There are some concerns that the design of the LUX-TEN legislation (formerly L-NET) might conflict with anti-competitiveness ‘State Aid’ rules at the EU level. LUX-TEN Advocates need to:
- take a close look at revised 2022 guidelines for State Aid as they apply to climate, environmental protection and energy (CEEAG) to determine likelihood of a legal challenge;
- research parallel precedents for exemptions or rulings that are substantively similar to LUX-TEN; and
- possibly propose revisions to the legislation to align more closely in design to those exempted policies.
This is a list and description of guidelines on the EU Commission Website.
The renewable energy feed-in tariff is likely the closest policy to explore for comparison.
In doing some separate research in the Czech context, I found an example of an EU ruling from 2016/17 that established that the Czech FIT was actually in compliance with (i.e. not needing exemption) with EU regulations. However, the ruling did indicate that during the 2006-2012 period, the rates offered to projects participating in the FIT could be characterized as generating ‘windfall profits’ and that future rate-setting must avoid excessive levels of payment to maintain compliance.
We would welcome any further thoughts on whether the L-NET, as is, is likely to be compliant, or how it might be modified to become so if it is likely now.
A breakdown of key things to consider in this analysis:
Projects aimed at eliminating atmospheric carbon dioxide that are located outside of the territory of the Grand Duchy of Luxembourg are eligible for financial compensation, or payments, under the terms referred to in this law, if minimum fifty percent of ownership of the project assets are held by
individuals or entities legally domiciled in the territory of the Grand Duchy of Luxembourg.
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The fact that the bill allows for projects to be developed outside of LU might increase likelihood of compliance. But the requirement of 50% ownership by companies domiciled in LU might do the opposite…?
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The funding mechanism for the program is an existing one, a climate innovation fund to support tech development and deployment. The bill amends the law to include funding for Lux-ten projects. If this prior law is compliant with EU state aid regs, then would this resolve any challenges to lux-ten…?
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There is reference to the General Block Exemption Regulation (GBER) in the CEEAG document above, and how these regs relate to each other. The GBER establishes exemptions to state aid rules, and apparently 96% of aid programs in Europe have been exempted under GBER, suggesting that the exemptions are either incredibly broad, or that states have used the regulation creatively to work around state aid (unlikely). The CEEAG document references that certain exemptions exist for ‘small scale projects’ under GBER but I have been unable to find reference to that in my research. This could be relevant to LUX-TEN because, for entirely different reasons not related to state aid compliance, the proposal caps CDR project size to a relatively small scale. This could be an argument for exemption, but we need to understand what “small” means in a regulatory sense.
Considering the requirements of the relevant EU rules on State aid for environmental projects (TFEU, GBER and CEEAG) as well as the upcoming changes introduced by the upcoming carbon removal certification framework or CRCF (but ignoring any EU rules on State aid for R&D), LUX-TEN will have a much better chance of passing muster with the EU commission by incorporating the following twelve amendments.
- Cap the subsidy to the funding gap i.e., the difference in net present value (NPV) between at least one typical investment scenario and a “counterfactual scenario”. Assuming the latter consists in doing nothing, Luxembourg will need to prepare and submit the following to the EU Commission:
a. quantify, for each scenario where a reference CDR project is implemented:
- all main costs and revenues,
- the estimated weighted average cost of capital (WACC),
- the NPV over the lifetime of the project.
b. provide reasons for the assumptions used for each aspect of the quantification.
c. explain and justify any methodologies applied.
The funding gap will then be estimated as the negative NPV of the reference project over its lifetime. In case the counterfactual scenario does not consist in doing nothing (e.g., for BECCS or other projects with an economic rationale outside of CDR), then its NPV will need to be estimated too and the funding gap will be the difference between both NPVs.
<!>This mandatory cap makes it very challenging to apply the degressive tariff envisioned in the original bill<!>.
Given that costs and revenues are very hard to estimate, Luxembourg may be required to introduce compensation models that are a mix of ex-ante and ex-post e.g., ex-post claw-back or cost monitoring mechanisms, while keeping incentives for the beneficiaries to minimise their costs and pursue efficiencies over time.
Full alignment with the GBER can also be achieved by capping total financial support at:
a. A percentage (60% for small firms, 50% for medium-sized firms, 40% for other firms) of all costs “directly linked to the achievement of a higher level of environmental protection”.
b. EUR 15 million per firm per project (including any other aid that may be provided by other Member States unless it concerns different eligible costs). Exceptions may apply when the other funding comes from EU institutions.
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Commit to updating this analysis of costs and revenues every 3 years.
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Reduce the programme duration to 10 years.
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Demonstrate how Luxembourg will ensure that projects for which aid is budgeted will actually be developed, for example setting clear deadlines for project delivery, checking project feasibility as part of pre-qualification for receiving aid, requiring collateral to be paid by participants, or monitoring project development and construction. However, Luxembourg may grant more flexibility regarding pre-qualification requirements for projects developed and 100 % owned by SMEs.
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Add back the MRV-related content that had been scrapped in the bill submitted last Fall, highlighting how the requirements align with the Do No Significant Harm (DNSH) that is now central to the EU’s environmental policy.
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Address any competition for storage space between CDR and CCS projects as it may be considered a “negative externality that adversely affects competition and trade between Member States”.
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Organise a public consultation “on the competition impacts and proportionality” of the LUX-TEN tariff. The consultation must last for at least 4 weeks and cover covering eligibility requirements as well as the proposed absence of competitive bidding processes and the process proposed instead. Consultation questionnaires must be published on a public website. Luxembourg must publish a response to the consultation summarising and addressing the input received. This should include explaining how possible negative impacts on competition have been minimised through the scope or eligibility of the proposed measure. Luxembourg must provide a link to their response to the consultation as part of the notification of aid measures under this Section.
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Clearly state that a written application must be submitted to the Minister before any work on the project starts.
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Require applicants to also:
a. provide metrics regarding their size,
b. indicate the start and end dates of the project and its location
c. lay out a list of project costs, which must be provided pre-tax and “supported by documentary evidence which shall be clear, specific and contemporary”.
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Commit to publishing the information submitted to the EU Commission about LUX-TEN.
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Clearly state that any firm is ineligible to payments under the programme if it is subject to an outstanding recovery order following a previous EU Commission decision declaring an aid granted by Luxembourg illegal and incompatible with the internal market.
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Finally, assuming the aid is granted without a competitive bidding process and the measure benefits a particularly limited number of beneficiaries, the Commission may require Luxembourg to ensure that the beneficiaries disseminate the know-how obtained as a result of the aided projects with the aim of accelerating the roll-out of the successfully demonstrated technologies.
To conclude, if LUX-TEN subsidies are approved by the Commission, they may trigger additionality objections from certification bodies as explained by Johan Börje on March 24. One way to solve this chicken-and-egg problem is to make subsidies dependent on carbon removal credits being issued and certified, e.g., by a certification body that meets the requirements of the proposed CRCF.