European Commission approves German support to cogenerated electricity

The European Commission has found German plans to support high-efficiency cogeneration to be in line with EU state aid rules. They promote energy efficiency, lower CO2 emissions and lead to a better integration of cogenerated power into the electricity market.

At the same time, the Commission will start an in-depth investigation into reductions for certain users from the surcharges imposed to finance the support.

Commissioner Margrethe Vestager, in charge of competition policy, said: "Cogeneration plants not only produce electricity but also put to use the heat generated in the process. The German cogeneration support scheme we approved today can make an important contribution to EU energy and climate goals. It improves the integration of highly efficient electricity cogeneration into the market whilst keeping electricity prices low for customers. At the same time, we need to examine in more detail the impact on competition of reductions for certain users from the surcharge that finances the scheme."

The German Heat and Power Cogeneration Act 2016 (Kraft-Wärme-Kopplungsgesetz - KWKG 2016) provides for state aid to operators of new and modernised highly efficient cogeneration ("CHP") plants (except coal and lignite-fired CHP). It also supports the construction and expansion of energy-efficient district heating/cooling networks (i.e. pipelines often built in towns, which allow the transfer of heat/cooling to end users) as well as the construction and retrofitting of heating/cooling storage facilities.

The Commission's investigation found that this support improves the integration of cogeneration into the electricity market and is in line with EU state aid rules, in particular its 2014 Guidelines on State aid for environmental protection and energy:
  • Operators of installations will have to offer their electricity on the market and will receive their support in the form of a fixed premium on top of the market price.
  • The measure gives an incentive to CHP plants to operate when they are needed, i.e. at times of higher electricity demand. This is because they will only receive the fixed premium for a limited number of operating hours (so-called full load operating hours). Therefore, the plants have an incentive to operate when the market price is higher. In line with the Guidelines, CHP plants will not receive any support when electricity prices are negative, i.e. when supply exceeds demand.
  • The cost effectiveness of the CHP support is further ensured through tenders to allocate support to new CHP plants with installed capacity between 1 and 50 megawatt (MW). CHP plants with installed capacity of more than 50 MW will receive premiums as set out in the KWKG 2016. This is because the participation of the larger plants in tenders could render those uncompetitive. It avoids that a limited number of large bidders, which would be able to cover the entire tender capacity, can resort to strategic bidding leading to higher prices and preventing smaller suppliers from competing.
  • CHP plants produce heat and electricity simultaneously. The measure provides for support to facilities that store this heat for use when it is actually needed and thereby increases the ability of CHP plants to react to electricity demand.
  • District heating/cooling, i.e. transferring centrally produced heat/cooling to end users, is an area in which cogeneration can be particularly energy efficient. The measure provides for support to construct or expand district heating/cooling networks. In line with the Guidelines it is limited to networks that are mainly filled with cogenerated, renewable or industrial waste heat.
The KWKG 2016 also provides for state aid for existing gas-fired high-efficient CHP plants used for district heating. Germany has demonstrated that due to a higher level of production costs and low electricity prices, without the limited support, these plants would stop operating. On this basis, the Commission has found that the support was proportionate and needed to prevent a significant increase of CO2 emissions in Germany and is in line with EU state aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union.

For these reasons, the Commission concluded that the scheme will contribute to energy efficiency, lower CO2 emissions and lead to a better integration of cogenerated power into the electricity market. Potential distortions of competition brought about by the state support will be limited by allocating part of the support through competitive tenders.

The scheme is accompanied by a detailed evaluation plan to assess its impact. The results of this evaluation will be submitted to the Commission by December 2021.

In-depth probe into surcharge reductions for certain customers
The measure is financed by a levy (the "CHP-surcharge") imposed on electricity consumption collected by network operators as a supplement to network charges. The CHP-surcharge is 0.445 € cent/kWh in 2016. The KWKG 2016 provides for reductions for users with high yearly energy consumption and certain energy-intensive industrial users. These reductions reduce the burden that these users would normally have had to bear and therefore constitute state aid within the meaning of EU rules.

The Commission will now assess further whether these reductions are compatible with EU state aid rules. It will in particular consider whether reductions from the CHP-surcharge could be needed to make financing of CHP support schemes sustainable. As regards surcharges used to finance renewable support schemes, the 2014 Guidelines on State aid for environmental protection and energy allow reductions for certain users under specific conditions to ensure their competitiveness. The Commission will assess whether similar reasons could apply to the CHP-surcharge. It will also carefully examine the proportionality of CHP-surcharge reductions foreseen in the KWKG 2016 and their impact on competition.

Opening an in-depth investigation does not prejudge its outcome. It allows Germany and third parties to comment on the measure under review and bring forward information that can help better understand the impact of the reductions on competition.

The Commission found in 2002 that Germany's 2000 law for the protection of electricity generation on the basis of combined heat and power did not constitute aid (case NN68/2000). However, the notified support scheme is different from the 2000 CHP law in several aspects. In particular, the 2016 support scheme is financed by a levy imposed by law. The Commission therefore considers that the notified 2016 CHP support scheme contains state aid.

The non-confidential version of the decision will be published in the State aid register on the competition website under the case numbers SA.42393. The State Aid Weekly e-News lists new publications of state aid decisions on the internet and in the EU Official Journal.

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