ECJ ruling provides EU Member States more flexibility in designing the promotion of renewable energies.

By Jörn Kassow and Alexander Wilhelm

The European Court of Justice (ECJ) recently ruled that the German Renewable Energy Act of 2012 (Erneuerbare-Energien-Gesetz – EEG 2012) did not constitute State aid (C-405/16 P). The ECJ found that the support mechanism for renewable energies in practice financed by electricity consumers paying the so-called “EEG surcharge”, and the reductions for electricity-intensive companies related to the EEG surcharge, do not constitute State aid because they do not involve State resources.

The ECJ ruling on 28 March annulled a November 2014 decision by the European Commission (EC) that approved the German support mechanism for renewable energies as compatible State aid, and for the most part the reduction of the EEG surcharge for electricity-intensive undertakings. However, in that decision the EC had also ordered Germany to recover a limited part of the reductions that was deemed incompatible.

Background

The EEG 2012 — like the preceding versions and the current version of the Renewable Energy Act — established a support and compensation scheme designed to promote and accelerate investment in the production of energy from renewable sources (RES). To cover high investment costs, the EEG 2012 guaranteed producers of renewable energy higher proceeds from electricity than the market price, since grid system operators were obliged to buy their electricity at feed-in tariffs and market premiums predetermined by law. Grid system operators were “entitled” to recover these costs for the support mechanism by passing them on via the EEG surcharge levied upon the electricity suppliers. Grid operators collected and administered these funds. In turn, electricity suppliers were “legally neither obliged nor prevented” to further pass on the costs — in practice costs were passed on so that the surcharge was ultimately paid by the final consumer. However, the EEG 2012 enabled a State body to set caps on the amount of the EEG surcharge that could be passed on to electricity-intensive undertakings (EIUs) — such as those in the metal, chemical, railway, and automotive industries — to avoid harming their competitiveness. Consequently, these caps severely reduced the EEG surcharge paid by EIUs.

The EC, and also the General Court at first instance, classified both the RES support mechanism and the reduction of the EEG surcharge for EIUs as State aid within the meaning of Art. 107 TFEU. In their reasoning, the scheme involved State resources because it was akin to a levy on electricity consumption imposed by the State, in that electricity suppliers and de facto final consumers were required to subsidise the support for RES producers and the reductions for EIUs. In addition, these funds remained under the “dominant influence” of the State and were not administered freely by the grid operators. In its 2014 decision the EC found that the support mechanism and most of the reductions were generally compatible with State aid rules, but it also ordered Germany to recover parts of the reductions that were not covered by the relevant State aid Energy guidelines. At the time, the recovery amounted to about €30 million plus interest.

The Court Ruling

On appeal, the ECJ sided with Germany’s arguments and overturned the General Court’s judgment. According to the ECJ’s reasoning, the funds generated by the EEG surcharge did not constitute State aid because they were not granted directly or indirectly through State resources. The ECJ found that the EEG surcharge could not be considered a levy imposed by the State because the fact that electricity suppliers “in practice” passed on their financial burden under the EEG surcharge to the consumers was not sufficient, since they were not “required” by law to do so. Furthermore, the judgement emphasised that the German public authorities had neither the “power of disposal” over the EEG surcharge funds so as to decide on a different allocation than that laid down in the EEG 2012, nor “public control” over their management by the grid system operators except the public monitoring for proper implementation of the law. In this regard, the ECJ distinguished this case from its 2013 judgment on a similar French scheme, where the State budget could be called upon to cover any shortfall from consumer charges and the funds were administered by a public law body. On these bases, the ECJ set aside the judgment of the General Court and annulled the EC’s 2014 decision. This is a final judgment that cannot be appealed.

Conclusion

After the EC’s intervention in 2014, Germany started negotiations with the EC that resulted in amendments to the German Renewable Energy Act, which took into consideration the concerns of the EC so that the dispute had no relevance for the further application of this Act until today.

However, the ECJ’s ruling still has significant practical impacts. The first impact is that by annulling the EC decision, there is no longer an obligation for Germany to recover about €30 million from EIUs.

The second impact is even more important: the EC and other critics may emphasise that the ECJ employed a formalistic and therefore questionable interpretation to exclude such measures with extensive private actor involvement (thereby replacing public authorities’ intermediary role in the transfer of resources between final consumers and electricity producers) from State aid control. This approach risked enabling Member States to avoid State aid control by employing certain legislative designs.

However, on the grounds of the ruling, Member States now have more flexibility to design a privately administered system to promote renewable energies in such a way as to keep them outside State aid control.

This post was prepared with the assistance of Apostolos Papadimitriou in the Brussels office of Latham & Watkins.