Green Deal, Recovery and State Aid Control

By Natalia Fabra

An interesting debate has recently emerged regarding the need (or not) of modifying competition policy rules in order to support the energy and climate agenda. This debate encompasses all areas of competition policy: antitrust, mergers, and state aid control (see the conference that the DG-Comp recently organized around this issue). Among these areas, state aid control stands out given that most of the Green Deal investments will involve State Aid…from energy efficiency investments to sustainable mobility, to name just two. Likewise, 37% of the recovery fund will be devoted to green investments. Should state aid control be disconnected from environmental policies, or should we rather exploit the synergies between the two policies?

In my view, State Aid control must play a fundamental role in the energy transition. The amount of public funds that are going to be allocated for sustainability purposes is very significant, larger than ever before in European history. So it is crucial that we get this right, making sure that the aid does not distort competition and trade and also ensuring – let me stress this – that we make the most out of the public investments. Public funds are limited and therefore costly. Allocating them to the wrong activities or giving them away in the form of firms’ rents would entail high opportunity costs.

The best way to make sure that our funds are used as efficiently as possible is to rely on competitive mechanisms for allocating those funds, whenever possible. The merits of competition are well known. Through competition, producers are pushed to innovate in order to reduce those costs and to pass on their lower costs to consumers through lower prices. For this purpose, State Aid rules can be very effective, as we have seen in the past. The 2014 Energy and Environmental Aid Guidelines (EEAG) required the use of competitive tenders as the default approach for allocating renewable energy support. The experience with renewables’ tenders has been very positive – among other successful stories, just last month in Spain, the new auction resulted in prices of 25€/MWh for solar and wind installations, well below the current wholesale electricity prices. This has been a major achievement of state aid rules, which can also prove very useful as we move along the energy transition.

But when we write down the rulebook – and the EEAG is currently being revised – it is important that we get it right because we otherwise run the risk of making the energy transition inefficiently expensive. And whereas I am positive about several aspects of the current guidelines, in my view they over-emphasize the efficiency of technology-neutrality. And this can be costly. As it is well understood, technology-neutrality selects the least-cost projects (at least if we overlook potential learning by doing externalities) but it unduly over-compensates the low-cost producers. Since public funds are costly, when we leave excessive rents with producers, we are also incurring inefficiencies.

What does this trade-off between efficiency and over-compensation depend on? In recent work with Juan Pablo Montero, “Technology-neutral versus technology-specific procurement”, we try to shed light on this issue. We find that a critical factor in this trade-off is the ex-ante asymmetry between the technologies we put to compete together. If those technologies are very different from each other, for instance, if we make hydrogen compete against electric batteries, or demand response against biomass, technology neutrality can give rise to excessive rents, more than offsetting any efficiency benefits of technology neutrality. The desirability of technology neutrality should thus be assessed on a case-by-case basis, rather than imposed as a requirement regardless of the nature of goods or services that are traded. This is just a call on the importance of future guidelines. State aid control can be a powerful rulebook as long as the rules are appropriate.

I already emphasized the value-added of state aid control in fostering the use of competitive mechanisms. This should also apply to the Recovery Fund at least for one good reason: the recovery needs to be efficient for it to be robust. The Commission should require member states to allocate the Recovery Fund through competitive mechanisms whenever possible, following the spirit of the state aid guidelines. There is a large amount of asymmetric information regarding the costs of the projects, so the use of competitive mechanisms is critical not only for selecting firms that are best at carrying them out but also for avoiding overcompensations. Requiring additionality to the projects is also critical as we do not want to spend public funds on projects that would have been carried out anyway. The member states are in a rush to spend these resources, they are also concerned about their true ability to spend them all. We thus run the risk that they might overlook these issues unless they are required to do so.

Beyond the role of state aid in promoting the use of competitive mechanisms, let me also add that I wish State Aid could come with some sort of green conditionality, in line with the green conditionality embodied in the Recovery and Resilience Facility. I find it contradictory that on the one hand Europe is setting ambitious environmental goals, and on the one hand, it allows member states to provide aid that contravenes these goals. The rational of state aid control is to stop member states from granting aid that would lead to inefficiencies such as distortions to competition or to trade. Damaging the environment is another major inefficiency that should also be added to the list, I believe. The no-harm principle should be part of state aid control.

The European Court of Justice’s decision in Hinckley Point C has weakened this case, but I would like the Commission, if possible, to rely on the provisions of the Treaty on environmental protection to ensure that no State Aid damages the environment. And if State Aid is not deemed appropriate for this purpose, legislators should do their part of the job. This would be another powerful channel through which state aid control could greatly contribute to the Green Deal as well as to the recovery.