State aid for a decarbonised Europe

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Introduction

EU State aid decisions have a major impact on how – and if – markets enable decarbonisation and the energy transition. This project analyses recent State aid decisions as to their consistency with decarbonisation objectives and the energy transition. Case studies are used to engage with decision-makers and stakeholders. Our objective is to raise awareness of the importance of State aid decisions for decarbonisation and the need for consistency to ensure that market forces work in support of decarbonisation and the energy transition.

This project is part of the European Climate Initiative (EUKI). EUKI is a project financing instrument by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU). The EUKI competition for project ideas is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. It is the overarching goal of the EUKI to foster climate cooperation within the European Union (EU) in order to mitigate greenhouse gas emissions.

Case studies

The case studies are based on European Commission decisions that authorise aid measures given by Member States to the energy sector. The themes of capacity mechanisms, renewable energy, energy efficiency, carbon pricing and industry decarbonisation have been selected, either because of the perspective they provide due to a large number of cases since 2014, their controversial nature, or their political importance. In all cases, these themes are directly relevant for the decarbonisation of Europe.

Capacity Mechanisms


Renewable energy


Energy Efficiency

Case studies coming soon.

CO2 pricing

Case study 1: Workshop, 20 November 2019: Making State aid work for Europe’s decarbonisation – State aid decisions on carbon pricing. Presentation available to download here.

Industry decarbonisation

Case studies coming soon.

Latest news & events

  • Event 14 November 2019

    Conference: State aid perspectives on the “Coal-to-Clean Transition” in Europe

    Conference organised by ClientEarth and Agora Agora Energiewende on ‘State aid perspectives on the “Coal-to-Clean Transition” in Europe’.

  • Event 22 October

    Workshop: Is the existing State aid framework in support of a decarbonised Europe?

    Workshop: Is the existing State aid framework in support of a decarbonised Europe? A critical assessment of the EU State aid Guidelines for renewable energy sources.

  • Power grid

    UK’s Capacity Market is not fit for purpose

    We have written to the European Commission arguing that there is no proven need for the UK’s Capacity Market – and that as designed, it favours coal and gas power plants over cleaner technologies.

  • lone standing tree poland

    Ostroleka C owners ‘on a financial tightrope’ ahead of capacity market auction

    ClientEarth has issued a further legal warning to Polish energy companies Enea and Energa as they prepare to bid for state subsidies for controversial coal power plant Ostrołęka C.

  • FAQs

    What is State aid?

    In general terms – ‘State aid’ refers to financial support (subsidies, tax breaks, interest-free loans etc.) granted by the government or public authorities to a company within the EU/EEA. EU law prohibits authorities from granting State aid unless and until it has been approved by the European Commission.

    The European Commission considers that the following conditions must be fulfilled for a measure to constitute State aid (it is not specifically defined in the EU Treaties):

    1. The recipient of the aid must be an ‘undertaking’ that is, any ‘person’ who assumes an economic activity. Companies and partnerships are examples of undertakings – including companies owned by the State. Generally speaking, individuals are not considered to be undertakings – except when they are ‘active on a market’ (e.g. ‘prosumers’ who are individuals that both consume, produce and inject electricity into the grid);
    2. the aid must grant an advantage to the recipient undertaking, that it would not have obtained on the market under normal conditions. However, some payments made by Member States do not grant an advantage. For instance, when they are made as a ‘prudent market operator’ (such as a private company acting in its commercial interests). This is known as the market economy operator principle (the MEOP);
    3. the advantage must benefit particular (‘selected’) undertakings or the production of particular goods. For example, failure to collect taxes from any company would likely not be State aid, as all companies are treated in the same way. However, a decision not to collect taxes only from a single company, or companies in a particular sector, would likely be ‘selective’;
    4. the aid must be granted by a Member State or through State resources. State resources may be involved even without a direct transfer of money from the Member State to the recipient (e.g. a decision not to collect taxes);
    5. the aid must distort or threaten to distort competition within the internal market; and
    6. the aid must affect or threaten to affect trade between the Member States. This criterion is easily met in liberalised EU markets such as the energy market.

    These criteria reflect the requirements of Article 107 of the Treaty on the Functioning of the European Union (TFEU).

    Why is State aid important for energy and environmental protection sectors?

    State aid is generally prohibited – unless it is first approved by the European Commission (the Directorate-General for Competition). The Commission may approve State aid in many different situations, including where government intervention is necessary to ensure a well-functioning and equitable market.

    One example (among many) is as the market does not typically ‘price in’ the environmental benefits of energy sector technologies, the Commission may pursue a well-functioning energy market by approving State aid to support renewable energy generation, or technologies that reduce demand for electricity.


    Is it possible to operate a business and make investments without State aid?

    Not only is it generally possible to operate a business and make investments without any State aid, it is also desirable to do so to achieve a competitive level playing field in the EU internal market. As their name indicates, aid measures aim to support or promote the development of a particular sector, a category of undertakings, or individual undertakings. In a competitive liberalised market, these undertakings should be able to develop by themselves as per market rules – and disappear if they are meant to.

    However, State aid may be justified, for example, to help develop certain industries – in particular, new industries that would otherwise not be able to effectively compete in a market saturated by long-term and well-established players (incumbents) whose investments have already been paid off. This is typically the case for renewable energies or demand-side response, which are new technologies that may need a boost to make their way into the energy market.

    Can all economic sectors receive State aid?

    Yes, aid measures can – and generally are – granted in all economic sectors. Typical examples are aid to the agricultural, financial or transport sectors.

    Each economic sector has its specificities and policy objectives for supporting certain industries may differ. This is why the European Commission adopts sector-specific guidelines to reflect the sector-specific approaches to applying State aid rules. However, there are common legal principles that must always be complied with, regardless of the industry the aid is given to.


    What are examples of State aid in energy and environmental protection sectors?

    In 2014, the European Commission issued Guidelines on State aid for environmental protection and energy (EEAG). These guidelines explain how the European Commission will apply State aid law when it assesses aid measures in these sectors.

    Types of aid covered by the EEAG will not necessarily be approved by the European Commission. However, when deciding whether to approve them, the Commission will apply the detailed rules set out in the EEAG to relevant aid measures.

    Examples of aid measures covered by the EEAG are:

    • aid for investments or upgrades of renewable energy installations, high efficiency co-generation units, biomass, biogas and biofuel production units;
    • aid for the development of energy efficiency measures;
    • operating aid to energy from renewable sources, such as feed-in tariffs or premiums that guarantee renewable energy producers a minimum price;
    • exemptions for energy intensive users from certain environmental taxes or from funding support for renewable energy sources; and
    • generation/resource adequacy measures such as capacity mechanisms.
    What laws apply to State aid in the energy and environmental sectors and who drafts them?

    The general rules that apply to State aid are Articles 106 to 109 of the Treaty on the Functioning of the EU.

    Aside from the provisions within the Treaty, the European Commission regularly issues so-called “guidelines”. These can either be ‘sector-specific’ (e.g. financial sector, transport, broadband etc.) or ‘horizontal’ i.e. dealing with certain types of aid measures that apply to all industries (e.g. environmental protection, rescue and restructuring aid to firms in difficulty, research, development and innovation). Despite Member States not being formally bound by the guidelines, they are the rules of assessment the European Commission must follow. Therefore, State aid measures that are not designed in strict compliance with those rules stand little chance of being approved.

    The European Commission and the European Council may also adopt exemption regulations to exempt certain categories of aid from being notified to the European Commission before their implementation.

    European Commission decisions and case law from the Court of Justice of the European Union (CJEU) are also relevant precedents for assessing State aid measures.


    Who is in charge of controlling the application of State aid law?

    Member States are primarily responsible for ensuring that all measures they intend to grant comply with State aid laws.

    National courts and the European Commission can assess whether a measure qualifies as a State aid and will be subject to a compatibility assessment. However, the European Commission has the power to assess whether a State aid measure is compatible with the internal market and when applicable, order its recovery (repayment).

    Under national law, national courts are then responsible for enforcing European Commission decisions in the Member States, e.g. issuing recovery orders or prohibiting further payments at national level, or granting damages.

    The CJEU ultimately controls the application of State aid law and can exercise its powers either upon referral for a preliminary ruling from national courts, or following to a petition for annulment brought against a European Commission decision.


    Why does a Member State need to get approval from the European Commission to support a national industry?

    State aid measures that a Member State intends to implement are subject to prior authorisation by the European Commission, and must therefore be notified. The measures will not be implemented pending this authorisation (standstill obligation). If they are, they are considered “unlawful” and may be subject to investigation by the Commission.

    Authorisation is required by the European Commission as State aid is a matter of competition between Member States and policy. For example, a political decision to support an industry or a particular undertaking may distort competition on the internal market if another Member State does not in turn support that economic sector within its country. This is a different, albeit comparable logic to the well-known competition matters of antitrust and abuse of dominant position, which are matters of competition between undertakings.


    What are the criteria of compatibility of an aid measure with EU law?

    If the European Commission establishes that a measure has the character of State aid, it must assess it to determine whether it is compatible with the internal market. The European Commission may issue a positive (or conditional) decision if it finds that the measure is in fact compatible. If it concludes that the aid measure is incompatible with the internal market, the European Commission will issue a negative decision.

    In accordance the common assessment principles, it has been established that the European Commission will only consider State aid to be compatible with the internal market if it satisfies each of the following seven criteria:

    1. It contributes to an objective of common European interest;
    2. state intervention is necessary as the market cannot achieve the objective;
    3. the aid is an appropriate instrument for achieving the objective, as opposed to market reforms or new policies;
    4. the aid has an incentive effect, changing the behaviour of the aid beneficiaries;
    5. the aid is proportionate – the minimum necessary to achieve the incentive effect;
    6. disproportionate negative effects on competition and trade between Member States are avoided; and
    7. the aid is awarded in a transparent manner.

    The compatibility assessment can be complex, often relying on detailed economic and technical input. The way the assessment is conducted may also vary from case to case. It can be difficult for third parties – without access to the complete set of data – to conduct its own, detailed compatibility assessment.

    If the European Commission finds that the aid measure is not compatible with the internal market, it will issue a decision prohibiting the aid. In this case, the Member State cannot implement the aid measure – it will need to redesign it and then re-notify the aid measure to the European Commission to once again seek its approval.


    What type of decisions can the European Commission take?

    The European Commission is the sole competent institution for assessing whether a State aid measure is compatible with the law. It can therefore take the following types of decisions:

    • A decision that a measure does not constitute State aid. In which case, it does not conduct a compatibility assessment and the measure may be enforced by the Member State without further conditions – or under conditions on the design of the measure that the European Commission may have recommended in its decision.
    • A decision not to raise objection. This is when a State aid measure is notified by a Member State prior to its implementation and the European Commission finds that it is both State aid and compatible with the internal market. It can therefore be implemented by the Member State.
    • A decision to open formal investigations. This is when the European Commission has doubts about the compatibility of aid measures with the law and requires further information and evidence to make its assessment. Third parties are generally asked to provide information that can be used by the European Commission to adopt a final decision.
    • A positive decision. This is a final decision authorising the aid following formal investigations, or finding that an unlawful (non-notified) aid is nonetheless, compatible with EU law.
    • A negative decision, with or without recovery. Opposite to a positive decision, the European Commission may find that a State aid measure is not compatible with the internal market and must therefore not be implemented. In principle, the European Commission will order recovery of aid that was already paid for and prohibit any future payments under the incompatible State aid measure. Some exceptions may apply e.g. to payments made more than ten years prior to the decision, or when the beneficiaries could legitimately expect that the State aid measure was compliant with the law (although this exception is rarely admitted).

    The team

  • Andreas Graf

  • Juliette Delarue, State Aid Expert, Environmental Lawyers ClientEarth

    Juliette Delarue

  • Maria Kleis-Walravens, Environmental Lawyers ClientEarth

    Maria Kleis-Walravens

  • Matthias Buck

  • Contact

    Find us
    Agora Energiewende
    Anna-Louisa-Karsch-Str. 2
    10178 Berlin
    Deutschland

    ClientEarth
    60 Rue du Trône (3rd floor)
    Box 11
    1050 – Ixelles
    Brussels

    Websites
    www.agora-energiewende.de/en/
    www.clientearth.org

    Telephone
    Agora: +49(0)30 700 14 35 000
    ClientEarth: +32 (0) 2 808 43 24

    About this project

    Managed by Agora Energiewende and ClientEarth with financial support by EUKI/BMUB, the project aims to analyse the trends in the European Commission’s decisional practice on State aid cases relating to environmental protection and energy and to confront them with the reality of the energy market and the desired developments in the context of the energy transition.