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.

Via: http://www.carbonbrief.org/blog/2014/07/what-does-the-state-aid-ruling-on-uk-energy-subsidies-mean/