Exploring the Evolving Landscape of State Aid: Key Changes in European Union Regulations
Dating back to the Treaty of Rome in 1957, European Union (EU) state aid rules have sought to prevent market distortions by regulating state aid received by companies in Member States. However, projects may be approved for state aid if it promotes general economic development within the EU and is in line with the EU’s objectives.
The European Commission (EC) oversees the delicate balance, weighing potential risks and benefits to granting state aid. Recent global events, such as the pandemic and Russia’s invasion of Ukraine, have prompted a shift, transforming the EC from a strict regulator to a flexible crisis regulator1. Now, the EC grants Member States more flexibility in providing state aid to address severe economic disruptions2. This piece explains how companies can benefit from the changes in state aid regulations across the investment landscape in Europe.
The EC as a Crisis Regulator
Russia’s invasion of Ukraine, which started in February 2022, has had significant economic impact on the EU – supply shocks triggered by surging oil and gas prices, potential energy scarcity, increasingly cautious investor sentiment in the face of geopolitical uncertainty, a shift in government spending in favor of defense and security, and inflation, to name a few. In response to these challenges, the EC adopted a Temporary Crisis Framework (TCF) in March 2022 to support the economy with state aid measures. The TCF was intended to add flexibility to the EC’s internal state aid assessment process, allowing for faster approvals with a broader scope, since many companies in the Member States, especially those in energy-intensive industries, faced economic hardship and needed immediate support.
The TCF has been adapted and expanded several times over the past year. The latest version, renamed to the Temporary Crisis and Transition Framework (TCTF), was published by the EC on March 9, 2023, to broaden support efforts beyond an immediate crisis response. The TCTF expands measures to all endeavors critical to the transition to a net-zero economy, in line with the Green Deal Industrial Plan to scale up the transition to clean energy across the EU. The EC has done so by adding a chapter on “green transformation” to the TCF.
However, it was not only the ongoing energy crisis that has led to a further relaxation of state aid rules. In August 2022, Inflation Reduction Act (IRA) in the U.S. came into effect, providing $369 billion in subsidies for green investments, putting pressure on the EU to prevent a decline in direct investment, as many European companies such as BMW3 and Linde4 consider relocating or expanding to the U.S.
Who is Benefiting from the TCTF
The TCTF framework allows Member States to grant significant state aid to companies driving the energy transition in the EU in the form of direct grants, tax advantages or loans/guarantees. Limits on state aid intensity and permitted forms vary depending on the size of the company and the region in which the investment is placed. The maximum limits for state aid are set by the EC as follows5:
Investments of Strategic Importance
To ensure European-based companies maintain their investments in the continent, point 86 of the TCTF refers to an exception when there is a risk of investments relocating to a country outside European Economic Area (EEA). In this case, the EC may approve “individual state aid up to the amount of the subsidy that the beneficiary could obtain for an equivalent investment outside the EEA”7. Specifically, state aid can be granted to strategic investments by matching the maximum amount that can be obtained in a third country (matching aid) or by providing the amount needed to incentivize the company to locate the investment in EEA (funding gap), whichever is the lowest. There is no explicit cap on the state aid to be granted, as long as it does not exceed the investment costs.
Certain safeguards apply for these exceptional projects8:
For projects carried out in a single country, only areas classified as assisted regions under the European regional aid guidelines are eligible for aid.
For projects across multiple countries9, non-assisted areas can be eligible for state aid if a significant part of the capital investment takes place in at least two assisted areas.
State aid can only be granted to state-of-the-art production technology from an environmental emissions perspective.
Relocation ban for projects within the EU.
What does it mean for Member States?
Overall, the TCTF provides Member States with more flexibility in granting state aid. The flexibility includes faster approval procedures, the means to reallocate funds from other programs/initiatives to support net zero projects, raising the threshold at which the EC must be notified and much more. Nevertheless, it is important to note that it is not a new EU subsidy program, instead the EC is redirecting funds from existing programs, such as the RePower EU Fund, for which Member States can now apply under the TCTF to bolster existing national resources.
While the EC allows all Member States to grant state aid under the same conditions, not all Member States have the same resources and capacity to grant aid. The diversified capacity to grant aid has led to an ongoing debate among Member States, leading to considerations to establish a “European Sovereignty Fund” to provide common sources of funding to Member States. The question of how such a fund would be financed remains open.
Investments that are in line with the European Green Deal have already had the chance to receive significant subsidies under the TCTF in the EU. This was recently demonstrated by Northvolt, which announced that the German government has offered incentives of approximately EUR 1 billion under the TCTF for Northvolt’s EUR 4.5 billion investment in a battery project in Heide10.
The changes to EU subsidies discussed above represent a great opportunity for innovative companies contributing to the energy transition and should be considered in these companies’ growth strategy and planning process. Nevertheless, the new framework requires evaluation of different state aid options, careful location benchmarking, preparation of comprehensive documentation, as well direct negotiations with governments.
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