Greening EU Energy: State Aid Control of Capacity Mechanisms as a Tool to Achieve the Paris Agreement Climate Objectives

(1)

Greening EU Energy

State Aid Control of Capacity Mechanisms as a Tool to Achieve

the Paris Agreement Climate Objectives

23 July 2019

Cosima Carta (12161667, cosima.carta@student.uva.nl) Master of Laws in European Union Law

Thesis supervisor: dhr. dr. L.J. Ankersmit Second reader: dhr. prof. dr. S.F. Blockmans

(2)

Abstract

In 2016 in Paris, the European Union agreed to join the international climate deal to limit global warming to well below 2°C and to pursue efforts towards 1.5°C. To live up to this legally binding commitment, the urgent reduction of greenhouse gas emissions is key. With respect to European energy markets, this requires the transition away from fossil fuels towards zero-carbon economies: the ‘Clean Energy Transition’. While EU energy policies have considerably developed to realise this transformation, their successful implementation is dependent on multiple factors, including, possibly, the prevention of harmful national capacity mechanisms by means of State aid control. Accordingly, this research provides for an analysis of the role of State aid control of capacity mechanisms to enable or even advance the Clean Energy Transition to meet the Paris climate objectives. To do so, it outlines the EU’s binding commitments and subsequent energy policy-efforts following the adoption of the Paris Agreement, after which it explores the potential of the ‘State aid tool’ in supporting these efforts. Considering various issues regarding the interaction of State aid policy and sustainable energy objectives, it argues that the State aid regime can and should be deployed to safeguard national capacity mechanisms are adopted in conformity with the decarbonisation objective and in support of EU (sustainable) energy legislation. The analysis of current State aid analysis reveals that, however, the Commission does not (yet) demonstrate such a forward-looking and integrated approach. Therefore, this thesis advocates that for State aid surveillance of capacity mechanisms to become a true tool in the achievement of the Paris targets, the Commission’s Guidelines and decisional-practice require updating. It concludes with proposing several suggestions accordingly.

(3)

List of Abbreviations

CEP Clean Energy Package

CFR Charter of Fundamental Rights of the EU CJEU Court of Justice of the European Union CO2 Carbon dioxide

COP DG

Conference of the Parties to the UNFCCC

Directorate-General (of the European Commission) DSR Demand Side Response

EEAG Guidelines on State Aid for Environmental Protection and Energy EMR Electricity Market Regulation

ETS EPS

Emissions Trading System Emission Performance Standard EU European Union

GBER General Block Exemption Regulation GC General Court

GHG Greenhouse Gas

IPCC Intergovernmental Panel on Climate Change IPCEI Important Projects of Common European Interest

(4)

OECD Organisation for Economic Cooperation and Development SGEI Service of General Economic Interest

TEU Treaty on the European Union

TFEU Treaty on the Functioning of the European Union TSO Transmission System Operator

(5)

Introduction

Droughts, floods, increasing temperatures, melting glacier waters, and rising sea levels.1 There is no denying the fact that the climate is changing. It may well be the defining issue of our century, and without urgent action, most definitely of the future ones. 2016 marked a welcome course in the global effort to combat climate change, when the first legally binding global climate deal was adopted, the Paris Agreement.2 With its ambition to limit global warming to well below 2°C and to pursue efforts towards 1.5°C, the Agreement directly impacts the way policies and strategies are designed and implemented in all countries, at all levels of government, and across all different sectors.

Energy is at the heart of these efforts, as globally, the energy sector represents around two-thirds of greenhouse gas (‘GHG’) emissions.3 A fundamental transformation of the energy sector is therefore essential to mitigate the effects of climate change. This ‘Clean Energy Transition’ requires the rethinking and redesigning of existing energy systems, from fossil-based to zero-carbon regimes based on enhanced energy efficiency and the scale up of renewables.4

The European Union (‘EU’) plays a crucial role in this context. As one of the world’s largest emitters of GHG emissions5_{, it has the potential to be in the driver’s seat of}

global action regarding the shift to a low-carbon economy. Indeed, the EU has since the 1990s undertaken various efforts to tackle climate change whilst securing the future supply of energy resources, most recently reflected in an extensive ‘Clean Energy Package’ (‘CEP’).6 This new energy rulebook, consisting of various

1_{The Climate Reality Project, ‘Ten Clear Indicators Our Climate Is Changing’ (18 May 2015)} <https://www.climaterealityproject.org/blog/10-indicators-that-show-climate-change>.

2_{Adoption of the Paris Agreement, Decision 1/CP.21 (2016), U.N. Doc. FCCC/CP/2015/10/Add.1.} 3_{Dominique Ristori, ‘Foreword on INSIGHT_E’ in Manuel Welsch and others (eds), Europe’s Energy} Transition: Insights for Policy Making (Elsevier 2017).

4_{IRENA, ‘Energy Transition' <https://www.irena.org/energytransition> accessed 18 July 2019.} 5_{Manuel Welsch, Europe’s Energy Transition - Insights for Policy Making (Elsevier 2017) 3.} 6_{Commission, ‘Clean Energy for All Europeans’ (2019)}

<https://publications.europa.eu/en/publication-detail/-/publication/b4e46873-7528-11e9-9f05-

(8)

legislative documents, provides a European framework aimed at accelerating the transition away from fossil fuels to deliver on the commitments made in Paris.7

Nevertheless, to reach the ambitious energy targets, robust policymaking within DG Energy alone will likely not suffice. As stated by the Commission in its Communication ‘A Clean Planet for All’, engagement of “all sectors of the economy

and society [is required] to achieve the transition to net-zero greenhouse gas emissions by 2050”.8 Environmental and energy concerns cannot, by their nature, be confined to a certain policy area; and the firm commitments of the EU are unlikely to be achieved using a sectorial approach. Rather, an integrated approach to climate and energy is needed, involving all policy fields and utilizing all potentially useful instruments: including the State Aid regime.

State aid policy does not only represent a strong system to protect the well-functioning of the internal market; it can potentially also serve as a powerful tool in transforming the energy market. Member States spend a considerable amount of resources to State aid for energy purposes;9 and the exercise of State aid control over these measures may considerably impact the shaping of energy markets. If the regime is applied to ensure State support takes the form of ‘good aid’, it can present a powerful tool in contributing to the EU’s energy transition plans. However, if used ineffectively, it can also significantly hinder the EU's ability to live up to its commitments.10

A particular issue in this respect is the control of so-called ‘capacity mechanisms’. In the wake of the changing structure of European electricity markets, most notably due to the rise of renewable energy sources, conventional generators such as fossil-fuel power plants have been increasingly pushed out of the market.11 While this is welcomed from an environmental viewpoint, Member States are concerned about the

7_{ibid 3, 4.}

8_{Commission, ‘A Clean Planet for All’ COM(2018) 773 final 6.}

9_{Commission, ‘State Aid Scoreboard 2018: Results, Trends and Observations Regarding EU28 State} Aid Expenditure Reports for 2017’

<http://ec.europa.eu/competition/state_aid/scoreboard/state_aid_scoreboard_2018.pdf> accessed 16 April 2019.

10_{See also ClientEarth, ‘The Effect of State Aid Governance on EU Climate and Energy Policy’ (2015)} <https://www.documents.clientearth.org/wp-content/uploads/library/2015-08-26-the-effect-of-State-aid-governance-on-eu-climate-and-energy-policy-ce-en.pdf>.

11_{Arnaud Coibion and John Pickett, ‘Capacity Mechanisms: Reigniting Europe’s Energy Markets’} (Linklaters LLP 2014) 1 <linklaters.com/capacitymechanisms>.

(9)

security of their energy supplies. To avoid potential blackouts, they are increasingly introducing mechanisms that (typically) remunerate generators or suppliers for being available to step in during times of peak demand.12 While these systems are not necessarily ‘bad’ as such – they may legitimately pursue the objective of common interest that is security of supply – if they would function as mere subsidies for polluting power plants, the EU’s hard-won climate change gains would be at high risk.13 As payments awarded via these schemes generally involve State aid, the State aid regime could potentially come to the rescue. Involved because of these mechanisms’ effects on competition, but possibly also because of their potential to delay the decarbonisation of energy markets, the Commission’s oversight of capacity mechanisms may significantly influence the attainment of the Paris climate objectives.

Accordingly, the central question of this research is: What role can and should EU

State aid control of national capacity mechanisms play to enable and advance the Clean Energy Transition in order to meet the Paris climate objectives? The aim is

to analyse whether and to what extent the State aid regime can and should be used to not only protect competition against distortive State measures, but also to enforce the implementation of environmental objectives in the area of capacity mechanisms. In order to do so, this thesis shall touch upon issues relating to the place of environmental considerations in State aid analysis; the interaction of State aid policy with the broader spectrum of EU policies and their implementation; and the correct balancing between European versus national policy objectives and competences. The thesis is divided into four chapters. The first chapter outlines the EU’s binding commitments as a result of the adoption of the Paris Agreement and its subsequent policy-efforts in the energy field. Based on challenges with regard to (the implementation of) these policies, the second chapter zooms in on the potential of State aid control of capacity mechanisms in contributing to the Clean Energy Transition. It first discusses the practical impact of State aid regulation of capacity mechanisms on transforming energy markets and secondly, the appropriateness of using the ‘State aid tool’ for this purpose. It is chosen to focus on these issues at this stage already, as it is considered valuable to gain an understanding of the (potential)

12_{Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms' SWD(2016) 385 final.} 13_{Arnaud Coibion and John Pickett (n 11) 1.}

(10)

impact of State aid control of capacity mechanisms in meeting the Paris objectives before analysing the legal definitions and criteria to this end. This will be covered in the third chapter, which provides an overview of the legal framework and analysis of State measures supporting capacity generation, focusing on whether it can be, and is currently, used to prevent measures that would hamper the achievement of the Paris targets. Based on this framework, the fourth chapter discusses potential shortcomings in the current rules and practice. It evaluates whether a different approach towards the control of capacity mechanisms is called for, and if so, seeks to provide recommendations as to how the rules should be redesigned or applied differently. Finally, the conclusion summarises the main findings and presents the answer to the research question.

(11)

Chapter 1: The road to meeting the Paris objectives: the EU’s

Clean Energy Transition

This chapter outlines the EU’s binding commitments and subsequent policy efforts in the energy domain following the adoption of the Paris Agreement. Focusing on the main developments in EU energy policy, it seeks to identify challenges to the achievement of the Paris climate targets and, based on that, the potential interplay with the State aid regime.

1.1 The Paris Agreement

1.1.1 Global binding climate targets

On 12 December 2015, the Parties to the United Nations Framework Convention on Climate Change (‘UNFCCC’), including the EU and all its Member States, reached a landmark Agreement to strengthen the global response to the threat of climate change.14 The Agreement, building upon the UNFCCC adopted in 1992,15 marks the first global legally binding commitment to combat climate change and adapt to its adverse impacts.16 Its key aim is to reduce GHG emissions in an effort to limit global average temperature rise this century to well below 2°C above pre-industrial levels and to pursue efforts towards 1.5°C.17 In addition, it aims to strengthen countries' abilities to address and adapt to the negative impacts of climate change18 and to align financial flows with a low emissions and a climate-resilient pathway.19 The Agreement entered into force on 4 November 2016 and has to date been ratified by 185 of the 197 Convention Parties.20

14_{Paris Agreement (2015), in U.N. Doc. FCCC/CP/2015/10/Add.1, Annex at 21; The Agreement was} formally adopted through decision 1/CP/21, see (n 2).

15_{United Nations Framework Convention on Climate Change 1992.}

16_{Paris Agreement Article 2(1); see also UNFCCC, ‘What Is the Paris Agreement?’}

<https://unfccc.int/process-and-meetings/the-paris-agreement/what-is-the-paris-agreement> accessed 28 May 2019.

17_{Paris Agreement Article 2.} 18_{ibid Article 4-8.}

19_{ibid Article 9-11; see also UNFCCC (n 16).}

20_{See UNFCCC, 'Status of Ratification of the Convention'} <https://unfccc.int/process/the-convention/news-and-updates> accessed 28 May 2019.

(12)

1.1.2 Action in the energy field

A transformative approach with regard to energy is at the heart of the Paris agenda. As two-thirds of GHG emissions originate from the energy sector, an urgent transition towards a low-carbon energy market is crucial to set the world on a pathway to limit global warming to 1.5°C.21 This requires a significant scale-back of energy-related CO2 emissions. In particular, these emissions will need to fall by 3.5% per year and

decline by more than 70% by 2050 compared to 2015 levels.22 Accordingly, it is necessary to phase-out the use of energy sources that keep emission levels up, most notably fossil fuels.23 To achieve this, economies, societies and markets must be reshaped rapidly; calling for innovative and transformative efforts from all major actors, including the EU.24

1.2 The EU’s Clean Energy Transition

1.2.1 Main commitments and policy efforts

Responsible for 10% of total worldwide GHG emissions, the EU plays a significant role in closing the emissions gap required to keep global warming below 2°C.25 Central to this effort is the design of its energy market, which today counts for over 75% of the EU's share of GHG emissions.26

Indeed, the EU has since the 1990s undertaken various efforts to shift to a low-carbon energy market. In 2009 it introduced the first targets to reduce emissions, increase the

21_{Ristori (n 3).}

22_{IRENA, ‘Global Energy Transformation: A Roadmap to 2050' (2019) 22} <https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2018/Apr/IRENA_Report_GET_2018.pdf>.

23_{Joeri Rogelj and others, 'Mitigation Pathways Compatible with 1.5°C in the Context of Sustainable} Development' in Global Warming of 1.5°C. An IPCC Special Report on the Impacts of Global Warming of 1.5°C above Pre-Industrial Levels and Related Global Greenhouse Gas Emission Pathways, in the Context of Strengthening the Global Response to the Threat of Climate Change, Sustainable Development, and Efforts to Eradicate Poverty (IPCC 2018) 149

<https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_Chapter2_Low_Res.pdf>.

24_{For a detailed overview of the (current) contribution of key energy technologies and sectors to the} achievement of the Paris climate targets, see IEA, ‘Tracking Clean Energy Progress’ (2019) <https://www.iea.org/tcep/> accessed 30 May 2019.

25_{UNEP, ‘Emissions Gap Report 2018' (2018) 14}

<http://wedocs.unep.org/bitstream/handle/20.500.11822/26895/EGR2018_FullReport_EN.pdf?isAllow ed=y&sequence=1>.

(13)

share of renewables and achieve energy savings;27_{which it pledged to increase}

following the Paris Agreement in 2015.28_{At the end of 2018, the necessary legislation}

for the implementation of the Paris Agreement was finalized, when the EU adopted a binding set of legislative parameters and emission reduction targets to cut GHG emissions by at least 40% by 2030. The share of total energy consumption from renewables was raised to 32%, along with an improvement of energy efficiency of at least 32.5%.29 In addition, the EU set a long-term goal to cut emissions by 80-95% compared to 1990 levels by 2050,30 accompanied by a strategy illustrating pathways to accelerate the energy transition in order to achieve international objectives.31

2019 marked a new step towards the achievement of the Paris objectives, when the EU agreed on a comprehensive reform of its energy policy framework.32 This new energy rulebook, named the ‘Clean Energy for all Europeans Package’ (‘CEP’),33 is aimed at accelerating the reduction of emissions to deliver on the Paris commitments and to follow up on the climate legislation adopted in 2018. It consists of eight legislative acts proposed by the Commission in 2016 and agreed upon by the Council and the European Parliament in 2018 and early 2019.34

1.2.2 Towards a zero-carbon energy market

Despite these efforts, recent studies suggest that there is still much to be done in order for the EU to meet the Paris objectives. The latest UN Emissions Reductions report indicates that while the EU’s GHG emissions have been steadily declining since 1990, a reversed trend of increasing emissions has been showing since 2014.35 Moreover, a

27_{See Commission, ‘Clean Energy for All Europeans’ (n 6) 3.}

28_{Latvia and the European Commission on behalf of the European Union and its Member States,} ‘Intended Nationally Determined Contribution of the EU and Its Member States’ (2015)

<https://www4.unfccc.int/sites/ndcstaging/PublishedDocuments/European%20Union%20First/LV-03-06-EU%20INDC.pdf> accessed 28 May 2019; Commission, ‘Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ COM(2015) 80 final.

29_{Commission, ‘A Policy Framework for Climate and Energy in the Period from 2020 to 2030',} COM(2014) 015 final.

30_ibid.

31_{Commission, ‘A Clean Planet for All’ (n 8).}

32_{Commission, ‘Press Release: Clean Energy for All Europeans: Commission Welcomes European} Parliament’s Adoption of New Electricity Market Design Proposals’ <http://europa.eu/rapid/press-release_IP-19-1836_en.htm> accessed 28 May 2019.

33_{Commission, ‘Clean Energy for All Europeans’ (n 6).}

34_{The acts and full references are available at <} https://ec.europa.eu/energy/en/topics/energy-strategy-and-energy-union/clean-energy-all-europeans> accessed 17 July 2019.

(14)

Commission report of 2019 reveals fossil fuels are still largely supported in the EU and EU energy consumption is rising despite efforts to reduce demand.36_Furthermore,

in a report issued at the end of 2018, the Intergovernmental Panel on Climate Change (‘IPCC’) warns that the current commitments expressed in, amongst others, the EU’s Nationally Determined Contribution37, are inadequate to bridge the emissions gap in time to meet the Paris targets.38 It emphasizes that emissions must be more urgently reduced than previously anticipated, requiring more pronounced and rapid transformations.39

Accordingly, more is needed to direct European energy markets on a pathway towards meeting the Paris climate targets. Nevertheless, it is still technically feasible and the momentum is there.40 The necessary transformations might, however, require efforts beyond ambitious policymaking by DG Energy. Roughly, progress will be driven by two interdependent elements: political and market developments.41 The shaping of energy markets is highly dependent on market dynamics, which on their turn are influenced by public intervention. At the interplay of both elements is the control of national measures granting an advantage to certain energy providers, whose activities may either delay or contribute to the Clean Energy Transition. Therefore, the next chapter will focus on the potential of State aid control, particularly in the field of capacity mechanisms, in contributing to the achievement of the Paris climate objectives.

36_{Commission, ‘Commission Report: Energy Prices and Costs in Europe' COM(2019) 1 final 210, 211.} 37_{Article 4 of the Paris Agreement requires all major emitters to present ambitious long-term strategies} to cut their emissions in the form of ‘Nationally Determined Contributions’.

38_{Rogelj and others (n 23) 95. Note that the impact of the new measures adopted in 2018 is not} included in this analysis. See UNEP (n 25) 13.

39_{Rogelj and others (n 23) 95; see also Commission, ‘A Clean Planet for All’ (n 8) 5.} 40_{Rogelj and others (n 23) 95; Roland Berger, 'Power to the People: The Future of Europe’s}

Decentralized Energy Market' (2017) 3 <https://www.rolandberger.com/en/Publications/The-future-of-Europe%27s-decentralized-energy-market.html>.

(15)

Chapter 2: State aid law in support of the energy transition

This chapter zooms in on the interplay between State aid control of capacity mechanisms and the energy transition. This investigation will be two-levelled. First, the impact of State aid regulation of capacity mechanisms on transforming the energy market is analysed in practice. Secondly, the appropriateness of the ‘State aid tool’ for this purpose is examined, assessing to which extent State aid law should be an answer to the EU’s sustainable energy challenges.

2.1 The potential of the State aid regime

2.1.1 State intervention in energy markets

Repairing energy market failures

While State aid is in principle prohibited where it distorts competition and affects trade between Member States,42 State aid law is based on the premise that markets may not always work properly when left alone and in some occasions need a form of State intervention.43 As a result, Member States may identify certain functions in the market that cannot be dealt with by free market dynamics or market reforms; and repair so-called ‘residual market failures’ through targeted aid measures.44_{Also with}

respect to energy and environmental objectives, effective, time-bound State intervention is considered to possibly help energy markets to reach a certain desired stage- where after competition can take over again.45 The latest State Aid Scoreboard indicates that, indeed, Member States increasingly introduce State aid for this purpose.46

42_{Article 107(1) TFEU.}

43_{Article 107(2) and (3) TFEU.}

44_{Kim Talus, Introduction to EU Energy Law (First edition, Oxford University Press 2016) 111; Kelyn} Bacon, European Union Law of State Aid (Third edition, Oxford University Press 2017) 8.

45_{Communication from the Commission – Guidelines on State aid for environmental protection and} energy 2014- 2020 [2014] OJ C 200/1 ('EEAG') 35; see also Sanmeet Kaur, ‘Using State Aid to Correct the Market Failure of Climate Change’ [2009] Review of European Community & International Environmental Law 268.

46_{The scoreboard indicates that in 2017 Member States spent €116.2 billion on State aid, of which 53%} was attributed to State aid for environmental and energy purposes. See Commission, ‘State Aid

Scoreboard 2018: Results, Trends and Observations Regarding EU28 State Aid Expenditure Reports for 2017’ (n 9).

(16)

To prove the need for State aid in the energy market, Member States must first establish the existence of residual market failures ‘hampering an increased level of

environmental protection or a well-functioning secure, affordable and sustainable internal energy market.47 Such failures may be different in nature and address

different kinds of energy objectives. For example, State intervention may be desired to repair failures hindering sustainability objectives, on the basis of which ‘environmental aids’, such as support for renewable energy sources, can be considered appropriate.48 In other cases, State aid measures may address energy security concerns, according to which measures providing ‘generation adequacy’, or ‘resource adequacy’49, for instance in the form of capacity mechanisms, may be deemed necessary.50_{This research will focus on the latter type of intervention.}

State aid for resource adequacy: capacity mechanisms

Security of supply, involving the ‘uninterrupted availability of energy sources at an

affordable price’, is vital for a well-functioning energy market.51 When markets fail to provide circumstances that guarantee this availability, ensuring security of supply is recognized as a legitimate objective of general economic interest to justify the introduction of State aid.52

Indeed, in recent years an increasing number of Member States have taken State aid action to secure their energy supplies.53 Partly, and perhaps paradoxically, this is due to the changing energy mix that is the result of the Clean Energy Transition.54 With the increasing share of renewables on the market, electricity generation in many

47_{EEAG 35.}

48_{See for instance ibid 3.3.}

49_{The EEAG use the terminology ‘generation adequacy’. Under the recast Electricity Market} Regulation (discussed in para. 2.1.2), the term ‘resource adequacy’ is used. As this change reflects a change in EU policy and is now the adequate legal terminology, ‘resource adequacy’ will be used throughout this thesis.

50_{EEAG 1.2 and 3.2.2.}

51_{IEA, ‘What Is Energy Security?’ <https://www.iea.org/topics/energysecurity/whatisenergysecurity/>} accessed 4 July 2019.

52_{Talus (n 44) 115; Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms’ (n 12)} 2.

53_{Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms' (n 12) 2.}

54_{The increase of renewables has pushed capacity out of the market. That same capacity may however} ensure the secure integration of renewables in the market. See further Francisco Enrique González-Díaz, ‘EU Policy on Capacity Mechanisms’ in Leigh Hancher, Adrien De Hauteclocque and Małgorzata Sadowska (eds), Capacity mechanisms in the EU energy market: law, policy, and economics (Oxford University Press 2015) 3-7.

(17)

countries is shifting from a system of relatively stable and continuous supply towards supplies from diverse and variable energy sources.55_{To secure that the electricity}

supply matches demand at all times and blackouts are avoided, systems securing resource adequacy can be put in place. A way to do this is for Member States to design mechanisms that support investments that can fill expected capacity gaps.56 Typically, these mechanisms remunerate generators or suppliers for their availability in case of demand peak.57 As this form of intervention – conferring certain market players with a remuneration (capacity payments) they would not receive on the market under normal conditions (where their only revenues accrue from the sale of electricity or services,58 not of their mere availability) – however generally involves State aid,59 the Commission reviews the compatibility of these mechanisms with State aid rules.

2.1.2 State aid control to advance the energy transition

State aid control shaping energy markets

As all State aid measures must be notified to the Commission, which is the only authority to rule on their compatibility with the internal market,60 the Commission holds a powerful mandate to regulate, and thereby shape, the European energy market. Accordingly, if it exercises its role in a way that is consistent with and in support of the Paris decarbonisation commitment and the EU’s climate and energy framework, it can also shape the clean energy market. First, it can enable entities stimulating the energy transition to use the State aid framework to their advantage, promoting aid for ‘green’ initiatives such as energy efficiency projects and renewable technology initiatives. Second, it can safeguard State support takes the form of ‘good

55_{EEAG 216.}

56_{‘Capacity mechanism' is an umbrella term for various schemes with different features, such as} capacity auctions, capacity payments and generation reserves. See for an overview Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms’ (n 12) 9.

57_{Commission, ‘State Aid to Secure Electricity Supplies’}

<http://ec.europa.eu/competition/sectors/energy/State_aid_to_secure_electricity_supply_en.html> accessed 9 June 2019.

58_{Market players such as demand side management (or response) operators (‘DSR’) and storage} operators can provide capacity and be eligible to capacity mechanisms whereas they do not sell electricity (they do not produce any) but sell other types of services on the energy market such as, respectively, management of reduction of consumption and storage. See for more on DSR para. 3.2.2. 59_{This will be showed in para. 3.1.}

(18)

aid’, effectively monitoring and, if necessary, prohibiting State measures that hinder this transition.61 _{In this regard, both the Commission’s framework of assessment,}

paving the way on how Member States should design aid measures; as well as its decisions in individual cases, prohibiting or allowing62 aid measures while creating an example for future ones, can have a significant impact.63

State aid control of capacity mechanisms

In areas of the energy market where State aid law frequently comes into play, such as capacity mechanisms,64 the guarding role of the Commission may even be considered as critical as formal EU laws on climate and energy.65 Concerned about these mechanisms’ effects on competition, but also about their potential to hinder the Clean Energy Transition – depending on how they are designed –, State aid oversight of capacity mechanisms can significantly influence the attainment of the Paris climate objectives.

Why would capacity mechanisms slow down the transition to a zero carbon energy market? As mentioned, capacity mechanisms often involve the granting of aid to generators or suppliers for keeping available in cases of need, i.e. peak demand. As such, they do not necessarily hinder the Clean Energy Transition. However, the case for capacity mechanisms appears more problematic when they function as mere State aid measures for polluting, often incumbent power plants using fossil fuels that, without the mechanisms, would be unprofitable against the rise of renewable

61_{See inter alia Matthias Buck, Andreas Graf and Patrick Graichen, ‘European Energy Transition 2030:} The Big Picture. Ten Priorities for the next European Commission to Meet the EU’s 2030 Targets and Accelerate towards 2050’ (Agora Energiewende 2019) 66

<https://www.agora-energiewende.de/fileadmin2/Projekte/2019/EU_Big_Picture/153_EU-Big-Pic_WEB.pdf>; ClientEarth (n 10); Marta Villar Ezcurra, ‘EU State Aid and Energy Policies as an Instrument of Environmental Protection: Current Stage and New Trends’ [2014] EStAL 665, 666.

62_{In principle, the Commission shall ‘authorise’ an aid scheme before it is implemented by a Member} State. However, not all schemes are notified (in breach of the standstill obligation of Article 108(3) TFEU) but the Commission may nonetheless issue a decision declaring the aid compatible with the internal market, a posteriori – hence the use of the generic term of ‘allowing’ here. Bacon (n 44) 442, 448.

63_{Matthias Buck, Andreas Graf and Patrick Graichen (n 61) 66.}

64_{As was mentioned in para. 2.1.1. and will be explained in para. 3.1, public intervention in energy} markets via capacity mechanisms generally involves State aid.

(19)

substitutes.66_{Allowing such plants to continue trading via strategic reserves or to get a}

parallel revenue stream without this being strictly necessary to ensure energy security, could slow down the attainment of the Paris objectives. Not only would it undermine the call for an urgent transition away from fossil fuels67 with the phase-out of subsidies68, but it could also forge price distortions affecting the market for cleaner energy substitutes.69

To address these concerns, the EU recently adopted new objectives and principles for capacity schemes in the recast ‘Electricity Market Regulation’ (‘EMR’) as part of the CEP.70 Most notably, Chapter 4 includes the introduction of a CO2 emission

performance standard (‘EPS’), prohibiting power plants emitting more than 550g of fossil fuel origin per kilowatt-hour from receiving (future) payments under capacity mechanisms.71 The standard starts applying for new power plants from 4 July 2019 at the latest and for existing ones from 1 July 2025.72 Commitments and contracts concluded before 31 December 2019 under existing capacity mechanisms are exempted.73 The new Regulation applies from 1 January 2020.74

Accordingly, today’s EU energy policy prohibits heavily polluting plants to participate in capacity schemes. State aid policy, in turn, can warrant capacity mechanisms do not become a form of illegal State aid undermining this legislation.75 It can make sure unlawful schemes are notified to the Commission, and if necessary prohibited, and that existing schemes are amended76, when in conflict with the EMR

66_{Frédéric Simon, ‘Capacity Markets: A Necessary Evil in the Energy Transition?’, (Euractiv, 10} September 2018) <https://www.euractiv.com/section/electricity/news/capacity-markets-a-necessary-evil-in-the-energy-transition/>.

67_{Rogelj and others (n 23) 149.} 68_{EEAG, 220.}

69_{Martina Zahno and Paula Castro, ‘Renewable Energy Deployment at the Interplay between Support} Policies and Fossil Fuel Subsidies’ in Stefan Weishaar and others (eds), The Green Market Transition (Edward Elgar Publishing 2017) 98.

70_{Regulation 2019/943 of 5 June 2019 on the internal market for electricity (‘EMR’).} 71_{ibid Article 22(4).}

72_{ibid respectively Articles 22(4) (a) and (b). The determination criteria between ‘existing’ and ‘new’} generation capacity is whether the plant started commercial production before or after 4 July 2019. 73_{ibid Article 22(5). This is the so-called ‘grandfathering clause’.}

74_{ibid Article 71. According to Article 71(2), some provisions including the EPS already apply since 4} July 2019.

75_{Karel Beckman, ‘The New EU Electricity Market Design: More Market – or More State?’} (energypost.eu, 13 March 2018) <https://energypost.eu/the-new-eu-electricity-market-design-more-market-or-more-state/>.

76_{To this end, the Commission introduced a ‘revision clause’ in four decisions authorizing capacity} mechanisms in France, Poland, Germany and Italy. See respectively Commission’s decisions of 7 February 2018 on SA.48490 (footnote 26); SA.46100 (para. 133 and footnote 32); SA.45852 (footnote

(20)

and/or the Paris climate objectives. If this is effectuated, State aid control of capacity mechanisms provides for a way in which the State aid regime can contribute to the Clean Energy Transition in an effort to meet the Paris climate objectives.77

2.2 The appropriateness of the ‘State aid tool’

Hence, in practical terms, the State aid regime provides for a meaningful tool to contribute to the Clean Energy Transition. Next, it is important to analyse whether it should also be actively deployed to this end. First, it will be assessed whether environmental energy considerations should play a (more significant) role in State aid analysis of capacity mechanisms. Second, it will be assessed whether it is appropriate to use the State aid regime as a form of policy tool in this field.

2.2.1 Environmental objectives in State aid analysis

In contrast to the remainder of competition provisions, State aid law is based on the premise that besides economic considerations, also non-economic concerns may play a role in State aid analysis.78 While State aid is in principle prohibited pursuant to Article 107 (1) TFEU, sub (2) and (3) of this provision explicitly allow certain non-economic (policy) objectives to justify an aid measure.79

Moreover, additional ‘evidence’ can be found in the Treaties supporting the premise that environmental objectives can, and perhaps should, play a significant role in State aid analysis. The central provision in this regard is Article 11 TFEU, according to which environmental protection requirements ‘must be integrated into the definition

14 as per corrigendum); and SA.42011 (footnote 14)

<http://ec.europa.eu/competition/sectors/energy/state_aid_to_secure_electricity_supply_en.html> accessed 17 July 2019.

77_{It should be stressed that, certainly, there are various other ways in which the EU State aid regime} could potentially contribute to the Clean Energy Transition. As this research however solely focuses on the role of State aid control over capacity mechanisms, these options are not discussed.

78_{Articles 101 and 102 TFEU. It should be noted that, as a result, the (theoretical) debate on the level} of integration of environmental objectives in competition analysis has proven more contentious. See for an analysis of different approaches for instance Suzanne Kingston, Greening EU Competition Law and Policy (Cambridge University Press 2011) and Julian Nowag, Environmental Integration in

Competition and Free-Movement Laws (Oxford University Press 2016). 79_{See Kingston (n 78) 379.}

(21)

and implementation of the Union’s policies and activities’. 80_{Similar environmental}

integration obligations can be found in Article 37 of the Charter of Fundamental Rights (‘CFR’), calling for a ‘a high level of environmental protection and the

improvement of the quality of the environment into the policies of the Union’ and

(more indirectly) Article 9 TEU, stating that ‘in defining and implementing its policies

and activities, the Union shall take into account requirements linked to […] and the protection of human health’.81 These provisions are guided by the general obligation resting on the Union to ‘ensure consistency between its policies and activities, taking

all of its objectives into account and in accordance with the principle of conferral of powers’, as enshrined in Article 7 TFEU.

The impact of these provisions on State aid control over (potentially environmentally harmful) capacity mechanisms is twofold. First, the Union arguably82 has the obligation – as it has in all other policy areas – to integrate environmental protection requirements into State aid law and practice; thus including the Commission’s review of State aid in the form of capacity mechanisms.83 Second, as the EU should promote consistency between its different policies and activities, increased coordination between State aid law and EU (sustainable) energy policy should be fostered. This seemingly supports the proposition that the State aid regime can and should play a role in the enforcement of EU energy legislation, including the EPS for power plants receiving capacity payments laid down in the recast EMR.

80_{For a discussion on the legal status of Article 11 and its influence on competition rules, see for} instance Beate Sjåfjell and Anja Wiesbrock (eds), The Greening of European Business under EU Law: Taking Article 11 TFEU Seriously (Routledge 2015); Nele Dhondt, Integration of Environmental Protection into Other EC Policies - Legal Theory and Practice (Europa Law Publishing 2003); David Grimeaud, ‘The Integration of Environmental Concerns into EC Policies: A Genuine Policy

Development?’ [2000] European Energy and Environmental Law Review 207; Kingston (n 78). 81_{For an overview of the guidance provided by the Treaties on environmental protection, see Sander} RW Van Hees, ‘Sustainable Development in the EU: Redefining and Operationalizing the Concept’ [2014] Utrecht Law Review 60.

82_{The Union is not necessarily of this opinion. See in this respect Aarhus Convention Compliance} Committee, Communication ACCC/C/2015/128

<https://www.unece.org/environmental- policy/conventions/public-participation/aarhus-convention/tfwg/envppcc/envppcccom/acccc2015128-european-union.html> accessed 17 July 2019.

(22)

2.2.2 State aid control as a policy tool

Subsequently, it should be asserted whether it is appropriate to use the State aid regime as a form of policy instrument to promote the energy transition in this way. While an integrated approach is supported, it is still important to consider EU competency rules to understand which actor should improve current patterns.84

Energy security as a national matter – or is it?

While the EU and the Member States share responsibility with respect to environmental and energy matters, the Commission has exclusive competence in the area of State aid.85 It can take State aid decisions in a quasi-judicial way,86 and is not refrained from applying the State aid rules to various sectors, nor to harmonised areas exclusively.87 With regard to State aid in the energy and environmental domain, it bases its decisions nearly always on its Guidelines, which are arguably more than a description of its State aid policy, but rather a way ahead to shape energy markets by virtue of State aid law.88 The question rises whether such ‘policy-making’ is in accordance with the well-founded principles of subsidiarity89 and the division of competences between the Member States and the EU.90

Potential friction with these principles is particularly delicate when it comes to energy – which is a shared competence according to Article 194 TFEU – and the control of national capacity mechanisms. Providing energy security is ultimately a responsibility of the Member States: if there is a blackout, citizens will hold their governments, and

84_{See also Marta Villar Ezcurra (n 61) 672.} 85_{Article 3 and 4 TFEU.}

86_{Stephen Tindale, ‘State Aid for Energy: Climate Action Is More Important than the Single Market’} (Centre for European Reform, 2015) 1

<https://www.cer.eu/sites/default/files/publications/attachments/pdf/2015/state_aid_for_energy_sct_22. 02.15-10650.pdf>.

87_{Christian Koenig, ‘Where Is State Aid Law Heading To’, EStAL 611.}

88_{See for this argument Christian Koenig (n 87); and Francesco Salerno, ‘The 2014 State Aid} Guidelines: How “Soft Law” Turns into “Hard Law”’ (Florence School of Regulation, 25 January 2018) <https://fsr.eui.eu/2014-state-aid-guidelines-soft-law-turns-hard-law/>.

89_{Article 5(3) TEU. The subsidiarity principle serves to regulate the exercise of the EU’s shared} powers, ruling out Union intervention when an issue can be dealt with effectively by Member States, while allowing it to act when this is not the case.

90_{Article 4 TEU. The division of competences has to be read in light of the principle of conferral, laid} down in Article 5 TEU, which States that the EU can only act within the limits of the competences that the Member States have conferred upon it in the Treaties.

(23)

not the EU, accountable. 91_{It is not up to the EU to determine the internal energy mix}

or the general structure of energy supply of its Member States.92_{Resultantly, an}

overly strict approach towards national capacity mechanisms could particularly agitate competency discussions and political commotion. Arguably, the Commission would overstep its competences if it were to use its exclusive State aid powers to interfere in the design of measures set up to deliver on policy considerations that are primarily of a domestic nature. Nevertheless, some form of compromise has been found in the recast EMR, which provides that Member States shall have regard to a European-wide adequacy assessment (to determine whether there is a regional adequacy problem), against which differing national assessments shall be reconciled.93 Likewise, they must have regard to cross-border capacity and integrate foreign operators and interconnections into their capacity markets, meant to ensure a better integration of resources and a deepening of the Energy Union.94

Striking the right balance

While the EU must respect that the introduction of capacity mechanisms is ultimately a national decision, this does not mean Member States should be given free rein in designing their schemes. They may involve State aid, and (only) if so, are – as any other State aid measure – subject to the assessment of the Commission. It is in this instance the Commission’s task to steer a fine line between permitting States to intervene in the market in the case of legitimate security of supply concerns, while safeguarding their measures do not constitute unlawful State aid. This is all the more important considering State intervention ‘getting it wrong’ in this field can considerably impact the future of a clean energy market.95

In conducting this balancing act, the Commission should – as argued in the previous paragraph – be allowed to adopt an integrated approach, and allay concerns over security of supply with competition as well as environmental concerns. After all, the

91_{Frédéric Simon (n 66).}

92_{Article 194(2) TFEU.} 93_{EMR Articles 23, 24} 94_{EMR recital 8, 32.}

(24)

Commission is a driver of all European common values and should be able to reflect those values accordingly.96

Conclusion

In conclusion, the proposal of this chapter is not to suggest that the State aid regime should altogether fill the gaps of EU (sustainable) energy policy. Ambitious policy-making in this area remains crucial, and relying too extensively on State aid regulation creates the risk of agitating undesirable competency discussions. However, given the clear mandate in the Treaties to integrate environmental protection in all policy domains and considering the impact of State aid resource adequacy regulation on the shaping of energy markets, adopting a sectorial approach in times that call for urgent action is not to be preferred.

Consequently, this research advocates that it is appropriate to use the State aid control of capacity mechanisms as a tool to contribute to the Paris climate targets, in particular by ensuring capacity schemes are designed in conformity with the decarbonisation objective and EU energy legislation. In order to assess whether the current State aid regime demonstrates such an integrated approach, the next chapter shall outline the legal framework and current practice in this area.

96_{Talus (n 44) 210.}

(25)

Chapter 3: State aid for capacity mechanisms: legal framework

& analysis

This chapter outlines the legal framework in which capacity mechanisms are assessed to determine whether they amount to State aid, and if so, whether that aid is compatible with the internal market. Article 107 TFEU and its application shall be put under the microscope, discussing firstly the definition of aid and secondly potential justifications. The analysis shall emphasize on whether the current framework can be, and is, used to ensure national capacity mechanisms are adopted in conformity with the decarbonisation objective and in support of EU energy legislation.

3.1 Article 107(1) TFEU: the notion of State aid

In order to constitute State aid, a measure must fulfil four cumulative criteria. There must be an intervention by the State through State resources (1); granting an economic advantage to the recipient undertaking (2); favouring the recipient undertaking or the production of certain goods (selectivity) (3); that is likely to distort competition and affect trade between Member States (4).97

(1) Intervention by the State through State resources

The first condition of Article 107(1) requires the measure to be imputable to the State and financed through State resources.98 It follows from the case law that the notion of ‘State’ includes any public or private body designated or established by the State.99 The concept of ‘State resources’ is intended to cover any direct or indirect measure having impact on the state budget or where the state has significant control.100

The Commission generally considers capacity payments to be an intervention by the State through State resources if they are initiated by or involve the government, which

97_{Additional clarification on the key concepts relating to the notion of State aid is given in} ‘Commission Notice on the Notion of State Aid’ [2016] OJ C 262/1.

98_{Although the wording of Article 107(1) suggests that it applies to aid granted by a State or through} State resources, the CJEU clarified that the two conditions are to be interpreted as cumulative. See C-379/98 PreussenElektra [2001] 58–62; C-126/01 GEMO [2003] 24.

99_{C-78/76 Steinike & Weinlig [1977] 21; C-379/98 PreussenElektra (n 98) 58.} 100_{C-379/98 PreussenElektra (n 98) 58; see also Bacon (n 44) 60–68.}

(26)

keeps a certain level of control over their discharge.101_{This is the case, for instance,}

when the system has been put in place by the State by means of a legislative act, and if the State has influence over issues such as the collection and administration of the capacity payments and the content of the capacity agreements.102

It should be mentioned that the Court has considered certain measures in the renewable energy sector to fall outside the scope of Article 107(1) for not involving ‘State resources’. This approach can be traced back to the PreussenElektra ruling, where the CJEU held that a State measure imposing a legal obligation on electricity suppliers to purchase electricity from renewable sources at fixed minimum prices did not involve the transfer of ‘State resources’ because the advantage was financed by private undertakings.103 Later cases nuanced this narrow reading of the ‘State resources’ criterion, 104 but in a recent case concerning German legislation obligating network operators to pay a feed-in tariff to the operators of renewable energy installations, the CJEU adopted an unexpected restrictive approach again.105 It held that the State did not hold power over the generated funds106 or control over the recipients,107 because the German scheme did not oblige the entities managing the support systems to collect surcharges from end consumers to recover their costs- despite the fact that effectively, the monies were being recovered.108 The case attracted considerable criticism – as did PreussenElektra – for potentially providing a (formalistic) format for Member States to design aid schemes in a way that would allow them to escape scrutiny by the Commission, which could potentially also obstruct the review of capacity mechanisms. 109 _{However, considering the}

particularities of the two German schemes that ‘succeeded’ in failing the State resources criterion, and the absence of precedents suggesting a similar approach regarding capacity generation measures, the likeliness of capacity mechanisms to

101_{Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms’ (n 12) 7.} 102_{See for instance Commission Decision of 23 July 2014 on SA.35980 110, 111; Commission} Decision of 7 February 2018 on SA.46100 117.

103_{C-379/98 PreussenElektra (n 98) 58–66.}

104_{C-206/06 Essent Netwerk Noord et al v Commission [2008]; T-25/07 Iride and Iride Energia v} Commission [2009]; C-262/12 Vent De Colère and Others v Commission [2013]; See also Guendalina Catti De Gasperi, ‘Overview of State Aid to Particular Sectors: Environment and Energy’ in

Competition and State Aid - An Analysis of the EU Practice (Second edition, International Competition Law Series 2015) 354.

105_{C-405/16 P Germany v Commission [2019].} 106_{ibid 73.}

107_{ibid 77.} 108_{ibid 71.}

(27)

escape qualification as ‘State aid’ for failing to meet the ‘State resources’ criterion is doubtful. Only if the mechanism would involve ‘purely ancillary services’ carried out by a transmission system operator (‘TSO’)110 without influence of the State, the capacity payments would likely fail qualification as State aid.111

(2) Economic advantage granted to an undertaking

The second element of Article 107(1) requires the State measure to grant an economic advantage to an undertaking. Both the concepts of ‘undertaking’ and ‘economic advantage’ have given rise to considerable case law,112 but the latter is particularly relevant with respect to the assessment of measures for resource adequacy. Generally, a measure that allows capacity providers to receive compensation beyond what they would normally obtain in the market will confer on them ‘an economic advantage’.113 Whether this is the case will be determined by the effects of the measure;114 its causes and aims, including any energy or environmental considerations, cannot shield it from fulfilling the economic-advantage element of Article 107(1).115

However, an exemption to economic transactions constituting an ‘advantage’ is the so-called Altmark route. This route refers to four cumulative criteria laid down by the Court in the like named case that can shield compensation for ‘services of general economic interest’ (‘SGEIs’) from classification as State aid. The essence of Altmark is that financial compensation by the State cannot be qualified as State aid if it can be seen as a mere compensation for the costs of an SGEI.116 The Altmark criteria have been applied in many cases in practice, including cases concerning capacity schemes. For instance, in 2003 the Commission accepted an Irish reserve generation capacity

110_{A TSO is an entity responsible for the operation and maintenance of the transmission system in a} given area and for ensuring this system is able to meet long-term demands for the transmission of electricity. See Directive 2009/72/EC of 13 July 2009 on the internal market in electricity Article 2(4). 111_{Commission, ‘Final Report of the Sector Inquiry on Capacity Mechanisms' (n 12) 7.}

112_{Bacon (n 44) 22.}

113_{See for instance Commission Decision of 23 July 2014 (n 102).}

114_{C-173/73 Italy v Commission [1974] 13; C-56/93 Belgium v Commission [1996] 79; C-241/94} France v Commission [1996] 20.

115_{Sjåfjell and Wiesbrock (n 80) 95; Nowag (n 78) 93, 94.}

116_{See Talus (n 44) 106; For more information on the Commissions assessment of the Altmark criteria,} see: Commission, ‘Guide to the Application of the European Union Rules on State Aid, Public

Procurement and the Internal Market to Services of General Economic Interest, and in Particular to Social Services of General Interest' SWD(2013) 53 final/2; Commission, ‘Communication from the Commission on a European Union Framework for State Aid in the Form of Public Service

(28)

scheme to meet the Altmark criteria, considering the scheme was an adequate measure to ensure security of supply, which ‘in itself could be considered an SGEI’.117

Similar to the Altmark route is the overall derogation for public-service functions contained in Article 106(2) TFEU, on the basis of which the Commission can essentially set aside State aid rules if this is required for the proper functioning of an SGEI, such as ‘security of supply’.118 In fact, this was applied in a case concerning a Spanish measure that benefited the production of electricity from indigenous Spanish coal. The Commission found the measure to constitute aid, as not all Altmark criteria were met, but considered it was nevertheless compatible on the basis of Article 106(2) as it constituted an SGEI necessary to secure electricity supply in Spain.119 Castelnou

Energía, owner of a combined cycle plant and backed by Greenpeace Spain,120

brought an action to annul the decision, highlighting that the Commission should have opened a formal investigation to examine whether security of supply could also have been guaranteed in a ‘greener’ way.121 The GC dismissed the action, upholding the Commission’s finding that the measure constituted a necessary SGEI.122 The ruling, not being appealed before the CJEU, arguably opened the door for – potentially environmentally damaging – measures securing electricity capacity to be justified on the basis of their ‘SGEI mission’, despite possible friction with State aid rules. In fact, in a recent decision of 10 May 2019, the Commission considered that Slovakia could temporarily entrust an electric utility company with an SGEI to ensure security of supply from indigenous fuel sources in a particular geographic area.123

Notably, the Castelnou Energía case also provided insight on the Court’s stance with respect to the interaction between State aid policy and other Treaty provisions and EU secondary legislation more broadly. The GC, asked by Castelnou Energía to take the environmental integration principle of Article 11 TFEU into account, ruled that, where the objective of the aid is not environmental, the Commission is not obliged to

117_{Commission Decision of 16 December 2003 on N 475/2003 35.}

118_{As article 106(2) is, in fact, a derogation of the Article 107(1) prohibition, it would be more accurate} to discuss this provision under the derogations in paragraph 3.2. However, as the 106(2) and the Altmark requirements are substantially alike, it is chosen to discuss this option here.

119_{Commission Decision of 29 September 2010 on N 178/2010.}

120_{See for their stance on the case Daniel Simons, ‘Should the European Commission Wear Green} Goggles More Often?’ (6 October 2014)

<https://www.greenpeace.org/archive-international/en/news/Blogs/makingwaves/Castelnou-Energia-v-Commission/blog/50868/>. 121_{T-57/11 Castelnou Energía v Commission [2014] 46.}

122_{ibid 173.}

(29)

take the EU environmental rules into account in its assessment. The consideration of non-State aid rules is, according to the GC, limited ‘to those rules capable of having a

negative impact on the internal market’.124 The decision has been subject to criticism as it seemingly considers environmental protection to not be a part of the internal market, when in fact Article 11 TFEU requires environmental protection to be integrated into all EU policies and activities; which together create the internal market.125

(3) Selectivity

In order to constitute aid, a State measure must also be selective; that is, that it benefits only ‘certain undertakings or the production of certain goods’ rather than all undertakings in a ‘comparable legal and factual situation’.126 If a capacity system only confers an advantage on economic operators in a certain sector of the economy127 or allows only certain (groups of) undertakings to participate,128 the material selectivity criterion is generally fulfilled.129 Only when the differential treatment can be justified by the ‘internal logic of the system’ – for example, when certain plants are excluded on the basis of objective criteria such as plant efficiency and flexibility – the criterion of selectivity may not be met.130

Furthermore, comparable to the economic advantage requirement, only the effects of a measure are relevant when determining selectivity. In Commission v Netherlands and

British Aggregates v Commission, the Court ruled that non-economic objectives, such

124_{T-57/11 Castelnou Energía v Commission (n 121) 187–192.}

125_{Richard Moules, ‘Significant EU Environmental Cases: 2015’ [2016] Journal of Environmental Law} 169, 180. See also para. 2.2.1.

126_{Inter alia C-143/99 Adria-Wien [2001] 48; C-409/00 Spain v Commission [2003] 47.} 127_{See for example Commission Decision of 21 February 2019 on SA.35980 113.} 128_{See for example Commission Decision of 7 February 2018 on SA.46100 120–123.}

129_{C-143/99 Adria-Wien (n 126) 41, 42; see also Antonis Metaxas, ‘Case studies: Greece’ in Leigh} Hancher, Adrien De Hauteclocque and Małgorzata Sadowska (eds), Capacity mechanisms in the EU energy market: law, policy, and economics (Oxford University Press 2015) 299. It should be noted that selectivity can also be established if the advantage is only granted to operators in a certain region, in which case the analysis typically entails the comparison of two regions and/or an investigation of the independence of a certain region. See Nowag (n 78) 100.

(30)

as environmental considerations, cannot as such enable a measure to avoid selectivity classification under 107(1) TFEU.131

(4) Distortion of Competition and effect on trade

The last element in the definition of aid is that the measure must be capable of distorting competition and affecting trade between Member States. For advantages granted to secure electricity capacity it is generally unproblematic to show this is the case, as energy is a tradable good and the EU market is liberalised.132

Notification

If the four-part test outlined above is fulfilled, the activity qualifies as State aid in the meaning of 107(1). On the basis of Article 108(3), Member States must notify the Commission of the proposed measure. If the Commission believes the proposal is not compatible with the internal market it will start a formal investigation.133 The State must in that case wait with implementation of the measure until positive response by the Commission.134

Conclusion

Public measures for securing electricity capacity will be considered State aid if all conditions defined in Article 107(1) are satisfied. Considering the various forms and types of capacity mechanisms throughout Europe,135 it depends on the circumstances of the case if – and if so, which of – the criteria will prove difficult to meet. The most likely ‘routes’ for Member States’ schemes to escape qualification as State aid is by

131_{C-279/08 P Commission v Netherlands [2011] 76; C-487/06 P British Aggregates v Commission} [2008] 91, 92.

132_{Talus (n 44) 110; Henrik Bjørnebye, Investing in EU Energy Security: Exploring the Regulatory} Approach to Tomorrow’s Electricity Production (Kluwer Law International 2010) 348, 349; See for example Commission Decision of 23 July 2014 (n 102) 114 where the Commission assumed the criterion to be fulfilled.

133_{Article 108(2) TFEU and Procedural Regulation 2015/1589 of 13 July 2015 Article 4(4).} 134_{Article 108(3) TFEU.}

135_{See for the various mechanisms Commission, ‘Final Report of the Sector Inquiry on Capacity} Mechanisms’ (n 12) 9.

(31)

failure to meet the ‘State resources’ requirement (PreussenElektra and German

Feed-in tariffs) or the ‘economic advantage’ criterion (Altmark), or by beFeed-ing exempted on

the basis of Article 106(2) (Castelnou). Nevertheless, in recent investigations the Commission consistently considered capacity mechanisms to fall within the ambit of Article 107(1), for which it continued to assess their compatibility under Article 107(3).136

Furthermore, an inspection of the case law reveals that the Court is rather prudent to take (environmental) aims and objectives of State measures into account in the process of establishing aid, as was shown particularly in Castelnou Energía,

Commission v Netherlands, Bundesverband Deutscher Banken, and British Aggregates. Accordingly, it is unlikely that the Commission will consider the Paris

climate objectives or EU secondary legislation on energy and environment at this stage.

3.2 Article 107(3): derogations from the general prohibition

The prohibition of Article 107(1) is not absolute. The Treaty provides for three grounds on the basis of which State aids may nevertheless be compatible with the internal market: they may be automatically compatible by virtue of Article 107(2); excluded by the Commissions’ discretion under Article 107(3); or justified by the overall derogation contained in 106(2) TFEU. In addition, certain types of aid falling within the ambit of the ‘General Block Exemption for Environmental Aid’ (‘GBER’)137 are exempted from the notification obligation of Article 108 TFEU, allowing Member States to introduce measures without the Commissions prior approval. 138

136_{For instance, in its clearance of six electricity capacity mechanisms in 2018 the Commission} assessed compliance of all mechanisms under the criteria of the 2014 EEAG. See Commission, ‘Press Release: State Aid: Commission Approves Six Electricity Capacity Mechanisms to Ensure Security of Supply in Belgium, France, Germany, Greece, Italy and Poland’

<http://europa.eu/rapid/press-release_IP-18-682_en.htm> accessed 10 June 2019; see also Arnaud Coibion and John Pickett (n 11) 13; González-Díaz (n 54) 18–29.

137_{Commission Regulation 651/2014 of 17 June 2014 declaring certain categories of aid compatible} with the internal market in application of Articles 107 and 108 of the Treaty.

138_{See Felix Schatz and Ulrich Soltész, ‘State Aid for Environmental Protection—The Commission’s} New Guidelines and the New General Block Exemption Regulation’ [2009] Journal for European Environmental & Planning Law 141, 150.

Greening EU Energy: State Aid Control of Capacity Mechanisms as a Tool to Achieve the Paris Agreement Climate Objectives