Introduction
In June 2021, the European Commission, in decision SA.55526, approved an amount of EUR 167 million of State aid for the construction and operation of a liquefied natural gas [LNG] terminal close to Alexandroupolis in northern Greece. In December 2022, Greece notified a measure involving additional State aid of EUR 106 million for the same project. The Commission authorised the additional aid in decision SA.105781.1
Given that a fundamental principle of State aid law is that no aid is allowed after a project has started, this case is rather important for understanding the conditions under which aid may be granted to an existing project, in an apparent exception to that fundamental principle.
The additional aid was requested by the operator of the terminal because of the steep increase in construction costs as a result of covid-19 and the Russian invasion of Ukraine. The increase in costs was unforeseen at the time of the initial design of the terminal and made the operation of the terminal commercially unviable.
In addition, the Commission took into account the fact that the terminal would strengthen energy security for Greece, by diversifying the sources of natural gas and reducing its reliance on Russian gas. Furthermore, the terminal would contribute to Greece’s green transition by speeding up the decommissioning of power stations that use lignite which is a particularly polluting sort of coal. The power gap caused by the closure of lignite plants would be partly covered by electricity produced from renewable sources and partly by gas-fired plants. Also, the terminal was expected to raise the competitiveness in the region.
If the construction of the terminal were abandoned, Greece would not be able to meet the peak demand for electricity and at the same time manage to close the lignite plants. Although the terminal would temporarily increase the use of gas, it would eventually account for a decreasing share in Greece’s energy mix as the production of green electricity would gradually expand.
The financial aspects of the terminal
The estimated life period of the terminal is 27 years. “(32) The initial total investment costs were estimated at EUR [250-500] million (see recital 38 of the initial decision). As the funding gap was estimated at EUR 166.7 million, this implies that an amount of EUR 197 million (in nominal terms) was to be contributed by external funds.”
“(33) According to the updated business plan, the total investment costs of the project (excluding VAT) amount to EUR [350-600] million (compared to [250-500] million reported at the time of the adoption of the initial decision).”
“(37) The updated annual operating costs amount to around EUR [40-80] million (25) and include the following categories: Personnel cost, closed-loop regasification energy cost, CO2 emissions cost, tug boat services, operation and maintenance cost and management fee, administration cost, general expenses and insurance cost. The increase in the operating costs compared to the amount referred in the initial decision (EUR [10-50] million) is due to updated estimations regarding the closed loop regasification energy cost, the CO2 emissions cost and the tug boat services costs.”
Although there was also an increase in the projected revenue of the terminal, the extra revenue was not sufficient to bridge the additional funding gap of EU 106 million.
Additional funding gap
Following the cost increases, the terminal operator updated the expected IRR and the calculation of the funding gap. The WACC remained the same.
“(45) Based on committed and prospective volumes […], the project, without the additional aid, would yield an IRR of [0-5]% in real, pre-tax terms, instead of the targeted [5-15]% in real, pre-tax terms (see recital (75) of the initial decision).”
This calculation showed that the construction and operation of the terminal had become commercially unviable.
“(46) Over a reference period of 27 years, the project has an additional negative Financial Net Present Value of EUR 106.1 million, which is equivalent to the additional funding gap of the project. This indicates that the expected revenues do not cover the total investment costs of the project.”
“(47) The updated financial analysis demonstrates that based on the assumed volume, investment costs and operational costs, the project requires a tariff of […] million EUR/bcm for the full implementation of the “user-pays” principle. According to the Greek authorities, such tariff would render the project non-competitive given the existing tariffs of neighbouring terminals, resulting in no long-term capacity reservations by the users, thus making the Project non-feasible.”
This observation is also important. Any infrastructure operator can bridge the funding gap of the project simply by raising the price it charges to users. Of course, two problems immediately arise. First, would customers be willing to pay that price or would they seek alternatives. Second, would it make sense for the energy and industrial policies of the country to have gas sold through the terminal at a high price?
Prevention of overcompensation
Since Greece intended to grant additional aid to the terminal, it was also necessary to ensure that the operator did not make excessive profits. For this reason, “(49) he Greek authorities confirmed that should the Project turn out to be more profitable than expected in the business plan, e.g., due to additional capacity bookings, excess revenues will be returned according to the mechanism described in recitals (79) to (85) of the initial decision. This mechanism aims at ensuring that the project IRR nominal pre-tax will not exceed […]% and that any revenues from capacity bookings that increase the IRR above […]% will be returned either to the terminal users in the form of tariff reduction or to the Granting Authority.”
Avoidance of lock-in effects
An important rule in the current Guidelines on Climate, Environmental Protection and Energy [CEEAG] is that State aid does not lock undertakings in outdated technologies and polluting sources of energy. The construction of an LNG terminal could entrench the use of gas and delay the transition to green fuels.
However, “(50) as for the Project’s contribution to the climate targets, the Greek authorities argue that natural gas will be the bridging fuel to a fully decarbonized energy system. To this end, the Project contributes to a cleaner energy mix through increased utilization of gas instead of lignite, hence reducing CO2 emissions in line with the lignite decommissioning plans of the Southern East European countries.”
“(52) The Greek authorities explain that the operation of the Alexandroupolis LNG Terminal and the availability of the associated regasification capacity have been considered as key factors for the Greek State when deriving its lignite decommissioning plan. Failure in commissioning the LNG Terminal in Alexandroupolis as initially planned, will reduce available gas volumes for the supply of the Regional market (including Greece).”
“(53) Specifically, the Greek authorities estimate that one additional year of delay in the lignite decommissioning plan of Greece would result in approximately 4 million tons additional CO2 emissions.”
“(56) In addition, the Greek authorities explain that while natural gas will be the transitional fuel for the medium term, the Project is compatible with the Union’s long term climate goals. This is because the Project’s technical design will enable swift adaptation to receive and transmit hydrogen, green ammonia and/or alternative gases (e.g., bio-methane).”
Assessment of the compatibility of the aid with the internal market
The Commission assessed the compatibility of the aid on the basis of the 2022 CEEG. Since the Commission had already found that the aid contributed to the development of an economic activity, it paid more attention to the existence of incentive effect, especially because the project has already started.
Incentive effect
First, the Commission recalled that “(87) according to point 26 of the CEEAG, aid can be considered as facilitating an economic activity only if it has an incentive effect. An incentive effect occurs when the aid induces the beneficiary to change its behaviour, to engage in an additional economic activity or in a more environmentally-friendly economic activity, which it would not carry out without the aid or would carry out in a restricted or different manner. The aid must not support the costs of an activity that the aid beneficiary would anyhow carry out and must not compensate for the normal business risk of an economic activity (point 27 of the CEEAG).”
“(88) Proving an incentive effect entails the identification of the factual scenario and the likely counterfactual scenario in the absence of aid (point 28 of the CEEAG).”
“(89) Greece submitted that in the absence of the notified aid, the construction and operation of the Project would not continue as planned, as due to a large cost increase beyond the control of the beneficiary and unexpected at the time of the initial decision (see subsection 2.4.1), an additional funding gap materialized (see recitals (43) to (48)). As the Greek authorities explained, the beneficiary is not able to finance the additional costs from its own resources.”
“(90) Given that the Project would have a negative Net Present Value without the additional aid, it would have been difficult to find an alternative interested investor, if any.”
Then the Commission acknowledged that “(91) according to point 29 of the CEEAG, aid does not have an incentive effect for the beneficiary in cases where the start of works on the project or activity took place prior to a written aid application by the beneficiary to the national authorities. In cases where the beneficiary starts implementing a project before applying for aid, any aid granted in respect of that project will, in principle, not be considered compatible with the internal market.”
“(93) This situation could not be foreseen at the time of the initial Commission decision.”
“(94) Together with the political imperative to complete the Project as planned, the project promoter cannot avoid incurring higher cost. However, in order for the project promoter to maintain its incentive to participate in the Project and to continue organizing the different sub-workstreams, the Commission accepts the Greek argument that the project promoter needs to receive the notified aid, preserving the initial incentives to participate.”
“(95) The Commission accepts Greece’s argument that terminating the relationship with the current promoter Gastrade and searching for other potential promoters would not have
reduced the costs given the project timeline. […] The Commission has no indications that the cost did not reflect prevailing market conditions.”
“(96) The Commission acknowledges that the specific risks that have materialized in this case and that have created cost overruns do not constitute business risks that the State or the project promoter should have anticipated in view of their ordinary risk assessment. In this context it also needs to be considered that not continuing the Project as planned is not an acceptable option in view of the political consequences and cross-border importance of this project.”
The Commission concluded that the additional aid had an incentive effect. Given the novelty of this case, it is worth listing the decisive issues of this case:
1. The funding gap increased substantially.
2. The causes of the increase were not foreseen in the initial business plan and were not within the control of the project operator.
3. As a result, the project became financially unviable.
4. The project could not be abandoned because it was important for the Greek economy and green transition.
5. Selecting a new operator would cause delay and would not improve the underlying financial situation.
6. The additional aid only restored the profitability of the project to its initial level.
7. A claw-back mechanism would prevent any excess profit.
No breach of any relevant provision of EU law
Next, the Commission examined whether the aid measure would infringe any other provisions of EU law.
“(101) According to point 33 of the CEEAG, if the supported activity, or the aid measure or the conditions attached to it, including its financing method when it forms an integral part of the measure, entail a non-severable violation of relevant Union law, the aid cannot be declared compatible with the internal market.”
“(103) In relation to compliance with national and EU public procurement rules, the Commission’s assessment on compatibility of State Aid could be affected by a possible incompliance with EU public procurement rules if it produces additional distortion of competition and trade on the market for the provision of LNG regasification services, on which the beneficiary will be active.”
“(104) No additional distortive effect on the competition and trade on the market for LNG regasification services has been identified that would be created by a potential noncompliance with Directive 2014/25/EU, as regards the selection of the subcontractors. Therefore, in absence of an “indissoluble link” between EU public procurement rules as regards the tenders for the construction sub-works and the object of the aid, the compatibility assessment of the aid cannot be affected by a potential infringement.”
Proportionality
“(122) Aid is considered to be proportionate if the aid amount per beneficiary is limited to the minimum needed for carrying out the aided project or activity (point 47 of the CEEAG).”
“(123) In accordance with point 381 of the CEEAG, the proportionality of the investment grant is assessed on the basis of the funding gap principle as set out in points 48, 51, and 52 of the CEEAG.”
“(124) According to point 48 of the CEEAG, aid is considered as limited to the minimum needed for carrying out the aided project or activity if the aid corresponds to not more than the net extra cost (‘funding gap’) necessary to meet the objective of the aid measure, compared to the counterfactual scenario in the absence of aid. The funding gap is determined by the difference between the economic revenues and costs (including the investment and operation) of the aided project and those of the alternative project which the aid beneficiary would credibly carry out in the absence of aid.”
“(125) According to point 51 of the CEEAG, where the aid is not granted under a competitive bidding process, the funding gap must be determined by comparing the profitability of the factual and counterfactual scenarios.”
“(127) As analysed in section 2.5, the estimated additional funding gap of the Project is EUR 106.1 million. Greece explained that the discounted value of the aid of EUR 106.1 million, is equal to 100% of the additional funding gap (see recital (43)). The Commission notes that this calculation is based on detailed business projections which the Commission has reviewed and concludes that the aid does not exceed the funding gap and is limited to the minimum necessary.”
“(129) In addition, the Commission verified that the profitability of the project, measured by the internal rate of return, does not exceed the remuneration required by the market, measured by the WACC, as explained by Greece (see recital (45)).”
“(130) In particular, the Commission notes that the base WACC remain identical to the initial decision and is in line with the base WACC applied to the other LNG terminal in the country.”
“(131) The Commission concludes that the IRR of the project, as projected in the business plan submitted by the Greek authorities, would be close to – but not exceed- the WACC.”
“(135) The Greek Authorities will put in place a claw-back mechanism to avoid overcompensation above the rate of return of 10.50%. This mechanism will be reviewed by the RAE. It will guarantee that direct beneficiaries cannot generate unreasonably excessive profits.”
“(136) The claw-back mechanism foresees that any excess return will be partly returned to the terminal users through tariff reductions, and mostly returned to the granting authority, in order to avoid overcompensation.”
Avoidance of undue negative effects on competition and trade
Since in its initial decision the Commission concluded that the terminal would not cause any unnecessary negative effects and since the new aid measure did not alter the project but merely enabled its completion, the Commission concluded that there were no additional negative effects and that the aid was compatible with the internal market.
