The article is based on a legal opinion, that was given to LEAG.
Introduction
The European Green Deal envisages a clean and decarbonised energy sector with net-zero greenhouse gas emissions by 2050.[1] These ambitious objectives entrust the Member States with enormous tasks in connection with the transformation process, which must always be designed in a proportionate manner. For this purpose, compensation measures are regularly part of decarbonisation strategies. In the context of the German lignite phase-out, new legal challenges arise, in particular, due to State aid law.
In a decision of 2 March 2021 (C(2021) 1342 final – SA.53625)[2] the European Commission (Commission) decided to initiate the procedure laid down in Article 108(2) TFEU, based on an examination of the information supplied by the German authorities (and by some third parties) regarding the lignite phase-out. Compared to the phase-out of hard coal in Germany, which was supported by the Commission´s decision not to raise objections on 25 November 2020, the lignite phase-out has triggered a number of critical comments by the Commission when initiating the formal investigation procedure. The core subject of the investigation is the compensation of EUR 4.35 billion to be granted to the operators for the early closure of the lignite-fired power plants. The approval of the measure by the Commission is of crucial importance here, as the entire construction of the lignite phase-out is subject to the State aid clearance.[3] Is Germany’s lignite phase-out strategy, which is a fundamental part of the process of decarbonisation on the way to reach the EU’s ambitious climate goals, actually compatible with EU State aid law?
The Commission’s opening decision
Following pre-notification contacts, in December 2020, Germany notified to the Commission, pursuant to Article 108(3) TFEU, compensatory measures to be provided to Lausitz Energie Kraftwerke AG (LEAG) as well as RWE Power AG (RWE) for the phase-out of lignite powered electricity generation.
The subject of the Commission’s formal investigation is the compensation scheme under public-law contract terms for the closure of the lignite installations of LEAG and RWE. The legal basis for this compensation is the German ”Act on the reduction and termination of coal-fired power generation” (“closure law”) of 8 August 2020, as amended by Article 22 and 23 of the “Act amending the Renewable Energy Act and other energy acts”, published on 21 December 2020. The closure law envisages the phase-out of coal-fired power generation by 2038 at the latest.
The German government is authorised, by virtue of section 49 of the closure law, to conclude a public-law contract with the lignite operators in order to regulate the terms and conditions of the reduction, and ultimately the termination, of the lignite-fired power generation. On this basis, Germany and the lignite operators elaborated terms and conditions included in the ”Public-law contract on the reduction and termination of lignite-fired electricity generation in Germany” (the “contract” or “public-law contract”), which was approved by the German Parliament on 13 January 2021.[4] This contract establishes the operators’ legal obligation to close 30 lignite installations. In this regard, the closure law (section 40) contains a table that indicates the final closure dates between 2020 and 2038. The operators may temporarily or definitely close the installations before the closure date envisaged in the closure law. Therefore, the lignite phase-out follows a negotiated procedure between the German government and the operators.
Section 44 of the closure law foresees a compensation of EUR 2.6 billion to RWE for the closure of the lignite installations in Rhineland and EUR 1.75 billion to LEAG for the closure of the installations in Lusatia (Lausitz) by the end of 2029. The agreed compensation will be paid in 15 equal annual installments on 31 December of each year, starting from the year in which the first installation of the operator closes or is transferred to the deferred closure mechanism (“Zeitlich gestreckte Stilllegung”) (section 45 of the closure law). Based on the public-law contract, the compensation is to be used to cover the rehabilitation costs for the opencast mines in a timely manner (section 14 seq. of the public-law contract). Accordingly, the modalities of compensation are specified in the public-law contract.
From the Commission’s point of view, the compensation contains two main elements: First, the operators’ foregone profits (pp. 8 of the decision), because the closure law requires them to close down earlier than they would have done otherwise. Second, the additional mine rehabilitation costs that RWE and LEAG face following the requirement to cease their activities earlier than envisaged (pp. 12 of the decision).
In its preliminary assessment, the Commission considers that the compensation measure constitutes State aid according to Article 107(1) TFEU (pp. 20 of the decision). The Commission finds that the cumulative criteria for the existence of State aid are likely to be met. Based on these criteria the financial support must:
- be granted by the State or through State resources,
- favour certain undertakings or the production of certain goods with an economic advantage,
- distort or threaten to distort competition, and
- affect trade between Member States.
The Commission notably assumes the existence of an advantage due to the high amount of the compensation (pp. 20 of the decision), going beyond a compensation of unamortised investment costs and including foregone profits that cannot be granted as compensation even under German law. Therefore, the Commission concludes that RWE and LEAG are granted an advantage they would not have been able to attain through a compensation claim at a national court or under normal market conditions. The Commission’s main argument is that the compensation might constitute disproportionate overcompensation, even taking into account the Asteris judgment of the Court of Justice of the European Union (ECJ) (p. 22, para 107 of the decision):
“(107) In addition, the compensation amounts that Germany grants to LEAG and RWE in the context of the current measure seem to go beyond a compensation of unamortised investment costs. The compensation amounts were justified as compensating the operators’ foregone profits until 2040 for LEAG and 2051 for RWE. Given that there is no right under German law to be shielded from legal changes – not even until investment costs have been amortised – and that the protection of property rights does not cover turnover and profitability prospects, the Commission also considers it very likely that the compensation granted by Germany goes beyond appropriate expropriation compensation that could be justified under the applicable national law.
(108) On a preliminary basis, the Commission therefore concludes that RWE and LEAG are granted an advantage they would not have been able to attain through a compensation claim at a national court or under normal market conditions.”[5]
The Commission also concludes that the compensatory measure might cause a negative impact on competition, due to the fact that the German electricity market is part of a liberalised market (p. 23, paras 111-113 of the decision):
“(111) In view of the fact that the German electricity market is part of a liberalised market which is connected and coupled with the bidding areas of neighbouring countries, the operators of the lignite-fired power plants are in direct competition with other power generators.
(112) In addition, the phase-out of lignite fired electricity generation means that the electricity that would have been produced by these installations will now have to be produced by other generators, which is likely to affect the merit order and hence the electricity wholesale price.
(113) The Commission therefore considers, at this stage of the procedure and on preliminary basis, that the measure impacts competition and trade between Member States.”[6]
Assessment of the measure
Although the Commission provides a number of reasons in the decision to open the formal investigation procedure, it does not take into account all relevant aspects that are decisive for the assessment of the existence of State aid within the meaning of Article 107(1) TFEU. First, when considering all elements appropriately, the compensation for the lignite phase-out might not grant an advantage to the operators, in particular to LEAG (B.). Second, the measure is unlikely to cause a negative impact on competition, taking into account the reduced market position of LEAG after the lignite phase-out (C.).
Doubts regarding the existence of an advantage
Specifications in the State aid notice
The criterion of an advantage within the meaning of Article 107(1) TFEU is defined in the Commission’s notice on the notion of State aid (“State aid notice”).[7] Accordingly the measure in question has to cause an economic benefit for the undertaking that could not have been obtained under normal market conditions:
“An advantage, within the meaning of Article 107(1) of the Treaty, is any economic benefit which an undertaking could not have obtained under normal market conditions, that is to say in the absence of State intervention. Section 4.2 of this Communication provides detailed guidance on the question whether a benefit can be considered to be obtained under normal market conditions.”[8]
The economic benefit is further specified as an improvement of the financial situation of the undertaking following the State intervention:
“Only the effect of the measure on the undertaking is relevant, and not the cause or the objective of the State intervention. Whenever the financial situation of an undertaking is improved as a result of State intervention on terms differing from normal market conditions, an advantage is present. To assess this, the financial situation of the undertaking following the measure should be compared with its financial situation if the measure had not been taken. Since only the effect of the measure on the undertaking matters, it is irrelevant whether the advantage is compulsory for the undertaking in that it could not avoid or refuse it.”[9]
According to these specifications in the State aid notice, an advantage within the meaning of Article 107(1) TFEU exists if the financial situation of an undertaking improves as a result of the State measure, the terms of which differ from normal market conditions. Therefore, a comparison with the financial situation of the undertaking without (before) State intervention (status quo ante) is crucial.
In the case at hand, it is necessary to understand the lignite phase-out as a broad and highly complex measure, for which the compensation is an indispensable element in striking a proportionate balance in view of the early closure of the lignite-fired power plants. Compensation therefore can neither be considered separately from the concrete decommissioning obligations, nor by focusing on abstract terms of the German State liability law, on which the Commission’s decision (pp. 21, 22, para. 100 seq.) places a particular emphasis, by contrast to its regular “more economic approach”. Due diligence must be bestowed, inter alia, on the economic assessment of the agreement under a concrete longer-term risk management, and not only on foregone profits and additional mine rehabilitation costs, which seems to be the Commission’s focus.
With regard to a market analogous assessment the State aid notice strictly adheres to the market economy operator test (“MEOT”):
“The decisive element is whether the public bodies acted as a market economy operator would have done in a similar situation.”[10]
Compensation for LEAG is primarily a security deposit
Considering the security deposit nature of the compensation payments, it appears rather unlikely that LEAG gains an advantageous economic position under MEOT terms. In order to apply a market analogous assessment, it is crucial to understand the security mechanisms of the compensation scheme. The entire compensation is granted by payments to special-purpose vehicles and is thus withdrawn from LEAG’s direct disposability. Instead, the entire compensation is channelled and filtered as a security deposit through the special-purpose vehicles (SPV, “Zweckgesellschaften”) that manage the financial resources within strict public law constraints in order to secure the rehabilitation obligations under mining law and any other after-care obligations.
The strict earmarking procedure regarding the use of public funds correlates with the tightening legal and economic conditions for LEAG in recent years. The mining authorities of Saxony and Brandenburg demanded for collaterals under German mining law for the rehabilitation of the opencast mines (section 56(2) of the German Federal Mining Act – BBergG). Instead of mining law security payments, LEAG then agreed with the authorities on the establishment of SPVs. Therein special assets will be saved until the end of the opencast mines in order to secure LEAG’s obligations to rehabilitate the opencast mines (section 55(1) BBergG). For this purpose, corresponding precautionary agreements were concluded with Saxony and Brandenburg, which regulate the details, especially LEAG’s obligation to pledge all shares in the SPVs to the Federal States. Under these precautionary agreements the SPVs pledged to the Federal States save sufficient special assets, and, therefore, serve as a security instrument replacing any security that might otherwise be required under German mining law.
The German Government recognised this precautionary legal construction in the negotiations on the lignite phase-out and synchronized it within the compensation scheme. Consequently, LEAG’s entire compensation flows into the two SPVs in Brandenburg and Saxony (section 10(2) of the contract), always available for the corresponding public purposes and obligations (sections 14 and 16 of the contract).
Pursuant to section 16 of the contract, the SPVs are obliged to use the compensation for the mining law rehabilitation and for the fulfilment of other after-care obligations. However, it should be noted that the special assets may be available for investments and management measures by the SPVs, among others with the exception of investments in the energetic use of lignite. For this purpose, investment guidelines set out detailed requirements, according to section 16(1) of the contract:
“LEAG and the special-purpose companies are obliged to ensure, by means of appropriate measures and in consultation with the responsible mining authorities, that the assets of the special-purpose companies and the income from their investment assets are only used to fulfil their obligations under mining law for the rehabilitation and any after-care obligations, unless there is an opportunity to use the assets in accordance with the investment guidelines of the respective precautionary agreement to increase assets.”
Nevertheless, it must always be ensured that the assets of the SPVs remain sufficient to fulfil the primary obligations. This also becomes clear when considering that investments according to section 16(1) must always serve to increase assets of the SPVs.
[1] https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en.
[2] https://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_53625.
[3] The ‘‘Public-law contract on the reduction and termination of lignite-fired electricity generation in Germany’’, which forms the decisive legal basis for the lignite-phase out, in section 25 contains a clause making its entry into force subject to the State Aid clearance.
[4]https://www.bmwi.de/Redaktion/DE/Downloads/M-O/oeffentlich-rechtlicher-vertrag-zur-reduzierung-und-beendigung-der-braunkohleverstromung-entwurf.pdf?__blob=publicationFile&v=.
[5] European Commission, Decision of 2 March 2021 – C(2021) 1342 final – SA.53625, pp. 22.
[6] European Commission, Decision of 2 March 2021 – C(2021) 1342 final – SA.53625, p. 23.
[7] European Commission, Notice of 19 July 2016 – 2016/C 262/01.
[8] Ibid., para 66.
[9] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 67.
[10] European Commission, Notice of 19 July 2016 – 2016/C 262/01, para 76.
Author
Christian Koenig, Prof. Dr. iur., LL.M. (LSE), University of Bonn
Photo by Artyom Korshunov on Unsplash
