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A tool for assessing risks inherent in draft Commission Guidelines with respect to 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).
Formula for the calculation of the aid
For sectors deemed to be exposed to a significant risk of carbon leakage due to EUA costs passed on in electricity prices as a result of the implementation of the ETS Directive, aid to compensate for such costs incurred as of 1 January 2013 will be considered compatible with the internal market within the meaning of Article 107(3)(c) of the TFEU provided that, among others, the conditions set out in draft Guidelines are met.
The maximum aid payable per installation for the manufacture of products within the eligible sectors defined in Annex II to the draft Guidelines must be calculated according to the following formula and for year t equals:
Aid intensity at year t, expressed as a fraction (e.g. 0,8)
times
CO2 emission factor (tCO2/MWh) (at year t)
times
EUA forward price at year t-1 (EUR/tCO2)
times
Product-specific electricity consumption efficiency benchmark (MWh/tonne) defined in Annex III to the draft Guidelines
times
Baseline output
This article relates to: draft 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 Guidelines).
The draft Guidelines present conditions under which the aid granted 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 also analysed in the following articles:
State aid rules regarding aid involved in optional transitional free allowances for the modernisation of electricity generation – unfeasible for beneficiaries?
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
The Community guidelines on State aid and EUETS after 2013 – changes urgently needed
Emission trading schemes and rules on public aid – what is a relation between them
Where electricity consumption efficiency benchmarks listed in Annex III to the draft Guidelines are not applicable to the products manufactured by the beneficiary, in the above formula the parameter for product-specific electricity consumption efficiency benchmark (MWh/tonne) defined in Annex III to the draft Guidelines is substituted by fall-back electricity consumption benchmark 0.7.
Let’s look into details for each parameter of the above formula with a special emphasis on the risk exposition of the facilities included in carbon leakage sectors.
Risk for maximum aid intensity
Risk identification
Pursuant to the draft Guidelines the aid intensity must not exceed 85 % of the eligible costs in 2013, 2014 and 2015, 80 % of the eligible costs in 2016, 2017 and 2018 and 75 % of the eligible costs in 2019 and 2020.
Such assumption implies inherently that not all costs of undertakings in sectors deemed to be exposed to a significant risk of carbon leakage due to EU ETS allowance costs passed on in electricity prices will be reimbursed through the aid.
Risk parameterisation
The scale for this risk corresponds to the remaining fraction of these costs (respectively 15%, 20% and 25% in the timelines as above).
Possible measures for management for risk
The fraction of electricity costs not covered by the aid scheme will have to be compensated through other means or savings (given the differentiated character of the sectors on the carbon leakage list, I’m not going into further particulars here).
Risk for inadequate CO2 emission factor
Risk identification
‘CO2 emission factor’ denominated in tCO2/MWh, pursuant to the draft Guidelines means
‘the weighted average of the CO2 intensity of electricity produced from fossil fuels in different geographic areas. The weight shall reflect the production mix of the fossil fuels in the given geographic area. The CO2 factor will be the result of the division of the CO2 equivalent emission data of the energy industry divided by the Gross electricity generation based on fossil fuels in TWh ...’
The maximum regional CO2 emission factors are listed in Annex IV to the draft Guidelines.
Given the lack of relevant data at sub-national level, the geographic areas shall comprise the entire territory of one or more Member States.
If CO2 emission factor adopted for calculation of the electricity price for a given contract will be higher than specified in the Annex IV to the draft Guidelines the industrial plant being the electricity buyer will face the risk of receiving aid in the amount that won’t compensate for the costs incurred.
Risk parameterisation
It is difficult to set parameter for this risk in the current extremely volatile carbon market.
Possible measures for management for risk
It seems reasonable to verify the basis for CO2 cost component with respect to the CO2 emission factor in the electricity price applied in the electricity supply contract and, where necessary and possible, to renegotiate the agreement.