Q&A: State aid law – a hindrance or a help to saving the planet?

What is State aid? 

Sometimes, governments intervene in energy markets. Authorities may intervene to make sure there’s a ready supply of power, for example, or to promote renewable energy. When a government gives a financial lift to a company, it is called ‘State aid’ – literally, the state (or other authority) is helping a company out.

State aid is a financial advantage: it can mean subsidies, tax breaks, or interest-free loans.

To make sure that any aid granted by governments serves society’s and the planet’s best interest, State aid guidelines exist to help decide whether that aid should be approved or not. 

Are there limitations on State aid?

There are conditions on State aid: if you are going to skew the market, you need to be careful how you do it, and it must be justifiable – it cannot harm competition and trade to the extent that would go against the common interest. So before an EU country goes ahead and issues a major pay-out to a company, it needs approval from the European Commission. The Commission uses a set of guidelines to assess whether the aid would be legal or not. 

As of this year, there are specific rules for State aid for the environment and the energy sector, known as the EU Guidelines on State aid for climate, environmental protection and energy (the ‘CEEAG’). In theory, if the aid does not meet the rules in the guidelines, it is unlikely to be authorised.

That throws some EU countries’ planned support for fossil fuels into question.

How can State aid help to protect our planet and help build a stable and resilient future?

The CEEAG are key to helping the EU defend people, nature and climate, as the guidelines tell national governments how they can channel funds towards the energy transition, instead of fossil fuel lock-in.

Under the new guidelines, State aid can enable governments to support the deployment of renewables, energy efficiency, low-carbon and renewable hydrogen, clean mobility, coal phase-outs and nature restoration.

For the first time, the guidelines contain rules on how EU countries can support an exit from coal, oil, shale and peat activities. The guidelines do not go so far as to force countries to phase out coal by a certain date, but they do set clear limits: any aid granted must incentivise an earlier closure than originally planned and be proportionate to the expected profits or additional costs to the operator.

The CEEAG also finally recognise the important role people and households can play in decarbonising the EU’s energy systems by allowing renewable energy communities to receive financial support. Empowering energy communities can help the EU become less reliant on external sources of energy, which is key to achieving energy independence. 

The new guidelines also promote energy efficiency – more moderated and flexible energy use – which is central to decarbonising the EU’s energy system and an essential part in helping manage the EU’s energy consumption in the short term. However, there is more to be done on energy efficiency, which should be the first port of call in the energy transition. While the CEEAG wants more money to go towards renovating inefficient buildings, energy efficiency means more than just insulating windows.

But could State aid hold us back?

The new State aid guidelines make a mistake by classifying fossil gas as a ‘transition fuel’. They even – alarmingly – call it ‘environmentally friendly’. But this is not supported by science – gas is not a ‘light’ fossil fuel. Its impacts in the short term are actually far more intense for the climate than even carbon dioxide.

The guidelines try to caveat this controversial call by requiring EU countries to show how any gas subsidies they want to grant will help achieve the EU’s 2030 and 2050 climate targets, and avoid fossil fuel lock-in. The vague conditions mean national governments can keep supporting highly polluting gas infrastructure, security of supply measures aimed at increasing gas backup capacity, or the production of gas-based hydrogen.

It means phasing out fossil fuels will largely depend on national willpower, which risks the EU as a whole falling short of its climate targets.

Legal clashes: the barrier to progress

One of the biggest hurdles to State aid helping, rather than hindering the EU reaching its climate goals is inconsistency between different laws. 

An example of this is the double subsidies that Romania’s incumbent energy company, Oltenia Energy Complex (OEC), would receive. Under the Rescue and Restructuring State aid guidelines, OEC was granted €1.33 billion in state support to keep the troubled lignite-based electricity producer afloat. Lignite is the dirtiest form of coal. Together with our partners, we responded to the European Commission’s decision last year to open an investigation into whether the restructuring aid should be granted, arguing that using public money in this way constituted unlawful State aid.

In the meantime, Romania has announced that it plans to phase out coal before 2030 in line with the Paris agreement. Under the CEEAG, this decision would mean Oltenia is entitled to even more subsidies as a compensation for closing its coal plants.

The problem is that as the Rescue & Restructuring State aid guidelines are not revised in tandem with the CEEAG, this creates a loophole for EU countries to potentially opt for giving restructuring aid to their coal utilities first to make them profitable, only to then compensate the companies for closures once they decide on a coal phase-out date. 

This isn’t the only instance of laws undermining each other to the benefit of fossil fuels. The same could also happen with the Temporary Crisis Framework for State Aid. The framework, which aims to relieve economic strains driven by Russia’s war in Ukraine, allows member states to support companies that are facing additional costs caused by the rise of fossil gas and electricity prices. That, inevitably, will mean more money from the public purse funding climate-condemning fossil fuels.

How can we unlock the power of the new State aid guidelines? 

Given the current energy crisis, the introduction of these temporary measures is understandable. However, unlike the CEEAG, the framework does not oblige EU countries to set any sustainability requirements when granting crisis aid. Not doing so could be damaging for the EU's energy transition, as it could undermine and even contradict the CEEAG's objectives.

The way the Commission interprets the CEEAG  will therefore be key in whether or not State aid helps the EU reach its climate objectives. It is up to national governments and the Commission to use State aid and the guidelines to push for a rapid and fair energy transition that gives the EU a chance of reaching its climate targets and energy independence.

Learn more about the role State aid can play in building a stable and resilient future by registering for Politico’s Competitive Europe Summit 2022.