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Simon Evans

30.07.2014 | 11:25am
UK policyWhat does the state aid ruling on UK energy subsidies mean?
UK POLICY | July 30. 2014. 11:25
What does the state aid ruling on UK energy subsidies mean?

Last week two UK energy subsidy schemes got the green light. They are at the heart of government plans to cut energy emissions while minimising consumer bills and keeping the lights on.

But before the UK could press ahead with its plans it needed approval under EU rules designed to prevent government support or ‘state aid’ that unfairly favours particular industries.

It’s all an “immensely complicated business”  according to Conservative peer Lord Jenkin who says he’s spent many months trying to understand the details of the government’s reforms.

We didn’t want to do the same – and you probably don’t either. So we asked for help from state aid legal expert Erika Szyszczak, barrister at Littleton Chambers and professor of law at the University of Sussex.

What are the schemes designed to do?

The twin pillars of the government’s electricity market reforms are contracts for difference (CfDs) and the capacity market.

CfDs are the government’s new system for supporting low-carbon energy. They will provide a guaranteed ‘strike price’ for each unit of electricity generated. Seven large projects were offered early CfDs in May and regular auctions for other projects will begin in the autumn.

The capacity market is designed to ensure there is always enough capacity on the grid to satisfy peak demand. It will auction contracts of one, three or 15 years to suppliers that promise to make power available in future. The first auction will be held in December for 50.8 gigawatts of capacity to be available in 2018-19.

If you want to know more, we suggest you read our more detailed  efforts. If you insist, here’s the government’s mind-bogglingly complex attempt to explain the reforms.

Why did the schemes need approval from the EU?

The commission allows certain kinds of state aid that help the EU meet its broader economic or environmental goals, like EU emissions or renewable energy targets. Major subsidy schemes such as the capacity market and CfDs are checked on a case by case basis to see if they can be allowed.

Szyszczak tells us:

“CfDs and the capacity market are some of the first schemes to be considered under new guidelines on state aid for environmental protection and energy, which became applicable on 1 July 2014. The aim of the new rules was to modernise the use of state aid in the energy field and not to assume automatically that alternative forms of energy need support.”

She’s written a longer description of the changes here. But you can get a flavour of what the new rules mean from Szyszczak’s heading: “time for renewables to join the market”. As environmental policy journal ENDS Report explains, the upshot is that by 2017, all large-scale renewables will have to compete for subsidies.

What did the commission decide?

Both UK schemes were approved. The details of the rulings won’t be available for a few months, making detailed analysis impossible. But it’s fair to say the commission is a big fan of the UK’s plans.

Commission vice-president in charge of competition policy Joaquín Almunia said:

“The UK CfDs encourage all renewable energy technologies producing electricity to compete against each other for support beyond 2016. It is a fine example of how to promote the decarbonisation of the economy with market-based support mechanisms, at the lowest possible cost for consumers.”

In a separate statement Almunia said :

“The UK capacity market embraces the principles of technology neutrality and competitive bidding to ensure generation adequacy at the lowest possible cost for consumers, in line with EU state aid rules.”

But some hope that the UK will have had to make some concessions – like limiting capacity payments to coal – in order to get approval for the schemes. We will have to wait to find out.

How were the schemes designed to meet state aid rules?

It’s key to the acceptance of the UK schemes that the support is being given through market-based mechanisms, Szyszczak says. She adds that money is or will be allocated transparently, competitive procedures such as auctions will be used to select the recipients of the aid and renewable power from other member states sent through undersea cables will not be discriminated against.

Szyszczak says:

“Established technologies including onshore wind, solar panels and small hydropower plants will compete for contracts in a common auction. Less established, new and innovative technologies  like offshore wind, wave, tidal stream and geothermal energy will initially benefit from allocated budgets in order to promote their development.

“Coal plants converting to burn biomass will be supported through dedicated tenders up to 2017. After that date the UK will evaluate whether biomass can be included in the common tenders for established technologies.”

Is everyone happy with the UK’s plans?

The commission has been satisfied the schemes meet its state aid requirements but that doesn’t mean everyone is happy with them. In June the UK National Audit Office (NAO) complained that early CfDs had been allocated “without price competition”.

There was a competitive auction between schemes vying to secure fixed-price CfDs – something the commission recognised. But whereas the commission was satisfied with competition between projects the NAO wanted competition on price too, to drive down costs.

Decisions on state aid in the commission revolve around issues of transparency and non-discrimination, says Szyszczak, whereas member states are also worried about value for money.

Another problem with the early CfD awards identified by the NAO is that they will eat up 58 per cent of the total budget for renewables support. There are fears that leaves hardly any money for other schemes. Only £50 million per year will be available for onshore wind and solar until 2020 with £150 million for things like offshore wind.

The capacity market hasn’t escaped criticism either. Concerns centre around its potential to help old coal plants stay open into the late 2020s and beyond, when the UK is supposed to be decarbonising its electricity supply by 2030.

What is the significance of the state aid rulings?

CfDs and the capacity market are the most important parts of the government’s electricity market reform plans. If they hadn’t been signed off, four years of work would have gone out the window and the future of the UK’s energy system would have been thrown up in the air.

Luckily the UK was successful in securing the commission’s agreement. Szyszczak says:

“Usually when a member state wants to implement a scheme that will need state aid approval they will negotiate with the commission beforehand.”

Problems begin if there is a big disagreement in these negotiations, as there has been over UK plans to subside a new nuclear plant at Hinkley Point in Somerset. The commission has yet to decide if this would count as illegal state aid or not but in February it issued a damning preliminary verdict on the nuclear plans.

If a member state wants to push its point of view it can apply for state aid approval anyway and then appeal the decision if the commission makes an adverse decision on a scheme, says Szyszczak.

Nuclear subsidies are not covered by the new state aid guidelines and will be decided under different principles, Szyszczak says. The UK is arguing that supporting Hinkley Point serves the general economic interest of the country rather than its environmental aims.

The commission is also due to make a state aid ruling on CfDs awarded to Drax power station to convert some of its coal boilers to burn biomass instead. So while the main pillars of UK electricity market reform have the EU seal of approval there may yet be some banana skins for energy and climate secretary Ed Davey.

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