EU greenlights state aid regulations including CfDs, partly allows gas projects

The European Commission accepted the new Guidelines on State Aid for Climate, Environmental Protection and Energy. Projects with government support need to be aligned with the decarbonization goals, with some exceptions for gas. The document enables member states to introduce contracts for difference through auctions including for CO2 emissions.

Public support will play a role in ensuring that the green transition happens fast, the European Commission’s Executive Vice-President Margrethe Vestager, in charge of competition policy, said after the body endorsed the new Guidelines on State Aid for Climate, Environmental Protection and Energy (CEEAG).

The document will be formally adopted in January, according to the announcement. The rules involve an alignment with the European Green Deal and other regulatory changes in the energy and environmental areas.

European Union member states are “not likely” to get approval for financial support to projects if they are not compatible with the decarbonization goals, Vestager added. The 27-member bloc aims to drive down net carbon emissions to zero by mid-century.

Projects must minimize cost for taxpayers, can’t distort competition

The guidelines cover environmental and climate protection and green energy generation. They include sections to support the decarbonization of the economy in a broad and flexible manner open to all technologies that can contribute to the European Green Deal, including renewables, energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity as well as measures to ensure security of energy supply, the document shows.

The cost for taxpayers must be minimized and the measures can’t distort competition. The guidelines also aim at facilitating the participation of renewable energy communities and small and medium-sized enterprises (SMEs), as important drivers for the green transition, the commissioners said.

Entry point for carbon contracts for difference

The revised rules generally allow for aid amounts up to 100% of the funding gap, especially where aid is granted following a competitive bidding process, and introduce new aid instruments, such as contracts for difference (CfDs) to help member states respond to the greening needs of industry, according to the announcement.

CCfDs are aimed at bringing breakthrough technologies to industrial production

A contract for difference entitles the beneficiary to a payment equal to the difference between a fixed strike price and a reference price – such as a market price per unit of output. They have been used for electricity generation measures in recent years but could also involve a reference price linked to the Emissions Trading System (EU ETS).

It means companies that receive state aid in an auction would pay back the difference between the fixed carbon price that they agreed on and the market price if the emissions price in the ETS tops the strike price, and vice versa, the document reveals. Carbon contracts for difference, CCfDs, may be a useful tool for bringing breakthrough technologies to market, the European Commission said.

Exemption for gas projects with options for clean hydrogen, biogas

The guidelines are ending subsidies for the most polluting fossil fuels. Measures involving new investments in natural gas are unlikely to be approved unless it is demonstrated that the investments are compatible with the EU’s climate targets. Gas is “a special case because for now, it acts as a bridge towards our path to more renewables,” Vestager explained.

Gas projects need to provide an option to add green hydrogen or biogas. The CEEAG includes a section on aid for the closure of coal, peat and oil shale plants to facilitate decarbonization in the power sector.

Prosumer-led energy transition

CEEAG, when formally adopted, will replace the existing Energy and Environmental State Aid Guidelines (EEAG). Member states will be required to align existing schemes to the new rules as of 2024.

SolarPower Europe praised the exception of rooftop photovoltaic projects of up to 1 MW and 100% renewable energy community- or SME-owned projects of up to 6 MW from auctions. The organization said it empowers more European citizens and businesses to invest in solar and accelerates the prosumer-led energy transition.

The new state aid rules encourage tenders specific to certain renewable applications, such as agri-solar and floating solar, ensuring Europe maintains its competitive global lead in innovative solar power technologies, the statement adds.

WindEurope: Pioneering projects can receive direct aid aside of auctions

WindEurope said technology-specific auctions are necessary, arguing that complementary technologies such as wind and solar need to scale up in parallel and that having them compete in the same auctions would be counterproductive.

“Pilot and demonstration projects are essential to innovation in wind turbine technology. With the new state aid guidelines, they can receive direct aid aside of auctions, if member states can prove that there is not sufficient competition for those very specific projects. This now also applies to wind energy projects with turbine sizes of more than 6 MW, crucially allowing for the latest turbine technology to be used,” WindEurope stressed.