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EU renewable generators: time to wean them off “overcompensating” subsidies?

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The European Commission has published draft state aid guidelines on environmental and energy aid for 2014-2020 for consultation.  According to the accompanying press release, these would “facilitate the decarbonisation of energy supply and the integration of the EU internal energy market”.  A less charitable reader might detect in the draft guidelines some tensions between the EU’s competing goals of promoting free competition and completing the EU internal energy market on the one hand and the need to reduce greenhouse gas emissions and ensure security of energy supply on the other.

The draft guidelines follow the policy outlined in the Commission Communication on delivering the internal electricity market and making the most of public intervention, published with accompanying  staff working papers in November: the suspicion that, notwithstanding “the challenges of the climate change agenda”, some national subsidy regimes for renewables are “overcompensating” what are now “mature” technologies; that new schemes designed to ensure security of supply may end up supporting plants that are unnecessary or inefficient; and that Member States too readily opt for subsidies rather than pursuing demand reduction options or the potential for EU market integration.

There is considerable emphasis on the use of competitive bidding processes.  The draft thresholds for determining whether a technology is “deployed” and subsidies to it therefore require to be subject to more rigorous criteria may be set quite low (between 1 and 3 per cent of production at EU level).  For each technology / kind of aid, the draft guidelines list specific anti-competitive pitfalls to be avoided and/or ways to monitor for, and correct, possible overcompensation.  And it is envisaged that the guidelines will apply not just to new schemes, but also to existing ones which are amended after the guidelines come into force – unless the only amendment is the publication of a new tariff, or the beneficiary has received confirmation that it will benefit for a predetermined period.

In some ways, none of this should be surprising.  By definition, even aid that has been cleared by the Commission remains susceptible to further examination in the light of changing market conditions – which may lead to something that was originally found compatible with the internal market subsequently being found to be incompatible.  It remains to be seen whether the draft Guidelines will lead to this happening more often, or whether they will change much as a result of this new consultation (the third on this subject).  One thing that is certain is that there is no shortage of high-profile cases to which the Commission can apply its current thinking.  On the same day as the draft guidelines were published the Commission announced an in-depth investigation into a German scheme reducing renewables surcharges to energy-intensive users and into the UK’s proposed aid to EDF’s Hinkley Point C nuclear power station.

All of which comes as a reminder that the low carbon investment support and security of supply elements of the UK Government’s flagship programme of Electricity Market Reform (EMR) require – and have yet to be granted – state aid clearance from the Commission.  The same is true of the proposed exemption for energy intensive industrial users from the increases in supply charges that will fund EMR.  It is not surprising that recent DECC announcements have stressed the possibility of e.g. moving to competitive bidding for EMR contracts for difference (rather than setting the “strike price” administratively) sooner rather than later.  Fortunately, the EMR regime has been designed in such a way as to accommodate a lot of adjustments both before and after it goes live later this year.

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