Excessive cross-border accumulation of subsidies could threaten the EU’s energy transformation

EU Member States have unwittingly supported other Member States’ renewable energy targets with their own subsidiesa practice that violates EU internal market rules, explains Kim Talus at the UEF Faculty of Law. It looks at how Denmark subsidized Danish biomethane producers who exported to Sweden, where Swedish consumers were already benefiting from subsidies. promoted Danish biomethane producers at the expense of rivals. In December 2022, the General Court of the European Union forced a rethink, and regulations have already been put in place to prevent this, with inspections, monitoring and enforcement now required. This is extremely important because subsidies will play a bigger role for a long time to come as transformation progresses and cross-border trade growsThe challenge is Balancing the complexity of multi-country incentives with equal opportunities for individual countries. The internal market should not be about the race for the highest subsidies, but about competition based on affordability and product quality, Talus argues. The wrong approach means raising the total price for everyone and undermining social acceptance of the transformation as a whole.

In its quest to achieve climate neutrality by 2050, the EU intends to use the power and potential of the internal market to implement the energy transformation. However, For the market to function effectively, it must avoid distortions and inefficiencies for which entire societies will have to pay. This requires finding a delicate balance between the smooth functioning of the market on the one hand and interventions and subsidies on the other on the other hand, it is necessary to achieve politically agreed decarbonization goals.

State aid is expected to increase

Because Renewable energy sources are not always cost-competitive, butthe volume of state aid is expected to increase. This is also due to growing global competition for renewable energy investments. New support mechanisms are being tested at EU level, such as the EU Hydrogen Bank, and State aid rules are relaxed through frameworks such as the Temporary Crisis and Transitional Frameworkwhich has already been extended twice. Member States may temporarily match subsidies from third countries, especially the United States.. Germany, for example, has already taken advantage of this by providing appropriate assistance to a Swedish battery manufacturer.

Products may be covered by subsidies in several EU countries

All this is happening in an environment where the EU internal market has long been a well-established reality, not least in the energy sector. Products, goods and services compete across borders. It is therefore logical that Control of state aid and prevention of excessive subsidies cannot be limited to national borders and ignore the risk that the product may be subsidised in several EU countries to an extent that would seriously distort competition in the internal market.

When one country unknowingly supports another

In addition, Member States are also struggling with economic pressures from rising energy and capital costs and the broader economic slowdown. What is even more surprising is that in some cases Member States have unwittingly supported other Member States’ renewable energy targets with their own funds, a practice that violates EU internal market rules.

Denmark and Sweden

However, this is exactly what happened in the recent case involving Denmark and Sweden: in the former country subsidies helped to increase the competitiveness of biomethane, which was then attracted to the latter country, where it received another subsidy after its consumptionthus contributing to achieving Sweden’s renewable energy goals.

It is no wonder that this unusual form of neighborly help aroused the interest of Danish parliamentarians which asked the responsible minister about the use of appropriate public funds. The minister then admitted that, in accordance with EU Renewable Energy Directive (III)Danish subsidized biomethane exports have indeed contributed to Sweden’s renewable energy targets. He announced that this particular state aid scheme would be adapted to stop such practice in the future.

However, at a more general level, the fundamental problem of distortive over-subsidisation through cross-border cumulation of state aid is far from being solved – it most likely goes far beyond the specific biomethane sector.

The Landwarme verdict

On 21 December 2022, the General Court of the European Union delivered an important but insufficiently commented judgment in Case 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 use of biomethane in that country. These schemes and the Commission’s approval did not take into account the fact that some countries, notably Denmark, provided state aid for the production of biomethane, which then received second state aid when consumed in Sweden. This led to excessive subsidies, pushing competitive biomethane from other countries out of the Swedish marketThe court found that this resulted in an increase in the market share of Danish producers at the expense of imports from other countries.

In its defence, the Commission maintained that it was not empowered to assess cross-border cumulation of State aid. It argued that EU law neither required nor permitted any cumulation of aid from different Member States to be taken into account when assessing the compatibility of subsidies with the internal market. However, the Court rejected this position and found that, on the contrary, the Commission was indeed obliged to carry out such an assessment.

For this purpose, the Court of First Instance also held that the Commission must take into account all available information, including information on specific cases provided by market participants. Although the Court indicated that it would accept an argument of de facto impossibility if the relevant information were indeed unavailable, in Landwärme it held that sufficient information was indeed ‘generally known’ and publicly available.

Consequences of the judgment and future state aid reviews

In response to the Landwärme ruling, the Commission was obliged earlier this year to open a formal investigation into Swedish state aid schemes and invite third parties to submit comments. So the focus now turns to the “how” of such an assessment of cross-border cumulation and over-subsidization.

It is not easy, on the contrary, but it is now a legal obligation. Therefore, all available means must be exhausted for this purpose. Information sources are already available for ongoing evaluation and in the future “Union Database” (UDB) for tracking liquid and gaseous renewable fuels and recycled carbon fuels, scheduled for November 2024, will help meet these requirements in the future. The UDB will include data on whether support was provided for the production of specific batches of fuel and what type of support program was used. In addition, national state aid registersIf improved, it could serve as a useful source for analysing cumulative State aid from different Member States.

At Member State level, cross-border subsidies should be taken into account in advance when assessing potential overcompensationMechanisms such as Guarantees of Origin (GO) and other types of aid already exist. The EU Renewable Energy Directive prevents Member States from issuing marketing authorisations to producers receiving financial support under a support scheme. DenmarkThe new tender scheme for biomethane production planned by the company includes the principle of “state aid or GO”, and NetherlandsCompanies can only reserve and trade HBE (similar to GO) if they have not received any subsidies for biofuel production.

And finally, grant beneficiaries themselves can support the control of cross-border state aid by ensuring the transparency of any other potentially relevant aid can receive for their activities. This not only serves the public interest in a correct assessment of competition and trade between Member States, but is also in the interest of legal certainty for beneficiaries.

These examples, referring 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 judgment of the Court of First Instance in the Landwärme case is logical and contributes to the creation of a level playing field for biofuels in the internal market. Assures, that biofuels produced in different Member States are treated equally in final markets where they compete with biofuels produced in other Member States.

The momentum for change is there. First, both the Swedish and Danish programs are open to review. The original “bad practice” that was an example of overcompensation can be resolved and transformed into a “best practice”An interesting question in this regard is the fact that in the case of Denmark, the current state aid regime also needs to be adjusted, as most of the current production in Denmark has already been contracted under the current system. Secondly, at the same time The Commission can now adapt both the methodology for assessing ex ante cumulation and the methodology for ex post monitoring/reporting to cover cross-border aspects in accordance with the judgment of the Court of First Instance. All this was supported by Eurogas and Energy Traders Europe.

What is the rate?

Maintaining a fragmented approach to assessing the cumulation of State aid at national level has become untenable. Given the EU’s ambitious renewable energy and biomethane targets, state aid will be necessary for a long time to come.and As demand for finance grows and trade in renewable energy increases, the cross-border impact of state aid becomes increasingly important to ensure a level playing field on the EU internal market.

Clearly, the internal market should not be about the race for the highest subsidies, but about competition based on the affordability and quality of productsIf State aid goes beyond the threshold of creating unjustified distortions of competition, it will undermine the ability of the internal market to deliver an efficient energy transition and thus defeating its own purpose, raising the total price for everyone and undermining social acceptance of the entire transformationwhat could happen if such unsustainable practices continue – this is an issue of fundamental importance to the entire energy sector, going far beyond biomethane alone.

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Kim Talus is a professor of European Energy Law at UEF Faculty of Law and Director of the Center for Climate, Energy and Environmental Law (CCEEL) and Professor of Energy Law at University of HelsinkiHe is also a partner in a Swiss consulting firm in the field of energy law. Energy and Regulatory Partners