Latest European Commission proposals for updated rules on state aid for environmental protection appear to allow member states more flexibility in their renewable energy support schemes. Under draft community guidelines from the competition directorate, member states will be able to channel aid to renewable energy projects based on kilowatt hours (kWh) rather than a limited period of time. This will enable them to support renewable energy for longer than the five years envisaged in an earlier draft of the rules released in January.
Competition commissioner Mario Monti is drawing up the new rules to replace existing guidelines -- dating back to 1994 -- which cease at the end of 2000. The aim of the rules is to ensure that any public subsidies within member states are compatible with the EU single market and reduce over time. All schemes which provide a protected market for renewable energy -- whether by fixed prices, competitive tendering or renewables portfolio standards -- are classed as state aid. It was uncertainty over the definition of aid that resulted in proceedings against the German government for failure to notify the competition commission of its renewable energy law. Germany argues that its Renewable Energy Feed in Tariff (REFIT) is not state aid because its premium payments are paid by electricity customers and not by the state.
The competition commission accepts aid to renewables deserves special treatment because of their difficulties with competing against conventional sources of energy and the EU's policy to promote renewable energy. The form that operating aid takes in each country depends on the particular support mechanism in place, the document says. It allows member states two options for granting operating aid to renewables. Under option one, aid is designed to compensate for the difference between the production cost of renewable energy and the market price. It is calculated according to the number of kWh which a renewables plant must produce and on the price/kWh needed to pay off the investment. Option two allows operating aid irrespective of the number of kWh, but the aid must be wound down over a period of up to five years.
For investment aid, the guidelines allow subsidies on up to 40% of eligible investment costs -- which are those extra capital costs borne by renewables compared with conventional plant of the same capacity.
The commission wants to see the new state aid rules in place by the end of December 2000 and to run until end 2007.
As the European renewables community digests the full implications of the draft guidelines, which the proposed renewable energy directive must take account of, first reactions have been mixed. "It seems to me that they are quite positive on the whole, with option one giving a great deal of security to just about all investors -- fairly independently of prevailing wind speeds," says political scientist Volkmar Lauber from the University of Salzburg. At the same time, he believes, they offer the possibility of earning extra income from emissions trading, which would allow wind operators to draw advantage of the fact that their external costs are small when compared to fossil fuels. "They seem to allow a conjunction between REFITs and certificates-based systems."
The European Wind Energy Association (EWEA) is cautious. According to the group's Vicky Pollard, it is worried that the commission's proposal for strictly limiting operating aid to "compensating for extra production costs" compared with market prices would not allow renewable schemes to make a profit. "Production costs must include a normal level of profit to ensure that state aid does not in effect restrict new investment. Any support scheme must allow an appropriate rate of return," she says. Another EWEA concern is that operating aid will not be extended to cover reinvestment costs. "We need to ensure that sufficient money can be set aside for replacement parts," Pollard says, referring to projects which have not been commercially financed and thus subject to due diligence scrutiny and extensive financial safety margins.
The German government, meanwhile, dubs the guidelines "an impediment" to member states' environmental and resource saving policies. Since a first draft of the guidelines surfaced in January 2000, the Germans have been calling for an "exemption regulation" in aid for environmental protection, effectively an authorised breach of competition law. Moreover, the duration of the guidelines until 2007 is too long, the German government adds in its official response. A review should be planned for 2004 "aiming at developing a group exemption regulation for the environment," it says.
Referring to the pending proceeding against Germany in the European Court of Justice, the federal government "notes" that the draft guidelines leave open the issue of whether guaranteed price schemes like the REFIT fall under the term aid. Denmark, too, is anxiously waiting for the new guidelines to come into effect when it will learn whether the commission will agree to its plans under its new electricity market reform for a ten year period of price protection for wind generators before they must compete on the open market.
Meanwhile, Europe's environment ministers have repeated their call for the removal of subsidies to fossil fuels. At its October meeting, the Environment Council referred to its conclusions of June 1998 and again invited the commission to propose common measures to reduce or eliminate fossil fuel and other subsidies and tax regimes which run counter to the rational use of energy.