The European Commission has opened an investigation into two questionable provisions of the German Renewable Energy Act. Matthias Lang summarizes the reasons for the inquiry and how it might affect the German Energiewende.

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As previously expected, the European Commission has opened an in-depth investigation to examine whether the reduction granted to energy-intensive companies on the surcharge promoting renewable energy sources in Germany (“EEG-surcharge”) is compatible with EU state aid rules. The Commission will also investigate the reduction on the EEG-surcharge granted to suppliers that source 50% of their electricity portfolio from domestic renewable electricity (“green electricity privilege”).

1. EEG and State Aid

The Commission examined the Renewable Energy Source Law as applicable since 2012 (EEG-Act 2012) during a preliminary investigation triggered by numerous complaints received from consumers and competitors. The substantial amendments of the EEG that entered into force in 2012 “changed the structure of the German support mechanism to electricity from renewable sources in such a way that it constitutes state aid in the meaning of EU rules, because it is financed by a resource under the control of the state”, the Commission concluded.

The Commission further explains its assessment as follows:

“The EEG-Act 2012 provides for a surcharge to be imposed on the consumption of electricity. The surcharge is to be managed by the four German transmission system operators according to detailed rules established in the EEG-Act 2012 and implementing regulations. The regulator is in charge of the monitoring of the management of the surcharge.”

The Commission compared this situation under the EEG 2012 with the previous system under the Stromeinspeisegesetz, the predecessor of the EEG, which was introduced in 1998, and decided that the 1998 purchase obligation scheme was significantly different. For the Stromeinspeisungsgesetz, the European Court of Justice in 2001 in its PreussenElektra case (Case C-379/98) had decided that the feed-in tariff regime at the time did not constitute state aid:

“A statutory provision of a Member State which, first, requires private electricity supply undertakings to purchase electricity produced in their area of supply from renewable energy sources at minimum prices higher than the real economic value of that type of electricity, and, second, distributes the financial burden resulting from that obligation between those electricity supply undertakings and upstream private electricity network operators, does not constitute State aid within the meaning of Article 92(1) of the Treaty.”

Despite PreussenElektra, as a consequence of it new assessment, the Commission considers the support granted under the EEG 2012 in the form of feed-in tariffs and market premia to constitute state aid.

However, the Commission considered the German EEG as far as support for generation from renewable energy is concerned to be in line with the Commission’s 2008 guidelines on state aid for environmental protection.

In this context, it is significant to note that the Commission has today also published “Draft Guidelines on environmental and energy State aid for 2014-2020“, which we will review in a separate blog post. The new guidelines will surely also be carefully read by the new German government that announced a fundamental reform of the EEG in its coalition agreement.

The following two aspects of the EEG-Act may not be in line with EU state aid rules, the Commission says:

2. Renewable Surcharge Reduction for Energy-Intensive Consumers

The Commission argues as follows:

“The surcharge reduction for energy intensive companies appears to be financed from a state resource. The reduction is available only to undertakings of the manufacturing sector having a consumption of at least 1 GWh/a and with electricity costs representing 14% of their gross added value. The reductions seem to give the beneficiaries a selective advantage that is likely to distort competition within the EU internal market. The current state aid guidelines do not foresee the possibility of such reductions. At the same time, the Commission considers that under certain conditions, reductions on the financing of renewable electricity may be justified for energy-intensive users in order to prevent carbon leakage. In parallel to the investigation, the Commission is inviting stakeholders to comment on possible criteria that could be included in the forthcoming guidelines (see IP/13/1282). The Commission will therefore carefully examine whether the reductions for energy-intensive companies can be justified and whether they are proportionate and do not unduly distort competition.”

3. “Green Electricity Privilege”

For the ”green electricity privilege” (§ 39 of the EEG-Act), the Commission is of the opinion that it could possibly result in discriminatory taxation. It argues as follows:

“The reduced EEG-surcharge is available to suppliers only if 50% of the electricity portfolio is sourced from domestic renewable electricity produced in plants that are not already more than 20 years in operation. This seems to discriminate between domestic and imported electricity from renewable sources produced in similar plants. In the formal investigation, the Commission will examine in more detail whether the discrimination would exist only in so far as the imported electricity has not already benefitted from support in the country of origin.”

4. Next Steps

The opening of an in‑depth investigation does not prejudge the outcome of the investigation, the Commission specifically pointed out. It gives third parties an opportunity to comment on the measure under assessment.

It is difficult to overestimate the importance of today’s opening decision of the European Commission for the future development for German and European support systems for renewables. It should also be seen in the context of the Commission’s recent Communication “Delivering the internal electricity market and making the most of public intervention” and the accompanying set of Staff Working Documents on important aspects of the Communication, giving guidance to Member States on state interventions aimed at preventing market distortions and providing secure and affordable energy and the upcoming.

Qualifying the German EEG support scheme for renewable energy as state aid is a paradigm shift, and is intended to open future developments of the EEG to much closer review under European state aid law provisions. Energy intensive companies and beneficiaries of the green electricity privilege will have to very closely assess what the opening decision means for them, in particular regarding a potential “repayment” risk to pay the difference between the full EEG surcharge and their reduced surcharge.

The recent Lufthansa/Frankfurt-Hahn/Ryanair state aid decision of the Court of Justice of 21 November 2013 (C-284/12) may further complicate matters. In this decision, the court cryptically held:

“Consequently, where the Commission has initiated the formal examination procedure with regard to a measure which is being implemented, national courts are required to adopt all the necessary measures with a view to drawing the appropriate conclusions from an infringement of the obligation to suspend the implementation of that measure.”

The new German government will continue to argue in favour of the legality of the EEG surcharge reductions. In a speech given this morning in parliament, Chancellor Angela Merkel addressed the expected opening of the investigation. Germany had to remain a strong industrial location, she said. This would be pointed out to the Commission, she further said, adding that Germany already had some of the highest electricity prices for the industrial sector.

Source: europe.eu

This post first appeared on German Energy Blog and is reposted with the kind permission of its author Matthias Lang.