As part of “A Green Deal Industrial Plan for the Net Zero Age” to respond to the US Inflation Reduction Act (IRA) (see our alert), the European Commission (the “Commission”) adopted on 9 March 2023 its Temporary Crisis and Transition Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia (the “TCTF”). The text amends the Temporary Crisis Framework last amended on 28 October 2022 (see our blog). 

These are the three most important things you need to know about the TCTF:

• To avoid that an investment would be located outside the European Economic Area (EEA), EU countries may support investments in the manufacturing of relevant equipment for the transition towards a net-zero economy, such as batteries, solar panels, wind turbines, heat pumps, carbon capture usage and storage (CCUS), as well as their key components and critical raw materials necessary for their production. They may even grant aid matching foreign subsidies to support those investments, provided that they are located in the poorer areas of the EU.
• EU countries’ possibilities to grant aid for accelerating the rollout of renewable energy are extended to any renewable technologies, including hydropower, and no longer require a bidding process to select the aided projects that are considered as less mature.
• The TCTF is not a subsidy program, and it is up to EU Member States to provide public funding.

Aid to cover investment costs for the production of relevant equipment for the transition towards a net-zero economy

Under general State aid rules, aid facilitating industrial production, cannot, in principle, be granted, except for initial investments in assisted areas (i.e. areas with low population density or abnormally poor) and under specific conditions. With the TCTF, EU Member States may grant aid for investments in the production of relevant equipment for the transition towards a net-zero economy (e.g. batteries, solar panels, wind turbines, heat-pumps, electrolysers, CCUS, key components and critical raw materials to produce such equipment). The following aid is now allowed:

• “Anti-relocation” aid, even outside assisted areas, up to 15% of the investment costs incurred (e.g. land, buildings, plant, machinery, patent rights), with a cap of €150 million. Some top-ups are allowed for investments in assisted areas (up to 20-35% with a maximum of €200-350 million, depending on whether the investment takes place in an area with low population density or in an abnormally poor area); and for aid in the form of tax advantages, loans or guarantees (+5%) or for small- (+20%) and medium-sized companies (+10%). Such aid must be part of a program applicable in a non-discriminatory basis to any applicant that fulfils the conditions.
• Exceptionally, “matching” aid on an individual basis, outside of any pre-defined program, to “match” a subsidy available for an equivalent investment outside the EEA, which includes the EU Member States, Norway, Lichtenstein and Iceland. The aid however cannot exceed the funding gap, that is the amount necessary to induce the company to locate the investment in the EEA. The investment must be fully located in an assisted area or partly in an assisted area but involving several EEA countries. The beneficiary must commit to use state-of-the art production technology from an environmental-emissions perspective and show that the aid does not create counter-cohesion effects, for instance because the project could have been located in an even poorer area of the EEA.

For both anti-relocation aid and matching aid, the aid must be granted by 31 December 2025 and the investment must be maintained in the area concerned for at least five years (or three years for small and medium sized enterprises) after completion of the investment. The risk that the investment would not take place in the EEA without the aid must be demonstrated as well as the absence of relocation of the investment within the EEA. The applicant to an aid program will also have to provide detailed information notably on the investment, including its expected positive effects for the area concerned in terms of job creation, R&D activities, etc.

Aid to cover operating or investment costs for accelerating the rollout of renewable energy

The TCTF expands until 31 December 2025 the possibility for EU countries to grant aid to accelerate the rollout of renewable energy and energy storage. Member States may devise State aid programs applicable to any company that would fulfil the conditions, to support electricity generation from any renewable energy sources as well as energy storage. Renewable energy sources are defined in the Renewable Energy Directive, and also include hydropower, initially excluded. The new or repowered installation must be completed and operational within 36 months except for offshore wind technologies.

Unless the power that the installation can produce is very low (e.g. for the own purposes of a company), aid for investments in solar photovoltaic, wind and hydropower generation must in principle be determined through a competitive bidding process. Such process should lead to the bidder(s) requesting the lowest support to win the subsidisation contract. In all other cases, the aid could also be set administratively by the granting authority. In any event, overcompensation must be avoided, and the aid amount may not exceed the total investment costs or, if set administratively, 45% of those costs.

Aid for renewable energy output could also be granted in the form of a two-way contract for difference of maximum 20 years, whereby the power producer is guaranteed a minimum remuneration for the electricity produced irrespective of market conditions (such as for instance negative electricity prices due to excessive renewable electricity supplies compared to demand) and the retrocession of revenues to the State where prices exceed a certain limit.

Similarly to investment aid, the amount of aid to support the production of electricity from solar photovoltaic, wind and hydropower is in principle determined after a competitive bidding process (except for small installations). In other cases, the strike price, which corresponds to the minimum remuneration, may be set administratively by the energy regulator to cover the net costs of the producers.

Impact on stakeholders in the Net-Zero Industry

Contrary to other jurisdictions, the TCTF does not create any overarching subsidy program, and each individual EU Member State remains competent to introduce State aid programs.

The TCTF is part of a larger initiative, and its use by EU countries may be incentivized by coming legislation, such as the Net-Zero Industry Act (NZIA) proposed by the Commission on 16 March 2023. The NZIA proposal intends to achieve climate and energy independency objectives. It sets a benchmark of 40% of EU deployment needs for the green transition to be covered by manufacturing capacity of strategic net-zero technologies located in the EU.

To diversify its energy sources, the EU also expects imports of energy, such as 10 million tons of renewable hydrogen by 2030. Contrary to aid for relevant equipment for the transition towards a net-zero economy, and similarly to the State aid rules that are generally applicable, aid to accelerate the rollout of renewable energy and energy storage may also be granted for imports in the EU (for a precedent see our alert).

Companies manufacturing equipment for the transition towards a net-zero economy or investing in the production of energy from renewable sources or in energy storage  may consider approaching EU Member States to seek the most adequate public funding for their investments or export projects. Covington can help you navigating the complexities and opportunities of recent EU developments for the transition towards a net-zero economy.