New rules ease access to state aid to attract investment in response to the Inflation Reduction Act
On March 9, the European Commission adopted the Temporary Crisis and Transition Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia (the “Temporary Crisis and Transition Framework”). This Commission Communication extends the support measures already granted in the context of the war in Ukraine. It also encourages investment in key sectors for the transition towards a zero-emission economy, in line with the Commission’s recently adopted Green Deal Industrial Plan.
In parallel, to facilitate and accelerate the green and digital transition of the EU economy, the Commission has endorsed the amendment to the General Block Exemption Regulation (“GBER”). In a determined attempt to support environmentally-based aid, the GBER declares certain categories of state aid compatible with the Treaty on the Functioning of the European Union—provided that they meet certain conditions—.
The Inflation Reduction Act (IRA) recently adopted in the United States has set alarm bells ringing in the European Union. There is concern that the planned incentives for the development of clean technologies will harm European companies by diverting investment to North America. In particular, the IRA will provide up to $369 billion in tax credits and direct subsidies to help companies increase production of sustainable technologies, but only if the funded projects take place mostly in the United States.
In response, the European Commission has recently presented its own Green Deal Industrial Plan. Among other things, it involves a significant relaxation of state aid rules regarding investment in green technologies and processes.
Novelties of the Temporary Crisis and Transition Framework
The new features introduced by the Temporary Framework focus on three levels:
State aid for investments in “sectors strategic for the transition towards a net-zero economy”
The Temporary Framework allows Member States to grant state aid to encourage investment projects of strategic importance for the transition to a net-zero economy. The main features of this aid are as follows:
- The measures cover projects for the production of energy transition equipment (e.g., batteries, solar panels or wind turbines) or inputs or raw materials for the production of this equipment.
- The aid may be granted in the form of direct grants, tax advantages or loans (both subsidized interest rates and guarantees).
- The aid must not exceed 15% of the total investment costs in tangible and intangible assets, or €150 million per undertaking per Member State. In some cases, the aid may be increased to 35% or €350 million, and even more if it is granted to SMEs or through tax relief.
In addition, the Commission requires Member States to verify the specific risks of the production investment not taking place within the EEA in the absence of the aid. The Temporary Crisis and Transition Framework introduces a major novelty in this regard: exceptionally, the Commission may approve aid above the mentioned thresholds and up to the amount of the grant that the beneficiary could receive in a third country (“matching aid”). To do so, the investment must be directed at an assisted area identified in the regional aid maps or must take place in at least three Member States, with a substantial part in at least two assisted areas.
State aid for renewable energy generation
The Temporary Framework covers investment and operating aid to accelerate renewable energy production and storage. In particular:
- Aid for energy production from renewable sources or storage.
- Investment aid for the production of energy from renewable sources, electricity and thermal storage, and storage of renewable hydrogen and biofuels, in the form of direct grants, loans, guarantees or tax advantages. The amount of the aid may even reach 100% of the investment costs if granted through a bidding process.
In general, facilities’ eligibility for this aid is conditional on the works having started as of the date of adoption of the Temporary Framework.
State aid for the decarbonization of industrial production processes
The Temporary Framework extends the possibility for Member States to grant aid for investments aimed at decarbonization or reduction of fossil fuel energy consumption in industrial processes. More specifically:
- The aid must be aimed at accelerating electrification and energy efficiency of industries and introducing new hydrogen-based technologies.
- The aid may be granted in various forms, including direct grants, loans or tax advantages. It must be aimed at financing investments that enable the beneficiary to reduce direct greenhouse gas emissions by at least 40%, or the energy consumption of industrial facilities by at least 20%.
- The maximum aid amount must not exceed either 10% of the total budget available per Member State for these decarbonization purposes, or EUR 200 million. However, upon “appropriate justification”, the Commission may accept schemes exceeding these thresholds.
Main amendments to the Block Exemption Regulation
The amendment to the Block Exemption Regulation gives Member States more flexibility to design and implement aid measures in key sectors for the transition to climate neutrality and a decarbonized industry, accelerating investment and financing for clean technology production.
Among other aspects, the revised rules:
- increase the possibilities for aid in the area of environmental protection and energy—e.g., to support the rollout of renewable energy, decarbonization projects, green mobility and biodiversity, as well as to facilitate investments in renewable hydrogen and to increase energy efficiency;
- facilitate the implementation of certain projects involving beneficiaries from several Member States, such as Projects of Common European Interest in the field of R&D; and
- block exempt aid measures set up by Member States to regulate prices for energy such as electricity, gas and heat produced from natural gas or electricity.
The validity of the GBER is extended until the end of 2026 for legal certainty and regulatory stability.
The state aid dilemma
The indiscriminate granting of state aid can have significant negative effects and lead to a fragmentation of the EU internal market. For instance, France and Germany have granted almost 80% of the state aid approved over the past few years in response to the COVID-19 crisis and the war in Ukraine. In fact, Executive Vice-President Margrethe Vestager has recently gone so far as to state that European countries are not equal when it comes to state aid.
While the Temporary Framework attempts to balance these concerns, the fear of falling behind in the global race for energy transition has tipped the balance towards broader state support. Inaction could lead to the failure of the entire EU climate transition plan and was therefore not an option. The Temporary Framework explicitly recognizes this by noting that the urgency for the EU to reduce its dependence on fossil fuels is exacerbated by “global challenges posing a threat of investments in these sectors being diverted in favor of third countries outside the EEA.”
However, the conditions attached to the granting of “matching aid” also consider the potential implications of an excessive relaxation of state aid rules that would threaten cohesion between Member States. The objective is to strike a balance between the different challenges facing the EU.
Outlook for the future
The relaxation of state aid rules will allow Member States to channel billions of euros into “green” industries, technologies and processes. The renewable energy sector and the decarbonization of industrial processes will be the areas to benefit most under the new Temporary Crisis and Transition Framework.
Companies will have to assess their investment decisions. If they are eligible under the Temporary Framework, robust plans will be necessary before initiating contacts with public authorities and participating in publicly sponsored projects.
It should be noted that aid may only be granted until December 31, 2025. Also, if the financed facilities are not completed within 36 months from the date of granting, the aid will be reduced.