The EEAG 2014 – one and a half years on

Leigh Hancher

Overview

• Background to EEAG

• Some statistics

• Notion of ‘aid’

• Compatibility

• Art 106(2)

• Conclusions

Background to EEAG

• SAM exercise May 2012 -> objectives

• EAG 2008 expiry: Issues paper

• Energy and Climate Change Framework

• Leaked draft EEAG July 2013 – extends to nuclear

• December 2013 – official draft

• Opening decision on Hinkley Point

Background to EEAG

• 5000 submissions received in consultation

• EAAG adopted April 2014 – enters into force July 2014

• Transitional regimes

EEAG 2014

• INVESTMENT AID

• Notification threshold for individual measures under a scheme: €15 million per

company

• Assessment based on general compatibility criteria and common assessment

principles

• OPERATING AID TO RES electricity

• Notification threshold for individual measures under a scheme: generation

capacity per site above 250 MW

• Duration of approval for scheme: 10 years

• Schemes preferably open to EEA / Energy Community

• a) Integration in the market:

• From 2016: (for all new aid schemes and measures) Renewable electricity

installations:

• sell the electricity they produce on the market, receiving a

• premium in addition to the market price.

• must compensate for short-term deviations from their

• scheduled generation plan

• Receive no incentives to generate when prices are negative

EEAG/2

• b) Introduction of competitive bidding

• Transitional phase 2015-2016

• Aid granted through competitive processes for at least 5%

• of the planned RES capacity From 2017

• Aid granted through competitive processes for 100% of the

• planned RES capacity, except if a Member State demonstrates that

the result would be suboptimal (e.g. limited number of eligible

projects/sites, risk of overcompensation or of underbidding)

• Process open to all generators and technologies. (Reasons for

exceptions include: grid stability, long-term potential of a new

technology, need to achieve diversification of sources)

• c) Special regime for small installations

• 3. OPERATING AID TO RES OTHER THAN ELECTRICITY

• Aid per unit of energy should not exceed the levelised costs of

producing energy (LCOE7) minus the market price of the form of

energy concerned.

The LCOE may include a normal return on capital. Investment aid is

deducted.

EEAG/3

• Infrastructure – certain market failures presumed so justified to use State aid to finance those investments. Examples are "projects of common interest” and projects in assisted areas.

• all users must benefit from the new infrastructure, so aided projects must provide open access to third parties and subject to tariff regulation.

• aid to infrastructure may not have any distortive effects.

• standard for examining aid should be the same for unregulated and regulated sectors

Some Statistics

• State Aid Scoreboard Feb 2016:

• Large increase in EEAG aid (28.5 billion) in year to Dec 2014 due to increased awareness that measures = state aid

• 9 out of 10 measures registered under GBER

• 47 decisions under EEAG to date

• [of which 20 relate to German offshore wind parks over 250 MW]

Notion of state aid

• From Preussen Elektra via Vent de Colere to Elcogas

• Virtually any intervention in setting additional charges on transmission tariffs = state aid

• Role of intermediary fund? How important?

• Selectivity test as an escape route?

• Increasing confusion in case law on this concept

Notion of aid/2

• Distinction between application of test to tax measures v the rest

If ad hoc measure= economic advantage -> presumption of selective advantage

If general measure -> is there advantage? Is it selective? 3 part test as applied to tax measures?

Notion of aid/3

• 6 ways to bake the cake!

Compatibility – a throw of the dice?

RES Projects in the UK

– CfD scheme, 5 offshore windfarm projects and Capacity Market scheme approved in July 2014 under Article 107(3)(c) and EEAG

– 1 further project (Teeside biomass CHP) approved in January 2015

– 2 biomass conversion projects (Lynemouth and Drax) : formal proceedings opened in February 2015 into Lynemouth

RES projects under EEAG

– EEAG framework – under Article 107(3)(c)– Key requirements for aid for electricity from renewable

energy sources:• Beneficiaries need to sell electricity directly into market

and be subject to market obligations. • From 1 January 2016 – aid must be premium to market

price, standard balancing responsibilities and no incentive to generate under negative prices

• From 1 January 2017 – generally need competitive transparent bidding processes (could be technology specific if justified), duration of aid only up to period when plant fully depreciated

– CfD mechanism accepted by Commission as meeting EEAG objectives

Hinkley Point - 2014

• Two European Pressurised Reactor units, representing approximately 7% of UK electricity generation

– initially intended to be delivered in 2017 but later planned for 2023

– final investment decision is pending and EDF may not go ahead

• The UK government proposed, and the Commission approved, an extensive package of support measures for the beneficiary, NNBG:

• 35 year contract for difference (CfD), with a £92.5/MWh index-linked strike price

• UK government credit guarantee

• ‘Secretary of State agreement’ in case of ‘political shutdown’

Hinkley /2

• the support package was considered as single (investment) aid measure

– link between the pricing of the guarantee, NNBG’s rating, and the CfD provisions

• UK government -> guarantee would be offered on commercial terms in line with the market economy operator principle (MEOP) : CfD = SGEI compensation – Altmark applies

– Commission - guarantee fee cannot be considered at market price, since the market does not provide a similar facility (see also Paks II opening decision)

– No entrustment so no SGEI/Altmark not met

Art 107(3)c) Market failure and nuclear

• market failures for low-carbon generation more broadly, and nuclear, in particular

– low-carbon generation• no long-term price signals for carbon and lack of stable regulatory framework

for carbon reductions• security of electricity supply is not adequately priced in

– nuclear• lack of financial instruments to hedge against significant risk of nuclear

construction• risk of political ‘hold-up’ and lack of credible commitment by policymakers

• concerns raised by the Commission:– potential overcompensation given the variable risk profile over the life of the

project– refinancing gains after construction are not automatically shared with customers

Biomass – Lynemouth

• Commission concerns:

• Lynemouth’s expected returns sensitive to assumptions for thermal efficiency, the load factor and fuel costs

• overcompensation cannot be excluded; Lynemouthcould be overcompensated if the plant achieves higher thermal efficiency and load factor and if fuel costs decline

• no safeguards in place to correct potential overcompensation

• concerns about the appropriateness of assumptions on thermal efficiency, load factor and fuel costs

Art 106(2) as compatibility test

• Commission refused to apply in Hinkley – no entrustment of a genuine SGEI

• Commission indicates it cannot apply in French ‘Plan Bretagne’ – no security threat?

• Could apply to achieve diversity of supply –Lithuanian LNG (Gazprom was super dominant)

• Black hole on costs – Case T- 57/11 Castelnou(Spanish coal)

Conclusions

• Does the Commission stick to its own guidelines?

• Can MS claim national energy policy trumps (Art 194(2))?

• Can national systems still be designed to escape Art 107(1)?

• Are EEAG objectives realistic – is technological neutrality possible?

• On RES – test is transition to auctions and FIPs after 2017