State aid: Commission opens in-depth investigation into Belgian capacity mechanism

The European Commission has opened an in-depth investigation to assess whether a Belgian capacity mechanism to safeguard security of electricity supply is in line with EU State aid rules.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “Capacity mechanisms have the important objective of ensuring security of electricity supply. But if they are not well-designed they may cause higher electricity prices for consumers, give undue advantages to certain energy operators or hinder electricity flows across EU borders. We will now investigate further if the nation-wide capacity mechanism that Belgium plans to introduce is in line with EU State aid rules, to ensure it is cost-effective and that it does not lead to undue distortions of competition.”

Belgium notified the Commission of its plans to introduce a national market-wide capacity mechanism to incentivise energy capacity providers (both generators and demand side response operators) to offer their availability to the transmission system operator (TSO). The capacity mechanism would replace the Belgian strategic reserve that the Commission approved under EU State aid rules in 2018.

Under the capacity mechanism, the beneficiaries would be selected though a competitive bidding process and would be remunerated for their availability. The support would take the form of a capacity payment for the duration of the capacity agreement (which would range between one and 15 years). In exchange, the successful bidders would give their availability to the TSO during stress events experienced by the electricity system. 

With the capacity mechanism, Belgium aims at ensuring security of electricity supply, in particular in view of its decision to phase-out of all nuclear capacity by 2025. More specifically, the objective of the scheme is to ensure that there is sufficient capacity for the production of electricity and that such production meets the demand (so-called “resource adequacy”).

At this stage, the Commission has concerns that the capacity mechanism, as notified by Belgium, may not be in line with EU State aid rules, more specifically with the Guidelines on State aid for environmental protection and energy. In particular:

• The Commission’s preliminary view is that Belgium has not so far sufficiently demonstrated, nor properly quantified, possible future issues of resource adequacy in the Belgian electricity market. This is essential to identify the actual need for public support and to determine whether the envisaged aid would be limited to what is necessary. In this respect, the Commission, has concerns that the support foreseen by the capacity mechanism may go beyond what is necessary to address the adequacy issue, possibly leading to over-procurement of capacity.
• Moreover, the Commission is concerned that the measure may discriminate against certain technologies (e.g. renewable capacity) or unfairly limit participation of cross-border capacity.
•  Finally, the Commission will examine whether the so-called “congestion revenues” that would be earned by the TSO from the allocation of cross-border tickets (i.e. access rights for foreign capacity providers to participate in the capacity mechanism) would be allocated in a way that effectively incentivises further interconnection between Belgium and its neighbouring countries and that does not lead to undue negative effects on competition and trade.

The Commission will now investigate further to determine whether its initial concerns are confirmed. The opening of the in-depth investigation gives Belgium and other interested parties the opportunity to submit their comments. It does not prejudge the outcome of the investigation.

Background

The Commission’s 2016 sector inquiry into capacity mechanisms has formed the basis for a close cooperation between the Commission and EU Member States to ensure that capacity mechanisms are well-designed and fit for purpose.

The sector inquiry report confirmed that capacity mechanisms can be necessary where market and regulatory failures block the price signals necessary to maintain appropriate levels of security of supply. However, the report made clear that EU State aid rules are important to ensure that capacity mechanisms do not act as backdoor subsidies for specific technologies or cause other undue distortions of competition, or come at too high a price for electricity consumers.

Since the publication of the sector inquiry, the Commission has approved several capacity mechanisms, including the Belgian Strategic reserve which the Commission approved in 2018. All decisions can be find on the Commission’s dedicated webpage.

The non-confidential version of the decision will be made available under the case number SA.54915 in the State aid register on the Commission’s competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.