharging infrastructure allowing the transfer of electricity with a power output of up to 22kW that support smart recharging functionalities.
For aid granted without competitive bidding, the aid may be considered proportionate, if it does not exceed 40% of the eligible costs. The aid intensity may be increased by 10% for zero-emission vehicles or for medium-sized enterprises or by 20% for small enterprises.
At the same time, although alternatives to fossil-based fuels are already available, the Commission recognises that as regards heavy-duty vehicles or hydrogen refuelling infrastructure, LNG or blended fossil-based hydrogen may be eligible for aid if granted until 2025 and 2035 respectively and provided that the relevant Member State has put forward a strategy to phase out fossil fuels.
Energy infrastructure – hydrogen
Aid for energy infrastructure is another area covered by the CEEAG. Eligible investments may include digitalisation, smartening of energy infrastructure, e.g. in order to enable integration of renewable or low-carbon energy, as well as upgrades on grounds of climate resilience. The CEEAG contain a clear set of definitions of the various types of energy infrastructure, including for the first time also hydrogen infrastructure. The latter comprises either repurposed or newly constructed (cross-border) transmission pipelines; storage facilities; dispatch, reception, regasification or decompression facilities; terminals; and any equipment or installation essential for the hydrogen system including compressor stations.
Fossil fuel power plants decommissioning
Under the CEEAG, in the context of accelerating the energy transition in Member States with very low income per capita, aid can be granted for the closure of coal/peat/oil shale power plants and/or mining operations with a simultaneous investment in more environmentally-friendly generation. The Commission explicitly refers to natural gas as a transitional and less polluting energy source. Certain projects are exempted from the scope of the CEEAG until 31 December 2023 provided that they: i) are located in Member States with real GDP at or below 35% of the 2019 EU average; ii) involve simultaneous closure of the coal / peat / oil shale power plants of the same capacity as the new generation covered by the investment, by no later than 2026; iii) concern Member States without a capacity mechanism in place committing to undertake market reforms ensuring security of supply; and iv) are part of a credible and ambitious decarbonisation strategy.
Aid to large airports
In derogation to point 17(b) of the 2014 Guidelines on State aid to airports and airlines (Aviation Guidelines), the CEEAG explicitly provides that large airports with a passenger volume of over 5 million per annum, would be eligible for aid to decarbonise their infrastructure, operations and systems, assuming they meet the criteria described above.
Further noteworthy developments in the CEEAG include:
- Aid for the rehabilitation of nature and ecosystems, and for the protection and restoration of biodiversity, (in addition to aid for decontamination already covered under the EEAG) is provided under the CEEAG; aid intensity may reach up to 100% of eligible costs
- Selective reductions in the payment of levies for energy-intensive users are foreseen to avoid carbon leakage, i.e. avoiding that EU businesses move their production to countries outside the EU, where environmental targets are absent or less ambitious, and therefore the production costs lower. Eligibility is determined on the basis of electrointensity and trade-intensity thresholds at sector level
- The Guidelines promote also greener security of supply measures by setting strict national emission thresholds or incorporating other environmental criteria into their security of supply measures.
The CEEAG bring the 2014 Guidelines in line with the recent developments in the EU’s climate and energy policy and the Green Deal objectives. The revised Guidelines set out in detail the compatibility criteria for aid in several sectors that are expected to contribute to the 2030 and 2050 decarbonisation targets such as the production of renewable and low-carbon hydrogen, clean mobility and energy efficiency. The Commission has decided to significantly widen the scope of the Guidelines, while it gives a particular weight to the assessment of the necessity and proportionality of the aid, rendering competitive bidding processes the default mechanism for awarding aid and determining the aid level.
The complete briefing can be accessed here