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Brussels, 29 September 2010

State aid: Commission clears public service compensation to electricity generators in Spain

The European Commission has authorised a compensation which Spain intends to grant to electricity generators to meet the costs of fulfilling a public service obligation, namely producing certain volumes of electricity out of indigenous coal. The directive that governs the functioning of the EU electricity market allows Member States to put in place such public service obligations, motivated by reasons of security of energy supply, within a limit of 15% of national electricity consumption. The state support is in line with EU State aid rules on public service compensations because it will not result in over-compensating electricity generators for fulfilling the obligations imposed on them.

The European Commission has cleared under EU state aid rules a Spanish Royal Decree to compensate electricity companies for the extra cost incurred with the public service obligation to produce certain volumes of electricity out of coal produced in Spain.

Spain argued the Decree is a transitory measure necessary to ensure security of supply for electricity over the next four years, in a country that remains badly interconnected with other major European electricity markets and in view of the country's high share of renewable energy (wind and solar) whose production is highly intermittent.

The scheme will expire on 31 December 2014 at the latest. It may be ended at an earlier stage by the Spanish authorities if market conditions make it no longer necessary. The Spanish authorities gave a firm commitment that it will under no circumstances be prolonged beyond 31 December 2014.

EU electricity liberalisation directives allow a Member State, for reasons of security of supply, to impose on electricity generators public service obligations consisting in producing electricity out of domestic fuel sources, within a limit of 15% of national consumption (Article 3 (2) and 11 (4) of the Second Electricity Market directive (Directive 2003/54/EC) and Article 3 (2) and Article 15 (4) of the Third Electricity Market directive (2009/72/EC) that will come into application in March 2011). The Commission has verified that the conditions set out in these provisions were fulfilled in this case.

During the period 2011-2014, the volumes of electricity concerned by the Spanish decree will not exceed 23.4 terawatt hours (TWh) per year, which is around 9% of the national consumption, a percentage that is below the 15% limit foreseen in the directives. For the remainder of 2010, the volumes of electricity will not exceed 9.6 TWh, which is also lower than the 15% limit.

The Commission ensured consistency between this measure and the Coal Regulation - present and new, proposed on 20 July 2010 (see IP/10/984) – which allow specific types of State aid to the coal industry under certain conditions. The current Regulation expires at the end of the year, but under a proposal to the EU Council, currently under discussion, operating subsidies will be phased out by 1 October 2014. The Commission obtained from Spain that the coal that can be burned by the indigenous coal power plants under the public service obligations will originate from coal mines subject to all the rules of the future Coal Regulation. Furthermore, the quantities of coal concerned will not exceed the declining production targets already set in the Spanish National Coal Plan.

The EU framework on state aid in the form of public service compensation allows aid where it does not exceed the difference between the costs incurred for providing the service and the revenues obtained in that context, taking account of a reasonable profit. In this case, the compensation to the power plants is strictly limited to the extra costs imposed by the public service. In total 10 power plants are concerned by the public service obligation.

Similar public service compensation schemes, involving coal or other domestic fuels such as brown lignite or peat, have been approved in the past in Austria, Ireland, Slovenia and also Spain. (see decisions NN 49/1999, N 34/1999, N 6A/2001 and C 7/2005).

The non-confidential version of the decision will be made available under the case number N 178/2010 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

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