Navigating the EU State Aid rules, when implementing a capacity mechanism

Dec 15, 2016

More often than not understanding what to expect from an upcoming EU regulation can be a challenge. I have been through a good number of its energy trading regulations and still at times, I am left wondering, how implementing the next one will unfold. And yes, my expectations often prove wrong. Yet, I keep trying to understand and see the logic of it all. So, when I’ve read that the EU finally approved France’s new capacity support scheme after few changes ensuring its compliance with the EU State Aid regulation, I’ve decided that a quick overview may help us all understand, what are the key rules to be upheld.

A number of generation capacity support measures are expected to appear across the continent, all with the purpose of ensuring energy security. However, all such measures need to be in line with the EU Guidelines on State aid for environmental protection and energy, issued in 2014 in an attempt to ensure that the key principle of free competition across the Union is preserved. This regulation defines the conditions under which state aid for supporting additional capacity is permissible. Its objective is to correct for the inability of the energy market at its current state of liberalization to adequately compensate investors for bringing additional capacity on the market. One of the EU MS, which attempted this State Aid puzzle is France. It introduced a Capacity market obligation mechanism to ensure there is enough of it to satisfy its peak load. The measure introduced was supposed to steer clear from all EU state aid requirements by being structured as public service obligation. However, the latter did not stop the EU Commission to put France’s first capacity guarantee auction on hold until it reviews the entire mechanism for compliance with the State Aid regulation. Why and what a country considering any capacity support mechanism may expect in the light of the above?

So, in a nutshell, the State aid regulation requires:

  • The measure to be open to all technologies possible including demand response, energy storage and additional interconnection;
  • The support amount to be as little as economically possible;
  • The mechanism to be open to participation from operators across the Union, if this is physically feasible;
  • The country introducing the mechanism to do a thorough analysis beforehand on any currently existing market distortions, which may have caused the capacity shortage and address these upfront;
  • The aid not to have a negative effect on the competition in the EU energy market;
  • The measures to be effective in attracting new capacity;
  • The measures to reward only capacity and not generation of electricity;
  • The measures to give preference to renewable capacity, when everything else is being equal.

The requirements are clearly in line with the overall energy policy of the EU for free market competition, with the goal for creating a joint EU energy market and encouraging environmentally friendly ways of meeting the EU energy demand. The goals are clear, the way to achieve them not so much. There is a lot of ambiguity about how to reliably evaluate the impact of the existing market distortions or intended measures, provided the complexity of the system. This is exactly the point, which attracted the scrutiny of the European Commission in the case of France.

In its press publication from 13th of November 2015 the EU Commission has expressed its concern that the capacity mechanism may distort competition and prevent certain market players from entering the energy market. It is the commission’s concern, that French capacity mechanism may not be done in the most cost-effective and competitive way. Furthermore, the Commission suspects that the mechanism may not result in additional capacity entering the grid. On the 8th of November 2016, the Commission finally announced its approval for the French capacity mechanism. The changes, which secured this approval, are allowing for new market players and foreign capacities to enter the scheme and introducing a series of measures to prevent possible market manipulation.

This investigation and the following approval mean that the French mechanism is indeed considered a state aid (1) and its necessity (2) appears to be justified in the Commission’s view, while corrections needed to be introduced to address its efficiency (3) and effectiveness (4). The conclusion is that the Commission will uphold its requirements, even when considered contradictory by some. Not doing so will directly undermine its goal of creating a single European energy market. Additionally, capacity support mechanisms being a novelty in Europe will have to go through several iterations before settling upon a mechanism, which will meet the requirements of all stakeholders.

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Written by Snezhina Mileva
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