EU State aid for the green transition: the floodgates are open

On 9 March, the European Commission (Commission) significantly amended its State aid framework to support the economy following Russia’s aggression against Ukraine. This revision of the existing Temporary Crisis Framework (TCF), which is now called Temporary Crisis and Transition Framework (TCTF), is nothing short of a paradigm shift in EU State aid law. The EU now leaves the achievement of its climate targets to the willingness and ability of the Member States to subsidise companies in support of accelerating the rollout of renewable energy, the decarbonisation of industrial production processes and accelerated investments in sectors strategic for the transition towards a net-zero economy. Under the TCTF, Member States that can afford to enter the subsidy race, are essentially free to do so for the next few years.

Background to the new rules

The significantly relaxed rules on investment in the green transition are, of course, part of the European response to Russia’s war on Ukraine and the target of reducing dependency on imported fossil fuels. However, it goes without saying that the TCTF is a reaction to the United States’ Inflation Reduction Act (IRA), a 369 billion USD measure that entered into force in August 2022 and provides for generous subsidies to “green investments”, provided that production takes place in the United States. It has been widely debated in recent months whether the IRA would put European companies at a disadvantage and redirect investments from the EU to the United States. There were concerns that Europe may fall behind in the green transition (despite its various existing support programmes of comparable, if not higher, volume), and the French President Macron even called the IRA “super aggressive”. European politicians, in particular from France and Germany, have therefore called for a relaxation of EU State aid rules to counter these risks.

However, there were also voices that warned against entering a “subsidy race”. EU Competition Commissioner Vestager repeatedly expressed her reservations about higher subsidies to companies, arguing that long-term competitiveness will not be boosted by subsidies, but rather by robust and fair competition and a level playing field in the EU’s single market. Others feared that relaxing State aid rules could impair cohesion between Member States, as Member States with “deeper pockets” would be able to grant significantly more subsidies to their national industries than other countries. This concern is supported by EU statistics that show that 53% of State aid approved by the Commission under the TCF in 2022 was granted by Germany, 24% by France and 7% by Italy – with the remaining Member States accounting for a combined 16%.

What approach does the TCTF take?

The TCTF tries to balance these various concerns, but the fear of falling behind in a global subsidy race clearly swung the pendulum towards significantly more generous State support. This is explicitly acknowledged in the TCTF: the urgency for the EU to reduce its dependence on fossil fuels is also exacerbated by “global challenges posing a threat of investments in these sectors being diverted in favour of third countries outside the EEA”.

State aid for renewable energy generation

The TCTF allows investment aid and operating aid to accelerate the rollout of renewable energy and energy storage.

• Aid can be granted for investments for the production of energy from renewable sources, electricity and thermal storage and storage of renewable hydrogen and biofuels, in the form of direct grants, loans, guarantees or tax advantages. The aid amount can be determined either (i) through a competitive bidding process, in which case the aid can make up 100% of the investment costs, or (ii) administratively, set by a Member State on the basis of the investment cost, in which case the aid can make up 45% of the total investment costs (which can be increased to 55% if the beneficiary is a medium-sized undertaking).
• Aid can also be granted for the operation of energy production from renewable sources or storages, in the form of a two-way contract for difference that provides for a minimum remuneration protection and a limit to avoid excess remuneration.

Such aid may, in general, only be granted to installations for which works started as of 9 March 2023.

State aid for the decarbonisation of industrial production processes

Member States may also subsidise investments that accelerate the electrification and energy efficiency of industries and introduce new technologies using hydrogen.

• The maximum aid amount “in principle” must not exceed 10% of the total budget available per Member State for such decarbonisation purposes, or 200 million EUR. Upon “appropriate justification”, the Commission may also accept schemes that exceed these thresholds.
• Such support must reduce the companies’ direct greenhouse gas emissions by at least 40%, or the energy consumption in industrial installations by 20%.

State aid for investments in “sectors strategic for the transition towards a net-zero economy”

The TCTF allows Member States to grant State aid to incentivise the production of equipment for the transition towards a net-zero economy. This includes batteries, solar panels, wind turbines, heat-pumps, electrolysers, and equipment for carbon capture and storage, or input for production of such equipment, or the production or recovery of raw material necessary for the production of such equipment. The aid may be granted in form of direct grants, tax advantages, or loans.

• The subsidies may reach 15% of the total investment costs in tangible or intangible assets, or 150 million EUR per company and Member State. For investments in assisted areas in regional aid maps, the aid may be increased to 35% or 350 million EUR, which is a measure to support cohesion within the EU. These aid amounts may be further increased if the aid is granted to SMEs or by way of tax breaks.
• The Commission requires Member States to verify the concrete risks of the productive investment not taking place within the EEA in the absence of the aid. Exceptionally, the Commission can approve aid above the thresholds mentioned above and up to the amount of a subsidy which the beneficiary could receive in a third country, provided that (i) the investment is made fully in an “assisted area”, or (ii) in at least three Member States where a significant part of the investment takes place in at least two “assisted areas”.

While this “matching up” exemption shows that the Commission has entered the subsidy race, the conditions underline that the concerns were addressed that relaxed State aid rules would only benefit the wealthiest Member States and threaten cohesion between Member States.

What’s next?

The ball is now in the court of the Member States to come up with aid schemes, as aid under the TCTF is primarily to be granted via aid schemes to several companies. Member States and companies have to act fast though – as the Commission pointed out, these rules are temporary, and aid can only be granted until 31 December 2025. If the installations financed by the aid are not completed within 36 months of the date of granting the aid, the aid will be reduced.

Please contact us or your usual contact in our Antitrust, Competition and Trade team if you would like to discuss this update further. To read more about these and other antitrust developments, refer also to our Global antitrust in 2022: 10 key themes report.