On 28 October 2022, the European Commission (the “Commission”) adopted the second amendment to its Temporary Crisis Framework for State Aid measures to support the economy following the aggression against Ukraine by Russia (the “Framework”). The second amendment to the Framework extends its duration by one year until 31 December 2023.
The four most important things you need to know about this amendment are:
- Maximum aid amounts have been increased;
- Guarantees or subsidised interests can now cover larger amounts of loans when taken by large energy utilities companies that provide financial collateral for trading activities on energy markets. Exceptionally, guarantees can also be provided as unfunded financial collateral directly to central counterparts or clearing members to cover the liquidity needs of energy companies, to clear their trading activities on energy markets;
- To achieve the EU targets of reducing electricity consumption in response to high energy prices, Member States may provide compensation for genuine reductions in electricity consumption; and
- State recapitalisations are not subject to detailed rules as under the COVID-19 Temporary Framework, however the Commission highlights the general principles it will use to assess them on a case-by-case basis.
Increased amount of aid
- The amendment quadruples the amount of aid that Member States may grant to companies affected by the crisis to €2 million. In the agricultural and fisheries sectors, the amounts are raised to €250,000 and €300,000, respectively.
- The conditions under which compensation for additional costs due to exceptionally severe increases in natural gas and electricity prices can be granted have been relaxed. The amendment increases the maximum amount of aid that can be granted from €2 million to €4 million. Now, 50% of the eligible costs can be covered by the aid, compared to 30% previously, and up to 70% of the previous consumption can be used as a reference to determine the additional costs (in contrast to the 60% initially provided for).
- For beneficiaries suffering from a reduction in economic performance, the aid could even reach up to €100 million.
- Maximum aid for energy-intensive users is increased from €25 million to €50 million. The maximum aid amount is increased from €50 million to €150 million for energy-intensive users active in a particularly affected sector, such as the production of aluminium and other metals, glass fibres, pulp, fertilizer or hydrogen and many basic chemicals.
Coverage of collaterals for trading activities on energy markets
- Whereas the Framework already allows Member States to guarantee loans, including for trading activities on energy markets, it nevertheless limits the amount of loans for which a guarantee can be granted. The Framework provides a similar limitation for subsidised loans. These limitations have been lifted for large companies providing financial collateral for trading activities on energy markets, subject to there being an appropriate justification.
- Furthermore, Member States may exceptionally provide a guarantee as unfunded financial collateral directly to central counterparts or clearing members to cover the liquidity needs of energy companies, to clear their trading activities on energy markets.
Compensation for electricity reduction consumption
- To compensate companies for the electricity consumption reduction needed to reach the targets imposed on EU Member States under Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices (see our blog post), Member States may establish aid schemes in compliance with existing State aid rules, or with the following conditions as set out in the amendment:
- the aid must provide financial compensation only where the amount of electricity consumed is lower than expected. Whether consumption reduction is genuine may be verified through different methodologies, account being taken of high price incentives to reduce consumption, incentives from other payments or schemes (e.g. subsidies previously received to improve the energy efficiency of a building), weather conditions, or “gaming risks”;
- the aid must contribute to reaching the targets of reducing electricity consumption by 5% in peak hours or 10% overall;
- the aid must be granted following a competitive bidding process;
- beneficiaries will be selected based on the lowest unit cost of additional consumption reduction (in EUR/MWh), and overcompensation must be clawed-back; and
- beneficiaries must commit not to increase their overall gas consumption and not to consume off-peak more than a certain proportion of the compensated electricity consumption reduction in peak hours.
Contrary to the temporary framework that the Commission adopted to address the COVID-19 outbreak (the “COVID-19 Temporary Framework”), the amendment does not devote a specific section to solvency support. It does however provide general principles relating to how the Commission will assess, on a case-by-case basis, the solvency support provided to address the financial needs of companies that would otherwise cease or downsize operations and threaten markets of systemic importance. These principles are:
- the aid must be necessary, appropriate and proportionate, without exceeding the minimum needed to ensure the viability of the company;
- the aid cannot be granted to a company in a group, unless it can be demonstrated that the company’s difficulties are not the result of an arbitrary allocation of costs within the group, and that the difficulties are too serious to be dealt with by the group itself;
- the State must be appropriately remunerated;
- measures to mitigate competition distortions must be taken, such as divestments, bans on bonuses, bans on dividend payments or bans on acquisitions, as laid down in the 2014 Rescue and Restructuring Aid Guidelines; and
- for each beneficiary, Member States must undertake a long-term viability assessment and, where considered appropriate by the Commission, notify to the Commission for approval a restructuring plan in accordance with the Rescue and Restructuring Aid Guidelines, within a specified period of time.
The Covington team will continue to monitor the developments and keep you updated.