Compliance & Investigations
New Compliance Requirements in Energy Law due to European State Aid Law
As in all highly regulated areas, energy law includes certain requirements whose penalties are frequently applied in order to ensure compliance with them. In cases of non-compliance, violators may face penalties for regulatory offences or lose their privileges. The companies concerned usually already have compliance structures in place to handle this system. Recently, however, a new level has been added which increasingly needs to be addressed in compliance management systems: European State aid law. More and more, energy regulatory systems in which financial burdens are shifted around (rolled over) between various players now need to meet State aid requirements as well. European state aid may override national regulations and follows its own (European) rules when it comes to enforcement and penalty mechanisms. One example of this is the option of recovering financial means that have been incorrectly rolled over, i.e. rolled over in violation of a Member State's own domestic regulations. This option has been much discussed in the wake of a recent European General Court (EGC) decision.
Energy law: provisions and penalties
As a highly regulated area subject to strict political requirements, energy law relies on particular mechanisms to ensure compliance with these regulations. Essentially, legislators have two means at their disposal. The first consists in penalties within the narrow sense of the word, such as the threat of regulatory offences. The second is the loss of privileges, such as those relating to existing models in which a "slice" of a virtual power plant is leased. In such models, privileged under the 2017 Renewable Energy Sources Act (EEG), various power consumers use a power generation facility pro rata. The relevant authorities need to be notified of these models by 31 December 2017 so that the models can retain their privileges, namely that the EEG surcharge is waived in their case. Should this cut-off date be missed, the privilege will be lost.
A further new level of penalties: European State aid law
In addition to these well-known forms of enforcing regulations, the provisions of European State aid law will, increasingly, need to be factored into compliance management systems. This also applies to energy law, where financial support for particular measures is frequently rolled over in order to share out the resulting burdens among the originators as equally as possible. Such measures may be seen politically as meriting support (e.g. renewable energy sources) or technically as requiring support (e.g. energy reserves). Given its basis in EU law, State aid law may override national regulations and penalize by its own means developments that do not harmonize with it. In addition to the possibility of voiding the corresponding contractual agreements, such means may also include the recovery of financial incentives wrongfully received.
This option has now been further expanded by the EGC in a recent decision. The judgment of 10 May 2016 (Case T-47/15) concerned the German Renewable Energy Sources Act's roll-over mechanism. In the latter, the volumes of electricity generated in certain facilities qualifying for support (e.g. solar installations and wind turbines) are passed on financially to energy producers, network operators and consumers. To cover the subsidy costs received by the power producer, a surcharge is levied that is likewise rolled over to all players, including, ultimately, the final consumer, whose electricity bill will show the EEG surcharge.
The EGC has now ruled that these financial means – rolled over in the financial equalization mechanism provided for in Germany's Renewable Energy Sources Act – constitute State aid within the meaning of European State aid law. This is worth noting because the equalization basically occurs between private market players (network operators etc.). The EGC decision expands the concept of "State aid", central to this area of law. The Court ruled that it was sufficient that the State had initiated the equalization and surcharging system and that the State controls the flow of funds. European State aid law can therefore be relevant on practically all levels of the roll-over mechanism. Above and beyond the EGC decision, moreover, this case law is transferrable to other roll-over mechanisms, such as those under Germany's Combined Heat and Power Act (Kraft-Wärme-Kopplungsgesetz) and the regulated grid charges.
Recovery as a penalty
State aid control now also applies to cases in which the roll-over mechanism is not functioning as intended under statutory law, e.g. where the mechanism has been implemented incorrectly. It is conceivable, for example, that the special requirements of the surcharge system have been incorrectly applied by the responsible players. In the EGC's view, "State funds" then remain at a point in the roll-over mechanism where they were not supposed to. As State funds are concerned and the other criteria for State aid are frequently met (the criteria are generally interpreted broadly), it may be necessary to assume that impermissible State aid is given under Article 107 TFEU. In this case, the threat exists that there will be a duty to unwind the financing classified as aid unlawful under EU regulations.
Such unwinding is governed by European State aid rules. Even though the Renewable Energy Sources Act itself includes provisions concerning how to deal with financial means incorrectly rolled over, European State aid provisions also need to at least be taken into consideration in order to ensure their effective implementation (effet utile). Section 57(5) sentence 3 of the Renewable Energy Sources Act, for example, provides that recovery claims between network operators and installation operators as well as – on the next level – between transmission system operators and network operators become statute-barred at 2400hrs on the 31 December of the second calendar year following feed-in. But these limitation rules need to be measured against the principle of effet utile and are not permitted to conflict with the claim to repayment intended under State aid laws. So an open issue is how this is to be reconciled with the 10-year limitation period that applies in principle under Article 15(1) Procedural Regulation (Council Regulation (EC) No 659/1999 of 22 March 1999).
Further unresolved problems that may result
This development has other consequences as well that have yet to be resolved. Besides the question of who specifically would be obliged to undertake the recovery, there is also the question of whether – and if so, who – would have to make notification of State aid to formally begin an investigation procedure. This is only required in the case of new State aid. If financial means remain at a point in the surcharge system because the roll-over was incorrect, the point in time at which new State aid is given can hardly be determined in abstract terms. This point in time could range from a waiver of the recovery to the time at which the limitation period ends under national statutes of limitations, through to supreme court decisions on the recovery claim (for further details in German on this and the subject in general, we refer you to Lippert/Kindler, Die Staatlichkeit finanzieller Mittel in Umlagesystemen, EnWZ 2017, 256).
The EGC's judgment on 10 May 2016 increases legal risks for market participants in the energy sector. From now on, errors in implementing the roll-over mechanism regulated within a Member State may unintentionally create (on one level of the system) benefits that meet the criteria for aid unlawful under EU regulations. Increasingly, therefore, European State aid law will need to be considered in compliance management systems within the energy industry. Specifically with regard to surcharge systems – which continue to be on the increase in energy law – companies will therefore need to ensure that financial means are duly passed on in future. There may otherwise be a threat that payments must be unwound due to mandatory EU regulations with resultant problems that companies will be facing for the first time.