Securing Electricity Generation Capacity An assessment through the lens of EU State aid law

1. Securing Electricity Generation CapacityAn assessment through the lens of EU State aid law Eleni Manaridou, LL.M. Ph.D. Fellow Centre for European Studies in Economic Law (CESEL) 6th Annual CRNI Conference – Brussels, 22 November 2013

2. Outline of the presentation • Under-investment in generation capacity in EU • Capacity mechanisms • Capacity mechanisms: State Aid? • Capacity Mechanisms as Compensation for PSO • Compatibility with the Internal Electricity Market • Draft Environmental and Energy Aid Guidelines (EEAG) • Conclusion

3. Under-investment in generation capacity • Can energy-only markets guarantee generation adequacy? • Retirement of ageing conventional power plants • Increase of intermittent RES in the system • Lack of sufficient investment incentives: • Priority dispatch of RES • Governmental price caps • Demand decrease due to economic crisis • Member States’ response: Capacity Mechanisms

4. Capacity Mechanisms • Electricity generators get remunerated for keeping capacity available. • Capacity payments • Capacity requirements/Capacity Obligations • Reliability contracts/Capacity Options • Strategic reserves/Contractual guarantees and arrangements • Capacity subscriptions

5. Capacity Mechanisms: State Aid? • EU State Aid Concept • Aid in any form whatsoever • Granted by a Member State or through State resources • Gives an advantage to selected undertakings • Distorts or threatens to distort competition • Affects inter-state trade • Prohibited

6. No Advantage when Capacity Mechanisms: PSO • Altmark criteria • Clearly defined PSO • Compensation methodology established in advance • No overcompensation; compensation must not exceed costs plus reasonable profit • Public tender or costs of a typical, well-run and adequately equipped undertaking. • No notification

7. PSO/SGEI notion • Member States have wide margin of discretion subject to control by the Commission for manifest error. • Article 3(2) Electricity Directive • Having full regard to the relevant provisions of the Treaty, in particular Article [106], Member States may imposeon undertakings operating in the electricity sector, in the general economic interest, public service obligations which may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection, including energy efficiency, energy from renewable sources and climate protection.

8. PSO/SGEI notion (cont.) • Federutility set strict conditions: • Is State intervention necessary? • 2011 SGEI Communication: ‘It would not be appropriate for Member States to attach specific obligations to a service, which is already provided or can be provided satisfactorily by market participants and under conditions, [...], consistent with the public interest,as defined by the State’.

9. PSO/SGEI notion (cont.) • Federutility set strict conditions: • Is State intervention necessary? • 2011 SGEI Communication: ‘It would not be appropriate for Member States to attach specific obligations to a service, which is already provided or can be provided satisfactorily by market participants and under conditions, [...], consistent with the public interest,as defined by the State’. • Recital 46 Electricity Directive: ‘It is important that the public service requirements can be interpreted on a national basis, taking into account national circumstances and subject to the respect of [Union] law’. • Quality terms set by the Member States

10. PSO/SGEI notion (cont.) • Federutility set strict conditions: • Limited in duration; periodic reassessment • Not beyond what is necessary • Clearly defined • Transparent • Non-discriminatory • Verifiable • Equal access for EU electricity undertakings to national consumers

11. Compatible with Internal Electricity Market? • Upcoming public consultation on: • Draft Guidelines on environmental and energy aid 2014-2020 (EEAG) and • Communication on delivering the internal market and making the most of public intervention • Public intervention must be: • Well-designed • Targeted • Proportionate

12. EEAG • Three-step balancing test • Is the aid measure aimed at a well-defined objective of common interest? • Is the aid well-designed to deliver the objective of common interest, i.e. does the proposed aid address the market failure or other objective? • Is the aid an appropriate policy instrument? • Is there an incentive effect? • Is the aid measure proportional? • Are the distortions of competition and effect on trade limited, so that the overall balance is positive?

13. EEAG (cont.) • A common objective and the necessity for State intervention • Objective, e.g. target excess capacity margin • Shortage of capacity and lack of alternative options, like interconnectors • Cause of the problem • Why the market cannot deliver the objective

14. EEAG (cont.) • Appropriate policy instrument • Remuneration strictly limited to keeping available capacity; clause to withdraw the measure; open to supply-side (existing and potential operators) and demand-side participation • Incentive effect • Counterfactual scenario: no construction of capacity without aid • Proportional measure • Reasonable rate of return; preferably through bidding process; clause to adjust the level of aid; claw-back of excess aid

15. EEAG (cont.) • Overall balance: positive • Limited in time • Non-discriminatory • Participation of generators from other Member States • Demand-side participation • Incentives for building of interconnectors not to be negatively affected • Technologically neutral

16. Conclusion • “State intervention is one of the causes • and one of the effects of the current lack of • competition in the energy sector” • AG Colomer, Federutility, para. 30

17. Thank you for your attention! • Eleni Manaridou, LL.M. • PhD Fellow • Centre for European Studies in Economic Law (CESEL) • Law Faculty – University of Copenhagen • eleni.manaridou@jur.ku.dk