As the debate over the government’s varied support for the Electrogas Delimara power station continues to intensify, particularly in terms of the government’s €360 million loan guarantee, there are several examples at European Union level where the European Commission has approved governments’ support for private businesses’ energy projects.

 

The UK’s state aid for Hinkley Point

Last October, the European Commission, following a 10-month investigation, ruled that UK state aid measures for the Hinkley Point nuclear power plant in Somerset were compatible with EU rules. The state aid in question was given in two tranches, both of which bear more than a passing resemblance to the Maltese situation. 

The Commission had first assessed a UK state guarantee covering any debt which the operator will seek to obtain on financial markets to fund the construction – a parallel with the Maltese government’s controversial €360 million state guarantee for ElectroGas.

During the Commission’s investigation, the UK authorities “convincingly demonstrated” that the construction of the power station could not be achieved by market forces alone.

“There is a market failure here, in particular because the project would not raise the necessary financing on the market due to its unprecedented nature and scale,” European Commissioner Joaquín Almunia said in October.

But the approval of this first tranche came with concessions.

As regards the state guarantee itself, the fee remunerating the granting of a state guarantee had been significantly increased “in order to accurately reflect the risk profile of the project”, so as to benefit British taxpayers and to reduce competition distortions created by the aid.

The Maltese government has said that ElectroGas Malta has paid the government a “market-orientated” loan guarantee fee of €8.8 million, and it is not known if Brussels is seeking to see that amount raised.

Secondly, and more importantly, the European Commission evaluated the price support mechanism, called the ‘contract for difference’, ensuring that the operator of the Hinkley Point plant will receive stable revenue for a period of 35 years, paid for by UK consumers – again, another parallel with the Maltese government’s 18-year agreement with ElectroGas.

The support is the difference between market price and a strike price (the price of each unit of electricity supplied), set in order to guarantee a reasonable return on investment.

As regards the price support mechanism, additional safeguards were added, which ensured that any higher profits of the project than those expected will be shared with UK consumers and taxpayers.

Two so-called “gain-share” mechanisms were put in place:

• The first will be triggered if the construction costs are lower than expected, and;

• The second will be triggered if the overall profits of the operator – in other words, the return on equity – are higher than those originally estimated. If such extra profits materialise, all the gains will be shared between the plant operator and the public entity. This will happen through a decrease of the price paid by the public entity to the operator – the so-called ‘strike price’. The higher the return on equity, the more the gains will be shared.

For example, an increase in the profit rate of one percentage point would generate savings of more than €1.5 billion for UK consumers, instead of those savings going to the operator’s coffers. The Commission also ensured that this mechanism would apply during the entire lifetime of the project, 60 years, instead of the 35 years originally foreseen.

 

Lithuania

In November 2013, the European Commission authorised €448 million aid for the construction of a Lithuanian LNG terminal. 

In this case the European Commission found that aid for the construction and operation of a Liquefied Natural Gas terminal, to be developed in the Klaipėda Seaport in Lithuania by AB Klaipėdos nafta, complies with EU state aid rules. The project aims at increasing the security of gas supply in Lithuania by diversifying its supply sources. The Commission concluded that the aid furthers EU energy goals without unduly distorting competition as the development of the LNG terminal will integrate Lithuania into the EU gas market and will stimulate competition on the Lithuanian gas markets.

Commission Vice-President in charge of competition policy Joaquín Almunia at the time stressed: “The aid will reduce Lithuania’s dependence on a single source of gas supplies and enhance its security of supply. By diversifying the gas supply sources, the terminal will also stimulate competition between gas suppliers, which in turn will benefit consumers.”

In present value terms, the various public support elements for the construction of the LNG Terminal amount to about €448 million.

The Commission’s investigation found that the investment contributes to the security of supply and that the aid is necessary and proportionate to realise the investment. Moreover, the terminal will be open to third parties on non-discriminatory terms, ensuring that there are no undue distortions of competition.

As to the compensation for maintenance costs, it will amount to a yearly average of €17 million.

 

Finland

And in Finland, the Commission approved a support package for a gasification plant.

In June of this year, the European Commission concluded that Finnish plans to grant around €10 million of public investment to Vaskiluodon Voima Oy, the operator of a gasification plant in Vaasa, are in line with EU state aid rules. The plant will convert forest biomass (mainly wood chips and a small amount of peat) into gas for electricity generation and district heating instead of using coal. The Commission found that the aid will further EU energy and environmental goals, notably reducing carbon dioxide emissions and dependence on imported coal, while maintaining competition in the Single Market.

EU Commissioner in charge of competition policy Margrethe Vestager said: “The investment in the Vaasa gasification plant will reduce our carbon dioxide footprint and dependence on imported coal. It shows how state aid rules can encourage sensible public spending targeted at reaching the EU’s environmental and energy policy goals.”

In 2012, Finland notified plans to support the construction of a gasification plant in Vaasa and integrate it with an existing coal burning boiler. The plant will produce gas from forest chips (90 per cent) and peat (10 per cent) that will replace between 25 and 40 per cent of the coal currently used to fuel the boiler. Finland will support the project with around €10 million of investment aid, as well as a variable premium above the market price for electricity. This premium would be paid to Vaskiluodon Voima Oy, the plant operator, for the use of forest chips with the aim of ensuring sufficient profitability. It would be set at a value of up to €5.47 per megawatt-hour (MWh), depending on the price of EU emission trading allowances, and would be paid for up to 12 years.

The Commission assessed the measure under the applicable EU rules on state aid for environmental protection and energy. It found that the investment in gasification allows imported coal to be replaced with renewable energy sources in a cost-efficient way. The gasification of forest biomass has not been demonstrated on this scale before and this plant could be a blueprint for future projects, both in the EU and worldwide.

Furthermore, the previously mostly fossil energy based heating will be much more environmental friendly: As a result of the investment, CO2-emissions are expected to decrease by 228,000 tons per year. The plant also contributes to increasing security of energy supply and reduces Finland’s dependency on imported fuels.

The Commission therefore concluded that the positive effects of the aid clearly offset any potential distortions of competition brought about by the public financing.

 

Poland

Again, this year, the European Commission found that Poland’s plans to grant aid of €758 million for nine gas projects in Poland are compatible with EU state aid rules. The projects will contribute to building a true Energy Union by increasing gas interconnection capacity between Poland and neighbouring countries, by eliminating bottlenecks and by reinforcing the existing Polish gas transmission network. The Commission found that public funding for the nine projects are objectives of common interest, in compliance with EU state aid rules, in particular its 2014 Environmental Protection and Energy State Aid Guidelines.

EU Commissioner in charge of competition policy Margrethe Vestager said: “Today’s approval of this significant public investment in Poland’s gas pipelines is an example of how state aid rules can encourage sensible public spending and contribute to building a real Energy Union. Interconnections enable energy flows between countries, improve cross-border connections and allow diversification of gas supply sources.”

Five of the nine gas infrastructure projects will connect European gas supply sources from the Baltic, Adriatic and the Black Sea to the rest of Europe via Poland (as part of the “North South Gas interconnection priority corridor”). Therefore, they will increase the diversification of gas supply in Poland. The rest of the projects will contribute to an increase in the overall level of security of supply in Poland by eliminating bottlenecks and providing additional capacity to the existing gas networks.

The total investment costs to realise the nine gas infrastructure projects are estimated at €1.2 billion. The public aid of €758 million will cover 64 per cent of the total investment costs. These funds will come from the European Regional Development Fund under the Infrastructure and Environment Operational Programme 2014–2020. The remainder of the investment costs will be funded by the Transmission System Operator Gazociągów Przesyłowych GAZ-System S.A. (GAZ-System). Resources from the European Regional Development Fund are considered as state resources (i.e. state aid) since member states have discretion to decide on their specific use.

The Commission concluded that the support measures were in line with EU state aid rules. In particular, the Commission’s assessment showed that the projects could not have been carried out without public funding. An in-depth financial analysis demonstrated that GAZ-System’s expected income from the use of the new gas infrastructure would be insufficient to cover investment costs for the nine gas infrastructure projects over a period of 25 years. If the total investment costs were to be financed only by GAZ-System’s own financial resources, it would have led to an increase of the average transmission tariff by 22.34 per cent, which would not have been sustainable.