Introduction
It is an established principle in the case law that the Commission may not authorise State aid that infringes other provisions of EU law, both primary and secondary. Now consider the following case. A Member State notifies to the Commission regional investment aid to support the construction of a mega factory. The factory will produce its own energy and for that purpose a small coal-fired electricity plant will be installed. This is because the factory will be located close to a coal mine that is licensed to operate for another 10 years. Without the extra demand from the factory, the mine would become commercially unviable. Should the Commission prohibit the aid?
After the landmark judgment of September 2020 in case C-594/18 P, Austria v European Commission, advocates of green policies concluded that it was incumbent on the Commission to prohibit aid that could harm the environment. This is because in that judgment, the Court of Justice held that “(44) State aid which contravenes provisions or general principles of EU law cannot be declared compatible with the internal market”.
The Court of Justice was in fact copying from a previous judgment, in case C-390/06, Nuova Agricast, according to which “(50) it is clear from the general scheme of the Treaty that the procedure under Article 88 EC [now Article 108 TFEU] must never produce a result which is contrary to the specific provisions of the Treaty … Accordingly, State aid, certain conditions of which contravene other provisions of the Treaty, cannot be declared by the Commission to be compatible with the common market.”
Another Treaty provision that may be contravened is Article 11 TFEU which stipulates that environmental protection requirements “must be integrated into the definition and implementation of the Union’s policies and activities”. Therefore, is the Commission now obliged to take the environmental impact of State aid measures into account?
Well, after the judgment of the General Court of 30 November 2022, in case T101/18, Austria v European Commission, it is now clear that advocates of State aid policy that incorporates a mandatory environmental impact assessment would be legally wrong, even if they would be morally right or could be proven right by a social welfare analysis.
In terms of the objectives and conditions of the aid measure, the General Court ruled that the Commission was neither obliged, nor allowed to take into account infringements that were not inextricably linked to the measure. In terms of the impact of the aid on trade and competition [i.e. the “second condition” in Article 107(3)(c)] and the balancing of its positive and negative effects, the Court of Justice had already ruled in case C-594/18 P that the Commission could only take into account the negative effects on trade and competition. As expressed by the Court of Justice ,in that case, “(101) examination of the second condition laid down in Article 107(3)(c) TFEU entails the Commission taking into account the negative effects of the State aid on competition and trade between Member States, but does not require any negative effects other than those to be taken into account.”
The new judgment of the General Court is important because the interpretation of the Court of Justice in case C-594/18 P left a crucial issue unresolved. There was no explanation as to the nature of the link between the State aid and the contravention of other provisions of EU law.
Background
Austria sought the annulment of Commission decision 2017/2112 on public funding granted by Hungary to Paks II nuclear power station. As may be recalled, case C-594/18 P also concerned a nuclear power station – Hinkley Point C in the UK. Hearings in the Paks II case were suspended until the Court of Justice would deliver its judgment in the Hinkley Point C case.
The beneficiary in the present case was MVM Paks II company. The project was to be fully funded by Hungary. The Paks II company was wholly owned by the Hungarian state. A controversial aspect of this case was that Paks II was to use Russian nuclear reactors. Consequently, the project depended on extensive Russian involvement and technical knowledge and input. The construction of the power plant was assigned to JSC NIAEP – a Russian entity – through an intergovernmental agreement. Furthermore, Russia agreed to provide Hungary with a state loan to finance the project. The Russian funding was in the form of a revolving credit facility of EUR 10 billion backed by a state guarantee. In addition, Hungary would make available an amount of EUR 2.5 billion from its own budget.
After a formal investigation, the Commission concluded that the public funding constituted State aid that was, however, compatible with the internal market under Article 107(3)(c) with certain conditions.
Link between State aid and infringement of non-state aid provisions of EU law
Austria claimed that the aid measure infringed other provisions of EU law.
The General Court noted that “(25) the Commission, […], examined whether the aid complied with provisions of EU law other than the rules on State aid. […], the Commission proceeded on the basis that it was required, in accordance with the general scheme of the FEU Treaty, to ensure that provisions governing State aid are applied consistently with specific provisions other than those relating to State aid and, therefore, to assess the compatibility of the aid at issue with those specific provisions, but that such an obligation was imposed on the Commission only where the aspects of aid are so inextricably linked to the object of the aid that it is impossible to evaluate them separately.” The Court continued in the same paragraph that where “the aspect of the aid at issue is inextricably linked to the object of that aid, the Commission must assess its compatibility with provisions other than those relating to State aid in the context of the procedure provided for in Article 108 TFEU and that assessment may result in a finding that the aid concerned is incompatible with the internal market. By contrast, if the aspect at issue can be separated from the object of the aid, the Commission is not required to assess its compatibility with provisions other than those relating to State aid in the context of the procedure provided for in Article 108 TFEU.”
Here the General Court cited an earlier judgment of the General Court in case T-57/11, Castelnou Energía v European Commission. According to that judgment, “(181) when the Commission applies the State aid procedure, it is required, in accordance with the general scheme of the Treaty, to ensure that provisions governing State aid are applied consistently with specific provisions other than those relating to State aid and, therefore, to assess the compatibility of the aid in question with those specific provisions.” “(182) However, such an obligation is imposed on the Commission only where the aspects of aid are so inextricably linked to the object of the aid that it is impossible to evaluate them separately […] The obligation is not imposed, however, where the conditions or factors of an aid scheme, even though they form part of the aid, may be regarded as not being necessary for the attainment of its object or for its proper functioning.”
Then, the General Court applied the principle of inseparability to the Paks II case and found that that “(26) there was no ‘indissoluble link’ between a possible infringement of Directive 2014/25 on public procurement and the object of the aid, such that the assessment of the compatibility of the aid could not be affected by that possible infringement”.
Next, in what is probably the most important part of its judgment, the General Court interpreted what the Court of Justice actually said or meant in case C-594/18 P.
“(28) No conclusions can be drawn from the fact that the Court of Justice did not examine the existence of an inextricable link in its judgment of 22 September 2020, Austria v Commission (C-594/18 P, EU:C:2020:742). That is explained by the fact that in the case which gave rise to that judgment the alleged infringement of principles of EU law derived from the actual object of the aid, namely the development of a power plant producing electricity from nuclear power. Accordingly, the question of the existence of a link with an aspect of the aid, separate from its object, did not arise.”
“(29) Contrary to what is claimed by the Republic of Austria, the judgment of 22 September 2020, Austria v Commission (C594/18 P, EU:C:2020:742), does not show that the Court of Justice intended to broaden the scope of the review falling to the Commission in the context of a procedure to determine whether State aid is compatible with the internal market. By means of a reference to the judgment of 15 April 2008, Nuova Agricast (C390/06, EU:C:2008:224, paragraphs 50 and 51), the Court of Justice observed, in paragraph 44 of the judgment of 22 September 2020, Austria v Commission (C594/18 P, EU:C:2020:742), that it had already held that State aid which contravened provisions or general principles of EU law could not be declared compatible with the internal market. That principle is in fact part of the settled case-law of the Court of Justice, as is shown by the references in paragraph 50 of the judgment of 15 April 2008, Nuova Agricast (C390/06, EU:C:2008:224).”
“(30) Consequently, given that the Court of Justice made a reference to settled case-law in paragraph 44 of the judgment of 22 September 2020, Austria v Commission (C594/18 P, EU:C:2020:742), there is nothing to support the conclusion that it intended to abandon its case-law under which a distinction should be drawn between aspects that are inextricably linked to the object of the aid and those that are not.”
The difference between State aid procedure and infringement procedure
In its capacity as guardian of the Treaties, the Commission may initiate the infringement procedure provided in Article 258 or 260 TFEU. However, it has no powers to prohibit a national measure. The finding of infringement is reserved solely for the Court of Justice. By contrast, in the field of State aid, the Commission may prohibit the implementation of a national measure and require recovery of the aid without any prior confirmation by the Court of Justice.
Therefore, the General Court went on to examine the consequences of these distinct provisions.
“(31) If the Commission were required to adopt a definitive position, irrespective of the link between the aspect of the aid and the object of the aid at issue, in a procedure relating to State aid, on the existence or absence of an infringement of provisions of EU law distinct from those coming under Articles 107 and 108 TFEU, that would run counter to, first, the procedural rules and guarantees – which in part differ significantly and imply distinct legal consequences – specific to the procedures specially established for control of the application of those provisions and, second, the principle of autonomy of administrative procedures and remedies”.
“(32) It is therefore necessary to reject the Republic of Austria’s interpretation that the Commission, […], is henceforth required to verify that any aspect of an aid measure or any circumstance relating to the aid, even if it is not inextricably linked to the aid, does not infringe any provision or general principle of EU law.”
“(33) It should be added that in a situation where, as in the present case, two separate procedures are at issue, which both fall within the Commission’s competence and whose respective rules it must observe, there would be a risk of a conflict or infringement of those rules if the Commission was required to assess the same aspect of the aid in both the procedure concerning the authorisation of the aid at issue and an infringement procedure.”
“(34) It follows that the Commission did not err in law when it considered that it should limit its review, in the procedure under Article 108 TFEU, to the aid measure itself and to the aspects which are inextricably linked to it.”
It should also be noted that the Commission had also examined possible violation of public procurement rules in the context of the normal infringement procedure and concluded that no infringement had been committed.
The procedure for the selection of the beneficiary
Austria argued that the aid measure was inextricably linked to the fact that the construction of the power plant was assigned directly to a company – JSC NIAEP – without any competitive selection.
At this point it should be, first, clarified that the aid at issue consisted of the provision free of charge, but funded by Hungary, of two new nuclear reactors to the Paks II company.
It should also be recalled that when a public authority decides to grant State aid it is not required, as a matter of a general rule, to select the beneficiary or beneficiaries through a competitive selection unless there is an explicit obligation imposed on Member States [e.g. see the GBER provisions on broadband networks or green electricity]. But no such obligation exists in the field of nuclear power. Member States may choose to whom to grant aid. A competitive selection eliminates advantage in the meaning of Article 107(1) TFEU. But, if the intention is to grant State aid, competitive selection is superfluous, unless it is explicitly required by, say the GBER, in order to minimise the amount of State aid or to ensure that the aid goes to the most efficient provider.
Here there are two companies: JSC NIAEP that would construct the power station and Paks II that would own and operate the reactors. The aid measure concerned the provision of the reactors. JSC NIAEP was appointed by Russia that also provided the EUR 10 billion loan. Paks II was appointed by Hungary.
The General Court pointed out that “(36) the question of whether the award of the contract for the construction of those two reactors should have been subject to a tender procedure concerns the manufacture and supply of the asset to be provided free of charge and thus precedes the aid measure itself. Accordingly, the award decision in respect of the contract for the development and construction of the two new reactors does not constitute an aspect of the aid itself.”
“(37) The carrying out of a public procurement procedure and the possible use of another undertaking for the construction of the reactors would alter neither the object of the aid, namely the provision free of charge of two new reactors for the purpose of their operation, nor the beneficiary of the aid, which is the Paks II company. In addition, an infringement of the rules on public procurement would produce effects solely on the market for the construction of nuclear power stations and would have no consequences for the market covered by the object of the aid measure at issue.”
“(38) As regards the influence of the lack of a public procurement procedure on the amount of the aid, […] it has not been demonstrated that other tenderers could have supplied the two reactors with VVER 1200 technology on better terms or at a lower price.* Furthermore, the Commission also correctly states that the lawfulness of its decision on State aid does not depend on compliance with the EU rules on public procurement when the choice of another undertaking for the construction of reactors would not alter the assessment in the light of the rules on State aid. Even if the use of a tender procedure might have altered the amount of the aid, that factor would not by itself have had any effect on the advantage which that aid constituted for its recipient, the Paks II company, given that that advantage consisted of the provision free of charge of two new reactors with a view to their operation. Consequently, an increase or reduction in the aid amount does not result, in the present case, in an alteration to the actual aid or in a modification of its anticompetitive effect.” [* Only the Russian company could provide that technology.]
“(40) As regards the question of whether EU law lays down an obligation to carry out a tender procedure for the engineering, procurement and construction of the two new nuclear reactors at the Paks nuclear power plant, the Commission stated in that recital that, in any event, Hungary’s compliance with Directive 2014/25 had been assessed by it in a separate procedure, in which the preliminary conclusion, on the basis of the available information, was that the procedures set out in Directive 2014/25 were not applicable, on the basis of Article 50(c) thereof, to the award of work for the construction of two reactors.”
“(42) The Commission had concluded in the infringement proceedings that the direct award of the task of constructing the two new reactors did not infringe EU public procurement law. That conclusion was based on an in-depth analysis of the technical requirements which Hungary had relied on in order to justify the absence of a tender procedure.”
Disproportionate distortions of competition at the expense of green electricity?
Austria submitted that the aid was incompatible with the internal market because it produced disproportionate distortions of competition as a result of the exclusion from the electricity market of producers of energy from renewable sources. It also alleged that those producers were treated unequally.
With respect to the unequal treatment of green electricity producers, the General Court reiterated “(97) that the Court of Justice has already held that a Member State is free to determine the composition of its own energy mix […] Accordingly, the Commission cannot require that State financing be allocated to alternative energy sources. It also follows that a Member State cannot be obliged to provide for absolutely identical financing or operating conditions for all energy producers.”
“(98) In the second place, […], a threat of some distortion to competition is inherent in any aid. This must therefore be accepted, up to a certain point, in the assessment of whether aid to facilitate the development of certain activities is compatible with the internal market within the meaning of Article 107(3)(c) TFEU, with the limit being exceeded if that aid adversely affects trading conditions to an extent that is contrary to the common interest.”
Then the General Court observed that “(99) the Commission reached the conclusion that any negative effects resulting from the aid at issue would at least be offset by the objective of common interest pursued.” But, it must be said that the objective of common interest is inherent in all aid that aims to address a market failure or inadequacy. In itself, it does not prove that the positive effects offset the negative effects. Nevertheless, the General Court continued in the same paragraph that “since the situation at issue concerns solely the costs of investment in two new reactors intended to replace the four old reactors, which will be gradually closed down on account of their age, and with no operating aid being foreseen, the effect on the energy market will only be limited.” This latter part of paragraph 99 is probably factually correct, but not the first part.
The General Court went on to consider and agree with the market assessment carried out by the Commission which had concluded that the electricity produced by Paks II would have only minimal effect on the market.
Creation of a dominant market position?
Austria argued that the aid would create market dominance, given that the companies operating the old and new reactors at Paks nuclear power station were wholly state-owned.
Strengthening or creating dominance is an effect that certainly impacts on the conditions of competition in the internal market.
The General Court recalled that “(131) in accordance with Article 107(3)(c) TFEU, aid may be authorised only if it does not adversely affect trading conditions to an extent contrary to the common interest, which entails weighing up the positive effects of the planned aid for the development of the activities that it is intended to support and the negative effects that that aid may have on the internal market […] Such negative effects on competition arise in particular where the aid leads to the creation or maintenance of a dominant position on the market of the recipient of the aid.
The Court also noted that “(132) the Commission, […], examined whether an increase of possible market concentration resulted from the merged future ownership and operation of the old reactors at the Paks nuclear power station with the new reactors.”
The Commission found that “(133) the Hungarian electricity generation market was characterised by a relatively high concentration, with the current Paks (MVM Group) nuclear power station providing some 50% of domestic generation. […] However, the Commission took the view that certain items of information addressed its concerns, namely, first, that the objective of the Hungarian measure was the gradual replacement of the existing nuclear capacity at the Paks nuclear power station between 2025 and 2037, second, that Hungary had submitted that the MVM Group and the Paks II company were independent and unconnected and, third, that, according to Hungary, the Paks II company, its successors and affiliates would be fully legally and structurally separated, and be maintained, managed and operated independently and without connection to the MVM Group and all of its businesses, successors and affiliates and other State-controlled companies active in the generation, wholesale or retail of energy”.
The General Court proceeded to examine the market analysis in the contested Commission decision and concluded that there was negligible risk that the aid in question would result in the creation of market dominance.
“(148) In conclusion, the Commission was right to consider, […], that the impact of the aid at issue on the market was proportionate in view of the objectives of security of supply and of the need to prepare carefully the decommissioning of the units at the Paks nuclear power station.”
In paragraphs 149 to 176, the General Court considered and rejected several other arguments put forth by Austria concerning the structure and functioning of the electricity market in Hungary and the rest of the EU.
The General Court also rejected Austrian pleas alleging insufficient analysis of other aspects of the aid measure. Given that none of the pleas was successful, the Court dismissed the appeal in its entirety.
Conclusions and unresolved issues
The judgment of the General Court is important because it clarifies the nature of the link that must exist between State aid and other provisions of EU law in order for an aid measure to be found to be incompatible with the internal market.
But there are still a couple of issues that are unclear. First, it is rather vague what the Commission must do when there is an inseparable link between the aid measure and a possible contravention of other EU law. Should it prohibit the aid and start infringement proceedings or should it start infringement proceedings, wait until the Court delivers its judgment and then declare the aid compatible or incompatible.
Second, both the Court of Justice and the General Court examined the case where State aid does “contravene” EU law. This suggests that it is not enough for State aid to support an activity that harms the environment. Such harm must actually be prohibited by law. Consider again the example of the aided factory and the coal mine at the beginning of this article. First, is there an inextricable link between the objective of the aid, which is regional development, and possible harm to the environment? Second, if the coal mine operates legally and the aid recipient undertaking can legally choose its energy generating technology, should the Commission take into account the environmental harm? In Castelnou Energia the General Court concluded that increased CO2 emissions from more coal use as a result of the measure in question would not necessarily breach EU law since the Spain – the Member State concerned – could offset the increase with reductions in other sectors. But what would happen if this kind of remedial action could not be taken?
[1] I am grateful to Peter Staviczky for insightful comments on an earlier version of this article.
The full text of the judgment can be accessed at:
