The EU is revamping the state aid guidelines for environmental protection and energy (EEAG), as the existing framework drawn up in 2014 is now seriously outdated. The current EEAG was designed to apply in the 2014-20 period, but was extended to end-2021 due to the Covid-19 pandemic. The 2014-20 guidelines set out new conditions for national support to renewable electricity, thus supporting the transition from feed-in tariffs to market price premiums and competitive bidding.
As for the new guidelines, particular attention will be given to green hydrogen and energy storage, as these technologies fall outside the scope of the current framework. These emerging technologies are considered key to unleashing the further deployment of renewables, including solar PV.
The stakeholder consultation closed on Jan. 7 and the European Commission will now begin to draw up a new framework that should better reflect the green transition and the objective to reduce greenhouse gas emissions by at least 55% by 2030. The new guidelines will come into force by early next year, but the commission is expected to carry out most of the groundwork between now and July.
The ability of green hydrogen to bring down emissions in hard-to-abate sectors such as steel and aluminum production should give this technology a strong presence in the revised guidelines. Electricity storage and electric mobility will also receive attention.
The overhaul means EU member states will likely be allowed to design fairly benign subsidy schemes in order to trigger the speedy rollout of new technologies. Well-designed national subsidy schemes – for example, through auctions and contracts for difference (CfDs) – will be particularly important due to budget constraints in the aftermath of the Covid-19 pandemic.
“Member states may be given more flexibility to increase state aid for renewables under the new guidelines, particularly if a project is considered key to reach the 55% GHG reduction target and help boost the economy in the wake of the Covid-19 pandemic,” Catherine Banet, a professor at the University of Oslo and a CERRE Academic Research fellow, told pv magazine.
“Member states may, for example, be given the flexibility to offer a so-called green bonus on top of the support scheme if a project is considered particularly important. To this end, the revised guidelines may be more generous in allowing more national support to solar projects and other types of renewables. Those are among the ideas assessed by the EC,” Banet added.
However, a continuation of national subsidies to mature technologies such as wind and solar PV is seen by some as controversial. This is because costs have fallen to levels where these assets are often able to compete without support. For example, subsidy-free solar PV plants underpinned by long-term corporate power purchase agreements (PPAs) have become more common across Europe. That said, uncertainties linked to future wholesale prices for electricity are an obstacle to the further expansion of subsidy-free renewables in general.
“Subsidizing fully commercial and mature renewable generation might undermine the well-functioning internal electricity market and the market-based formation of electricity prices. Therefore, state aid and subsidies for mature technologies and markets should be avoided,” said Norwegian power company Statkraft, in response to a recent EEAG stakeholder consultation. Statkraft – historically a hydropower company – has been growing its solar and wind portfolio over the years and has entered into several PPAs with solar generators in Spain.
As for new technologies, the guidelines are expected to set out a clear framework for national support to hydrogen produced by renewable electricity, for example in the form of auctions and CfDs. However, blue or low-carbon hydrogen produced by natural gas and carbon capture and storage (CCS/CCUS) seems to be a much more sensitive issue. Danish renewables company Orsted, for example, has called for a clear distinction between renewable and low-carbon energy in the revised EEAG.
However, to accelerate the decarbonization of industry and transport, green hydrogen may not be able to do the job alone in the foreseeable future.
“It seems obvious that the revised guidelines will be supportive of green hydrogen projects. But the EC will not necessarily close the door on other technologies such as blue/low carbon hydrogen in the short term,” said Banet.
“This is because reaching substantial volumes of hydrogen relatively quickly will be a challenge. However, there may be time restrictions on national support schemes for hydrogen with CCS, depending on emissions criteria.”
Level playing field
A number of stakeholders have cautioned against a technology-neutral approach, as different technologies are at different stages of maturity.
French energy company Engie said national support – if needed – should be made available to all solutions contributing directly or indirectly to the energy transition, without picking winners at an early stage.
However, different solutions are de facto not competing on a level playing field, and purely technology-neutral approaches tend to overlook this aspect, the company said in a response to the stakeholder consultation.
“For instance, renewable H2 is not cost-competitive today with other forms of low-carbon H2, while it is a key solution to decarbonize hard-to-abate sectors in the future. It could therefore be promoted specifically to trigger scale effects and cost reduction,” said Engie.
There is no doubt that state aid and national subsidy schemes will be key to reaching the EU’s objective of 6 GW of electrolysis capacity by 2024 and 40 GW by 2030. The total investment needed is estimated at €430 billion, of which an estimated €145 billion would have to come from various forms of public support, according to Brussels-based interest group Hydrogen Europe. The group says the current EEAG is not fit for purpose to accelerate the hydrogen economy.
Producing green hydrogen is around five to six times more expensive compared with gray hydrogen sourced from fossil gas. Moreover, prices for EU carbon allowances are not yet high enough to trigger a market-based switch of technologies. According to Hydrogen Europe, subsidies to compensate end users for higher energy costs because of the switch to renewable gases should be allowed under the revised state aid regime.
To some extent, the EU state aid guidelines are considered “soft law,” as they are not binding rules for member states as such. However, the commission is obliged to follow them closely when assessing whether to approve national support schemes. The guidelines first and foremost apply to subsidies and aid for renewables, and do not include support for nuclear power or the coal phase-out directly. That said, the revised EEAG framework could for example put restrictions on the participation of older gas-fired plants in national capacity auctions or so-called capacity remuneration mechanisms. Such payouts to power plants exist in Ireland, Britain and France and are under planning in Belgium and more recently in Spain.
A number of stakeholders have also called on the commission to avoid establishing any link between the revised EEAG framework and the Taxonomy Regulation adopted in June 2020. The latter regulation will provide investors with a classification system of what can be considered environmentally sustainable investments.
“A lot will be decided between now and July. The EC wants to complete the final draft by September so that the revised guidelines can be adopted before the end of 2021. It is a big challenge as RED ll and the Gas Directive will also be revised and harmonization across these frameworks is key,” said Banet.
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