To the European Commission EU consultation on State aid for environmental protection

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1 EU consultation on State aid for environmental protection EDF thanks the Commission for the invitation for all interested parties to submit their comments on the review of the environmental protection state aids guidelines. As the Commission stresses, and in line with the state aid provisions of the Treaty on the Functioning of the European Union (TFEU), the aim of state aid in the environmental field is to achieve a higher level of environmental protection than would occur in the absence of the aid. Furthermore, in order for an aid measure to be considered compatible with EU law, it is necessary that the positive effects of the aid outweigh its negative effects in terms of distortions of competition. On this basis, the review of Community Guidelines on State Aid for environmental protection should pursue the European objective of combating climate change while increasing security of supply and ensuring the competitiveness of European economies. Although regulation and market based instruments are the most important tools to achieve environmental objectives in general, we admit that state aid measures can also be effective tools in remedying some market failures related to environment protection and for achieving objectives such as the de-carbonisation of the European economy if these are well directed and limited (in time and amount). That is what we learned from the application of the current state aid Guidelines. More specifically, the EC's guidelines on state aid for environmental protection should consider all the tools helping to meet the objective of de-carbonisation of the economy as eligible for compatible aid. This is not the case in the current version of these guidelines as, for example, the definition of energy sources eligible to receive public support is limited to renewable energy sources and does not include all the sources of energy helping to meet the objective of de-carbonisation. We believe that the real value of carbon is not reflected by its current price fixed by the ETS system. The ETS price is not sufficient to discourage high carbon generation and/or to incentivise generators to convert to a low carbon model. Consequently, additional intervention of the public authorities is needed to support the development of low carbon generation technologies. In addition, public support towards a de-carbonised production mix is really efficient AND proportionate if it creates a real level-playing field for the development of low carbon technologies, and finally lets the market decide the most cost-effective solutions. When deciding in which technology to invest, a generator takes into account several risks such as the risks related to fossil fuel price movements. Therefore an efficient public support mechanism needs to address and hedge these different risks sufficiently to create the needed low-carbon level-playing field. Relying on a carbon price alone would mean that the carbon price would have to offset a range of other risks such as fossil price movement risks against which a non fossil generation / low carbon plant has no natural protection. Relying only on the CO2 price would thus require such a significant risk premia that very few investors will afford that risk. Therefore, proportionate risk hedging has to be part of a robust framework that will help move the fundamental structure of electricity markets from fossil fuels towards a structure in which all low carbon technologies can compete on a level playing field.

2 Lastly, we consider that there is a close link between the economy decarbonisation and the security of energy supply. The existing market structure is driven by short run marginal costs. This market framework could present a significant obstacle in the EU s effort s to develop a robust energy market for low carbon technologies as most low carbon will not be able to secure a viable revenue stream within this framework because these technologies have high upfront capital costs and low short run marginal costs. Security of supply requirements therefore fall into two categories: ensuring enough low carbon plant is built and that there is enough capacity to meet demand at all times. It is critical that the market framework is able to support both objectives. This link is not reflected in the current text of the EC's guidelines on state aid for environmental protection (nor in any other guidelines). We believe that a reflection of all the concerned stakeholders should be undertaken, possibly in the double context of the State aid modernisation process and the future EC consultation on capacity mechanisms, to adopt texts that will ensure to achieve both goals of decarbonisation and security of supply. Well targeted aids dedicated to Research and Development/Innovation Whereas State aids linked to R D are tackled in specific guidelines, EDF takes the opportunity of this consultation to stress the crucial role the R D has to play in the current European context in order to stimulate environmentally friendly technologies, and consequently to ensure economic growth and job creation in Europe. Most of the innovations which are likely to contribute to de-carbonisation of the economy are emerging technologies. Many of them can only be expected to become cost-efficient after major breakthroughs like floating offshore, electricity storage other than pump storage, wave and tide energy, smart grids demonstration projects, virtual plants based on smart grids, etc. As long as these breakthroughs have not been achieved, available processes and devices are not competitive enough to be rolled out at an affordable cost and funds spent to finance operation are not efficient. Investing funds in R&D is necessary in order to accelerate the necessary breakthroughs and is a prerequisite of a sustainable de-carbonisation. When a technology is nearing to maturity a transitional and proportionate support to operation can be envisaged but should be phased out rapidly. In such a context: - Individual aids should be of significant amount: fostering innovation requires theoretical research as well as large scale demonstration projects and major progress can only be expected from projects managed by partnerships bringing together a wide range of skills - Support should be well targeted towards a limited number of promising technologies - The support should vary over time as the technology matures. That means taking into account the level of maturity of each technology and the evolution of the context. Making support for renewable energy evolve We recognize that the cost of production of some types of renewable energy does not allow companies to charge competitive prices on the market. However we note that, due to continuing technological developments in the field of renewable energy, the cost difference between renewable energy and market prices has shown decreasing trends over the past years, thus reducing the need for aid. As a consequence, the subsidies should be phased out when the renewable technologies have gone through their learning curve and have reached parity with conventional generation.

3 We also believe that, at this stage, all should be done to fully integrate renewable energy sources into energy markets in order to have a competitive level playing field for all power production technologies. In that order, power generated from mature RES technologies should gradually be more and more subject to the same ancillary obligations as conventional generation. Power from RES sources should participate in balancing mechanisms so as to reward accurate anticipation of intermittent generation. As stated before, at this stage of development, aid should solely be considered at R D stage when technologies are relatively far from maturity and then progressively be phased out when they are closer to maturity and then reach market competitiveness in line with conventional generation. Efficient support to Energy Efficiency Over the past years, state aids and tax exemptions have been widely used among Member States to promote Energy Efficiency, with variable success. EDF wishes to underline that the following principles should be taken into account to establish a successful regulation framework, consistent with the 3x20 objectives and designed to promote a dynamic energy efficiency sector. 1. State aids should systematically be evaluated and ranked in terms of energy AND CO2 efficiency to be sustainable, consistent with the 3x20 objectives, and not distortive between energies. In developing sustainable energy policy, it is essential to keep a consistent approach to evaluate the potential of different schemes, and to consider the costs and benefits of a measure. Based on that, each aid dedicated to energy efficiency has first to respect the direct proportionality criteria: the total avoided cost of energy should be, on the long-term, comparable to energy prices or less. Furthermore, to assure that the aid is globally consistent with the 3x20 objectives, CO2 efficiency has to be considered as the second evaluation criteria, and should be used to rank and choose between different schemes: there are several examples of state aids and exemptions based on a quite low range of avoided energy price, but resulting in very contrasted implicit carbon prices 1. Even if it may make sense to subsidize non mature energy efficiency solutions or sectors which have not yet reached competitiveness but are expected to do so, we do believe that all the solutions have to be ranked on the basis of energy+co2 efficiency criteria and that options should be considered inefficient if the global avoided energy+co2 cost is much higher than the investment cost. Moreover, resources and current generation fleets are so diverse among all Member States that only CO2 efficiency can be used in the guidelines to guarantee no re-carbonisation effects (for example 1 See Economic Analysis of Residential and Small-Business Energy Efficiency Improvements, Sustainable Energy Authority of Ireland, September 2011, evaluating schemes with an implicit cost of CO2 between 92 and 200 /tco2, but with energy costs between 28 and 30 /MWh; and see Evaluation du Crédit d Impôt développement durable, France, Avril 2011, evaluating the global implicit CO2 cost of the scheme between 80 and 98 /tco2, with very contrasted situations of individual measures : between 5 and 65 /avoided kwh and between 10 and 230 /tco2.

4 state aids encouraging switching from one energy to another for heating could lead to an increase or decrease of CO2 emissions, depending on the national energy mix). 2. State aids and exemptions should focus on structuring the highly fragmented sector of energy efficiency in buildings, to ensure a real level playing field and avoid deadweight effects. The new Energy Efficiency Directive includes horizontal provisions for the EE sector (qualification, accreditation, certification, training...). In EDF s view, these provisions and the associated state aid mechanisms should focus on situations where the EE sector is atomized. Generally speaking, a competitive EE market already exists for big industrial, service and trading companies in several countries and the ESCo sector has shown some ability to structure itself, with limited State intervention, where demand for energy service was growing. On the other hand, the sector of energy efficiency in buildings, especially for SMEs and households, is mainly composed by very small companies, whose natural market is too narrow to be really competitive, and with a very complex segmented value chain 2. Our experience in this sector showed us that, in this situation, direct support on the demand side, to households or SMEs, can finally lead to huge deadweight effects 3 as they do not encourage efficiently the providers of EE services to improve the quality of their offers or to make them cost-efficient. EDF is convinced that the best solution, to avoid a risk of free-ridership and spill-over, is to dedicate state aids to structure this sector, contributing to promote efficient players and simplifying the value chain, in order to have a dynamic competitive market. As a result, state aids dedicated to qualification, accreditation, certification, training, consumers information, etc. could better serve the goal of achieving energy efficiency while progressively eliminating the necessity of public support for this sector. In addition, EDF wishes to highlight that the use of structural funds to support energy efficiency projects for private housing or SMEs should focus on the same objective: creating a market in the medium term by structuring an efficient offer. Supporting low carbon vehicles Electric mobility, combined with a low-carbon energy mix, should be widely supported as it address energy savings, de-carbonisation, air pollution and health While road transport is responsible for a large share of overall GHG in Europe, as well as for local pollution by dust, particulates, NOx and SOx, it is important to encourage clean modes of transport both in order to combat global climate change and to reduce local pollution, in particular in city centers. EDF strongly believes that electric transports, fed by a low-carbon mix, are one of the best solutions to lower CO2 emissions and to bridge a real gap of energy efficiency in the transport sector : electric 2 See Energy Efficiency in Buildings, Business realities and opportunities, WBCSD See Willingness-to-Pay for Energy Conservation and Free-Ridership on Subsidization Evidence from Germany, Grösche & Vance, 2009 : around half of the subsidized households in Germany would have done an energy efficient investment, even without subsidies.

5 vehicles are reported to be between 3 to 6 times more efficient than conventional vehicles 4 and they can be almost totally carbon-free. Batteries for electrical transport are now close to maturity. The car industry has shown in the past its ability to significantly reduce costs through scale effects. The cost reduction which remains necessary in order to reach competitiveness with conventional vehicles will most probably be achieved when production of electrical and hybrid vehicles reaches the usual scale of the car manufacturing industry. This will strongly impact emissions in many Member States where electricity has a relatively low carbon content. In such a context it has become very efficient to encourage the acquisition of clean transport vehicles through direct aid. *** 4 See Plugging Into Electric Mobility, G. Kendal, WWF, 2009