State Aid and the Energy Sector
State aid, unbundling and EdF — a new piece in the puzzle?
Written by Leigh Hancher
The EU Treaty state aid rules (Articles 107 and 108) have a major role to play in the energy sector. Governments intervene to support public and private energy companies as markets evolve from heavily regulated to liberalised markets and from carbon to low carbon economies. In some cases, this may mean compensating companies left with ‘stranded assets’ — generating facilities which cannot compete on the market and cannot exit the market on commercial terms. In other cases, it can mean providing financial incentives for new market entrants — such as producers of renewable energy — who cannot compete with fossil fuel producers. Often governments provide both types of support at the same time and, indeed, Europe’s energy market is heavily subsidised.
The EU state aid rules do not forbid government support for the energy sector — their purpose is to distinguish good aid from bad and to allow Member States to finance ‘objectives of common European interest’, such as the clean energy transition.
Despite several decades of application, the concept of a state aid is still not well defined and continues to generate protracted legal battles in the European courts. This is well illustrated by a ruling in Case T-747/15 of the General Court of the EU on Tuesday 15 January 2018, confirming that the Commission had correctly applied the state aid rules to order France to require EdF to pay back Euro 1.37 billion.
A government may claim that as a major shareholder in an energy company, it is entitled to reorganise that company just as any private shareholder would often do. Private shareholders use their own resources to fund re-structuring but governments invariably use public resources generated from tax revenue to cover restructuring costs. The French government did exactly that when, in accordance with EU energy law requirements, it unbundled the state energy company, EdF, to create a separate transmission system operator (TSO). It waived a tax claim in order to boost the utility ’s balance sheet after unbundling. In 2003, the Commission held that this tax waiver was an illegal state aid. France claimed that it had simply acted as any other market investor would have done and that the method it had used (the tax waiver) was irrelevant.
Although most private investors do not enjoy the right to collect and then waive taxes, rather surprisingly, the EU courts upheld France’s challenge. The Commission had to redo its homework. In 2015, it adopted a new decision. It found that the French government had not made any assessment of the future profitability of the firm at the time of the tax waiver. The government had not required the same return on its investment as a private investor would have done. State aid was therefore granted to EdF. The General Court’s ruling can be appealed to the European Court of Justice (ECJ) and, if this occurs, at least two decades will have elapsed in this complex but by no means a unique case.
State aid may well be an important instrument in the Commission’s toolbox but it is not always easy to deploy, and legal challenges are very frequent. Our new book on State Aid in the EU Energy Sector explores the significance as well as the complexities of the EU state aid regime.
The 2014 State Aid Guidelines: How ‘soft law’ turns into ‘hard law’
Written by Francesco Salerno
In EU law parlance, Guidelines adopted by the European Commission go by the friendly-sounding title of “soft law”. Appearances can be deceiving, though.
In the field of State aid, the European Commission has adopted a multitude of Guidelines, ranging from horizontal issues (such as regional aid) to the treatment of aid measures in specific sectors. The energy sector is no exception. In fact, the first Guidelines were adopted in 2001. After an amendment in 2008, there has a comprehensive review in 2014.
The 2014 Guidelines on State aid for environmental protection and energy impact some of the most critical issues in the energy transition: they set out new rules on subsidies to renewables, on special measures for energy-intensive consumers to reduce their burden of financing renewables, and on capacity payments.
This re-regulatory effect of the 2014 Guidelines elicited legal challenges alleging the Commission’s lack of competence and misuse of powers. The General Court eventually dismissed the action on procedural grounds (Case T-694/14) because it considered that Member States are not obliged “neither in law nor fact, to amend their legislation on operating aid in order to bring it into line with the contested guidelines”, so the Guidelines were not of “direct concern” to the applicant.
While being technically impeccable, the General Court ruling betrays awareness that, in practical terms, State aid Guidelines are difficult to distinguish from Directives. In fact, in the same ruling, the General Court admits that, while a Member State remains theoretically free to notify a measure of aid which does not satisfy the Guidelines’ criteria, it is “very probable” that such a notification would elicit a negative decision from the Commission.
Thus, for operators and regulators, the 2014 Guidelines are at the cross-roads where soft law meets hard law.
The 2014 State aid Guidelines are reshaping the national rules applicable to the incentives powering the clean energy transition. Our new book on State Aid in the EU Energy Sector provides, in detail, analysis of the Guidelines and its implications for operators and regulatory authorities.
Regulating prices in the ‘brave’ new world of the energy transition: the role of EU State aid control
Written by Adrien de Hauteclocque
Pubic intervention on energy prices is nothing new. However, its reach has undoubtedly increased since the process of liberalisation began. Member States now tend to distort prices for renewable energy, nuclear and back-up capacities (through so-called capacity mechanisms). Producers, household customers and energy-intensive users almost all benefit from some sort of preferential tariffs. Twenty years after liberalisation started, Member States are interfering with the price formation mechanism all along the energy supply and consumption chain. The free market segment of the industry indeed gets narrower and we can wonder whether energy markets still deserve the label ‘liberalised’. Given the new objectives we have, in particular climate change mitigation and affordability, we cannot but conclude that pubic intervention on energy prices at national level is here to stay.
In this context, EU State aid control remains a key tool to regulate in the wider European interest. The Union institutions have developed an important body of case law and decisions on price regulation and EU State aid law. Major difficulties nonetheless remain. Among them, we can highlight, for instance, the issue of the existence of an advantage, as it is not always easy to determine what would have been the competitive price without public intervention. Another is the issue of the involvement of state resources, which constantly re-surface in new guises. In the new context, tailor-made individual aid schemes for targeted customers (as opposed to producers) seem difficult to implement. Regimes favouring a category of users by exempting them from a component of the energy price should remain a common feature of the energy policy landscape. As renewable support schemes will progressively be rolled back while technologies are maturing, one of the key issues in the coming years will be the protection of energy-intensive users, in order to avoid carbon leakage. A careful balance will have to be reached, not only to avoid distortions in downstream markets, but also to ensure that the tariff deficit does not threaten the viability of the whole system.
The issue of energy prices will remain a sensitive one and there is no denying the fact that EU State aid law will have a role to play. Our new book on State Aid in the EU Energy Sector provides a detailed analysis of the relationship between EU State aid control, under Articles 107 and 108 of the TFEU, and the regulation of energy prices.
