The EC’s Environmental and Energy State Aid Guidelines 2014-2020 (EEAG) require Member States to implement technology-neutral auctions as part of their renewable energy support schemes. However, the reality looks quite different, write Bastian Lotz and Silvana Tiedemann from Navigant (a Guidehouse company), Lars Jerrentrup of Aurora Energy Research, and Lion Hirth from Neon. Most Member States continue to use technology-specific auctions, using exemption clauses in the EEAG to do so. The authors warn that the rules are poorly defined and create uncertainty. Why does it matter? While the main argument for technology-neutral auctions is the minimisation of generation costs (static efficiency), there are good reasons for Member States to implement technology-specific auctions, such as enhancing dynamic efficiency, minimising total system costs, and promoting secondary policy objectives. Exemption clauses used by the EC should, however, be tightly defined and consistently applied. This will increase transparency, predictability, and legal certainty for Member States and all concerned. The EEAG is due for revision this year, the perfect time to resolve this issue, conclude the authors.
The European Commission sees technology-neutral auctions as the preferred way of determining the level of support payments for electricity from renewable energy sources. The European Commission enforces this technology-neutrality requirement through its state aid control, which is part of the European Union competition policy.
In our understanding, technology-neutral renewable energy auctions are competitive bidding processes without any formal restrictions on the participation of available technologies, in which neither negative nor positive technology-specific discriminatory rules exist.
Tech-Neutral v Multi-Tech v Tech-Specific
By contrast, multi-technology auctions may restrict participation to certain technologies. Multi-technology auctions may also apply additional technology-specific discriminatory elements like quotas, bonus payments, and price ceilings for specific technologies. A third type of auction, technology-specific auctions, restrict participation to only one technology, meaning there are separate auctions per technology.
Most Member States continue to rely on Tech-Specific Auctions
Despite the EEAG’s technology-neutrality requirement, most Member States continue to implement technology-specific auctions. We analysed 18 European Commission decisions on Member States’ support schemes that were formally notified for mandatory state aid clearance between July 2014 and May 2018. Only two of these support schemes are technology-neutral. All other notified support schemes deviate from the technology-neutrality principle. The degree that Member States discriminate between technologies is high:
- Seven cases qualify as technology-specific
- Six cases apply multi-technology auctions with additional discriminatory elements
- One case incorporates multi-technology auctions without such discriminatory elements
- Two cases feature combinations of multi-technology and technology-specific auctions
How can the apparent discrepancy between EU law and Member State practice be explained?
The EEAG allows Member States to introduce technology-discriminatory auctions only under certain conditions. Point 126, fifth paragraph of the EEAG explicitly mentions five justifications to derogate from the technology-neutrality requirement:
- Longer-term potential of a given new and innovative technology
- Need to achieve diversification
- Network constraints and grid stability
- System (integration) costs
- Need to avoid distortions on the raw material markets from biomass support
Given this list is non-exhaustive, the European Commission can also specify additional exemption clauses. To legally reconcile both the technology-neutrality requirement and Member States’ persisting application of discriminatory auctions, the European Commission invokes exemption clauses when assessing the state aid compatibility of Member States’ support schemes.
How does the EC apply Exemption Clauses to justify technology-discrimination?
In all but two of the cases involving discriminatory auctions, the European Commission draws on a broad, vague, and circular exemption (i.e., the Need for Diversification) rather than relying on more precise exemptions stated in the EEAG (e.g., System Costs and Network Constraints). The Need for Diversification is referred to in 14 cases to justify derogations from technology-neutrality (see Figure 1). Other exemption clauses are only invoked in conjunction with Need for Diversification.
Network Constraints is the second most common exemption clause applied in eight cases. It is followed by System Costs and Longer-Term Potential. The only two cases which feature discriminatory auctions but do not refer to Need for Diversification are special. In one case, the European Commission finds that technology-neutral auctions would lead to a Suboptimal Result, without further defining it. The other case exhibits an additional exemption not explicitly stated in point 126, fifth paragraph of the EEAG. Finally, the two remaining cases do not invoke any exemptions as the European Commission finds the respective support schemes to comply with the technology-neutrality requirement.
“Need for Diversification” is poorly defined
Our analysis demonstrates that the poorly defined Need for Diversification clause serves as a catchall category. This provides the European Commission with enough leeway to justify derogations from the technology-neutrality requirement for diverse reasons. There are three lines of argumentation in this respect. First, the European Commission acknowledges Need for Diversification without further substantiation, leading to an almost circular reasoning. Second, it interprets this exemption clause in terms of defining elements of other exemption clauses. Third, it subsumes arguments not accounted for by the EEAG under Need for Diversification.
The EC readily accepts Member States’ justifications of Technology-Discrimination without thorough substantiation
The level of scrutiny applied by the European Commission varies strongly from case to case, ranging from precise and transparent assessments to unsubstantiated statements. In other words, the European Commission uses all available information for its assessment of support schemes in those cases where Member States submit comprehensive information. However, it is also willing to accept Member State submissions that provide little information. In these cases, the European Commission readily accepts justifications for technology-discrimination without being able to rely on solid data or thorough substantiation.
The EEAG fails to deliver on its purpose
State Aid Guidelines are sectoral protocols published by the European Commission specifying the principles of its application of state aid law. Their purpose is to increase transparency, predictability, and legal certainty for Member States. With respect to technology-neutral auctions for renewable energy, this is not the case.
The rule of technology-neutrality in renewable energy auctions is almost never followed, and the deviation from the rule is poorly and inconsistently justified. This practice might eventually come at the cost of higher legal uncertainty for Member States.
Given Member States’ apparent unwillingness to follow the technology-neutrality principle as well as significant scientific arguments against technology-neutral auctions, the European Commission should define clearer exemptions from the technology neutrality requirement and establish reliable procedures for their application to increase legal certainty. This year’s revision of the EEAG is the moment to do so.
Silvana Tiedemann, managing consultant, and Bastian Lotz, consultant, are part of the Navigant (a Guidehouse company) energy policy team in Berlin.
They wrote the article together with Lars Jerrentrup, senior analyst at Aurora Energy Research, and Lion Hirth, founder and director at Neon.
The article is based on a scientific paper the authors published in the Journal for European Environmental & Planning Law.