Commission opens in-depth State aid investigation into French electricity capacity mechanism and Brittany security of supply measures

• Summary
• The French capacity mechanism
• Security of supply requirement
• State resources
• Selective advantage
• Legality of the aid
• Proportionality
• Distortion of competition
• Support for a CCGT plant in Brittany
• Comment

The French capacity mechanism

The Commission decision, made on 13 November 2015 but not published until the end of December, sets out the details of the French capacity mechanism. The French capacity mechanism was established by the 2010 "loi NOME", which introduced new electricity market rules. It requires suppliers, network operators and certain users to contribute to the security of electricity supply. They must hold a quantity of capacity guarantees each year in proportion to the peak consumption for which they are responsible. Capacity guarantees can be obtained on the basis of a supplier's own resources (eg. its own generation capacity, or its ability to reduce its demand or that of its customers, known as demand response) or from third parties via a market. The capacity obligation reflects the supplier's consumption during the peak demand period, known as PP1. This consists of between 10 and 15 days per year defined by RTE, the French electricity transmission system operator. The capacity obligation is calculated by reference to two time windows (07:00 to 15:00 and 18:00 to 20:00) on the PP1 days. This is then adjusted according to the sensitivity of the supplier's demand to temperature (the French electricity market is highly temperature-sensitive, because of the high use of electricity for heating). Demand response by suppliers on behalf of their own customers is taken into account in the form of a reduction of the capacity obligation. Capacity obligations are then further adjusted by a security coefficient, reflecting the risk of default and also the effect of interconnection of the French market with other European electricity markets. Interconnection is therefore taken into account in the French market, but only implicitly. Foreign capacity is not entitled to receive capacity certificates.

Operators of generation or demand response capacity must have their capacity certified by RTE, and receive capacity certificates according to their anticipated contribution to security of electricity supply at times of peak demand. Certificates are granted according to the availability of the unit during PP2 periods. These consist of between 10 and 25 days per year, defined by RTE. PP2 days include all of the PP1 days, together with up to 10 additional days. The unit operator declares the anticipated availability of its capacity, and certain other parameters, to RTE, which then issues a certificate, calculated on the basis of the original data, together with corrections reflecting the risk of non-availability, for example in the case of wind, hydro or solar generation. Guarantees of capacity are recorded in a register held by RTE, and may be traded, either bilaterally or on an exchange. The mechanism includes financial arrangements to cover imbalances between individual capacity obligations and amounts certified.

It will be seen that demand response can be taken into account in one of two ways. Demand response provided implicitly by suppliers – reducing the level of their capacity obligation - must in fact be activated during PP1 periods so that it actually reduces the level of consumption. Other, explicit, providers of demand response must make their capacity available during PP2 periods. According to the French government, the longer duration of the PP2 requirement for explicit participation offsets the less onerous requirement merely to be available rather than to be activated.

RTE plays an important role in the mechanism – proposing rules, calculating the parameters of the mechanism and verifying them against the security requirement, certifying and verifying capacity, calculating capacity obligations and calculating and administering imbalances.

Security of supply requirement

The French government has determined that the required level of security for the market is that there should be sufficient capacity for all but 3 hours per year. This figure, known as the Loss of Load Expectation (LOLE), is the same as that chosen for the GB and some other markets. This value reflects the fact that the cost of 100% security of supply, ie. a LOLE of 0 hours, would exceed the value placed on it by consumers. RTE assesses security of supply against this criterion, and has concluded that there is a risk that this standard will not be met in a number of years. The French government argues that other infrastructure measures, including network reinforcement and interconnection, and measures to encourage the participation of demand response in wholesale markets, have been insufficient to meet the standard.

State resources

The French government argued that the capacity mechanism does not amount to State aid. The State has no direct involvement in setting the price of guarantees of capacity. The price is determined freely by a market. The involvement of the French State is limited to setting the security of supply criterion.

The Commission disagreed. It expressed the view that the aid is granted through State resources within the meaning of Article 107(1) TFEU, according to the principles set out in the Court of Justice judgment in Case C-262/12 Vent de Colère. In that case, the Court held that a mechanism for offsetting in full the additional costs imposed on undertakings because of an obligation to purchase wind-generated electricity at a price higher than the market price that is financed by all final consumers of electricity in the national territory constituted an intervention through State resources, because the funds were held and paid out by the CDC, a State-owned body.

The Commission explained that it has previously found that State resources were characterised as such where funds used to finance such a mechanism were deducted from private companies’ own funds. In such circumstances, the Commission explained that funds can be regarded as State resources provided that (i) the State forgoes public resources and/or (ii) the sums corresponding to the measure in question remain under public control, even if they are not considered as being under State ownership throughout. As the basis for this argument, the Commission referred to the judgments of the Court of Justice in Case C-565/08 Commission v. Italy, Case C-206/06 Essent and Case C-262/12 Vent de Colère.

The Commission argued that in the present case the State forgoes public resources, following the Court’s approach in the NOx case (Case C-279/08 P Commission v. Netherlands). In that case, the Court of Justice found that the emission allowances in question had the character of intangible assets provided by the State free of charge to selected undertakings. It held that by conferring on the emission allowances the character of tradeable intangible assets and by making them available to the undertakings concerned free of charge, the State forgoes public resources. The Commission recently applied the same reasoning to the Romanian green certificates system (SA.37177-2015/NN). The Commission also considered that it could be applied to this case since the French State has created a market for capacity certificates. Therefore, by making them available to capacity providers free of charge, the State forgoes public resources.

The Commission found in this case that the sums remain under public control. It referred to the Court of Justice case law (including Vent de Colère, Case C-677/11 Doux Élevage SNC et Coopérative agricole UKL-ARREE v. Ministère de l’Agriculture etc, Case C-482/99 France v. Commission etc). In these cases, the Court held that Article 107(1) TFEU covers all the financial means by which the public authorities may actually support undertakings, irrespective of whether or not those means are permanent assets of the public sector. Therefore, even if the sums in question are not permanently held by the Treasury, the fact that they remain constantly under public control, and therefore available to the competent national authority, is sufficient for them to be categorised as State resources. In this case, the Commission explained that RTE has been appointed to manage a balancing fund which compensates the difference between expected and actual capacity. The Commission argued that even though RTE does not own the sums allocated to this fund, it remains under public control and therefore available to the national authorities. The Commission concluded that since the State can control and influence the management of the certificates, as well as the balancing fund, it is sufficient to characterise the funding mechanism as a public resource.

This is the opposite conclusion to the one reached by the Conseil d'État in the ANODE case – a challenge to the French capacity mechanism by a group of small energy suppliers. The Conseil d'État concluded that there was no aid – the measure is imputable to the State but because the State does not sell/forgo selling the certificates, it does not involve State resources.

Selective advantage

The Commission considered that the mechanism confers a selective advantage. The Commission did not accept the argument of the French State that the capacity mechanism does not meet the first condition, set out in the Altmark judgment, for public service compensation to escape classification as State aid, namely that the beneficiary of the aid recipient undertaking is actually required to discharge public service obligations and those obligations have been clearly defined. According to the Commission, the mechanism is not based on a service public obligation, since the certification obligation is not absolute as, by definition, it does not apply to demand response. That is to say that some capacity providers take part in the capacity mechanism on a voluntary basis, and their participation is therefore optional as opposed to compulsory. The Commission concluded that the advantage conferred by this mechanism is selective, as it only benefits electricity capacity providers and does not apply to other sectors. Furthermore, the Commission notes that to be eligible to receive certificates, a capacity provider must have capacity in excess of 0.1MW, which emphasises the selectivity of the mechanism.

The Commission also argued that the mechanism affects inter-State trade since it creates an advantage which is not available to non-French capacity producers.

Legality of the aid

While the Commission recognised the fact that security of supply is a legitimate objective of common interest, it was not convinced that there is in fact currently a shortfall in generation adequacy in France. It considered that RTE had adopted too prudent a view, that a capacity gap would probably not appear until 2025 and that there might be other means of securing adequacy, and that a significant increase in demand response capacity could be expected between 2014 and 2019.

The Commission also noted, in particular, that the mechanism creates a distinction between “explicit” demand side response (obtaining capacity certificates) and “implicit” demand side response (reducing suppliers' obligations). The Commission considered that the mechanism tends to favour the provision of demand side response by electricity providers, as opposed to independent aggregators, because implicit participation requires availability only in PP1, as opposed to explicit participation, which requires availability for the longer PP2 period. Furthermore, the Commission noted that interconnection and foreign capacity are taken into account only insofar as the obligations of suppliers are reduced by a security coefficient that reflects the contribution of interconnection to security of supply. The Commission commented that this fell short of the requirements of its Environmental and Energy State Aid Guidelines (EEAG), which requires cross-border participation where physically possible.

Proportionality

The Commission assessed the proportionality of the mechanism by reference to section 3.9.5 of the EEAG. It expressed doubts as to the transparency of the mechanism, leading to the possibility of overcompensation, as to discrimination between different technologies (and in particular as between demand response participating implicitly and demand response participating explicitly), and as to the likelihood that the mechanism would reinforce the position of EDF, as the holder of some 85% of the retail market and 90% of the wholesale market. Although a number of measures will increase liquidity of the certificates, the Commission still doubted that they will prevent the exercise of market power by EDF. Overall, the Commission had concerns about the proportionality of the measure as a means of securing supply.

Distortion of competition

The Commission noted that in order to be found compatible with the EU State aid rules, as set out in point 3.9.6 of the EEAG, aid must:

• be open to all providers of capacity where technically and physically possible;
• not reduce incentives to invest in interconnection and not undermine market coupling;
• not undermine investment decisions made prior to the introduction of the measure;
• not unduly strengthen market dominance; and
• give preference to low-carbon technologies where technical and economic parameters are equivalent.

However, it concluded that the French capacity mechanism may cause significant distortion both to competition in electricity markets and to electricity flows between Member States. The absence of long-term price signals risks creating or reinforcing entry barriers. The mechanisms also creates a distinction between demand response capacity participating explicitly and implicitly. Foreign capacity is not eligible to participate, so not all potential providers of capacity can participate on an equal basis. The difficulty of estimating customers' portfolios also creates a barrier to entry by new suppliers, and may reinforce the market position of EDF. The capacity mechanism is also likely to lead to a reduction in price of energy in France, which is likely to lead to a reduction in interconnector revenue, in turn leading to reduced future investment in interconnectors. Together with the fact that foreign generation may not participate in the capacity mechanism, this risks further locking the French market, which would undermine market coupling.

Support for a CCGT plant in Brittany

On the same date, the Commission opened an in-depth investigation into a scheme to provide support for the development of a new Combined Cycle Gas Turbine plant in Brittany. The French government invited tenders to develop a new CCGT plant to resolve network constraints and to provide both capacity and system services (eg. reactive power) in Brittany. The French capacity mechanism will not provide the requisite support because it operates at a national level, whereas there is a need for support in this specific area. The French government argued that the measure satisfies the Altmark criteria because it fulfils a public service obligation. The Commission disagreed. It took the view that there was no evidence of a security of supply problem, and that the tender process was discriminatory because it specified a CCGT plant. There was a risk that the support for the plant would aggravate the problem rather than alleviate it. The Commission believed that at least part of the requirement could have been fulfilled by demand response.

Comment

The Commission's concerns in these two French cases are the same as those highlighted by Competition Commissioner Margrethe Vestager in her comments on the launch of the Commission's first State aid sector inquiry, focusing on capacity mechanisms, in April 2015: "governments have a legitimate interest to ensure that there is sufficient electricity supply - households and industry should not face black-outs. My role is to safeguard that public measures to underpin investment in electricity supplies do not unduly favour particular producers or technologies, or create obstacles to trade across national borders. For example, in some cases it might be more efficient to invest in improving electricity grid connections between EU countries than to build new power stations." The preliminary results of that inquiry are due imminently, are expected to provide important guidance in this area, and may lead to the closer harmonisation of capacity mechanisms across the EU. Meanwhile it is interesting to note that the Commission's decision to give State aid clearance to the GB capacity market is now the subject of an appeal to the European Court of Justice based on the alleged unfair treatment of demand response, and the Conseil D'État has also referred to the Court a number of questions raised by the French mechanism.