CCS and EC state aid rules

1
CCS and EC state aid rules

• Illustrated by two Norwegian cases
• Professor Hans Chr. Bugge
• Research assistant Nina K. Hallenstvedt
• Natural Resources Law Group
• University of Oslo

2
What is the issue?

• Technological development in CCS is needed and
  this will be very expensive.
• When (if) the proper technological solution is
  found, huge investments are required in capture,
  transport, and storage installations. Also the
  running of the system will be costly.
• At present full scale CCS from power production
  is very far from being economic and commercial
  (even if combined with Enhanced Oil Recovery
  EOR). The costs cannot be covered through the
  market price for electricity.
• State aid is necessary, but
• Do the EC state aid rules limit the
  possibilities?

3
The Norwegian situation

• Norway wants to be a pioneer and gain experience
  in this field and if possible make CCS
  commercial.
• Norways continental shelf has an enormous
  storage potential.
• The possibility of CCS has been on the political
  agenda for nearly 10 years.
• In 1999 a plan and application for gas-fired
  power plants without CCS became a very
  controversial issue in Norway. (A government had
  to resign on it.)

4
The Kårstø gas-fired power plant

• In 1999 a permit was finally given to the Kårstø
  power plant (south of Bergen on the west coast)
  without CCS requirement.
• It is now operating, emitting 1,2 mill. tons of
  CO per year against EU ETS emission allowances
  (when it operates)
• The political aim is to retrofit CCS within 2012,
  based on best available technology
  (post-combustion amine process).
• Gassnova SF - a 100 state owned company for the
  development of gas power technology/CCS was
  established in 2005. It shall build and run the
  full scale CCS chain at Kårstø from 2012. This is
  a separate entity from the company Naturkraft
  which owns and runs the power plant itself.
• The vision Kårstø as CCS hub for CO2 from other
  Norwegian sources and the continent, possibly at
  least 20 mill. tons per year (in the Utsira or
  Johansen formations).

5
The Test Center Mongstad (TCM)

• In 2007 StatoilHydro got permission to establish
  a new gas-fired power plant at Mongstad (north of
  Bergen), on the condition that new CCS technology
  is in place from 2014.
• For this purpose a joint venture RD company has
  been established Test Center Mongstad (TCM).
• The Norwegian state has 80 and StatoilHydro 20
  shares in TCM.
• This is Norways moon landingA very high
  profile project for the government and for our
  prime minister in particular.

6
Summing up the engagement of the Norwegian state

• Kårstø 100 state engagement in the future CCS
  chain (Gassnova).
• Estimated costs Investment costs of 500 mill.
  and upwards, annual operating costs of min. 37
  mill.
• Mongstad 80 direct state involvement in a
  technology RD project estimated to 200 mill.
• Is this state aid? Is it prohibited by the
  present EC state aid rules (ECT art. 87)? (These
  apply to Norway through the EEA Agreement, see
  its art. 61.)

7
The present status of these cases

• Norway has notified EFTA Surveillance Authority
  (ESA) about the government investment in the TCM
  and Kårstø.
• (Within EFTA, ESA corresponds to the EU
  Commission.)
• The issues are under discussion between the
  government and ESA since the summer 2007 for TCM
  and since January 2008 for Kårstø.
• No formal case opened yet.

8
ECT Article 87 (1)

• Save as otherwise provided in this Treaty, any
  aid granted by a Member State or through State
  resources in any form whatsoever which distorts
  or threatens to distort competition by favouring
  certain undertakings or the production of certain
  goods shall, in so far as it affects trade
  between Member States, be incompatible with the
  common market.
• .

9
ECT Art 87 (3)

• 3. The following may be considered to be
  compatible with the common market
• .
• (b) aid to promote the execution of an important
  project of common European interest ..
• (c) aid to facilitate the development of certain
  economic activities or of certain economic areas,
  where such aid does not adversely affect trading
  conditions to an extent contrary to the common
  interest
• CCS is explicitly not covered by the Community
  Guidelines for State Aid for Environmental
  Protection.

10
The stages to consider

• Research and technological development including
  the investment and running of a test project.
• Investments in full scale installations for
  capture, transport, injection, and storage.
• The future operation of the CCS chain.

11
What is seen as state aid? Some basics

• An element of public support to an activity (and
  not only from the state).
• A broad understanding of support (in any form
  whatsoever, a burden, not only subsidies)
• It must be specific, an exception from the
  general rule, and not in accordance with the
  system.
• It must influence competition (even
  hypothetical).
• It must have effect on trade between MS (this is
  often presumed if the other conditions are
  fulfilled) .

12
Is public investments through a state company
state aid?

• Yes, if that investment is not market based,
  and
• .there is no special justification for not
  acting as an ordinary market actor.
• This is the market economy investor principle
  (MEIP) or private investor test,
• called the center piece of EC state aid law.
• The principle that public and private actors in
  the market must be treated equally ECT art. 295.

13
The test may be quite complex

• The test Would a rational, private investor of
  comparable size, and in a comparable situation
  have made the investment?
• Many hypothetical factors and uncertainties
• - what type of private actor to compare with?
• - what is the correct rate of return on the
  investment?
• - what time frame short or long term? .etc.
• What role does the environmental objective play?
  Does this justify the state involvement? Would a
  private firm act likewise?
• The state has a certain margin of discretion in
  the judgments on these issues.

14
Where do we stand?The Mongstad case (simplified)

• ECON study (for the government)
• Premise strict CO2 emission reduction
  requirements post Kyoto and so increasing price
  on emission allowances.
• TCM a profitable investment in a 20-years
  perspective. The state can take a long term view.
  Conclusion not state aid.
• ESA No a 5 years perspective is the correct
  one, and the project will not be profitable in 5
  years. Conclusion state aid.
• What if other power companies want to join the
  project, and buy shares from the state? (Several
  companies consider this.)

15
The Kårstø case

• The objective Retrofit full scale CCS from 2012.
• Investments of 500 mill. to be covered 100 by
  the state. Operating costs of 37 mill. to be
  covered by the state.
• The total costs correspond to an emission
  allowance price of ca. 100 per ton CO2.
• (The price today is 28).
• Present status complex assessments made by ESA.
• (A long list of questions has been presented to
  the Norwegian government.)
• Most likely regarded as state aid (no private
  actor would make the investment), but may the
  exception rule in art 87 (3) be applied?

16
The exception rule in art. 87 (3)

• The following may be considered to be compatible
  with the common market
• .
• (b) aid to promote the execution of an important
  project of common European interest ..
• (c) aid to facilitate the development of certain
  economic activities or of certain economic areas,
  where such aid does not adversely affect trading
  conditions to an extent contrary to the common
  interest
• In this case (b) can be seen as absorbing (c).

17
Elements in this assessment

• Is there a well-defined objective of common
  interest?
• Is there a market failure which necessitates
  state aid?
• Is state aid the appropriate instrument to
  address the identified market failure?
• Is it proportional to correct the marked failure?
• Are the distortions of competition and trade
  effects limited, and the total balance positive?
  (Balancing test)
• What weight to the environmental objective?
• In the end a broad assessment with discretionary
  elements. The decision may be more political than
  strictly legal.

18
Some questions raised by ESA re. Kårstø

• The time frame for state financing of operational
  costs?
• Envisaged shut down periodes of the power plant?
  What economic effects?
• A detailed net present value calculation for the
  CCS (costs, revenues and discount factor).
• Is it foreseen that it may be profitable?
• Is the CCS technology current, or does it include
  novelties?
• Comparisons with other exisiting CCS facilities
  world wide?
• How to chose the technology to be used
  (technology vendors), and will the know-how be
  shared by others?
• Who will supply the energy for the CCS, and how
  is the energy price fixed?
• The nature of various state interests managed by
  Gassnova.
• ..

19
What about state support to private projects?

• This will normally be state aid and acceptance
  must be based on the exception rule in art. 87
  (3) b) or c) and the mentioned assessment
  elements.
• The key issue will probably be the necessity
  test Strong environmental arguments in favour,
  but how much state aid is necessary in order to
  compensate for the market failure (net loss) and
  get projects going?
• The post Kyoto regime and the future price of CO2
  allowances will be of importance.

20
What are the general and political prospects?

• CCS is seen generally and by the Commission as an
  important part of the solution to the climate
  problem.
• EU wants to stimulate technological development
  in CCS, through 12 pilot projects.
• The Commission has declared that it has a
  positive attitude towards state aid for
  technological development of CCS, based on the
  exception rule in art. 87 (3).

21
The prospects (cont.)

• It seems likely that considerable state support
  even 100 - for technological development will be
  accepted.
• In May 2008 the Energy Commissioner Andris
  Piebalgs told a Norwegian audience that 80 state
  involvement in TCM Mongstad seems acceptable.
• He stressed the importance of developing CCS
  technology.
• You should not worry . but I am not the
  Commissioner for competition

22
The prospects (cont.)

• State aid to investments in full scale
  installations is a more complex issue, but in the
  short term the application of the exception rule
  seems reasonable due to the important
  environmental objective.
• Most likely the question will be what level of
  state aid is necessary.
• State aid to cover future operating costs of the
  CCS chain seems less likely, at least in the long
  term, but not impossible.
• (Operationg aid is accepted for renewable
  energy.)