EFTA SURVEILLANCE AUTHORITY DECISION

No 301/14/COL

of 16 July 2014

amending for the ninety-eighth time the procedural and substantive rules in the field of State aid by adopting new Guidelines on State aid for environmental protection and energy 2014-2020 [2015/790]

THE EFTA SURVEILLANCE AUTHORITY (‘the Authority’),

HAVING REGARD to the Agreement on the European Economic Area (‘the EEA Agreement’), 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 (‘Surveillance and Court Agreement’), in particular to Articles 5(2)(b) and 24 thereof and Article 1 in Part I of Protocol 3 thereof,

Whereas:

Under Article 24 of the Surveillance and Court Agreement, the Authority shall give effect to the provisions of the EEA Agreement concerning State aid,

Under Article 5(2)(b) of the Surveillance and Court Agreement, the Authority shall issue notices or guidelines on matters dealt with in the EEA Agreement, if that Agreement or the Surveillance and Court Agreement expressly so provides or if the Authority considers it necessary,

On 9 April 2014, the European Commission adopted ‘Guidelines on State aid for environmental protection and energy 2014-2020’ (1). The Guidelines set out the conditions under which State aid for environmental protection and energy can be declared compatible. They apply from 1 July 2014,

These guidelines are of relevance to the European Economic Area,

Uniform application of the EEA State aid rules is to be ensured throughout the European Economic Area in line with the objective of homogeneity established in Article 1 of the EEA Agreement,

According to point II under the heading ‘GENERAL’ of Annex XV to the EEA Agreement, the Authority, after consultation with the European Commission, is to adopt new Guidelines, corresponding to those adopted by the European Commission,

HAVING consulted the European Commission,

HAVING consulted the EFTA States by letter dated 26 June 2014 on the subject,

HAS ADOPTED THIS DECISION:

Article 1

The substantive rules in the field of State aid shall be amended by introducing new Guidelines on State aid for environmental protection and energy 2014-2020. The new Guidelines are annexed to this Decision and form an integral part of it.

Article 2

Only the English version is authentic.

(1) OJ C 200, 28.6.2014, p. 1.

ANNEX

PART III — HORIZONTAL RULES

Guidelines on State aid for environmental protection and energy 2014-2020 (1)

TABLE OF CONTENTS

INTRODUCTION 3

1. SCOPE AND DEFINITIONS 5

1.1. Scope of application 5

1.2. Aid measures covered by the Guidelines 6

1.3. Definitions 6

2. NOTIFIABLE ENVIRONMENTAL AND ENERGY AID 11

3. COMPATIBILITY ASSESSMENT UNDER ARTICLE 61(3)C OF THE EEA AGREEMENT 11

3.1. Common Assessment Principles 12

3.2. General compatibility provisions 13

3.3. Aid to energy from renewable sources 24

3.4. Energy-efficiency measures, including cogeneration and district heating and district cooling 28

3.5. Aid for resource efficiency and in particular aid to waste management 30

3.6. Aid to Carbon Capture and Storage (CCS) 31

3.7. Aid in the form of reductions in or exemptions from environmental taxes and in the form of reductions in funding support for electricity from renewable sources 32

3.8. Aid to energy infrastructure 35

3.9. Aid for generation adequacy 37

3.10. Aid in the form of tradable permit schemes 40

3.11. Aid for the relocation of undertakings 41

4. EVALUATION 42

5. APPLICATION 42

6. REPORTING AND MONITORING 43

7. REVISION 43

INTRODUCTION

(1) In order to prevent State aid from distorting competition in the internal market and affecting trade between Contracting Parties in a way which is contrary to the common interest, Article 61(1) of the Agreement on the European Economic Area (‘the EEA Agreement’), lays down the principle that State aid is prohibited. In certain cases, however, State aid may be compatible with the functioning of the EEA Agreement under Articles 61(2) and (3) of the EEA Agreement.

(2) On the basis of Article 61(3)(c) of the EEA Agreement, the EFTA Surveillance Authority (‘the Authority’) may consider compatible with the functioning of the EEA Agreement State aid to facilitate the development of certain economic activities within the EEA, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(3) Environmental policy objectives should be taken into account when assessing the compatibility of State aid in the environmental sector, in particular with a view to promoting sustainable development, cf. Articles 73-75 and the ninth recital of the Preamble of the EEA Agreement. Accordingly, competition policy and environmental policy are not mutually antagonistic, but the requirements of environmental protection need to be integrated into the definition and implementation of competition policy, in particular so as to promote sustainable development.

(4) The European Commission (‘the Commission’) has adopted new Guidelines on State aid for environmental protection and energy 2014-2020 (‘the Commission Guidelines’). The Commission Guidelines are an instrument to implement a number of policy decisions taken by the European Union, including the Europe 2020 strategy (2), the climate and energy package (3), the flagship initiative ‘Resource efficient Europe’ (4), the Resource Efficiency Roadmap (5) as well as the communication ‘A policy Framework for climate and energy in the period from 2020 to 2030’ (6) (the 2030 Framework) setting out the energy and climate objectives to be met by 2030. There have also been several Council conclusions call for a phasing-out of environmentally harmful subsidies (7). The Commission Guidelines thus consider negative impacts of environmentally harmful subsidies, while taking into account the need to address trade-offs between different areas and policies as recognised by these policy instruments. For instance, aid for the extraction of fossil fuels is not included in these Guidelines.

(5) The Authority notes that these policy instruments, as well as a number of legislative provisions these Guidelines refer to, may not be incorporated into — or fall outside the scope of — the EEA Agreement (8). Nonetheless, with a view to ensuring a uniform application of State aid provisions and equal conditions of competition throughout the EEA, the Authority will in general apply the same points of reference as that of the Commission Guidelines when assessing the compatibility of environmental aid with the functioning of the EEA Agreement, while taking into account the particular legislative situation of the EFTA States. This implies that the present Guidelines make reference to relevant European Union legislation and policy documents where such have been adopted. The Authority emphasises that such references to European Union legislation do not imply that the EFTA States are obliged to comply with this legislation when such legislation has not been implemented in the EEA Agreement (9). These texts serve only as a basis for assessing the compatibility of State aid measures with the functioning of the EEA Agreement in terms of Article 61(3) of the EEA Agreement

(6) In these Guidelines, the Authority sets out the conditions under which aid for energy and environment may be considered compatible with the functioning of the EEA Agreement under Article 61(3)(c) of the EEA Agreement.

(7) In the communication on State aid modernisation (10), the Commission announced three objectives pursued through the modernisation of State aid control: (a) to foster sustainable, smart and inclusive growth in a competitive internal market; (b) to focus Commission ex ante scrutiny on cases with the biggest impact on the internal market while strengthening the cooperation with Member States in State aid enforcement; (c) to streamline the rules and provide for faster decisions.

(8) In particular, the communication called for a common approach in the revision of the different Guidelines and frameworks based on strengthening the internal market, promoting more effectiveness in public spending through a better contribution of State aid to the objectives of common interest, greater scrutiny on the incentive effect, on limiting the aid to the minimum necessary, and on avoiding the potential negative effects of the aid on competition and trade. These principles have also been implemented by the Authority. The compatibility conditions set out in these Guidelines are based on these common assessment principles.

1. Scope and definitions

1.1. Scope of application

(9) These Guidelines apply to State aid granted for environmental protection or energy objectives in all sectors governed by the EEA Agreement in so far as measures are covered by Section 1.2. They therefore also apply to those sectors that are subject to specific EEA rules on State aid (e.g. transport (11) and coal) unless such specific rules provide otherwise.

(10) These Guidelines do not apply to: (a) the design and manufacture of environmentally friendly products, machines or means of transport with a view to operating with fewer natural resources and action taken within plants or other production units with a view to improving safety or hygiene (12); (b) the financing of environmental protection measures relating to air, road, railway, inland waterway and maritime transport infrastructure; (c) stranded costs as defined in the Guidelines relating to the methodology for analysing State aid linked to stranded costs (13); (d) State aid for research, development and innovation (14) which is subject to the rules set out in the Guidelines for State aid for research and development and innovation (15); (e) State aid to biodiversity measures (16).

(11) Environmental and energy aid may not be awarded to firms in difficulty as defined for the purposes of these Guidelines by the applicable Guidelines on State aid for rescuing and restructuring firms in difficulty (17) as amended or replaced.

(12) When assessing aid in favour of an undertaking which is subject to an outstanding recovery order following a previous Authority decision declaring an aid illegal and incompatible with the functioning of the EEA Agreement, the Authority will take account of the amount of aid still to be recovered (18).

1.2. Aid measures covered by the Guidelines

(13) The Authority has identified a number of environmental and energy measures for which State aid under certain conditions may be compatible with the functioning of the EEA Agreement under Article 61(3)(c) of the EEA Agreement: (a) aid for going beyond Union standards or increasing the level of environmental protection in the absence of Union standards (including aid for the acquisition of new transport vehicles); (b) aid for early adaptation to future Union standards; (c) aid for environmental studies; (d) aid for the remediation of contaminated sites; (e) aid for energy from renewable sources; (f) aid for energy-efficiency measures, including cogeneration and district heating and district cooling; (g) aid for resource efficiency and, in particular, for waste management; (h) aid for CO2 capture, transport and storage including individual elements of the Carbon Capture Storage (‘CCS’) chain; (i) aid in the form of reductions in or exemptions from environmental taxes; (j) aid in the form of reductions in funding support for electricity from renewable sources; (k) aid for energy infrastructure; (l) aid for generation adequacy measures; (m) aid in the form of tradable permits; (n) aid for the relocation of undertakings.

1.3. Definitions

(14) For the purposes of these Guidelines the following definitions apply: (1) ‘environmental protection’ means any action designed to remedy or prevent damage to physical surroundings or natural resources by a beneficiary's own activities, to reduce the risk of such damage or to lead to more efficient use of natural resources, including energy-saving measures and the use of renewable sources of energy; (2) ‘energy-efficiency’ means an amount of saved energy determined by measuring and/or estimating consumption before and after implementation of an energy-efficiency improvement measure, whilst ensuring normalisation for external conditions that affect energy consumption; (3) ‘Union standard’ means (a) a mandatory Union standard setting the levels to be attained in environmental terms by individual undertakings (19), or (b) the obligation under Directive 2010/75/EU of the European Parliament and of the Council (20) to use the best available techniques (‘BAT’) and ensure that emission levels of pollutants are not higher than they would be when applying BAT; for the cases where emission levels associated with the BAT have been defined in implementing acts adopted under Directive 2010/75/EU, those levels will be applicable for the purpose of these Guidelines; where those levels are expressed as a range, the limit where the BAT is first achieved will be applicable; (4) ‘eco-innovation’ means all forms of innovation activities resulting in or aimed at significantly improving environmental protection, including new production processes, new products or services, and new management and business methods, the use or implementation of which is likely to prevent or substantially reduce the risks for the environment, pollution and other negative impacts resulting from the use of resources, throughout the life cycle of related activities. For the purposes of this definition, the following are not considered innovations: (i) minor changes or improvements; (ii) an increase in production or service capabilities through the addition of manufacturing or logistical systems which are very similar to those already in use; (iii) changes in business practices, workplace organisation or external relations that are based on organisational methods already in use in the undertaking; (iv) changes in management strategy; (v) mergers and acquisitions; (vi) ceasing to use a process; vii) simple capital replacement or extension; (viii) changes resulting purely from changes in factor prices, customisation, regular seasonal and other cyclical changes; (ix) trading of new or significantly improved products; (5) ‘renewable energy sources’ means the following renewable non-fossil energy sources: wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases; (6) ‘biomass’ means the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries including fisheries and aquaculture, as well as biogases and the biodegradable fraction of industrial and municipal waste; (7) ‘biofuel’ means liquid or gaseous fuel for transport produced from biomass; (8) ‘bioliquid’ means liquid fuel for energy purposes other than for transport, including electricity, and heating and cooling, produced from biomass; (9) ‘sustainable biofuel’ means a biofuel fulfilling the sustainability criteria set out in Article 17 of Directive 2009/28/EC on the promotion of the use of energy from renewable sources and any amendment thereof (21); (10) ‘cooperation mechanism’ means a mechanism which fulfils the conditions of Article 6, 7 or 8 of Directive 2009/28/EC; (11) ‘energy from renewable energy sources’ means energy produced by plants using only renewable energy sources, as well as the share in terms of calorific value of energy produced from renewable energy sources in hybrid plants which also use conventional energy sources and it includes renewable electricity used for filling storage systems, but excludes electricity produced as a result of storage systems; (12) ‘cogeneration’ or combined heat and power (CHP) means the simultaneous generation in one process of thermal energy and electrical and/or mechanical energy; (13) ‘high-efficiency cogeneration’ means cogeneration which satisfies the definition of high-efficiency cogeneration as set out in Article 2(34) of Directive 2012/27/EU of the European Parliament and of the Council (22); (14) ‘energy-efficient district heating and cooling’ means district heating and cooling which satisfies the definition of efficient district heating and cooling system as set out in Article 2(41) and (42) of Directive 2012/27/EU. The definition includes the heating/cooling production plants and the network (including related facilities) necessary to distribute the heat/cooling from the production units to the customer premises; (15) ‘environmental tax’ means a tax with a specific tax base that has a clear negative effect on the environment or which seeks to tax certain activities, goods or services so that the environmental costs may be included in their price and/or so that producers and consumers are oriented towards activities which better respect the environment; (16) ‘Union minimum tax level’ means the minimum level of taxation provided for in Union legislation; for energy products and electricity it means the minimum level of taxation laid down in Annex I to Directive 2003/96/EC; (17) ‘small and medium-sized enterprise’ (‘SME’), means an undertaking that fulfils the conditions laid down in the Commission recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (23); (18) ‘large enterprise’ and ‘large undertaking’ mean enterprises which do not fall within the definition of SME; (19) ‘individual aid’ means aid granted either on the basis of a scheme or on an ad hoc basis; (20) ‘aid intensity’ means the gross aid amount expressed as a percentage of the eligible costs; all figures used must be taken before any deduction of tax or other charge, where aid is awarded in a form other than a grant, the aid amount must be the grant equivalent of the aid, aid payable in several instalments must be calculated at its value at the moment of granting; the interest rate to be used for discounting purposes and for calculating the aid amount in a soft loan must be the reference rate applicable at the time of grant; the aid intensity is calculated per beneficiary; (21) ‘operating benefit’ means, for the purposes of calculating eligible costs, in particular cost savings or additional ancillary production directly linked to the extra investment for environmental protection and, where applicable, benefits accruing from other support measures whether or not they constitute State aid, including operating aid granted for the same eligible costs, feed-in tariffs or other support measures; (22) ‘operating cost’ means, for the purposes of calculating eligible costs, in particular additional production costs such as maintenance costs flowing from the extra investment for environmental protection; (23) ‘tangible asset’ means, for the purposes of calculating eligible costs, investments in land which are strictly necessary in order to meet environmental objectives, investments in buildings, plant and equipment intended to reduce or eliminate pollution and nuisances, and investments to adapt production methods with a view to protecting the environment; (24) ‘intangible asset’ means, for the purposes of calculating eligible costs, spending on technology transfer through the acquisition of operating licenses or of patented and non-patented know-how where such spending complies with the following conditions: (a) it must be regarded as a depreciable asset; (b) it must be purchased on market terms, from an undertaking in which the acquirer has no power of direct or indirect control; (c) it must be included in the assets of the undertaking, and remain in the establishment of the recipient of the aid and be used there for at least five years; this condition does not apply if the intangible asset is technically out of date; if it is sold during those five years, the yield from the sale must be deducted from the eligible costs and all or part of the amount of aid must, where appropriate, be reimbursed; (25) ‘internalise the costs’ means the principle that all costs associated with the protection of the environment should be included in the production costs of the polluting undertaking; (26) ‘polluter’ means someone who directly or indirectly damages the environment or who creates conditions leading to such damage (24); (27) ‘pollution’ means the damage caused by the polluter by directly or indirectly damaging the environment, or by creating conditions leading to such damage to physical surroundings or natural resources; (28) ‘the polluter pays principle’ or ‘PPP’ means that the costs of measures to deal with pollution should be borne by the polluter who causes the pollution; (29) ‘contaminated site’ means a site where there is a confirmed presence, caused by man, of hazardous substances of such a level that they pose a significant risk to human health or the environment taking into account current and approved future use of the land; (30) ‘ad hoc aid’ means aid not granted on the basis of an aid scheme; (31) ‘energy infrastructure’ means any physical equipment or facility which is located within the EEA or linking the EEA to one or more third countries and falling under the following categories: (a) concerning electricity: (i) infrastructure for transmission, as defined in Article 2(3) by Directive 2009/72/EC (25); (ii) infrastructure for distribution, as defined in Article 2(5) by Directive 2009/72/EC; (iii) electricity storage, defined as facilities used for storing electricity on a permanent or temporary basis in above-ground or underground infrastructure or geological sites, provided they are directly connected to high-voltage transmission lines designed for a voltage of 110 kV or more; (iv) any equipment or installation essential for the systems defined in points (i) to (iii) to operate safely, securely and efficiently, including protection, monitoring and control systems at all voltage levels and substations; and (v) smart grids, defined as any equipment, line, cable or installation, both at transmission and low and medium voltage distribution level, aiming at two-way digital communication, real-time or close to real-time, interactive and intelligent monitoring and management of electricity generation, transmission, distribution and consumption within an electricity network in view of developing a network efficiently integrating the behaviour and actions of all users connected to it — generators, consumers and those that do both — in order to ensure an economically efficient, sustainable electricity system with low losses and high quality and security of supply and safety; (b) concerning gas: (i) transmission and distribution pipelines for the transport of natural gas and bio gas that form part of a network, excluding high-pressure pipelines used for upstream distribution of natural gas; (ii) underground storage facilities connected to the high-pressure gas pipelines mentioned in point (i); (iii) reception, storage and regasification or decompression facilities for liquefied natural gas (‘LNG’) or compressed natural gas (‘CNG’); and (iv) any equipment or installation essential for the system to operate safely, securely and efficiently or to enable bi- directional capacity, including compressor stations; (c) concerning oil: (i) pipelines used to transport crude oil; (ii) pumping stations and storage facilities necessary for the operation of crude oil pipelines; and (iii) any equipment or installation essential for the system in question to operate properly, securely and efficiently, including protection, monitoring and control systems and reverse-flow devices; (d) concerning CO2: networks of pipelines, including associated booster stations, for the transport of CO2 to storage sites, with the aim to inject the CO2 in suitable underground geological formations for permanent storage; (32) ‘funding gap’ means the difference between the positive and negative cash flows over the lifetime of the investment, discounted to their current value (typically using the cost of capital); (33) ‘Carbon Capture and Storage’ or ‘CCS’ means a set of technologies that captures the carbon dioxide (CO2) emitted from industrial plants based on fossil fuels or biomass, including power plants, transports it to a suitable storage site and injects the CO2 in suitable underground geological formations for the purpose of permanent storage of CO2; (34) ‘generation adequacy’ means a level of generated capacity which is deemed to be adequate to meet demand levels in the Contracting Party in any given period, based on the use of a conventional statistical indicator used by organisations which are recognised as performing an essential role in the creation of a single market in electricity, for example ENTSO-E; (35) ‘generator’ means an undertaking which produces electrical power for commercial purposes; (36) ‘generation adequacy measure’ means a mechanism which has the aim of ensuring that certain generation adequacy levels are met at national level; (37) ‘balancing responsibility’ means responsibility for deviations between generation, consumption and commercial transactions of a BRP within a given imbalance settlement period; (38) ‘standard balancing responsibilities’ mean non-discriminatory balancing responsibilities across technologies which do not exempt any generator from those responsibilities; (39) ‘balance responsible party (BRP)’ means a market participant or its chosen representative responsible for its imbalances; (40) ‘imbalances’ means deviations between generation, consumption and commercial transactions of a BRP within a given imbalance settlement period; (41) ‘imbalance Settlement’ means a financial settlement mechanism aiming at recovering the costs of balancing applicable to imbalances of BRPs; (42) ‘imbalance Settlement Period’ means time units used for computing BRPs' imbalances; (43) ‘competitive bidding process’ means a non-discriminatory bidding process that provides for the participation of a sufficient number of undertakings and where the aid is granted on the basis of either the initial bid submitted by the bidder or a clearing price. In addition, the budget or volume related to the bidding process is a binding constraint leading to a situation where not all bidders can receive aid; (44) ‘start of works’ means either the start of construction works on the investment or the first firm commitment to order equipment or other commitment that makes the investment irreversible, whichever is the first in time. Buying of land and preparatory works such as obtaining permits and conducting preliminary feasibility studies are not considered as start of works. For take-overs, ‘start of works’ means the moment of acquiring the assets directly linked to the acquired establishment; (45) ‘demonstration project’ means a project demonstrating a technology as a first of its kind in the EEA and representing a significant innovation that goes well beyond the state of the art; (46) ‘assisted areas’ means areas designated in an approved regional aid map for the period 1 July 2014 to 31 December 2020 in application of Articles 61(3)(a) and (c) of the EEA Agreement; (47) ‘regional aid map’ means the list of areas designated by a Contracting Party in accordance with the conditions laid down in the Guidelines on regional State aid for 2014-2020 (26).

2. Notifiable environmental and energy aid

(15) Individual aid granted on the basis of an aid scheme remains subject to the notification obligation pursuant to Article 62(3) of the EEA Agreement, if the aid exceeds the following notification thresholds (27) and is not granted on the basis of a competitive bidding process: (a) investment aid: where the aid amount exceeds EUR 15 million for one undertaking; (b) operating aid for the production of renewable electricity and/or combined production of renewable heat: where the aid is granted to renewable electricity installations at sites where the resulting renewable electricity generation capacity per site exceeds 250 megawatts (‘MW’); (c) operating aid for the production of biofuel: where the aid is granted to a biofuel production installation at sites where the resulting production exceeds 150 000 tonnes (‘t’) per year; (d) operating aid for cogeneration: where aid is granted to cogeneration installation with the resulting cogeneration electricity capacity exceeding 300 MW; Aid for the production of heat from cogeneration will be assessed in the context of notification based on electricity capacity; (e) aid for energy infrastructure: where the aid amount exceeds EUR 50 million for one undertaking, per investment project; (f) aid for Carbon Capture and Storage: where the aid amount exceeds EUR 50 million per investment project; (g) aid in the form of a generation adequacy measure: where the aid amount exceeds EUR 15 million per project per undertaking.

(16) Tax exemptions, reductions from environmental taxes and exemptions from the financing of energy from renewable sources falling under Section 3.7 will not be subject to the conditions for individually notified aid. However, aid granted in the form of fiscal aid not covered by Section 3.7 of these Guidelines will be subject to an individual assessment if the thresholds in that Section are exceeded. This also applies irrespective of whether the individual beneficiary benefits at the same time from a tax exemption or reduction falling under Section 3.7.

(17) These Guidelines provide the compatibility criteria for aid schemes and individual aid for environmental protection and energy objectives which are subject to the notification obligation pursuant to Article 62(3) of the EEA Agreement.

3. Compatibility assessment under Article 61(3)c of the EEA Agreement

(18) State aid for environmental protection and energy objectives will be considered compatible with the functioning of the EEA Agreement within the meaning of Article 61(3)(c) of the EEA Agreement if, on the basis of the common assessment principles set out in this Chapter, it leads to an increased contribution to the EEA environmental or energy objectives without adversely affecting trading conditions to an extent contrary to the common interest. The specific handicaps of assisted areas will be taken into account.

(19) This Chapter clarifies how the Authority will apply the common assessment principles set out in Section 3.1 when assessing aid measures falling within the scope of these Guidelines and, where applicable, lays down specific conditions for individual aid (either provided on the basis of a scheme or ad hoc).

(20) Section 3.2 sets out the general compatibility conditions applicable to all aid measures falling within the scope of these Guidelines, unless the more specific sections of Chapter 3 specify or amend these general compatibility conditions. Accordingly, Section 3.2 applies in particular to the following measures which are not part of the more specific sections of Chapter 3: (a) aid for environmental studies; (b) aid for the remediation of contaminated sites; (c) aid for undertakings going beyond Union standards or increasing environmental protection in the absence of Union standards; (d) aid for the early adaptation to future Union standards.

3.1. Common Assessment Principles

(21) To assess whether a notified aid measure can be considered compatible with the functioning of the EEA Agreement, the Authority generally analyses whether the design of the aid measure ensures that the positive impact of the aid towards an objective of common interest exceeds its potential negative effects on trade and competition.

(22) The communication on State aid modernisation of 8 May 2012 (28) called for the identification and definition of common principles applicable to the assessment of compatibility of all aid measures carried out by the Commission. The Authority also follows this approach. For that purpose, the Authority will consider a State aid measure compatible with the functioning of the EEA Agreement only if it satisfies each of the following criteria: (a) contribution to a well-defined objective of common interest: a State aid measure aims at an objective of common interest in accordance with Article 61(3) of the EEA Agreement (Section 3.2.1); (b) need for State intervention: the State aid measure is targeted towards a situation where aid can bring about a material improvement that the market alone cannot deliver, for example by remedying a well-defined market failure (Section 3.2.2); (c) appropriateness of the aid measure: the proposed aid measure is an appropriate policy instrument to address the objective of common interest (Section 3.2.3); (d) incentive effect: the aid changes the behaviour of the undertaking(s) concerned in such a way that it engages in additional activity which it would not carry out without the aid or which it would carry out in a restricted or different manner (Section 3.2.4); (e) proportionality of the aid (aid kept to the minimum): the aid amount is limited to the minimum needed to incentivise the additional investment or activity in the area concerned (Section 3.2.5); (f) avoidance of undue negative effects on competition and trade between Contracting Parties: the negative effects of aid are sufficiently limited, so that the overall balance of the measure is positive (Section 3.2.6); (g) transparency of aid: Contracting Parties, the Authority, economic operators, and the public, have easy access to all relevant acts and to pertinent information about the aid awarded thereunder (Section 3.2.7).

(23) Certain categories of schemes may further be made subject to a requirement of ex post evaluation as described in Chapter 4. In such cases, the Authority may limit the duration of those schemes (normally to four years or less) with a possibility to re-notify their prolongation afterwards.

(24) Moreover, if a State aid measure or the conditions attached to it, including its financing method when it forms an integral part of it, entail a non-severable violation of EEA law, the aid cannot be declared compatible with the functioning of the EEA Agreement (29). For example, in the field of energy, any levy that has the aim of financing a State aid measure needs to comply in particular with Articles 10 and 14 of the EEA Agreement (30).

3.2. General compatibility provisions

3.2.1. Contribution to an objective of common interest

3.2.1.1. General conditions

(25) The general objective of environmental aid is to increase the level of environmental protection compared to the level that would be achieved in the absence of the aid. The Europe 2020 strategy in particular set targets and objectives for sustainable growth to support the shift towards a resource-efficient, competitive low-carbon economy. A low-carbon economy with a significant share of variable energy from renewable sources requires an adjustment of the energy system and in particular considerable investments in energy networks (31). The primary objective of aid in the energy sector is to ensure a competitive, sustainable and secure energy system in a well-functioning European energy market (32).

(26) Contracting Parties intending to grant environmental or energy aid will have to define precisely the objective pursued and explain what is the expected contribution of the measure towards this objective.

(27) Environmental studies can contribute to achieving a common objective when they are directly linked to investments eligible under these Guidelines, also if following the findings of a preparatory study, the investment under investigation is not undertaken.

3.2.1.2. Additional conditions for individually notifiable aid

(28) To demonstrate the contribution of an individually notifiable aid towards an increased level of environmental protection, the Contracting Party may use, as much as possible in quantifiable terms, a variety of indicators, in particular the ones mentioned below: (a) abatement technologies: the amount of greenhouse gases or pollutants that are permanently not emitted in the atmosphere (resulting in reduced input from fossil fuels); (b) existing Union standards: the absolute amount and relative size of the increase in the level of environmental protection over and above the standard, that is to say a reduction of pollution that would not be achieved by the standard in the absence of any State aid; (c) future Union standards: the increase in the rate at which future standards are implemented, that is to say a reduction of pollution starting at an earlier date.

3.2.2. Need for State intervention

3.2.2.1. General conditions

(29) Whereas it is generally accepted that competitive markets tend to bring about efficient results in terms of prices, output and use of resources, in the presence of market failures (33), State intervention may improve the efficient functioning of markets. Indeed State aid measures can under certain conditions, correct market failures and thereby contribute towards achieving the common objective to the extent that the market on its own fails to deliver an efficient outcome. In order to assess whether State aid is effective to achieve the objective, it is necessary first to diagnose and define the problem that needs to be addressed. State aid should be targeted towards situations where aid can bring a material improvement that the market cannot alone deliver.

(30) To establish Guidelines ensuring that aid measures achieve the common objective, Contracting Parties should identify the market failures hampering an increased level of environmental protection or a well-functioning secure, affordable and sustainable internal energy market. Market failures related to environmental and energy objectives may be different or similar, but can prevent the optimal outcome and can lead to an inefficient outcome for the following reasons: (a) Negative externalities: they are most common for environmental aid measures and arise when pollution is not adequately priced, that is to say, the firm in question does not face the full cost of pollution. In this case, undertakings acting in their own interest may have insufficient incentives to take the negative externalities arising from production into account either when they decide on a particular production technology or when they decide on the production level. In other words, the production costs that are borne by the undertaking are lower than the costs borne by society. Therefore undertakings typically have insufficient incentive to reduce their level of pollution or to take individual measures to protect the environment. (b) Positive externalities: the fact that part of the benefit from an investment will accrue to market participants other than the investor, will lead undertakings to underinvest. Positive externalities may occur for instance in case of investments in eco-innovation (34), system stability, new and innovative renewable technologies and innovative demand-response measures or in case of energy infrastructures or generation adequacy measures that benefit many Contracting Parties (or a wider number of consumers). (c) Asymmetric information: this typically arises in markets where there is a discrepancy between the information available to one side of the market and the information available to the other side of the market. This could for instance occur where external financial investors have a lack of information about the likely returns and risks of the project. It may also come up in cross-border infrastructure collaboration where one party has an information disadvantage compared to the other party. Although risk or uncertainty do not in themselves lead to the presence of a market failure, the problem of asymmetric information is linked to the degree of such risk and uncertainty. Both tend to be higher for environmental investments with a typically longer amortisation period. It might reinforce a focus on a short-term horizon that could be aggravated by financing conditions for such investments in particular for SMEs. (d) Coordination failures: they may prevent the development of a project or its effective design due to diverging interests and incentives among investors, so called split incentives, the costs of contracting, uncertainty about the collaborative outcome and network effects, for example e.g. uninterrupted supply of electricity. They can arise for example in the relationship between a building owner and a tenant in respect of applying energy-efficient solutions. Coordination problems may be further exacerbated by information problems, in particular those related to asymmetric information. Coordination problems may also stem from the need to reach a certain critical mass before it is commercially attractive to start a project which may be a particularly relevant aspect in (cross-border) infrastructure projects.

(31) The mere existence of market failures in a certain context is not sufficient to justify State intervention. In particular, other policies and measures may already be in place to address some of the market failures identified. Examples include sectorial regulation, mandatory pollution standards, pricing mechanisms such as the Emissions Trading System (‘ETS’) and carbon taxes. Additional measures including State aid may only be directed at the residual market failure, that is to say the market failure that remains unaddressed by such other policies and measures. It is also important to show how State aid reinforces other policies and measures in place that aim at remedying the same market failure. Therefore, the case for the necessity of State aid is weaker if it counteracts other policies targeted at the same market failure.

(32) The Authority will consider that aid is needed if the Contracting Party demonstrates that the aid effectively targets a (residual) market failure which is not addressed.

3.2.2.2. Additional conditions for individually notifiable aid

(33) Whereas market failures may exist in general and aid measures may be, in principle, well-designed to target an efficient market outcome, not all undertakings concerned may be confronted with these market failures to the same extent. Consequently, for notifiable individual aid, the Authority will assess the specific need for aid in the case at hand. It is for the Contracting Party to demonstrate that there is a market failure which is still not addressed with regard to the specific activity supported by the aid and whether the aid is effectively targeted to address that market failure.

(34) Depending on the specific market failure addressed, the Authority will take into account the following factors: (a) whether other policy measures already sufficiently address the market failure, in particular the existence of environmental or other Union standards, the ETS or environmental taxes; (b) whether State intervention is needed, taking into account, the cost of implementation of national standards for the aid beneficiary in the absence of aid compared to the costs, or absence thereof, of implementation of those standards for the main competitors of the aid beneficiary; (c) in the case of coordination failures, the number of undertakings required to collaborate, diverging interests between collaborating parties and practical problems to coordinate collaboration, such as linguistic issues, sensitivity of information and non-harmonised standards.

3.2.3. Appropriateness of the aid

(35) The proposed aid measure must be an appropriate instrument to address the policy objective concerned. An aid measure will not be considered compatible with the functioning of the EEA Agreement if the same positive contribution to the common objective is achievable through other less distortive policy instruments or other less distortive types of aid instruments.

3.2.3.1. Appropriateness among alternative policy instruments

(36) State aid is not the only policy instrument available to Contracting Parties to promote increased levels of environmental protection or to achieve a well-functioning secure, affordable and sustainable European energy market. It is important to keep in mind that there may be other, better placed instruments to achieve those objectives. Regulation and market-based instruments are the most important tools to achieve environmental and energy objectives. Soft instruments, such as voluntary eco-labels, and the diffusion of environmentally friendly technologies may also play an important role in achieving a higher level of environmental protection.

(37) Different measures to remedy the same market failure may counteract each other. This is the case where an efficient, market-based mechanism has been put in place to deal specifically with the problem of externalities. An additional support measure to address the same market failure risks to undermine the efficiency of the market-based mechanism.

(38) Different measures to remedy different market failures may also counteract each other. A measure addressing a generation adequacy problem needs to be balanced with the environmental objective of phasing out environmentally or economically harmful subsidies, including for fossil fuels. Similarly, a measure to reduce greenhouse gas emissions can increase the supply of variable power which might negatively affect generation adequacy concerns.

(39) Respect for the ‘polluter pays principle’ (‘PPP’) through environmental legislation ensures in principle that the market failure linked to negative externalities will be rectified. Therefore, State aid is not an appropriate instrument and cannot be granted in so far as the beneficiary of the aid could be held liable for the pollution under existing EEA or national law (35).

3.2.3.2. Appropriateness among different aid instruments

(40) Environmental and energy aid can be awarded in various forms. The Contracting Party should however ensure that the aid is awarded in the form that is likely to generate the least distortions of trade and competition. In that respect, the Contracting Party is required to demonstrate why other potentially less distortive forms of aid such as repayable advances as compared to direct grants or tax credits as compared to tax reductions or forms of aid that are based on financial instruments such as debt or equity instruments (for example, low-interest loans or interest rebates, State guarantees, or an alternative provision of capital on favourable terms) are less appropriate.

(41) The choice of the aid instrument should be coherent with the market failure that the aid measure aims at addressing. In particular where the actual revenues are uncertain, for instance in case of energy saving measures, a repayable advance may constitute the appropriate instrument. For aid schemes implementing the objectives and priorities of operational programmes, the financing instrument chosen in this programme is in principle presumed to be an appropriate instrument.

(42) For operating aid, the Contracting Party must demonstrate that the aid is appropriate to achieve the objective of the scheme to which the aid is targeted. To demonstrate that the aid is appropriate, the Contracting Party may calculate the aid amount ex ante as a fixed sum covering the expected additional costs over a given period, to incentivise undertakings to minimise their costs and develop their business in a more efficient manner over time (36).

(43) For the purpose of demonstrating the appropriateness of schemes, the Contracting Party can also rely on the results of past evaluations as described in Chapter 4.

3.2.4. Incentive effect

3.2.4.1. General conditions

(44) Environmental and energy aid can only be found compatible with the functioning of the EEA Agreement if it has an incentive effect. An incentive effect occurs when the aid induces the beneficiary to change its behaviour to increase the level of environmental protection or to improve the functioning of a secure, affordable and sustainable energy market, a change in behaviour which it would not undertake without the aid. The aid must not subsidise the costs of an activity that an undertaking would anyhow incur and must not compensate for the normal business risk of an economic activity.

(45) The Authority considers that aid does not present an incentive effect for the beneficiary in all cases where work on the project had already started prior to the aid application by the beneficiary to the national authorities. In such cases, where the beneficiary starts implementing a project before applying for aid, any aid granted in respect of that project will not be considered compatible with the functioning of the EEA Agreement.

(46) Contracting Parties must introduce and use an application form for aid. The application form includes at least the applicant's name and the size of the undertaking, a description of the project, including its location and start and end dates, the amount of aid needed to carry it out and the eligible costs. In the application form, beneficiaries must describe the situation without the aid, i.e., a situation that is referred to as the counterfactual scenario, or the alternative scenario or project. In addition, large undertakings must submit documentary evidence in support of the counterfactual scenario described in the application form.

(47) When receiving an application form, the granting authority must carry out a credibility check of the counterfactual scenario and confirm that the aid has the required incentive effect. A counterfactual scenario is credible if it is genuine and relates to the decision-making factors prevalent at the time of the decision by the beneficiary regarding the investment. It is not required to meet the conditions of paragraphs 45 and 46 where the aid is awarded on the basis of a competitive bidding process.

Incentive effect and adaptation to Union standards

(48) The Authority considers that aid granted to adapt to future Union standards has in principle an incentive effect, including when the standard has already been adopted but is not yet in force. However, in the latter case, aid has an incentive effect if it incentivises the realisation of the investment long before the standard enters into force. Aid granted for the adaptation to Union standards already adopted but not yet in force will be considered to have incentive effect if the investment is implemented and finalised at least one year before the Union standards enter into force.

(49) As a further exception to paragraph 48, an incentive effect may exist if aid is granted for: (a) the acquisition of new transport vehicles for road, railway, inland waterway and maritime transport complying with adopted Union standards, provided that the acquisition occurs before those standards enter into force and that, once mandatory, they do not apply to vehicles already purchased; or (b) retrofitting operations of existing transport vehicles for road, railway, inland waterway and maritime transport, provided that the Union standards were not yet in force at the date of entry into operation of those vehicles and that, once mandatory, they do not apply to those vehicles.

(50) The Authority considers that aid in support of investments that enable the beneficiary to take measures that go beyond the applicable Union standards contributes positively to the environmental or energy objective. In order not to discourage Contracting Parties from setting mandatory national standards which are more stringent than the corresponding Union standards, such positive contribution exists irrespective of the presence of mandatory national standards that are more stringent than the Union standard. This includes for instance measures to improve the water and air quality beyond mandatory Union standards. Such positive contribution also exists in the presence of a mandatory national standard adopted in the absence of Union standards.

Incentive effect and energy audits

(51) Under the Directive 2012/27/EU (‘the Energy Efficiency Directive’ or ‘the EED’), large enterprises have to carry out energy audits every four years. Therefore aid for energy audits for large enterprises can have an incentive effect only to the extent that the aid does not compensate an energy audit required by the EED. As the same obligation is not imposed on SMEs, State aid granted to SMEs for carrying out the energy audit can have an incentive effect.

(52) The previous paragraph is without prejudice to the assessment of the incentive effect of State aid for energy-efficiency measures prescribed by or carried out as a result of the energy audit or those resulting from other tools, such as energy management systems and environmental management systems.

3.2.4.2. Additional conditions for individually notifiable aid

(53) For measures subject to individual notification, the Contracting Parties must fully demonstrate to the Authority the incentive effect of the aid. They need to provide clear evidence that the aid has an effective impact on the investment decision in a way that it changes the behaviour of the beneficiary leading the beneficiary to increase the level of environmental protection or leading to a better functioning of the European energy market. To allow a comprehensive assessment, the Contracting Party must provide not only information concerning the aided project but also a comprehensive description of the counterfactual scenario, in which none of the Contracting Parties award aid to the beneficiary.

(54) The advantages of new investments or production methods are usually not limited to their direct environmental effects or effects on the energy market. Such advantages may in particular be production advantages (37) while the risks relate particularly to the uncertainty about whether the investment will be as productive as expected.

(55) The incentive effect is, in principle, to be identified through the counterfactual scenario analysis, comparing the levels of intended activity with aid and without aid. Essentially, that amounts to checking the profitability of the project in the absence of the aid, to assess whether it indeed falls short of the profit obtained by the company by implementing the alternative project.

(56) In that context, the level of profitability can be evaluated by reference to methodologies which are standard practice in the particular industry concerned, and which may include methods to evaluate the net present value (‘NPV’) of the project (38), the internal rate of return (‘IRR’) (39) or the average return on capital employed (‘ROCE’). The profitability of the project is to be compared with normal rates of return applied by the company in other investment projects of a similar kind. Where those rates are not available, the profitability of the project is to be compared with the cost of capital of the company as a whole or with the rates of return commonly observed in the industry concerned.

(57) Where no specific counterfactual scenario is known, the incentive effect can be assumed when there is a funding gap, that is to say when the investment costs exceed the NPV of the expected operating profits of the investment on the basis of an ex ante business plan.

(58) The Contracting Parties are, in particular, invited to rely on contemporary, relevant and credible evidence including, for example official board documents, credit committee reports, risk assessments financial reports, internal business plans, expert opinions and other studies related to the investment project under assessment. Documents containing information on demand forecasts, cost forecasts, financial forecasts, documents that are submitted to an investment committee and that elaborate on various investment scenarios, or documents provided to the financial institutions could help to verify the incentive effect.

(59) In order to ensure that the incentive effect is established on an objective basis, the Authority may in its assessment of the incentive effect compare company-specific data with data concerning the industry in which the company is active, known as benchmarking. In particular, the Contracting Party should where possible provide industry-specific data demonstrating that the company's counterfactual scenario, its required level of profitability and its expected cash-flows are reasonable.

(60) The Authority may find that there is an incentive effect in cases where an undertaking may have an incentive in carrying out a project, with aid, even if the aided project does not achieve the normally required level of profitability. This might be justified for example in view of wider benefits not reflected in the profitability of the project itself. In such circumstances, the evidence provided to support the existence of an incentive effect becomes particularly important.

(61) Where an undertaking is adapting to a national standard going beyond Union standards or adopted in the absence of Union standards, the Authority will verify that the aid beneficiary would have been affected substantially in terms of increased costs and would not have been able to bear the costs associated with the immediate implementation of national standards.

(62) For investments that bring undertakings above the minimum levels required by Union standards, the Authority can still find no incentive effect, in particular if such investments correspond to the minimum technical standards available in the market.

(63) If the aid does not change the behaviour of the beneficiary by stimulating additional activities, that aid does not have incentive effect in terms of promoting environmental behaviour in the EEA or strengthening the functioning of the European energy market. Therefore, aid will not be approved in cases where it appears that the same activities would still be pursued without the aid.

3.2.5. Proportionality of the aid

3.2.5.1. General conditions

(64) Environmental and energy aid is considered to be proportionate if the aid amount per beneficiary is limited to the minimum needed to achieve the environmental protection or energy objective aimed for.

(65) As a general principle, aid will be considered to be limited to the minimum necessary if the aid corresponds to the net extra cost necessary to meet the objective, compared to the counterfactual scenario in the absence of aid. The net extra cost is determined by the difference between the economic benefits and costs (including the investment and operation) of the aided project and those of the alternative investment project which the company would carry out in the absence of aid, that is the counterfactual scenario.

(66) However, it might be difficult to fully take into account all economic benefits that a company will derive from an additional investment (40). Therefore, for measures, which are not subject to an individual assessment, a simplified method that would focus on calculating the extra investment costs, that is to say not taking into account the operating benefits and costs may be used. Measures which are not subject to an individual assessment will be deemed proportional if the aid amount does not exceed the maximum aid intensity, that is a given percentage of the eligible costs as defined in paragraphs 67 to 71. Those maximum aid intensities also serve as a cap to the aid given for notifiable measures.

Eligible costs

(67) The eligible costs for environmental aid are the extra investment costs in tangible and/or in intangible assets which are directly linked to the achievement of the common objective.

(68) The eligible costs are determined as follows: (a) where the costs of achieving the common interest objective can be identified in the total investment costs as a separate investment, for instance, because the green element is a readily identifiable ‘add-on component’ to a pre-existing facility, the costs of the separate investment constitute the eligible costs (41); (b) in all other cases, the eligible costs are the extra investment costs established by comparing the aided investment with the counterfactual situation in the absence of State aid. In principle, reference can be made to the cost of a technically comparable investment (42) that would credibly be realised without aid (43) and which does not achieve the common interest objective or that only attains that objective to a lesser degree.

(69) Annex 2 contains a list of the relevant counterfactual scenarios or eligible cost calculations reflecting the counterfactual scenario that should be used in similar cases. The Authority may accept alternative counterfactual situations if duly justified by the Contracting Party.

(70) For measures supporting integrated projects such as integrated energy-efficiency measures, or biogas projects, the counterfactual scenario can be difficult to establish. Where a counterfactual scenario cannot credibly be established, the Authority is amenable to consider the total costs of a project as an alternative, which may imply lower aid intensities to reflect the different eligible cost calculation.

(71) The rules set out in paragraphs 68 to 70 are applicable to the construction of the production plants in energy efficient district heating or cooling projects. However, the funding gap approach will be applied for aid to the construction of the network, similar to the assessment of energy infrastructure.

Maximum aid intensities

(72) In order to ensure predictability and a level playing field, the Authority applies maximum aid intensities for aid, set out in Annex 1. These aid intensities reflect the need for State intervention determined, on the one hand, by the relevance of the market failure and, on the other hand, by the expected level of distortion of competition and trade.

(73) Higher aid intensities may be allowed for some types of aid or for investments located in an assisted area, but the aid intensity can never exceed 100 % of eligible costs. Higher aid intensities may be allowed as follows: (a) the aid intensity may be increased by 15 percentage points for energy and environmental investments located in assisted areas fulfilling the conditions of Article 61(3)(a) of the EEA Agreement and by 5 percentage points for energy and environmental investments located in assisted areas fulfilling the conditions of Article 61(3)(c) of the EEA Agreement. The Authority deems those increases to be justified in view of the various handicaps faced by these areas that might be an obstacle to environmental or energy investments; (b) the aid intensity can be increased by 10 percentage points for medium-sized enterprises and 20 percentage points for small enterprises. With regard to small and medium-sized enterprises which may be faced, on the one hand, with relatively higher costs to achieve environmental or energy objectives compared to the size of their activity and, on the other hand, with capital market imperfections which force them to bear such costs, higher aid intensities may also be warranted, as the risk of serious distortions of competition and trade is reduced when the beneficiary is a small or medium-sized enterprise; (c) higher aid intensities may be justified under certain conditions in case of eco-innovation which can address a double market failure linked to the higher risks of innovation, coupled with the environmental aspect of the project. That applies in particular to resource efficiency measures. The aid intensity may be increased by 10 percentage points, provided that following cumulative conditions are fulfilled: (i) the eco-innovation asset or project must be new or substantially improved compared to the state of the art in its industry in the EEA (44); (ii) the expected environmental benefit must be significantly higher than the improvement resulting from the general evolution of the state of the art in comparable activities (45); and (iii) the innovative character of the assets or projects involves a clear degree of risk, in technological, market or financial terms, which is higher than the risk generally associated with comparable non-innovative assets or projects (46).

(74) Therefore, the Authority will consider aid to be compatible with the functioning of the EEA Agreement if the eligible costs are correctly calculated and the maximum aid intensities set out in Annex 1 are respected.

(75) Where aid to the beneficiary is granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria, the aid amount may reach 100 % of the eligible costs (47). Such a bidding process must be non-discriminatory and provide for the participation of a sufficient number of undertakings. In addition, the budget related to the bidding process must be a binding constraint in the sense that not all participants can receive aid. Finally, the aid must be granted on the basis of the initial bid submitted by the bidder, therefore excluding subsequent negotiations.

3.2.5.2. Cumulation of aid

(76) Aid may be awarded concurrently under several aid schemes or cumulated with ad hoc aid, provided that the total amount of State aid for an activity or project does not exceed the limits fixed by the aid ceilings laid down in these Guidelines.

(77) Aid is not to be cumulated with de minimis aid in respect of the same eligible costs if such cumulation would result in an aid intensity exceeding that laid down in these Guidelines.

3.2.5.3. Additional conditions for individually notifiable investment and operating aid

(78) For individual aid, compliance with the maximum aid intensities set out in this section and in Annex 1, is not sufficient to ensure proportionality. These maximum aid intensities are used as a cap for individual aid (48).

(79) As a general rule, individually notifiable aid will be considered to be limited to the minimum if the aid amount corresponds to the net extra costs of the aided investment, compared to the counterfactual scenario in the absence of aid. All relevant costs and benefits must be taken into account over the lifetime of the project.

(80) If no specific alternative project can be identified as a counterfactual scenario, the Authority will verify whether the aid amount exceeds the minimum necessary to make the aided project sufficiently profitable, for instance whether it increases its IRR beyond the normal rates of return applied by the undertaking concerned in other investment projects of a similar kind. When that benchmark is not available, the cost of capital of the company as a whole or rates of return commonly observed in the industry concerned may be used for that purpose.

(81) The Contracting Party should provide evidence that the aid amount is kept to the minimum. Calculations used for the analysis of the incentive effect can also be used to assess whether the aid is proportionate. The Contracting Party must demonstrate the proportionality on the basis of the documentation referred to in paragraph 58.

(82) For operating aid granted by way of a competitive bidding process, the proportionality of individual aid is presumed to be met if the general conditions are fulfilled.

3.2.6. Avoidance of undue negative effects on competition and trade

3.2.6.1. General considerations

(83) For the aid to be compatible with the functioning of the EEA Agreement, the negative effects of the aid measure in terms of distortions of competition and impact on trade between Contracting Parties must be limited and outweighed by the positive effects in terms of contribution to the objective of common interest.

(84) The Authority identifies two main potential distortions caused by aid, namely product market distortions and location effects. Both types may lead to allocative inefficiencies which undermine the economic performance of the internal market and to distributional concerns which affect the distribution of economic activity across regions.

(85) Aid for environmental purposes will by its very nature, tend to favour environmentally friendly products and technologies at the expense of other, more polluting ones and that effect of the aid will, in principle, not be viewed as an undue distortion of competition, since it is inherently linked to the very objective of the aid, that is to say making the economy greener. When assessing the potential negative effects of environmental aid, the Authority will take into account the overall environmental effect of the measure in relation to its negative impact on the market position, and thus on the profits, of non-aided firms. In doing so, the Authority will consider in particular the distortive effects on competitors that likewise operate on an environmentally friendly basis, even without aid. Likewise, the lower the expected environmental effect of the measure in question, the more important the verification of its effect on competitors' market shares and profits in the market.

(86) One potentially harmful effect of State aid for environmental and energy objectives is that it prevents the market mechanism from delivering efficient outcomes by rewarding the most efficient and innovative producers and putting pressure on the least inefficient to improve, restructure or exit the market. That might lead to a situation where, due to the aid granted to some firms, more efficient or innovative competitors, for example competitors with a different, possibly even cleaner technology, that would otherwise be able to enter and expand are unable to do so. In the long run, interfering with the competitive entry and exit process may stifle innovation and slow down industry-wide productivity improvements.

(87) Aid may also have distortive effects by strengthening or maintaining substantial market power of the beneficiary. Even where aid does not strengthen substantial market power directly, it may do so indirectly, by discouraging the expansion of existing competitors or inducing their exit or discouraging the entry of new competitors.

(88) Apart from distortions on the product markets, aid may also give rise to effects on trade and location choice. Those distortions can arise across Contracting Parties, either when firms compete across borders or consider different locations for investment. Aid aimed at preserving economic activity in one region or attracting it away from other regions within the internal market may not lead directly to a distortion in the product market, but it may displace activities or investments from one region into another without any net environmental impact.

Manifest negative effects

(89) In principle, an aid measure and the context in which it is applied need to be analysed to identify the extent to which it can be deemed distortive. However, there are situations where the negative effects manifestly outweigh any positive effects, meaning that the aid cannot be found compatible with the functioning of the EEA Agreement.

(90) The Authority establishes maximum aid intensities which constitute a basic requirement for compatibility, and which have the aim of preventing the use of State aid for projects where the ratio between aid amount and eligible costs is deemed very high and particularly likely to be distortive.

(91) Likewise, aid for environmental and energy objectives that merely leads to a change in location of the economic activity without improving the existing level of environmental protection in the Contracting Parties will not be considered compatible with the functioning of the EEA Agreement.

3.2.6.2. General conditions

(92) In assessing the negative effects of the aid measure, the Authority focuses on the distortions resulting from the foreseeable impact of the environmental and energy aid has on competition between undertakings in the product markets affected and the location of economic activity. If State aid measures are well targeted to the market failure they aim to address, the risk that the aid will unduly distort competition is more limited.

(93) If the aid is proportionate and limited to the extra investment costs, the negative impact of the aid is in principle softened. However, even where aid is necessary and proportionate, aid may result in a change in behaviour of the beneficiaries which distorts competition. A profit seeking undertaking will normally only increase the level of environmental protection beyond mandatory requirements if it considers that this will result, at least marginally in some sort of advantage for the undertaking.

(94) In order to keep the distortions of competition and trade to a minimum, the Authority will place great emphasis on the selection process. Where possible, the selection process should be conducted in a non-discriminatory, transparent and open manner, without unnecessarily excluding companies that may compete with projects to address the same environmental or energy objective. The selection process should lead to the selection of beneficiaries that can address the environmental or energy objectives using the least amount of aid or in the most cost-effective way.

(95) The Authority will in particular assess the negative effects of the aid by considering the following elements: (a) reduction in or compensation for production unit costs: if the new equipment (49) will lead to reduced costs per unit produced compared to the situation without the aid or if the aid compensates a part of the operating cost, it is likely that the beneficiaries will increase sales. The more price elastic the product, the greater the potential of the aid for distorting competition; (b) new product: if the beneficiaries obtain a new or a higher quality product, it is likely that they will increase their sales and possibly gain a ‘first mover’ advantage.

3.2.6.3. Additional conditions for individually notifiable aid

(96) The Contracting Party must ensure that the negative effects as described in Section 3.2.6.1 are limited. In addition to the elements specified in Section 3.1.6.2, the Authority will take into account and assess whether the individual aid leads to: (a) supporting inefficient production, thereby impeding productivity growth in the sector; (b) distorting dynamic incentives; (c) creating or enhancing market power or exclusionary practices; (d) artificially altering trade flows or the location of production.

(97) The Authority may consider the planned introduction of energy and environmental support schemes, other than the one notified, which directly or indirectly benefit the beneficiary with a view to assessing the cumulative impact of the aid.

(98) The Authority will also assess whether the aid results in some territories benefiting from more favourable production conditions, notably because of comparatively lower production costs as a result of the aid or because of higher production standards achieved through the aid. This may result in companies staying in or re-locating to the aided territories, or to displacement of trade flows towards the aided area. In its analysis of notifiable individual aid, the Authority will accordingly take into account any evidence that the aid beneficiary has considered alternative locations.

3.2.7. Transparency

(99) Contracting Parties must ensure the publication of the following information on a comprehensive State aid website, at national or regional level: the full text of the approved aid scheme or the individual aid granting decision and its implementing provisions, or a link to it, the identity of the granting authority/(ies), the identity of the individual beneficiaries, the form and amount of aid granted to each beneficiary, the date of granting, the type of undertaking (SME/large company), the region in which the beneficiary is located (at NUTS level II) and the principal economic sector in which the beneficiary has its activities (at NACE group level).

(100) For schemes in the form of tax advantage and aid in the form of reductions in the funding of support for energy from renewable sources, the information on individual aid amounts can be provided in the following ranges (in EUR million): (0,5-1); (1-2); (2-5); (5-10); (10-30); (30 and more).

(101) Such information must be published after the decision to grant the aid has been taken, must be kept for at least 10 years and must be available to the general public without restrictions. (50) Contracting Parties will not be required to provide such information before 1 July 2016. The requirement to publish information can be waived with respect to individual aid awards below EUR 500 000.

3.3. Aid to energy from renewable sources

3.3.1. General conditions for investment and operating aid to energy from renewable sources

(102) The European Union sets ambitious climate change and energy sustainability targets in particular as part of its EU 2020 strategy. Several Union legislative acts already support the achievement of those targets, such as the ETS, Directive 2009/28/EC (51) (‘the Renewable Energy Directive’ or ‘RED’) and the Directive 2009/30/EC of the European Parliament and of the Council (52) (‘the Fuel Quality Directive’). However, their implementation may not always result in the most efficient market outcome and under certain conditions State aid can be an appropriate instrument to contribute to the achievement of the Union objectives and related national targets.

(103) These Guidelines apply to the period up to 2020. However, they should prepare the ground for achieving the objectives set in the 2030 Framework. Notably, it is expected that in the period between 2020 and 2030 established renewable energy sources will become grid-competitive, implying that subsidies and exemptions from balancing responsibilities should be phased out in a degressive way. These Guidelines are consistent with that objective and will ensure the transition to a cost-effective delivery through market-based mechanisms.

(104) Market instruments, such as auctioning or competitive bidding process open to all generators producing electricity from renewable energy sources competing on equal footing at EEA level, should normally ensure that subsidies are reduced to a minimum in view of their complete phasing out.

(105) However, given the different stage of technological development of renewable energy technologies, these Guidelines allow technology specific tenders to be carried out by Contracting Parties, on the basis of the longer-term potential of a given new and innovative technology, the need to achieve diversification; network constraints and grid stability and system (integration) costs.

(106) Specific exceptions are included for installations of a certain size, for which it cannot be presumed that a bidding process is appropriate, or for installations at demonstration phase. The inclusion of such installations is optional.

(107) In view of the overcapacity in the food-based biofuel market, the Authority will consider investment aid in new and existing capacity for food-based biofuel not to be justified. However, investment aid to convert food-based biofuel plants into advanced biofuel plants is allowed to cover the costs of such conversion. Other than in this particular case, investment aid to biofuels can only be granted in favour of advanced biofuels.

(108) Whilst investment aid to support food-based biofuel will cease from the date of application of these Guidelines, operating aid to food-based biofuels can only be granted until 2020. Therefore, such aid can only be granted to plants that started operation before 31 December 2013 until the plant is fully depreciated but in any event no later than 2020.

(109) In addition, the Authority will consider that the aid does not increase the level of environmental protection and can therefore not be found compatible with the functioning of the EEA Agreement if the aid is granted for biofuels which are subject to a supply or blending obligation (53), unless a Contracting Party can demonstrate that the aid is limited to sustainable biofuels that are too expensive to come on the market with a supply or blending obligation only.

(110) In particular while the ETS and CO2 taxes internalise the costs of greenhouse gas (‘GHG’) emissions, they may not, yet, fully internalise those costs. State aid can therefore contribute to the achievement of the related, but distinct, EEA objectives for renewable energy. Unless it has evidence on the contrary, the Authority therefore presumes that a residual market failure remains, which can be addressed through aid for renewable energy.

(111) In order to allow Contracting Parties to achieve their targets in line with the EU 2020 objectives, the Authority presumes the appropriateness of aid and the limited distortive effects of the aid provided all other conditions are met.

(112) With regard to aid for the production of hydropower, its impact can be twofold: on the one hand, such aid has a positive impact in terms of low GHG emissions, on the other hand, it might also have a negative impact on water systems and biodiversity. Therefore, when granting aid for the production of hydropower, Contracting Parties must respect Directive 2000/60/EC of the European Parliament and of the Council (54) and in particular Article 4(7) thereof, which lays down criteria in relation to allowing new modifications of bodies of water.

(113) A core principle of EEA legislation on waste is the waste hierarchy which prioritises the ways in which waste should be treated (55). State aid for energy from renewable sources using waste, including waste heat, as input fuel can make a positive contribution to environmental protection, provided that it does not circumvent that principle.

(114) Aid to energy from renewable sources can be granted as investment or operating aid. For investment aid schemes and individually notified investment aid, the conditions set out in Section 3.2 apply.

(115) For operating aid schemes, the general provision of Section 3.2 will be applied as modified by the specific provisions as set in this Section. For individually notified operating aid, the conditions set out in Section 3.2 apply, where relevant taking into account the modifications made by this Section for operating aid schemes.

(116) The Authority will authorise aid schemes for a maximum period of 10 years. If maintained, such measure should be re-notified after such period. Concerning food-based biofuel, existing and newly notified schemes should be limited to 2020.

(117) The Union set an overall Union target for the share of renewable energy sources in final energy consumption and translated this target into mandatory national targets. The Renewable Energy Directive includes cooperation mechanisms (56) to facilitate cross border support for achieving national targets. Operating aid schemes should in principle be open to other EEA countries and Contracting Parties of the Energy Community to limit the overall distortive effects. It minimises costs for Contracting Parties whose sole aim is to achieve the national renewables target laid down in Union legislation. Contracting Parties however may want to have a cooperation mechanism in place before allowing cross border support as otherwise, production from installations in other countries will not count towards their national target under the RED (57). The Authority will consider positively schemes that are open to other EEA or Energy Community countries.

(118) Aid to electricity from renewable energy sources should in principle contribute to integrating renewable electricity in the market. However, for certain small types of installations, this may not be feasible or appropriate.

3.3.2. Operating aid granted to energy from renewable sources

3.3.2.1. Aid for electricity from renewable energy sources

(119) In order to incentivise the market integration of electricity from renewable sources, it is important that beneficiaries sell their electricity directly in the market and are subject to market obligations. The following cumulative conditions apply from 1 January 2016 to all new aid schemes and measures: (a) aid is granted as a premium in addition to the market price (premium) whereby the generators sell its electricity directly in the market; (b) beneficiaries (58) are subject to standard balancing responsibilities, unless no liquid intra-day markets exist; and (c) measures are put in place to ensure that generators have no incentive to generate electricity under negative prices.

(120) The conditions established in paragraph 119 do not apply to installations with an installed electricity capacity of less than 500 kW or demonstration projects, except for electricity from wind energy where an installed electricity capacity of 3 MW or 3 generation units applies.

(121) In a transitional phase covering the years 2015 and 2016, aid for at least 5 % of the planned new electricity capacity from renewable energy sources should be granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria. From 1 January 2017, the following requirements apply: Aid is granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria (59), unless: (a) Contracting Parties demonstrate that only one or a very limited number of projects or sites could be eligible; or (b) Contracting Parties demonstrate that a competitive bidding process would lead to higher support levels (for example to avoid strategic bidding); or (c) Contracting Parties demonstrate that a competitive bidding process would result in low project realisation rates (avoid underbidding). If such competitive bidding processes are open to all generators producing electricity from renewable energy sources on a non-discriminatory basis, the Authority will presume that the aid is proportionate and does not distort competition to an extent contrary to the functioning of the EEA Agreement. The bidding process can be limited to specific technologies where a process open to all generators would lead to a suboptimal result which cannot be addressed in the process design in view of, in particular: (a) the longer-term potential of a given new and innovative technology; or (b) the need to achieve diversification; or (c) network constraints and grid stability; or (d) system (integration) costs; or (e) the need to avoid distortions on the raw material markets from biomass support (60).

(122) Aid may be granted without a competitive bidding process as described in paragraph 121 to installations with an installed electricity capacity of less than 1 MW, or demonstration projects, except for electricity from wind energy, for installations with an installed electricity capacity of up to 6 MW or 6 generation units.

(123) In the absence of a competitive bidding process, the conditions of paragraphs 119 and 120 and the conditions for operating aid to energy from renewable energy sources other than electricity as set out in paragraph 126 are applicable.

(124) The aid is only granted until the plant has been fully depreciated according to normal accounting rules and any investment aid previously received must be deducted from the operating aid.

(125) These conditions are without prejudice to the possibility for Contracting Parties to take account of spatial planning considerations, for example by requiring building permissions prior to the participation in the bidding process or requiring investment decisions within a certain period.

3.3.2.2. Aid for energy from renewable sources other than electricity.

(126) For energy from renewable sources other than electricity, operating aid will be considered compatible with the functioning of the EEA Agreement if the following cumulative conditions are met: (a) the aid per unit of energy does not exceed the difference between the total levelised costs of producing energy (‘LCOE’) from the particular technology in question and the market price of the form of energy concerned; (b) the LCOE may include a normal return on capital. Investment aid is deducted from the total investment amount in calculating the LCOE; (c) the production costs are updated regularly, at least every year; and (d) aid is only granted until the plant has been fully depreciated according to normal accounting rules in order to avoid that operating aid based on LCOE exceeds the depreciation of the investment.

3.3.2.3. Aid for existing biomass plants after plant depreciation

(127) Unlike most other renewable sources of energy, biomass requires relatively low investment costs but higher operating costs. Higher operating costs may prevent a biomass (61) plant from operating even after depreciation of the installation as the operating costs can be higher than the revenues (the market price). On the other hand, an existing biomass plant may operate by using fossil fuel instead of biomass as an input source if the use of fossil fuel as an input is more economically advantageous than the use of biomass. To preserve the use of biomass in both cases, the Authority may find operating aid to be compatible with the functioning of the EEA Agreement even after plant depreciation.

(128) The Authority will consider operating aid for biomass after plant depreciation compatible with the functioning of the EEA Agreement if a Contracting Party demonstrates that the operating costs borne by the beneficiary after plant depreciation are still higher than the market price of the energy concerned and provided that the following cumulative conditions are met: (a) the aid is only granted on the basis of the energy produced from renewable sources; (b) the measure is designed such that it compensates the difference in operating costs borne by the beneficiary and the market price; and (c) a monitoring mechanism is in place to verify whether the operating costs borne are still higher than the market price of energy. The monitoring mechanism needs to be based on updated production cost information and take place at least on an annual basis.

(129) The Authority will consider operating aid for biomass after plant depreciation compatible with the functioning of the EEA Agreement if a Contracting Party demonstrates that, independent from the market price of the energy concerned, the use of fossil fuels as an input is more economically advantageous than the use of biomass and provided that the following cumulative conditions are met: (a) the aid is only granted on the basis of the energy produced from renewable sources; (b) the measure is designed such that it compensates the difference in operating costs borne by the beneficiary from biomass compared to the alternative fossil fuel input; (c) credible evidence is provided that without the aid a switch from the use of biomass to fossil fuels would take place within the same plant; and (d) a monitoring mechanism is in place to verify that the use of fossil fuels is more beneficial than the use of biomass. The monitoring mechanism needs to be based on updated cost information and take place at least on an annual basis.

3.3.2.4. Aid granted by way of certificates

(130) Contracting Parties may grant support for renewable energy sources by using market mechanisms such as green certificates. These market mechanisms (62) allow all renewable energy producers to benefit indirectly from guaranteed demand for their energy, at a price above the market price for conventional power. The price of these green certificates is not fixed in advance, but depends on market supply and demand.

(131) The Authority will consider the aid referred to in paragraph 130 to be compatible with the functioning of the EEA Agreement if Contracting Parties can provide sufficient evidence that such support (i) is essential to ensure the viability of the renewable energy sources concerned; (ii) does not, for the scheme in the aggregate, result in overcompensation over time and across technologies, or in overcompensation for individual less deployed technologies in so far as differentiated levels of certificates per unit of output are introduced; and (iii) does not dissuade renewable energy producers from becoming more competitive.

(132) The Authority considers in particular that no differentiation in support levels through green certificates may be applied unless a Contracting Party demonstrates the need for a differentiation on the basis of the justifications set out in paragraph 121. The conditions set out in paragraphs 119 and 120 apply when technically possible. Any investment aid previously received must be deducted from the operating aid.

3.4. Energy-efficiency measures, including cogeneration and district heating and district cooling

(133) The European Union set the objective of saving 20 % of the Union's primary energy consumption by 2020. In particular the Union adopted the Energy Efficiency Directive, which establishes a common framework to promote energy-efficiency within the Union pursuing the overall objective of achieving the Union's 2020 headline target on energy-efficiency and pave the way for further energy-efficiency improvement beyond 2020.

3.4.1. Objective of common interest

(134) In order to ensure that aid contributes to a higher level of environmental protection, aid for district heating and district cooling and cogeneration of heat and electricity (‘CHP’) will only be considered compatible with the functioning of the EEA Agreement if granted for investment, including upgrades, to high-efficient CHP and energy-efficient district heating and district cooling.

(135) State aid for cogeneration and district heating installations using waste, including waste heat, as input fuel can make a positive contribution to environmental protection, provided that it does not circumvent the waste hierarchy principle (referred to in paragraph 113.

(136) To demonstrate the contribution of the aid towards an increased level of environmental protection, the Contracting Party may use, as much as possible in quantifiable terms, a variety of indicators, in particular the amount of energy saved due to better, lower energy performance and higher energy productivity or the efficiency gains by reduced energy consumption and reduced fuel input.

3.4.2. Need for State intervention

(137) Energy-efficiency measures target negative externalities as referred to in paragraph 30 by creating individual incentives to attain environmental targets for energy-efficiency and for the reduction of greenhouse gas emissions. In addition to the general market failures identified in Section 3.2, one example of a market failure that may arise in the field of energy-efficiency measures concerns energy-efficiency measures in buildings. When renovation works in buildings are considered, the benefits of energy-efficiency measures do not typically accrue with the building owner, who generally bears the renovation costs, but with the tenant. State aid may therefore be needed to promote investments in energy-efficiency in order to meet the targets of the EED.

3.4.3. Incentive effect

(138) The EED sets out targets including in energy-efficient renovation of buildings and in final energy consumptions. However, the EED does not impose energy-efficient targets on undertakings and will on that point not prevent an aid in the field of energy-efficiency from having an incentive effect.

(139) The incentive effect of the aid will be assessed on the basis of the conditions set out in Section 3.2.4 of these Guidelines.

3.4.4. Appropriateness of the aid

(140) State aid may be considered an appropriate instrument to finance energy-efficiency measures, independently of the form in which it is granted.

(141) For energy efficiency measures, a repayable advance may be considered as an appropriate State aid instrument in particular if the revenues from the energy-efficiency measure are uncertain.

(142) When assessing State aid granted for in particular the energy-efficient renovation of buildings, a financial instrument set up by the Contracting Party to finance renovation works may be considered as an appropriate instrument for the granting of State aid.

3.4.5. Proportionality

Investment aid for energy-efficiency measures

(143) The eligible costs are determined as the extra investment costs as established in paragraph 68. For energy-efficiency measures, the counterfactual scenario can be difficult to establish particularly in case of integrated projects. For such projects, the Authority is amenable to consider a proxy for determining the eligible costs as set out in paragraph 70.

(144) The aid intensities set out in Annex 1 apply.

Operating aid for energy-efficiency measures (except operating aid for high energy efficient CHP)

(145) The Authority will consider operating aid for energy-efficiency to be proportionate only if the following cumulative conditions are met: (a) the aid is limited to compensating for net extra production costs resulting from the investment, taking account of benefits resulting from energy saving (63). In determining the amount of operating aid, any investment aid granted to the undertaking in question in respect of the new plant must be deducted from production costs; and (b) the operating aid is limited to a five-year duration.

Operating aid for high energy efficient CHP

(146) Operating aid for high energy efficient cogeneration plants may be granted on the basis of the conditions applying to operating aid for electricity from renewable energy sources as established in Section 3.3.2.1 and only: (a) to undertakings generating electric power and heat to the public where the costs of producing such electric power or heat exceed its market price; (b) for the industrial use of the combined production of electric power and heat where it can be shown that the production cost of one unit of energy using that technique exceeds the market price of one unit of conventional energy.

3.5. Aid for resource efficiency and in particular aid to waste management

3.5.1. Resource Efficiency

(147) The Europe 2020 flagship initiative for ‘Resource Efficient Europe’ aims for sustainable growth by identifying and creating new business opportunities, inter alia, through new and innovative means of production, business models and product design. It sets out how such growth can be decoupled from the use of resources and its overall environmental impact.

(148) Market failures as identified in paragraph 30 are particularly relevant for resource efficiency. In addition, market failures in that area are not often addressed by other policies and measures, such as taxation or regulation. State aid may in such cases be necessary.

(149) For individual measures, Contracting Parties need to demonstrate quantifiable benefits in this policy area, particularly the amount of resources saved or the resource efficiency gains.

(150) The Authority recalls in view of the close ties with new innovative production means that measures promoting resource efficiency may benefit, once the relevant criteria are fulfilled, from an additional eco-innovation bonus as referred to in paragraph 73.

3.5.2. Aid to waste management

(151) More specifically, and in line with the waste hierarchy principle (referred to in paragraph 113), the Union's Seventh Environment Action Programme identifies the prevention, reuse and recycling of waste as one of its top priorities. Contracting Parties are required to establish waste management plans (64) and should respect this hierarchy and design state aid measures that are be coherent with implementation of these plans. Another key concept which inspires EEA legislation in the environmental field is the ‘polluter pays principle’, described in paragraph 39.

(152) State aid for the management of waste, in particular for activities aimed at the prevention, reuse and recycling of waste, can make