State aid: Commission opens in-depth investigation into grants for new oil-shale fuelled power plants in Estonia.

M2 PRESSWIRE-March 23, 2011-: State aid: Commission opens in-depth investigation into grants for new oil-shale fuelled power plants in Estonia(C)1994-2011 M2 COMMUNICATIONS

RDATE:23032011

Brussels --The European Commission has opened an in-depth investigation under EU state aid rules into an Estonian project to grant state support of up to EUR1.5 billion spread over 20 years to the operators of two newly-constructed 300 MW power plants. The aid would be paid for the mere availability of the plants, provided that they are mainly fuelled with oil-shale, a hydrocarbon widely available in Estonia. Estonia claims that the aid is necessary to increase the security of energy supply. While the Commission acknowledges the importance of securing energy supplies, it has, at this stage, doubts that the proposed Estonian measure would be the least distortive means to achieve this objective. In particular, large-scale subsidies would be allocated over a long period without a tender procedure. This could result in discouraging investment into alternative technologies in Estonia and in neighbouring Member States and in crowding out competitors, who would have to operate without such aid. The opening of an in-depth investigation allows interested third parties to comment on the measure under scrutiny. It does not prejudge the outcome of the procedure.

Commission Vice-President in charge of competition policy Joaquin Almunia said: "While the Commission recognises the special circumstances of the electricity market in Estonia, the specific design of this measure has the potential to seriously disturb competition and could discourage investment in other technologies in Estonia and neighbouring Member States."

Estonia plans to grant state aid of up to EUR75 million annually over 20 years (i.e. a maximum of EUR1.5 billion) for the operation of two oil-shale power plants in order to increase its locally-installed electricity generation capacity between 2013 and 2016. Estonia contends that planned domestic generation capacity and electricity interconnections with other Member States in the Baltic region are insufficient to address future risks to its security of supply.

The proposed scheme would require that the plants be operated with oil-shale as their main fuel. The duration of the scheme would be from 2013 at the earliest until 2032 at the latest. The aid would be in the form of a direct grant remunerating the mere availability of the plants. The amount would be calculated on the basis of the hours of availability of the plants multiplied by an amount fixed in accordance with average CO2 prices on international markets. Oil-shale is one of the most CO2-intensive fuels and virtually no electricity generator in the world other than the publicly owned incumbent Eesti Energia uses it for wide-scale electricity generation.

The Commission acknowledges the necessity to secure the supply of electricity. However, at this stage, the Commission has doubts whether the proposed measure, in its current form, is in line with EU state aid rules.

In particular, no competitive tender is foreseen and, therefore, the most likely beneficiary of the measure would be the fully vertically integrated incumbent energy company Eesti Energia that has significant activity along the whole value chain from mining to electricity distribution, with shares of more than 75% in all these activities in Estonia. Moreover, the aid would be granted irrespective of future sales revenues from electricity generation and there would be insufficient mechanisms to avoid possible windfall profits from such generation. Finally, in view of the substantial amount of aid and the long duration of the scheme, third parties have already raised concerns that the aid might crowd out existing plants and discourage investments in new plants both in Estonia and in neighbouring markets, since competing plants -- contrary to the subsidised new plants -- would be obliged to bear their full investment costs.

The non-confidential version of the decision will be made available under the case number SA.30531 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

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