Brussels sets out new green aid rules, with ‘pragmatic exceptions’ for gas

If an EU government wants to fund a project that is not in line with the EU’s 2030 or 2050 climate targets, “the balance is not likely to tip in favour of supporting it with aid,” said EU competition chief Margrethe Vestager. [European Union, 2021]

New state aid rules spelling out conditions under which EU governments are allowed to support companies on environmental grounds, boost clean energy, and phase out support for fossil fuels were unveiled by the European Commission on Tuesday (21 December).

The guidelines seek to align EU state aid rules with the European Green Deal, focusing on supporting renewable energies and attaining the bloc’s climate objectives.

If an EU government wants to fund a project that is not in line with the EU’s 2030 or 2050 climate targets, “the balance is not likely to tip in favour of supporting it with aid,” said EU competition chief Margrethe Vestager who presented the new rules.

The guidelines also include a new section on aid for the closure of coal, peat, and oil shale plants to facilitate decarbonisation in the power sector, the EU executive said in a statement.

Once formally adopted early next year, the new guidelines will immediately apply to all EU legal texts. EU member states will have until 2024 to align their existing aid schemes with the new requirements.

The guidelines broaden the scope of areas exempted from the EU’s usually strict state aid rules, supporting new players in the energy field such as small scale renewable energy producers, Vestager explained.

Other new areas covered include government support to improve the energy performance of buildings and clean mobility, such as infrastructure for electric vehicles, clean vessels and aircraft.

Commission to ease state aid straitjacket as recovery fund kicks in

The European Commission will present in the second half of this year a wide-ranging review of its state aid rules to facilitate public funding to strategic areas, as member states await the first transfers of the EU’s recovery funds.

“A bit of pragmatism” on gas

However, the new guidelines also inject “a bit of pragmatism” into state aid rules, added the Danish commissioner who singled out natural gas as “a special case because for now, it acts as a bridge towards our path to more renewables.”

“But a bridge is not a destination, and state aid decisions will reflect hat logic. Our goal is and will remain phasing out our reliance on fossil fuel. And that includes gas,” Vestager insisted.

When pressed by reporters to elaborate further, the Danish commissioner said a “special clause” will apply to natural gas allowing for “member states with the lowest GDP to transition from coal to gas. Because they kind of need a helping hand in order to do so.”

That comment is likely aimed at EU countries like Poland, Greece, and Romania, which are heavily reliant on coal and planning investments in gas projects to displace it.

Key criteria for fossil gas projects to win EU state aid approval is whether they are future-proof and ready to accept higher shares of green hydrogen or biogas. They must also prevent a lock-in effect into polluting energy by demonstrating a clear pathway to decarbonisation.

“We cannot have gas with a lock-in effect,” Vestager said. “We can make necessary pragmatic exceptions, but it still has to contribute to our green target,” she explained.

Regarding state aid for nuclear, Vestager said that it would continue to be assessed under the 1957 Euratom treaty, which provides a legal basis for EU support to nuclear safety and research projects.

The revised state aid guidelines could play an indirect role for nuclear though, “for instance when hydrogen is produced with nuclear” power, Vestager said. “And that is in the guidelines”.

Contracts for difference

Notably, the new state aid guidelines will allow governments to support any clean technology with so-called Contracts for Difference, which entitle the beneficiary to a payment equal to the difference between a fixed ‘strike’ price and a reference price – such as the price of CO2 on the EU carbon market.

“For example, if you’re an energy provider and the market price is below that strike price, then the state pays you the difference,” Vestager explained. If the market price is above, the beneficiary then pays back the difference to the state. “And that ensures stable and predictable revenue streams,” she said.

Contracts for difference were first tested in Germany, which pioneered the scheme last year as part of its €7 billion hydrogen strategy. The scheme is supported by German industry association BDI, which sees it as financing clean technologies in energy-intensive industries like chemicals, cement, and steelmaking.

€860 billion needed to finance German climate goals

The new German government should enable the investment of about 860 billion euros until 2030 to initiate emission reduction activities across all sectors of the economy, the German industry association BDI has said, reported CLEW.

Reactions

Reactions to the new state aid rules were contrasted.

Environmental lawyers at ClientEarth were up in arms about the new guidelines, saying the provisions on gas are “blatantly inconsistent” with the EU’s climate neutrality goal. 

“Gas is not a ‘light’ fossil fuel – this is a dangerous misunderstanding,” said ClientEarth State aid lawyer Stéphanie Nieuwbourg. “Allowing taxpayers’ money to be used to back these projects is blatantly inconsistent with the EU’s and member states’ decade-long pledge to end subsidies for fossil fuels,” she said in a statement.

“The only ‘safeguard’ that the Commission has put in place is to require member states to justify how aid granted to gas activities is compatible with the climate targets, but any justification would be unacceptable – no gas project can mitigate climate change,” she said.

Others were more positive, however. The solar industry association, SolarPower Europe, said the new state aid rules are “now in line with the European Green Deal” by preventing aid to fossil fuels and further restricting support to natural gas.

The new state aid rules also encourage tenders specific to certain renewable applications, such as agri-solar and floating solar, the association noted, saying this will ensure Europe maintains its competitive global lead in innovative solar PV technologies.

“As more member states look to solar and storage to decrease exposure to volatile gas-driven electricity prices, hybrid solar tenders introduced in the new subsidy rules will enable the growth of these technologies,” said Claire Couet, Policy Director of SolarPower Europe.

Moreover, under the new state aid rules, rooftop PV projects up to 1 MW, as well as 100% renewable energy community or SME-owned projects up to 6 MW, will not be burdened by competitive bidding processes, SolarPower Europe remarked, saying “this empowers more European citizens and businesses to invest in solar, and accelerates the prosumer-led energy transition.”

The European federation of citizen energy cooperatives (REScoop.eu) also welcomed the new rules, saying it “carves out a space” for small-scale renewable energy as part of the green transition.

“We welcome the Commission’s affirmation that citizens and communities are indispensable to achieving a low carbon energy transition,” said Dirk Vansintjan, President of REScoop.eu.

“Member states now have the green light to accommodate the unique characteristics of energy communities and to develop a bikelane in their support schemes so that communities can take ownership of their renewable energy,” he said.

[Edited by Alice Taylor]

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