Commission approves €750 million Estonian strategic reserve to support security of electricity supply

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The European Commission has approved, under EU State aid rules, an Estonian €750 million strategic reserve to safeguard security of electricity supply in emergency situations.

A strategic reserve is a type of capacity mechanism that remunerates resources that are held outside the market and used in cases of emergency, when the electricity demand exceeds the available supply. In Estonia, this occurs during periods of low wind and solar power generation while consumption is at its peak.

The strategic reserve, which will be in place until 2035, will be open to all projects that can contribute to achieving the security of supply objective, including electricity generation, demand-side response and storage. Electricity generation and storage units will offer their availability to start supplying electricity. Demand-response units (typically large electricity consumers) will offer their availability to reduce electricity consumption at peak times. To be eligible under the strategic reserve, projects will need to comply with the CO₂ emission limits set out in the EU Electricity Regulation.

The projects that will benefit from the aid will be selected through a transparent, non-discriminatory bidding process, with safeguards to ensure effective competition. Beneficiaries will compete based on the amount of aid requested per MW of capacity available during a scarcity event.

The Commission’s assessment

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

The Commission found that:

• Estonia demonstrated that the measure is necessary and appropriate, in line with the Electricity Regulation.
• The measure has an incentive effect, as the beneficiaries would not keep operating existing power units or invest in additional units to the same extent without the public support.
• The aid has a limited impact on competition and trade within the EU. It is proportionate, as the level of the aid corresponds to the effective financing needs. Safeguards limiting the aid to the minimum will be in place, including a competitive bidding process for the aid award and a verification of the funding gap for applicants which are deemed to have market power. Finally, distortions of energy markets are minimised, as the capacity funded is held outside of the electricity markets.
• The measure brings about positive effects that outweigh any potential distortion of competition and trade in the EU.
• The aid complies with the relevant provisions on capacity mechanisms and strategic reserves included in the Electricity Regulation.

On this basis, the Commission approved the Estonian measure under EU State aid rules.

Background

The Commission’s 2022 CEEAG provide guidance on how the Commission assesses 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 Guidelines create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the European Green Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU’s goals and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and 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.

Capacity mechanisms, including strategic reserves, have the important objective of ensuring security of electricity supply. Capacity mechanisms need to be well designed in order to ensure that they do not (i) lead to higher electricity prices for consumers, (ii) give undue advantages to certain energy operators or (iii) hinder electricity flows across EU borders.

The EU Electricity Regulation establishes rules to ensure the functioning of the internal market for electricity and defines a framework for regularly assessing the forecast level of security of supply in the EU. Whenever a risk is identified, Member States need to review the functioning of electricity market, and consider removing the distortions, which may cause the risk. In case such approach is insufficient to address the identified risk, Member States may introduce a capacity mechanism, subject to design requirements to ensure cost-efficient, cleaner and proportionate measures to deliver security of electricity supply.

For More Information

The non-confidential version of the decision will be made available under the case number SA.112459 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.