3. The Commission asked Cyprus to provide further information by letter of 8 May 2009, to which Cyprus replied by letter of 29 May 2009.

Transcription

1 EUROPEAN COMMISSION Brussels, C(2009)5398 Subject: State aid N 143/2009 Cyprus Aid scheme to encourage electricity generation from large commercial wind, solar, photovoltaic systems and biomass Sir, 1. PROCEDURE 1. By letter of 9 March 2009, Cyprus notified the Commission of an aid for the financing of different projects for the development of renewable energies. 2. A meeting with the Cypriot authorities was held on 5 May The Commission asked Cyprus to provide further information by letter of 8 May 2009, to which Cyprus replied by letter of 29 May DESCRIPTION OF THE AID 2.1. Legal basis 4. The legal basis of the scheme is the Decision of the Council of Ministers of 30 December The electricity market in Cyprus 4. The electricity sector in Cyprus has been completely liberalised as regards the generation segment and partially liberalised as regards the supply of electricity. Eligible customers, which constitute 65 % of the total demand for electricity in Cyprus, include commercial, industrial and agricultural customers as well as the entities in charge of Κύριο Μάρκος Κυπρiανού Υπουργό Εξωτερικών Λεωφόρος Δημοσθένη Σεβέρη Chypre Λευκωσία Commission européenne, B-1049 Bruxelles Belgique Europese Commissie, B-1049 Brussel België Τηλέφωνο: (0)

2 street lighting. Cyprus has an exemption from the EC Electricity Directive 2003/54/EC 1 permitting it to delay full market opening. By 1 January 2014 all customers will be able to choose their electricity supplier. 5. The main generator of electricity is the Electricity Authority of Cyprus (EAC). The EAC is a majority State-owned, vertically integrated company 2 established under the Electricity Development Law Cap.171 of EAC is also the owner of the transmission and distribution networks. However, independent transmission system and distribution system operators have been appointed to manage the networks and grant access on equal terms to users. As a vertically integrated company, EAC is also active in the supply of electricity. 7. The Cyprus Energy Regulatory Authority (CERA), established on the basis of the Electricity Market Regulatory Law of 2003 N.122(I)/2003 is entrusted with the task of regulating the electricity sector and access to the networks in Cyprus Background 8. There is a general need for increased energy production in Cyprus due to the fact that, in recent years, the maximum power demand as well as the energy generated has increased by almost 6 % per year. Cyprus has no interconnection capacity. 9. In April 2009, the European Parliament and the Council adopted directive 2009/28/EC on the promotion of use of energy from renewable sources 3 (hereafter the RES directive ) with binding targets for each Member State for the use of energy from renewable sources. Under that directive, Cyprus is obliged to meet a target of 13 % of the total energy consumption coming from renewable energy sources in However, in 2008, electricity production from renewable energies accounted for less than 1 % of national electricity consumption in Cyprus. The proposed aid scheme is designed to contribute to the achievement of Cyprus' renewable energies target Scope of the support scheme 10. The aim of the present scheme is to provide government support to foster investments in the production of electrical energy from renewable sources notably wind, solar (both thermal and photovoltaic), biomass and biogas released from sanitary landfills 4. The scheme will consist in a feed-in tariff to be paid to renewable energy producers. Wind power is expected to deliver the majority of the RES electricity supported under this scheme Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC, OJ L 176, , p EAC is governed by an Authority, the members of which are appointed by the Council of Ministers. In the case of EAC, the government, through the Minister of Commerce, Industry and Tourism, is empowered to give directives to the Authority on matters pertaining to the general interest of the country. Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L 140, , p. 16. For each RES technology, there will be a maximum limit of supported capacity, namely: 165 MW of wind power can be supported until 2013, no more than 2 MW of energy from photovoltaic installations can be supported each year, maximum 25 MW of solar thermal energy can be supported until 2013, 4 MW of energy from biomass can be supported until 2013 and 3 MW of biogas can be supported until

3 11. As regards biomass, the scheme will support the production of electricity from byproducts and waste from vegetable, animal, forestry and fishing activities prior to or following their biomechanical treatment, as well as the organic fraction of urban waste water and waste The scheme includes support to biogas produced from sanitary landfills and from the sludge of biological treatments Description of the support mechanism 13. Under the proposed scheme, eligible RES producers will sell all their electricity to EAC and will receive a fixed price per KW/h for twenty years. The financial flows of the proposed scheme will be the following: Figure 1: Financial flows of the proposed scheme Levy on electricity bills I LA = 2% of Gross Income of the RES Producers (kwh*subsidy) Local Authorities Levy = kwh consumed * (fixed) Electricity Authority of Cyprus PI RES = kwh Produced * subsidy - I LA RES Electricity Producers I SF = Levy - PI RES RES Fund 14. EAC will be obliged to buy all electricity produced in Cyprus from renewable sources and will carry out all administrative work related to the scheme, including the collection of the levy and the distribution of compensatory benefits to local authorities. EAC will enter into a long term Power Purchase Agreement (hereinafter: PPA) with each of the RES generators. In accordance with the PPAs, generators of energy from renewable sources (hereinafter: RES) will sell their electricity to EAC at a fixed global price (the 5 The scheme does not cover the production of electricity from the combustion of the biodegradable fraction of urban/industrial waste in incinerators. 3

4 tariff) which has been set so as to cover all RES production costs including a return on capital. EAC will collect the levy on behalf of the RES Fund and use the proceeds to pay the tariffs to producers. Any resources left over after payment of the tariffs will be handed over by EAC on a monthly basis to the RES Fund. Should the proceeds of the levy be insufficient to pay the tariffs, the RES Fund will provide to EAC the additional resources required. 15. The tariff will include compensatory benefits for the local authorities of the communities neighbouring the facilities. The benefits have been set at 2 % of the annual revenues of RES producers. The support will be provided for the first 20 years 6 of the economic lifetime of each investment and the levels have been determined on the basis of the following formula: Fixed global tariff (EAC price + RES supplement) = Production costs (including depreciation and a return on capital) Figure 2: Formula for determining the support levels Levels and structure of the tariffs 16. Since the tariff is based on the production costs for each form of RES production concerned, different tariffs will apply for each RES technology. The applicable tariff for each energy source is set out in Figure 3 below. Fixed global tariff Renewable energy source (EUR per kwh) Wind power Photovoltaic (up to 20 kw) Photovoltaic (21 to 150 kw) Solar thermal Biomass Biogas Figure 3: tariffs applicable for each supported RES technology Although the economic lifetime of biomass installations is normally 12 years, also such installations will receive support for a period of 20 years. For electricity produced from biomass, there is an additional bonus of EUR per kwh if one of the following conditions is fulfilled: (1) the electricity is produced from cogeneration heating and/or cooling units, (2) the conversion of biomass is achieved through thermo-chemical processes such as gasification and dry fermentation, (3) the gas used for the production of electricity has been processed so that its quality is equivalent to that of natural gas or (4) the electricity is produced from fuel cells, gas engines, steam engines, the Rankine organic cycle (ORC), the Kalina cycle or Stirling engines. For electricity produced from biogas, there is an additional bonus of EUR per kwh when the gas used for the electricity production has been processed so that its quality is equivalent to that of natural gas or when the electricity is produced from fuel cells, gas engines, steam engines, the Rankine organic cycle (ORC), the Kalina cycle or Stirling engines. 4

5 17. The support for wind-generated electricity is limited to kwh/kw per year. The scheme provides that, if the average electricity production by a wind farm during a fouryear period exceeds kwh/kw per year, the generator will receive for the additional electricity produced (i.e. the energy produced above the kwh/kw threshold) only the EAC price. The limit is subject to revision every four years. 18. As shown in Figure 2, the fixed tariff paid by the EAC to RES producers will be the sum of two components: (1) the purchase price paid by EAC (hereinafter: the EAC price) and (2) a supplement paid through the RES levy (hereinafter: the RES supplement) The EAC Price 19. The EAC price is set by the Cypriot Regulator CERA to reflect EAC's avoided costs, namely the cost it would bear to produce and inject additional electricity into the system. For the calculation of these costs the following factors are taken into account: (a) the weighted average marginal generation cost of EAC; (b) the cost of fuel (mainly fuel oil) 9 ; (c) transmission/distribution system losses. 20. The weighted average generation marginal cost is based on the calculation of the hourly marginal cost of electricity generation, and takes into account seasonal variations and the load curves of typical days. 21. The EAC price will be adjusted when considered necessary by CERA based on any changes in the actual costs of the electricity supplier. For this purpose, EAC will submit annually data on production and operation costs in the context of a development plan which is subject to examination and approval by CERA The RES supplements 22. The proceeds of the levy accrue ultimately to the RES Fund, which is a State-owned fund designed to finance renewable energies. EAC, acting on behalf of the Fund, collects the levy and retains the resources required to pay the fixed tariff to each RES producer. 23. As set out in the description below, the conditions and levels of support will vary according to the type of renewable energy. The RES supplement for each energy source will be the difference between the fixed tariff and the EAC price. In case of a decrease of the EAC price (for example due to a drop in fuel prices), the RES supplement will be higher. On the contrary, should the EAC price increase, a smaller RES supplement will be required Production costs 24. The Cypriot authorities have provided to the Commission concrete examples related to the calculation of the costs for each of the categories of renewable energies to be promoted under the present scheme. 9 Finally, EAC tariffs include a fuel adjustment clause which states: In each monthly period, the price of each unit (kwh) charged shall be increased or decreased by cent in euro for every 5 EUR cent increase or decrease in the cost of fuel above or below EUR per metric tonne as defined by the Authority in the monthly period. The fuel adjustment factor was calculated based on the number of kwh sold. However it has to be further adjusted to account for network losses. 5

6 25. According to the Cypriot authorities, the following types of costs will be taken into account: (i) installation and investment costs; (ii) operating and maintenance costs; (iii) financing costs; (iv) taxes; (v) compensation for the communities in which the installations are located. 26. The proposed tariffs are based on a study aimed at determining the incentives required to develop RES in Cyprus 10. In the study, a sensitivity analysis based on the standard capacity of each type of RES installation was carried out. The various components of the production costs of each technology were analysed for the purpose of determining the tariff required to meet the objectives of the scheme. 27. In order to ensure that there is no over-compensation, the Cypriot authorities will take into consideration the rapidly evolving nature of RES technologies and adjust the support levels when needed. If necessary, such a revision will be carried out in 2011 or All cost calculations are based on a depreciation period of 20 years. 29. The internal rate of return on the supported investments varies between the different forms of renewable energy sources and ranges between 12 and 13% Financing of the scheme 30. The resources required to finance the RES supplements will be raised via a tax of 0.22 EUR cents per kwh to be paid by all electricity users in Cyprus 11. If the funds raised through the levy system should prove insufficient to finance the scheme, the State will cover the balance Beneficiaries 31. All private or legal persons governed by private law and public sector and local government authorities engaged in any economic activity are entitled to submit an application for subsidy, unless they are bankrupt, in bankruptcy proceedings or subject to criminal proceedings. 32. However, applicants operating in the field of production, processing or trade of agricultural products or fisheries shall be entitled to receive environmental aid only if they sell at least 50% of the electricity generated. 33. The number of beneficiaries is estimated to be between 51 and Duration and budget of the scheme 34. Aid can be granted under the proposed scheme from until Once granted, aid will be paid out for a period of 20 years See "Summary of study on development of a grant scheme to encourage electricity production by large commercial wind, solar thermal and photovoltaic systems and use of biomass" by the Ministry of Commerce, Industry & Tourism, September In addition, see "Study to re-calculate the overall purchase price of electricity generated from large wind systems and photovoltaic systems," by Zervos, A., November Due to its geographical location, there are no imports of electricity in Cyprus. 6

7 35. The total budget of the scheme is estimated to be EUR 500 million (approximately EUR 25 per annum) Other information 36. A condition for the aid to be granted is that the supported project must not have started before the legal basis has come into force and before the beneficiary has submitted its aid application to the national authorities. 37. Cyprus has undertaken to notify individually to the Commission any aid that exceeds the thresholds for detailed assessment specified in Chapter 5 of the Community guidelines on State aid for environmental protection 12 (hereafter 'the Guidelines'). 38. The Cypriot authorities have also committed to submit annual reports to the Commission with detailed information as regards large undertakings, as well as to maintain for 10 years detailed records on all the aid granted and submit them to the Commission upon request. 3. ASSESSMENT OF THE MEASURE 3.1. Existence of State aid 39. Article 87(1) of the EC Treaty provides that 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. Therefore, for a measure to constitute State aid within the meaning of Article 87(1) of the EC Treaty, it must confer an economic advantage on its recipients, it must be selective, it must involve the transfer of State resources and it must affect or threaten to affect competition and trade between Member States Economic advantage 40. The aid scheme will enable RES producers to sell their electricity at a tariff which is higher than the market price. Therefore, it will confer an economic advantage on RES producers. 41. By contrast, the presence of an advantage for EAC can be ruled out. EAC is obliged by law to purchase the RES electricity at a price which reflects its avoided cost; that is, the cost it would bear to produce and inject additional electricity into the system. This price is set (and regularly updated) by the Electricity Regulator, which is an independent body, on the basis of objective parameters, such as EAC's marginal generation cost, fuel costs and distribution losses. EAC will thus buy RES electricity at a price which equals the cost of producing the same amount of grey electricity, and therefore cannot draw any economic advantage from the aid scheme. 42. EAC manages the system, since it handles the financial flows and physically pays the tariffs (EAC price plus RES supplement) to RES producers. However, the handling of these financial flows does not result in any advantage for EAC, since the resources of the RES Fund are entirely transferred to the final beneficiaries (the RES producers). 12 OJ C 82 of , p. 26 7

8 Selectivity 43. The support is granted exclusively to RES producers: therefore, the measure is selective Transfer of State resources 44. The resources used to finance the scheme come from EAC and from the RES Fund. EAC is a majority State-owned company and the State can exert direct control on its activities. The RES Fund is also a State-owned entity. The resources accruing to the RES Fund are raised through a compulsory parafiscal levy paid by electricity consumers. The RES supplements are paid out to the final beneficiaries by EAC, which acts as administrative manager of the scheme. 45. According to the case-law of the Community Courts, the yield of a levy which is obligatory under national law and transits through a body established by law (which may be either public or private) constitutes State resources within the meaning of Article 87 (1) of the EC Treaty when the resources remain under State control 13. In the case at hand, all the resources used to finance the scheme are public and remain at all times under State control. Therefore, the scheme involves a transfer of State resources Impact on trade 46. Cyprus is an isolated, insular country with no physical energy links to other EU Member States. Therefore, green electricity produced in Cyprus and benefiting from the notified aid scheme cannot be physically traded outside the island. However, in the Commission's decision-making practice and the case-law of the Community Courts, the absence of physical trade flows is not, in itself, accepted as evidence that an aid measure has no impact on intra-community trade. 47. It should be noted that, given the level of expertise required to construct and operate windfarms or solar plants and the absence of undertakings with such expertise in Cyprus 14, the likely beneficiaries of the scheme will be international players specializing in renewable energies, possibly already operating in more than one EU Member State. In these circumstances, aid granted to invest in renewable projects in Cyprus is liable to improve the beneficiaries' competitive position vis-à-vis competing undertakings in intra-community trade. It is settled case-law 15 that in such circumstances intracommunity trade should be considered affected and competition distorted. 48. Therefore, the notified measure constitutes State aid within the meaning of Article 87(1) of the EC Treaty and can be declared compatible only if can benefit from one of the derogations provided for in the EC Treaty Legality of the aid 49. By notifying the measure, Cyprus has complied with the obligations arising from Article 88(3) of the EC Treaty See, for example the judgment of the ECJ in Case C-206/06 Essent Netwerk Noord v. Aluminium Delfzijl, not yet published, paragraph 70 and the judgment of CFI in Case T-25/07 Iride, not yet published. EAC operates oil-powered plants. See, inter alia, the judgment of the ECJ in Philip Morris v. Commission, (Case 730/79, ECR [1980] p , paragraph 11) and judgment of the ECJ in Air Liquide Industries v. Ville de Seraing et Province de Liège (Joint Cases C 393/04 and C 41/05 ECR [2006] p. I-05293). 8

9 3.3. Compatibility of the aid 50. The Commission has assessed whether the measure at hand can benefit from the derogation laid down in Article 87(3)(c) of the EC Treaty, which enables the Commission to authorize State aid aimed "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". 51. The increased use of renewable energy sources is one of the Community's priorities in the fight against climate change. This is amongst others reflected in the RES directive, which sets binding national targets for 2020 for each Member State in order to increase their share of RES energy in relation to their total energy consumption. In Article 3(2) of that directive, it is stated that, Member States shall introduce measures effectively designed to ensure that the share of energy from RES equals or exceeds the targets. 52. The compatibility criteria for State aid for renewable energies are spelled out in the Community Guidelines on State aid for Environmental Protection 16 (the Guidelines). A detailed examination of the measure has shown that it fulfils all the criteria of the Guidelines, as demonstrated below. 53. First of all, the Commission notes that solar energy, wind power, electricity obtained from biomass and biogas all fall within the definition of renewable energies laid down in points 70(5) and 70(6) of the Guidelines. 54. According to points 107 and 109 of the Guidelines, Member States may grant operating aid to compensate for the difference between the cost of producing energy from renewable sources, including depreciation of investments, and the market price of the energy concerned. Operating aid may be granted until the plant has been fully depreciated according to normal accounting rules. Any further energy produced by the plant will not qualify for any assistance. However, the aid may also cover a normal return on capital. 55. Over the years, the Commission has authorized feed-in tariffs schemes for renewable energies in several Member States 17. Generally speaking, tariffs may be variable or fixed. In the variable tariffs model, RES producers receive for their energy the market price, plus a variable premium reflecting the difference between RES production costs and the market price. In the fixed tariffs model, RES producers receive a global tariff. 56. The difference between fixed and variable tariffs is largely an apparent one. In both models, RES producers obtain a guaranteed final price which is, de facto, independent of the market price of electricity but is calculated on the overall production costs (inclusive of a return of capital) of the various RES technologies used. In the variable tariffs model, the element of aid can be more easily isolated, since it coincides with the variable premium, whereas in the fixed tariffs model the aid element is implicit and embedded in the global tariff. However, the economic effects of the two types of tariffs are identical OJ C 82 of , p. 1. For example Austria (State aid NN 162/A/2003 and N 317/A/2006), Decision C(2006) 2955 of 4/7/2006), Slovenia (State aid C 7/2005, Decision 2007/580/EC of 24 April 2007) and Luxembourg (State aid C 43/2002, Decision C(2009)230 of ). 9

10 57. Point 109(a) of the Guidelines sets out conditions which are tailored to a variable tariffs model, as it requires that the element of aid (the variable premium) should correspond to the difference between production costs and market price. In that scenario, in order to verify the absence of overcompensation it is necessary to ensure not only that the production costs have been correctly calculated, but also that the variable premium is calculated as the difference between RES production costs and the market price and that it is regularly updated to take into account variations in the market price. 58. However, in a fixed tariffs scenario, the global tariff (fixed once and for all on the basis of the RES production costs) will contain an implicit element of State aid which is variable (since it depends on the level of the market price) and which is by design the difference between the RES production costs and the market price prevailing at a particular point in time. Therefore, for fixed tariffs such as those proposed by Cyprus, the requirement to take into account the market price of the energy concerned set out in point 109 of the Guidelines will always be met, and therefore this point of the Guidelines can be applied without the need for a separate demonstration, since there can be no overcompensation of RES producers provided the global tariff correctly reflects RES production costs inclusive of a reasonable return on capital Absence of overcompensation Production costs 59. In this scenario, the Commission has verified the plausibility of the production costs data provided by the Cypriot authorities. As described in point 31, the Cypriot government commissioned a comprehensive independent study to identify the total production costs and an acceptable return on capital for RES investments. On the basis of this study, the government has set the level of incentive required for the tariffs to attract investment in the technologies concerned. The study is based on the experience gathered with a previous State aid scheme introduced in 2004, which, with the exception of a few biomass plants, proved unsuccessful in attracting investments in renewable energies. 60. The parameters used in the study to identify the production costs are the amount of energy which can be generated by each type of plant, the cost of the investment including interest paid on loans, operating and maintenance costs, tax rates, compensatory benefits for local communities and a reasonable rate of return on capital. 61. An important element for the calculation of the tariffs is the estimated amount of energy the various technologies can generate (the production potential). This is particularly relevant for wind power and solar energy, where actual production is variable and highly dependent on local conditions. 62. In particular, as regards wind power, which is expected to deliver a large proportion of the RES electricity supported under the scheme (up to 165 MW), the Commission notes that, according to available information, Cyprus has a low wind regime, and wind resource mapping is not sufficiently developed. Besides, there are no operational data on the performance of wind farms in Cyprus (no wind power is currently generated on the island). In these circumstances, the conservative wind power potential estimates put forward by the Cypriot authorities can be considered acceptable. Since the tariffs are based on conservative estimates, in order to avoid overcompensation in cases where more wind power is produced compared to the estimate, the Cypriot authorities have 10

11 introduced a safety clause limiting support only to the first KW/year. This limit may be revised every four years. Given the lack of experience with wind power generation in Cyprus, this cautious approach seems sensible. 63. It should also be noted that, under the unsuccessful 2004 support scheme, 27 applications for large-scale wind power systems were filed, but none of these projects came to fruition, as the incentives proved insufficient to cover the investors' risk and increased purchase and installation costs. 64. As regards investment and operating costs, the Commission notes that, in Cyprus, construction costs are expected to be higher than elsewhere in the EU. The lack of RES expertise in Cyprus results in the need to employ experienced contractors from the EU to reduce construction delays, and all equipment needs to be imported, including, for example, large cranes for the transport of wind turbines. The lack of local infrastructure has a negative impact on the expected cost of construction and the risk of delays. Besides, the long-term operating costs of RES plants in Cyprus cannot be established with absolute certainty. In the absence of local technicians, expertise has to be brought in from abroad (i.e. Greece), especially for more specialist work. This is expected to lead to higher operating costs, at least in the short term, until local expertise is developed. 65. For biomass and landfill gas, a system of bonuses is envisaged for plants which use specific technologies which are more costly. The Cypriot authorities have specified that the level of the bonus has been calculated to reflect the additional production costs of these technologies. 66. As regards the compensatory benefits for the local authorities, such benefits, which amount to 2% of earnings, are deducted from the RES producer's income and transferred by EAC directly every two months to the final beneficiaries. This deduction is taken into account when calculating the return on capital for RES producers. Therefore, the compensatory benefits have no impact on the assessment of the aid in favour of RES producers Return on capital 67. The RES production costs calculated by the Cypriot authorities include a return on capital (internal rate of return, or IRR) between 12 and 13%. 68. The Commission has already authorised in the past aid schemes which provided for a comparable rate of return on the investment. For example, in its decision on the Belgian scheme for the granting of green certificates to energy derived from windpower, biomass and water (N 415/B/2001), the Commission recalled its previous practice to consider that a 12% IRR could be accepted as a fair return on capital. In a Danish case which concerned a wide variety of energy sources (wind power, CHP, biogas, solar etc), a rate of return of 10% was accepted. In a UK State aid scheme providing for support to energy derived from tidal streams and waves (case N 318/05), an internal rate of return of 11.6% was also accepted. Comparable IRR were accepted also in cases N 707/02 and N 543/05, which concerned Dutch schemes for the promotion of renewable energies and CHP and the promotion of high efficiency CHP respectively. 69. In the mentioned cases, the highest rates of return referred to relatively new technologies, such as offshore wind-power or tidal energy, which entail a higher 11

12 element of risk. In Cyprus, the technologies to be used are more mature. However, the rates of return proposed for Cyprus, which are only marginally higher than those of the most closely comparable schemes, reflect other risks related to the specific circumstances prevailing on the island. In particular, the lack of independent power producers on the island and the very limited renewable energy capacity installed to date show that this sector is still at an early stage of development, and, consequently, projects entail a higher level of risk than, for example, on continental Europe. For example, construction costs and long-term operating costs in Cyprus can only be estimated. Furthermore, the limited size of the Cypriot economy and the absence of local banks capable of financing the projects mean that the investors have to rely only on international banks. This increases the complexity of finding financing, as the banks themselves have to assess the country-specific risks in a new market. In addition, the current financial climate and the lack of liquidity make banks more risk-averse, and more likely to focus on their own home markets. Furthermore, due the relatively small size of the electricity market in Cyprus, with limited opportunities for growth it is unlikely that the investors will benefit from the economies of scales which would arise, for example, from operating multiple projects. 70. In view of the above, the Commission considers that the proposed rates of return are acceptable Conclusions on the absence of overcompensation 71. In view of the rapidly evolving nature of RES technologies, the Commission considers that, typically, feed-in tariffs should include a mechanism ensuring that production costs (and therefore support levels) for new beneficiaries acceding to the scheme are revised at regular intervals in order to rule out overcompensation (for example in the case of a drop in production costs due to technological developments). The Cypriot authorities have specified that the first projects under the notified scheme will be implemented in 2010, and the scheme will last only until The duration of the scheme will therefore be very short. In any event, the Cypriot authorities have committed to take into consideration the evolution of RES technology and adjust the financial parameters, if necessary, by 2011/ In conclusion, on the basis of an analysis of the production costs estimated by the Cypriot authorities and the commitment to reevaluate the required level of support, the Commission takes the view that the proposed tariffs will not result in overcompensation. 73. Therefore, the requirements of point 109 of the Guidelines are fulfilled Duration of the support 74. According to point 109(a) of the Guidelines, "operating aid may be granted until the plant has been fully depreciated according to normal accounting rules". The feed-in tariffs will last for a period of twenty years, which coincides with the depreciation of the investments, with the exception of biomass plants, for which the period of depreciation is approximately 12 years. However, for these plants point 109(c) of the Guidelines foresees the possibility to continue granting operating aid even after plant depreciation, in order to compensate for the higher operating and maintenance costs borne by the producers after the plant is fully depreciated. Therefore, the duration of the support is in line with the Guidelines. 12

13 75. Point 109(a) of the Guidelines also specifies that "any further energy produced by the plant cannot qualify for any assistance". After the twenty years have elapsed, RES producers will receive, in principle, only the EAC price. Since this price does not contain any element of aid for RES producers (as it reflects the cost of producing electricity from fossil fuels, which is typically lower than the market price) this requirement can be considered fulfilled Incentive effect 76. State aid must have an incentive effect. According to point 144 of the Guidelines, if the aided project has not started before the aid application, the requirement of incentive effect is presumed to be automatically met for all categories of aid granted to SMEs, except in cases where the aid must be assessed on the basis of a detailed assessment 18. For beneficiaries other than SMEs and projects subject to detailed assessment, point 145 of the Guidelines requires that the incentive effect is demonstrated by the Member State. 77. The Cypriot authorities have confirmed that projects may not start before the aid application is submitted to the competent authorities. The majority of projects is likely to be carried out by SMEs. As regards projects carried out by undertakings other than SMEs, the Cypriot authorities have indicated that, on the basis of the independent study carried out, none of the investments envisaged in the scheme would be profitable without State aid. The Cypriot authorities have committed to notify individually any project which would qualify for detailed assessment. Therefore, the Commission is satisfied that aid granted under the scheme will always have an incentive effect Cumulation 78. Aid granted under this scheme is not cumulable with aid from any other sources for the same eligible expenses Financing mechanism 79. It is settled case-law that the mode of financing of an aid may render it incompatible with the Treaty 19. The notified scheme is financed by means of a compulsory contribution imposed on all electricity consumers. In such cases, the contribution constitutes a parafiscal levy the legality of which must be examined by the Commission. In particular, this type of contribution may infringe Articles 25 or 90 of the EC Treaty if it is levied on imported electricity while benefiting only national producers of electricity. In the case at hand, the levy is not imposed on imported electricity. In any event there are no imports (or exports) of electricity into Cyprus and no interconnection is planned for the near future. Therefore, the financing mechanism is lawful. 4. CONCLUSION 80. On the basis of the foregoing considerations, the Commission finds that the measure notified by Cyprus is compatible with the common market pursuant to Article 87(3)(c) of the EC Treaty For operating aid for renewable energies, detailed assessment is applicable to projects which lead to the installation of more than 125 MW of electricity. See, for example, the judgment of the ECJ of 21 October 2003 in Case C-261/01 and C-262/01, Van Calster, [2003] p.i and the judgment of the Court of 17 july 2008 in case C-206/06, Essent, not yet published. 13

14 If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Registry B-1049 Brussels Fax No: Yours faithfully, For the Commission Neelie KROES Member of the Commission 14