State aid: Commission approves €2.98 billion German scheme to promote green district heating

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

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The European Commission has approved, under EU State aid rules, a €2.98 billion German scheme to promote green district heating based on renewable energy and waste heat. The measure will contribute to the implementation of Germany‘s National Energy and Climate Plan and to the EU’s strategic objectives relating to the EU Green Deal, in particular the EU’s 2050 climate neutrality target.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “This €2.98 billion scheme will contribute to greening the district heating sector in Germany, by supporting the construction of more efficient district heating systems and the decarbonisation of existing ones. With this measure, Germany will be able to increase the share of renewable energy and waste heat in the heating sector, thereby considerably decreasing its emissions. The German aid measure we have approved today will contribute to achieving the EU Green Deal objectives and help Germany meet its environmental targets, while limiting possible distortions of competition.”

The German scheme

In June 2022, Germany notified the Commission of its intention to introduce a scheme to promote green district heating based on renewable and waste heat.

The scheme, which will run until 30 August 2028, will be open to district heating network operators and operators not currently providing this service on the market. The aid will take the form of direct grants. The measure will support feasibility studies and transformation plans respectively for the construction and the decarbonisation of district heating networks. Under the scheme, district heating network operators will also be able to receive investment aid for:

• the construction of new district heating systems with a share of renewable and waste heat of at least 75%;
• the decarbonisation and upgrade of existing district heating systems to operate on the basis of renewable energy and waste heat; and
• the installation of renewable heat and solar thermal generation facilities, heat pumps and heat reservoirs, as well as the integration of waste heat in district heating systems.

In addition, district heating network operators will be able to receive operating aid for the generation of renewable heat through solar thermal installations and heat pumps.

Support for feasibility studies and transformation plans will cover up to 50% of their costs. When it comes to investment aid, the aid amount per beneficiary will cover up to 40% of the eligible investment costs. In the case of operating aid, the aid will be calculated based on the amount of renewable heat produced. The granting authority will ensure that the aid does not exceed the funding gap (i.e. the aid amount necessary to attract the investments that otherwise would not take place).

This nation-wide scheme is expected to support the installation of approximately 681 MW of renewable heat generation capacity per year, reducing greenhouse gas emissions by approximately 4 million tonnes of CO₂ per year.

The Commission’s assessment

The Commission assessed the scheme under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (‘TFEU’), which enables EU countries to support the development of certain economic activities subject to certain conditions, under the 2022 Guidelines on State aid for climate, environmental protection and energy.

The Commission found that:

• The aid is necessary and appropriate for the decarbonisation of the district heating sector in Germany and that it has an ‘incentive effect’. As fossil fuels have a cost advantage over renewable and waste heat, in the absence of aid, investments in district heating generation facilities would be based on fossil fuels and thus reflect the current energy mix in Germany, characterised by high share of gas boilers and cogeneration installations. Furthermore, in the absence of aid, investments in new district heating networks and in the decarbonisation of existing networks are unlikely to take place due to the high costs and low revenues of such investments. Finally, without the aid, the beneficiaries of the scheme would not have sufficient incentives to plan the construction of new district heating networks and the decarbonisation of existing ones in a cost-effective manner.
• The aid is proportionate and limited to the minimum necessary. While the level of aid is not based on the individual funding gap quantification for each of the beneficiaries, the granting authority must ensure that support does not exceed the funding gap. In addition, the support for heat generation will be subject to annual monitoring by the granting authority to ensure that the funding gap is not exceeded.
• The positive effects of the aid on the decarbonisation of district heating systems in Germany outweigh any potential negative effects on competition and trade between Member States. The scheme will support the decarbonisation of the district heating sector in Germany, reducing greenhouse gas emissions, in line with the European Green Deal, without unduly distorting competition in the Single Market.

On this basis, the Commission approved the German scheme under EU State aid rules.

Background

The Commission’s 2022 Guidelines on State aid for climate, environmental protection and energy provide guidance on how the Commission will assess the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.

The new guidelines, applicable as from January 2022, create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the Green Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU’s objectives and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and will cater for the increased importance of climate protection. They include sections on energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.

The guidelines allow Member States to support the production of heat from cogeneration plants linked to district heating sector, subject to certain conditions. These rules aim to help Member States meet the EU’s ambitious energy and climate targets at the least possible cost for taxpayers and without undue distortions of competition in the Single Market.

The Energy Efficiency Directive of 2018 established an EU-wide binding energy efficiency target of at least 32.5% by 2030. With the European Green Deal Communication in 2019, the Commission reinforced its climate ambitions, setting an objective of no net emissions of greenhouse gases in 2050. The European Climate Law adopted in June 2019, which enshrines the 2050 climate neutrality objective and introduces the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, sets the ground for the ‘Fit for 55′ legislative proposals adopted by the Commission on 14 July 2021. Among these proposals, the Commission has presented an amendment of the Energy Efficiency Directive to develop a more ambitious binding annual target for reducing energy use at EU level.

The non-confidential version of the decision will be made available under the case number SA.63177 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.