State aid: the Commission approves tender mechanism to compensate for the early closure of hard coal fired generation in Germany
The European Commission found that a competitive tender mechanism introduced by Germany to compensate hard coal-fired power plants for phasing out earlier than foreseen promotes European Union climate objectives and is in line with State aid rules.
Executive Vice-President Margrethe Vestager, in charge of competition policy, said: «Phasing out hard coal-fired power plants contributes in a crucial way to the transformation to a climate-neutral economy, in line with the European Green Deal objectives. Germany’s plans to provide incentives for the early closure of such plants and to compensate the businesses that leave the market early via competitive tenders are in line with EU State aid rules. That’s because competitive tenders are an effective tool to ensure that the compensation is kept to the minimum needed and ultimately to avoid an undue distortion of competition in the EU’s Single Market».
The German tender mechanism
According to the German coal phase out law, the use of coal for the production of electricity will have to phase-out by 2038. Germany has decided to encourage the early closure of hard coal-fired power plants via a shutdown premium awarded through a competitive tender mechanism. This mechanism will also ensure an orderly closure of coal fired-plants, in order to guarantee the energy security of supply in Germany.
The German energy regulator will publish seven tenders between 2020 and 2023, for closures of hard coal-fired and small lignite-fired (below 150 MW) power plants that will take place annually until 2026. The winners of the tenders will be determined by the energy regulator on the basis of transparent selection criteria. The design of the tender mechanism should allow Germany to eliminate the highest amount of CO2 emissions from the market at the lowest cost, whilst avoiding the closure of those power plants that are essential for network stability.
In its decision, the Commission does not take a final position on whether the measure provides the operator with an advantage over its competitors, and whether it thus constitutes State aid. At the same time, the Commission assessed the compatibility of the measure under Article 107(3)(c) TFEU and concluded that the measure would in any event be compatible with the EU’s Single Market. In particular, it found that there are a number of elements, which ensure that the tender is competitive and that, therefore, the compensation is kept to the minimum necessary. The Commission concluded that the contribution to EU environmental and climate goals of the measure outweighs any potential distortion of competition and trade brought about by the support. On this basis, the Commission approved the measure under EU State aid rules.
Background
The European Green Deal has recognised that further decarbonising of the energy system is critical to reach climate objectives in 2030 and 2050. The production and use of energy across economic sectors account for more than 75% of the EU’s greenhouse gas emissions. Therefore, a power sector largely based on renewable sources must be developed, complemented by the rapid phasing out of coal and decarbonisation of gas.
In addition to the tender mechanism for the acceleration of the hard coal phase out, the German coal phase out law also envisaged a measure for the phase out of lignite, which is not covered by this decision (except for small lignite-fired power plants, producing less than 150 MW). The compensation for the closure of lignite-fired power plants will not be determined on the basis of a tender mechanism, but agreed between the German government and operators. The Commission is in contact with the German authorities on this matter and is expecting soon a formal notification of this measure for assessment under EU State aid rules. According to the preliminary information at the disposal of the Commission, the assessment of the measure will in all likelihood warrant the opening of a formal investigation procedure that gives Germany and interested third parties an opportunity to submit comments. In general, the opening of a formal investigation procedure does not prejudge the outcome of the Commission’s investigation.
Further information
The non-confidential version of the decision will be made available under the case number SA.58181 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 Competition Weekly e-News.
