Europe: EU publishes new Guidelines for State Aid – key provisions relating to operating aid for electricity produced from renewable sources

• Energy and infrastructure - Clean energy

28-04-2014

Following an extensive consultation process, the European Commission (“the EC”) has now published its new Guidelines on state aid for environmental protection and energy which will come into force on 1 July 2014 and continue to apply until the end of 2020 (“the Guidelines”).

A key element of the new Guidelines are the provisions relating to operating aid for the production of electricity from renewable sources.

Summary of the main changes in the context of support for production of electricity from renewable resources

The changes engendered by the Guidelines will come into force on a tiered basis (rather than in full from the start) as follows:

• From 1 January 2016, aid will be assessed by the EC based on compliance with requirements linked to the aid being  based on the grant of a premium over and above market prices, the undertaking of standard balancing obligations and there being no incentive to generate electricity under negative prices;
• During the transitional phase years of 2015 and 2016 at least 5% of operating aid (for planned new electricity capacity from renewable sources) must be granted on the basis of a open non discriminatory competitive bidding process. It is open to each Member State to go over this figure, with the 5% being a minimum;
• From 1 January 2017, subject to limited exceptions, all aid will  be required to be granted on basis of a competitive bidding process subject to clear, transparent and discriminatory criteria.

The required conditions up to 1 January 2017 do not apply to installations with an installed electricity capacity of less than 500 kilowatts (kW) and demonstration projects (except for wind farms) with an installed electricity capacity of no more than 3 megawatts (MW) or 3 generation units.

Post 1 January 2017 the requirement for open competition regarding the grant of operating aid does not apply in respect of installations with installed electricity capacity of less than 1MW, or demonstration projects (except for wind farms) for installations with an installed electricity capacity of no more  6 MW or six generation units.

Additional exemptions to the need for a competitive process are where Member States can demonstrate that (1) only one or a varied limited number of projects or sites could be eligible; or (2) a competitive bidding process would lead to higher support levels (e.g. where there is a risk of strategic bidding); or (3) a competitive process would result in lower project realisation rates.

The required competitive bidding process should operate on a technology neutral basis, unless it can be demonstrated that a process open to all generators would lead to a sub-optimal results which cannot be addressed in the design process. The UK Department of Energy & Climate Change (DECC) will have to bear this in mind when structuring any technology specific competitive processes under the CfD scheme.

Where an exemption to the need for a competitive bidding process can be shown to apply, it is necessary to still demonstrate to the EC that the requirement in terms of the conditions applicable from January 2016 will be complied with.

Approved operating aid will only be permitted until the plant benefitting from such aid has been fully depreciated in accordance with normal accounting rules. Also any investment aid previously received for such generation plant (e.g. regional or SME investment aid or R&D&I investment aid measures) will have to be deducted from any operating aid. This will require consideration of the merits of such operating aid where capex payments in the form of investment aid has already been applied as against qualifying plant.

Individual approvals required for large schemes 

A proposal has been put on the table by the EC that all existing schemes must be brought into line with the new Guidelines by no later than 1 January 2016, subject to the following exemptions:

• Existing energy from renewable sources (and cogeneration) operating aid schemes need only be so adapted if they are to be prolonged over and above the original duration approved by the EC, have to be re-notified to the EC after expiry of the initial 10 year period or are changed for what was originally approved; or
• Whenever a recipient of aid has received confirmation based on an approved scheme that it (the recipient) will benefit from State aid under such a scheme for a predetermined period, such aid can continue to be granted for that entire period on the basis of the original approval (an example of where this would apply is feed in tariff payments).

It will be interesting to see how DECC (on behalf of the UK) and other Member States responds to this proposal (with it being unusual for a proposal relating future action to be set out in a published guideline documents).