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European Commission

Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

State aid Modernisation for an integrated EU energy market

Eurelectric event

Brussels 2 December 2013

Energy: the sector where ‘more Europe’ is most needed

I would like to thank Mr ten Berge for his kind invitation to speak at this conference.

I will focus my presentation on the current review of the State aid Environmental Guidelines.

This review is part of the wider State aid Modernisation strategy and translates its general principles into tangible policy orientations.

From the outset I decided to broaden the scope of the existing environmental guidelines to cover the public financing of energy, for the simple reason that the objectives of sustainable, secure and affordable energy for Europe are closely linked to our climate policy.

The new guidelines will help Member States invest better in their energy-policy choices to pursue common European objectives.

The crucial term here is ‘European’. The best solutions to our current challenges are EU-wide solutions.

Energy is probably the sector in which completing the Single Market will bring the most benefits to Europe’s businesses and citizens.

In spite of this, completing the Single Market for energy has been complicated so far. Reform efforts – including the third Energy Package launched in 2007 – are taking longer than expected to have an impact on the ground.

As a result, energy prices are remarkably higher in the EU than in other industrialised areas of the world.

This hampers competitiveness in the EU – especially in energy-intensive industries – threatening Europe’s ten-year lead in decarbonisation.

There is a broad consensus as to what we need to do to tackle these challenges. Let me recall the top items on the list:

  1. Giving the EU a common framework for energy;

  2. Investing in infrastructure;

  3. Increasing energy efficiency; and

  4. Encouraging aid to renewables that is more efficient and better market-integrated.

Competition policy: recent and current activity

What can competition policy do to help achieve these goals? Before I discuss the new guidelines, let me describe briefly what we are doing to enforce competition rules.

Energy markets are a long-standing priority for competition policy, as testified by the sector inquiry finalised in 2007.

Since then, we have taken a dozen antitrust decisions involving old incumbents in several countries, such as France, Belgium, Germany, and Italy.

Our preferred policy in all these cases has been to seek commitments that would make a structural difference over time and open up the markets.

More recently, our work has focussed on Central and Eastern Europe. Last April, for instance, we accepted the commitments offered by ČEZ, the Czech electricity incumbent.

In addition, on-going investigations involve the Romanian power exchange OPCOM, the Bulgarian incumbent BEH, and Gazprom.

In this latter case, one of the key issues is that the company may have imposed prices on its customers that are unfairly high if compared to costs or to competitive benchmarks.

We suspect that Gazprom can use its market power to adopt a pricing policy that is out of line with market fundamentals.

This results in large price gaps across Europe and we are concerned that Gazprom may have maintained them through territorial restrictions in supply agreements and by foreclosing other gas suppliers.

We are conducting antitrust investigations in Western Europe too. Let me mention a couple of cases that are important in view of maintaining trust in price formation.

We are continuing our investigation in the Power Exchanges case after the inspections that took place in February last year.

Power exchanges are central to the functioning of electricity markets and the completion of the internal energy market. Therefore it is essential to prevent all business practices that could undermine confidence in these markets.

In May, we also carried out inspections in our Oil and Biofuel Markets case, which focuses on the prices provided to the price-reporting agency Platts.

The importance of the benchmarks established by the agency and the non-regulated nature of the process may leave scope for anti-competitive behaviour leading to price distortions.

Prices published by price reporting agencies serve as benchmarks for trade in the physical and financial derivative markets for many commodity products in Europe and worldwide. And this means that even small distortions may have a large impact.

The new Environmental and Energy Aid Guidelines

Ladies and Gentlemen:

Let me now come back to the process of reviewing the Environmental and Energy Aid Guidelines.

The overall goal of our review is setting a comprehensive framework to help EU countries invest better in their energy policies.

This strategic goal can be broken down into three objectives:

  1. The first one is already part of our existing rules; promoting investments in energy efficiency.

  2. The second objective, introduced by the new rules, looks at renewable energy sources. Considering current technology and market developments, we believe that public support should be better targeted taking into account the state of deployment of the different technologies.

  3. Finally, we intend to promote the use of public subsidies to improve interconnections and develop cross-border networks.

These last two points are among the main innovations of the new guidelines and I would like to explain them in detail.

Renewable sources of energy

The new Guidelines are designed to minimise the competition distortions caused at present by subsidies to renewable sources of energy.

Particularly, they will prevent over-compensation of renewables and encourage the gradual integration of renewable electricity into the normal functioning of electricity markets.

Indeed, the new guidelines will be fully consistent with the EU climate-change and energy targets set in the Europe 2020 strategy and support Member States in their efforts to reach them.

A debate has been launched on the EU climate-change policy after 2020 and its targets have not been set yet. The new guidelines are not part of this debate. They will remain in force only until 2020 and will operate in the context of our current objectives.

What the new guidelines do say is that public subsidies must be designed well. This means above all two things: not wasting taxpayers’ money and not distorting competition in the market.

In addition, keeping down the costs of supporting renewable sources will help Europe maintain its lead in decarbonisation and will also be good for the competitiveness of our industry.

Today, a recurrent problem in subsidies schemes for renewables is that they often grant technology-specific and fixed tariffs. These arrangements shelter these energy sources from price signals and lead to market distortions.

The solution offered by the new Guidelines is the progressive introduction of market-based instruments.

In practice, this means that subsidies can be granted to the more deployed technologies in a competitive bidding process, which will keep to a minimum the aid needed to bring them forward. These are the technologies that can already be supported through market premiums rather than by feed-in tariffs.

In contrast, a bidding process may not be viable for less deployed technologies, but these too can be oriented towards the actual market situation. The focus here should be avoiding over-compensation.

At any rate, any ambitious renewables policy comes at a cost.

Several EU countries are concerned that financing renewables puts a burden on energy intensive-industry and that this may trigger delocalisation and ultimately lead to carbon leakage.

We faced a similar challenge when the ETS system was introduced. We tackled it allowing aid to compensate for the costs that were passed on to customers in energy-intensive industries. The solution found then could serve as a blueprint for the costs stemming from the support to renewables.

Energy infrastructure

Moving on to the objective of promoting the integration of Europe’s energy markets, for the first time the new guidelines will favour State aid for cross-border energy infrastructure.

The advantages are clear; better connections between national markets reduce concerns about intermittence and security of supply and improve economies of scale.

More integrated markets are also good news for competition and market efficiency, with benefits expected for industrial and residential consumers alike.

In particular, last October the Commission unveiled a long list of projects in energy infrastructure and defined them as “projects of common interest”.

The new guidelines support the implementation of these projects as a matter of principle. And this is an example of how competition policy can help Europe pursue its energy-policy goals.

Generation capacity and nuclear energy

Let me round up my presentation of the revised guidelines with two other important elements; the subsidies granted to maintain adequate levels of generation capacity and the question of nuclear energy.

The risk of under-investment in new power plants is another challenge for Europe. Some EU countries are planning to introduce so-called “capacity mechanisms” to encourage producers to build new generation capacity or prevent them from shutting down existing plants.

We are considering the inclusion of State aid rules to avoid that these mechanisms unduly favour national generation. Such rules would allow this form of support under strict conditions and when there are no alternatives, such as better interconnections and demand-side responses.

As to nuclear energy, the European Commission decided in September that the new Environmental and Energy Guidelines would not include any mention of it.

It is up to Member States to decide whether they intend to use nuclear power in their energy mix, and a few countries have indeed announced that they will build new nuclear plants.

If national authorities eventually decide to support nuclear energy, it will be our responsibility to assess the compatibility of their subsidies under EU competition law on a case-by-case basis and directly under the provisions of the Treaty.

Ladies and Gentlemen:

What are the next steps? Before the Christmas break, we will invite market participants to give us their feedback on a draft of the revised Environmental and Energy Aid Guidelines.

I encourage you all to take part in the consultation. Basing the new rules on real market information is very important for us. After that, I expect the new guidelines to be adopted in the first semester of 2014.

When they are in place, they will give Europe a robust framework to support renewable energy for the decarbonisation of our economy; to promote energy infrastructure and energy efficiency; and to ensure capacity without giving undue benefits to established, conventional power generators.

Together with our continuing antitrust and merger-review action, the new guidelines should be seen as another step towards the completion of Europe’s internal energy market.

Thank you.

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