Commission approves modifications to Belgian capacity mechanism

The European Commission has approved, under EU State aid rules, modifications to the Belgian capacity mechanism to safeguard security of electricity supply. The modifications will make the capacity mechanism more cost-efficient in its daily operation. It will also be more environmentally-friendly, with stricter carbon dioxide (CO2) emission limits to better align with the European Green Deal, and will contribute to ending dependence on Russian fossil fuels, under the REPowerEU Plan.

The modifications

Belgium notified to the Commission its plans to modify its capacity mechanism approved by  the Commission in August 2021 (SA.54915). The Belgian capacity mechanism aims to ensure that there is sufficient capacity to produce electricity and that such production meets the expected demand of electricity. The modified scheme, with a budget of €4 billion, will run until October 2031.

In the context of the ongoing energy crisis, in March 2022, Belgium revised its nuclear phase-out plan and decided to extend the lifetime of two of its seven nuclear reactors for a period of ten years. In June 2023, Belgium reached an intermediary agreement with the energy company Engie for the prolongation of the lifetime of two reactors.

Furthermore, Belgium notified to the Commission modifications aimed at increasing the environmental-friendliness and cost-efficiency of the capacity mechanism. These modifications include: (i) tightened carbon dioxide emission limits for beneficiaries; (ii) a change in the financingmechanism (in the context of a broader reform of the Belgian Electricity Act); and (iii) improvements to the daily operation of the capacity mechanism based on experience gained during the first two capacity auctions held in Belgium.

The capacity mechanism is open to all technologies, in particular: (i) all electricity generation units, (ii) demand-response units and (iii) storage units, with the objective of ensuring their availability when the balance between supply and demand may be at risk. Electricity generation and storage units will offer their availability to start supplying electricity, while demand-response units will offer their availability to reduce electricity consumption. The capacity mechanism is also open to capacity providers active in other Member States.

The beneficiaries will be selected through a competitive bidding process, where beneficiaries will compete based on offers relating to the lowest amount of aid per megawatt of capacity.

The Commission’s assessment

The Commission assessed the modifications under EU State aid rules, in particular Article 107(3)(c)  of the Treaty on the Functioning of the European Union (‘TFEU’), which enables Member States to support the development of certain economic activities subject to certain conditions, and the Guidelines on State aid for climate, environmental protection and energy 2022 (CEEAG).

The Commission found that:

• The measure is necessary and appropriate to ensure the security of electricity supply.
• The scheme has an ‘incentive effect’, as the beneficiaries would not keep operating existing units or invest in additional units to the same extent without the public support.
• The aid has a limited impact on competition and trade within the EU. In particular, it is proportionate, as the level of the aid corresponds to the effective financing needs. Moreover, necessary safeguards limiting the aid to the minimum will be in place, including a competitive bidding process for the aid award. Finally, any potential distortion of the energy markets is kept to the minimum, as the capacity mechanism remunerates for availability and not electricity production,  and is open to all technologies, including those of capacity providers active in other Member States.
• The measure brings about positive effects that outweigh any potential distortion of competition and trade in the EU.
• The aid complies with the relevant provisions of the EU Electricity Regulation on capacity mechanisms and strategic reserves.

On this basis, the Commission approved the Belgian scheme under EU State aid rules.

Background

The Commission’s 2022 CEEAG provide guidance on how the Commission assesses the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.

The Guidelines, applicable as of January 2022, create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the European Green Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU’s goals and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and cater for the increased importance of climate protection. They include sections on energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.

Capacity mechanisms have the important objective of ensuring security of electricity supply. Capacity mechanisms need to be well designed in order to ensure that they do not (i) lead to higher electricity prices for consumers, (ii) give undue advantages to certain energy operators or (iii) hinder electricity flows across EU borders.

The EU Electricity Regulation establishes rules to ensure the functioning of the internal market for electricity and defines a framework for regularly assessing the forecast level of security of supply in the EU. Whenever a risk is identified, Member States need to review the functioning of electricity market, and consider removing the distortions, which may cause the risk. In case such approach is insufficient to address the identified risk, Member States may introduce a capacity mechanism, subject to design requirements to ensure cost-efficient, cleaner and proportionate measures to deliver security of electricity supply.

The Belgian capacity mechanism is the first market-wide capacity mechanism (not considering strategic reserves) assessed under the 2022 CEEAG.