The European Commission loosens State aid rules to foster energy transition and prevent the flight of green technologies from Europe
9 min read
On 9 March 2023, the European Commission adopted the Temporary Crisis and Transition State aid Framework ("TCTF") aimed at boosting and retaining clean tech investments in Europe. The TCTF marks an unprecedented loosening of EU State aid rules in an attempt by the EU to prevent the exodus of green projects across the Atlantic, due to the US Inflation Reduction Act ("IRA"). EU Member States now have more scope to compete with foreign countries on offering subsidies, in a bid to facilitate Europe's energy transition.
What prompted the loosening of the State aid rules?
The loosening of State aid rules has been prompted by the sharp increase in energy prices and the risk of European industry shifting to the US in response to the IRA, which entered into force in August 2022 and offers USD 369 billion worth of subsidies for "green investments", as a result of which businesses consider relocating to the US.
The TCTF follows a heated debate at EU level as to whether to loosen the State aid regime. Member States such as France and Germany have called on the Commission to relax its State aid rules. However, the Commission has remained hesitant, concerned that any relaxation will come at a significant cost to the EU's internal market.
What does the TCTF do?
In essence, the TCTF allows Member States to provide undertakings with significant State aid support in order to develop and boost businesses that will drive the EU's energy transition. In response to the IRA, the Commission would, exceptionally, allow the Member States to offer "matching aid" to undertakings if they can show a credible case that they would indeed relocate elsewhere because of foreign subsidies.
These rules apply only until 31 December 2025, while beneficiaries will be asked to deliver the projects within 3 years of the date of receipt of the aid.
The TCTF presents a partial amendment and prolongation to the Temporary Crisis Framework ("TCF") initially adopted on 23 March 2022, and subsequently amended on 20 July 2022 and 28 October 2022 (see our alert).
The TCTF is also accompanied by an endorsed amendment to the General Block Exemption Regulation ("GBER"), which, in essence, allows Member States to grant aid, without prior notification to the Commission, to companies that will accelerate the rollout of renewable energy, the decarbonization of industrial production processes and accelerate investments in sectors strategic for the transition towards a net-zero economy.1 To benefit from the GBER, aid must not exceed the thresholds established. In particular, aid for environmental protection may not exceed EUR 30 million per company, per project.
Both, the TCTF and the amended GBER are part of the EU's Green Deal Industrial Plan for the Net-Zero Age ("Green Deal Industrial Plan"), the aim of which is to facilitate Europe's green transition to a net-zero economy, and to ensure faster access to sufficient funding for companies operating in the EU.
What are the key changes to the State aid rules?
New possibility to grant State aid to accelerate investments in sectors strategic for the transition to a net-zero economy (new point 2.8 TCTF)
The TCTF introduces the possibility for Member States, on the basis of approved State aid schemes (and exceptionally, on an individual basis), to support investments in sectors strategic for the green transition, and to provide incentives for their fast deployment and ensuring that they do not relocate outside the EU, because of better subsidies elsewhere. Specifically:
- Member States may fund the production of batteries, solar panels, wind turbines, heat-pumps, electrolyzers, equipment for carbon capture usage and storage ("CCUS").2
- Such State aid may be granted in the form of direct grants, tax advantages, or loans/guarantees. The aid's intensity will vary depending on the size of the company, the region in which the investment is made as well as the form of the aid. For example, large companies can receive between 15-35% of their eligible investment costs, capped for direct grants between EUR 150-350 million per undertaking, per Member State, depending on the region of investment.
- In terms of procedure, for all aid under the new point 2.8 of the TCTF, companies must apply, before the start of works, to the granting authority of the respective Member State. Importantly, no prior approval is needed from the Commission if the aid is granted under an approved scheme. However, the Member State has to verify the risks of the productive investment not taking place within the EEA without the aid, and confirm that there is no enhanced risk of relocation within the EEA, due to the aid. Within 60 days, the Member State has to provide substantial information to the Commission; this is an important procedural safeguard mechanism that enables the Commission to re-assess, in individual cases, whether the requirements of point 2.8 TCTF are met.
- Exceptionally, the Commission may approve individual aid to companies up to the amount of the subsidy that they could receive for an equivalent investment in a non-EEA country (so-called "matching aid")3, provided that they satisfy certain criteria, such as:
- The investment takes place in assisted areas of the EU that are less economically advantaged; or – in cases of cross-border investments – if the investment includes at least three Member States, with a significant part of the overall investment taking place in at least two assisted areas. The company must commit to stay in the area concerned for at least five years, or less for SMEs.
- The investment involves state-of-the-art production technology from an environmental emissions' perspective, and which could not take place without the requested aid.
- The aid amount should not exceed the funding gap that is needed to incentivize businesses to locate their investment in the EEA. Furthermore, the aid should not facilitate the relocation of production activities between Member States.
- For the exceptional "matching aid", the procedural safeguard is even higher, as each aid has to be individually notified and cannot be implemented without the Commission's approval.
State aid for accelerating the rollout of renewable energy production and storage
The TCTF further prolongs and extends the possibility to provide investment and even operational State aid on the basis of approved aid schemes, for the rollout of renewable energy production and storage. Specifically:
- Member States may now fund the production of all renewable sources,4 including the production of renewable hydrogen and hydrogen-derived fuels.5 Electricity storage and thermal storage also qualify for State aid support as well as the storage for renewable hydrogen, biofuels, bioliquids, biogas and biomass fuels, provided that at least 75% of its contents, annually, is coming from a renewable source.
- The State aid can be granted for new installations or repowered capacities.
- Remarkably, the intensity for investment aid can go up to 100% of the total investment cost, if the aid is granted in a competitive bidding process; otherwise it is up to 45%. The State aid may be granted in the form of direct grants, repayable advances, loans/guarantees, or tax advantages as well as contracts for differences, for no longer than 20 years (for the operational aid).
- The State aid amount will be determined either through a competitive bidding process6 or by an administrative decision of the Member State, on the basis of the investment costs (for the investment aid) or the strike price set by the competent authority (for the operational aid). Aid for solar, onshore and offshore wind, and hydropower installations is subject to mandatory competitive bidding only if the aid per undertaking and per project is above EUR 30 million.
State aid for decarbonization of industrial production
Finally, to encourage a reduction in the dependency on imported fossil fuels, the TCTF prolongs and further extends the possibility of Member States to set up State aid schemes aimed at the decarbonization of industrial production. Specifically:
- Member States may fund projects that speed-up the decarbonization of the industry and use renewable hydrogen-derived fuels. The investment must enable companies to reduce direct greenhouse gas emissions by at least 40% or reduce energy consumption in industrial installations by at least 20%.
- The maximum individual aid amount per undertaking is limited to 10% of the overall State aid scheme budget for decarbonization, and is now capped at EUR 200 million. The Commission may also exceptionally accept schemes that grant aid in excess of this threshold.
- The eligible investments for such State aid must enable the business concerned to (i) reduce at least 40% of its CO2 emissions compared to the pre-aid situation or switch to the use of renewable and electricity-based hydrogen to substitute fossil fuels and/or (ii) reduce by at least 20% its energy consumption in industrial installations compared to the pre-aid situation.
- Aid intensity may not exceed 40% of the eligible costs. The intensity may be increased by 10-20% for SMEs or by 15% for investments delivering higher reductions in direct CO2 emissions or energy consumptions. The aid amount may be determined through a competitive bidding process.
How can business benefit from the new State aid regime?
The TCTF also gives much leeway to the Member States to attract new investors as well as to develop and boost the domestic green technology. It is now for Member States to consider whether, and how, to use the possibilities under the TCTF to offer financing incentives to companies driving the EU's energy transition.
Companies across all sectors may obtain considerable financial support (potentially up to 100% of eligible costs, and in cases of "matching aid" theoretically even more) as long as their activities are in line with the objectives of the Green Deal Industrial Plan. In order to benefit from the highest amounts of aid, businesses will have to carefully consider its investment decisions and put together a robust documentation, in line with the TCTF.
1 The revised GBER will be formally adopted once available in all languages of the EU, and will start to apply one day after its publication in the Official Journal.
2 As well as the production of key components designed and used as direct input for the production of these products and the production or recovery of related critical raw materials necessary for the production of the mentioned products/equipment and key components.
3 Point 86 of the TCTF.
4 As defined in Article 2 (1) of the Renewable Energy Directive 2018/2001. In essence, any non-fossil sources, i.e., wind, solar and geothermal energy, ambient energy, ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas, and biogas.
5 The production of electricity from renewable hydrogen is, however, excluded.
6 At least 70 % of the total selection criteria used for ranking bids must be defined in terms of aid per unit of environmental protection.
Elisa Coppo (White & Case, Associate, Brussels) contributed to the development of this publication.
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