If somebody hoped so far that submitting national plan for investments, pursuant to Article 10c(5) of Directive 2003/87/EC, would in any way resolve the question of state aid, he should now, after publication of the guidelines, have no illusions about it.
The Communication from the Commission, Guidance document on the optional application of Article 10c of Directive 2003/87/EC (2011/C 99/03, OJ C 99, 31.3.2011, p. 9) is beset with dangers for Member States and for potential beneficiaries hoping to get free emission allowances.
1. “Additional investments” not matching increasing electricity supply and demand, economical viability of investments
Let’s start for instance with principle 4 regarding national plan for investments. Such a plan submitted by the Member State to the Commission pursuant to Article 10c(1) of Directive 2003/87/EC, according to the Commission view, should cover only investments:
1) which are additional to investments Member States must undertake in order to comply with other objectives or legal requirements accruing from Union law, and
2) which are not required to match increasing electricity supply and demand.
Above-mentioned requirements may be a surprise for economic operators being lately under big pressure of building new capacities, in the face of increasing scarcity regarding electricity generation available for system operators in certain Member States. The said two principles established by the Commission may be construed that, for instance, investments for installations required by Union law to decrease NOx and SO2 emissions mustn’t be counted against the value of free emission allowances eligible on the basis of Article 10c of the Directive 2003/87.
Exclusions of the investments designed to match increasing electricity supply and demand, in turn, cast doubts, as from which date the “increase” should be counted – taking into account the recent economic crisis during which the demand for electricity has fallen. This criterion gained importance because it seems – in the light of the above-mentioned principle and interpreting it a contrario – that investment intended to preserve already existing in the system level of capacities (and satisfy current level of demand) may be counted towards the value of free emission allowances.
According to the principle 6 set by the Commission, investments should be economically viable in absence of the free allocation of emission allowances under Article 10c of Directive 2003/87/EC, once transitional allocation of such allowances comes to an end, with the exception of specific pre-defined emerging technologies still at the demonstration stage and listed in Annex III to the Guidelines.
This condition (not foreseen expressis verbis in the Directive) appears as a field of potential bothersome disputes with the participation of the Commission. It is a common knowledge that the category of economic viability depends particularly on the adopted assumptions and according to the specific set of premises we can get differing results (see to that effect available analyses considering for instance CCS). Should the Commission decide to question economic viability of a specific investment, it would be probable that the procedure get stuck in endless deliberations over economic indices and factors having rather casual connection with free emission allowances.
Above-described principles are not, however, of a strict character. The investments identified in the national plan should be in line with them ‘to the extent possible’ only and any inconsistencies should be substantiated by the Member State in a detailed manner (having in mind, as always, the underlying principles of the Directive 2003/87, the Treaties and other relevant Union legislation). The notion: ‘to the extent possible’ is, however, another field of the Commission discretion allowing to bloc national investment plan. It seems that in principle everything is possible but question arises at what cost.
2. State aid – disillusion, but the detailed rules still unknown
Point 27 of the Commission Guidelines forms in my opinion the greatest danger to the viability of the project consisting in making use of the derogation provided for in the Article 10c of the Directive 2003/87. The problem of state aid regarding free allocations appeared already in the first and second trading periods, but taking into account the general rule of grandfathering in the years 2005 – 2012, there was adopted a simplified approach thereto.
As opposite, in the third trading period the general rule is auctioning and every entity getting allowances for free faces the problem of state aid. The current guidelines didn’t contribute so far to resolve these potentially complicated issues because the Commission only intends to adopt compatibility criteria for assessment of this type of aid in the near future. It will be, however, very interesting piece of legal analysis burdened with far-reaching consequences. These compatibility criteria should be of utmost importance to every economic operator taking part in the EU ETS - for obvious reasons, for those potentially benefiting from Article 10c, and for others wishing, for instance, to examine the possibilities for challenging the competitiveness practices in the EU ETS.
If somebody hoped so far that submitting national plan for investments, pursuant to Article 10c(5) of Directive 2003/87/EC, and any consequent decision by the Commission, would in any way resolve the question of state aid, he should now, after publication of the guidelines, have no illusions about it.
The Commission clearly decided that above-mentioned procedure is entirely without prejudice to Member States' State aid notification obligations pursuant to Article 108 TFEU. Member States must notify measures involving state aid to the Commission pursuant to Article 108(3) TFEU. The Commission reminded that following notification, Member States might not put proposed measures into effect until this procedure resulted in a final decision by the Commission.
The issues that rise concerns from the point of view of installations hoping for free allocations on the basis of Article 10c of the Directive, are in particular the following.
The Commission remarked in the guidelines that Member States should plan for any required State aid notifications, but question arises when and how the Member States should do so, as the time lapses fast and the Commission didn’t even publish up to now the rules governing the process. It follows that there are some problems with deadlines but there can also be expected content–related complications.
The specification for methods allowing to ensure that free allocations do not result in undue distortions of competition, is a crucial issue.
It seems, furthermore, that national plan will in principle concentrate aid on a limited number of beneficiaries: legal measures provided for in Article 10c are designed, as regards territorial scope, for several Member States only, and from a sectoral point of view, for electricity generators. To demonstrate that the aid is not likely to reinforce the beneficiaries' market position is a real challenge and the Commission leaves the Member States up to now entirely without directions.
The aid mustn’t, however, in any way unduly distort competition ‘beyond what is strictly necessary in the light of the overall objectives of this Directive’ (I draw the attention of the reader to next notion subject to very discretionary interpretation).
In the light of the above remarks, despite of the publication of the guidelines, Member States and the potential beneficiaries of the Article-10c-derogation are still at the very uncertain legal position as regards state aid rules.
The issues of ‘eligible investments’, ‘market value’ and ‘the mechanism to ensure the balance between amount of investments and free emission allowances’ analysed by the Commission in the guidelines are even more interesting and I make further comments thereto in the second part of these considerations.