State aid rules regarding aid involved in optional transitional free allowances for the modernisation of electricity generation – unfeasible for beneficiaries?

The important clarification regarding Article 10c of the Directive 2003/87/EC is that the market value of allowances allocated free of charge must not exceed the total costs for investments undertaken by the recipient of free allowances (at the level of company groups). If the total investment costs are lower than the market value of the allowances, the recipients of free allowances will be obliged to transfer the difference to a mechanism that will finance other investments eligible under the National Investment Plan.
The issue of State aid regime could be decisive for potential free allocations and consequently highly influential with respect to market price tendencies for emission allowances.

The rules for State aid regime regulating optional transitional free allowances for the modernisation of electricity generation pursuant to Article 10c of the Directive 2003/87/EC are the one of four regulatory State aid frameworks envisioned by the recently published Communication from the Commission on Guidelines on Certain State Aid Measures in the Context of the Greenhouse Gas Emission Allowance Trading Scheme Post 2012 (draft Commission Communication).

The other three areas encompassed by the said instrument are:
1) Aid to undertakings in sectors and subsectors deemed to be exposed to a significant risk of carbon leakage due to EU ETS allowance costs passed on in electricity prices (aid for indirect emission costs),
2) Investment aid to highly efficient power plants, including new power plants which are CCS-ready (described in ‘CCS-ready installation concept pursuant to draft Commission Communication Guidelines on Certain State Aid Measures in the Context of the Greenhouse Gas Emission Allowance Trading Scheme Post 2012’),
3) Aid involved in the exclusion of small installations and hospitals from the EU ETS.

The draft Commission Communication presents conditions under which the aid granted with respect to above-mentioned issues in the period from 1 January 2013 to 31 December 2019 will be considered compatible with the internal market within the meaning of Article 107(3)(c) of the TFEU.

The application of State aid rules to free allocations of emission permits is quite complicated and evoked legal disputes already at the beginning of the EU ETS (see: ‘Emission trading schemes and rules on public aid – what is a relation between them’).

The regulatory bias in the third trading period as from 2013 is however entirely different than in the two preceding periods, where the free allocations constituted the general underlying  principle. As from 2013 the allocation of emission allowances free of charge will be the exception to the rule of issuing the units through the auctioning. So far, however, the Union executive have not managed to adapt State aid regulatory framework to new circumstances (on the particulars of the issue see: ‘The Community guidelines on State aid and EUETS after 2013 – changes urgently needed’). So, the above-quoted draft Commission Communication regarding Guidelines on Certain State Aid Measures in the Context of the Greenhouse Gas Emission Allowance Trading Scheme Post 2012 is among the most expected documents necessary for the scheme participants to prepare to, so radically changed, regulatory environment.

When it comes to State aid involved in transitional and optional free allowances for the modernisation of electricity generation and the investments included in the National Investment Plans, in accordance with Article 10c of the ETS Directive, the Commission underlines that in the first place must be observed the stipulations specified in the related legal instruments i.e.:

1) Commission Decision of 29 March 2011 on guidance on the methodology to transitionally allocate free allowances to installations in respect of electricity production pursuant to Article 10c(3) of Directive 2003/87/EC, C(2011) 1983 final, 29.3.2011,

2) Communication from the Commission, Guidance document on the optional application of Article 10c of Directive 2003/87/EC, OJ C 99, 31.3.2011, p. 9.

The draft Commission Communication contains the provision that the Commission will apply  Guidelines to all notified aid measures in respect of which it is called upon to take a decision after the Guidelines are published in the Official Journal, even where the projects were notified prior to their publication, including for aid to be granted before 2013.

The general requirement to consider the aid granted under Article 10c of the Directive 2003/87/EC compatible with the internal market within the meaning of Article 107(3)(c) of the TFEU is that the aid must have an incentive effect in that must result in a change in the behaviour of the aid beneficiary. The other conditions are however more specifically designed.

Excepting the rule mentioned at the beginning requiring the market value of allowances allocated free of charge must not exceed the total costs for investments undertaken by the recipient of free allowances (at the level of company groups), the another highly noteworthy requirement  is that Member States will be obliged to demonstrate that the aid will not unduly distort competition, in particular as a result of the selection of a limited number of beneficiaries. As the draft Commission Communication also stresses ‘Member States shall also demonstrate that the aid will not unduly distort competition where such aid is likely to reinforce the beneficiaries’ position of strength on the market (at company group level) beyond what is strictly necessary’. Presumably, this could be very contentious issue, as the assessment, what is ‘strictly necessary’ may vary depending on the bias of the reviewer.