EN Official Journal of the European Union L 189/36

EFTA SURVEILLANCE AUTHORITY DECISION

No 125/06/COL

of 3 May 2006

regarding the Norwegian Energy Fund (Norway)

THE EFTA SURVEILLANCE AUTHORITY (1),

Having regard to the Agreement on the European Economic Area (2), in particular to Articles 61 to 63 and Protocol 26 thereof,

Having regard to the Agreement between the EFTA States on the establishment of a Surveillance Authority and a Court of Justice (3), in particular to Article 24 thereof,

Having regard to Article 1(2) of Part I and Articles 4(4), 6, 7(2), 7(3), 7(4), 7(5) and 14 of Part II of Protocol 3 to the Surveillance and Court Agreement,

Having regard to the Authority's Guidelines (4) on the application and interpretation of Articles 61 and 62 of the EEA Agreement, and in particular Chapter 15 on Environmental Aid thereof,

Having regard to the Authority's Decision of 14 July 2004 on the implementing provisions referred to under Article 27 of Part II of Protocol 3 to the Surveillance and Court Agreement,

Having called on interested parties to submit their comments pursuant to those provisions (5) and having regard to their comments,

Whereas:

I. FACTS

1. Procedure

By letter of 5 June 2003 from the Norwegian Mission to the European Union, forwarding a letter from the Ministry of Petroleum and Energy dated 4 June 2003, both received and registered by the Authority on 10 June 2003 (Doc. No 03-3705-A, registered under case SAM 030.03006), the Norwegian authorities notified alterations of two existing aid schemes, namely ‘Grant programme for introduction of new energy technology’ and ‘Information and educational measures in the field of energy efficiency’, pursuant to Article 1(3) of Part I of Protocol 3 to the Surveillance and Court Agreement.

By letter dated 16 June 2003 (Doc. No 03-3789-D), the EFTA Surveillance Authority (hereinafter ‘the Authority’) informed the Norwegian authorities that due to the fact that the scheme had already been put into effect on 1 January 2002, i.e. before the notification, the measure would be assessed as ‘unlawful aid’ in accordance with Chapter 6 of the Authority's Procedural and Substantive Rules in the Field of State Aid (6).

After various exchanges of correspondence (7), by letter dated 18 May 2005 the Authority informed the Norwegian authorities that it had decided to initiate the procedure laid down in Article 1(2) of Part I of Protocol 3 to the Surveillance and Court Agreement in respect of the Norwegian Energy Fund.

The Authority's Decision No 122/05/COL to initiate the procedure was published in the Official Journal of the European Union and the EEA Supplement thereto (8). The Authority called on interested parties to submit their comments thereon. The Authority received one observation. By letter dated 27 September 2005 (Event No 335569) the Authority forwarded the observation to the Norwegian authorities for comments.

By letter from the Norwegian Mission to the European Union dated 15 July 2005, forwarding a letter from the Ministry of Modernisation dated 12 July 2005 and a letter from the Ministry of Petroleum and Energy dated 11 July 2005, the Norwegian authorities submitted comments to the Authority's decision to open the formal investigation procedure. The letters were received and registered by the Authority on 19 July 2005 (Event No 327172).

Further information, in particular a report by the expert First Securities, was submitted by the Norwegian authorities on 6 October 2005 (Event No 345642). A meeting between the Norwegian authorities and the Authority took place on 11 October 2005. By email of 18 November 2005, the Norwegian authorities submitted further information (Event No 350637). A meeting with the Norwegian authorities took place on 13 February 2006. Further information was submitted by the Norwegian authorities on 8 March 2006 (Event No 365788).

2. Description of the support measures under the Energy Fund

With its notification, the Norwegian Government announced alterations of two existing schemes in the field of energy which have been operating since 1978/79 under the competence of the NVE, the Norwegian Water Resources and Energy Directorate. The first scheme was the ‘Grant program for introduction of new energy technology’ by which the Norwegian Government gave investment support for the introduction of renewable energy technology. The second scheme, ‘Information and education measures in the field of energy efficiency’, concerned support for campaigns and courses on energy efficiency for the industry, commercial and household sectors. The schemes were funded by budgetary allocations. The most important notified alterations to the schemes concerned:

2.1. the merger of the schemes under a new funding mechanism, the Energy Fund;

2.2. a different way of financing the schemes by now also making — for all measures supported by Enova — use of a levy on the electricity distribution tariffs (9) in addition to continued grants over the state budget; and

2.3. the administration of the Energy Fund by the newly established administrative body Enova. Likewise, new provisions and an agreement between the Norwegian State and Enova have been adopted. These new provisions should ensure that the support measures attain certain newly identified energy policy objectives.

ad 2.1 Merger of the two support schemes

On 1 January 2002 the Energy Fund was established and the two schemes mentioned above were merged under that Fund. The Energy Fund serves as a financing mechanism for support measures, which continue under the new regime.

ad 2.2 The new mode of financing the Energy Fund

Whereas the existing schemes were funded by grants from the state budget, the newly established Energy Fund is financed by grants from the state budget, as well as by means of a levy on the electricity distribution tariffs (not a levy on the energy production itself).

This levy is provided for by the Energy Fund Regulation of the Ministry of Petroleum and Energy of 10 December 2001 (10). According to section 3 in conjunction with section 2a) of the Energy Fund Regulation, any company which has been granted a license according to section 4-1 of the Energy Act (11) (‘omsetningskonsesjoner’) shall, when it charges the end user for the withdrawal of electrical energy from the grid, combine the invoice with a 1 øre/kWh (increased as of 1 July 2004 from former 0,3 øre/KWh) supplement for each withdrawal (see also section 4-4 Energy Act).

The licensee shall then pay a contribution to the Energy Fund of 1 øre/kWh multiplied by the amount of energy for which the end user in the distribution network is invoiced. As can be seen from the table under section I.7 of this Decision, the Energy Fund has been increasingly financed by the levy alone. However, that does not rule out the possibility that the Energy Fund might receive budgetary appropriations again, in future years.

ad 2.3 The administration of the Energy Fund by Enova

On 22 June 2001, Enova SF was established (12). Enova is a new administrative body, organised as a state enterprise (statsforetak, SF) (13). It is owned by the Norwegian State via the Ministry of Petroleum and Energy. Enova has been operating since 1 January 2002, i.e. the date when the Energy Fund was established.

Enova's principal task is to implement the support schemes, administer the Energy Fund and reach the energy policy objectives which the Norwegian Parliament approved in 2000. These principal tasks are further specified in an Agreement between the Norwegian State (the Ministry of Petroleum and Energy) and Enova SF (hereinafter ‘the Agreement’) (14). According to Enova's own description, ‘the establishment of Enova SF signals a shift in Norway's organization and implementation of its energy efficiency and renewable energy policy’.

3. National legal basis for the support measures

The national legal basis for the support measures is a Parliamentary Decision of 5 April 2001 (15) on the basis of a proposition by the Ministry of Petroleum and Energy of 21 December 2000 (16). The Parliamentary Decision amends the Energy Act of 29 June 1990 No 50 (Energiloven). The principal tasks of Enova are specified in the above mentioned Agreement between the Ministry and Enova.

Of further relevance is the newly adopted Regulation No 1377 of 10 December 2001, concerning the levy on the electricity distribution tariff (Forskrift om innbetaling av påslag på nettariffen til Energifondet). A regulation on the Energy Fund (Vedteker for energifondet) places the Energy Fund under the Ministry of Petroleum and Energy and stipulates its administration by Enova.

4. The objective of the aid measure

The establishment of the merged schemes under the newly established Energy Fund and the administrative body Enova was done with a view to achieve a more cost-effective use of public funding for energy saving measures and the production of environmentally sound energy. Enova and the Energy Fund should achieve the new energy objectives adopted by Parliament (17).

According to the Agreement mentioned above, energy savings and new environmentally sound energy shall make up together a minimum of 12 TWh by the end of 2010, of which:

— a minimum of 4 TWh shall be from increased access to water-borne heating based on new renewable energy sources, heating pumps and thermal heating, and

— a minimum of 3 TWh shall be from increased use of wind energy.

The Agreement stipulates as a secondary objective that the Fund's resources shall contribute to the saving of energy and to new, environmentally sound energy, which together shall make up a minimum of 5,5 TWh (originally 4,5 TWh) by the end of 2005. By supporting new renewable energy forms and contributing to more energy saving, Norway also wishes to become less dependent on the predominant source for electricity production used, hydropower. The figures below, communicated by the Norwegian authorities, show Norway's ongoing reliance on hydropower, despite the increasing use of wind energy and thermal electricity in recent years.

Table 1

Production, consumption, import and export of electricity, Norway, in GWh, 2000-2005

2000 2001 2002 2003 2004 Jan-May 2005 Total production 142 816 121 608 130 473 107 273 110 427 60 976 Hydro 142 289 121 026 129 837 106 101 109 280 na Wind 31 27 75 220 260 na Thermal electricity 496 555 561 952 887 na Consumption 123 761 125 206 120 762 115 157 121 919 56 665 Import 1 474 10 760 5 334 13 471 15 334 1 923 Export 20 529 7 162 15 045 5 587 3 842 6 234 Net import –19 055 3 598 –9 711 7 884 11 492 –4 311 Net import/consumption 0,0 % 2,9 % 0,0 % 6,8 % 9,4 % 0,0 % Net export/consumption 15,4 % 0,0 % 8,0 % 0,0 % 0,0 % 7,6 %

5. The Energy Fund system as notified

5.1. General remarks on the Energy Fund

Enova can give investment support for energy saving systems and for production and use of renewable energy sources as well as initial investment aid for new energy technologies.

The level of subsidy is determined by a technical and financial evaluation of each project. Priority is given to those projects which give the highest kilowatt-hour (kWh), saved or produced, per subsidised NOK. This leads to a competition of projects for the receipt of public funds with the goal being to choose the most efficient projects.

Calls for project proposals are announced in major national and regional newspapers at least biannually and for most programmes four times a year.

5.2. Renewable energy

As regards the investment support for the production and use of renewable energy, Norway supports energy projects which are defined in Article 2 of Directive 2001/77/EC (18) as renewable energy sources (see point 7 of the Authority's State Aid Guidelines on Environmental Aid, hereinafter ‘the Environmental Guidelines’, which covers wind and solar energy, geothermal energy, wave energy, tidal energy and hydroelectric installations with a capacity below 10 MW as well as biomass). Hydropower, which is — as explained — the traditional source for electricity production used in Norway, has so far not been given any support (19). Funds for the introduction of natural gas are not part of the Energy Fund (20).

Enova regards the following projects as qualifying for support in general terms: wind energy, bioenergy, tidal energy, geothermal energy, ocean wave energy. Solar energy comprises passive solar building integrated solutions, solar heating systems and PV (photovoltaic) production.

When it comes to the notion of ‘bioenergy’, the Norwegian authorities have clarified that this term is used for renewable energy (electricity or heat) based on biomass as defined by Directive 2001/77/EC. Bioenergy is a wider notion than biomass and covers e.g. projects which convert biomass to electricity and/or heat in contrast to biomass projects which only concern the production and processing of biomass itself. Such projects are dependent on extra investment in back-up and peak load capacity based on other sources of energy. Therefore, the costs of investments in these projects might not only cover biomass, but also other sources of energy besides biomass. The Authority understands that there could be situations in which the bioenergy consists only of a fraction of biomass.

The Norwegian authorities have specified that the notion of ‘use’ of renewable energy sources will cover situations in which the investment is made for internal production, whereby the producer and the user is the same entity (which is often the case for heat production).

Enova calculates the support that can be given to a project as the discounted present value of the difference between current production costs of the project and current revenues based on the market price of the relevant energy source. In other words, it uses a net present value calculation (hereinafter referred to as NPV calculation).

In order to choose the market price, the Norwegian authorities distinguish between three different situations:

Firstly, they consider the case of renewable energy production which is fed into the transmission grid and, therefore, competes with traditional generation of electricity as quoted on the Nordpool power exchange. This is the case for wind, bio, waste, solar, tidal and ocean wave energy and the price quoted in Nordpool serves as a reference. On the Nordpool power exchange, both spot prices and forward prices up to three years can be observed. As investments are based on the expectations of future electricity prices, Enova refers to forward contracts which are traded on a daily basis. To cancel out random price fluctuations, a six-month average of the latest tradable future contracts is used. The price is quoted on the submission date of the project application, which occurs four times a year.

The second case is that of district heat, which is distributed on a local distribution net and competes with heat from fossil fuels or from electricity. In this situation, Enova refers to the actual contract price (21) paid by the consumer (the price of the ordinary energy — from fossil fuels and electricity).

The third scenario covers energy production which is not fed into any distribution net (e.g. on-site power generation based on residual steam not fed into the power grid). In this case, the price the end user is facing in the market is used, including taxes.

The objective of the aid scheme is to encourage investment into renewable energies which would otherwise not take place, due to the fact that the energy price obtainable in the market does not cover the costs and thus makes the net present value negative. For that reason, according to the Norwegian authorities, the subsidy shall only compensate the extra costs of the production of renewable energy. Moreover, the support granted by Enova shall not exceed the amount deemed necessary in order to trigger the project, i.e. to encourage a positive investment decision.

However, when the Energy Fund and Enova were established, there were, according to the Authority's information, no precise specifications as to when the triggering effect would be considered to have been reached. It was e.g. not specified when the project would reach — with the support from the Energy Fund included — a zero net present value. Admittedly, analyses were made to establish when the project would break even. Still, there were no explicit limitations which prevented State support above that point. As further illustrated in the Authority's decision to open the formal investigation procedure, in some instances the support granted by Enova might have led to project support which resulted in a calculated positive net present value (22).

When projects are granted support, Enova and the aid recipient enter into an aid contract, which regulates the terms on which disbursement will take place. The disbursements might be adjusted in accordance with any cost reduction during the construction period. After the investment is realised, there is a follow-up on the realised costs against costs estimated in the application. If these factors differ to the advantage of the applicant, Enova may adjust the financial aid downward to reflect the actual cost structure (23).

The basis for the trigger off requirement includes a fair return on capital. The discount rate used was set at a rate of 7 % per annum (nominal, pre-tax rate) for all projects to which certain percentage points were added as a risk premium. The Norwegian Government stated that Enova will base its analysis on theoretical values suggested in public reports from acknowledged government institutions in Norway, whereby the risk premium would vary between 2,5 to 4,5 %, depending on the type of energy and project.

5.3. Energy saving measures

According to the system as notified (24), support for the investment in energy saving measures is calculated according to the same net present value calculation method used for renewable energy projects.

5.4. New energy technology

In this category, Enova supports technologies which still need some development and which need to be further tested before they are economically viable, although they are past the stage of research and development projects covered by Chapter 14 on research and development aid of the Authority's State Aid Guidelines. Examples of such technologies are tidal or wave energy installations. The projects might be linked to achieve energy efficiency or foster renewable energy production.

During the formal investigation, the Norwegian authorities clarified that this category could be considered as a subcategory of the investment support for renewable energy production and energy saving described above. In the past, 95,3 % of the supported projects under this category concerned renewable energy production, 4,3 % concerned energy saving measures (25).

Enova has signed an agreement with the Norwegian Research Council on the ‘introduction of innovative energy solutions’ for energy saving and heat production from solar energy and biomass. According to the Norwegian authorities, this agreement does not constitute a new aid scheme, but only an enhanced focus on an area where the cooperation between Enova and the Research Council is expected to give synergy effects. According to the Norwegian authorities, this mechanism functions as a common entry door for projects which might either be in a pre-competitive stage (and thus might receive support from the Research Council) or generate revenues (and might receive support from Enova). The project will not receive funding from both support agencies. However, the Norwegian authorities underline that, in any event, the cumulation rules guarantee that section G (66) of the Environmental Guidelines are to be respected. This section of the Environmental Guidelines states that support under these guidelines may not be combined with other forms of State aid within the meaning of Article 61(1) of the EEA Agreement, if such overlapping produces an aid intensity higher than that laid down in the Environmental Guidelines.

Since only projects generating revenues are to be supported by Enova, Enova uses the net present value calculation mentioned above equally for the support of new technology projects. The income of the projects is based on the generation of electricity and heat for sale, which, according to the Norwegian authorities, constitutes an income which makes the projects viable for the net present value calculation approach.

5.5. Energy audits

Enova also offers advisory and consultancy services to achieve energy efficiency free of charge to undertakings. The purpose of the support is to increase the number of enterprises that perform energy audits and analyses and help them to reduce the respective costs. As notified, these services were legally neither limited to aid below the de minimis threshold nor aid to small and medium-sized enterprises. They were targeted to certain undertakings. In the programme text for 2003, the target groups were described as owners of private and public buildings with a total surface area over 5 000 square metres and industrial enterprises, as well as tenants of large areas. As of 2003, Enova has granted money to firms to purchase such advisory and consultancy services, rather than rendering the service itself.

The Norwegian authorities stress that support under these programmes should be distinguished from the teaching and educational measures. This is so as the funding goes directly to companies for performing energy audits and energy analyses and to identify either energy saving investments or behavioural changes within the enterprises. The Authority will, therefore, consider this support separately in the present decision. The Norwegian authorities further argue that the programmes are similar to energy audits under a Finnish scheme, approved by the Commission (26).

In the past, grants might have been handed out which covered up to 50 % of eligible costs. According to the Norwegian authorities, as of 1 January 2004, only 40 % of the eligible costs have been supported.

5.6. Information and educational programmes in the field of energy efficiency

Enova operates an energy information helpline, whereby information and advice are provided free of charge to anyone interested in achieving more energy efficiency. In as far as Enova does not have the capacity to undertake these activities itself, the Norwegian authorities state that services have been bought in line with the public procurement rules. Enova does not exercise any discretion regarding to whom such advice and information is provided.

Until 1 January 2003, Enova offered a widely publicised programme by which queries regarded energy efficiency which required concrete follow-up in households and undertakings on-site were handled by twenty regional efficiency centres which represented Enova in this field. The support was provided free of charge and approximately two hours were reserved for each request. The Norwegian authorities state that Enova did not enjoy any discretion regarding the recipients to whom to provide this service.

For educational measures, the following programmes are to be mentioned. The Norwegian authorities stress that competition among bidders and cost-effectiveness of the projects are essential.

Until 1 January 2005, Enova provided a programme (27) for the development of teaching material and learning concepts to stimulate and preserve knowledge concerning renewable energies, in companies. The programme was organised as a tendering process, and Enova paid 50 % of the total development costs of the project. The objective of the programme was to stimulate the development of teaching material on energy efficiency (books, software, etc.), as well as to support the development of energy related courses, e.g. at colleges/universities or developed by trade unions, etc. The programme was open to public, private and non-profit entities. The programme texts for 2003 and 2004 contained a prioritisation list (e.g. projects for the construction business, projects involving public/private partnerships and projects to be marketed until 1 August 2003). For the 2003 programme, the supplementary education was particularly geared towards universities, unions, trade organisations and private educational operators (phase 1) and architects, suppliers, entrepreneurs and other personnel working with energy systems in commercial buildings (phase 2) or aimed at the construction business (programme text 2004).

In order to promote the 2004 education programme, Enova offered a programme on developing education courses in energy for technical personnel and engineers. This was organised by a tendering process. Only the first 50 persons to have completed the course got the course paid for by Enova. According to the Norwegian authorities, this support was given directly to individuals and not to undertakings.

The above mentioned teaching material programmes ended on 31 December 2004. According to the Norwegian authorities, new programmes would be notified to the Authority. Altogether, some 33 projects have received support under the programme. The Norwegian authorities state that some of the projects might fall under the de minimis threshold. Moreover, some of the support went to public sector entities, universities and other educational entities and to non-profit organisations. The Norwegian authorities claim that for these entities, the support given by Enova did not concern an economic activity carried out by an undertaking falling within the ambit of Article 61(1) of the EEA Agreement, but rather the support of an educational activity.

The scheme as such did not contain any limitation specifying that the aid should only be given to certain types of entities or activities. Nor did it state that the support should not exceed the de minimis threshold as stipulated in the Act referred to under point 1(e) of Annex XV to the EEA Agreement (28). The support was neither limited to small and medium-sized undertakings (29), as mentioned in the Act referred to under point 1(f) of Annex XV to the EEA Agreement, nor was it structured to meet the requirements of the Act referred to in point 1(d) in Annex XV to the EEA Agreement (30) (training aid).

In addition, Enova runs a programme to improve energy planning skills in local municipalities, in particular public planning and area planning according to the Norwegian Planning and Building Act. The programme, which is offered free of charge, is aimed at high level decision makers and technical personnel in the municipalities. The Norwegian authorities state that Enova carries out an assessment as to whether the municipality is performing a service in competition with other operators in the market. If so, such an activity will not be supported.

6. Recipients/aid intensities for investment support for renewable energy production

The Authority's investigation concerns an ongoing aid scheme. Thus, the indication of potential aid recipients cannot be finally established with this Decision and is only indicative. In their letter dated 15 July 2005, the Norwegian authorities identified until the end of 2004; 236 recipients of energy audit and investment aid support (the latter both for renewable energy production and energy saving measures), which received State support exceeding the de minimis threshold and which was not support given to public entities for carrying out their public functions. The Norwegian authorities further identified 33 projects supported under the educational/teaching material programme.

The Norwegian authorities claim that another estimated 875 projects either concern support to public entities or support for the purchase by Enova of a certain service according to the public procurement rules.

For renewable energy projects, the Norwegian authorities submitted the following table showing aid intensities, based on total investment costs, for the renewable energy projects granted between 2002-2004:

Renewable energy Aid intensity in % of total investment costs, support calculated according to the net present value approach Number of projects Average Maximum Wind 10 23 % 68 % District heating 19 20 % 31 % Bio 31 20 % 50 % New renewable 1 25 % 25 %

7. Budget and duration

The Agreement 2002-2005 (see above section I.2.3 of this Decision) was prolonged until the end of 2006. It is foreseen that the Agreement will further be prolonged until 31 December 2010. The Norwegian authorities have submitted the following overview of the scheme's budget:

State budget million NOK Levy on tariff million NOK Total budget million NOK Total budget million euro (31) 2002 270 161 431 57,3 2003 259 192 451 56,4 2004 60 470 530 63,3 2005 0 650 650 79,3

8. Cumulation

As to the cumulation of the support granted by Enova with other government support, the Authority notes that, in principle, the projects might receive aid from other sources. The Norwegian authorities stated in the notification that they would ensure that the aid granted would never exceed the thresholds of section G. (66) of the Environmental Guidelines. As already mentioned, this section stipulates that aid authorised under the Environmental Guidelines may not be combined with other forms of State aid, if such overlapping leads to an aid intensity which is higher than laid down in the Environmental Guidelines. Applicants have to notify Enova if applications for additional government aid have been submitted.

9. Suggested amendments by the Norwegian authorities

With a view to making the system compatible with the Environmental Guidelines, the Norwegian authorities have suggested certain amendments to its system, which are described below. During the Authority's investigation, the Norwegian authorities started implementing these amendments.

9.1. Amendments for the investment support relating to renewable energy production

1. Norway will limit the support to projects falling within the definition of renewable energy sources in Article 2a and b (for biomass) of Directive 2001/77/EC. Moreover, no support will be given for existing hydropower plants.

2. The amount of aid will be calculated according to a net present value calculation to be based on the difference between the production costs and the market price. The aid will be given as a lump sum. The calculation method applied is as follows (demonstrated with the example of an actual wind energy project, amounts expressed in NOK):

Eligible investment cost (32) 123 000 000 Production kWh/year 45 700 000 Price NOK/kWh 0,25 Annual Income (33) 11 425 000 Operating cost NOK/kWh 0,10 Annual operating cost 4 570 000 Annual net income 6 855 000 Economic lifetime Years 25 Return on capital 6,33 % NPV –38 000 000 Investment aid 38 000 000

Compared to the system as notified, the model calculation above will be based on the ‘eligible’ investment costs and not on full costs. As stated by the Norwegian authorities, financial costs, miscellaneous costs and indemnity costs are not included in the eligible costs, at least not since 1 January 2004.

3. The market price for electricity used in the above calculation will be taken from the relevant Nordpool prices. In the case of district heating, it will be the relevant price that the end user of oil or electricity (whichever is lowest) faces when the decision about the State support is made. If the project economy is based on large customer contracts with prices deviating from the observable end user price of electricity and oil, the contract prices will be the relevant price. Regarding electricity production not fed into the grid, the end user price including taxes will be used.

4. The aid may cover a fair return on capital. However, the discount rate and the risk premium will be established for Enova by an external expert for each renewable industry concerned.

It should be noted that the Norwegian authorities submitted a report by the appointed independent expert, First Securities ASA (34), to the Authority. The expert uses a Capital Asset Pricing Model (35) and calculated discount rates of 7 % for wind energy, 6 % for distant heating, bio energy and energy use respectively. The calculation is understood to be a framework which enables Enova to discuss the use of equity discount rates for individual projects. In particular, the so-called beta value might be higher depending on the project's risk (36) and lead to higher discount rates.

The interest rate and the risk premium will be reviewed and updated annually by the Norwegian authorities. If there are unexpected changes that significantly affect the discount rate which occur between annual updates the Norwegian authorities will carry out an extraordinary adjustment of the discount rate accordingly. However, this applies only if there is reason to believe that the change is of permanent character.

5. The eligible investment costs shall be those listed in Commission Decision N 75/2002 — Finland (37). The Norwegian authorities state that since 1 January 2005 Enova has accepted only such costs as being eligible.

6. No aid in excess of the amount necessary to trigger the project will be given. This means that in case of a negative net present value, resulting from a net present value calculation which is calculated according to the parameters stipulated in number (2) above, State support will only be given to ensure that the project breaks even, i.e. to bring the net present value up to zero.

7. A project with a calculated zero rate or a positive net present value without aid will not be entitled to any aid.

8. With the exception of support for biomass, the support granted under this scheme shall never exceed the threshold stipulated under section D.3.3.1 (54) of the Environmental Guidelines. Section D.3.3.1 (54) of the Environmental Guidelines limits the support to the difference between market price and production costs, capped at plant depreciation, whereby plant depreciation is to be understood as investment costs only. The aid may also cover a fair rate of return, where Norway can show that this is indispensable given the poor competitiveness of certain renewable energy sources.

9. Within Enova's methodology for calculating aid levels, the maximum amount of aid granted from Enova will be limited to the investment cost. Projects generating a negative EBITDA (38) under normal operating conditions, at the time of investment, will not be in a position to receive any aid at all. The discount rate used for that purpose will be the discount rate used by Enova, as mentioned in number 4 of section 9.I of this Decision.

10. For biomass, operating aid exceeding the investment costs might be granted. However, under no circumstances will more operating aid be granted than foreseen in section D.3.3.1 (55) (39) of the Environmental Guidelines.

11. For support under the system, biomass will be defined as the ‘biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste’ (see Article 2(b) of Directive 2001/77/EC). In case of support of bioenergy which contains sources other than biomass, operating aid as stipulated above in number 10 shall only be given for that part which contains biomass. The support of the other parts was limited to investment support as defined under number 5.

12. The scheme will be limited until 1 January 2011.

The Norwegian authorities have also submitted the following operating cost data for renewable and conventional energy production data:

Total running costs, NOK/kWh

Technology Operating and maintenance costs Fuel Total running costs Figures from the IEA report: Projected costs of generating Electricity 2005 update Coal 0,034-0,068 0,076-0,152 0,11-0,22 Gas 0,023-0,031 0,187-0,249 0,21-0,28 Combined heat and power production 0,17-0,44 Figures from NVE report: Costs of the production of energy and heat in 2002 Wind 0,05 0,05 Figures from the Enova project portfolio (examples) Wind 0,05-0,10 0 0,05-0,10 Bio 0,07-0,15 0,2-0,3 0,27-0,45 New renewable 0,05 District heating 0,05-0,10

9.2. Energy saving measures

As for the system notified, the Norwegian authorities argue that the net present value calculation should also be accepted for the calculation of support for energy saving measures. However, the Norwegian authorities proposed changes to the future application of the support measures for energy saving, as follows:

The Norwegian authorities will calculate the investment aid for energy saving measures according to section D.1.3 (25) (40) of the Environmental Guidelines in combination with section D.1.7 (32) of the Environmental Guidelines, i.e. the investment costs of the project will be strictly confined to the extra investment costs necessary to meet the environmental objectives. This means that the costs of the energy saving investment will be compared to the costs of a technically comparable investment that does not provide the same degree of environmental protection. In cases of investment in additional equipment and procedures with no other function than energy saving, where no alternative comparable investment exists, the comparable investment costs are set at zero. Replacement costs of machines to meet Norwegian required standards are not eligible for support.

1. The costs will be calculated net of the benefits accruing from any increase in capacity, costs savings engendered during the first five years of the life of the investment and additional ancillary production during that five-year period.

2. The eligible costs will be confined to investment costs. In that respect, eligible costs will be the same as those listed by the European Commission in its Decision N 75/2002 — Finland (41). As of 1 January 2005, the Norwegian authorities have only considered such costs as eligible.

3. The amount of aid will be limited to 40 % of the extra costs, calculated according to the above parameters and no operating aid will be given under that scheme. According to section D.1.5 (30) of the Environmental Guidelines, for small and medium-sized enterprises the aid might be increased by 10 percentage points. For that purpose, small and medium-sized enterprises will be defined according Chapter 10.2 of the Authority's Guidelines on aid to micro, small and medium-sized enterprises.

4. The Norwegian Government will ensure that, if combined with other public subsidies, the total aid will not exceed the above mentioned limits.

5. The scheme will be limited until 1 January 2011.

9.3. Support for new energy technologies

The Norwegian authorities state that new technologies projects, as far as renewable energy projects are concerned, are to be supported according to the rules for supporting the production and use of renewable energy production (NPV approach). As far as energy efficiency technologies are concerned, the calculation mechanisms for energy saving mechanisms will be applied. The support will, inter alia, include projects which earlier have only been tested in laboratories, have limited exploitation or are developed for conditions different from that in Norway and need adaptation.

Pre-competitive projects, falling under the Authority's State Aid Guidelines for Research and Development, will be notified individually. Projects which are an upgrading of existing products or production line will not be supported. The same goes for projects which have already started or for which the start up decision has been made.

9.4. Information and education measures in the field of energy efficiency

The Norwegian authorities confirmed that the programmes for teaching material and learning concepts, education courses for technical personnel and on-site follow-up ended on 1 January 2005. If these or similar projects are to be taken up in the future, they will be notified in advance to the Authority.

The Norwegian authorities further confirmed that the training programme for public entities only relates to the public function of the local municipalities (see also section I.5.6 of this Decision).

9.5. Miscellaneous

The Norwegian authorities further confirmed that the support is applied in a non-discriminatory manner also to foreign investors and that they will regularly report to the Authority on the application of the scheme. The Norwegian authorities submitted a list to the Authority showing eight examples of foreign operators having received support under the Energy Fund.

10. Grounds for initiating the formal investigation procedure

In its decision to open the formal investigation procedure, the Authority took the view that the measures concerning energy saving, the support of new energy technologies and the support for the investment in renewable energy production constituted State aid within the meaning of Article 61(1) of the EEA Agreement. As for the information and educational measures (including advisory and consultancy services) the Authority noted that with the exception of the information helpline and possibly the on-site visits, the Fund enjoyed ample discretion. It, moreover, found that this discretion turned the support measures into selective, rather than general, measures. All the measures were found to distort or threaten to distort competition and affect trade between the Contracting Parties. Since the aid in relation to the Energy Fund was not notified in time to the Authority, it constituted unlawful aid within the meaning of Article 1(f) in Part II of Protocol 3 to the Surveillance and Court Agreement.

As to the compatibility assessment, the Authority made a distinction between the Energy Fund as notified and a system with the amendments suggested by the Norwegian authorities.

The Authority expressed doubts in the decision to open the formal investigation procedure as to whether the investment support for renewable energy production could be justified under the Environmental Guidelines. In particular, the Authority noted that the support was not based on the ‘extra cost’ methodology of section D 1.3 (27) and section D.1.7 (32) of the Environmental Guidelines. Rather, it identified the need for aid by carrying out a net present value calculation of the project. The Authority found that there were no sufficient guarantees that only costs related to the investment would be supported. Further, there was no mechanism to preclude any overcompensation. For energy saving measures, the Authority noted that contrary to renewable energy projects, the Environmental Guidelines stuck strictly to a support of 40 % of eligible investment costs. With the net present value calculation applied by the Norwegian authorities it was not certain that this threshold would be respected. For energy technology projects as well as for energy audits, the Authority required more information. On the information and educational support measures, the Authority noted that the aid scheme in this respect was not limited to de minimis support (although support for some of the projects might have stayed below the threshold) or limited to small or medium-sized enterprises. On that basis, the Authority came to the initial conclusion in the decision to open the formal investigation procedure that the system as notified was not compatible with the EEA State aid provisions.

In the decision to open the formal investigation procedure, the Authority also dealt with the amendments suggested by the Norwegian authorities. It stated that it would investigate further whether the Norwegian approach to base the support on a net present value calculation of the project concerned could be accepted, if the Norwegian authorities decided to limit the support to the difference between the market price and the production costs, see section D.3.3.1 (54) of the Environmental Guidelines. The Authority was also concerned about how the requirement of section D.3.3.1 (54), third sentence of the Environmental Guidelines was going to be applied in practice by the Norwegian authorities. This section prescribes that once supported, any further energy produced by the plant would no longer qualify for any further assistance. The Authority also expressed doubts about the support of projects whose net present value would still be negative, due to high operating costs, after having received support from Enova.

The Authority could not form a final view on the support for new energy technologies and on educational measures, as well as on the advisory and consultancy services (energy audits).

11. Comments from third parties

The Authority received one comment from third parties to its opening decision. The German Ministry for the Environment, Nature Conservation and Nuclear safety states that there is no possibility of clearly identifying the relevant market and establishing whether the supported undertakings would indeed be in competition with non supported undertakings and would receive an advantage. Further, the German Ministry states that the principle of establishing the extra costs of renewable energy production is not very suitable for determining the aid amount, as long as there is no general applicable and clearly defined definition of the concept of extra costs. With regard to the 40 % threshold for aid intensities, the German Ministry finds that this will often not give a sufficient incentive for a private investor to act, as he would have to take over 60 % of the costs. One might therefore consider whether the support should be based rather on a proportion of the total investment costs. The German Ministry states that some shortcomings of the Environmental Guidelines in this respect have been overcome by the Commission's case practice.

12. Comments by the Norwegian authorities

As to the existence of State aid, in their reply of 15 July 2006, the Norwegian authorities take the view that the Authority applies a too strict selectivity test, which does not leave an opening for any discretion for programmes which are basically open for all companies. As to the support for teaching material, Enova enjoyed discretion to dismiss only such projects which did not meet the objectives of the programme or could ensure sufficient quality. These minimum criteria were therefore of an objective character.

The Norwegian authorities further claim in the above letter that the Authority should have made a compatibility assessment of the Energy Fund directly under Article 61(3)(c) of the EEA Agreement, as the Commission did in the UK WRAP lease fund scheme (42).

As to the compatibility assessment of the investment support for renewable energy production, the Norwegian authorities state that for renewable energy production as notified, the system's element of competition between different projects excludes any overcompensation. Further, the agreement between Enova and the Ministry states that any aid given has to be compatible with the EEA Agreement. As to the inclusion of costs which might not have been eligible, the Norwegian authorities state that this would only concern a small fraction of the costs.

Throughout the preliminary investigation phase and in their reply of 15 July 2006, the Norwegian authorities point out that Norway faces a different energy situation than most European states as more than 99 % of its domestic electricity production stems from hydropower. Hydropower has a different cost structure and different cost levels than the traditional energy production in the rest of Europe based on coal, gas and nuclear energy. A comparison with hydropower for calculating the extra costs of new renewable energy production under the Guidelines is, in the Norwegian authorities’ view, not feasible. There are further important advantages in applying the chosen methodology. Firstly, the net present value method is the commonly used methodology in the energy sector as well as in other industrial sectors. By referring to the market price, objective and easily available criteria are chosen. Using this method for all projects applying for support, Enova can compare different projects competing for State support on an equal basis and grant support to those projects which have the best aid/environmental benefit ratio. Secondly, the method will ensure that a project will only be granted the amount necessary to enable the project to get to the market.

Norway states that if one were to follow verbatim the Environmental Guidelines, the Norwegian authorities would have to supplement the investment aid scheme with an operating aid scheme, for which the aid would also be decided, in the end, on the basis of a net present value calculation. The operating aid so given would de facto be an investment aid scheme where the grant would be paid in instalments rather than in a lump sum, without any significant difference in the possibility of support, but with less transparent and, administratively, a more complicated system (43). In the system as notified, Enova would only be involved in the investment phase of the project.

The Norwegian authorities agree in their reply of 15 July 2006 with the Authority's finding in the opening decision that Enova's method in general results in investment aid which is below or equal to the extra investment costs of the renewable energy plant. However, the Norwegian authorities object to a ceiling of plant depreciation. This would ignore the fact that the projects are also entitled to a fair rate of return, as stipulated in the Authority's Environmental Guidelines (section D.3.3.1 (54)) and applied in the Commission's Decision regarding the Q7 offshore wind project (44). As the appropriate level of the rate of return will be established on the basis of the findings of an independent expert, the Norwegian authorities argue that there is no danger of overcompensation resulting from rates of return being too generous.

As to the requirement that a supported project should not receive any further assistance, see section D.3.3.1 (54) of the Environmental Guidelines, the Norwegian authorities agree that there should a limitation of the support given by the Energy Fund. The Norwegian authorities state that two mechanism will ensure such a limitation. Firstly when Enova assesses a project, all known income (cash flow) will be taken into account, regardless of e.g. other government support being qualified as State aid. These elements will be taken into account on the income or cost side, where relevant, and will consequently reduce the need for further support by Enova. Secondly, with regard to the possible introduction of a green certificate system, the Norwegian authorities refer to a clause in the contract to be concluded with the aid recipient that he has to pay back, with interest, any aid received by the Energy Fund, if he enters the certificate market.

The Norwegian authorities have suggested — during the formal investigation of the scheme — an amendment with regard to projects which, even with the support received from the Energy Fund, would have a negative net present value. This amendment is now contained in section I.9.1 number 9 of this Decision and states that projects generating a negative EBIDTA, under normal operating conditions at the time of investment, are not in a position to receive any aid at all.

II. APPRECIATION

1. State aid within the meaning of Article 61(1) EEA Agreement

Article 61(1) of the EEA Agreement reads as follows:

‘Save as otherwise provided in this Agreement, any aid granted by EC Member States, EFTA States or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Contracting Parties, be incompatible with the functioning of this Agreement.’

1.1. Presence of State resources

According to Article 61 of the EEA Agreement, the measure must be granted by the State or through State resources. In the present case, the support of the various investment projects is done by way of grants, which are financed from the State budget and from the levy on the distribution tariff. The financing via direct budgetary allocations fulfils the criterion of ‘State resources’.

With regard to the proceeds of the levy on the distribution tariff, the Authority notes that according to established case law and European Commission practice, State resources are involved where money is transferred by a fund and when the fund is established by the State and the fund is fed by contributions imposed or managed by the State (45). In this regard it will have to be established, whether the State exercised control over the money in question (46). In order to be considered as State resources, it is sufficient that the assets are permanently under the control of public authorities (47).

The Energy Fund was established by the Norwegian State. The Energy Fund is administered by a public body, Enova, which is owned by the Norwegian State via the Ministry of Petroleum and Energy. The Fund was established in order to fulfil a policy objective by the Norwegian State and to help meet the Norwegian States’ energy targets in relation to the Kyoto Protocol. For that purpose, the Norwegian State imposes a compulsory levy by way of regulation (see I.3 of this Decision) which shall finance the Fund. The level of the levy is equally determined by the State. The proceeds of the levy are poured directly into the Energy Fund which allocates them to the chosen projects. The Authority, therefore, considers that the Norwegian State exercises permanent control over the levy and that it qualifies as State resources in the meaning of Article 61(1) of the EEA Agreement.

1.2. Favouring certain undertakings or the production of certain goods

In order to qualify as aid within the meaning of Article 61(1) of the EEA Agreement, the measure must in addition, firstly, confer on the recipient advantages that relieve it of charges that are normally borne from its budget. Secondly, the aid measure must be selective in that it favours ‘certain undertakings or the production of certain goods’. In the following, a distinction will be made between the investment aid schemes, including energy audits, and the educational/teaching measures.

1.2.1. General remark: Assessment of the Energy Fund scheme as such, not of individual grants under the scheme

In the present case, the support measures described below might, in some situations, have been given to individuals rather than to undertakings (e.g. for some of the teaching and educational measures) or might concern an educational rather than an economic activity. However, none of the various support measures were formally (law or administrative guidelines) limited to individuals or certain types of activities (48). Support could e.g. be given to e.g. private educational operators, which might carry out economic activities or be geared towards certain industrial sectors (e.g. the construction business).

The current notification and assessment deals with the Energy Fund as such, not with individual grants under it. Therefore, there is no need for the Authority to assess– for its evaluation of the Energy Fund scheme as such (49) — e.g. whether the support in individual cases given to non-profit organisations and educational entities concerned the (economic) activity of an undertaking. As the Energy Fund scheme did not contain any limitations in that regard, the findings of the Authority, therefore, is that — with the exception below — the support under the scheme went to undertakings.

Support granted to the public sector for carrying out energy efficiency measures as part of the public function of that entity does not constitute State aid. This concerns, in particular, the programme on energy efficiency measures for municipalities. This support does not contain State aid within the meaning of Article 61(1) of the EEA Agreement, as long as it is limited, as confirmed by the Norwegian authorities, to the public entity function of the supported recipient.

1.2.2. Investment support (renewable energy production, energy saving measures, new energy technology and energy audits)

The grants for the above-mentioned investments give the recipients an advantage in the sense of Article 61(1) of the EEA Agreement by either enabling them to invest in renewable energy production or to invest in measures which reduce their energy consumption or enable the company (in the case of audits via increased competence and energy analysis) to use energy more efficiently, thereby further reducing the company's ordinary running costs.

The support is also selective. As for the investment support for renewable energy production, the support refers to a particular category of energy producers.

Selectivity also exists for the other measures, as the grants are allocated to only certain companies chosen by Enova after comparing the projects during the application process and deciding which is the most efficient project of the application round to be supported. As established by case law (50), in a situation in which a fund enjoys ‘a degree of latitude which enables it to adjust its financial assistance having regard to a number of considerations such as, in particular, the choice of the beneficiaries, the amount of financial assistance and the conditions under which it is provided, (…) the system is liable to place certain undertakings in a more favourable situation than others’ (51). Each project fulfilling the application criteria can not be certain to be granted support, as this depends on the other projects competing with it in the application process and the amount of money Enova is willing to allocate within the concrete round of project evaluations. As Enova is free to choose how often and which kinds of calls for submitting project proposals it organises, the system gives Enova a sufficient margin of discretion to make the support measures selective (52).

In addition, for energy audits, there is an additional element of selectivity in that the programme (programme text 2003, see above section I. 5.6 of this Decision) was targeted at owners of private and public buildings with a total surface of over 5 000 square metres and at industrial enterprises.

1.2.3. Information and educational programmes in the field of energy efficiency

The Authority takes the view that no selectivity is involved for Enova's information helpline where advice on energy efficiency would be granted to anyone interested in advice on energy efficiency, without Enova being able to exercise any discretion to that end.

No State aid is further involved for the on-site visits as far as private households are concerned, as the support in these situation are not granted to undertakings in the sense of Article 61(1) of the EEA Agreement. Moreover, even for efficient use of energy in commercial buildings, the Authority does not find State aid in the meaning of Article 61(1) EEA Agreement involved, as the measure was open to anyone interested in it, without granting Enova and its efficiency centres any discretion. In other words, the measure does not fulfil the condition relating to selectivity.

A selective advantage exists in relation to the support programme for the development of teaching material and educational courses, as it reduces the developer's costs of creating such material or programme, compared to others who do not receive such support. The Authority does not agree with the Norwegian authorities that it applies too strict a selectivity test for the teaching/educational programmes. The support is, firstly, targeted towards certain sectors, e.g. in the 2003 programme inter alia to private providers of educational services or in the 2004 programme to the construction business. The programme texts underline that offers of study should meet the needs of business, partially with private industry participating in the programme's financing. This leaves room for the development of sectoral solutions. Secondly, the respective programmes still leave Enova a great margin of discretion. The Norwegian authorities themselves stress that the competition of projects is essential. Consequently, some projects might not be guaranteed support even though they fulfil certain objective criteria, as they might lose out if other projects in the respective assessment round score better. There is also no guarantee that a rejected project would be supported in the next round. Further, the programme texts of 2003 and 2004 contain a priority list, which further demonstrates that certain projects, in particular those which are not among the projects to be prioritised, will have a lesser chance of being supported. The Authority, therefore, considers the support to be selective.

1.3. Distortion of competition and effect on trade between Contracting Parties

To be aid in the meaning of Article 61(1) of the EEA Agreement, the measures must distort or threaten to distort competition and affect trade between the Contracting Parties.

In the present case, the measures are strengthening the competitive situation of the supported enterprises within the energy and electricity markets in the European Economic Area, where they actually or potentially compete with other energy producers (53).

Quite a number of projects supported in the past (see section I.6 of this Decision) might have fallen under the Act mentioned in point 1(e) of Annex XV to the EEA Agreement (Commission Regulation (EC) No 69/2001 of 12 January 2001 on the application of Articles 87 and 88 of the EC Treaty to de minimis aid), because the allocated grants are below the de minimis threshold. However, not all of the supported projects had the character of de minimis aid. Nor was it a condition of the scheme that this should be so.

As the electricity market is largely liberalised and there is trade flow in energy products and electricity between the EEA States (e.g. Norway imports and exports a certain percentage of its electricity), the described (potential) distortion of competition takes place in relation to other EEA undertakings. This is further demonstrated by the fact that various types of electricity are traded in Nordpool, a common framework between the Nordic countries. The Energy Fund system is, therefore, distorting or threatening to distort competition and affect trade between the Contracting Parties.

2. New aid

As shown above in section II.1 of this Decision, the system provided by the Energy Fund entails aid within the meaning of Article 61(1) of the EEA Agreement. It needs to be determined whether it also constitutes new aid, which should have been notified in sufficient time for the Authority to make an assessment, see Article 2 in Part II of Protocol 3 to the Surveillance and Court Agreement. New aid is defined as all aid (…), ‘which is not existing aid, including alterations to existing aid’, see Article 1(c) in Part II of Protocol 3 to the Surveillance and Court Agreement.

The Norwegian Government states that the programmes merged under the Energy Fund mechanism existed before the entry of Norway into the European Economic Area. Therefore, the schemes originally constituted existing aid within the meaning of Article 1(b)(ii) in Part II of Protocol 3 to the Surveillance and Court Agreement.

With the notification, the Norwegian authorities notified the Authority of alterations to the existing aid schemes. These consist mainly of:

(i) the 2002 merger of the existing schemes under the newly established Energy Fund;

(ii) the new administration of the support with the creation of the new administrative body Enova, thereby replacing the formerly responsible Norwegian Water Resources and Energy Directorate;

(iii) the development of new energy objectives by Parliament, which means that the measures under the schemes should now achieve measurable energy efficiency and production goals;

(iv) and finally a new financing mechanism (levy on the distribution tariff).

These changes were accompanied by a new set of legal provisions on Enova, which have an impact on the support granted in that the measures should now achieve new policy objectives agreed in 2002 between the Norwegian State and Enova.

These alterations were not purely of a technical or administrative nature [see Article 4(1) in the Authority's Decision of 14 July 2004 (54)], but significantly changed the previously existing system and its legal framework. Firstly, in line with the Court's judgment in Namur Les Assurances (55), the existence of new aid must be determined by reference to the provisions providing for it. In this regard, it should be noted that with the establishment of the Energy Fund and Enova, a whole new set of rules governing the support under the Energy Fund and its financing was adopted. Firstly, there was a Parliamentary decision of 5 April 2001, by which the Energy Act of 29 June 1990 was amended. The decision authorised the Government to oblige the distributor of energy (by a licence, ‘omsetningskonsesjoner’) to add a levy to the electricity distribution tariff paid by the end consumer. This levy shall then contribute to the financing of the Energy Fund. A then newly adopted Government regulation of 10 December 2001 lays down the details of how this levy should be collected and transferred to the Energy Fund. In the propositions leading up to the parliamentary decision, the Government had defined new and concrete energy objectives (see I.4 of this Decision), whose fulfilment should be achieved within a given time frame by the establishment of the Energy Fund and Enova. The objectives and their achievements were further specified in the Agreement between the Ministry and Enova. A new regulation on the Energy Fund placed the Fund under the Ministry of Petroleum and Energy and stipulated its administration by Enova. This demonstrates that in the years 2000/2001 the legal provisions governing the support of energy efficiency measures were significantly altered and supplemented.

These legislative and administrative changes were done with the intention to substantially alter the current support regime and create a completely new way to fund energy saving measures and renewable energy production (56). The merger of the two new schemes was more than a mere technical formality as their combination under one heading was effectuated in order to provide for better targeted State support and achieve more tangible results in terms of sustainable energy policies. Support decisions for projects will now have to take into account whether the projects can contribute to the new objectives defined by Parliament in 2000/2001, which is a substantive alteration to the previous support mechanisms.

A completely new administrative structure substitutes the formerly responsible Norwegian Water Resources and Energy Directorate's (NVE) competence with that of the newly founded administrative body Enova. Enova is bound by an Agreement with the Ministry to administer the Energy Fund to achieve Parliament's newly defined energy objective and to manage the Fund according to the newly adopted legislation. It further is called upon to promote — through the administration of the funds — competition in the market. This shows that Enova does not simply continue the NVE's work, but is entrusted with new tasks and obligations, which is a substantial alteration of the previous schemes.

Finally, it is of importance that a new financing mechanism has been set up. Instead of budgetary allocations, the support measures are (increasingly) financed via the means of a levy on the distribution tariff, which is used for financing the Energy Fund. While Norway pointed out that the levy as such has been introduced prior to the entry into force of the EEA Agreement, this does not alter the Authority's finding that the introduction of the new financing mechanism resulted in a substantial change. Before 2002, the levy was managed by the grid companies to mainly finance their own information activities on energy efficiency. Now the levy is set up and controlled by the Norwegian State, which earmarks it for financing the Energy Fund. The Fund can apply the finances to all different kind of support measures, not limited to information activities (57). In light of the above, the Authority concludes that the alterations to the funding system are of a substantial nature.

The described changes alter the aid scheme as such, without being a severable part from the existing schemes (58). The new financing and administrative mechanism as well as Enova's obligation to achieve newly defined energy objectives concern the very structure of the support programme and apply to all measures supported under the Energy Fund. The alterations were undertaken with a view to make better use of public resources and achieve more sustainable energy efficiency results, which made it necessary to introduce new structures and new objectives. These new structures and objectives determine each support decision and cannot be considered as severable from the formerly existing aid measures.

Consequently, the notified alterations are to be classified as new aid within the meaning of Article 1(c) in Part II to Protocol 3 of the Surveillance and Court Agreement.

The Energy Fund became operational on 1 January 2002, i.e. before June 2003, when the scheme was notified to the Authority. The Energy Fund system was therefore belatedly notified to the Authority and thereby infringed the standstill obligation in Article 1(3) in Part I of Protocol 3 to the Surveillance and Court Agreement. The aid is thus to be classified as ‘unlawful aid’ within the meaning of Article 1 (f) in Part II of Protocol 3 to the Surveillance and Court Agreement. Any unlawful aid which is not declared compatible with Article 61(3)(c) of the EEA Agreement is subject to recovery.

3. Compatibility of the aid

In the Authority's view, the aid measures do not comply with any of the exemptions provided for under Article 61(2) or (3)(a), (b) and (d) of the EEA Agreement. Therefore, one has to assess whether the aid could be justified under Article 61(3)(c) of the EEA Agreement. Under this provision aid may be declared compatible if ‘it facilitates the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest’.

The Authority will assess the Energy Fund according to Article 61(3)(c) of the EEA Agreement in conjunction with the Authority's Environmental Guidelines. These Guidelines required the EFTA States to bring their environmental aid schemes into line with these Environmental Guidelines by 1 January 2002.

In the following assessment, the Authority will make a distinction between the Energy Fund system as notified to the Authority and as applied since 1 January 2002 (see section II 3.1 of this Decision) and the future changes envisaged by the Norwegian authorities which intend to make the support compatible with the EEA State aid provisions (see section II 3.2 of this Decision).

3.1. Assessment of the Energy Fund as notified to the Authority

3.1.1. The investment support (renewable energy production, energy saving investment, new energy technology, energy audits)

In its decision of 18 May 2005 to open the formal investigation procedure, the Authority expressed doubts as to whether the investment support granted by the Energy Fund could be declared compatible under the Environmental Guidelines.

In their comments of 15 July 2005 to the opening decision, the Norwegian authorities argued that the system should be authorised directly under Article 61(3) (c) of the EEA Agreement. The Authority does not follow the view, at least as far as the support concerned is covered by the Environmental Guidelines. In the Authority's opinion, the European Commission's WRAP decision (59) is not relevant in this regard. The difference between the two cases is that in the case of recycling, the Guidelines do not provide for any provision on investment aid, whereas renewable energy investment support is covered by the Environmental Guidelines. The Authority is bound by its own guidelines (60). It therefore, finds that it cannot ignore the investment aid chapter of the Guidelines (section D.1.3, in particular point (27) and section D.1.7 (32) or the operating aid chapter (section D.3.3.1 (54)), which cover the situation of renewable energy sources) and the aid intensities contained therein.

1. Investment support for renewable energy production

Investment for renewable energy production can be supported up to an aid intensity of 40 % or, where necessary, of 100 % of eligible costs, see section D.1.3 (27) of the Environmental Guidelines. Section D.1.6 (31) clarifies what constitutes the eligible investment, namely investment in land, buildings, plants and equipment, and, under certain conditions, intangible assets. Section D.1.7 (32) establishes that eligible costs are the difference between the investment costs of a renewable energy production plant and the investment costs of a conventional power plant (hereinafter ‘extra cost approach’).

The Authority noted in its Decision to open the formal investigation procedure (61) that the support for renewable energy sources was not based on an extra cost approach as laid down in D.1.7 (32) of the Guidelines. It also found that without the amendments later suggested by the Norwegian authorities, there would be no guarantee that the support would stay within the boundaries of the 40 % threshold. There was, furthermore, no guarantee that it would stay within the higher threshold of 100 % of extra costs nor that the scheme would not lead to overcompensation. There were, e.g., no guarantees that only eligible investment costs would be supported and that no more aid than necessary to trigger the project would be given to an undertaking. Hence, the Authority took the preliminary view that the Energy Fund, as notified, could not be justified according to the investment aid chapter (section D.1.3 of the Environmental Guidelines) and constituted incompatible State aid.

The comments by the Norwegian authorities have not removed these doubts. As to the support of costs, which might not have been eligible, the Norwegian authorities state that as of 1 January 2005, Enova has only accepted the support of costs listed in the Commission's Decision regarding Finland N 75/2002, whereas in the past, other costs (e.g financial costs) have been supported, even if this might constitute only a small fraction of the total costs. Since the Energy Fund, as notified, did not contain any clear rules on which costs are eligible, the danger to include non eligible costs has indeed materialised. Likewise, the Norwegian argument that the aid scheme's element of competition restricts the possibilities of over-compensation, cannot alter the Authority's findings that the scheme did not have any functioning legal restrictions in place which would guarantee that the support stays within the threshold of the investment aid chapter of the Guidelines. Without any such rules in place, it would be a matter of chance for overcompensation to be avoided.

The Authority upholds its view expressed in the Decision to open the formal investigation procedure that also the conditions of section D.3.3.1 (54) are not met for the system as notified. The Authority could not establish that there were parameters in place which would ensure that the threshold of section D.3.3.1 (54) would never be exceeded. There was neither a guarantee that only investment costs would be included in the calculation (section D.3.3.1 (54) is limited to plant depreciation), nor was there sufficient certainty on how the discount rate should be established and that the aid would never exceed the amount necessary to reach a zero net present value.

In conclusion, the Energy Fund system as notified does not meet the compatibility standards of the Environmental Guidelines.

2. Energy saving support

Investment for energy saving (the notion of energy saving is defined in section B(7) of the Environmental Guidelines), can be supported up to an aid intensity of 40 % of eligible costs according to section D.1.3 (25) of the Environmental Guidelines. Section D.1.6 (31) of the Environmental Guidelines defines the investment concerned, i.e. land, buildings, plants and equipment and, under certain conditions, intangible assets. Section D.1.7 (32) of the Environmental Guidelines limits the support to eligible costs, which are defined as the extra investment costs necessary to meet the environmental objectives. No aid can be given for an adaptation to a European Community standard (62), if the undertaking is not a small or medium-sized undertaking.

In its Decision to open the formal investigation procedure, the Authority found that the support is not calculated according to the extra cost method as laid down in section D.1.7 (32) of the Environmental Guidelines. In particular, it does not stay within the 40 % threshold of section D.1.3 (25) of the Environmental Guidelines. Contrary to the investment support for renewable energy production, the 40 % threshold cannot be exceeded for energy saving measures (63).

The Norwegian authorities state that in practice they have followed the approach of the Guidelines. The Authority would not dispute that individual grants under the Energy Fund scheme might in themselves have been compatible with the Environmental Guidelines. However, that does not make the Energy Fund scheme as such — which did not contain any thresholds as to the aid intensities nor did it follow the extra cost approach — compatible with the Environmental Guidelines.

Consequently, as there were no mechanisms in place which would exclude that aid granted under that support measure would exceed the 40 % threshold of support, whereby the costs would be compared with the costs of traditional power production, the Energy Fund scheme, as notified, is to be considered as incompatible aid.

3. New energy technology

In its decision to open the formal investigation procedure, the Authority found that it did not have sufficient information in order to assess whether the projects in this category would be projects relating to renewable energy production (64). Likewise, the Authority was not certain whether the projects concerned research and development projects, which should have been assessed according to Chapter 14 on aid for research and development of the Authority's State Aid Guidelines.

During the formal investigation procedure, the Norwegian authorities clarified that support under this category would not concern projects at the stage of research and development, but mainly renewable energy production projects and to a lesser extent energy saving measures. The data demonstrated by the Norwegian authorities of projects grouped under this heading showed that so far only these categories have been supported. The project of ‘new energy technology support’ is, therefore, to be considered as a subgroup of the investment support for energy saving measures or renewable energy production.

However, for the Energy Fund, as notified, the Authority finds that the system did firstly not establish clearly that the new energy technology projects are subgroups of the other support categories and should therefore be assessed according to the same rules. In any event, as for the other support measures, the Authority finds that the system as notified did not contain any restrictions which guaranteed that the respective thresholds for investment support for renewable energy production and energy saving measures would be respected, or that only the eligible investment costs would be supported. The Authority, therefore, comes to the conclusion that the support as notified does not fulfil the requirements of the Environmental Guidelines.

4. Energy audits

In the Decision to open the formal investigation procedure, the Authority found that it did not have sufficient information to assess whether support under this heading would be compatible with the Environmental Guidelines, in particular under section D.2 (36) of the Environmental Guidelines (support for small and medium-sized enterprises).

Regarding this support category, the Norwegian authorities referred, during the formal investigation procedure, to a Finnish scheme, which allows for costs of energy audits to be taken into account for state support (i.e. not limited to small and medium-sized companies). The Norwegian authorities stress that, like the Finnish system, the Norwegian Energy Fund allows firms to receive financial support to perform energy audits and analyses, either to help achieve feasible energy efficiency or for energy saving investments or behavioural changes. The Finish scheme had allowed for aid covering 40 % of the eligible costs. The Norwegian scheme granted up to 50 % of eligible costs.

The Authority, firstly, finds that the Energy Fund scheme as notified did not contain any limitations which would guarantee that the support of such measures does not exceed the 40 % threshold for energy saving measures as laid down in section D.1.3 (25) of the Environmental Guidelines. In particular, a support of up to 50 % of eligible costs is not compatible with the Environmental Guidelines.

Secondly, the Authority does not find that a support of energy audits in relation to purely behavioural changes, without any envisaged investment, can be based on section D.1.3 of the Environmental Guidelines, which aims at investment support only. The Commission's authorisation in relation to a Finnish support scheme was limited to such investment support (65). It might be that further support for advisory and consultancy services would be considered compatible with section D.2 (36) of the Environmental Guidelines, in conjunction with the Act referred to under point 1(f) of Annex XV to the EEA Agreement (66) (aid to small and medium-sized enterprises). However, this is not decisive for the compatibility of the aid scheme as the Energy Fund as notified did not contain any limitations to that end. It can, therefore, not be declared compatible with the Environmental Guidelines.

3.1.2. Teaching material and educational measures

The Authority notes that the teaching material and educational programmes as notified were not limited to small and medium-sized companies, as stipulated in the Act mentioned in point 1(f) in Annex XV to the EEA Agreement (aid to small and medium-sized enterprises) (67). Neither was the support limited to support falling under the Act referred to in point 1(d) in Annex XV to the EEA Agreement (training aid) (68). The Authority, therefore, does not have to assess whether the support measures could be justified under these block exemptions. This type of support is also not covered by the Environmental Guidelines.

The Norwegian authorities argue that the aid under Energy Fund, in general or for parts, should be assessed directly under Article 61(3)(c) of the EEA Agreement.

In order to establish whether such a measure can be authorised by directly applying Article 61(3)(c) of the EEA Agreement, the Authority has to establish whether the support is necessary for and proportionate to fulfilling its objective.

The objective of the support measure was to enhance knowledge and competence about energy saving possibilities and energy efficiency. Energy saving measures, although related to investment, are explicitly laid down in the Environmental Guidelines as an objective open for State support. In general, energy efficiency measures contribute to achieving the Kyoto goals to reduce greenhouse gases, and knowledge and competence play an important role in the introduction and implementation of energy efficiency measures. As regards the necessity of the support at hand, the programme was aimed at the development of new material and courses and has excluded maintenance and revision of existing courses, as these costs were meant to be covered by course fees. The support under the programme was meant to give an incentive for the creation of new material, for which there was a need, as the Norwegian authorities argued that there was a lack of up-to-date teaching materials and learning courses in Norway.

The aid can be considered proportionate and not distorting trade to an extent contrary to the common interest. In this respect it is important for the Authority's finding that the scheme has been terminated and only covered 33 projects (one went to individuals), each with a limited amount of aid being granted. For 12 of the projects, dealing with support to entities which are registered as non-profit organisations, the support ranged between NOK 50 000 and 918 000, i.e. EUR 6 900 and 126 970 (69), with only two projects receiving support of around NOK 1 300 000 (EUR 180 555). For support to universities and colleges, the support ranged between NOK 200 000 and 450 000 (EUR 27 662 and 62 240), with only one supported project receiving NOK 875 000 (EUR 121 023). Enova, moreover, never assumed the total project costs, but limited its contribution to 50 % thereof. Further, an open ‘aid’ tender procedure was used to select the beneficiaries and determine the amount of aid. The tendering procedure also guaranteed that the aid would be limited to the necessary amount and would be proportionate. The aid was also project related and did, thus not constitute operating aid to reduce the operator's ordinary running costs. It can, therefore, be concluded that the aid did not distort competition to an extent contrary to the common interest. Consequently, the aid was compatible with Article 61(3)(c) of the EEA Agreement.

3.1.3. Conclusion for the system as notified

The Authority finds that the Norwegian authorities have unlawfully implemented the Energy Fund scheme in breach of Article 1(3) of Part I to Protocol 3 to the Surveillance and Court Agreement.

Enova's information helpline and the on-site visits do not constitute aid within the meaning of Article 61(1) of the EEA Agreement.

The investment support measures (renewable energy production, energy savings, energy audits) as notified are not compatible with Article 61(3)(c) of the EEA Agreement in conjunction with the Environmental Guidelines.

The support granted for the development of teaching material and educational courses between 1 January 2002 until 31 December 2003 is compatible under direct application of Article 61(3)(c) of the EEA Agreement.

3.2. The Energy Fund with the envisaged amendments by the Norwegian authorities

3.2.1. Investment support

1. Investment support for renewable energy production

As a starting point for assessing the Norwegian investment aid scheme, the maximum aid available to a project, as stipulated in the Guidelines, will have to be determined. Section D.1.3 (27) of the Environmental Guidelines sets out the threshold for investment aid, which is to be limited to 40 % of the extra investment costs necessary to meet the environmental objectives. If necessary, 100 % of eligible costs may be supported.

In addition, sections D.3.3.1 (53) and (54) of the Environmental Guidelines also allow for operating aid, in order to compensate for higher unit investment costs. Point (54) allows support to compensate for the difference between the production cost of renewable energy and the market price of the power concerned. However, the aid must be limited to plant depreciation, which is to be understood as investment depreciation. If the EFTA state can show that the aid is indispensable given the poor competitiveness of certain renewable energy sources, a fair return on capital may also be included.

Operating aid is normally understood as aid intended to relieve an undertaking of the expenses which it would normally have had to bear in its day-to-day management or its usual activities. However, for renewable energy sources, operating costs are generally lower than for conventional technology. On a day-to-day basis, renewable energy production is, therefore, expected to generate a positive cash flow, i.e. not be in need of any aid to relieve them of operating costs.

Section D.3.3.1 (54) of the Environmental Guidelines limits the support for plant depreciation (i.e. investment). What is compensated for, in effect, are the higher unit investment costs, rather than ordinary running costs. Consequently, aid granted under point (54) is, in effect, given to support an undertaking's investment. If the aid would cover a fair rate of return on capital in addition to depreciation of the capital, all capital costs would be covered, and the aid would in present value terms amount to the full investment. Future capital depreciations augmented by the required rate of return would in present value terms be discounted by the same rate. The discounted costs would be the upper ceiling for the aid.

The Environmental Guidelines allow for a combination of investment and operating aid. When calculating the operating aid available, account should be taken of any investment aid granted to the firm in question, see D.3.3.1 (54) of the Environmental Guidelines. Thus, any investment aid granted will be deducted from the eligible amount for operating aid. This shows that the threshold in section D.3.3.1 (54) of the Environmental Guidelines functions as the maximum threshold for giving investment aid to a renewable energy project.

As described in section I 9.1, points (4) and (7) of this Decision, the NPV approach used by Enova calculates the aid amount so that projects reach an NPV of zero, which, for a rational investor, would be the triggering off point for when a project is realized in the market. No aid will be given in excess of the amount necessary to reach the zero net present value. The aid element can thus be expressed as:

(Discounted Cash Flows (DCF)) – (Investment costs) + (Aid) = 0

As expressed above, the cash flows from the operations of the renewable project are used to pay off the original investment costs. Renewable energy projects generally have higher unit investment costs than traditional technology. Hence, the net income generated (the DCF component above) will, in many cases, not be high enough to pay off the necessary investment. These projects are then eligible for an aid component, in order to bring the NPV to 0.

The Authority has had, however, one concern with the use of this method for calculating aid. The reason for that has been that projects that do not generate a positive cash flow may also be considered eligible for aid. Such projects will generate a negative DCF, which will lead to the aid component exceeding the investment costs, and consequently the maximum aid intensities.

However, as long as the DCF component remains positive, the aid given to any project will never exceed the investment costs. To address this concern, the Norwegian authorities have agreed to amend the scheme, as expressed in number section I.9.1 number 9 of this Decision, so that projects which have a negative DCF are not eligible for any aid from Enova. This ensures that the maximum ceiling is not exceeded, by limiting aid to investment costs.

However, for projects which generate a relatively low DCF, the aid component will be relatively large, resulting in high aid intensities. For this to be justifiable, it must be demonstrated that the aid given is ‘indispensable’ for the realization of the projects.

No rational investor can be expected to launch a project with a negative NPV. For that reason, the Authority is of the view that a NPV calculation, preformed on the basis of the best available information when granting the aid, will serve as a sufficient demonstration of the indispensability of the aid given. When applying the NPV method, due account must be taken of the individual risk involved in each project when setting the discount rates for an investment. Following discussions with the Authority, Norway commissioned an independent analysis from First Securities (70) in order to determine the discount rates to be used when assessing project applications under the scheme. In this report, the method for arriving at the correct discount rates is set out, based on best practice financial methodologies.

Further, the Norwegian authorities have underlined that Enova would only be involved in the investment phase of the projects. Projects which have received investment aid from Enova will not be eligible for any further support under the Environmental Guidelines once the lump sum payment has been made. Another positive element is that the aid is ‘tendered out’, i.e. that different projects compete for support and that only the most efficient projects which provide the best aid/energy efficiency ratio will be supported. This approach will contribute to support only projects which are promising and give support only to the extent necessary.

An exception to the above is biomass projects. For such projects, the provisions of D.3.3.1 (55) of the Environmental Guidelines allow for a higher total ceiling than investment costs. The reason for that is that these projects typically have low investment, but high running costs. In the case of these projects, the Authority is of the view that aid may be distributed according to the NPV calculations, without the investment costs as a limit.

The above discussion has dealt with the maximum aid intensities. However, for most of the projects eligible for aid from Enova, the actual aid intensities will be considerably lower. This is due to the fact that renewable energy projects in general have low operating costs, which will lead to DCFs which are higher than for conventional technology. Given that Enova allocates aid to the most cost effective projects based on internal competition, the majority of projects can be expected to result in aid components within the threshold of 100 % of extra investment costs as stipulated in section D.1.3 (27), with the ceiling resulting from the application of section D.3.3.1 (54) rarely being reached. This is confirmed by an assessment of the renewable energy production projects supported so far. On average, the aid intensities for the supported wind, district heating and bio energy projects was around 24 % of total investment costs, with a maximum aid intensity for one wind project of 68 % and for a bio energy project of 50 % of the total investment costs (71). However, as it can be demonstrated that the NPV method in any case does not lead to overcompensation with respect to the guidelines, there is no need to demonstrate this in detail.

In conclusion, the Authority is of the view that following the amendments by the Norwegian authorities, the NPV method of distribution aid respects the thresholds laid down in the Environmental Guidelines, in particular section D.3.3.1 (54).

In its Decision to open the formal investigation procedure, the Authority was also concerned about whether the projects which were financed by the Energy Fund would receive further assistance by the State, regardless of whether this support would qualify as State aid in the meaning of Article 61(1) of the EEA Agreement or not, see section D.3.3.1 (54) of the Environmental Guidelines. The Authority was concerned that such further assistance could result in unnecessary funding, as the projects support by Enova would already lead to a zero net present value, including a fair rate of return, and should thus be sufficient to trigger the project realisation.

The Norwegian authorities stressed that Enova would only be involved in the investment phase of the project and that the project would only receive the minimal lump sum to trigger off the investment, but not more. During the formal investigation procedure, the Norwegian authorities further clarified that in the cash flow calculation of the project, all income would be taken into account. This would include income from other types of state intervention, even if not qualified as State aid. If the State support qualifies as State aid, this would have to be notified to the Authority in order to establish the project's financial needs.

With regard to the possible introduction of a Norwegian green certificates market (72), the contract with the aid beneficiary explicitly contains a repayment clause for the support granted by the Energy Fund in order to avoid support from two sources. The project's support is further paid out in instalments which can be adjusted if the project has lower costs than expected. Upon the closure of the aid contract (i.e. when the last instalment is paid), Enova will make a final assessment and a possible adjustment can be made, either if Enova finds out that the aid recipient provided misleading information or that the project received other state support. On the basis of the foregoing, the Authority considers section D.3.3.1 (54) of the Environmental Guidelines to be fulfilled.

In the Decision to open the formal investigation procedure, the Authority was concerned that the Energy Fund would also support projects which still have a negative net present value, even with the support granted by the Energy Fund. The Norwegian authorities have now stated (see number 9 in section I.9.1 of this Decision) that projects generating a negative EBITDA, under normal operating conditions at the time of investment, are not in a position to receive any aid at all. The Authority's concerns have, consequently, been taken into consideration.

2. Energy saving measures

The Norwegian authorities suggest amending the notified system (see section I.9.2 of this Decision) and intend to apply, for the support of energy saving measures, the ‘extra cost approach’ as stipulated in section D.1.3 (25), section D.1.6 (30), (31), and section D.1.7 (32) of the Environmental Guidelines. The aid intensities of 40 % of eligible costs with the possibility of a top up of 10 percentage points for small and medium-sized enterprises are equally respected.

The Authority notes that this approach is in line with the Environmental Guidelines and thus compatible with the functioning of the EEA Agreement.

3. New energy technologies

The Norwegian authorities confirm that the support under this category is just a subgroup under the investment support in renewable energy production and energy saving measures respectively.

As long as the respective calculation criteria used for the investment support for renewable energy production (section I.9.1) and energy saving measures (see I.9.2 of this Decision) are to be used for this support category, the support under this category is to be assessed according to the same criteria. It will thus be compatible with the Environmental Guidelines.

4. Energy audits

The Authority finds that costs for energy audits and energy analyses can be supported according to section D.1.3 (25) in conjunction with section D.1.6 (31) and section D.1.7 (32) of the Environmental Guidelines. The Authority accepts that energy audits, feasibility studies and energy analyses are often necessary assessments for finding out which energy saving measures merit an investment and which do not (73). As long as directly linked to an energy saving investment, the Authority accepts that costs for energy audits are eligible. Aid granted on this basis cannot exceed a threshold of 40 % of the eligible costs concerned, with the possibility of a top up of 10 percentage points for small and medium-sized undertakings, see section D.1.5 (30) of the Environmental Guidelines.

When it comes to energy audits, which are made in order to put a behavioural or sy