Commission Approves €450M German Measure to Replace Electricity Generation

Source: 9/30/2022, Location: Europe

The European Commission has approved, under EU State aid rules, a temporary German measure to enable five lignite-fired power plants to be on stand-by and ready to be activated to the extent needed in the event of natural gas shortages. The measure will compensate the operators of the power plants for the costs of getting the plants ready to operate if needed. The measure, under which aid may be provided until 31 March 2024 at the latest, will contribute to safeguarding natural gas availability amidst Russian natural gas shortages in the context of Russia's war against Ukraine.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “This temporary measure will enable Germany to mitigate the economic impact of Putin's war against Ukraine, as it will contribute to replacing gas in the event of shortage, thereby enhancing our preparedness for the next winter.”

The German measure

Germany notified the Commission its plan to adopt a measure, with an estimated budget of €450 million, to establish a temporary lignite supply reserve, consisting of five lignite-fired power plants that are currently deactivated, and compensate the plant operators for the costs incurred in ensuring the plants are operational and ready to return to the market in case of need. The operators will not receive compensation for the time they are operating the plants, as at that moment they will be participating in the market and will be earning revenues. The aim of the measure is to save natural gas by providing the German and, more generally, the European electricity system with additional generation capacity in the short-term in order to replace electricity generation from Russian natural gas.

Under the measure, the five power plants will be transferred into a temporary lignite supply reserve for the period between 1 October 2022 and 31 March 2024. Germany will also compensate the two affected operators, Lausitz Energie Kraftwerke AG and RWE AG, for the necessary costs incurred to ensure the plants are operational and ready to return to the market.

In case of risk of natural gas shortage, the five plants in the reserve would be called and could enter the electricity market for a certain period of time, where they would participate like any other electricity generator. The permission to operate in the market would be given initially for a limited period, at maximum until June 2023, but could be prolonged by the German authorities until end March 2024, in case of need. For the proven necessary reactivation and standby of these plants, the plant operators would be compensated, which would however be set off against the profits made on the market for the time they would operate.

The Commission's assessment

The Commission assessed the measure under EU State aid rules, in particular Article 107(3)(b) Treaty on the Functioning of the European Union, which allows Member States to grant aid to specific companies or sectors to remedy a serious disturbance in a Member State's economy. The Commission found that:

- The aid has a limited impact on competition and trade within the EU. In particular, it is appropriate and necessary to remedy a serious disturbance in the economy of a Member State (i.e. risk of gas shortage) by enhancing preparedness for next winter.
- The measure is proportionate as it will only cover those costs that are necessary to enable the plants to operate until the end of March 2024 if needed. Moreover, necessary safeguards limiting the aid to the minimum necessary will be in place, including a settlement mechanism to ensure that the costs actually incurred by the operators are offset against the profits that they had made when operating the plants. Therefore, any potential overcompensation of the beneficiaries is excluded.
- The aid is limited in time as it will only apply until 31 March 2024 at the latest. On this basis, the Commission approved the German measure under EU State aid rules.

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