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Four forms of subsidy allowed -- EU rules for renewables state aid

New European guidelines for aid to renewable energy sources are now in place after the European Commission approved in December proposals by Competition Commissioner Mario Monti. The new guidelines set out the conditions under which member states can grant support for environmental protection -- including renewable energy.

Monti claims he has adopted an approach that "looks very favourably on aid for renewables." He stresses the guidelines are consistent with the draft directive on renewable energy that is making its way through the European Parliament and Council of Ministers. "Competition policy and environmental policy are not at variance with one another," he says. "However, taking environmental requirements into account does not mean that all forms of aid must be authorised."

Commission policy is based on the "polluter pays" principle, but it justifies aid when it serves as an incentive or provides a temporary solution to a specific problem -- such as renewable energy development where production costs are higher than existing market prices for energy, states Monti.

Forms of aid to renewables and other environmental protection measures have moved on since 1994 when the previous rules came into effect, says Monti. "Member states now intervene more frequently, for example in the energy sector, providing aid in forms that were rather uncommon until recently, notably tax reductions or exemptions. Similarly, new forms of operating aid are proliferating."

Up to 50% subsidy

The basic rate of investment aid allowable to renewables has been raised from 30% to 40%, with a further 10% bonus for investments in small and medium sized enterprises (SMEs), assisted regions and in entire communities, such as islands.

Member states are also able to choose from four options for granting operating aid. The aid may compensate for the difference between production costs of renewables and the market price of energy until the plant has been fully depreciated and to allow a fair return on investment. Aid may take the form of market mechanisms such as green certificates.

In a new provision urged by the German government, aid can also be granted on the basis of the external costs avoided by use of renewable energy. This should be calculated according to an internationally recognised method of quantifying externalities -- such as the EU's ExternE study. Lastly, member states have the "traditional" option of granting operating aid for a limited period -- for not more than five years and wound down gradually.

The European Wind Energy Association gives the new guidelines a cautious welcome. EWEA's Vicky Pollard notes that the new "external costs avoided" option gives countries more flexibility in their design of support mechanism. "But it is not foolproof," she warns. "It is not easy to calculate externalities."

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