Table of Contents 1Introduction: Political and legal context1 1.1State aid control policy in the field of environmental protection and energy1 1.2Relationship with other EU initiatives2 1.3Fitness Check4 1.4Ex post evaluation6 1.5REFIT6 2Problem definition7 2.1What are the problems?7 2.2What are the problem drivers?11 2.3How will the problem evolve?14 3Why should the EU act?17 4Objectives: What is to be achieved?17 4.1General objective17 4.2Specific objectives18 5What are the available policy options?19 5.1What is the baseline from which options are assessed?21 5.2Policy options: Differentiation or harmonisation of rules per category of aid (A)23 5.3Policy options: Facilitation of the award of aid and related safeguards (B)26

5.4Policy options: Aid award through administrative rules or through competitive bidding (C)29 5.5Policy options: Approach to fossil fuels (D)30 5.6Policy options: EIUs (E)32 5.7Options discarded at an early stage36 6What are the impacts of the policy options?37 6.1Differentiation or harmonisation of rules per category of aid (A)37 6.1.1 Methodology 37 6.1.2 Economic impact 38 6.1.3 Environmental impact 38 6.1.4 Impact on SMEs 39 6.2Facilitation of the award of aid and related safeguards (B)39 6.2.1 Methodology 39 6.2.2 Economic impact 40 6.2.3 Environmental impact 42 6.2.4 Impact on SMEs 42 6.3Aid award through administrative rules or competitive bidding (C)43 6.3.1 Methodology 43 6.3.2 Economic impact 43 6.3.3 Environmental impact 46 6.3.4 Impact on SMEs 46

6.4Exceptions to the general rules on GHG emissions reduction (A-C)47 6.5Approach to fossil fuels (D)47 6.5.1 Methodology 47 6.5.2 Economic impact 47 6.5.3 Environmental impact 49 6.5.4 Impact on SMEs 49 6.6General social impacts (A-D)50 6.6.1 Costs 50 6.6.2 Employment 50 6.7Impact on Recovery and Resilience Plans (A-D)51 6.8EIUs (E)52 6.8.1 Scope, challenges and methodology 52 6.8.2 Economic and social impact 53 6.8.3 Environmental impact 56 6.8.4 Impact on SMEs 57 7How do the options compare?57 7.1Differentiation or alignment of rules per category of aid (A)58 7.2Facilitation of the award of aid and related safeguards (B)60 7.3Aid award through administrative rules or competitive bidding (C)62 7.4Approach to fossil fuels (D)64

7.5EIUs (E)66 8Preferred option67 8.1Differentiation or alignment of rules per category of aid (Option A1)67 8.2Facilitation of the award of aid and related safeguards (Option B2)67 8.3Aid award through administrative rules or competitive bidding (Option C3)67 8.4Fossil fuels (Option D1)68 8.5EIUs (Option E1)68 9How will actual impacts be monitored and evaluated?69 9.1Transparency69 9.2Ongoing annual monitoring of selected State aid cases70 9.3Mandatory ex post evaluation of certain State aid measures70 9.4State Aid Scoreboard70 ANNEX 1Procedural information72 ANNEX 2Stakeholder consultation77 ANNEX 3Who is affected and how?102 ANNEX 4Analytical methods107 ANNEX 5Changes that fall outside the scope of this Impact Assessment108 ANNEX 6Operating aid, investment aid, aid intensities, and funding gap120 ANNEX 7Assessing the Impacts of the Options Concerning the differentiation or harmonisation of rules per category of aid (A)121 ANNEX 8Assessing the Impacts of the Options Concerning Facilitation and Safeguards (B)125

ANNEX 9Assessing the Impacts of the Options Concerning Competitive Bidding (C)133 ANNEX 10Assessing the Impacts of exempting certain technologies from the general GHG rules (A-C)144 ANNEX 11Assessing the Impacts of the Options Concerning Reduced levies for energy-intensive users (E)150 ANNEX 12GBER explanatory note192 Glossary Term or acronym Meaning or definition AI Aid intensity BAU Business as usual CB Competitive bidding CBAM Carbon Border Adjustment Mechanism CCfD Carbon contract for difference CCS Carbon capture and storage CCU Carbon capture and use CEEAG Climate, energy and environmental aid guidelines CHP Combined heat and power, or ‘cogeneration’ DG COMP Directorate-General for Competition of the European Commission DNSH Do no significant harm EE Energy efficiency EEAG Energy and environmental aid guidelines 2014-2020 EFTA European Free Trade Association EI Electro-intensity EIU Energy-intensive user ETS guidelines State aid rules for indirect costs compensation for the fourth trading period of the EU ETS EU ETS EU Emissions Trading Scheme FF55 ‘Fit for 55’ legislative package FG Funding gap GBER General block exemption Regulation GHG Greenhouse gas GVA Gross value added IA Investment aid LNG/CNG Liquefied natural gas / compressed natural gas OA Operating aid PV Photovoltaic RES Renewable energy source(s) RES-e Electricity produced from RES RRF Recovery and Resilience Facility SEIP Sustainable Europe Investment Plan TAM Transparency Award Module TFEU Treaty on the Functioning of the European Union TI Trade intensity 1Introduction: Political and legal context 1.1State aid control policy in the field of environmental protection and energy State aid refers to selective financial support (subsidies in the form of grants, tax reductions, interest-free loans, etc.) granted by Member States to undertakings within the EU/EEA. State aid is an objective notion defined in Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) and, as a general rule, the granting of State aid is in principle incompatible with the internal market where it distorts competition and trade within the EU. However, Articles 107(2) and 107(3) of the TFEU provide for some exceptions to this general rule. State aid may be necessary to correct market failures that impede the timely achievement of objectives such as environmental protection (including greenhouse gas mitigation) or security of energy supply at a cost for society. For example, State aid may compensate for the costs of environmental benefits not covered by market prices, or correct for information asymmetries and misaligned incentives that would otherwise inhibit private investments that are beneficial to society. State aid can improve the efficient functioning of markets and contribute to the development of an economic activity where market forces alone would fail to deliver an efficient outcome. The financing of the Green Deal may also entail increased risk of relocation outside the European Union to other jurisdictions where environmental protection is absent or less ambitious, resulting in carbon leakage. State aid may be necessary to reduce this risk for the most affected undertakings, as in the case of levies on electricity that finance energy decarbonisation and social policies. The objective of State aid control is to ensure that, when needed to achieve the objective pursued, such aid does not unduly distort competition and trade between Member States. State aid control contributes to public policy objectives such as the European Green Deal, making sure the aid is targeted where really needed and leveraging on the efficient functioning of markets including the European Energy Union and maintaining the integrity of the internal market. In accordance with Articles 107 and 108 of the TFEU, State aid control is the exclusive competence of the Commission. As a result, the Commission defines the conditions under which State aid may be considered to be compatible with the internal market. In this respect, the Commission adopts horizontal and sectoral guidelines which set out the approach that it will take when assessing the compatibility of notified State aid measures. These guidelines are regularly revised to adapt them to technological, economic, legal and policy-related developments. In the field of environmental protection and energy, the relevant guidelines are the Guidelines on State aid for environmental protection and energy (EEAG). The Commission assesses the compatibility of measures involving large amounts of aid, or more complex measures, following a notification by the Member State. Simpler measures, for which the Commission has developed enough positive enforcement practice, and which pose fewer challenges to the internal market, are exempted from notification subject to compliance with rules defined ex ante. Under Articles 36 to 49 of the General Block Exemption Regulation (GBER), Member States can grant aid without the need to notify the aid measure to the Commission beforehand. The provisions of those articles of the GBER are based on those established in the EEAG. The scope of the Impact Assessment covers both the revision of the EEAG and the parallel revision of the relevant parts of the GBER, as announced in the Inception Impact Assessment. 1.2Relationship with other EU initiatives The revision of the EEAG and of the accompanying provisions in the GBER aims to provide a modernised and simplified framework enabling public authorities to reach the EU objectives in a cost-effective manner with minimum distortions of competition. The revision will also facilitate measures to support the transition towards a climate neutral and circular economy. It should also ensure that the new rules are fit for new technological and market developments and ensure a fair transformation of the economy in the next years of economic recovery.

In addition to addressing the issues identified in the Fitness Check (see Section 1.3), the revision of the EEAG and GBER aims to respond to important changes in the EU’s policy priorities. In particular, the EEAG and GBER should reflect the objectives of the Green Deal and the updated Industrial Strategy, which aim to transform the EU into the first climate neutral economy by 2050, as well as into a circular, climate resilient, and zero-pollution economy. The Green Deal Investment Plan has set out that ‘the relevant State aid rules will be revised by 2021 in light of the policy objectives of the Green Deal and support a cost-effective and socially-inclusive transition to climate neutrality by 2050. State aid rules will be revised to provide a clear, fully updated and fit-for-purpose enabling framework for public authorities to reach these objectives, while making the most efficient use of limited public funds. State aid rules will support the transition by fostering the right types of investment and aid amounts. They will encourage innovation and the deployment of new, climate-friendly technology at market scale. They will also facilitate the phasing out of fossil fuels, in particular those that are most polluting, thus ensuring a level-playing field in the internal market. This will include, in particular, the Environmental and Energy State aid guidelines’. In this vein, the revised EEAG and GBER will need to complement and support the increasingly ambitious EU policies resulting from the Commission’s ‘Fit for 55’ (FF55) legislative package. In addition to the general goal of reducing greenhouse gas (GHG) emissions by at least 55% by 2030, among its key policy proposals, this package sets out ambitious targets for renewable energy and energy efficiency, buildings, including new industry and transport sector targets for the use of renewable electricity, renewable hydrogen and renewable fuels of non-biological origin, more stringent standards for district heating and the cogeneration of heat and power, measures to promote the development of (smart) recharging and refuelling infrastructure for clean transport, as well as the new Carbon Border Adjustment Mechanism (CBAM). The revised EEAG and GBER will also need to support the EU’s commitments to phase out fossil fuel subsidies, which are not declining sufficiently according to the 2021 State of the Energy Union Report. In addition, the revised EEAG and GBER must also take into account the economic and budgetary implications of the COVID-19 pandemic, including measures to support economic recovery in the EU. In this context, the green recovery is an important focus area of the Recovery and Resilience Facility (RRF) which will mobilise €672.5 billion in grants and loans to help Member States repair the economic and social damage caused by the pandemic, and support economic recovery. At least 37% of Member States’ spending under the RRF will have to be climate-related, making the future guidelines important for enabling the EU to quickly and decisively bounce back from the global public health and economic crisis. Much of this spending will be aid that will be assessed under the revised EEAG and GBER. 1.3Fitness Check The EEAG were reviewed as part of the Fitness Check of the 2014 State aid modernisation package . The Fitness Check has shown an increasing volume of energy and environmental aid granted in the period 2014-2019 (more than 180 decisions adopted under the EEAG and ±1 000 measures implemented under the GBER). Around 51% of total State aid spending in the EU is attributed to State aid to environmental and energy savings. €202 billion of State aid was approved under the EEAG between 2014 and 2019. It is estimated that 38% of this aid was for support for renewable energy sources (RES), 27% was for reductions in environmental taxes, 10% was for energy efficiency, 10% was for combined heat and power (CHP), 9% was for multi-technology schemes, 3% was for measures of all types where SMEs are the targeted beneficiaries. The remaining types of scheme (carbon capture and storage, industrial decarbonisation, clean mobility, district heating, energy infrastructure, security of supply) each accounted for 1% or less of the aid approved under the EEAG in the period 2014-2019. During that same period, from a total of €227 billion of aid granted under the GBER, 34% (€78 billion) was granted as environmental aid. Germany was by far the largest provider of State aid under the EEAG between 2014 and 2019, accounting for over €177 billion. France had over €7.8 billion of aid approved under the EEAG in the same period, the UK over €6.5 billion, the Czech Republic over €6 billion, and Italy almost €4.2 billion. The Fitness Check has shown that overall, the EEAG (and the corresponding GBER articles) have worked well, but that they should be updated to reflect regulatory, technological and market developments. In particular, the Fitness Check revealed that the EEAG do not seem fully adapted to new technologies and novel support types, that they are not entirely coherent with more recent environmental and energy legislation, that some provisions have been less successful in promoting public policy objectives and that several provisions are unduly complex or can be further clarified. On the other hand, with the increasing role of public support in this area, the control of spending is even more important. As regards energy charges imposed on economic operators, the EEAG have allowed Member States to lower energy charges for energy intensive users (EIUs) with the argument that this was necessary to enable the introduction of ambitious renewables policies by means of levies. The Fitness Check has shown that it is unclear whether this has been actually the case. With regard to the objective of avoiding relocation risk, the effectiveness of those reductions seems to vary across Member States, depending e.g. on the amount of RES financing, on whether this is financed by levies and thus on the proportion of the RES charge over the electricity charges for EIUs. 1.4Ex post evaluation The ex post evaluation conducted as part of the Fitness Check found that, partly as a result of the obligation set out in the EEAG to gradually move to bidding processes such as auctions and tenders, rather than by the direct award of contracts, RES deployment costs had decreased. Within the sampled schemes, the weighted average price of wind capacity fell by 62% between 2015 and 2019, while the weighted average price of solar photovoltaic (PV) capacity fell by 51%, it was found to be unclear whether average prices are lower in multi-technology than single-technology RES auctions. The total volume of announced subsidy-free RES projects in the EU in August 2019 was approximately 18 GW i.e. around 3.5% of total installed RES capacity. Large differences were found in the level of aid awarded for CHP technologies across different plant types and plant sizes, suggesting scope for improvements. The cost of renewables and energy efficiency policies has been financed either by the national budget (i.e. general or specific taxes) or by specific levies such as RES and CHP levies. Where Member States have used levies, they often introduced large exemptions for EIUs, with an increasing charge for other users. The levy rate varies significantly across Member States. In Germany and Italy, the rising financing volume covered by levies implied that the percentage of the electricity bill represented by levies on non-EIUs has increased from under 15% in 2009 to more than 40% in 2018. At the same time, the possibility of reductions for EIUs led to a more even distribution of effective levies (i.e. after reductions) for EIUs across the EU. Still, Member States with the highest levies also tend to show the highest average effective levies across Member States.

1.5REFIT The revision of the EEAG is part of the Commission’s Work Programme for 2021. 2Problem definition The problems set out in this section were identified using evidence from the Fitness Check (Section 1.3). There have been developments since the Fitness Check was published in 2020 that have reinforced the urgency of tackling certain problems. These include the COVID-19 crisis, and the various policy targets set out in the Green Deal and the FF55 package. Care was taken to distinguish problems from their symptoms, and to define problems without bias, including preconceived notions of what solutions might be. 2.1What are the problems? The evidence presented in the Fitness Check suggests that the current EEAG were developed in a different market, regulatory and policy context, and provide a rather rigid framework which is not well-suited to addressing the present-day challenges linked to climate change, energy transition, and environmental degradation, and enabling Member States to implement the broad range of public financing measures needed to help achieve the objectives of the Green Deal and the NextGenerationEU recovery instrument (including through measures supported under the Recovery and Resilience Facility, InvestEU, the Just Transition Mechanism, the Innovation Fund, the Modernisation Fund, etc.). Problem 1: The Guidelines are not adapted to new technologies or new types of aid measures The evaluation conducted as part of the Fitnesss Check has shown that the current scope of the Guidelines and the coverage of the compatibility assessment rules do not enable to cater for the diversity of State aid measures that Member States may implement. As set out above, the current guidelines (and the related provisions in the GBER) cover a limited catalogue of policy measures and instruments. In addition, in relation to certain categories of aid, the EEAG and the GBER only cover measures resulting in an improvement in the level of environmental protection of the beneficiary itself. Critical investments needed to reduce GHG emissions in the buildings and transport sectors are not appropriately addressed. This prevents recent regulatory changes, market evolutions and technological developments from being adequately covered. As mentioned, decarbonisation technologies such as carbon capture and use (CCU) or direct air capture of CO2 are not covered by the EEAG. Moreover, the current compatibility rules do not enable new types of aid instruments and innovative scheme designs (e.g. aid for energy performance of buildings through the facilitation of energy performance contracting or using carbon contracts for difference for a variety of projects). Problem 2: The Guidelines inadequately reflect recent developments in EU climate, environment and energy policy Building on other major policy initiative introduced after 2014 (e.g. the Clean Energy for All European package, Clean Air Programme), the implementation of the Green Deal has led to significant legislative activity – most notably the FF55 package – which is likely to both increase the overall need for State aid to further reduce GHG emissions or otherwise increase the level of environmental protection in the EU (e.g. by increasing biodiversity and resource efficiency) and require Member States to support these efforts through new instruments and technologies and in other sectors. The scope of the current guidelines does not fully enable Member States to present State aid measures that address the wide range of actions set out under the Green Deal. The set of measures covered in the current EEAG is relatively restricted, and their provisions are rather technology-targeted and prescriptive. Key policy areas of the Green Deal such as biodiversity or natural habitat/ecosystem rehabilitation are not covered at all and others like clean mobility and resource efficiency are currently only partially covered. Moreover, some decarbonisation measures do not fall within the scope of the EEAG (e.g. carbon capture and use or clean mobility infrastructure) or require a convoluted assessment under multiple sections of the EEAG (e.g. hydrogen production) which have different compatibility conditions that are not very well-suited. A misalignment between the EEAG and the current EU priorities, including those put forward in the Green Deal, also emerged in the context of the public consultation on the Fitness Check. As regards EIUs, since the adoption of the EEAG in 2014, two carbon leakage lists under the EU Emission Trading Scheme (ETS) and the ETS State aid guidelines (ETS guidelines) have been updated. These rules aim at reducing the risk of carbon leakage and use a similar set of indicators to identify the sectors most at risk of relocation outside of the EU. Furthermore, the current rules risk to undermine other policy priorities and they need to be re-assessed in light of the new EU climate objectives, notably to ensure they do not undermine the decarbonisation of the EIUs and the implementation of the Green Deal. Problem 3: Competition distortions and cost-effectiveness concerns are insufficiently addressed as part of the assessment of the negative effects of aid in view of the scale of the national spending in this area. The provisions of the guidelines intended to ensure that aid is kept to the minimum level necessary to achieve the objective pursued have shown to be ineffective in certain situations, which has led to potential undue distortions of competition, both at national and cross-border levels, for example through possible overcompensation, crowding-out of private investment, deadweight losses or shortcomings in the design of the aid. This may include aid unjustifiably creating different competitive conditions between Member States, for example where a limited number of beneficiaries are singled out for support despite the availability of more cost-effective alternatives. The support study for the revision of the EEAG showed that the cost of different types of support for environmental protection is not usually identified (though Member States are in some cases starting to do this). When the cost of achieving one tonne of CO2 reduction was identified for different measures in the study this showed that the cost varies dramatically, with CHP measures for example in some cases 5 times more expensive than RES measures (see Figure 5 in ANNEX 8). CHP measures are assessed under different rules than RES in the EEAG and have a lesser requirement for competitive bidding processes. Individual measures for CHP are also possible, enabling Member States to pick preferred projects for reasons other than cost effectiveness or environmental protection. This problem is made more relevant in view of the scale of national spending in this area which is expected to rise and to extend to new areas. With regards to EIUs, the ex post evaluation and the support study found wide disparities in levies across the EU. While in some Member States levies are high, other Member States grant reductions on already low levies. A company subject to high levies (or reductions from high levies) will bear a significant additional burden vis-à-vis a company from the same or substitutable sector in a country without or with very low levies. Levies and levy reductions therefore risk creating undue intra-sector competition distortion if not applied properly. The same holds true for competition between sectors with substitutable products (inter-sector competition). Competition distortions may also arise if certain companies belonging to the same sector benefit from reduced levies, while other companies operating in the same Member State do not. Under the current EEAG this is the case for a certain number of sectors, where particularly energy-intensive undertakings may receive levy reductions, while less energy-intensive undertakings in the same sector have to pay the full levy. Problem 4: The compatibility assessment rules are sometimes overly complex, difficult to apply or lack transversal consistency The content and structure of the compatibility assessment rules in the current guidelines are sometimes excessively complex, and therefore difficult to apply (e.g. determining eligible costs based on a counterfactual, determining the applicable emission levels and environmental performance from EU standards), both for Member State authorities when designing aid measures, and for the Commission when assessing the compatibility of notified aid measures. This even led in one case to misinterpretations in court judgments where the court has misunderstood when to apply the ‘general’ sections of the guidelines and when these are superseded by the specific rules applicable to a certain category of aid. This problem is therefore already impeding the Green deal objectives, and could easily become worse as the number of technologies and sectors covered by the Green Deal continues to expand, possibly even ruling out aid for innovative projects because of arbitrary or outdated requirements that are binding on the Commission. There is margin for simplifying the rules, thereby reducing the administrative burden linked to the notification and the assessment of aid measures, while at the same time broadening the material scope of the guidelines and making the compatibility assessment rules more consistent between technologies, more systematic and more accurate where necessary. Problem 5: The effectiveness of the rules for EIUs in achieving part of the stated objectives is unclear

The EEAG have allowed for reductions in levies funding support for electricity from RES for EIUs. At the time these reductions were introduced to address two main concerns. While a sufficient financing base for the development of RES and acceptance for ambitious policies was to be ensured, the rules also aimed at avoiding that undertakings particularly affected by these levies are put at a significant disadvantage vis-à-vis competitors operating in jurisdictions where RES policies are absent or less ambitious. With regard to the former, the ex post evaluation has shown that overall for Member States there is not a conclusive correlation between the introduction of levies or reductions for EIUs and the introduction of ambitious renewables policies. Moreover, EIUs reductions may shift the financial burden related to RES levies from one consumer group to another since some Member States finance reductions to EIUs by increasing levies on other consumers. With regard to the latter, the ex post evaluation and support study have found that it is challenging to prove empirically that exemptions from RES levies reduce the relocation risk of EIUs, as relocation decisions are multifactorial and it is difficult to isolate the impact of the levy reduction or lack thereof on the decisions of undertakings to relocate outside the EU. Nevertheless, the support study has shown that particularly electro-intensive firms are negatively affected by high electricity prices (including levies) and firms more exposed to international trade are more likely to be subject to a relocation risk. The higher the level of the levies, according to the support study, the higher the relocation risk. EIUs have also argued in the targeted consultation that reductions on RES levies are indeed needed to limit their risk of relocation. The relocation risk due to high energy levies therefore remains a relevant factor that needs to be addressed. 2.2What are the problem drivers? Problem driver 1: Increased ambition of EU targets for climate, environmental protection and energy The Green Deal significantly increases the climate and environmental protection ambition of the EU. More ambitious EU targets require environmental protection efforts on an unprecedented scale, including in hitherto overlooked ‘hard-to-decarbonise’ industrial processes and transport activities. Although the bulk of the necessary capital will be mobilised by the private sector, the remaining market failures and barriers provide a rationale for public intervention and financing at EU level. New areas and sectors will shift into the focus of decarbonisation support and new technologies will continue to emerge, and will therefore potentially be proposed as beneficiaries of support mechanisms. As concerns EIUs, the recently updated ETS guidelines and ETS carbon leakage list, which aim at addressing the risk of carbon leakage stemming from the effect of rising carbon prices, determine eligibility solely at sector or subsector level and have stricter requirements to allow aid than the EEAG. In particular, although these two sets of rules use trade intensity as metrics to determine eligible sectors, the EEAG allow many sectors (including selected undertakings within 152 sectors) with a trade intensity of at least 4% to be eligible. On the other hand, the 2020 ETS guidelines require eligible sectors to have at least 20% of trade intensity while the ETS carbon leakage list is determined in a more flexible way, based on the multiplication of trade intensity and carbon emission intensity. In addition, in the context of the European Green Deal the Commission has stated that energy efficiency must be prioritised (‘Energy efficiency first’ principle). Unconditional, unjustified or excessive reductions to the levies paid by energy-intensive industries risk undermining this policy objective. On the other hand, the decarbonisation of EIUs has been identified as a policy objective in the Green Deal and in the European industrial strategy Communication. As the electrification of industrial processes is one of the most important avenues for reducing the EIUs carbon footprint, energy levy reductions need to be properly designed in order not to weaken the achievement of this policy objective. Problem driver 2: Differing budgetary constraints and industrial priorities post-COVID It is budget-constrained Member States who will at least partially have to shoulder these investments. This is particularly difficult considering the recent strain on budgets stemming from the COVID-19 pandemic, during which all Member States have put in place support measures for impacted sectors and companies. Besides having less means across the board, Member States have varying budgetary capacities to draw on to finance these investments and different industrial priorities. 70 out of 85 respondents on this point in the open public consultation questionnaire confirmed an increasing difference between Member States’ resources to support environmental protection since 2019, due to the pandemic and the ensuing recession. With the RRF, the funds mobilised for mitigating the economic and social impact of the coronavirus pandemic are an opportunity for Member States to increase their climate, energy and environment budgetary capacities to make their economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green transition. Based on currently approved plans, Member States plan to allocate almost 40% of the available €723.8 billion to support climate-related measures, Problem driver 3: Public acceptance of costs of climate and energy transition Maintaining public acceptance for the green transition will be crucial, as the costs of financing it will be levied on taxpayers and electricity consumers. Commission analysis from 2018 suggested that, even before the increased climate ambition of the FF55 package, electricity consumer prices would increase by a further 1% of GDP equivalent until 2030 before stabilising. Achieving the newly increased 2030 climate and energy targets will require around €350 billion of additional annual investments. Given that some Member States may be under political pressure to act against strong electricity price increases, ensuring the cost-effectiveness and proportionality of State aid would appear to be critical in maintaining support for the EU’s climate ambitions. Problem driver 4: Information asymmetry and costs uncertainty There have always been information asymmetries between policymakers designing support schemes and market participants delivering decarbonisation. This was acknowledged in the Impact Assessment for the 2014 EEAG, which led to the introduction of competitive bidding processes in support schemes for RES and eventually to significant award price decreases for wind and PV generation. Such asymmetries are likely to remain important as decarbonisation efforts extend to new sectors and technologies whose costs are uncertain or prone to evolution. Problem driver 5: Level of detail, and scope of the Guidelines The EEAG contain a set of detailed and rather rigid rules which could be simplified to be more user-friendly and future-proof. For example, in contrast to the detailed conditions the Guidelines set out for aid to established technologies such as cogeneration, they lack any reference to hydrogen or carbon contracts for difference (CCfDs), among other key market developments. Problem driver 6: Significant innovation in technologies and support schemes

Finally, the push to reduce emissions quicker, and in new sectors, is leading to significant innovation in technologies and support schemes. This makes necessary to have a broader and more flexible set of rules, which also cater for information asymmetries between policymakers and market participants, as there is now significant general uncertainty about the cost of new and emerging technologies. Problem driver 7: Outdated assumptions, data, and analysis on which rules are based The aforementioned problems are driven by the fact that the EEAG are based on assumptions and data that may no longer be accurate and up to date. The lack of correlation between the public intervention and the introduction of ambitious and socially accepted renewable policies may be the result of an inaccurate assumption. In particular, allowing reductions from RES levies may shift the financing from one power consumer category to another, which may not contribute to greater public acceptance for such policies. As confirmed by the results of the targeted consultation, the changes to trade intensity (TI) and electro-intensity (EI) of the eligible sectors in the EEAG, which are based on 2009-2011 data, seem to be substantial. The 2020 report ‘Energy prices and costs in Europe’ confirms changes in the energy intensity of manufacturing sectors. In addition, in the context of the Commission’s case practice, several Member States have also argued that some sectors that are not eligible would now meet the requirements under the EEAG. As regards trade intensity, the data used for the revision of the ETS carbon leakage list adopted by the Commission showed considerable changes for sectors that are eligible under the EEAG. The EEAG no longer adequately address their objectives and strike the right balance on the trade-offs of the pursued objectives, because there is a risk that the list of eligible sectors might be outdated or because the methodology to calculate reductions might be outdated. It can also lead to a situation in which there is a risk of overcompensation, either because some sectors should not be eligible for reductions anymore or because some sectors need a lower aid intensity to alleviate relocation risks. Alternatively, sectors which were not eligible for compensation in the previous period may now require aid to alleviate relocation risks due to high levies as their electro-intensity has increased. 2.3How will the problem evolve? If no action is taken, the current EEAG will expire at the end of 2021. This would mean that any aid in the sector not covered by the GBER would have to be notified and assessed through the direct application of Article 107(3)(c) of the TFEU, and compatibility criteria would develop solely through case practice in the form of published decisions. That situation would lead to the 2030 objectives of the Green Deal not being addressed in a streamlined and comprehensive manner, as Member States would not have any comprehensive ex ante guidance on how to design those schemes, reducing legal certainty, as well as the predictability, transparency, and consistent application of the rules. It could also give rise to higher administrative burdens, as each individual assessment would require multiple exchanges between the Commission services and Member States’ authorities to gather the necessary data to determine eligibility and proportionality. This Impact Assessment therefore does not consider the scenario of letting the EEAG expire. If the current EEAG would simply be prolonged, the identified problems will also lead to a situation in which the 2030 objectives of the Green Deal would not be addressed in a streamlined and comprehensive manner. Climate protection costs would increase, and the assessment of novel measures would increasingly have to be carried out under several (sub-) sections of the EEAG or directly under the Treaty. This could significantly delay the implementation of necessary measures and reduce public acceptance, which would have two main consequences. First, the achievement of the 2030 objectives would be more burdensome, less efficient, and less likely. Contributions to the objectives would disproportionately come from project categories already covered in the EEAG as newer or less common projects would be harder to accommodate, leading to competition distortions. Second, important preconditions for the achievement of the 2050 objectives would not be in place, as it would be more difficult to support the deployment of less mature and/or innovative technologies and approaches that could therefore be disincentivised. These shortcomings would also spill over into the post-COVID economic recovery. With at least ~€250 billion of the EU’s RRF earmarked for fighting climate change, inefficiencies in the State aid framework for energy and the environment would slow down and diminish the effectiveness of this economic and social support. As concerns EIUs, the problems identified above are likely to persist throughout 2021-2030. The Green Deal Communication and the FF55 package have shown the EU’s commitment to climate change mitigation policies, in particular targeted towards decarbonisation. Implementation of these objectives may well in part be financed through levies on electricity consumption, which could lead to their further increase. While the cost of renewables have been decreasing as a result of technological progress, several respondents to the targeted consultations argue that EIUs cannot yet benefit from falling RES costs and that the financing costs of ongoing RES schemes will continue to be charged to consumers for several years. In addition, stakeholders mentioned that the increasing RES penetration might lead to an increase in system costs and network charges. In view of the ambitious decarbonisation targets set by policy makers, levies may be introduced to finance other measures contributing to the greening of the electricity sector. More than 80% of the business respondents to the public consultations expect electricity levies to increase in light of the EU’s increased climate ambition, largely in the range of 0-20%. Public authorities and civil society share this expectation. Furthermore, all public authorities that contributed to the consultation anticipate that the expected levels of electricity taxes and levies carry a medium to high risk to impair the electrification of EIUs’ production processes. Similarly, almost 90% of businesses consider the risk to impair electrification significant, against around 66% of the civil society contributors. Since the adoption of the EEAG, various electricity taxes and levies continue to have a significant impact on electricity prices paid by end consumers and they remain by far the most important source of differences in retail electricity prices across Member States, displaying a dispersion that is three times higher on average than that of the network and energy components. This is due to the large differences in Member States’ funding of energy policies affecting levies imposed on electricity consumption. Renewable levies ranged from 3€/MWh in Sweden to 67€/MWh in Germany in 2019. Several Member States did not collect them at all. These differences primarily stem from public finance choices under Member States prerogative and fall outside the scope of State aid control. On the other hand, selective reductions in these levies are likely to entail competition distortions and need to be well justified and kept to a minimum in order to be compatible with State aid principles. It is therefore likely that undertakings particularly exposed to the cost of electricity and to international competition will continue to face a significant additional burden, which may heighten the risk of their relocation outside of the EU. However, undertakings in Member States with low levies are less likely to face this relocation risk. The current energy crisis, manifested by extreme spikes of electricity and gas prices, highlighted the importance of affordable energy supplies for the normal functioning of the economy. As businesses struggle with rapidly rising energy bills, which often threaten their livelihood, Member States are seeking various ways to provide some relief. Reductions from renewable levies could thus gain in importance as a tool to address heightened relocation risks and stabilize the economic outlook, at least in the short term perspective. Some Member States are taking more drastic measures, abolishing electricity levies completely and transferring the financing of renewable policies partially or fully to the state budget or various environmental schemes. Changes that fall outside the scope of this Impact Assessment In order to ensure that the analysis is focused on answering the most important questions, this report examines the impacts of proposed changes identified in the Inception Impact Assessment.

Changes that merely involve alignment with sectoral legislation – in particular the technical regulations related to the Green Deal and the FF55 – or that aim to broaden the technological and sectoral coverage of the Guidelines in line with the objectives related to the Green Deal and the EU policy initiatives that ensued fall outside the scope of this impact assessment. This concerns in particular aid for biodiversity, aid for resource efficiency and circularity, and aid to tackle pollution other than from GHGs. Changes imposed by developments in EU case-law are also outside the scope of the analysis. Recent Court judgments have nevertheless required important changes to the rules contained in the EEAG. In particular a series of requirements stemming from the Hinkley Point C judgment have entailed adjustments to the structure of the Commission’s compatibility assessment of notified measures. Such issues are however not examined in detail in this report as they arise from mandatory alignment to case-law. This impact assessment focuses on the most contentious competition policy issues, namely aid for decarbonisation, the question of fossil fuels, and aid for EIUs. Amendments in the EEAG concerning aid for biodiversity, aid for resource efficiency and circularity, aid to tackle pollution other than from GHGs, which all feature in the proposed revision of the EEAG, have therefore not been examined as part of this report as they raise fewer policy issues (they merely concern technical adjustments or alignment with sectoral legislation) and have a less central role in addressing climate change (they are not specifically targeted at the reduction of GHG emissions), have less wide-ranging economic, social and environmental implications, and have more reduced potential impacts on competition (this is the case in particular of aid measures targeting biodiversity, environmental remediation, ecosystem management and nature-based solutions, which are less subject to competitive pressure on markets). These topics do not raise major issues in relation to the three problem areas examined in this impact assessment. Whereas topics such as biodiversity, natural habitat preservation and restoration, nature-based solutions and the remediation of contaminated sites have an important role to play regarding adaptation to climate change, they have lesser influence on efforts to reduce GHG emissions (climate change mitigation) or to minimise reliance on fossil fuels, which are one of the main focuses of this impact assessment. There seems to be general consensus among stakeholders that the proposed rules regarding these areas are relatively uncontentious and, unlike for other topics that are the subject of this impact assessment, the views on the State aid rules that should apply to these topics do not appear to be highly polarised. Compared to other sectors, respondents to the open public consultations have not identified the proposed rules relating to these topics as being particularly problematic (see ANNEX 2). Finally, the potential distortions of competition appear to be low for projects relating to areas such as natural habitat preservation, ecosystem management, nature-based solutions, remediation of environmental damage, etc. as many operators in these fields mainly pursue non-market activities. Further information on these measures can be found in ANNEX 5. 3Why should the EU act? As indicated in Section 1.1, the Commission has exclusive competence for setting out the conditions under which State aid may be considered to be compatible with the internal market in the form of State aid guidelines. The subsidiarity principle therefore does not apply. In the absence of new energy and environmental aid guidelines for the period after 31 December 2021, the Commission would have to assess the compatibility of notifiable State aid measures in the field of energy and the environment on a case-by-case basis in direct application of Article 107(3)(b) and (c) of the TFEU. This scenario would undermine the legal certainty and predictability that the EEAG have provided to date. In this respect, EU action is necessary to ensure uniform conditions for the granting of environmental State aid (i.e. a ‘do nothing’ approach is not credible). The existence of a revised and extended GBER for the period as from 1 January 2022 would limit the requirement for Member States to notify aid for certain types of measures but it would not address the whole spectrum of potential aid measures. In addition, the revised GBER would not be an appropriate instrument to cater for competition concerns linked to large amounts of aid or for measures that are not suitable to be exempted from notification (e.g. new technologies, new forms of aid). Other policy instruments than regulation at EU level (e.g. soft law) would not be effective. External rules controlled by a third party (the Commission) are needed to ensure transparent and equal treatment in the relations between aid granting authorities and aid beneficiaries. Therefore, rules on energy and environmental aid must be put in place as from 1 January 2022 and guidelines have proven to be an appropriate tool to address the need for comprehensive rules and to achieve the intended objectives. 4Objectives: What is to be achieved? 4.1General objective The general objective of the revision is to adapt the Guidelines to enable Member States to provide aid that contributes to achieving the EU’s medium- and long-term climate, environmental and energy policy objectives in a cost-effective and non-distortive manner between competing undertakings and across Member States. For EIUs, the general objective of the revision is to ensure that the rules at stake contribute to the development of competitive, innovative and sustainable energy-intensive industries. This will be achieved by limiting the levy reductions to the minimum necessary to avoid both relocation and undue competition distortions, while preserving the incentive for a cost-effective decarbonisation of the economy. 4.2Specific objectives The revision will contribute to the achievement of the general objective by pursuing the following four specific objectives: Specific objective 1: Ensuring coherence of the EEAG rules with EU policy goals in the field of climate, energy and the environment (SO1) The substantive rules contained in the EEAG should be made coherent with the Green Deal, including the legally binding objective to achieve climate neutrality by 2050. This requires the State aid guidelines to be broadened to include new measures and technologies that require public support to deliver on the increased general climate ambitions, as well as to make them more flexible to strengthen public support toward political priorities (e.g. investments toward energy efficiency), while ruling out interventions that are incompatible with the Green Deal.

Specific objective 2: Improving the capacity of the EEAG rules to adapt to technological and financial developments (SO2) The rules in the EEAG should be redesigned and made future-proof to respond dynamically and effectively to technological changes (e.g. the electrification of the mobility sector, the use of hydrogen in industrial processes and as an energy vector, smart grids, renewable feedstock, nature-based solutions, etc.) and innovation in financing mechanisms (e.g. CCfDs). While some developments can be anticipated, others may be unexpected, requiring the identification and codification of common principles that can be flexibly applied. Specific objective 3: Minimising market distortions (SO3) Certain rules in the EEAG should be redefined to ensure that State aid in the field of climate, the environment and energy continues to enable certain activities or projects without undue distortions of competition (e.g. undue preference, windfall profits, negative spill-overs, deadweight effects – including greenwashing), lock-in effects or adverse impacts on trade within the internal market (market partitioning, locational effects, overprotective regimes, etc.). Adaptations could be warranted by information gained through the experience of applying the current rules, or by changes in the technological and regulatory landscape affecting the balance between the benefits of certain aids and their impacts on the market. Specific objective 4: Ensuring administrative simplification (SO4) The rules contained in the EEAG should be revised in order to facilitate the design and implementation of more effective aid schemes by Member States, as well as to further simplify the compatibility assessment of notified measures by the Commission, while ensuring that State aid control in the fields of energy and environmental protection remains focused on those intervention areas or types of projects that are most likely to require specific scrutiny because of their potential to distort competition. Specific objective 5: Ensuring cost-effectiveness of aid (SO5) The rules in the EEAG should be remodelled to improve the cost-effectiveness of State aid. This will help ensure that the most environmental protection (including reducing GHG emissions) can be achieved with finite public resources, and minimise the costs to consumers and taxpayers. Specific objective 6: Avoid relocation and carbon leakage (SO6) Reducing the risk that, due to the burden stemming from levies on electricity financing decarbonisation policies, EIUs move outside the EU and create carbon leakage. Specific objective 7: EIUs decarbonisation (SO7) Preserving the incentives for a cost-effective decarbonisation of energy-intensive industries. 5What are the available policy options? The scope of the Impact Assessment covers the central principles along which the future guidelines will be revised, not the precise drafting of those future guidelines. The following five policy questions are relevant for identifying the options which address how to achieve the specific objectives set out in Section 4.2: Policy question Main purpose Specific objective(s) addressed (A) Scope and harmonisation of rules: Should the rules for granting aid for the reduction of GHG emissions be aligned across different technologies or sectors, including for new technologies or sectors? How to ensure the coherence of the EEAG rules with EU policy goals in the field of climate, energy and the environment How the guidelines can best accommodate technological and financial innovations. How to simplify the design and implementation of aid measures. SO1 SO2 SO4 (B) Facilitation and safeguards: How to facilitate the granting of aid for measures that contribute to the Green Deal, while minimising distortions of competition and trade? How to prevent undue distortions of competition and adverse impacts on trade within the internal market. How to simplify the design and implementation of aid measures. How to increase the cost-effectiveness of aid. SO3 SO4 SO5 (C) Tendering: Should tendering be extended to become the default option for aid for the reduction of GHG emissions, and if so, how broad and encompassing across technologies and sectors should tenders be? How to minimise market distortions when granting aid. How to maintain the cost-effectiveness of aid. SO3 SO5 (D) Fossil fuels: Should projects be differentiated based on their environmental merits to be aligned with the Green Deal? If so, how? How to ensure the coherence of the EEAG rules with EU policy goals in the field of climate, energy and the environment. SO1 (E) EIUs: How to strike the right balance across different levy levels and difficult trade-offs (e.g. relocation risk vs. competition distortions; electrification vs. energy efficiency) How to prevent undue distortions of competition and adverse impacts on trade within the internal market. How to reduce the risk of carbon leakage. How to preserve incentives for the decarbonisation of EIUs. SO3 SO6 SO7 The dependencies between options have been assessed to be marginal, such that the identification of a preferred option in one policy area can be assumed not to decisively affect the assessment of the options in another. All options examined would affect decisions on aid measures adopted by the Commission as from the entry into force of the revised guidelines (proposed: 1 January 2022). All options would also affect existing aid schemes after the expiry of the transition period set out in the CEEAG (proposed: 2 years), but would not affect aid already granted to individual beneficiaries (e.g. long-term subsidy contracts would not be affected), and would therefore not involve retroactive changes that could undermine investor certainty. As explained in Section 2 and further detailed in ANNEX 5, the proposed changes to the rules regarding other policy areas which are not addressed in detail in this report are all incremental and of a relatively minor importance and therefore not sufficiently relevant. They include, for example, alignment with sectoral legislation, alignment with EU case-law, measures to improve the consistency of the provisions with the experience of case practice, and measures with a less central role in addressing climate change or reducing fossil fuel use, less wide-ranging economic, social and environmental implications, and reduced potential impacts on competition. This report therefore does not examine the impacts of those proposed changes. This report focuses on answering the most important questions, as laid out in the Inception Impact Assessment, which would lead to the greatest impact and benefit. 5.1What is the baseline from which options are assessed?

In the baseline scenario the current EEAG would be extended without modification. The rules for the measures or technologies which can receive aid, such as RES and Carbon capture and storage (CCS), would be maintained. Aid for other measures or technologies would need to be assessed directly under the TFEU. This would also mean that operating and investment aid would generally be subject to different compatibility conditions and that operating aid would only be allowed for a limited number of measures or technologies. The application of the funding gap and maximum aid intensity approach would also vary. Under a baseline scenario of the current EEAG extended without modification, investment aid for productive investments would continue to be limited to maximum aid intensities, which can be increased if a tender is conducted. Investment aid would continue to be the only generally allowed form of aid for environmental protection (including industrial decarbonisation) and resource efficiency (including waste heat recovery and circular economy). Operating aid would continue to be allowed for RES and CHP until depreciation of the investment and for energy efficiency for a maximum of five years, with the possibility to extend it in case of a tender. For RES and CHP, operating aid would be possible after depreciation only for biomass and gas-fired CHP used in district heating. A tender would continue to generally be required for the award of operating aid, which would not be the case for investment aid. Furthermore under the baseline scenario, the GBER would continue to provide exemptions from notification to investment aid for environmental protection below €15 million per undertaking per investment project – a level below which aid for the eligible projects was deemed to be minimally distortive. Moreover, investment aid for energy efficiency and remediation of contaminated sites would be exempted from notification respectively below the thresholds of €10 million and €20 million per undertaking per investment project. Investment aid for district heating and cooling distribution network would be exempted from notification below €20 million per undertaking per investment project and for energy infrastructure below €50 million. Operating aid for the production of electricity from renewable sources and for the promotion of energy from renewable sources in small scale installations would be covered by the GBER up to €15 million per undertaking per project. For energy infrastructure, district heating networks, CCS, and recently also for generation projects, after the Sustainable Europe Investment Plan (SEIP) , aid would be allowed up to the funding gap without distinction based on the form of the aid. As regards the quantification of the environmental benefits, a potential safeguard which increases the transparency of measures, this would continue to be required in some limited instances. For RES and CCS, for instance, the current EEAG does not require the quantification of the contribution of support measures to CO2 emission reductions. However, this would be required for certain categories of aid, such as aid for environmental protection going beyond EU standards or increasing environmental protection in the absence of EU standards, for aid for the early adaptation to future EU standards, and aid for resource efficiency. Concerning requirements to consult stakeholders on the design of aid schemes, a potential safeguard enabling stakeholders to flag up competition and other concerns, Member States would not be obliged to do so with a simple prolongation of the current EEAG. However, the Commission would have the possibility to seek information from stakeholders after the opening of a formal investigation into a support measure in cases where it has doubts on its compatibility with the internal market. As regards tendering, which helps to channel support towards the most (cost-) effective projects and ensure the proportionality of the aid, the allocation of aid through a competitive bidding process would only be required for operating aid to RES and CHP. With respect to broadening (which means increasing tender eligibility to encompass competing projects that can deliver the targeted objective – e.g. opening a renewable electricity generation (RES-e) scheme to PV as well as wind generation), this would continue to be required only for RES-e, increasing participation and exerting downward pressure on costs. However, there would remain a number of exceptions allowing Member States to derogate from multi-technology schemes. Regarding fossil fuels, the technologies currently eligible for aid under the EEAG are clearly defined in the scope and no further differentiation is made within a support scheme. The main areas where fossil fuels have been eligible for support under the EEAG are through measures for energy infrastructure, mobility and various energy efficiency measures including those involving CHP. Under infrastructure rules in the EEAG, infrastructure including for the most polluting fossil fuels could potentially be supported, for example oil pipelines. In the case of mobility, aid could be possible for mobility solutions involving fossil fuels where they would exceed the level of environmental protection required by applicable Union environmental standards (e.g. gas-fuelled buses). In relation to energy efficiency including district heating and CHP, no differentiation is made between coal-fired, gas-fired, oil-fired or renewables-based generation or energy equipment, meaning that State aid can be channelled to the most polluting fossil fuels, regardless of consistency with the long-term climate ambitions of the EU so long as the projects deliver primary energy savings. Under these circumstances, it is therefore very questionable that the current rules are aligned with the policy objectives of the Green Deal and with the phasing-out of fossil fuels, in particular those that are most polluting. Concerning EIUs, Member States would be able to grant reductions from levies financing RES to undertakings in 68 sectors, and to undertakings with high electro-intensity in additional 152 sectors. The aid intensity would remain at a level of 85%, with the possibility to apply a cap on the levy payment at the level of individual undertakings equal to 4% of its GVA, or to 0.5% of its GVA for undertakings with at least 20% of electro-intensity. Reductions on levies would be allowed regardless of the level of the full levy. The aid would not be conditional to the fulfilment of any environmental action. 5.2Policy options: Differentiation or harmonisation of rules per category of aid (A) Option A0: BAU Option A0+: BAU approach extended to new technologies Option A1: Partial harmonisation according to sectoral characteristics Option A2: Partial harmonisation according to EU policies Scope Narrow and fixed Wider but fixed Wider and open for new technologies in the future Wider and open for new technologies in the future Rules (level of harmonisation) Differ per technology Differ per technology Same for majority of technologies. Specific rules for areas where the general criteria would unduly preclude aid. Same for many technologies. Specific rules for areas that are EU policy priorities, and areas where the general criteria would unduly preclude aid. Option A0 maintains the structure of the current guidelines, which entails of one section which sets out general compatibility provisions, and three different, technology-specific sections that deal with individual technologies/approaches for reducing GHG emissions. Dedicated rules Technologies falling under common harmonised rules for decarbonisation Renewable electricity, heat and gas CCU Energy efficiency, district heating and CHP Industrial decarbonisation CCS Electricity storage Methane emissions reduction Energy performance in buildings Renewable hydrogen Clean vehicles Recharging and refuelling infrastructure Coal closures Option A0+ would also involve continuing with the current approach in the EEAG which generally involves separate rules based on technology. However, to accommodate market developments, separate new rules would be created for all new foreseeable technologies, yielding a structure of one section for general compatibility provisions and 12 technology-specific sections. This updates the approach in the current guidelines to reflect changes observed in the market since 2014. Option A1 would involve harmonising the rules everywhere this could simplify the guidelines and facilitate schemes involving a wider variety of project types that primarily deliver GHG emissions reductions. The same rules would apply to most measures that primarily aim to reduce GHG emissions, such as clean renewable energy of all types, CCS and CCU, energy storage, CHP and industrial process energy efficiency including the production of low carbon hydrogen. The left column of Table 2 shows the technologies for which rules would be harmonised. Under this option, the list in the left column is open and can potentially accommodate other technologies including any new technologies. However, under Option A1 there would still be specific sections of the guidelines for certain technologies/approaches where specific different rules need to apply. The technologies listed in the right-hand column of Table 2 require a different approach to facilitating the granting of aid, preventing distortions of competition or maintaining the cost-effectiveness and proportionality of aid, due to certain specificities inherent to these technologies or sectors. Technologies falling under common harmonised rules for decarbonisation Not part of general rules (but still as close as possible) Renewable electricity Clean vehicles Renewable heat Recharging and refuelling infrastructure Renewable gas Energy performance in buildings Energy efficiency (production process) District heating Non-district heating CHP Coal closures CCS CCU Industrial decarbonisation Renewable hydrogen Electricity storage Methane emissions reduction

Specific rules are necessary for aid for clean mobility (vehicles and infrastructure) and energy efficiency in buildings for several reasons: (i) GHG reductions are measured using different methods than for applications in the energy or industrial sectors (e.g. emissions abated per passenger-km or tonne-km, energy performance levels of buildings); (ii) sector-specific rules and definitions are required (e.g. definitions of types of vehicles, notion of energy performance); and (iii) the level of GHG emissions is a not a direct function of output (as is generally the case for energy production or energy efficiency in production processes). District heating cannot be accommodated under the general decarbonisation rules for several reasons: (i) district heating projects in different cities or regions cannot be compared homogeneously only on the basis of decarbonisation because of the local character of heat markets and of local planning considerations; (ii) there may not be a level playing field between district heating and more polluting heating solutions, e.g. individual wood stoves or gas boilers, due to differing regulatory standards, including emissions standards, energy-efficiency requirements, and emissions reduction targets at EU level. Support to close down coal, peat and oil shale activities requires specific provisions for several reasons: (i) the general rules for GHG emissions reductions are too general to fit the specific objective of phasing-out the most polluting energy sources; (ii) there may be a very small number of power plant operators (especially those burning lignite, peat or oil shale) in individual Member States; (iii) power plants burning these fuels very often constitute an integrated system together with mines in their proximity from which the fuel is sourced, which requires additional considerations to be taken into account. Renewable Energy Communities The 2018 Renewable Energy Directive requires Member States to ensure that renewable energy communities can participate in support schemes on an equal footing with other participants, and confirms that they would be eligible to receive support under the rules for renewable energy generation. In line with this, it is not proposed to include specific rules for renewable energy communities in the right-hand columns of Table 2 or Table 3 below . From a competition point of view, renewable energy communities are undertakings and, as such, they have the potential to distort competition in the internal market in the same way as other market operators. The role of State aid policy is to ensure an effective and efficient use of public support to achieve environmental protection. Creating more favourable compatibility criteria for community projects that might be characterised by higher costs compared to their commercial counterparts could increase the cost of the energy transition with negative impacts on the overall level of environmental protection that can be achieved for the available budget. Nevertheless, the draft guidelines on which the public has been consulted (see Section 4.3 of ANNEX 2) allow Member States to include non-price related selection criteria in competitive bidding procedures and also provide for exceptions for small projects below a certain size to benefit from direct price support – non-discriminatory measures that allow Member States to favour renewable energy communities, in particular smaller ones. Member States could, for example, include community-focused criteria in tenders or provide direct support to renewable energy communities that qualify as small. Option A2 would involve maintaining separate rules for GHG reduction technologies that have deployment targets set out in EU legislation – namely RES and energy efficiency – while harmonising the rest of the rules to the greatest practicable extent where this can simplify the guidelines and facilitate schemes involving a wider variety of project types that primarily deliver GHG emissions reductions. Compared with Option A1, a number of additional sections would be created to cover the technologies set out in the leftmost column of Table 3 below . This would streamline the guidelines to some extent, while still providing tailored rules for technologies that are EU policy priorities and for which specific targets are defined. However, under Option A2 there would still also be specific sections of the guidelines for certain types of projects/measures where specific rules need to apply, and where accommodating these technologies under a single general section would lead to unclear or impractical rules. For instance, common rules for decarbonisation may not fit the specific role of aid for clean mobility even if such aid aims at the reduction of GHG emissions, as the technologies are too diverse and cannot be brought in competition with investments such as CCU which are complementary approaches for GHG emissions reduction rather than substitutes. EU policy priorities with dedicated rules Technologies falling under common harmonised rules for decarbonisation Not part of general rules (but still as close as possible) Renewable electricity Non-district heating CHP Clean vehicles Renewable heat CCS Recharging and refuelling infrastructure Renewable gas CCU District heating Energy efficiency (in production processes) Industrial decarbonisation Coal closures Energy performance in buildings Electricity storage Renewable hydrogen Methane emissions reduction Under all options, we assume that the Commission would continue with the current practice of issuing guidance to clarify how the rules in the guidelines apply to specific technologies, where necessary. 5.3Policy options: Facilitation of the award of aid and related safeguards (B) The relevant parameters for the policy options are: ·The form of the aid, i.e. whether investment aid and/or operating aid should be allowed for certain types of measures or projects; ·The method for determining the aid amount, i.e. through fixed aid intensities (administrative rationale) or through a funding gap calculation (economic rationale), including ; ·Whether individual projects should be notified above a certain size (e.g. amount of the investment or aid amount); ·The threshold above which measures must be notified to the Commission for scrutiny, and which types of measures this threshold should apply to; ·Whether specific safeguards are necessary to ensure that aid is allocated in a non-discriminatory way, that Member States quantify the costs of the level of environmental protection that the planned measure is expected to achieve or that granting authorities should have to conduct prior public consultations on planned aid schemes. Option B0: BAU Option B1: More facilitation Option B2: Facilitation with safeguards Aid form: operating aid (OA) / investment aid (IA) IA everywhere, OA only in certain areas OA and IA everywhere OA and IA everywhere Aid amount: funding gap (FG) / aid intensity (AI) FG only for OA, otherwise AI FG everywhere FG everywhere Individual notifications Required as of certain size Optional (based on case-by-case assessment of notified schemes) Optional (based on case-by-case assessment of notified schemes) Block exemption €15 million threshold and narrow scope €20 million threshold and broader scope €20 million threshold and broader scope Safeguards (quantification of environmental protection cost; public consultation) No No Yes



Option B0 would involve continuing with the current approach in the EEAG and GBER. In terms of facilitation, this means: ·Investment aid would be allowed for all activities, but operating aid would only be allowed for RES-e and CHP. This restriction on reflects the consideration that operating aid is more likely to cause market distortions by directly supporting variable production costs.

·A funding gap approach to awarding aid would only be used together with operating aid, i.e. limited to RES-e and CHP. Otherwise, aid would be required to be granted based on maximum aid intensities. This would help to simplify the granting of the aid, but to the detriment of some projects not being able to recover all their costs and therefore not being realised. ·Moderate notification thresholds (€15 million per undertaking per project) and a relatively circumscribed range of project types eligible for block exemption would ensure that the Commission scrutinises a greater number of measures, albeit with greater administrative burdens. In terms of safeguards: ·Aid awarded to large projects under an approved scheme would have to be individually notified to the Commission for additional oversight of parameters and assumptions leading to the aid award that could cause significant distortions. ·Member States would not generally be required to quantify the estimated cost of the GHG reductions expected to be achieved by measures that primarily target a decrease in GHG emissions. ·Member States would not be required to consult the public on competition or other issues caused by proposed subsidy schemes that primarily target a decrease in GHG emissions. Option B1 would involve facilitating investment in aid measures supporting the Green Deal without putting in place any additional competition safeguards. This would provide Member States with maximum flexibility and minimise administrative burden. In terms of facilitation, this means that: ·Investment aid and operating aid would be allowed for all measures primarily reducing GHG emissions, subject to specific conditions. ·A funding gap approach to awarding aid could be used for all measures primarily reducing GHG emissions, subject to specific conditions. ·Individual notifications for large projects within approved schemes would not systematically be required, except in specific cases where it appears appropriate upon assessment of the notified scheme. ·Notification thresholds would be increased to €20 million per undertaking per project, and a broader range of project types would be made eligible for block exemption under the GBER, to reduce administrative burden. In terms of safeguards: ·Member States would not generally be required to quantify the estimated cost of the measureable GHG reductions expected to be achieved by measures that primarily target a decrease in GHG emissions. ·Member States would not be required to consult the public on competition or other issues caused by proposed schemes that primarily target a decrease in GHG emissions. Option B2 would involve facilitating investment in aid measures supporting the Green Deal but with additional safeguards to reduce competition distortions. This would provide Member States with increased flexibility, while reducing administrative burden by reducing the number of measures that have to be notified to the Commission. In terms of facilitation, the approach would be the same as for Option B1. In terms of safeguards: ·Member States would be required to quantify the estimated cost of the measureable GHG reductions expected to be achieved by measures that primarily target a decrease in GHG emissions. ·Member States would be required to consult the public on competition or other issues caused by proposed schemes involving the granting of €150 million per year or above of State aid. The rationale is to improve transparency of planned schemes for stakeholders, and to create a better factual decision base for the Commission – something that is limited today due to the confidentiality of exchanges between Member States and the Commission regarding specific State aid measures. This measure would also be useful to test the proposed eligibility for schemes, and ensure they do not unduly exclude direct competitors. 5.4Policy options: Aid award through administrative rules or through competitive bidding (C) Option C0: BAU Option C1: Administrative Option C2: Competitive bidding Option C3: Multi-technology competitive bidding unless justified Option C4: Cross-border opening Competitive bidding (CB) requirement CB only required for RES-e and CHP CB not required CB generally required for all measures primarily reducing GHG emissions CB generally required for all measures primarily reducing GHG emissions CB generally required for all measures primarily reducing GHG emissions Participation RES-e CB generally must cover all RES-e technologies N/A CB can be restricted to specific technologies without justification CB must generally cover all competing technologies unless justified (e.g. based on long term potential of a specific technology or the need to meet another environmental objective) CB can be restricted to specific technologies without justification, but must be open to projects in all Member States

The options described below address Problem 3 as identified in Section 2.1: that competition distortions and cost-effectiveness concerns are insufficiently addressed in view of the scale of the national spending under the guidelines. Option C0 would involve competitive bidding processes only being required for measures supporting RES-e and CHP, with RES-e tenders generally required to include all RES-e technologies to foster participation. Certain exceptions from competitive bidding are available in these areas – notably for small installations and where there is insufficient competition to ensure competitive price setting. Likewise, Member States are able to support specific RES-e technologies with justifications, including to develop immature technologies with long-term potential. For measures supporting other activities that primarily target a reduction in GHG emissions apart from RES-e and CHP, aid can be calculated and awarded administratively, for example in schemes that offer a set level of aid per unit of output or unit of investment, and select beneficiaries on application. For projects not subject to tenders, aid proportionality can only be assessed on the basis of a conservative aid intensity approach or by way of a case by case funding gap approach, which entails more administrative burden, less accurate aid proportionality, and less cost-efficiency. Option C1 would allow Member States to choose whether or not to conduct a competitive bidding process for any measure that primarily targets a reduction in GHG emissions, regardless of the eligible technologies/approaches. This would give Member States the broadest scope possible to pick ‘winning’ technologies/projects/companies, allowing them the full freedom to channel funding, at the risk of cost inefficiencies and competition distortions. Option C2 would extend the requirement to conduct a bidding process to all measures that primarily target a reduction in GHG emissions, regardless of the eligible technologies/approaches. Member States would have full freedom to conduct technology-specific tenders (i.e. onshore wind only, or floating PV only) without the need to justify this restriction of the scope of the tender. This provides some scope to pick ‘winning’ technologies, but reduces the possibility of Member States pre-determining the specific projects or companies that would receive support. The possibility for technology-specific tenders enables Member States to avoid inframarginal rents being earned by cheaper technologies in a multi-technology approach. Option C3 would extend the requirement to conduct a bidding process to all measures that primarily target a reduction in GHG emissions, regardless of the eligible technologies/approaches. Tenders would generally need to be open to all competing technologies/projects that contribute to the objective – e.g. a measure for supporting electricity storage would need to be open to electricity generation and demand response too. Tenders could however be limited if necessary to achieve a specific EU objective, but would then generally need to include all relevant competing technologies. As with Option C0, exceptions to competitive bidding would be available where justified, as a strict tender requirement may not be appropriate in all situations (e.g. where there are demonstration projects and too few potential projects to enable effective competition, or to be in line with sectoral legislation). In addition, where the estimated costs of different decarbonisation approaches eligible for support differ significantly (by 15%), Option C3 would make it simpler to have separate bidding processes, e.g. in a renewable electricity scheme, offshore wind could benefit from a specific tender separate to RES-e technologies with a lower estimated cost such as PV and onshore wind. This would address the risk of a multi-technology approach increasing costs, due to the inframarginal rents earned by cheaper technologies. Specifically in relation to RES-e therefore, this would provide additional flexibility compared to Option C0, which includes a relatively strict principle of technology neutrality. Option C4 would be identical to Option C3 (extending multi-technology competitive bidding to all GHG reduction technologies), but with an additional obligation for Member States to open tenders to potential bidders in other Member States. This cross-border approach would increase participation in tenders and enable GHG emission reductions to be achieved at a lower cost, while fostering the development of the internal energy market. 5.5Policy options: Approach to fossil fuels (D) The options described below focus on the question of how to differentiate projects based on their environmental merits. Alongside the Green Deal, there are numerous initiatives at EU and national level to come up with a relevant methodology or taxonomy. However, all approaches are still in development and there is therefore no robust experience with their implementation and results. Of particular relevance are the work on the implementation of the ‘do no significant harm’ (DNSH) principle in the context of the RRF and the EU Taxonomy. Option D0: BAU Option D1: Fuel type Option D2: Taxonomy Regulation Option D3: New methodology No horizontal approach to fossil fuels Flexible alignment with the technical guidance on the application of DNSH under the RRF Regulation, with further safeguards Alignment with the criteria for determining whether an economic activity qualifies as environmentally sustainable under the EU Taxonomy Regulation Development of a new full lifecycle emissions approach to fossil fuels for State aid control Option D0 would involve not putting in place any system to address fossil fuel subsidies in the future guidelines. The signal to limit investment in fossil fuels would therefore have to come from the market and EU and national laws governing environmentally harmful pollutants, including the EU Emissions Trading System (EU ETS). Option D1 would involve generally aligning the future State aid guidelines with the RRF Regulation in terms of how the DNSH principle is applied to projects seeking funding in the context of a balancing test. This would generally exclude measures for power and heat generation based on fossil fuels from support, except for some projects based on natural gas under specific conditions. To prevent lock-in effects, support for measures involving new investments in natural gas (both in generation as well as infrastructure) would be possible only insofar as it is demonstrated that the investments are compatible with the EU’s 2030 and 2050 climate and energy targets or there is no feasible alternative with lower environmental impact. For natural gas infrastructure, investments would be required to be ‘fit for hydrogen’. The application of these requirements would take into account how close the aided investment is to the relevant target date, as well as key developments in relevant EU legislation. In addition, this option would foresee a partial lifecycle approach in specific cases to ensure that aid for the electrification of industry and hydrogen production does not lead to increased demand for fossil fuel projects, and therefore overall emissions increases. Regarding renewable hydrogen and other renewable fuels of non-biological origin, these requirements are codified in secondary legislation, and so this element of the option is also necessary to ensure its coherence with rules outside the scope of this impact assessment. Under this option, the Taxonomy may also be relevant for assessing whether aid contributes positively to Green Deal objectives, as aid for investments which are deemed sustainable under the Taxonomy may often be presumed to have beneficial environmental effects. Option D2 would involve aligning the future State aid guidelines with the Taxonomy in excluding support for projects that do not qualify as environmentally sustainable activities according to the criteria set out in that regulation. As the Taxonomy is not yet fully developed, the criteria that will be adopted could eventually diverge from those in Option D1. Moreover, this would not allow aid for projects that might be environmentally sustainable, but were not yet assessed for the purpose of the Taxonomy, and relevant technical screening criteria were not yet developed for them. Option D3 would involve the development of a new full lifecycle approach to quantifying GHG emission reductions, or even accounting for all types of pollution. This would go much further than the approach adopted until now for environmental protection aid, which is to allow aid that only reduces one type of direct pollution from a specific beneficiary without usually considering related pollution that may be created or reduced. 5.6Policy options: EIUs (E) Option E0: BAU Option E1: Sector list Option E2: ETS guidelines list Eligibility 1) Type A sectors Sectors with at least: - 10% of EI and 10% of TI, or

- 7% of EI and 80% of TI, or

- 20% of EI and 4% of TI, or

- substitutability with eligible sectors



2) Type B sectors Undertakings outside type A sectors with 20% of EI at individual level (for sectors with at least 4% TI) Applying these criteria would result in 70 sectors (Type A) and certain companies from additional 159 sectors (Type B) being eligible for levy reductions. Eligibility defined at sector-level, based on: - a minimum level of the multiplication of EI and TI at sector level (factor threshold), and - minimum levels of EI and TI at sector level (individual thresholds). The impact quantification is based on the following calibration: - a factor threshold of 0.6%, and - individual thresholds of 5% EI and 4% TI. Applying these criteria would result in 116 sectors being eligible for levy reductions. Sectors eligible for indirect cost compensation under the revised ETS guidelines Applying these criteria would result in 11 sectors being eligible for levy reductions. Aid intensity: Aid reduction level 85% Aid intensity is modulated based on the risk of relocation. For sectors above (EI*TI) factor threshold of 2% (91 sectors): 85%, with a minimum contribution to a reduced levy of 0.5 €/MWh For the rest of the sectors (25 sectors): 75%, with a minimum contribution to a reduced levy of 0.5 €/MWh 75% and scaled by efficiency benchmarks Aid intensity: Cap on the amount of payable levy - 4% of GVA - 0.5% of GVA for undertakings with at least 20% of EI Aid intensity is modulated based on the risk of relocation. For sectors above (EI*TI) factor threshold of 2% (91 sectors): 0.5% of GVA, with a minimum contribution to a reduced levy of 0.5 €/MWh For the rest of the sectors (25 sectors): 1% of GVA, with a minimum contribution to a reduced levy of 0.5 €/MWh 1.5% Environmental conditionality No Yes Yes Green bonus No Yes No In order to address Problem 2 presented in Section 2.1, options E1 and E2 take elements to different degrees from the methodologies used to determine the two carbon leakage lists under the EU Emission Trading Scheme (ETS) and the ETS State aid guidelines (ETS guidelines). One the one hand, the ETS carbon leakage and the ETS guidelines lists also aim at addressing relocation risk for EIUs stemming from the effect of the carbon market, due to the increased costs of direct emissions and/or to the indirect impact on electricity prices. In this context, the ETS Guidelines in particular have stricter requirements than the EEAG in terms of eligibility, aid intensity and attached conditions. On the other hand, the increased electricity prices stemming from the existence of the ETS are not fully comparable to electricity levies covered in the EEAG: the aim of the ETS is to put a price on a negative externality in a continental-wide market and across different fuels. Direct emissions from fossil fuels used in industrial sectors are priced by the ETS directly. Indirect emission costs in the electricity sector are mainly driven by the price of emission allowances, which is the same in all Member States. While the relief from direct ETS cost is addressed through free allocation of allowances, indirect cost compensation is covered by the ETS guidelines. Levy exemptions addressed by the EEAG, on the other hand, only concern electricity, not other energy carriers, and are but one possible tool of raising finance for support schemes for renewables and other decarbonisation measures; other financing means are for example (specific energy) taxes with their own distribution of tax burden. Where Member States impose electricity levies to finance support schemes, these are set at national level and differ extensively from case to case, also depending on past and current levels of renewables support, and can considerably exceed indirect ETS costs (see Figure 12 and Figure 13 ). In this context, Option E1 also includes a minimum level for reduced levies in line with the minimum rates for taxes on electricity consumption provided for under the Energy Taxation Directive. In order to address Problem 3 presented in Section 2.1, the three Options present different methods and degrees of restrictions in eligibility for the aid and related aid intensity, which affect the degree of competition distortions and of cost-effectiveness of the intervention. Moreover, levies vary greatly across the EU and are particularly high in Member States with increased climate ambitions or with many large legacy support schemes. In other Member States, a tax imposed on electricity consumption finances decarbonisation policies. While these differences have an impact across undertakings located in different Member States, they primarily stem from public finance choices under Member States prerogative and fall outside the scope of State aid control. On the other hand, selective reductions in electricity taxes or levies entail State aid are likely to lead to competition distortions and need to be well justified and kept to a minimum in order to be compatible with State aid principles. Option E1 introduces mitigating measures to address the risk of competition distortions across undertakings located in different Member States with different levy or tax rates, in line with the minimum rates for taxes on electricity consumption provided for under the Energy Taxation Directive. Problem 5 presented in Section 2.1 relates to the objectives pursued by the rules, which need to be fine-tuned. The analysis takes into account this aspect by adjusting the specific objectives of the intervention, which are used to assess the effectiveness of the three Options. Option E0 would maintain the current rules for granting levy reductions, while the methodology to determine eligibility would be based on the most recent sectoral data currently available. Option E1 would provide for a single eligibility list based on sectors, with aid intensity modulated according to the level of their relocation risk. For this purpose, it applies the methodology used to determine the carbon leakage list under the EU Emission Trading Scheme (ETS), which is based on a minimum level of the multiplication of the two relevant parameters to assess the risk of relocation and carbon leakage at sector level. In addition, minimum individual levels for both EI and TI indicators are included, in order to subject eligibility to a sufficiently high level in each individual parameter and avoid the possibility of sectors with extremely low values of either indicator to pass the multiplication threshold.

This approach has been selected to take into account the results of the targeted public consultation on the draft CEEAG, which proposed an eligibility list based on minimum individual EI and TI levels. The draft CEEAG set the benchmark for TI at 20% (as in the ETS guidelines and substantially higher than in the current EEAG) and the benchmark for EI at 10% (as in the current EEAG and substantially lower than the equivalent threshold in the ETS guidelines). There are differences in the underlying components of the cost of electricity between levies and the indirect cost of emission allowances (which is measured by the EI), as the national electricity levies are not fully comparable to the increased electricity prices stemming from the existence of the ETS, both in magnitude and heterogeneity. On the other hand, the exposure to international competition measured by TI does not depend on the underlying costs and therefore the case for alignment with existing EU rules is stronger. Based on the draft CEEAG for consultation, 51 sectors would have been eligible for levy reductions. The Commission explicitly invited stakeholders to provide feedback on that methodology to determine eligibility. The vast majority of private sector respondents as well as several Member States found the proposed methodology overly restrictive and rigid (see ANNEX 2). Many of these respondents argued that the rules to grant levy reductions should remain unchanged. Another frequent comment received was that the methodology proposed in the draft CEEAG should be reconsidered in order to apply the two eligibility indicators in a more flexible way. With this in mind, the quantification of the impacts is made by applying a minimum threshold to both to the multiplication of EI and TI indicators and to these indicators individually. A minimum factor of 0.6% is proposed, corresponding notionally to 15% for EI and 4% for TI and taking into account the results of the public consultation which called for a more flexible calibration of eligibility. In addition, this basic threshold is augmented by the minimum individual levels for EI (5%) and TI (4%). The slightly lower minimum individual levels for TI is in line with the lowest required level of TI currently applied in EEAG methodology. In other words, a sector with 4% TI (the lowest level possible for this indicator) has to display an EI of at least 15%, which is above the basic value that was put forth in the CEEAG draft for consultation. The application of the proposed criteria would result in 116 sectors eligible for levy reductions. Following the public consultation, this option E1 allows for the possibility to include further sectors or sub-sectors as eligible, provided that they meet the above eligibility requirements. This must be demonstrated by robust, validated data that are representative for the EU. Since it cannot be foreseen at this stage which sectors or sub-sectors would meet these criteria, the analysis in the impact assessment abstracts from that and bases itself on the data that have been collected via the data collection exercise for the review of the ETS carbon leakage list. In order to account for the fact that the risk of relocation is not uniform across sectors, the maximum proportion of aid allowed and the maximum GVA cap on the amount of payable levy by the most affected companies would be graduated. For the most at risk sectors displaying a multiplication of EI and TI of 2% and higher (corresponding to the threshold proposed in the draft CEEAG for consultation), the GVA cap is kept at 0.5% for the beneficiaries that reach it and the standard aid intensity cap is kept at 85% (in line with the EEAG). Beneficiaries from eligible sectors which display a multiplication of EI and TI of less than 2% are considered to be at a lower risk of relocation and can apply a GVA cap of 1% if they reach it or a standard aid intensity cap of 75%. However, in order to mitigate the impact on competition distortions across undertakings located in different Member States, levies reduced under the standard aid intensity would not be able fall below 0.5 EUR/MWh. This implies that 0.5 EUR/MWh will effectively become the minimum contribution for all levies. This value has been selected following the results of the public consultation, which explicitly invited stakeholders to provide feedback on this proposal, as well as by taking into account the minimum rate for taxes on electricity consumption provided for under the Energy Taxation Directive. In order to strengthen interlinkages of levy reduction schemes with Green Deal objectives, this option would subject aid to the same environmental conditionalities that are in the ETS guidelines in terms of energy efficiency investments, electricity consumption from carbon-free sou