Parliament Advisors Express Doubt About EU Law Compatibility of Lignite Capacity Reserve

In early July the Federal Ministry for Economic Affairs and Energy (BMWi) presented key points for measures to further promote the German energy transition (Energiewende) towards a mainly renewable energy supply. They included the proposal to gradually transfer some of the oldest coal-fired plants with a capacity of 2.7 GW to a capacity reserve (for which a cost-based remuneration would be paid) and close down the plants four years thereafter. The department of European Affairs that advises Parliament (Bundestag) has expressed doubt about the compatibility of the plans with EU law, the spokeswoman for climate policy for the Green Party and media sources said citing from the unpublished report.

1. Capacity Reserve Instead of Climate Levy

The capacity reserve including 2.7 GW of presumably lignite-fired power plant capacity replaced an earlier proposal to impose a (in our view unlawful) climate levy to save CO2 and reach the government’s climate goals. Capacity forming part of the capacity reserve shall no longer participate in the regular energy market. Hence, the revenue paid shall not influence price building in the regular market. However, details of this new lignite capacity reserve are not yet known.

2. Concerns by Bundestag Advisors

The experts advising Bundestag reviewed the preliminary, incomplete plans of a capacity reserve that includes coal-fired power plant capacity in the amount of 2.7 GW against Articles 107, 108 TFEU (Treaty on the Functioning of Europe) that describe unlawful state aid and the handling of the European Commission. They did so in a two-step approach. Firstly, they examined a capacity reserve as such. Secondly, they looked more closely at the inclusion of 2.7 GW of coal-fired capacity. They pointed out various times that they were only reviewing plans that were not yet very detailed.

a) “General” Capacity Reserve

A capacity reserve as such which would be tendered including all technologies (technology neutral tender) and would comply with the criteria set out by the European Court of Justice in the Altmark Trans judgment (CJEU, 24 July 2003, Case C-280/00 Altmark Trans), would not be aid in the sense of Article 107 para. 1 TFEU, the experts concluded.

In case the Altmark Trans criteria will not met, the next question will be under what conditions the Commission might come to the conclusion that the general capacity reserve was state aid in the sense of Article 107 TFEU. They also examined whether revenue paid for a capacity reserve would be justified under the EU guidelines on state aid for environmental protection and energy 2014-2020 (EEAG). While the paper generally believe this was possible, it casts doubts with regard to the necessity of a capacity reserve, citing a BMWi paper according to which Germany was able to satisfy demand 100% in the years 2012 to 2015.

b) Inclusion of 2.7 GW of Coal-fired Capacity in Capacity Reserve

Concerning the 2.7 GW of lignite-fired power that the government intends to include in the reserve, the experts voice more concern.

As this amount of capacity shall not be subject to a tender it would be considerably more difficult to comply with the Altmark Trans criteria. As a consequence, it was far more likely that the Commission found it to constitute state aid in the sense of Article 107 para. 1 TFEU. This would most likely not be justified by the CO2 emission reductions. A justification under EEAG was probably doomed to fail in view of a lack of neutrality with regard to the natural resource, the lack of tenders and the discrimination of resources with low CO2 output. Justifying the coal-fired capacity reserve directly under Article 107 para. 3 TFEU on grounds of environmental protection was also doubtful, the experts said, pointing out that a coal-fired capacity market reserve segment was difficult to align with the EU Emission Trading Scheme. Costs would mainly be borne by consumers in the form of a surcharge and not by the emitters in the form of emission certificates.

3. Consequences

It is not yet clear what the lignite capacity reserve will look like, so any legal analysis will have to work with many assumptions. This of course does not increase the likelihood of the analysis covering all relevant aspects of what will ultimately proposed. However, it is obvious that the lignite capacity reserve is challenging from a state aid law point of view, with different potential points of failure. Several influential people may be not unhappy to see a lignite capacity reserve fail. Let’s see what the proposal will look like – and whether it will be drafted in such a way that state aid concerns are addressed and/or minimised.

Sources:  Green Party Spokesperson for Climate Policy Annalena BaerbockSpiegel; Welt

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