Introduction
France notified a measure to grant State aid to ProLogium for the implementation of the Promotheus R&D project which concerned the development of solid-state batteries [SSB] for electric vehicles. ProLogium is a large enterprise with 758 employees. The Commission approved the measure in decision SA.106740.[1]
The aid measure has several unusual features. First, ProLogium committed to disseminate the scientific knowledge resulting from its R&D project on a regular and continuous basis during the project in 2023-2029. Target audiences for the knowledge dissemination activities would be universities, research organisations, SMEs, large enterprises, and industrial organisations.
According to the Commission decision, ProLogium “(25) provided a detailed roadmap for dissemination activities, which include both the dissemination of knowledge obtained through the collaboration with research organisations and the dissemination of non-IP protected results obtained from other aspects of the R&D activities. These activities include, notably, the use of websites, social media and the development of promotional print, digital and video material, dissemination through specialised publications and events (conferences, expert exchange visits, collaboration with the academic community, PhD fundings).”
In addition, “(26) ProLogium commits to facilitate access to certain assets protected by IP rights which are essential for developing a European battery ecosystem; in particular through non-exclusive licenses negotiated under FRAND (fair, reasonable and non-discriminatory) conditions, and without restrictions.”
Second, the aid was granted after an open selection procedure. ProLogium was selected after a call for expression of interest. The selection was based on “public and objective criteria”. The criteria were the following: “(29) the applicant’s project alignment with the French national battery strategy, the maturity of the project, the ability of companies to carry out the project, the project’s contribution to the battery ecosystem and ability to cooperate with a large number of academic and corporate participants in the EU battery industry, the innovativeness of the project, the credibility of the financial aspects of the project (business plan and investment costs) and the necessity of public support for the realisation of the project.” It is important to note that one of the conditions was “significant spill over commitments (e.g. dissemination of new knowledge)”; i.e. the willingness of the aided company to make publicly known the processes and results of its research.
Third, the amount of aid was relative large and the aid intensity exceeded the standard rates in the GBER for large enterprises. This is because the aid was assessed on the basis of the RDI Framework which allows for higher aid intensity for “applied research” and for projects whose results are disseminated.
The total eligible costs amount to EUR 2164.8 million over a period of approximately six years (2023 to 2029) and are allocated as follows:
- Industrial research: EUR 139.9 million
- Experimental development: EUR 2024.8 million
It may be recalled that footnote 60 of point 79 of the RDI Framework explains that the different R&D categories can be considered to correspond to Technology Readiness Levels 1 (fundamental research), 2-4 (industrial research) and 5-8 (experimental development).
Funding gap
The total costs of the project, including CAPEX and OPEX costs, amount to EUR [25,000 – 30,000] million. The net present value [NPV] of the R&D project without the aid is negative, approximatively EUR – [800 – 900] million. According to the information submitted to the Commission, the cash-flows turn positive as from 2030, that is at the end of the research phase.
“(43) The NPV of the R&D project […], was calculated on the basis of a quantification of all main costs and revenues of the project, discounted over the duration of the business plan (2022- 2039) at the Weighted Average Cost of Capital (‘WACC’) of the beneficiary. […] ProLogium provided its WACC calculations and a breakdown of the WACC parameters used in that calculation, together with the relevant underlying source. […] ProLogium estimated its WACC for the R&D project as [5-10]%. On this basis, and without the measure, the internal rate of return (IRR) of the R&D project is [0-5]%. The fact that the IRR is significantly below the WACC indicates that – absent the measure – the expected return from the R&D project would be below the cost of funding.”
Because the calculation of the funding gap takes into account the higher profitability or smaller size or less risk of an alternative project, it is also stated in the Commission decision that “(44) ProLogium’s board has not approved any alternative investment project, and, absent public support from the French State, ProLogium would not consider any other project of comparable size and innovativeness to the R&D project.”
In addition to the public grant, ProLogium intended to raise debt and equity amounting to EUR [4 000 – 6000] million.
Amount of aid and aid intensity
France proposed to grant EUR 1500 million, in nominal terms, that would correspond to 69.3% of the total eligible costs. Because the aid would be granted in tranches, the real [i.e. discounted] amount, net of taxes, equalled the NPV of the funding gap of [EUR 800 – 900] million.
Form of aid
The State aid would be provided in the form of a direct grant.
“(49) The French authorities submit that a grant is the most appropriate State aid instrument to address the main market and systemic failures which come from the very high fixed cost of innovation, coordination problems and Europe’s strategic dependence on battery cells. The grant is intended to compensate for the low profitability of the project for ProLogium without State aid, induced by the very high fixed cost of innovation. As such, they further argue that the market failure or other important systemic failure which the State aid from France seeks to address is neither lack of access to finance nor to provide ProLogium with a certain degree of risk-sharing. Consequently, a public soft loan, a State guarantee or a repayable advance would not be appropriate instruments for redressing the failures identified.”
Claw-back mechanism
The aid would also be subject to a claw-back mechanism. The purpose of that mechanism would be to recover some of the aid in case the project would be more profitable than forecasted in the funding gap analysis.
“(59) The claw-back will apply to ex-post figures, annually approved by an independent auditor, in case of positive net present value of cash flows after taking into account the State aid disbursements. The amount to be clawed-back in a certain year (hereinafter “year i”) correspond to the surplus (if positive) between the net present value (discounted in year i) of the ex-post audited cash flows and the net present value of the actual aid disbursements (from 2022 to year i). The surplus is then multiplied by a ratio equal to the lesser between 60% or the net State aid disbursements, divided by the eligible costs from 2022 to year i. A secured amount, guaranteed by a letter of credit (by a reputable financial institution having investment grade rating from a first-rank rating agency) complying with the two following conditions will be established (i) it must never be negative and (ii) if positive, it should correspond to the lower of the surplus multiplied by the above mentioned ratio and the sum of the actual State aid disbursements between 2022 and the year i. The resulting amount is then repaid to the French State.”
Compatibility of the aid with the internal market
The measure constituted State aid. France did not contest the Commission’s findings. The compatibility of the aid was assessed on the basis of the RDI Framework.
Incentive effect
“(93) The Commission notes the information and evidence submitted by the French authorities show that the beneficiary did not consider conducting a similar R&D project absent the aid, either in terms of innovativeness or scale.”
“(94) Furthermore, the Commission considers that, as demonstrated by the French authorities, the project entails high commercial, financial and technological risks, related notably to the level of the innovativeness of project’s R&D activities targeting the development of the two generations of innovative SSB. In this regard, the Commission considers that the innovations targeted by the beneficiary go beyond the state of the art, including the development of SSB and optimising its production process at a competitive cost, with silicon or metallic lithium-based anodes.”
“(95) In addition, the Commission notes that the project requires high upfront R&D investments, and that the cash flows projections shows a distant and uncertain return, which, in spite significant market funding, do not present sufficient incentives to enable ProLogium to obtain sufficient private investment to render the project viable.”
“(96) The Commission also observes that absent the aid, the IRR is estimated at [0-5]%, and significantly below the WACC which is equal to [5-10]%. The difference between the IRR and the WACC evidences that the expected returns of the project (absent the aid) are significantly below the cost of funding the R&D project.”
“(97) In light of the above, the Commission considers that the aid changes the behaviour of the beneficiary in such a way that it engages in new activities, notably the development of two innovative generation of SSB cells and products, and battery recycling technology, which would not be carried out in the absence of the aid to the same scale or level of innovativeness.”
With respect to the need for aid, “(122) the Commission considers that the aid is aimed at correcting market failures resulting from imperfect and asymmetric information, coordination problems and the insufficient dissemination of knowledge. Therefore, the Commission concludes that the need for State intervention in the project is established.”
Proportionality of the aid
“(138) The Commission observes that based on the payment schedule submitted by the French authorities, the discounted amount of the notified aid equals EUR [800 – 900] million, which is exactly equal to the NPV of the project as per the financial projections. Since the notified aid is limited to the identified funding gap of the project, the Commission considers that it is limited to the minimum necessary.”
“(140) The Commission notes that ProLogium has not considered implementing an alternative project of a similar scope and ambition absent the aid, which would have prompted the beneficiary to simply abandon the implementation of the R&D project.”
“(141) In addition, the Commission considers that the activities supported by the measure, corresponding to TRLs 2-4 and 5-8, qualify as industrial research and experimental development, defined respectively in point 16(r) and (k) of the R&D&I Framework. The Commission therefore concludes that the activities covered by the notified measure constitute applied research in accordance with point 16(e) of the R&D&I Framework.”
“(142) The maximum aid intensities allowed for individual aid measures for the category applied research (encompassing industrial research and experimental development), subject to a detailed assessment pursuant to point 93 and 94 of the R&D&I Framework, are laid down in the point 95 as follows: for large enterprises, the maximum allowed aid intensity for applied research activities is set at 60%. In case the applied research activities are subject to effective collaboration between an undertaking and a research organisation or subject to wide dissemination of results, the aid intensity might be increased up to 70%.”
“(143) The Commission notes that in the case at hand, the aid intensity amounts to 69.3% of the total eligible costs. Furthermore, the Commission observes that the beneficiary submitted clear commitments regarding dissemination of results.”
“(144) In light of the foregoing, the Commission concludes that the notified applied research activities are subject to effective collaboration and that the applicable maximum aid intensity under point 95, therefore, is 70%.”
“(145) The Commission notes that the NPV of the R&D project is negative (EUR [800 – 900] million). Absent the aid, the project is expected to generate an IRR of [0-5]%, which is lower than the cost of funding the investment (e.g. WACC), which is estimated at [5-10]%.”
“(146) The Commission notes that the claw-back mechanism has been clearly designed and provides financial predictability to the beneficiary. The Commission considers that the system will avoid a situation in which the beneficiary is overcompensated and will ensure that the aid remains proportionate if the beneficiary’s profits exceed the projected figures in the business plan.”
“(147) In light of the foregoing and taking into account financial aspects submitted by the French authorities, and in particular the expected IRR of the project, the cash flow projections, the significant investments requested upfront, and the high total costs of the project, that the notified discounted aid amount does not exceed the funding gap of the project, the fact that absent the aid there would not be an alternative project, and the existence of a claw back mechanism, the Commission considers that the French authorities have sufficiently demonstrated that the aid does not exceed the minimum necessary for the aided project to be sufficiently profitable.”
Possible negative effects of aid
The Commission verified that any negative effects would be kept to the minimum. In examined, in particular, distortions in product markets, distortions of dynamic incentives [as relating to (i) market growth, (ii) the aid amount with respect to total expenditure, (iii) closeness to the market (iv) the openness of the selection process, (v) exit barriers, (vi) incentives to compete for a future market, and (vii) product differentiation and intensity of competition], whether the aid could create or maintain market power and whether the aid would support an inefficient undertaking in a declining market.
In addition, the Commission examined whether the aid would incentivise relocation and displacement of economic activities from one Member State to another.
The Commission found that the “(186) (i) the global and EEA markets for the manufacturing and supply of EV battery packs and more particularly the SSB technology are emerging, with fast growing prospects and high exit barriers to the innovation process; (ii) there is no significant risk that the aid will discourage competitors to compete on the markets concerned in the future; (iii) the aid measure does not support the creation of a position of market power for ProLogium on the markets concerned nor maintains inefficient market structures; and (iv) that the aid is unlikely to have location effects, the Commission concludes that the measure has been designed in such a way as to limit the potential distortive impact on competition and trade.”
Furthermore, the Commission found that the aid measure had no “manifest negative” effects. As explained in point 117 of the RDI Framework, manifest negative effects make an aid measure incompatible with the internal market when “the aid measure is discriminatory to an extent not justified by its State aid character. […] This is particularly the case for aid measures where the award of aid is subject to the obligation for the beneficiary to have its central seat in the relevant Member State (or to be predominantly established in that Member State) or to use national products or services, as well as for aid measures restricting the possibility for the beneficiary to exploit the R&D&I results in other Member States.” In the case at hand, there were no manifest negative effects.
Therefore, the overall conclusion of the Commission was positive and approved the aid.
[1] The full text of the Commission decision can be accessed at:
https://ec.europa.eu/competition/state_aid/cases1/202436/SA_106740_124.pdf