Response to DG competition consultation - Draft guidelines on environmental and energy aid for 2014-2020

The Centre for European Reform is a think-tank based in London, working on economics, foreign policy, energy and JHA. We are pro-European, though not uncritical.

State aid rules are important for the single market, which needs to be deepened in energy. But the single market is not the only major goal which the EU has set itself. The Union has also promised a reduction of greenhouse gases by at least 80 per cent by 2050. The Commission therefore needs to balance these objectives in its new guidance. If there is unavoidable conflict between the goals, carbon reduction should be given priority.

There is no industrial policy reason to support mature technologies financially. However, there is a clear climate policy reason. The free market will not deliver low-carbon energy. Nor will the market mechanisms that the EU and member-states currently have in place.

Projects of common European interest
The consultation paper suggests that state aid should be permissible “to promote the execution of important projects of common European interest or to remedy a serious disturbance in the economy of a member-state”.

Climate and environmental projects are in the common European interest, since transboundary pollution blows across the whole continent and climate change effects the whole world. The consultation paper says that a project can be regarded as being in this category if it “contributes in a concrete, exemplary and identifiable manner to the Union interest in the field of environment or energy”. And that the advantages are not limited to the member-state or states implementing the project, but must extend to the Union as a whole. All projects to reduce greenhouse gas emissions benefit the Union as a whole, since climate change will damage every country.

The consultation paper says that projects must be “substantial in size”. It does not say how big is big enough. Presumably any nuclear or CCS project will be sufficiently substantial. The size requirement will be more challenging for energy efficiency and renewable energy. Insisting on large projects is not a sensible approach. Large projects are needed, but so are small ones. The clearest common interest that Europe has is controlling climate change. Otherwise much of the continent will become uninhabitable. Big offshore wind farms and solar power plants are needed. But so are small wind turbines and solar panels, and double-glazed windows. The Commission should never rule that a policy to support small-scale renewables and energy efficiency is against state aid rules simply because the equipment is too small.

Market failure
The consultation paper accepts that state aid measures can correct market failures. However, “the mere existence of market failures…is not sufficient to justify state intervention”. It argues that other policies, such as regulation or market mechanisms, can address the market failure. The Commission is correct that there are always different policy instruments that can be used by governments to meet objectives. But attempts to control climate change need to use all available policy instruments: regulation, market mechanisms and state aid. Lord Stern, lead author of a review of the economics of climate change,1 has described climate change as "a result of the greatest market failure the world has seen”.2 The carbon price under the Emissions Trading System (ETS) is not nearly high enough to internalise greenhouse gas externalities and so address the market failure. The reforms that the Commission has proposed are sensible, but will not come into force (if agreed) until 2020. Climate action is needed immediately, not in six years’ time.

A high carbon price would end dirty energy, but might not encourage enough clean energy. This would cause much human suffering and seriously damage Europe’s competitiveness. As the Stern Review demonstrated, controlling climate change by switching to low-carbon energy will be less expensive than continuing with high-carbon economies and paying to deal with the consequences of climate change. But this does not mean that low-carbon energy will be cheap. Renewables, carbon capture and storage and nuclear projects will in most cases require public financial support. So they will require financial support. The guidelines should recognise that all low-carbon energy projects are in the common European interest. So, unless there is clear procedural unfairness, they should be consistent with state aid rules.

Renewable energy
The consultation paper accepts that the ETS does not yet put a high enough price and carbon emissions, so a market failure remains and state aid can be necessary to meet member-states’ commitment under the renewable energy directive.

The proposed division into deployed and less deployed renewable technologies is reasonable. However, the guidelines should be technology neutral. All renewable technologies should be eligible for on-site feed in tariffs up to five megawatts. Community energy schemes (owned by local government or local community groups) should be eligible up to 10 megawatts.

Generation adequacy measures
Capacity payments will go to coal and gas power stations, so that the stations are available when intermittent renewables are not generating sufficient electricity. They are therefore subsidies for fossil fuels. The EU promised to end such subsidies, at the G20 summit in 2009. Little progress has been made since then, and there is no agreed timetable. But allowing new subsidies to fossil fuels is inconsistent with this commitment.

The consultation paper recognizes this. “The aid to generation adequacy may contradict the objective of phasing out environmentally harmful subsidies notably for fossil fuels. Member States should therefore primarily consider alternative ways of achieving generation adequacy which do not negatively impact on the objective of phasing out environmentally harmful subsidies, such as facilitating demand side management and increasing interconnection capacity.” The draft guidelines also say that “the measure may in principle be open to both new and existing generation”. So state aid could be allowed to keep existing coal power stations open, when they would have closed without the aid. This would not be consistent with climate action.

The guidelines should be much stronger on this point. The words “Member States should therefore primarily consider alternative ways of achieving generation adequacy” should be replaced with “Member States should use alternative ways of achieving generation adequacy: demand side management, electricity storage and increased interconnection capacity”.

The consultation paper also says that member-states should “give preference to low-carbon generators in case of equivalent technical and economic parameters”. Gas generation is not low-carbon, but is lower carbon than coal generation. And gas power stations are quicker and easier to turn on and off than coal stations are, so are better back-up for intermittent renewables. Therefore, if demand side management, electricity storage and increased interconnection capacity are not considered sufficient to provide generation capacity, some capacity payment to gas power stations should be allowed. The guidelines could make this clear. And they should also make clear that capacity payments to new or existing coal-fired power stations will not be allowed.

1 Nicholas Stern, ‘Stern review on the economics of climate change’, HM Treasury, London, 2006 2 Alison Benjamin, ‘Stern: Climate change a 'market failure'’, the Guardian, November 29th 2007.

2 Alison Benjamin, ‘Stern: Climate change a 'market failure'’, the Guardian, November 29th 2007.