Guest State Aid Blog by Professor Leigh Hancher, Nicole Robins and Dr Philipp Schliffke[1]
1 Introduction
The Renewable Energy Directive 2018/2001 (‘RED II’) states that ‘the promotion of the production and use of biomethane, its injection into a natural gas grid and cross-border trade create a need to ensure proper accounting of renewable energy as well as avoiding double incentives resulting from support schemes in different Member States.’[2] However, as discussed in this blog, this obligation does not appear to have been followed by all Member States.
In Case T‑626/20, Landwärme GmbH v Commission[3] (‘the Landwärme case’), the General Court (‘the GC’) held that the Commission must open a formal investigation to assess whether national aid schemes to promote the use of biomethane (in Sweden) result in overcompensation if the products concerned have already been subsidised in another Member State (specifically, Denmark).[4] The GC concluded that, when examining the compatibility of two Swedish support schemes, the Commission should have expressed serious doubts, as a result of overcompensation arising from the cumulation of aid granted by different Member States.
In its recent Opening Decision, the Commission explains that it has re-examined the compatibility of the two Swedish schemes promoting biomethane under the old state aid guidelines for environmental protection and energy (‘the EEAG’) and the new guidelines for climate, environmental protection and energy (‘the CEEAG’). The Commission reaches the preliminary conclusion that the schemes facilitate the development of an economic activity, have an incentive effect and are necessary to meet EU environmental targets. In light of the Landwärme judgment, the Commission nevertheless ‘seeks clarification on the impact of the combination of aid granted in Sweden under the schemes and aid granted by other Member States to biogas producers on the growth of imports in Sweden of biogas produced in other Member States, notably Denmark.’[5] As explored in this blog, the Commission’s Opening Decision raises novel legal and economic issues. In particular, the two national aid schemes could overcompensate both Danish and Swedish producers. In the context of increasing cross-border flows of biomethane, the aid schemes could also lead to significant distortions to competition and trade within the EU. In this blog, we consider how these issues could be addressed under state aid rules.
2 The background to the Landwärme case
The CEEAG (and its predecessor, the EEAG) deal with ‘overcompensation’ in a national as opposed to a transnational context. However, as the GC held, the Commission cannot conclude that a national scheme is compatible where third parties have highlighted the potential overcompensation resulting from aid granted in another Member State. As the GC confirmed, guidelines exist relating to the assessment of the cumulation of aid on a national basis; however, even if they are broadly silent on cross-border cumulation, these guidelines do not—and cannot—exclude cross-border cumulation from the assessment. The details of the scope of the cumulation test also differ in the various provisions in the guidelines.[6] The tricky question for the Commission is how to deal with potential cross-border overcompensation and the interrelationship between production costs, demand, revenues earned by producers, and the competitiveness of biogas with natural gas.
Over the last few years, cross-border flows of biomethane and Guarantees of Origin (‘GOs’) (see below) have reached significant volumes—the geographic market comprises at least Denmark, Germany, Sweden, Switzerland and the UK but is not limited to these countries.[7] However, national support schemes may or may not accept such internationally traded biomethane volumes and may or may not be compatible with each other.
In the Landwärme case, Denmark offers production support to encourage investment in biogas by guaranteeing the revenues of operators that upgrade their biogas such that it can be injected into the grid.[8] The biogas that is subsidised in Denmark, as well as the GOs, can be sold in other countries. In parallel, Sweden offers demand-side support with the aim of increasing demand for biogas by reducing its final price by exempting end-customers from the excise duty.[9] The scheme is open to biogas produced in Sweden as well as imported biogas.[10]
There is a significant lack of transparency about how both Denmark and Sweden assess whether the aid is limited to the minimum necessary. While the Commission sets out some principles for the monitoring systems in Sweden and Denmark, important details are lacking, such as whether the overcompensation assessment is undertaken for all beneficiaries, in addition to how revenues earned by producers from selling GOs are taken into account.[11] A GO is a certificate that attests the renewable origin of the energy, with one GO corresponding to 1 MWh of electricity produced.[12] GOs are transferable and are traded on a voluntary basis, which can take place independently from the transfer of energy to which they relate. Suppliers (or large businesses) purchase GOs from producers to demonstrate the renewable nature of their energy to end customers. It is noticeable that Danish producers have sold an increasing number of GOs in Sweden over the last few years.[13]
RED II clearly establishes the obligation that, when a producer benefits financially from a support scheme, the market value of the GO should be taken into account.[14] However, as set out below, it is unclear as to whether the GOs are appropriately taken into account by Sweden and Denmark in their overcompensation assessments.
3 Potential overcompensation of biogas producers and distortions to competition and trade
Due to the production support and demand incentivisation schemes in Denmark and Sweden respectively and increasing cross-border trade of biomethane and GOs, ‘double-subsidisation’ could arise. The cumulated aid schemes could overcompensate producers in both Denmark and Sweden. Given the increasing trade in biomethane and GOs, the aid schemes also have the potential to lead to significant distortions to competition and trade.
3.1 Potential overcompensation of Danish producers
To assess the proportionality of the aid, according to the Commission, Denmark compares the amount of the aid to the difference between the (higher) costs of upgrading to biomethane and the (lower) market price of natural gas.[15] The assessment which is undertaken on a rolling three-year period is, however, based only on ‘aggregate figures’, and no further details are provided.[16] In light of potential differences in the costs and revenues of each producer, to avoid the risk of overcompensation, the assessment should be undertaken for each individual beneficiary.
Furthermore, while the Commission claims that the assessment takes into account all costs and revenues, including income relating to sales of GOs within or outside Denmark, it is unclear if this approach is already followed in practice. Furthermore, if the overcompensation assessment is only undertaken for a sample of beneficiaries, it is possible that the aggregate figures might not be fully representative of producers’ actual revenues from exported GOs. As GOs are typically sold by biogas producers to suppliers (who purchase the GOs to demonstrate the ‘green’ nature of the energy to their end customers), if Denmark does not appropriately take into account the revenues received by producers from selling GOs, Danish producers could be over-compensated.
3.2 Potential overcompensation of Swedish producers
According to the Commission, to avoid overcompensation, Sweden checks that the tax reduction does not exceed the difference between the (higher) cost of biogas without taxes to the (lower) cost of natural gas with taxes.[17] However, similar to the Danish scheme, it appears that the overcompensation assessment is undertaken only at an aggregate level. If the cost of raw materials underpinning the assessment, for example, reflects the average across (the more expensive) domestic production or imports from Member States without similar support schemes as well as (the cheaper) imports from Denmark (due to the aid scheme), an aggregate assessment may not reveal that importers of the cheaper biogas from Denmark could be overcompensated.
In addition, it not clear whether the assessment undertaken by Sweden appropriately treats GOs. It is possible that Swedish undertakings could be overcompensated if GOs purchased from other Member States could be used to demonstrate eligibility for the tax exemption in Sweden. In this scenario, if the cost of purchasing the GO is less than the tax exemption, Swedish producers could also be overcompensated.[18] Therefore, it is important that the overcompensation assessment is carried out on an ex-ante basis for each individual beneficiary and appropriately reflects the GOs.
In Sweden, while a national registry for GOs relating to renewable gases does not currently exist, it is in the process of being developed.[19] Once it has been introduced, the overcompensation assessment would need to be further amended to take into account revenues earned by producers from selling GOs to other producers or to suppliers (or large businesses).
3.3 Distortions to competition and trade
As a result of the aid schemes, Danish producers and Swedish importers could sell biogas more cheaply than otherwise, and Danish producers could behave strategically in terms of the price at which they offered their GOs in other markets. These distortions would be compounded if producers are also being overcompensated. As acknowledged by the Commission, if the amount of aid exceeds the minimum necessary, ‘the aid recipient will benefit from a windfall profit that might unnecessarily distort competition and cannot therefore be found compatible with the common market’.[20]
However, in the Landwärme case, it has not yet been decided which Member State should prevent or claw back this windfall profit. This raises a number of important questions. Should Member States coordinate in terms of the recovery of the aid? Is there a legal or economic difference depending on which Member State recovers the aid?
4 Legal options open to the Commission
Obviously the Commission can impose conditions in its decision on the compatibility of the Swedish system with Article 107(3)c) TFEU. As an ex-post solution, it could require Sweden to monitor, and where necessary, adjust and report on its actions (in line with the CEEAG).
The Commission could even revisit its earlier compatibility clearance of the Danish scheme by invoking Article 108(1) TFEU to review an existing aid scheme in the light of market developments (see the Stichting Woonlinie precedent), which would represent a form of ex-post control of an aid system that generates windfall profits.[21] A Member State can be obliged to take ‘appropriate measures’ as approved by the Commission to adjust an existing aid scheme to avoid overcompensation.
Other legal options include the expanded database—the ‘UDB’—under Article 31a of the 2023 RED.[22] For gaseous fuels injected into the EU’s interconnected gas infrastructure, the GOs must be transferred to the UDB when a consignment of renewable gas is registered in the database, and must be cancelled after the consignment of renewable gas is withdrawn from the EU’s interconnected gas infrastructure. This will mean that GOs will not likely function as a separate source of revenue independent of the trade in the underlying physical gas, which could help to mitigate the risk of overcompensation.
[1] The authors are advising Landwärme on the state aid case. Dr Leigh Hancher is a Professor of European Law at the University of Tilburg and a Senior Adviser at Baker Botts LLP in Brussels. Nicole Robins and Dr Philipp Schliffke are partners at the economics and finance consultancy, Oxera Consulting LLP, based in Brussels and Hamburg respectively.
[2] Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, para. 123 (OJ L 328/82, 21.12.2018).
[3] Case T‑626/20, Landwärme GmbH v Commission ECLI:EU:T:2022:853. See the case note from Vollert, EuZW 2023, 417 (in German), and Nicolaides, P. (2023), ‘Cumulation of State Aid Granted by Different Member States’, 30 January, available at: https://www.lexxion.eu/en/stateaidpost/cumulation-of-state-aid-granted-by-different-member-states/.
[4] European Commission (2024), ‘State Aid SA.56908 (2023/C) (ex 2020/N) – Sweden, Prolongation and modification of biogas scheme for motor fuel in Sweden, State Aid SA.56125 (2023/C) (ex 2020/N) – Sweden, Prolongation and modification of scheme SA.49893 (2018/N), Tax exemption for non-food based biogas and bio-propane in heat generation’, C(2024) 659 final, 30 January.
[5] European Commission (2024), op. cit., 30 January, para. 232. Biogas is often used as an umbrella term that includes biomethane. For further details, see European Biogas Association, ‘About Biogas and Biomethane’, available at: https://www.europeanbiogas.eu/about-biogas-and-biomethane/.
[6] For example, under the CEEAG, aid may be awarded concurrently under several aid schemes or cumulated with ad hoc or de minimis aid in relation to the same eligible costs, provided that the total amount of aid for a project does not lead to overcompensation or exceed the maximum aid amount allowed under the guidelines. In contrast, under the Regional Aid Guidelines, the cumulation of investment aid from different regional schemes or ad hoc regional aid is allowed providing that the total amount of aid does not exceed the maximum aid intensity per project. European Commission (2022), ‘Communication from the Commission, Guidelines on State aid for climate, environmental protection and energy 2022’ C(2022) 481 final, 27 January, para. 56; and European Commission (2021), ‘Communication from the Commission, Guidelines on regional State aid’, C 153/1, 29 April, para. 99.
[7] European Commission (2024), op. cit., 30 January, paras 66 and 222.
[8] European Commission (2013), ‘State aid SA.35485 2012/N – Denmark, Aid for all forms of biogas use – A’, C(2013) 7726 final, 14 November, para. 12(b).
[9] European Commission (2024), op. cit., 30 January, para. 16.
[10] European Commission (2024), op. cit., 30 January, para. 33.
[11] European Commission (2024), op. cit., 30 January, paras 41–54 and 93-96.
[12] For further details, see Energinet, ‘Guarantees of Origin’, available at: https://en.energinet.dk/energy-data/guarantees-of-origin-el-gas-hydrogen/.
[13] European Commission (2024), op. cit., 30 January, paras 222–223.
[14] Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, Article 19(2) (OJ L 328/82, 21.12.2018).
[15] European Commission (2013), op. cit., 14 November, para. 39.
[16] European Commission (2024), op. cit., 30 January, para. 94.
[17] European Commission (2024), op. cit., 30 January, paras 44 and 193.
[18] Specifically, if a GO from a Member State where they are issued to producers could be used to demonstrate eligibility for the tax exemption in Sweden, it is possible that the cost of natural gas plus the cost of purchasing a GO could be less than the average natural gas price in Sweden including taxes, thereby leading to overcompensation.
[19] Energigas Sverige (2024), ‘Biomethane in Sweden – market overview and policies’, 27 March, available at: https://www.energigas.se/Media/1ernoznh/biomethane-in-sweden-240327.pdf.
[20] European Commission (2009), ‘Common principles for an economic assessment of the compatibility of state aid under Article 87.3’, para. 39.
[21] See Case C-414/15P, Stichting Woonlinie and Others v Commission.
[22] As of August 2024, the UDB is not yet fully operational; however, it is planned for November 2024. See International Sustainability and Carbon Certification, ‘Updates on the Development of the UDB’, available at: https://www.iscc-system.org/certification/union-database-udb/.