15 March 2018

The European Commission approved the capacity mechanisms in the electricity sector of six Member States, including Belgium. These mechanisms are compatible with the internal market since they contribute to safeguarding the security of electricity supply without creating a distortion of competition. 

Context

Capacity mechanisms enable remuneration for the availability of electricity generation and aim to ensure that the electricity supply always meets the demand. A large number of Member States of the European Union have adopted such mechanisms, which can be of various types: targeted mechanisms, market-wide mechanisms or demand-response schemes. These mechanisms generally offer electricity generators and other capacity providers remuneration in addition to the remuneration they obtain by selling electricity on the market. In exchange, the providers have to maintain the capacity to guarantee the security of electricity supply. However, this additional remuneration could potentially have a negative impact on competition in the internal market and is therefore subject to the supervision of the European Commission on the basis of the 2014 EU guidelines on State aid for environmental protection and energy.  

The Belgian situation: the choice of a strategic reserve

Belgium has identified several market failures that might jeopardise the security of supply, and has adopted several measures to counteract these failures. These include the extension of the activity of certain nuclear reactors until 2025, development of renewable energy through the gradual commissioning of offshore wind farm projects in the North Sea, improvement of interconnection with other Member States in projects of common interest (in particular projects like ALEGrO, NEMO and BRABO) and also implementation of the "Energy Pact" to cope with the nuclear phase-out, scheduled to take place between 2022 and 2025. However, these measures will not enable Belgium to ensure security of supply in the short term. Belgium has therefore chosen to use a targeted mechanism: the strategic reserve. The concept is simple: the authorities pay the capacity providers to keep their power plants operational so that Elia, the transmission system operator, can use them in case of an emergency. This mechanism is organised by the Act of 29 April 1999 on the organisation of the electricity market and by the Functioning Rules for the Strategic Reserves produced by Elia. The mechanism is implemented when the annual adequacy assessment of Elia concludes that security of supply is jeopardised for the winter period. In that case, the Minister of Energy, on the advice of the Directorate General for Energy of the Federal Public Service Economy, can instruct Elia to establish a strategic reserve and decide on its volume. Elia will then organise, within a period of one month, a tender for this volume. Financial support is given to power plants which have announced their intention to cease activities and which obtain the contracts. The cost of this financial support is financed through a levy on the distribution tariff and is thus borne by the final consumers. 
On 13 July 2017, the Belgian authorities notified the measure to procure a strategic reserve for five consecutive winters, from the winter of 2017–2018 onwards, to the Commission, in accordance with Article 108(3) of the Treaty on the Functioning of the European Union ("TFEU"). Such a reserve is necessary in the light of Belgium's strong dependence on imports for its security of supply, in particular on French nuclear energy. Belgium also experienced a high rate of unavailability of its own nuclear power during the past five winters. 

European approval

The Commission analysed the compatibility of the strategic reserve with the legal framework of State aid. The Commission concluded that the strategic reserve under Belgian law has all the characteristics of State aid: final consumers have to bear the financial charge for the measure, which Elia collects and transfers to the State. Elia also prepares an annual proposal for this levy to be approved by the CREG. The resources therefore qualify as State resources. The strategic reserve also grants a selective advantage, because only the beneficiary power plants obtain payments for remaining at Elia's disposal whilst having left the market. Finally, the strategic reserve has the inherent potential to distort competition in the internal market. 

The Commission nevertheless concluded that this aid is compatible with the internal market, even though this measure is in breach of the standstill obligation of Article 108(3) TFEU for the winter of 2017–2018. The Commission considered that the measure was compatible with Section 3.9 of the 2014 EU guidelines on State aid for environmental protection and energy, while taking into account the commitments of Belgium to make some changes to the mechanism.

Belgium was able to demonstrate that the strategic reserve was necessary to address a clearly identified and quantified security of supply risk. However, Belgium committed to reduce the volume of the strategic reserve from 900 MW to 700 MW after the winter of 2017–2018,  in order to reflect the fact that some power plants returned to the market. It also agreed to amend the legal basis to allow Elia to adjust the strategic reserve volume on its own initiative, depending on changes in circumstances. The contract duration will also be shortened. 

The strategic reserve is also appropriate, because this measure is complementary to and consistent with other "long-term" measures adopted by Belgium to ensure the security of supply. 

The measure also has an incentivising effect by encouraging power plants ready to leave the market to stay at Elia's disposal.
 
The mechanism is proportionate. The tender procedure ensures that bids will be reasonable and that the beneficiaries will not benefit from overcompensation.
 
Potential distortions to competition are limited, since the mechanism is open to all types of potential capacity providers. In addition, the strategic reserve is used only after all other solutions to the scarcity problem are exhausted. Belgium also committed to amend the legal basis to prohibit capacity providers from terminating their contracts early and to prohibit power plants that have announced "definitive closure" from returning to the market afterwards. 

The measure is transparent, since all relevant information is on Elia's website.

Conclusion

Thanks to this welcome decision by the Commission, we can hope that the security of supply in Belgium will be ensured by the creation of this strategic reserve for the next four winters. This decision was taken in parallel with other decisions of the Commission, which approved the capacity mechanisms for Germany, France, Greece, Italy and Poland. However, Belgium will need to modify the legal framework in accordance with the commitments it has made to the Commission in order to comply with European law. In order to mitigate negative effects on competition, it will no longer be admissible for the beneficiaries of this mechanism to terminate their contracts early or to return to the market after having announced "definitive closure". 

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