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ClientEarth Communications

29th May 2019

Fossil fuels
State Aid
Renewable Energy

The capacity mechanism Greece wants is a boon for fossil fuels

The Greek government wants to introduce a costly new subsidy scheme that would give money to ageing coal plants, favouring them over cleaner energy sources.

The scheme is a capacity mechanism – it gives payments to plants to make sure they are ready to provide power in times of peak demand.

We have written to the European Commission arguing that there is no need for the capacity mechanism when Greece is deliberately delaying market reforms that would ensure a functional energy system for the future.

Greece’s proposed capacity mechanism can only be implemented once approved by the Commission as State aid – and the Commission has not yet formally assessed the plans. However, we have submitted our observations to the Commission now, as we fear the Greek authorities are trying to push the scheme through quickly, before new rules in the EU’s Clean Energy Package enter into force at the end of the year.

Those rules would make it much harder for Greece to throw more harmful subsidies at its power plants – which is exactly what the capacity mechanism is designed to do.

Promoting pricey fossil fuels at the expense of climate and consumers

Greece’s electricity market is dominated by the state-controlled Public Power Corporation (PPC), which owns and operates the country’s fleet of lignite power plants. Lignite is the dirtiest form of coal, an inefficient and heavily polluting fossil fuel which has far outstayed its welcome.

Incredibly, instead of phasing out its lignite fleet, Greece plans to build not one, but two new units – Meliti II and Ptolemaida V. The latter is already under construction and, once built, will be the biggest lignite unit in the country – almost unbelievable as Europe vies to conquer runaway climate change.

A number of factors lie behind this madness, but two in particular are worth noting.

Firstly, the Greek government is traditionally protective of PPC’s dominance. Therefore, Greek authorities are reluctant to take steps that might benefit Greek citizens but harm an industry historically seen as being economically valuable, particularly at a time of economic instability.

This explains the delays in reforming the power sector by introducing new electricity markets. This reform is broadly known as the “Target Model”, slated for implementation since 2012.

However, without the Target Model, the market will remain uncompetitive and artificially dependent on fossil fuels as a means to ensure electricity supply, making it hard for cleaner technologies to break PPC’s stranglehold on electricity generation.

Secondly, the European Commission’s own attempts to force the market to become more competitive have been in some ways counterproductive. The Commission has required PPC to sell off 40% of its lignite assets – including the proposed new Meliti II plant – as a means to introduce more competition into the market for electricity generation.

This might have made some sense a decade ago but given that investors in these assets will need to run them for profit rather than close them down, it no longer does. The market should be opening up to renewables and saying farewell to these lignite dinosaurs.

The capacity mechanism also appears designed to grant huge subsidies to the lignite fleet – including the power plants the Commission has required to be divested, making them more attractive to potential purchasers.

However, the greatest cost will fall on Greek consumers, who will be forced to foot the bill of these subsidies. Given how hard it has been for Greece to find anyone to buy them – the deadline for bids has been repeatedly extended – it is clear why the government might want to throw money at the issue.

In their recent consultation, the Greek authorities claim that the mechanism aims to remedy ‘generation adequacy concerns’, which is designed to ensure there is enough available capacity to keep the lights on at times of peak demand. This claim is potentially disingenuous – and certainly has not been backed by the necessary evidence.

Read our observations on Greece's proposed capacity mechanism

Flaws in the capacity mechanism design

Under State aid law, if a government wants to implement a capacity mechanism, it must demonstrate that concerns over security of energy supply are great enough to warrant subsidies.

These concerns need to be established through a detailed and robust assessment of grid reliability, its capacity, and the resources available. They must then prove that nothing short of huge subsidies could be a solution for this problem.

The most fundamental issue in the Greek case is that there is no such robust assessment – at least, not one that has been made publicly available – that demonstrates concerns about adequate generation that could justify a capacity mechanism of this type.

Even if there were such concerns, a capacity mechanism should only be implemented as a last resort and Greek authorities should first apply the market reforms discussed above. State aid law aims to avoid ‘uncompetitive’ subsidies that make it harder for new participants and competitors to flourish.

Implementing market reforms would secure electricity supply and would help cleaner forms of energy generation to enter the market. This approach would not only reduce Greece’s climate impact and prevent burdening Greek tax payers, but also stop PPC’s lignite plants from receiving a massive uncompetitive boost that will arise from implementing this capacity mechanism.

The scheme’s current design also seems to make little effort to hide the fact that it promotes fossil fuels over cleaner technologies such as demand response (which allows consumers to reduce electricity consumption at times of peak demand, rather than requiring more generation capacity to come online).

As it stands, fossil fuel power plants can get much longer, and therefore more valuable, capacity agreements than these low carbon technologies. In addition, capacity thresholds for participation of demand response are set much (four times) higher than is often the case in other markets, such as in the USA.

Our recommendation

We are calling on the European Commission to block this capacity mechanism on the basis that it goes against existing EU competition rules and the Clean Energy Package.

The Commission must not be pressured into waving the scheme through quickly, with an insufficiently detailed assessment. It should conduct the in-depth analysis ordinarily required for such a complex and potentially anti-competitive scheme.

Giving into the Greek pressure – which aims simply to avoid complying with the ‘greener’ rules that apply to such schemes from 2020 – would be legally questionable, and a travesty at a time when the climate emergency means no free pass should be given to fossil fuel companies.