State aid Registry - Directorate-General for CompetitionEuropean Commission 1049 Bruxelles, BELGIQUERef.: "HT 359 - Consultation on Community Guidelines on State Aid forEnvironmental Protection"

The Danish position on the Commission draft for Environmental and

Energy Aid Guidelines 2014-2020

In response to the Commission ”Paper of the Services of DG Competitioncontaining draft Guidelines on environmental and energy aid for 2014-2020” Denmark has the following comments.The Danish authorities generally supports a coordinated approach and auniform set of rules to clearly and precisely define the goals and means inwhich Member States construct aid schemes in the environmental andenergy field. It is, however, important that these rules leave adequateroom and flexibility for the particularities of each Member State in orderto ensure the most efficient green transition across the Community.In light of this the Danish authorities can overall offer its support for themain objectives put forward by the Commission in this draft. In particularthe proposed expansion of the scope of the guidelines to include energy inthe guidelines is welcomed. The Danish authorities can offer their supportfor the objectives set out by the Commission to promote resource-efficiency, energy-efficiency and the phasing out of subsidies for fossilfuels. The Danish authorities also support making best-practices on RES1-aid with an eye on a gradual process, which will promote more uniformRES-aid across Member States, in respect of preserving the incentives tofurther expand RES according to the ambitious Danish RES-goals. Thiswill also help preserve the investor-trust, the national potential for RESand the multitude of tax-structures.

General remarks

As a preliminary remark the Danish authorities would like to emphasizethat any impact-assessment made in relation to the proposed provisionswould only fully serve its purpose, if it is conducted, made available toMember States and reflected by the Commission before the final adoptionof the guidelines.As regards the proposed transparency requirements the Danish authoritiesagree that further transparency and peer-review can have positive impactson the market. Denmark must, however, underline that the Commissionmust take national confidentiality laws and laws on data protection intoconsideration when setting out requirements for the level of detail of theregister. In connection hereto the Danish authorities must also stress thatconsideration should be taken to the fact that it will be very administra-tively burdensome for undertakings and the authorities of Member Statesto provide all the necessary information and manage and set up such asystem, especially considering that it will demand a great degree of moni-toring to keep it updated and correct at all times.

Main points

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Technology neutrality:

The requirements for technology neutrali-ty for mature or immature technologies will set up severe barriersfor Member States to implement strategic support schemes effec-tively as they cannot be targeted at certain technologies. It istherefore of crucial importance for the EU’s transition towardsgreen energy systems and a low carbon economy that MemberStates are allowed to pre-define the technologies that can begranted operating aid for mature RES technologies in a biddingprocess. It is suggested, that the threshold for when a technologyis considered a deployed technology should be 3 % in electricityproduction at EU level.

Transitional arrangements:

From the multilateral meeting heldon February 10 2014 discussing the guidelines, it was the clearperception of the Danish delegation from what was announced bythe Commission on this matter, that existing RES-schemes wouldbe able to run for the duration of the term, which they were ap-proved for. In other words all state aid beneficiaries, who have re-ceived a commitment of operating aid and in confidence heretohave invested accordingly, would be able to maintain this aid.This also applies to aid schemes, which do not concern RE-aid.Furthermore we noted that the Commission expressed forthcom-ingness towards setting a transition period at approximately 24months.

Reductions in funding support for energy from renewable

sources:

The current draft reduces member states’ incentives toimplement ambitious climate and energy policies. This is due tosome sectors – eg. gardeners and greenhouses and other electricityintensive sectors – paying PSO charges and being exposed toglobal competition are excluded from partial compensation of theadditional costs. It is proposed to allow reduction in PSO chargesto electricity intensive undertakings, defined as undertakingswhere more than [1.500] MWh is utilised per [1 million] euro val-ue added or where the electricity is utilised for electricity intensiveprocesses such as mineralogical and metallurgical processes, elec-trolysis and chemical reduction. In addition, each member stateshould be allowed to choose whether to make that reduction con-ditional on the conclusion on agreements between the MemberState and the beneficiaries to achieve at least the same level of en-vironmental protections as would have been achieved by payingthe full PSO-costs.

Non-harmonised environmental taxes:

The assessment of thenecessity of the aid should be the same when it comes to taxes lev-ied on energy products used for electricity production and othernon-harmonised taxes. The assessment in the draft used in relationto other non-harmonised taxes is preferable since it does not in-volve the carbon leakage criteria, which have been designed tosolve problems in an EU harmonised scheme and not problems inrelation to non-harmonised taxes on energy products used for elec-tricity production. The reference to the carbon leakage criteriashould be left out.

Reductions or exemptions from environmental taxes:

It shouldcontinue to be possible to exempt cogeneration of heat and power(CHP) within the EU ETS from CO2 taxation. CO2 tax should notbe levied in sectors that are covered by EU Emissions TradingScheme (EU ETS) in order to avoid overlap between CO2-taxation and ETS. Aid in form of reductions or exemptions formenvironmental taxes related to CHP should continue to be assessedunder section 5.6 (environmental taxes), not 5.3. It is importantthat energy taxes, including taxes on electricity, continue to betreated as harmonised taxes

Cooperation mechanisms:

Operating aid for RES projects shouldnot be mandatorily linked to the use of the RES-directive's coop-eration mechanisms, as it would weaken the economic impactand political commitment in all Member States to obtain the nec-essary funding for the green transition, if funds are channelled toprojects outside the country's borders. The Danish authorities aretherefore pleased that the Commission in the multilateral meetingheld on February 10 2014 were responsive to correcting the word-ing in the proposed provisions on this, so it becomes clear thatthese mechanisms are strictly voluntary.

9. The possibilities of granting aid for companies in the form of re-ductions or exemptions from environmental taxes1.Operating aid - stronger transitional arrangements if requirement ofbidding processesThe draft proposes that Member States provide operational aid only toelectricity-producing RES- and combined heat and power generators, af-ter using a bidding process or through the use of green certificates. If aMember State does not want to establish a green certificate market, theonly alternative will be bidding processes. In this way the draft fails toaccommodate Member States whose aid systems are based on a technolo-gy-specific subsidy model in relation to the electricity market price.In some Member states operating aid is mainly based on a subsidy modelwith fixed subsidy per. kwh of produced electricity in addition to themarket price or the grant, adjusted in relation to the electricity marketprice, according to whichever RES technology is concerned.A bidding process will require a substantial shift in these existing opera-tional aid systems, which have already been state aid approved or will beapproved before the guidelines expire at the end of 2014.If bidding processes will be a requirement to provide operational aid tothe production of electricity, the transitional provisions will need to beadapted, in order for the existing approved state aid schemes to remain inforce until they expire in accordance with the Commission's approval.Otherwise it will not be possible to secure the investors who have alreadymade investments in rely on the existing aid schemes.The Danish authorities’ understanding of the transitional rules is that allschemes concerning operating aid for energy production from renewableenergy sources can stay in force until they expire according to the ap-proval from the Commission. Besides beneficiariesfrom all kind ofschemesconcerning operating aid, will be granted aid under the entireperiod, if the beneficiary has received such a confirmation from a Mem-ber State that it will benefit from state aid for a predetermined period ac-cording to an approved state aid scheme.For Danish aid schemes currently notified, but not yet approved, therewill be an expectation that such schemes will be operational for at least 10years with the possibility of re-notification. For other operating aidschemes for RES, this means a need for transitional arrangements of up to10 years and similarly for operating aid schemes for cogeneration.In relation to aid for decentralized cogeneration, which up to and includ-

ing 2018 receive the basic amount financed by the PSO tariff, the draftsets up some obstacles for this state aid scheme to be extended, if itproves necessary with continued aid after 2018.From the multilateral meeting held on February 10 2014 discussing theguidelines, it was the clear perception of the Danish delegation from whatwas announced by the Commission on this matter, that existing RES-schemes would be able to run for the duration of the term, which theywere approved for. In other words all state aid beneficiaries, who havereceived a commitment of operating aid and in confidence hereto haveinvested accordingly, would be able to maintain this aid. This also appliesto aid schemes, which do not concern RE-aid. Furthermore we noted thatthe Commission expressed forthcomingness towards setting a transitionperiod at approximately 24 months.2.Technology neutralityAs regards the requirements on technology neutrality the Danish authori-ties must, however, strongly emphasize that each Member State shouldcontinue to determine, which RES-technologies are best suited to effec-tively ensure a green transition. Denmark has already made a comprehen-sive RES-expansion of the most cost-effective technologies, particularlywind turbines on land. The Danish focus is therefore on implementing theDanish Green Transition cost-effectively with technologies that ensuresecurity of supply, the continued stability of the grid and an energy sys-tem based on electricity. The prerequisite for this is an aid system, whichcontinues to be technology specific.It should be up to each Member State to determine which RES-technologies they wish to aid. This is also in coherence with the so-called“subsidiarity principle”. The need to apply an array of aid instruments inrelation to RES has been underlined in the IEA-report; "Deploying Re-newables 2011”. One of the main ”best practice policy principles are assuch;”[To] Take a dynamic approach to policy implementation, differen-tiating according to the current maturity of each individual RE technolo-gy (rather than using a technology neutral approach)”.Setting out a requirement of technological neutrality in state aid can beproblematic, because it does not allow for the development and commer-cialization of non-mature technologies which in the long run could ulti-mately prove more cost-effective than current technologies.The only technology-neutral RES-aid systems used in any significant ex-tent today are green certificates. The Commission's draft guidelines forRES-aid indicate that such systems can often lead to an increase in thecost expansion of RES because of the increased risk premium, which

manufacturers in such a system will often require. In the mentioned IEApublication it is concluded on the basis of a quantitative analysis of theIEA Countries RES-aid, that the countries, which applied certificationsystems, paid more for the production of RES than those, who used mar-ket-based electricity production subsidies.The Commission’s rationale behind a technology neutral approach seemsto be the encouragement of investments in the most cost-effective renew-able-technologies (RES-technologies), so that Member States can meettheir RES-obligations for the cheapest price as possible. An objective ofaiding the most cost-effective renewable technologies seems reasonablein Member States where there has so far only been a modest expansion ofRES. The guidelines must, however, take into consideration that manyMember States such as Denmark have already undergone a massive ex-pansion of RES, particularly of the most cost-effective technologies,which in Denmark is especially wind turbines on land.The requirement of technological neutrality will delay and increase thecost of the Member States’ conversion to an energy system, which is notdependent of fossil fuels, because Denmark and other Member States willbe unable to target schemes in the sectors, where it is necessary to pro-mote the green transition. Those Member States should continue to beable to focus their efforts on securing a continuous RES-expansion, whileensuring security of supply, the continued stability of the grid and a grad-ual change in the energy system from being primarily fuel-based to beingelectricity-based to a higher degree.Maintaining the possibility of granting technology specific aid is crucialto some Member states in order to meet the medium and long term energypolicy objectives as cost-effectively as possible. A technology neutralsupport would result in Member states being either unable to meet its re-newable energy targets (if support level is determined, corresponding tothe need for support to the cheapest renewable technologies) or that thecheapest renewable energy technologies will receive too high a compen-sation (if support level is determined, corresponding to the need for sup-port to the more expensive RES-technologies that are needed to use toachieve the renewable targets).The Danish challenge the coming decades in the field of renewable ener-gy will include a gradual change of the energy system from being pri-marily fuel based to being mainly electricity based. Due to this overallplanned structural change, continued technology-specific RES aid will beneeded for years to come. The Danish aid system for electricity produc-tion from RES and cogeneration has always been technology-specific.The system has resulted in a diversity of technologies in the expansion of

RES and has also ensured that there have been established RES- and co-generation technologies in different parts of the energy system, where thecompetitive situation in relation to the use of fossil technologies is verydifferent, partly because of substantial differences in tax levels.Regarding “aid for less deployed technologies producing electricity fromrenewable sources”, the draft guidelines accept in point 121 technologyspecific support, provided the aid is granted by way of feed-in-premiumor equivalent market based support.The Danish authorities propose that this approach on less deployed tech-nologies should apply on deployed technologies as well.The threshold for less deployed technologiesThe draft is differentiating between aid for deployed and less deployedtechnologies. The criterion is depending on the technology share in elec-tricity production reached, and it is suggested in the draft that a deployedtechnology should at least cover [1-3] % of the gross electricity produc-tion at EU level, before it is considered “deployed”.The Danish position is that this threshold should be as high as possibleand at least 3 %, considering the concerns on technology neutral biddingprocesses.3.Use of cooperative mechanisms for the RES-directive Article 7-9The Danish authorities support the cooperation mechanisms set out inpoint 118 in the RES-Directive, as they can serve as a useful tool forMember States that may not have the same potential to meet their RES-obligations within their borders.The Danish authorities must, however, also emphasize that the use ofthese instruments should continue to be voluntary for the Member States.It is considered to be politically unacceptable, if future operating aidschemes are open to be used for investments in RES-capacity outsideDenmark's borders. Political commitment is essential to obtain the neces-sary funding for the green transition. If the use of these mechanisms in atender for RES means, that a part of the aid will be channeled to projectsoutside the country's borders hereby also moving the development ofjobs, growth in companies and technology out of the country, the politicalconfidence will be weakened with the result that the RES-objectives can-not be reached.In the multilateral meeting concerning the proposed draft, which tookplace February 10 2014 the Commission reassured Member States, thatthe provision on cooperation mechanisms should not be read as an invol-

untary provision. Accordingly Member States will not be imposed an ob-ligation to use this provision. In light of this Denmark believe that itwould be appropriate to correct the wording of the provision, so it is clearthat operating aid for RES projects will not be linked to the use of theRES-Directive's cooperation mechanisms and that it is clear that the co-operation mechanisms remain fully voluntary, which Member States maychoose to make use of if appropriate.4.Monitoring and continuous adjustment of operating aidThe draft also sets out a requirement that Member States monitor theiroperating aid schemes in a special monitoring program. There is a call forreviews of all systems at least every two years and adaptation of the aid, ifit is proved that the aid intensity is higher than what is necessary for therequirements of incentive and proportionality etc.It is not clear from the draft whether this refers to State aid schemes as awhole or the specific projects, which have been given a promise of com-mitment for operating aid.If it is intended for specific projects, this implies that an investor will onlybe guaranteed an aid-level for up to two years contrary to the Danish aidfor offshore wind turbines today via a tender where the grant period istypically about 12 years. This could potentially adversely affect the inves-tors’ incentive to invest in major projects, if the investors cannot be guar-anteed operating aid for more than up to two years at a time, including therisk of down-regulating aid will increase the investment costs and thusincrease the need for aid.If the green transition is to succeed, it is necessary to implement a numberof major projects in order to shift electricity production to RES. It is cru-cial for the implementation of these projects, that they are ensured aid of acertain duration.5.Obligation of publicationThe Commission proposes that Member States publish a series of specificinformation relating to each aid beneficiary. This is highly problematic,especially in situations where the aid is granted via tax incentives, be-cause the information is considered confidential. This information is bynational law often covered by the secrecy of the authority in question.To this must be added that the confidential information could be detri-mental to the company in question if publicized and that it is only thecompany itself, who can assess whether the tax information or researchinformation is confidential in its nature. This problem is avoided when theCommission publishes its decisions.

It should also be noted that the general information regarding any notifiedaid scheme concerning reductions or exemptions from environmentaltaxes already is published on a public website.6.Aid in the form of reductions in funding support for electricity fromrenewable sources (lump sum tax credits)The Danish authorities consider it positive that the draft opens up the pos-sibility of setting up aid schemes in the form of aid to cover the PSO-costs of companies. To ensure the fulfillment of the climate and environ-mental goals of the EU, including the use of RES and the reduction ofgreenhouse gases, it is necessary to continue a significant expansion ofRES. To the extent that the expansion is financed by the users, the Danishauthorities considers it important to ensure that aid for payment of thePSO tariff for energy-intensive enterprises in Member States will be apossibility.The Danish authorities find that aid in the form of reductions in fundingsupport for electricity from renewable sources should be allowed if thebusiness is electricity-intensive. An “electricity-intensive business” shallmean a business entity, where more than [1.500] MWh as in Sweden isutilised per [1 million] euro value added or where the electricity is utilisedfor electricity intensive processes such as mineralogical and metallurgicalprocesses, electrolysis and chemical reduction and where "value added"shall mean the total turnover liable to VAT including export sales minusthe total purchases liable to VAT including imports.In addition, each member state should be allowed to choose whether tomake that reduction conditional on the conclusion on agreements betweenthe Member State and the beneficiary or associations of beneficiaries toachieve at least the same level of environmental protections as wouldhave been achieved by paying the full PSO-costs.The EU has committed itself to reducing its energy consumption by 20percent in 2020. The Energy Efficiency Directive, however, delivers only17 percent, which is why there is a need for additional measures to deliverthe remaining 3 percent. Denmark has good experiences with providingaid in the form of energy tax-reductions for companies, which have pro-cess energy, if these companies sign agreements on energy efficiency.In this way the company is given a financial incentive to use certifiedenergy management systems and to continue with optimizing energy con-sumption in the company. As an example of the good experiences one can

mention that gardeners who have had an agreement on energy efficiencysince the measure was launched in 1996 and up to 2011 have reducedtheir energy consumption by approximately 40 per cent per m2 of green-house area.Consequently the Danish authorities recommend that the instrument withagreements on energy efficiency improvements should also be allowed touse in this area in the future Environmental and Energy Guidelines.The Danish authorities note that the Commission in its "Consultation Pa-per" presented in March 2013 announced that it was being consideredextending the new Guidelines to cover granting aid for the PSO cost ofcompanies.The model described in the Commission's draft guidelines has a differentdefinition of which companies can be granted aid for PSO costs. The draftis based on the carbon leakage criteria. These criteria would exclude anumber of electricity-intensive companies from aid to payment of thePSO tariff, which is regrettable as they might not meet the carbon leakagecriteria, but still have high PSO costs and great potential for energy sav-ings. Carbon leakage businesses do for instance not include the agricul-tural sector and hence not the gardeners.The carbon leakage criteria are not relevant when applied to nationalschemes. Therefore, the Danish authorities considers that it should bepossible to broaden the criteria, using for instance an energy intensitycriteria as in Sweden, with a view to take into account higher nationalPSO costs for companies in some member countries. Using the carbonleakage criteria means distorting competition between member states, asmember states have chosen different paths to finance the expansion ofRES.This means that the Commission’s current draft gives de facto pref-erential treatment to electricity intensive enterprises in countries, wherethe expansion of RES is financed over the fiscal budget. This cannot be inthe interest of the Commission nor the EU at large.The Danish authorities have prepared a suggestion for the Commission,which shows how it may be possible to aid electricity intensive compa-nies. As aid for electricity intensive companies in the Danish suggestion isconditioned on the entering of agreements between the member state andthe beneficiary, aid of this kind is by no means an ‘open door’ for stateaid.The Danish authorities recognize that there is consideration to be madewith regard to companies subject to the carbon leakage criteria, which areparticularly energy-intensive and subject to international competition, and

therefore particularly sensitive to high energy taxes and high PSO-payments. However, it must be noted that there currently exist guidelinesfor certain state aid measures under the scheme for trading greenhousegas emissions after 2012 (2012 / C 158/04), which is precisely a possibil-ity for Member States to aid these type of companies. Similarly, the up-coming PSO scheme could also apply to this category of businesses.The Danish authorities consider, that the funding period in the currentEnvironmental Guidelines’ section on aid in the form of reductions inenergy taxes of 10 years without degression is appropriate, which theDanish authorities recommend also applies to the PSO funding.Finally the Danish authorities note that it is important that the rules onstate aid include granting of aid for energy-intensive industries’ paymentof PSO-fee.Regarding lump sum, Denmark finds that it is against the Danish Consti-tution to differentiate between different end-users of electricity by usinglump sum tax credits. Consequently aid in this area must be given asgrants. The Danish authorities therefore urge the Commission to maintainthe current wording and require aid to beneficiaries to be paid as a lumpsum amount.7.Investment AidAccording to the draft the maximum level of investment aid is generallylowered by 15-40 percentage points. This means that the share of costs forenvironmental improvement projects, which the company can recuperateare being diminished.From an investment point of view the lowering of the intensity will makesome environmental improvement projects more expensive for compa-nies. As a consequence these environmental projects will not be economi-cally viable and will therefore not be implemented.It is not consistent with a desire to promote green transition of power pro-duction to limit the level of aid and other opportunities to provide invest-ment aid for conversion to RES compared to today. It is both in the cur-rent rules and in the proposed draft already a requirement that one mustnot provide more aid than what is necessary to complete a project. Thisrequirement prevents individual projects from becoming overcompen-sated. It is however a fact that some projects need more aid whiles otherneed less aid to be economically viable.It is therefore the position of the Danish Authorities that the current max-imum percentages for investment aid should remain at the current level as

a lowering of the percentages is likely to reduce the number of environ-mental projects which will be economically viable.8.Capacity mechanismsThe Commission's draft on capacity mechanisms is an extension of theCouncil Conclusions of June 2013 on capacity mechanisms. The Danishauthorities consider the electricity market as the right instrument for re-solving issues relating to the relationship between consumption and pro-duction. Rising electricity prices as a result of lack of capacity will nor-mally act as an incentive to ensure that new capacity is provided, and na-tional capacity markets may have anti-competitive consequences.With the introduction of payments for capacity one risks paying for ca-pacity that could be dispensed with. There is on top of this even moretransfers between consumers and producers.It is recognized, however, that security of supply can be strained duringcertain periods in the electricity markets in parts of Europe and the Com-mission is therefore closely following the developments and assessingwhether there is a need for new mechanisms, including community-basedsolutions to ensure the necessary capacity. If the capacity mechanisms areindispensable, it is crucial that they are designed on a common, harmo-nized EU basis as possible based on the principles of the internal marketand ensuring effective competition.It is essential to the Danish transmission system, that there is nothing im-peding the transmission connections.9.The possibilities of granting aid for companies in the form of reduc-tions or exemptions from environmental taxesThe draft differentiates between taxes levied on energy products used forelectricity production and other non-harmonised taxes which mean thatthe assessment of the necessity of the aid is different. (The output tax onelectricity is a harmonised tax and therefore not included in the taxationof energy products used for electricity production). The Danish authori-ties find that in both situations the assessment of the necessity of the aidshould be the same and prefer the assessment used in relation to othernon-harmonised taxes.The assessment used in the draft regarding taxes levied on energy prod-ucts used for electricity production is based on the carbon leakage criteriawhich are used in relation to the ETS State Aid Guidelines. In relation tothe ETS scheme it is relevant to look at the sector intensity of trade withthird countries because the ETS quota price burdens all EU producers inthe same way. However when it comes to taxes levied on energy products

used for electricity production and other non-harmonised taxes they arenational taxes which burden the national producers, but not producers inother Member States or third countries. The relevant comparison when itcomes to trade intensity is therefore both third countries and other Mem-ber States. National taxes on energy products for electricity production,which are non-harmonised, should consequently be treated the same wayas other non-harmonised taxes and not be based on carbon leakage crite-ria, which have been designed for a harmonised EU scheme.When it comes to assess the necessity of the aid in relation to other non-harmonised taxes specific in regard to energy products and electricity thecurrent guidelines are referring the definition of energy-intensive businessdefined in article 17(1) of Directive 2003/96/EC. That definition shouldalso be used in the draft.It may also be a problem in relation to tax rules if the tax reductions tosupport environmentally friendly investments shall be assed under specif-ic sections of these guidelines for those technologies such as to supportenergy from renewable sources or cogeneration of heat and power. All taxrules shall be assed according to the tax rules in the guidelines.