Capacity mechanisms and EU state aid control: it is not all about compatibility

The Commission issued the preliminary report of its state aid sector inquiry into electricity capacity mechanisms on the 13th of April 2016. While it does not address the applicability of State aid rules, the most contentious legal issues can already be foreshadowed.

As is now well known, a measure qualifies as state aid when it fulfills four cumulative criteria: there must be (i) an economic advantage, favouring certain goods or sectors, (ii) funded by or through state resources which (iii) distorts competition and (iv) adversely affects trade in the internal market. Two issues remain particularly salient today when it comes to capacity mechanisms and the notion of aid: the existence of an advantage pursuant to the Altmark case law of 2003 and the involvement of state resources.

With regard to the existence of an advantage, the question is to determine whether the remuneration obtained through participation in the capacity mechanism is a mere compensation for performing a public service obligation, in this case contributing to the security of electricity supply. In the Altmark case of 2003 (C-280/00), the Court of Justice of the European Union further developed the test by defining four criteria, each of which must be fulfilled, to find that a measure does not constitute State aid.

First, the beneficiary must be vested with a public service obligation and this obligation must be clearly defined. In the case of capacity mechanisms, the specific question is whether the mechanism considered is able to address a security of supply problem, and if such problem indeed exists.

Second, and this is the easiest part, the parameters for compensation must be set beforehand, in an objective and transparent fashion, so that an unfair competitive advantage is not granted to the beneficiary, aka the participants of the capacity mechanism.

Third, the compensation must be strictly limited to what is necessary for the performance of the public service obligation, including a reasonable profit. This condition is particularly problematic as, while it depends on the chosen design, capacity mechanisms have a general tendency toward overcompensation.

Fourth, where the undertaking which is to perform a public service obligation is not chosen following a public procurement procedure, the level of compensation must be determined according to the costs which a typical undertaking, well-run and adequately provided with the means to meet the public service requirements, would have incurred in discharging those obligations, taking into account the receipts and a reasonable profit. Even if capacity mechanisms often include an auction procedure, as in the UK mechanism, this is not a guarantee that it will be exempt from State aid control as the Commission will scrutinise in great detail the anticipated procedure.

These four conditions will be hard to fulfill. However, it is not impossible, in particular keeping in mind that the Commission has already accepted that a measure addressing the security of supply concerns can be framed as a public service obligation. A Member State willing to follow that path must nonetheless expect to face an uneasy Commission, the public services ‘box’ entailing a big margin of appreciation for Member States in EU law.

With regard to the involvement of state resources, the key question is the degree of state control over the financial flows generated by the capacity mechanism. In the French capacity mechanism case for instance, the French Council of State in its decision of 9 October 2015 and the Commission in its opening decision 13 November 2015 reached opposite conclusions in this regard. Much like state support schemes to renewables, capacity mechanisms are often financed through a public levy aggregating ‘contributions’ from final consumers or distributors. The state aid ‘status’ of that kind of levy has become an enduring question of the past few years, but the case law is not without ambiguity. The state of the law was defined recently in the Vent de Colère e.a. case (C-262/12) of December 2013, and that question resurfaced again in the German case concerning the EEG surcharge (see case T-47/15, German v. Commission of May 2016).       

Once a state aid exists, it can be deemed compatible with the internal market, in particular pursuant to the guidelines on environmental and energy aid for 2014-2020. Even though the discussions around capacity mechanisms and EU state aid control often focus on compatibility, it would be wrong to assume that capacity mechanisms automatically entail the existence of state aid. The compatibility question will be discussed in more depth in the next post of this series.

Written by Adrien de Hauteclocque


Read the previous article: The state aid sector inquiry into electricity capacity mechanisms: what is in the interim report of 13 April 2016?

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