European Commission is reviewing its state aid rules

The European Commission is under pressure by Member States to revise its state aid rules. In the attached letter to (Economic & Financial Affairs) Ministers, Commission Executive Vice President Vestager lays out the measures already taken by the Commission and addresses a few questions to Member States with a request to respond by 25th January. BACI provides you below and wrote a letter to the Ministry of finance and Ministry of economy and industry with a few points that can be used in the interaction and that are based on our “time to act” paper.

Overall, we find there is a lack of focus on energy-intensive industries in the EVP’s letter. You will also note from the EVP’s letter that the European Commission is concerned about the distortive effect of state aid on the internal market. It points out that, from the EUR 672 billion of state aid approved under the Temporary Crisis State Aid Framework, 84% was notified by only three Member States (Germany: 53%; France: 24% and Italy 7%).

Suggested input:

  • Process simplification: many decarbonization projects combine funding from European and national sources; the notification and approval process is often complicated by different timelines and assessment criteria; it would be helpful if the Commission could streamline these processes and create a “one-stop-shop” procedure where projects can be submitted and all funding aspects (EU and national) are assessed simultaneously with the applicant company;
  • As to the strategic sectors for the decarbonization of the European economy, we have two remarks:
  1. the letter by the EVP to Ministers strongly focuses on hydrogen, digitalization, electric vehicles and batteries with relatively low attention for energy intensive industries (apart from the reference to the indirect compensation Guidelines under ETS for which cement is not eligible); we strongly contend that state aid also needs be geared towards energy-intensive sectors that need to make decarbonization investment decisions today over a 30-35 year investment cycle; for the cement industry, 2/3 of its emissions are process-related; this makes carbon capture a core technology for its decarbonization (42% of all projected emission reductions towards carbon neutrality by 2050); carbon capture technologies are capital-intensive, both in terms of CAPEX and OPEX, and carry a substantial technological and financial risk which makes it hard for companies to engage in without public funding; this is even more so as, in addition to CO2 capture these projects require the development of significant infrastructure (pipelines & storage sites); while the Climate, Energy and Environmental State Aid Guidelines (CEEAG, Section 3.6) allow for state aid related to CCUS, we urge for more clarity on the combination of state aid with EU funding (e.g. Innovation Fund); more guidance on how the “funding gap” referred to in point 165 of the CEEAG is calculated would be helpful;
  2. the Temporary State Aid Framework allows for aid for the decarbonization of industrial processes through electrification or energy efficiency; in sectors such as the cement sector where optimum levels of energy efficiency have been achieved and where the main source of CO2 is process-related, we expect state aid to be allowed for projects that aim to reduce these process emissions, including CCUS and projects related to the reduction of the clinker-to-cement ratio.
  • A reform of state aid rules should also focus on the development and swift deployment of Carbon Contracts for Difference (CCFDs) at EU and national level. This tool allows for a de-risking of projects, based on access criteria that should be simple and fast in execution. An assessment criterion based on highest GHG reduction per euro state aid does not help those hard-to-abate sectors where decarbonization costs are highest and which should be the focus of Contracts for Difference. Urgent guidance from DG COMP on how to design Contracts for Difference under state aid rules is required.

Annex: letter to the Ministers (Economy and Finance) of the Executive Vice-President of the Commission, Vestager.