State aid: Commission opens in-depth investigation into compensation for early closure of lignite-fired power plants in Germany

This article is brought to you in association with the European Commission.

The European Commission has opened an in-depth investigation to assess whether German plans to compensate lignite-fired power plants for phasing out earlier than foreseen are in line with EU State aid rules.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “The phase-out of lignite-fired power plants contributes to the transition to a climate-neutral economy, in line with the European Green Deal objectives. In this respect, our role is to safeguard competition by making sure that the compensation granted to the operators of the plants for phasing out earlier than foreseen is kept to the minimum necessary. The information currently at our disposal does not allow us to confirm this with certainty, and we will now investigate this further.”

The German lignite phase-out

According to the German coal phase out law, the use of coal for the production of electricity will have to phase-out by 2038.

Germany has decided to enter into agreements with the main producers of lignite-fired electricity, RWE and LEAG, to encourage the early closure of lignite-fired power plants.

Germany notified the Commission of its plan to compensate these operators with €4.35 billion for (i) foregone profits, as they cannot continue to sell electricity on the market, and (ii) additional mine rehabilitation costs resulting from the anticipated closure. Of the total €4.35 billion, €2.6 billion are earmarked for the RWE lignite installations located in the Rheinland and €1.75 billion for the LEAG installations in the Lausitz.

The Commission’s investigation

At this stage, the Commission’s preliminary view is that the German measure in favour of the lignite operators mentioned above is likely to constitute State aid. Furthermore, the Commission has doubts that the measure is in line with EU State aid rules.

The Commission’s doubts concern the proportionality of the compensation payments, in particular:

• with regard to compensation for forgone profits: Lignite operators are compensated for profits they can no longer make due to their early closure. The Commission doubts that compensating operators for foregone profits reaching very far into the future corresponds to the minimum required. It also expresses doubts regarding certain input parameters of the model used by Germany to calculate the foregone profits, including fuel and CO₂ Moreover, the Commission did not receive information at plant level.
• with regard to compensation for additional mine rehabilitation costs: Whilst the Commission acknowledges that additional mine rehabilitation costs that result from the early closure of the lignite plants could also justify a compensation for RWE and LEAG, it has doubts with regard to the information received, in particular on the counterfactual scenario used in the case of LEAG.

The Commission will now carry out an in-depth investigation to determine whether its initial concerns are confirmed. The opening of an in-depth investigation provides Germany and any interested third parties with the opportunity to submit comments. It does not prejudge the outcome of the investigation.

Background

The European Green Deal has recognised that further decarbonising of the energy system is critical to reach climate objectives in 2030 and 2050. The production and use of energy across economic sectors account for more than 75% of the EU’s greenhouse gas emissions. Therefore, a power sector largely based on renewable sources must be developed, complemented by the rapid phasing out of coal and decarbonisation of gas.

In November 2020 the European Commission found that the competitive tender mechanism introduced by Germany to compensate hard coal-fired power plants, as well as small lignite-fired power plants (below 150 MW) for phasing out earlier than foreseen, promotes European Union climate objectives and is in line with State aid rules. The non-confidential version of this decision is available under the case number SA.58181 in the State aid register on the Commission’s competition website.

Further information

The non-confidential version of the decision will be made available under the case number SA.53625 in the State aid register on the Commission’s 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 Competition Weekly e-News.