This is the second in a series of posts on the European Commission’s initial assessment of the package of measures by which the UK Government proposes to provide financial support for the proposed new nuclear generating station at Hinkley Point (HPC): click here for the first in the series. The text of Commission’s letter is now also available in the Official Journal of the European Union: interested parties have one month from the date of its publication (7 March 2014) to comment.
In this post we summarise the Commission’s analysis of the HPC support package. This consists chiefly of a proposed Contract for Difference (CfD) and a credit guarantee conferred by participation in HM Treasury’s UK Guarantees Scheme: both are conveniently summarised in the opening paragraphs of the Official Journal notice.
Introduction: the state aid rules
It is worth beginning by reminding ourselves of the key EU Treaty provisions on state aid. Article 107 of the Treaty on the Functioning of the European Union (TFEU) states:
1. Save as otherwise provided in the Treaties, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.
Article 107(2) then lists certain types of aid which fall within Article 107(1) but which “shall” be considered compatible with the internal market. These relate to aid having a social character or relating to natural disasters, economic crises or German unification and can therefore be disregarded for present purposes. Article 107(3) contains a further list of types of aid which “may” be considered compatible with the internal market. Article 108(2) and (3) TFEU state:
2. If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a State or through State resources is not compatible with the internal market having regard to Article 107, or that such aid is being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined by the Commission.
If the State concerned does not comply with this decision within the prescribed time, the Commission or any other interested State may, in derogation from the provisions of Articles 258 and 259, refer the matter to the Court of Justice of the European Union direct…
3. The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter aid. If it considers that any such plan is not compatible with the internal market having regard to Article 107, it shall without delay initiate the procedure provided for in paragraph 2. The Member State concerned shall not put its proposed measures into effect until this procedure has resulted in a final decision.
Secondary legislation has established an administrative framework for dealing with state aid cases (for further detail, click here). Measures that are put into effect without having been notified and approved under Article 108(3) are “unlawful aid”. If the Commission finds unlawful aid is incompatible with the internal market, it may require Member States to recover it from the beneficiaries.
To gain the Commission’s approval for the HPC package, the UK Government must therefore persuade the Commission either that its support for HPC does not constitute state aid within the meaning of Article 107(1), or that such support is compatible with the internal market. The Government has identified three possible ways to avoid a finding of incompatibility, as set out below.
The “no aid” arguments
Any claim that a measure does not constitute state aid depends on showing that one of the elements of aid set out in Article 107(1) – state origin of the aid, conferral of a “selective advantage”, impacts on intra-EU trade and competition – is not present. We take each of these in turn below as they have been applied to the HPC support package.
- Apparently, the UK authorities “do not contest” that the CfD is financed from resources under the control of the state. The Commission points out that the CfD will be administered by a Counterparty body essentially controlled, and potentially underwritten, by the Secretary of State.
- As regards distortion of competition and an effect on intra-EU trade, the Commission observes: “As in this case the notified measures will enable the development of a large level of capacity which might otherwise have been the object of private investment by other market operators using alternative technologies from either the UK or other Member States, the notified measures can affect trade between Member States and distort competition.”.
- That leaves as the key battleground the question of whether the support package confers a “selective advantage” on HPC. Would HPC be getting a deal that will give it an advantage in the market and that is not open to its competitors? In order to show that this element of the definition of aid is made out, the Commission has to engage with the criteria laid down by the Court of Justice in the case of Altmark. In that case, the Court found that in certain circumstances compensation provided to undertakings entrusted with a public service function would not constitute state aid. The Commission considers the Altmark criteria (discussed in the Commission’s 2012 Communication on compensation for the provision of services of general economic interest (SGEI)) in some detail. Overall, the Commission finds it hard to see that HPC would be entrusted with the kind of public service obligation (PSO) that the Altmark criteria envisage. It also inclines to the view that the compensation which HPC stands to receive under the CfD would be more than the Altmark criteria permit.
The “aid is compatible” arguments
The Government argues that if the HPC package is considered to be state aid, its contribution to the common EU objectives of decarbonisation, security of supply and diversity of electricity generation, and addressing related market failures, outweighs its negative impact on the internal market. The Commission is not persuaded by these arguments in favour of a finding of compatibility under Article 107(3). For example, it is sceptical of claims about decarbonisation on the basis that support for HPC could crowd out investment in other low carbon technologies; and it queries claims about security of supply on the grounds that the most immediate concerns about the adequacy of the UK’s electricity generation capacity relate to the current decade, not the 2020s when HPC would be commissioned.
But the Commission’s scepticism about the objectives of the HPC support package is only the beginning of its concerns from an Article 107(3) point of view. Even if it were prepared to accept that the HPC package is aligned with one of the “common EU objectives”, the Commission queries whether state aid – in the combined form of the proposed CfD and credit guarantee – is needed to enable HPC to achieve these objectives. Overall, the Commission suspects that the level of protection from ordinary market risks which the support package provides is excessive: more or less every aspect of the package, from the duration of the CfD to the way in which it has been negotiated, is viewed in sceptical terms, so that the Commission concludes by saying that it doubts “whether it effectively addresses a market failure”; questions “whether [it] can be deemed…to be proportionate”; and is “concerned about its distortive effects on competition”.
A “service of general economic interest”?
In between the “no aid” and “compatible aid” limbs of its case, the Government argues that the HPC package with the internal market, fulfils the conditions of the Framework which the Commission has put in place for determining whether larger SGEI schemes fall within Article 106(2) TFEU. Article 106(2) states:
2. Undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly shall be subject to the rules contained in the Treaties, in particular to the rules on competition, in so far as the application of such rules does not obstruct the performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to such an extent as would be contrary to the interests of the Union.
Article 106(2) is in some ways the ultimate derogation provision. It says, in effect, that certain undertakings will be exempt from the requirements of EU competition and state aid law if the application of that law would “obstruct the performance” of a service of general economic interest entrusted to a particular undertaking. The meaning of Article 106(2) has therefore been the subject of many arguments between the Commission and Member States.
The Commission has, for example, argued that Article 106(2) “authorizes measures contrary to the Treaty only to the extent to which they are necessary to enable the undertaking concerned to perform its task of general economic interest under acceptable economic conditions and, therefore, only if they are necessary for the financial equilibrium of the undertaking itself”. But the Court of Justice, whilst acknowledging that Article 106(2), like all derogations, must be interpreted strictly, has found that it “seeks to reconcile the Member States’ interest in using certain undertakings, in particular in the public sector, as an instrument of economic or fiscal policy with the Community’s interest in ensuring compliance with the rules on competition and the preservation of the unity of the common market”. Moreover, Member States “cannot be precluded, when defining the services of general economic interest which they entrust to certain undertakings, from taking account of objectives pertaining to their national policy or from endeavouring to attain them by means of obligations and constraints which they impose on such undertakings”. As a result, “for the Treaty rules not to be applicable to an undertaking entrusted with a service of general economic interest under Article 90(2) of the Treaty, it is sufficient that the application of those rules obstruct the performance, in law or in fact, of the special obligations incumbent upon that undertaking. It is not necessary that the survival of the undertaking itself be threatened”. (See Case C-157/94, Commission v Netherlands.)
A service of general economic interest
The Commission’s analysis in response to the UK’s SGEI arguments overlaps to a large extent with what it says in relation to the Altmark criteria and/or the Government’s Article 107(3) arguments. It concludes that the Commission doubts whether the HPC package qualifies as an SGEI within the meaning of Article 106(2) and the Framework, and that even if it did so qualify the Commission doubts that it would comply with the Framework.
Overall characteristics of the Commission’s analysis
In future posts we will examine some of the Commission’s arguments in more detail. For now, it is worth noting some more general features of the Commission’s appraisal.
- There is a degree of unevenness about the Commission’s analysis. It makes some extremely good points and some decidedly weak ones.
- There are a number of points when the Commission appears to help the UK by indicating possible ways of correcting what it sees as deficiencies in the HPC package in state aid terms. Whether these potential “escape routes” are in practice open to the UK Government is another matter.
- The Commission – intentionally or otherwise – draws attention to a number of places where the HPC package is different from the rest of the CfD regime (or at least the enduring regime for renewables). Sometimes this is to the latter’s advantage, but not always. In an ideal world, the whole of the CfD regime would have been worked out in full before being notified together, but it so happens that the first part of the regime that the Commission examines in detail is not entirely typical or representative of the regime as a whole.
- Inevitably, much of the analysis is somewhat tentative, because details of almost all parts of the package still remain to be fully worked out.
Behind everything lurks the question: how much (or how little) freedom do the EU state aid rules allow Member States to have as regards ensuring that a certain proportion of their electricity generating capacity belongs to a specified technology type?