Introduction
In July 2024, the Commission published its decision on State aid measure SA.104269 concerning a large investment project [LIP] undertaken by 3Sun in Italy. 3Sun is a subsidiary of Enel, the Italian energy company that is also one of the largest energy companies in Europe.
The project would take place in Catania, a city in the NUTS 2 region of Sicily. That area is eligible for regional aid under Article 107(3)(a) TFEU, with a standard aid ceiling of 40%. The project would extend the capacity of the existing production site of 3Sun. The existing plant manufactures solar photovoltaic panels [PV panels]. The extension would create the largest manufacturing plant in Europe for PV panels.
In this context, the project is unusual in four respects. First, it concerns extension of existing capacity. This is rather rare for LIPs. Second, it is realised in an assisted area of one of the more prosperous Member States. Third, as explained below, it also benefits from direct EU funding that does not constitute State aid. Fourth, as also explained later on, the amount of the aid was calculated according to “scenario 1” of the Regional Aid Guidelines [RAG], i.e. the negative NPV of the project in any location. By contrast, the aid for most LIPs is calculated according to “scenario 2”, i.e. the difference between the NPV of the project in the assisted area and the NPV in the best alternative location.
Form and amount of aid
The aid was in the form of a direct grant financed by Italian allocation of the Recovery and Resilience Facility [RRF]. Although the aid was to be provided through a measure that was implemented on the basis of the General Block Exemption Regulation [GBER, Regulation 651/2014], it had to be notified because it exceeded the relevant threshold for individual notification.
The notified aid was EUR 89.6 million in nominal value, or EUR 87.1 million in discounted value. The aid would be paid out in annual instalments over the period 2023-2026.
Other public funding
Very interestingly for a LIP, the Commission decision explains that “(32) in addition to the notified measure, the Investment Project will also receive a direct grant from the EU Innovation Fund (“IF” and the “IF grant”), which does not constitute State aid [footnote 22].* […] That IF grant agreement sets the maximum grant from the IF at EUR 117.68 million […] when applying for support from the IF, EGPI [the owner of 3Sunl] already had the intention to combine the IF grant with State aid and as such only applied for the IF support it would need on top of the expected State aid. EGPI has initially estimated to combine the IF grant of EUR 117.68 million with a regional aid amount of EUR 55.97 million and research and development aid of EUR 15 million, for a combined total support of EUR 188.64 million. This assumption was based on a maximum regional aid intensity of 25% available under the regional aid map for Italy for the period 2014-2020. When EGPI applied for regional aid on 17 February 2022, the maximum regional aid intensity in accordance with the 2022 Regional Aid Map had increased to 40 %, and accordingly, EGPI applied for EUR 89.6 million regional aid from the Italian authorities. The Italian authorities further confirmed that no research and development aid has been granted or will be granted and they committed that 3Sun will have the IF grant reduced to EUR 99.09 million so that the total support remains EUR 188.64 million.”
* Footnote 22: “The IF is the EU fund for climate policy, with a focus on energy and industry. It aims to bring to the market solutions to decarbonise European industry and support its transition to climate neutrality while fostering its competitiveness. The IF is implemented by the Commission in direct management and is hence not State aid, in accordance with Article 16(1) of Commission Delegated Regulation (EU) 2019/856 of 26 February 2019 supplementing Directive 2003/87/EC of the European Parliament and of the Council with regard to the operation of the Innovation Fund (OJ L 140, 28.5.2019, p. 6). The Commission has delegated certain implementation tasks in this regard to the European Climate, Infrastructure and Environment Agency (“CINEA”).”
It is worth noting that Article 15 of Regulation 2019/856 requires IF-supported projects to comply with State aid rules. Furthermore, according to Article 5 of the same Regulation, the eligible costs that can be supported by the IF are the difference between the NPV of the innovative project and the NPV of a conventional, more polluting project of the same capacity.
Eligible costs of the LIP
The total investment costs amounted to EUR 592.5 million, of which the eligible investment costs were EUR 537.9 million in nominal value and EUR 529.2 million in discounted value. According to footnote 16 of the decision, “the nominal amounts in this decision have been discounted to the 2022 value. The discount rate used is 1.71%, applicable for Italy on 1 September 2022, in accordance with the Communication from the Commission on the revision of the method for setting the reference and discount rates”.
“(23) The eligible costs result from costs for tangible and intangible assets, including the adaptation and construction of buildings, the acquisition of machinery and various intangible assets.”
“(24) Costs related to buildings and facilities account for approximately [20-40]% of the total investment costs and include both the adaptation of the existing building and the construction of a new one.”
“(25) Machinery accounts for approximately [45-65]% of the total investment costs and includes assets for the increased production capacity of PV panels.”
“(26) Intangible assets account for less than [1-20]% of the total investment costs and mainly include IT tools and software for the monitoring of the production and sale processes of PV panels.”
Aid intensity
The maximum aid amount and the maximum aid intensity for the project were calculated by applying the “scaling-down mechanism” to the total eligible investment costs in nominal value and in discounted value. Accordingly, the maximum aid amount was EUR 89.6 million in nominal value and EUR 88.4 million in discounted value. Therefore, the notified aid amount – EUR 87.1 million – was below that permitted maximum amount. The aid intensity corresponding to the notified aid amount, in discounted value, was 16.47%. The maximum aid intensity, resulting from the calculation of the adjusted aid amount was 16.65%.
Contribution to regional development
The project would contribute to the regional development of Sicily mainly through the creation of about 550-700 new direct jobs and about 550-700 indirect jobs, in particular in the maintenance, logistics and security sectors.
Compatibility assessment
Since there was no disagreement between Italy and the Commission on the presence of State aid, the Commission proceeded quickly to assess the compatibility of the project with the internal market. For this purpose, the Commission applied the provisions of the RAG. The rest of this article reviews the main parts of the assessment.
Substantive incentive effect
The project complied with the formal incentive effect. With respect to the substantive incentive effect, the Commission noted that “(109) paragraph 68 RAG indicates that for scenario 1 – which is invoked by Italy in the present case – the Member State could prove the incentive effect of the aid by providing company documents that show that the investment would not be sufficiently profitable without the aid. According to paragraph 71 RAG, in scenario 1, the level of profitability can be evaluated by using methods that are standard practice in the given industry, which may include, inter alia, methods to evaluate the NPV or the IRR. The profitability of the project is to be compared with normal rates of return applied by the beneficiary in other investment projects of a similar kind. Where these rates are not available, the profitability of the project must be compared with the cost of capital of the
beneficiary as a whole or with the rates of return commonly observed in the industry concerned.”
“(110) That financial model has been provided with several simulations, depending on the level of public support (without public support, only with support from the IF, and with support from the IF and the notified measure).”
“(111) According to paragraph 66 in connection with paragraph 67 RAG, a counterfactual scenario is credible if it is genuine and relates to the decision-making factors prevalent at the time of the decision by the beneficiary regarding the investment. […] Without State aid, it would not be a financially viable decision to implement the investment in Catania. First, […], the only rational choice was the extension of the capacity of the Existing Factory in Catania given the built up experience and synergies and taking into account that the site is large enough for the implementation of the Investment Project. Therefore, since it was not expected that the investment would be sufficiently profitable anywhere else in the EEA, a separate greenfield investment was not assessed […] Second, although the support under the IF would improve the Investment Project’s NPV, bringing it from negative EUR [140-160] million (and an IRR of [6-7]%) to negative EUR [70-90] million (and an IRR of [7.5-9]%), the notified measure is still needed to reach an acceptable NPV and an IRR close to WACC. By also including the notified measure, the financial model shows that the Investment Project would have a negative NPV of EUR [0-20] million and an IRR of [9-11]%. Enel considers that IRR as sufficient to carry out the Investment Project, although [9-11]% remains slightly below the WACC. Enel thereby considered several elements in its decision-making, in particular the strategic rationale of the Investment Project, its technological innovation and the future potential of a new generation of high-efficiency PV panels.”
“(112) The Italian authorities submitted information to the Commission on the individual components Enel applied in determining the WACC of [9.5-11.5]%. On the basis of this information the Commission considers that the WACC applied by Enel is reasonable.”
“(113) Enel took into account to accept a level of profitability of the Investment Project slightly below the WACC even with the notified measure. In addition, the Commission notes that in the absence of the notified measure, the IRR of [7.5-9]%, resulting from the financial model, would remain considerably below the WACC of [9.5-11.5]%, with a negative NPV of EUR [70-90] million and therefore would not justify the decision to carry out the Investment Project. Even if the IF contribution remained at the level originally granted, i.e. EUR 117.68 million, the IRR of the Investment Project would remain considerably below the WACC. Therefore, on the basis of the above strategic considerations contained in Enel’s internal documents, the Commission confirms that Enel had sufficient and rational arguments to accept this lower level of profitability.”
“(114) The Commission further notes that the beneficiary started construction works already on 1 April 2022 […], i.e. without a final investment decision. The Commission considers that the Italian authorities provided sufficient evidence that this reflected a decision adopted by the [internal body approving investment decisions] on the basis of a preliminary configuration of the Investment Project (the extension of the capacity of the Existing Factory including HJT PV panels only, […] While the IF support had already been granted, Enel could also reasonably
assume that also the notified aid would be granted. The Commission notes in particular the communication by the Italian authorities of 2 March 2022 and the publication of 16 March 2022 of the RRF budget allocation”.
Therefore, the Commission concluded that the scenario 1 counterfactual was sufficiently credible and that the aid had a real and substantive incentive effect.
Proportionality
“(131) The Commission notes that the notified aid amount (EUR 89.6 million in nominal value and EUR 87.1 million in discounted value) do not exceed the adjusted aid amount applicable to the Investment Project, being a large investment project (EUR 89.6 million in nominal value and EUR 88.4 million in discounted value). Moreover, the resulting aid intensity of 16.47% remains below the maximum aid intensity of 16.65% applicable for the Investment Project […] The Commission therefore concludes that the aid amount for the […] project does not exceed the adjusted aid amount in line with paragraph 90 RAG.”
“(132) As a general rule, the Commission will consider notifiable individual aid to be limited to the minimum, if the aid amount corresponds to the net-extra costs of investing in the area concerned, compared to the counterfactual in the absence of aid, with maximum aid intensities as a cap (paragraph 95 RAG). For scenario 1 situations (investment decisions), the aid amount should therefore not exceed the minimum necessary to render the project sufficiently profitable, for example to increase its IRR above the normal rate applied by the undertaking in other investment projects of a similar kind or, when available, to increase its IRR above the cost of capital of the beneficiary as a whole or above the rates of return commonly achieved in that industry (paragraph 96 RAG).”
“(133) The notified aid increases the NPV from EUR -[70-90] million (resulting in an IRR of [7.5-9]%) to EUR -[0-20] million (resulting in an IRR of [9-11]%)”.
“(134) The Commission notes that the resulting IRR of [9-11]% (with the notified measure) would be slightly below the WACC of [9.5-11.5]% normally required by Enel. […] Enel has considered that the resulting IRR would be sufficient to carry out the Investment Project given its significant novelty and innovative technological aspects […] The Commission also notes that the financial model, only taking into account the IF support, resulting in an IRR of [7.5-9]%, would not allow Enel to take a positive investment decision, as the level of profitability of the Investment Project would remain too far below the WACC of [9.5-11.5]%. This conclusion also holds if the IF support were to remain at the level originally granted”.
On the basis of the above analysis the Commission concluded that the aid was kept to the minimum necessary to render the project sufficiently profitable, and thus proportionate.
No undue negative effects
The Commission found that there was no manifest negative effect on competition, given that the aid did not create overcapacity in a market that was in absolute decline, in compliance with paragraph 104 of the RAG.
In addition, the aid did not have a manifest negative effect on trade by inducing relocation of economic activity from other locations in the EEA, resulting in a loss of jobs. Given that the demand for PV panels was forecast to increase over time, the Commission concluded, more broadly, that there were no undue effects on trade and competition and proceeded to authorise the aid.
