Doubts mount over legality of Germany’s proposed power reserve

The German government plan to put 2.7GW of lignite-fired power plants into a capacity reserve might be considered unjustified state aid under EU rules, said legal experts.

The government expects the reserve, where plants would receive remuneration for being on standby for covering unexpected supply shortages, to reduce emissions by 11m-12.5m tonnes of CO2 equivalent. Germany needs to cut 22m tonnes CO2 emissions to achieve its 2020 climate targets.

The European Commission could consider the measure state aid because it looks like lignite power plants will not be selected in the reserve via a public tender, said Matthias Lang, a partner at law practice Bird & Bird in Germany. The Altmark Trans ruling of the Court of Justice of the EU might give ground for considering it state aid, he said.

“It will also be interesting to see if and to what extent the additional aim of reducing CO2 emissions comes into play in the state aid analysis,” he added.

Negotiations with power plant operators, rather than tenders, will determine which plants go into the reserve, according to plans by the German economic affairs ministry.

Legal experts of the German parliament’s lower house, the Bundestag, also said in a recent analysis that the proposed reserve will probably be considered state aid under EU rules, said Lang.

The German government has said that it will be in contact with the European Commission to design the capacity reserve in a way that is in line with EU rules, said a spokeswoman for the economic affairs ministry on Tuesday. “And this is what we are currently doing,” she added.

The Bundestag legal experts added too few details are known about the measure to estimate if it can be considered justified at this stage.

“I share the concerns of Bundestag experts,” said Lang. “The government would need to justify it properly and I have not seen such a justification yet. It will be challenging [to justify it].”

If the proposed reserve is not really needed for the sake of supply security, then the measure is in essence just a payment to power plant operators and would be hard to justify, he said. Energy experts have told ICIS before that Germany is unlikely to need a capacity reserve in the next few years because it will probably have sufficient conventional capacity on the market to cover the demand at times of low renewable energy generation (see EDEM 10 July 2015).

The ministry plans to put the 2.7GW of lignite-fired capacity gradually in the reserve between 2017 and 2020. After four years in the reserve, the plants will be shut down.

The reserve might be hard to justify also because it includes only lignite-fired plants, said Lang. How much the payments to the reserve plants are will matter too, he added.

“The core of [the] capacity reserve is in our view designed in a way that can be justified state aid,” said the ministry’s spokeswoman. Small adjustments to the reserve plan might be needed to fit EU rules and the ministry is ready to make them, she added.

Even if Germany needs commission sign off before it can come into force, the implementation of the measure is unlikely to be delayed, said the ministry’s spokeswoman.

The EU state aid notification procedure can be conducted in parallel with parliamentary proceedings and based on Germany’s previous experiences, it usually does not take more than six months to receive the commission’s approval, the spokeswoman said.

The commission did not comment on when it could make its decision on the measure. Germany is one of the 11 member states included in the commission’s inquiry on capacity mechanisms, which will assess if there are features of such mechanisms that distort competition or hinder cross-border trade, a spokesman for the commission said. laura.raus@icis.com