Introduction
The Netherlands intends to reduce the emission of greenhouse gasses [GHG] by 55% by the year 2050. For this reason, in June 2023 it notified to the Commission a new version of a scheme, called the “Stimulering Duurzame Energieproductie en Klimaattransitie” [SDE++] which loosely translated means incentivising sustainable production of energy and climate transition. Its purpose is to fund technologies that reduce GHG emissions in multiple economic sectors.
Earlier versions of the scheme were approved by the Commission in 2020 [SA.53525] and 2021 [SA.100461]. The entire scheme was notified again so that it was assessed in Commission decision SA.104448 on the basis of the new guidelines on state aid for climate, environmental protection and energy [CEEAG].1
In order to determine the appropriate amount of subsidy, the scheme classifies different technologies into “groups” and different groups into one of five “domains”. There are also distinct “categories” within groups.
The five domains are: electricity [e.g. wind power], carbon capture and storage or use [CCS/CCU], low temperature heat [e.g. solar], high temperature heat [e.g. biomass combustion], and molecules [e.g. hydrogen production].
Funding gap method
The Netherlands Environmental Assessment Agency [PBL] calculates the necessary subsidy for reference projects in each technology category using the funding gap methodology. It takes into account “(35) all costs for the project and any income/avoided costs such as energy and/or CO2 prices that arise compared to the counterfactual situation (for example where a beneficiary had to buy or produce energy from fossil fuels in the absence of aid to produce renewable energy on site)”.
“(37) For 2023, PBL’s analysis assumes projects are financed with 30% equity and 70% debt (15%/85% for solar PV and 80%/20% for onshore wind because they are established technologies and lenders are comfortable with higher gearing), and that the return required on equity is between 11% and 14.5% depending on how well established the technologies in a category are and how risky investors are expected to consider the technology. The return on debt will be set at around 3% based on the current Euribor rate, a commercial interest margin and an interest swap to convert the interest margin into a 10-year interest rate. This would imply an overall assumed weighted average cost of capital (WACC) / target internal rate of return (IRR) of 4.2% to 7.5% nominal / 2.2% to 5.4% real, post-tax.”
Projects are selected through a competitive process of bidding for subsidies. The annual budget for the scheme is set at such level so that not all bidders can be successful. That is, the requested amounts exceed the budgeted amount. Furthermore, as explained below, there is a cap on the maximum amount of subsidy that can be requested, which varies across technology categories.
Amount of aid
As mentioned above, the scheme covers the funding gap. Without the subsidy beneficiaries would not have an incentive to reduce GHG emissions. The aid is granted in the form of “variable premiums”.
“(89) The subsidy amount is the difference between the price bid by a successful beneficiary in the competitive process (and which at the maximum will correspond to the cost for the production of energy (or capture and storage of CO2) that PBL has established to determine the category specific base amount) and the correction amount, which represents the revenues or avoided costs of the project, for example revenues from the sale of heat, electricity or gas produced, revenues from avoided emissions (eg. avoided EU Emissions Trading System (ETS) costs for projects covered by the ETS), avoided costs for the purchase or production of heat, and any revenues from other aid measures.”
For most technologies, the “correction amount” is simply the market price as it evolves over time. In other words, no subsidy is paid if the market price exceeds the cost borne by beneficiaries. This is shown in Figure 1 below.
“(92) There is also a floor price, which limits the revenues that beneficiaries can receive and thereby provides a cap on the maximum possible expenditure under the scheme. This is because, if the correction amount ever falls below the floor price, beneficiaries will be paid the difference between the floor price and the price bid in the competitive process.”
An amount corresponding to 80% of the estimated subsidy is paid monthly in advance to each beneficiary. The final subsidy amount is adjusted annually depending on the actual correction amount, which in turn depends on the real annual ETS, product (hydrogen) and energy prices.
“(94) If the ETS, product and energy prices are higher than expected, the correction amount will be higher and therefore the subsidy amount lower. If ETS, product and energy prices are lower than expected, the subsidy amount will be higher and the correction amount lower. The subsidy amount paid to each beneficiary is also adjusted ex post each year based on the actual metered output of the beneficiary (i.e. electricity, heat or gas produced, or amount of GHG stored), to ensure as far as possible that only actual GHG emissions reduced by the
beneficiary are subsidised. There is a maximum annual number of load hours for which each category of beneficiary can receive a subsidy.”
As of 2024, “(97) an additional clawback mechanism will be introduced for solar PV and wind, where the Netherlands has identified a risk that market revenues during the SDE++ contracts (12 to 15 years) may be higher than expected leading to excessive profits.”
Compatibility with the internal market
The Commission assessed the compatibility of the scheme with the internal market on the basis of the CEAAG.
Incentive effect
“(130) To demonstrate the presence of an incentive effect, point 28 CEEAG requires the factual scenario and the likely counterfactual scenario in the absence of aid to be identified. Furthermore, point 28 CEEAG requires the incentive effect to be demonstrated through a quantification referred to in Section 3.2.1.3 CEEAG. Point 52 CEEAG explains that a counterfactual scenario may consist in the beneficiary not carrying out an activity or investment.”
“(131) The Netherlands has identified the counterfactual for each category (see Section 2.3.6). For each category PBL identifies costs and revenues and sets a category specific base amount as described in Section 2.4.3 and a funding gap as described in Section 2.3.6. The calculations include all main investment and operating costs of the projects, as well as the main expected economic revenues from the sale of electricity, gas or heat. … The Netherlands has also set the level of the WACC used for different categories at an appropriate level depending on investors’ and lenders’ perception of the riskiness of the benefitting technologies (see Section 2.3.6).”
“(132) These calculations result in a funding gap for the majority of categories in the SDE++ (see recital (36) and accompanying footnote). For those categories, it is therefore very unlikely that projects would proceed without aid.”
“(133) For certain categories, specifically those within the solar PV and wind power technology groups, no funding gap is identified in PBL’s advice for the 2023 allocation process, indicating that these technologies should be profitable without support. However, the Netherlands has explained that for those projects, the funding gap is dependent on uncertain future revenues as these depend on volatile electricity prices. In these circumstances, where there is significant uncertainty concerning future market developments related to a large part of the business case support in the form of a certain guaranteed remuneration to limit exposure to negative scenarios may be considered necessary according to point 90 CEEAG to ensure that the private investment takes place (see also recital (144)). The Commission therefore concludes that the aid has an incentive effect in relation to these categories as well.”
Necessity of the aid
“(142) Point 89 CEEAG states that the Member State must identify the policy measures already in place to reduce GHG emissions and that the full costs of GHG emissions may not yet fully be internalised despite the implementation of measures to that effect, such as the EU ETS and other related measures or policies. In order to demonstrate the necessity of aid, points 38 and 90 CEEAG explain that the Member State must show that the reference project(s) would not be carried out without the aid, taking into account the counterfactual situation, as well as relevant costs and revenues including those linked to measures identified in point 89.”
“(143) As described in recitals (131) and (132), the Netherlands has demonstrated that without aid, the projects in most SDE++ categories would not be financially viable and the projects would not be carried out.”
(144) For certain categories, the Netherlands has not been able to demonstrate this, namely solar PV and wind power technology groups (see recital (133)). In this regard, point 90 CEEAG is relevant, which explains that ‘where there is significant uncertainty concerning future market developments related to a large part of the business case (as for example may be the case for renewable energy investments where electricity revenues are not coupled to input costs), support in the form of a certain guaranteed remuneration to limit exposure to negative scenarios may be considered necessary to ensure that the private investment takes place.’”
“(145) Point 90 CEEAG also states that: ‘In such cases, limits to profitability and/or clawbacks linked to positive scenarios may be required to ensure proportionality.’ As described in recital (97), the Netherlands has explained that a clawback will be introduced for the solar PV and wind power technology groups from 2024. For contracts awarded as part of the 2023 allocation process, as described in Section 2.5 the form of aid involves a premium that will only be paid where real revenues (the correction amount) are insufficient to cover the beneficiaries’ costs and provide a reasonable rate of return.”
Proportionality
“(152) Point 47 CEEAG explains that State 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 103 CEEAG states that aid for reducing greenhouse gas emissions should, in general, be granted through a competitive bidding process, while point 50 CEEAG explains that the selection criteria used for ranking bids should put the contribution to the main objectives of the measure in relation with the aid amount requested by the applicant.”
“(153) The aid under the SDE++ will be granted under a bidding process as described in recital (71). The design of the SDE++ will allow many different eligible technologies to compete in the same bidding process on the basis of their cost of emission reduction (see Section 2.4.1), in line with point 50 CEEAG. That design will allow less widespread technologies the possibility to outcompete more established technologies where their developers have found solutions for reducing costs.”
(157) Point 49 CEEAG sets out the conditions under which aid allocated through a competitive bidding process can be considered proportionate.”
“(158) The rules for the competitive bidding process in the SDE++ are transparent and published at least 6 weeks in advance of the deadline for submitting bids as required by point 49(b) CEEAG. The level of subsidy paid to beneficiaries in the SDE++ will be established via a bidding process where successful participants will receive the level of support for which they bid. As explained in recital (71), on the day that the budget limit is reached, a subsidy is granted first to the applications (bids) with the lowest subsidy intensity (EUR/tCO2equivalent). Competition should push participants to participate in the earliest phase that offers sufficient subsidies to make their project viable, since once the budget is exhausted the scheme will close for that year and any pending phases will be cancelled. There is a risk that, should the budget not be exhausted on the first day of an SDE++ phase, some projects will be selected for support ahead of cheaper projects because the cheaper projects did not submit their bid for a subsidy until day two of the final phase of an allocation process.”
Avoidance of undue negative effects of the aid on competition and trade
The Commission found the scheme to be compliant with all of the requirements of the CEEAG. It may be noted that point 70 CEEAG lays down a maximum period of 10 years for aid measures. The scheme has a duration of only three years.
Point 115 CEEAG stipulates that the subsidy per tonne of CO2 equivalent emissions avoided must be estimated for each reference project, and that the assumptions and methodology for that calculation must be clear and explicit. These were explicitly presented in the scheme .
Point 116 CEEAG explains that the aid must not merely displace the emissions from one sector to another and must deliver overall greenhouse gas emissions reductions. This was true for the Dutch scheme.
Point 123 CEEAG requires the aid measures are designed in such a way as to prevent any undue distortion to the efficient functioning of markets, and preserve efficient operating incentives and price signals. According to the Commission, “(183) the aid is provided in the form of a variable premium. This takes into account – via the correction amount – revenues such as those from the sale of electricity, gas, and heat. The correction amount is calculated on the basis of market prices, so beneficiaries have incentives to get the best possible revenue from their production; if they get a better price than the average market price, they earn a higher return. To make a reasonable rate of return, the average project also needs to operate in the number of hours anticipated by PBL when the category specific base amount was set. Projects that can exceed that average performance can earn higher returns. In addition, where projects can avoid costs, they can increase their returns. Finally, beneficiaries are only paid subsidies for actual metered output which acts as a control to ensure they are only paid for delivering measureable outputs that contribute to the GHG emissions reduction objective. This means beneficiaries have incentives to operate efficiently and maximise their output, as well as making sure they are available when prices are highest – for example if there are periods of the day, week or year where their output has a higher value.”
Point 127 CEEAG explains that aid for decarbonisation may unduly distort competition where it displaces investments into cleaner alternatives that are already available on the market, or where it locks in certain technologies, hampering the wider development of a market for and the use of cleaner solutions. Consequently, the Commission also verified that the scheme did stimulate or prolong the consumption of fossil-based fuels and energy, thereby hampering the development of cleaner alternatives and significantly reducing the overall environmental benefit of the investment.
Conclusion
“(197) Point 134 CEEAG states that, provided that all other compatibility conditions are met, the Commission will typically find that the balance for decarbonisation measures is positive (that is to say, distortions to the internal market are outweighed by positive effects) in light of their contribution to meeting Union energy and climate objectives, as long as there are no obvious indications of non-compliance with the ‘do no significant harm’ principle.”
“(198) The Commission notes that the measure will contribute to the achievement of Dutch energy and climate objectives and that all other compatibility conditions are met. The Commission finds no obvious indications of non-compliance with the ‘do no significant harm’ principle.”
“(199) Based on the above, the Commission concludes that the positive effects of the measure outweigh its negative effects on the internal market.
