“It is time for renewables to join the market* (…)”
Since the inception of modern Europe and the creation of the common market, competition has been lying at the heart of the European project. Leaving aside a number of exceptions mentioned in the treaties, European law has repeated the importance of not distorting competition. State support and state aids may therefore be legal so long as they do not adversely impact on trading conditions between the Member States. State aids must comply with a set of criteria which altogether form a balancing test. A clearance under this balancing test will mean that Europe will tolerate some public support to an industry or
services even though this aid may impact on market conditions. Yet, Europe hates artificial markets and the Union’s control over competition aims at removing distortions. The Commission’s April 2014 rules on public support to Renewable Energy Sources (RES) have precisely come to confirm this pro-market, liberal, stance.
Looking forward, European governments will find it harder to justify non market-based public support mechanisms for mature RES technology. This approach also signals that for the Commission, investments in RES should increasingly be a matter for project finance and private equity. Subject to a number of conditions, governments should thus refrain from supporting RES development through policy instruments not containing a degree of competition amongst qualifying participants.
Observers of European policies might agree that it was ample time for the Commission to take action. In some European Member States, the size of their energy market’s distortion between RES and non-RES energy producers had become unprecedented. Germany now suffers from record price electricity due the annual €24billion of RES public support socialised annually through electricity bills. While nuclear is being phased out, the likes of E.ON, RWE and other energy giants have recorded massive losses and depreciations as a result of too much German support to RES after Fukushima. Employment is also at threat, with RWE having to cut 6,700 jobs by 2016 and announcing a pay freeze for 2014. Dividends will be slashed by 50%.
The German energy transition’s business model, the Energiewende, has been short-lived. It has caused the suffocation of Germany’s main energy players. The RES sector is also now producing too much electricity that technically cannot be stored and threatens the country’s energy security by putting too much pressure on the operations of the country’s energy leaders. Part of the German halt to reforms will include reducing state aids to solar RES as soon this infrastructure generates more than 2.5 GW of electricity. Brussels has also confirmed that Germany’s energy-intensive sector could remain exempt from the levy charged to other economic actors in order to finance the energy transition. In the future, however, all exempted industries will pay a 15% tax. These industries have also been ordered to pay a one-off €30 million lump sum to compensate on past levy exemptions in 2013 and 2014.
Brussel’s plan is therefore to reinstate stronger market interactions amongst energy producers in Europe. Mature RES may no longer be regarded as industries in need of support. Electricity from mature RES, and solar in particular, should be sold under open and competitive market conditions, typical of mature technologies.
In the UK, the above guidelines have raised the RES industry’s concern. Federations fear that the new rules could gradually reduce the capacity of smaller investors to find public money for non-wind RES generating less than 5MW. The government’s new and market-based “Contracts for Difference” (CfD) will also target projects over 5 MW. CfD and their selection through auctions could signal that less public support will be devoted to smaller generators and that non market-based feed-in tariffs for smaller RES may decline more rapidly than advertised until their expiry in 2021. The good news is that on July 23, 2014 the EU Commission confirmed the CfD’s legality. The EU competition commissioner announced that the UK’s CfD are bound to promote “the generation of electricity from renewable sources (…) in line with EU state aid rules”.
In practice, large volumes of RES electricity in the UK will now have access to the grid through CfD and their tender process. For a country that is routinely concerned about the terms of its European membership, there seems to be a lot of good will and alignment on the Commission’s expectations. Commentators will indeed have a hard time finding that there is now much discrepancy in the UK’s electricity market reform and the European understanding of how competitive markets for the purchasing and development of electricity supplies should work. It could even look like Europe is praising the UK for what it does.
* EU Commission Vice President in charge of competition policy Joaquín Almunia, April 2014.
Nicolas Maulet is a lecturer in energy law and policy, and dispute resolution in oil and gas contracting, at Robert Gordon University’s (RGU) Aberdeen Business School. He is also the deputy course leader on the oil and gas law LL.M.
