Pedro Cruz Yábar Brussels, 21st June 2016 Application of State aid rules in energy infrastructure projects – perspective of beneficiaries Pedro Cruz Yábar Brussels, 21st June 2016

Structure 1. Procedural issues Timing of the notification: Best practices and incentive effect 2. Substantive issues Application of Art.61.8 CPR The correct identification of a counterfactual 2

Procedural issues Incentive effect Project identification Pre-feasibility study Feasibility study Grant application Project approval Procurement/ Implementation Identify SA issues + strategy Self assessment/ Pre-notification discussions + formal notification (if needed) Unless no notification needed or already approval decision: delays Illegal SA. Potential recovery Incentive effect - “The Commission considers that aid does not present an incentive effect for the beneficiary in all cases where work on the project had already started prior to the aid application by the beneficiary to the national authorities”. (§ 50 EEAG) - The application form includes at least applicant’s name and the size of the undertaking, a description of the project, including location and start and end dates, amount of aid needed to carry it out, eligible costs and a counterfactual scenario (granting authority must carry out a credibility check of the counterfactual scenario and incentive effect) - ‘Start of work’ means the start of construction work or the first firm commitment to order equipment, excluding preliminary feasibility studies. (However, these studies are not eligible in any case if incurred prior to the aid application) - Exceptions: Art.44 GBER Reductions in environmental taxes under Directive 2003/96/EC and §52 EEAG aid is awarded on the basis of competitive bidding process (any project) → Even if incurred before aid application, the costs of measures can be financed with State aid. 3

Procedural issues Project identification Pre-feasibility study Feasibility study Grant application Project approval Procurement/ Implementation Identify SA issues + strategy Self assessment/ Pre-notification discussions + formal notification (if needed) Unless no notification needed or already approval decision: delays Illegal SA. Potential recovery An investment may be necessary in order to meet mandatory EU standards. Since the company would have to comply with those standards in any event, State aid to meet mandatory EU (or national)standards that are already in force cannot be justified. [e.g. Section 3.2.4.1. Guidelines on State aid for environmental protection and energy Art.36.3 GBER Investment aid enabling undertakings to go beyond Union standards] But: Obligation has to be addressed to the beneficiary undertaking [Ex. Directive 2012/27/EU large enterprises have to carry out energy audits every four years] + Not allowed explicitly to finance compliance with it through State aid/public funds 4

Art.61 CPR and State aid rules REVENUE GENERATING PROJECTS [discounted revenues > discounted operating costs] Identification of eligible expenditure eligible expenditure to be co-financed from the Funds shall be reduced, taking into account the potential of the operation to generate net revenue over a specific reference period that both implementation of the operation. The eligible expenditure to be co-financed from the Funds shall be reduced, taking into account the potential of the operation to generate net revenue over a specific reference period: Application of a flat rate for the net revenue percentage. Calculation of the discounted net revenue Decreasing co-financing rate for a chosen priority axis (Art. 61). (a) de minimis aid (b) compatible State aid to SMEs, where an aid intensity or an aid amount limit is applied in relation to SA; (c) compatible State aid, where an individual verification of financing needs in accordance with the applicable State aid rules has been carried out. Not applicable if… 5

Art.61 CPR and State aid rules REVENUE GENERATING PROJECTS [discounted revenues > discounted operating costs] (a) de minimis aid (b) compatible State aid to SMEs, where an aid intensity or an aid amount limit is applied in relation to SA; (c) compatible State aid, where an individual verification of financing needs in accordance with the applicable State aid rules has been carried out. - What is an individual verification of financing needs? It is not a calculation of the maximum aid based on the identification of certain eligible costs without reference to a counterfactual deducting the operating profit and the application to those costs of a maximum aid intensity. → Unless the beneficiary is an SME, if the applicable State aid rules apply exclusively an eligible cost+aid intensity method for calculating the aid, in addition the funding-gap calculation will be applicable for the purposes of compliance with the CPR. The calculation method has to take into account the individual characteristics of the project (i.e. the revenues over the lifetime of the project) The existence of a State aid scheme or the approval of the amount of aid through an individual decision by the Commission does not always imply that an individual verification of financing needs has been carried out. 6

Art.61 CPR and State aid rules REVENUE GENERATING PROJECTS [discounted revenues > discounted operating costs] - What is an individual verification of financing needs? Examples: EEAG (Section 3.2.5 Proportionality of the aid – General conditions, paras.69-71) - Measures subject to an individual assessment [not covered by scheme/covered but exceeding threshold of para.20] “As a general principle, aid will be considered to be [proportional] if the aid corresponds to the net extra cost necessary to meet the objective, compared to the counterfactual scenario… The next extra cost is determined by the difference between the eco.benefits and costs (including the investment and operation) of the aided project and those of the…counterfactual scenario… Maximum aid intensities, that is, a given percentage of the eligible costs… serve as a cap to the aid” → If project falls under EEAG and individual assessment: individual verification of financing needs Art.48 GBER, Investment aid for energy infrastructure (electricity and gas transmission, distribution…) “The eligible costs shall be the investment costs. The aid amount shall not exceed the difference between the eligible costs and the operating profit of the investment.” 7

Identification of correct counterfactual Definition of counterfactual: An alternative, technically comparable investment that the beneficiary would credibly be realized without aid and which does not achieve the common interest objective or that only attains that objective to a lesser degree (§73.b) A counterfactual scenario is credible if it is genuine and relates to the decision-making factors prevalent at the time of the decision (§52). Any documentary evidence on alternative investments considered/Feasibility study is sufficient → In principle should be profitable without aid It can be a theoretical situation (i.e. not necessarily an alternative project planned by beneficiary if no aid granted) but it can be also a do-nothing situation (ex. Energy efficient project exclusively aimed at increasing EE and no investment would have been necessary to be made by the beneficiary) Feasible under the existing market conditions (e.g. taking into account existing operating aid schemes) Example: CHP Plant. Eligible costs = ▲Capex (Project investment costs) − Capex 1 (invest.cost of counterfactual) Annex EEAG/Art.40(4) GBER: The counterfactual is a conventional electricity or heating production system with the same capacity in terms of the effective production of energy →What is the aim of the project? Heat production → a) conventional heating installation with the same capacity (production of energy). Electricity production → b) conventional electricity generator with the same capacity. 8

Thank you very much! 9