This article is part of our special report Electricity market reform: A European tour.
The EU’s decisions to approve state support for emergency power plants in France, Germany, Poland, Italy and Greece will all have to be revisited in light of the ongoing reform of European electricity market rules, the European Commission said on Tuesday (4 September), saying it won’t make an exception for Germany.
A February state aid ruling by the Commission said support for emergency power generation in Germany – chiefly coal-fired plants – “remains uninfluenced by the future rules on the design of the electricity market” that are currently being negotiated at EU level.
The sentence, buried in a footnote on p.20 of the EU decision, remained unnoticed until now because the full text of the decision was published after the February announcement by the EU executive.
This raised accusations of double standards by other countries like Poland, which were not offered equivalent safeguards.
In similar rulings for France, Belgium, Poland, Italy and Greece, the Commission indeed stipulated very clearly that state aid for back-up power generation “will need to be interpreted in the light of…legislation that has not been adopted yet at the time of this decision.”
The review of state aid decisions will focus “in particular” on future CO2 emission limits aimed at phasing out support for coal-fired power plants, which are blamed for global warming, the Commission added.
— Frédéric Simon (@FredSimonEU) September 6, 2018
But the EU executive has now clarified that the German safeguard clause was “a mistake” that will soon be rectified.
“On the German decision, indeed, it’s a mistake which is in the process of being corrected,” said Christof Schoser, deputy head of unit at the Commission’s powerful competition directorate in charge of state aid controls.
“The state aid decisions will not shelter member states or companies from any future changes in legislation,” Schoser told a EURACTIV event on Tuesday (4 September).
As a general principle, state aid decisions do not protect countries from future changes in legislation, the official explained, saying “we did it on purpose not to pre-empt the ongoing legislative process.”
The announcement will come as a relief for Poland, which has complained of “double standards” in the ongoing reform of capacity markets for electricity because it left German coal plants largely off the hook.
Germany decided in 2015 to close eight lignite power plants and transfer them in a “strategic reserve” that can be used in case of emergency. Those plants are remunerated by the “capacity mechanism” which received EU clearance last February. But future funding for those back-up schemes could once again be thrown in the balance by the upcoming review.
Contacted by EURACTIV, the German EU representation in Brussels referred the matter to the competent ministry in Berlin, which declined to comment.
Grandfathering clause up for discussion
“Capacity mechanisms” are national schemes aimed at remunerating power plants that remain on stand-by in case of demand peak, typically in winter or when renewables aren’t available.
The Commission considers those as state aid and wants the schemes “Europeanised” with a cross-border dimension.
Ultimately, Brussels wants to phase them out completely, arguing capacity mechanisms distort the market and subsidise the most polluting form of electricity.
But that doesn’t mean state aid for coal will disappear any time soon. The EU’s upcoming electricity market reform might indeed grant a grandfathering clause to state aid decisions that have already been approved at EU level, Schoser pointed out.
“If the legislator wants to… protect certain contracts for a certain period of time, the legislator is free to do this,” Schoser said.
The point was echoed by Florian Ermacora, head of unit for wholesale electricity and gas markets at the Commission’s energy directorate, who also spoke at the EURACTIV event.
“One of the big discussion points in the legislative context at the moment is the extent to which approved state aid for capacity mechanisms or projects are exempt from future legislation” – and in particular the upcoming CO2 standards for power plants, Ermacora said.
“That is quite a tricky issue,” he added, saying he wasn’t aware of a precedent in EU state aid policy, whether in the energy or other industrial sectors.
Emission performance standard
The EU official was referring to a Commission plan to phase out state aid for power plants emitting more than 550g of CO2 per kilowatt hour – a proposal, which effectively rules out subsidies for coal as well as some inefficient gas power plants.
Poland is pushing hard to obtain “grandfathering” rights for EU state aid decisions in the ongoing reform of European electricity markets.
Power companies in Poland want to protect investments made in new generation coal-fired plants, saying they are needed to prevent blackouts at a time when old inefficient coal plants are being taken offline.
“The first point is to respect the decision” taken by the Commission, which cleared the Polish capacity scheme in February this year, including the contracts concluded under the scheme, said Maciej Burny, Director for International Relations at Polish energy company PGE.
“These contracts have to be respected because they will be signed before” the EU market design reform is adopted, said Burny, who was speaking on behalf of PKEE, the Polish electricity trade association, which supported the EURACTIV event.
It’s a matter of “legal certainty” and “protection of rights acquired” for the companies involved, Burny explained, saying any changes brought to contracts passed under the Polish scheme would cause “economic harm” evaluated at “€6 billion.”
In addition, the Polish power sector wants “derogations for existing installations” that Burny said “should last ten years” in order to give sufficient time for Poland to adjust its energy mix.
Carbon price could make CO2 limit unnecessary
The Commission agrees that investors need legal certainty. “Of course, you have the question of investor trust from the past. But that is the case for any decision applying to industrial plants. So from that point of view, I’m not sure that the state aid approval means exemption from new legislation,” Ermacora said.
That point is still up for discussion as part of the market design reform that is currently being debated in the EU Council and Parliament, the EU official said.
In any case, Burny said that placing a CO2 limit on state aid to power will become unnecessary with a carbon price above €20 per tonne.
“If coal is the problem for Europe, then we have to make sure that the EU ETS is doing its job,” Burny said, referring to the EU Emissions Trading Scheme, which places a price on every tonne of CO2 emitted by industrial installations.
“The price of carbon is around €20 per tonne today. If somebody is rationally thinking about new investments in coal power generation with a price of €20 and possibly higher due to the reform of the EU ETS, then they probably don’t have realistic assumptions,” Burny said.
Moreover, Burny warned that excluding transition support for coal in Poland would create other problems, leading to a “70% increase in natural gas consumption in Poland by 2040”. This, he added, would mean “a huge change” for Poland, which would become dependent on gas imports coming mainly from Russia.
Environmentalists, for their part, are crying foul. “Polluters have had a free ride for way too long,” said Roland Joebstl, from the European Environmental Bureau (EEB), a coalition of green NGOs.
“The rules of the new market design regulation must be in line with the Paris Agreement and they must apply to everybody without exemptions or grandfathering,” he told EURACTIV.
“We are all in this together,” Joebstl added, referring to this summer’s extreme weather events.