Legal comment: Does compensation for closing coal-fired power plants count as state aid?

The General Court of the European Union recently found that, before authorising state compensation for the early closure of a coal plant, the European Commission should have first examined whether it was state aid. The Commission must now examine if such compensation merely offsets a damage or constitutes state aid, the implementation of which requires prior approval.

The Netherlands had enacted a law prohibiting the use of coal to produce electricity. The prohibition is progressive, depending on the efficiency of a plant and its use of renewable sources. Under the law, coal-fired power plants that would be disproportionately affected by this prohibition compared to other plants are entitled to compensation. This was the case for the Hemweg coal-fired power plant owned by Vattenfall that had to close in the very short term because it did not produce any electricity from renewable energy sources. On 20 December 2019, the Netherlands paid €52.5m to compensate Vattenfall for early closure.

Hemweg-8 power plant. Image: Vattenfall/Jorrit Lousberg

Absent any state aid notification by the Netherlands, the Commission started to investigate the draft law under state aid law. The Commission decided on 20 May 2020 that, although a judge would probably decide that the state must compensate such early closure, it was not sure that Vattenfall had a right to compensation of €52.5m and hence, that the compensation was not state aid. However, it declared the compensation compatible with the internal market, and authorised it.

Decision challenged

The Netherlands challenged this decision before the Court because the Commission failed to examine the presence of state aid.

The Netherlands claimed that the Commission can only authorise a measure if it qualifies as a state aid pursuant to the Treaty and the regulation on the procedural rules in State aid control (procedural regulation). The Commission answered that with its simplified approach, it merely applied the principle of good administration.

The Court was not convinced by the Commission.

It ruled that the Commission had exceeded its powers. First, the text of the Treaty only provides for the compatibility of a measure if it qualifies as state aid. Second, under settled case law, if the Commission is not sure that a measure is state aid or is compatible with the internal market, it must open a formal investigation. Third, pursuant to the procedural regulation, if the Commission considers that there is no state aid, it must take a decision declaring the absence of state aid. By authorising the measure while it was not sure about its state aid qualification, the Commission infringed the state aid procedure.

Principle of legal certainty

The Court also ruled that the Commission infringed the principle of legal certainty. Contrary to what the Commission argued, its decision has legally binding effects. If the measure is an aid, failure to notify the measure for prior approval should lead a judge to require the Netherlands to claim the payment of interests over the period of illegality from Vattenfall, until the Commission has adopted its decision. Also, if the measure is an aid, the Netherlands would not be able to grant other aid, for instance to reuse the site of the coal plant, if, when accumulated with the compensation, it exceeds a certain amount. That would leave the Netherlands uncertain about its rights and obligations.

The Court ruling forces the Commission to clarify if and when the compensation for the early closure of coal-fired plants can escape state aid control. This might be relevant for plants still in operation that may be required to close in an effort to achieve EU decarbonisation objectives. For compensation caught by state aid rules, the Commission would in principle apply its 2022 Guidelines on State aid for climate, environmental protection and energy. Under those Guidelines, authorisations would come with strings attached, notably the obligation of the plant owner to invest in more environmentally friendly generation or, as regards unprofitable plants, for the state to limit compensation to exceptional costs relating to the social and regional consequences of the closure. However, it remains to be seen whether the Commission will adopt a new decision on the case before its appeal against the Court ruling has been decided.

Carole Maczkovics is of counsel in Covington & Burling LLP’s Brussels office, whose practice focuses on state aid law, foreign subsidies, and the economic regulation of network industries (energy and transport).

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