EU Member States have inadvertently supported with their own subsidies the renewable energy targets of other Member States, a practice that violates EU internal market rules, explains Kim Talus at UEF Law School. He looks at how Denmark subsidised Danish biomethane producers who exported to Sweden, where Swedish consumers were benefitting from subsidies already. This promoted Danish biomethane producers at the expense of rivals. In December 2022 the EU General Court forced a rethink, and rules are now in place to stop this happening, and now inspection, monitoring and enforcement are required. It’s vitally important because subsidies will play a greater role for a long time to come as the transition rolls out and cross-border trade grows. The challenge is balancing the complexity of multiple state incentives with a level playing field between states. The internal market should not be about a race for the highest subsidies, but about competition based on affordability and quality of products, says Talus. Getting this wrong means raising the total price tag for everyone, and undercutting social acceptance of the transition as a whole.
As the EU strives to achieve climate neutrality by 2050, it aims at harnessing the power and potential of the internal market for delivering the energy transition. But for the market to function effectively, it must avoid distortions and inefficiencies that societies as a whole will have to pay for. This requires striking a delicate balance between undistorted market functioning on the one hand, and interventions and subsidies required to achieve politically determined decarbonisation objectives on the other.
State aid is expected to rise
Because renewable energies are not always cost-competitive yet, the volume of State aid is expected to rise. This is also driven by the growing global competition for renewable energy investments. New EU-level support mechanisms, such as the EU Hydrogen Bank, are being tested, and State aid rules are being relaxed through frameworks like the Temporary Crisis and Transition Framework, which has now been extended twice. Member States can temporarily match subsidies from third countries, notably the United States. Germany, for instance, has already leveraged this by providing matching aid for a Swedish battery manufacturer.
Products can accumulate subsidies in several EU countries
All this occurs in an environment where the EU internal market has long become a well-established reality, not least in the energy sector. Products, commodities and services compete with each other across borders. It is therefore logical that State aid control, the prevention of oversubsidisation, cannot remain confined within national boundaries and ignore the risk that a product may accumulate subsidies in several EU countries to an extent that severely distorts competition on the internal market.
When one state supports the other, inadvertently
Furthermore, Member States have also been grappling with economic pressures from rising energy and capital costs and a broader economic downturn. It is therefore all the more surprising that, in some instances, Member States have inadvertently supported with their own funds the achievement of renewable energy targets of other Member States, a practice that violates EU internal market rules.
Denmark and Sweden
Nevertheless, this is exactly what happened in a recent case relating to Denmark and Sweden: the former country’s subsidies helped the competitiveness of its biomethane that was then attracted to the latter country where it received another subsidy when consumed, thereby contributing to the attainment of Swedish renewable energy targets.
Unsurprisingly, this unusual form of neighbourly assistance drew the interest of Danish parliamentarians that have queried the responsible Minister over the use of respective public funds. Subsequently, the Minister did admit that under the EU’s Renewable Energy Directive (III), the Danish-subsidised biomethane exports did indeed accrue towards the attainment of Sweden’s renewable energy targets. He announced that this specific State aid scheme would be adapted to discontinue such practice in future.
However, on a more general level the underlying fundamental problem of distortive oversubsidisation by cross-border cumulation of State aid is far from resolved – in all likelihood, far beyond the specific sector of biomethane.
The Landwärme Judgment
On December 21, 2022, the EU General Court delivered a significant but under-discussed judgment T‑626/20, Landwärme GmbH v Commission. The Court annulled the Commission’s decision to approve without a formal investigation two aid schemes in Sweden that supported the consumption of biomethane in the country. These schemes, and the Commission’s approval, overlooked the fact that some countries, notably Denmark, provided State aid for the production of biomethane, which then received a second state aid on top when consumed in Sweden. This led to excessive subsidies, pushing competing biomethane from other countries out of the Swedish market. The Court found that this resulted in increased market shares for Danish producers at the expense of imports from other countries.
In its defense, the Commission had maintained that it was not authorised to assess cross-border cumulation of State aid. It claimed that EU law did neither require nor allow to consider any cumulation of aid from different Member States when assessing the compatibility of subsidies with the internal market. However, the Court rejected this stance and concluded that on the contrary, the Commission was indeed under the obligation to conduct such as assessment.
For this purpose, the General Court also concluded that the Commission has to take account of all available information, including case specific information as provided by market participants. Although the Court indicated that it would accept an argument of factual impossibility if relevant information was genuinely not available, for the Landwärme case it held that sufficient information was indeed “generally known” and publicly available.
Consequences of the judgment and future reviews of State aid
In response to the Landwärme judgment, the Commission was required earlier this year to initiate a formal investigation procedure into the Swedish State aid schemes and to invite comments from third parties. Thus, the attention now turns towards the ‘how’ of such an assessment of cross-border cumulation and over-subsidisation.
It is not easy, far from it, but now it is a legal obligation. Hence, all available means must be exhausted to that end. Information sources are already available for the ongoing assessment and going forward, the “Union Database” (UDB) for tracing liquid and gaseous renewable fuels and recycled carbon fuels, scheduled for November 2024, will aid in meeting these requirements in future. The UDB will include data on whether support has been provided to produce specific fuel consignments and the type of support scheme used. Furthermore, national State aid registers, if improved, could serve as a useful source to examine cumulating State aid from various Member States.
At the Member State level, cross-border subsidies should be considered beforehand when assessing potential over-compensation. There are existing mechanisms, such as guarantees of origin (GO) and other aid types. The EU Renewable Energy Directive prevents Member States from issuing GOs to producers receiving financial support from a support scheme. Denmark‘s planned new tender scheme for biomethane production includes a “State aid or GO” principle, and in the Netherlands, companies can only book and trade HBEs (similar to GOs) if no subsidies have been paid for the biofuel’s production.
And lastly, the beneficiaries of subsidies themself can support the cross-border State aid control by making transparent any other potentially relevant aid they might receive for their activities. This serves not only the public interest of properly assessing the competition and trade between Member States, but it is also in the interest of legal certainty for beneficiaries.
These examples, applicable to subsidies from other EU Member States, show that it is not only necessary, but also possible to prevent overcompensation in cross-border situations. Therefore, the General Court’s Landwärme judgment is logical and contributes to the creation of a level playing field for biofuels on the internal market. It ensures that biofuels produced in different Member States are treated equally in the end-use markets where they compete with biofuels produced in other Member States.
The momentum for change is there. First, both the Swedish as well as the Danish schemes are open for review. The original ‘bad practice’ which was the showcase of overcompensation can be solved and turned into ‘best practice’. An interesting question in this respect is the fact that in the case of Denmark, the existing State aid scheme must be adjusted, too, as most of the current Danish production has already been contracted under the current system. Second, at the same time the Commission can now adjust both the ex-ante cumulation assessment methodology as well as the ex-post monitoring/reporting methodology to cover the cross-border aspects in line with the judgement of the General Court. All this has been supported by both Eurogas and Energy Traders Europe.
What is at stake?
Maintaining a nationally fragmented approach to assessing the cumulation of State aid has become indefensible. Given the EU’s ambitious renewable energy and biomethane targets, State aid will be necessary for a long time to come. And as the need for funding grows and the trade of renewable energy increases, the cross-border impact of State aid becomes ever more crucial for ensuring a level playing field in the EU’s internal market.
Clearly, the internal market should not be about a race for the highest subsidies, but about competition based on affordability and quality of products. If State aid exceeds the threshold of causing unwarranted distortions of competition, it will undermine the internal market’s capacity to deliver an efficient energy transition, thereby defeating its own purpose, raising the total price tag for everyone, and undercutting social acceptance of the transition as a whole, something that could happen in case such unsustainable practices continue – a question of fundamental importance for the whole energy sector, far beyond biomethane only.
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Kim Talus is a Professor of European Energy Law at UEF Law School and a Director of its Center for Climate Change, Energy and Environmental Law (CCEEL) as well as a Professor of Energy Law at University of Helsinki. He is also a Partner in a Swiss energy law consultancy Energy and Regulation Partners