2004/50/EC: Commission Decision of 17 September 2003 on the exemption from the Climate Change Levy which the United Kingdom is planning to implement in respect of coalmine methane (Text with EEA relevance) (notified under document number C(2003) 3242)
Date: 2003-09-17
Institutions: European Commission
Subjects: State aid, United Kingdom, environmental tax, hydrocarbon, mining operation, tax exemption

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION
of 17 September 2003
on the exemption from the Climate Change Levy which the United Kingdom is planning to imple-
ment in respect of coalmine methane

(notified under document number C(2003) 3242)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/50/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

Having regard to the Treaty establishing the European Com-
munity, and in particular the first subparagraph of Article
88(2) thereof,

Having regard to the Agreement on the European Economic
Area, and in particular Article 62(1)(a) thereof,

Having regard to Council Regulation (EC) No 659/1999 of 22
March 1999 laying down detailed rules for the application of
Article 93 of the EC Treaty (1), and in particular Article 7
thereof,

Having called on interested parties to submit their comments
pursuant to those provisions (2) and having regard to their
comments,

Whereas:

I. PROCEDURE

(1)

(2)

(3)

By letter dated 5 December 2002, the United Kingdom
notified the Commission of its intention to grant an
exemption from the Climate Change Levy (CCL) charged
to suppliers in respect of electricity produced from coal-
mine methane (CM) from abandoned coalmines.

By letter dated 5 February 2003,
the Commission
informed the United Kingdom that it had decided to
initiate the procedure laid down in Article 88(2) of the
EC Treaty in respect of the proposed exemption.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Union (3).
The Commission called on interested parties to submit
their comments.

(1) OJ L 83, 27.3.1999, p. 1.
(2) OJ C 69, 22.3.2003, p. 9.
(3) See footnote 2.

The Commission has received comments from interested
parties. It has forwarded them to the United Kingdom,
which was given the opportunity to react. In the light of
the comments from interested parties, the Commission
requested additional information by letter dated 26 May
2003. A meeting with the United Kingdom authorities
was held on 11 June 2003. The United Kingdom's
comments on the comments of interested parties and
the information requested by the Commission were
received by letter dated 10 July 2003.

II. DETAILED DESCRIPTION OF THE AID

(5)

(6)

The scheme will exempt from the Climate Change Levy
(CCL) supplies of electricity generated from coalmine
methane (CM) from abandoned coalmines.

The basic legislation for the CCL is contained in Sche-
dule 6 to the Finance Act 2000. Section 126 of the
Finance Act 2002 amends Schedule 6 to the Finance Act
2000 by inserting a new subparagraph (4A) after sub-
paragraph (4) of paragraph 19 of that Schedule. The
scheme will take effect from a day to be appointed by
Treasury Order. The
secondary legislation
relevant
(Regulations 46 to 51 of the CCL (General) Regulations
2001 — SI 2001/838) will
include CM within their
scope.

(7)

CM is a potent greenhouse gas, currently venting into
the atmosphere. At present, there are four CM extraction
sites being used for electricity generation with a total
generating capacity of 35MW.

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The aim of the scheme is to incentivise the industry to
develop further installations at about 40 further sites of
abandoned coalmines, with around 175MW added capa-
city. Because of the uncertainty as to the exact level of
environmental benefit from the scheme, the Government
intends to hold a review of the exemption in 2004/5.
However, the scheme was originally notified for a dura-
tion of 10 years.

CM. However, it is true that the use of CM for electricity
production avoids the release of CM into the atmosphere
as the unused CM is leaking. The Commission was of
the opinion that the overall effect on greenhouse gas
emissions did not alter the nature of the support in
terms of State aid, but should be taken into account
when assessing the compatibility of the measure with
State aid rules.

(8)

(9)

(10)

(11)

(12)

The minimum value of the exemption in its first year of
operation will be around GBP 1 million. If the uptake of
electricity generation plants fuelled by CM occurs as
planned, revenue foregone will rise to GBP 6,3 million
per annum.

The aid operates by giving a tax exemption equal to a
flat rate of GBP 4,30 per MWh of electricity generated
from CM. The United Kingdom authorities assumed at
the time of notification that, as the estimated 40 plants
incentivised by the exemption will not be all unecono-
mical up to point of the full support level, the measure
will involve some dead-weight loss.

The scheme will directly benefit the generators/suppliers
of electricity derived from CM, but the tax exemption is
likely to be shared with the company which extracts the
gas. There are three companies which currently extract
CM to sell
in the United
Kingdom. These are Alkane Energy, StrataGas and
Octagon Energy. The electricity generators working with
them are Clarke Energy, Scottish and Southern Energy
and Warwick Energy.

to electricity generators

Grounds for initiating the procedure

Contrary to the United Kingdom, the Commission did
not consider the selective advantage granted by the
measure to be justified by the logic and nature of the tax
system itself. The Commission considered that tax to be
due because of the harmful effect of the use of energy
on climate change. It is therefore in the nature of the tax
to exempt the use of energy, the production of which
has no harmful effect. This is the case, for example, for
electricity from renewable sources, as these sources do
not contribute to long-cycle CO2 (4). Like electricity
production from other fossil sources, electricity produc-
tion from CM has harmful effects and is therefore of a
different nature from electricity from renewable sources.
In fact, electricity production from CM is no different in
terms of CO2 emissions than electricity production from
natural gas. It would therefore be in the nature and logic
the tax system to tax electricity produced from
of

(4) See Commission Decision of 28 March 2001 relating to State aid C
18/2001 — United Kingdom, Climate Change Levy,
(OJ C 185,
30.6.2001, p. 22), and in particular p. 35 and 36 on the exemption
for electricity from some energy sources.

(13)

The Commission had doubts as to whether the aid,
which constituted operating aid, was compatible with
the Community guidelines on State aid for environ-
mental protection (hereafter ‘the guidelines’) (5).

(a) The measure does not comply with point 51.2 of
the guidelines as it is a new exemption from an
existing tax and the United Kingdom authorities did
not demonstrate a significant change in economic
conditions that could justify such an exemption.
Thus points 51.1(a) or (b) of the guidelines allowing
for ten year tax exemptions are not applicable.

(b) CM and electricity production from CM are not
renewable energy sources within the meaning of the
environmental guidelines and Directive 2001/77/EC
of the European Parliament and of the Council of 27
September 2001 on the promotion of electricity
produced from renewable energy sources in the
internal electricity market (6). In any case, the United
Kingdom did not claim that the measure was compa-
tible with the relevant provisions in section E.3.3 of
the guidelines related to renewable energy sources.

(c) Under point 51.3 of the guidelines Member States
may also encourage the development of processes
for producing electric power
from conventional
energy sources such as gas that have an energy effi-
ciency very much higher than the energy efficiency
obtained with conventional production processes. In
such cases, given the importance of such techniques
for environmental protection and provided that the
primary energy used reduces significantly the nega-
tive effects in terms of environmental protection, a
total exemption from taxes may be justified for a
period of five years where aid is non-degressive. The
Commission doubted that that provision was applic-
able in this and in any case, the notified duration of
10 years exceeds the duration of five years permitted
under point 51.3 of the guidelines. The conditions of
point 51.1, which could allow a ten year duration
under point 51.3, did not seem to be met.

(5) OJ C 37, 3.2.2001, p. 3.
(6) OJ L 283, 27.10.2001, p. 33.

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(d) The provisions relating to waste management and
energy saving (points 42 to 46 of the guidelines) also
seemed not to be fulfilled. The aid is not degressive,
it is not strictly limited to compensating for extra
production costs by comparison with the market
prices of the relevant product or service, and the aid
is not limited to five years. Furthermore it is ques-
tionable whether the measure can be considered as
aiming at managing waste or saving energy.

(e) The United Kingdom claimed that Section F of the
guidelines ‘Policies, Measures and Instruments for
Reducing Greenhouse Gases’
should apply. That
section applies to State aid potentially involved in
common and coordinated policies and measures,
including economic instruments, and also by means
of the instruments established by the Kyoto Protocol
itself, namely international emissions trading,
joint
development
implementation
mechanism. The Commission doubted that
that
section was applicable in this case.

clean

and

the

(f) Council Regulation (EC) No 1407/2002 of 23 July
2002 on State aid to the coal industry (7) did not
seem applicable.

(g) Finally, no other legal text based on Article 87(2) or

(3) appeared to be relevant.

(14) However, climate protection is a Community objective.
The Commission recognised the environmental benefit
for climate protection that could result
from the
measure, even if support for such a measure had not
been envisaged by the environmental aid guidelines.
However,
the
design of the measure might lead to overcompensation.

the Commission was concerned that

(15)

The quantity of electricity which could be produced
from CM in the United Kingdom is not negligible. The
Commission considered the potential
for electricity
generation from CM not only in the United Kingdom
but also in other Member States. The Commission was
also aware that Member States at
that stage were
discussing the possibility for a facultative exemption
from energy taxation of electricity produced from CM in
the context of the draft directive for the taxation of
energy products (8). For these reasons, the Commission
wanted to give third parties the possibility to comment
on the measure.

III. COMMENTS FROM INTERESTED PARTIES

(16) On 23 April 2003, the Commission received a letter
dated 16 April 2003 containing comments from the
Association of Coal Mine Methane Operators (ACMMO)
which can be summarised as follows:

‘renewable’ source of electricity and benefits from
the guaranteed feed-in prices under the ‘ Erneuer-
bare-Energien-Gesetz’
the promotion of
(law for
renewable energy). While in Germany generators get
GBP 46,00 per MWh,
in the United Kingdom the
price is GBP 17 per MWh. The United Kingdom
CCL
the
exemption would help to improve
economics of the sector and protect existing plants.
In view of the economic situation in the United
Kingdom it is unlikely that dead weight loss will
occur. Considering the large fall in wholesale electri-
city prices from GPB 25 per MWh in 1998 to
currently GBP17 per MWh, ACCMO even doubts
that the scheme as an isolated measure will be suffi-
cient for all the additional capacity being built, as
indicated by the United Kingdom authorities.

(b) ACMMO stresses the environmental

In comparison with wind,

importance of
the scheme. In terms of green house gas reduction,
electricity produced from CM is said to be better
than all
the renewable technologies because it
captures and uses methane, which is currently being
emitting to the atmosphere from abandoned coal-
mines.
it
reduces carbon dioxide equivalent emissions nine
times more effectively per kWh generated. Gener-
ating electricity from captured CM also helps cut
carbon dioxide emissions by substituting for fossil
natural gas. The measure is targeted to the capture
and use of a hazardous waste gas venting to the
atmosphere and causing significant environmental
damage.

for example,

(c) ACMMO expects any benefit obtained from the CCL
exemption to be shared out in roughly equal propor-
tions between the CM gas suppliers and the genera-
tors using that energy source. The most important
effect of the measure is, however, not to subsidise
the power generators but to give the gas suppliers
an economic benefit improving the rate of return on
marginal projects.

IV. COMMENTS FROM THE UNITED KINGDOM

(a) ACMMO compares the situation of new investments
for greenhouse gas capture in the United Kingdom
with the German market, where CM is legally a

(17)

(7) OJ L 205, 2.8.2002, p. 1.
(8) Fisc 311 Rev 1 ADD of 9.12.2002.

By letter of 10 July 2003, the United Kingdom authori-
ties asked the Commission to consider approval of the
notification under Section E.3.1, points 42 to 46 of the
environmental aid guidelines (Rules applicable to all
operating aid to promote waste management and energy
saving).

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The United Kingdom authorities consider that the extrac-
tion of CM gas from abandoned coalmines and its use as
fuel for electricity generation comply with the intentions
of that Section. They consider that the use of CM for
electricity generation represents a more efficient and
environmentally responsible usage. The reasons for this
are diversion of methane from leakage to the atmo-
sphere to a use with significantly less polluting end
products and reduction of fossil fuel usage from natural
reservoirs. There are environmental benefits at the level
of the extraction of the CM gas in terms of avoided
emissions and waste management as in point 42(a),
because it mitigates methane leakage to atmosphere, and
there are environmental benefits at the level of its use as
fuel for electricity generation in terms of energy saving
because its use avoids gas extraction from natural gas
resources, as in point 42(b) of the guidelines.

(22)

(23)

(18)

(19)

The use of CM for electricity production is the only
practical one. There is only one other viable usage for
CM. Two plants use it as burner tip fuel for certain
manufacturing processes, such as ceramic and glass
production. However, this use depends upon appropriate
local demand for the gas, and is not applicable to most
sites. Alternative measures of abatement/use of CM, such
as flaring the emitted gas would be completely uneco-
nomic and impractical and therefore do not represent a
viable option — the variability that exists in the natural
rate of gas flow, caused by atmospheric pressure, can
result in flares being extinguished. The gas does not have
a sufficiently high calorific value for it to be piped into
the United Kingdom's gas grid to be mixed with natural
gas.

(20) Under Section E.3.1 of the guidelines, point 46 states
that the duration of non-degressive aid should be limited
to five years, and its intensity must not exceed 50 % of
the extra costs.

The United Kingdom authorities provided detailed cost
figures to the Commission. Those figures are different
from those the United Kingdom used previously and
reflect the current economic scenario. Compared with
their situation at the time of notification, potential bene-
ficiaries are now faced with higher financing costs and
the amount of viable gas on potential sites is less than
expected (so increasing unit costs).

Regarding the CM gas, the latest information suggests
that the production costs are 0,89 (existing plant) or
1,07 (in new plants) p/kWh (in terms of chemical
energy), equivalent to 26 or 31 p/therm. This compares
to the price for the alternative gas for this utilisation
which would be natural gas at a price of around 20 p/
therm. As the tax rebate is based on the electricity
produced from the gas, i.e. half of 0,43 p/kwh = 0,215,
it must be adjusted to allow a comparison with the price
of natural gas. CM generators operate at 36 % efficiency
(40 % expected for new plant), so only 36 % of the
rebate (0,08p/kwh chemical energy) can be allocated to
each unit of chemical energy.
In terms of chemical
energy the current market price of natural gas is 0,68 p/
kWh. The rebate represents therefore between one and
two fifths of the difference between the market price of
natural gas (0,68 p/kWh) and the cost of CM gas (0,89
to 1,07 p/kWh). The aid provided is therefore less than
50 % of the extra costs.

(24)

latest
Regarding the electricity production from CM,
information suggests that the production costs are 2,13
(existing) or 2,37 (new) p/kWh excluding the costs of
the CM gas, or 4,61 or 5,04p/kWh including the costs
of the CM gas. This compares to the typical generation
costs (indicative figures) for electricity from new build
natural gas of 0,87p/kWh excluding gas costs, or 2,11p/
kWh including gas costs. The aid provided is therefore
less than 50 % of the extra costs.

(25) As regards timescales, the British Government would
accept a revision of the proposed timescale from ten
years to five years, and would reserve the right
to
reapply for State aid approval at the end of the period.

(21)

The aid would not exceed 50 % of the extra costs. The
aid provided by exemption from CCL is 0,43p/kWh. The
United Kingdom authorities were advised by ACMMO
the total production costs of electricity can be
that
divided 50/50 between the costs for CM gas and the
costs for electricity generation for a typical current plant
where the two operations act as separate business enti-
ties. Therefore the aid would amount to 0,215p/kWh in
respect of the gas extraction and 0,215p/kWh in respect
of the electricity production.

(26) At present there are no CM companies which are subsi-
diaries of coal companies and the British Government is
not aware of any coal companies with plans to develop
CM plant. The disused mines themselves are in public
ownership.

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V. ASSESSMENT OF THE AID

The existence of State aid

(27)

The CCL on electricity is charged to suppliers of electri-
city. The measure exempts electricity from CM from the
levy.
It is assumed that the whole tax exemption is
passed on to the electricity generators using CM as input
and to the CM gas suppliers in roughly equal propor-
tions by the suppliers through higher purchase prices (9).
These generators and the CM gas suppliers, which repre-
sent a specific category of undertakings, are therefore
granted an advantage. The advantage is granted through
State resources as the State suffers a loss of tax revenues.
The recipients exercise an economic activity on markets
(electricity and natural gas) on which there is trade
between Member States. The scheme thereby distorts or
threatens to distort competition and could affect trade
between Member States.

(28)

The selective advantage which the measure grants, is not
justified by the logic and nature of the tax system itself.
In this respect, the Commission maintains the reasoning
in its decision to initiate the procedure as summarised in
point 12 of this decision. The Commission notes that by
letter of 10 July 2003, the United Kingdom notified the
scheme as State aid under the environmental aid guide-
lines.

(29)

In conclusion, the Commission considers that the tax
exemption involves State aid to electricity generators
using CM and to CM gas suppliers. Such an aid which is
not linked to investment is operating aid.

(32) Methane from abandoned coalmines is a waste gas and
when venting to the atmosphere a potent greenhouse
gas. Methane from abandoned coalmines cannot be
avoided or (with some minor exceptions) be viably used
anymore, except for electricity production. If unused, the
gas will leak to the atmosphere. The Commission there-
fore considers that the extraction of methane from aban-
doned coalmines for electricity production is a way of
managing waste in a responsible manner and is therefore
consistent with the spirit of point 42(a) of the guide-
lines.

the same purpose.

It will contribute to saving other fossil

(33) Using CM for electricity production will lead to energy
fuel
savings.
sources from being used for
If
unused, methane and CO2 from other electricity produc-
tion would vent into the atmosphere. By substituting
it helps to decrease the total
other energy sources,
amount of greenhouse gases damaging the atmosphere.
As the purpose of energy saving measures is the sustain-
able use of energy sources and the reduction of green-
house gases, the measure can be considered to contri-
bute to energy saving in line with point 42(b) of the
guidelines (12).

(34) Operating aid for waste management and energy saving
can be considered compatible with point 46 of
the
guidelines, if the aid is limited to five years and does not
exceed 50 % of the extra costs. By letter of 10 July
2003, the United Kingdom authorities have limited the
duration of the scheme to five years and have demon-
strated that the aid will not exceed 50 % of the extra
costs either at the level of the CMM gas suppliers aor at
the level of the electricity generators.

(30) As regards the argument from ACMMO that electricity
from CM receives beneficial treatment under the German
Erneuerbare-Energien-Gesetz which threatens competi-
tion, the Commission notes that following the ruling of
the Court of Justice of the European Communities in
Case C-379/98 PreussenElektra AG (10), the Commission
decided that the EEG does not constitute State aid within
the meaning of Article 87(1) of the EC Treaty (11).

(35)

In addition, the Commission notes that Article 15(1)(b)
of the Common Position of the Council on the proposal
for a Council Directive restructuring the Community
framework for the taxation of energy products and elec-
tricity (13)envisages a facultative exemption from electri-
city taxation for electricity generated from methane
emitted by abandoned coal mines.

Compatibility of the aid

(31)

The Commission assessed the compliance of the State
aid with Article 87(3)(c) of the Treaty under the environ-
mental aid guidelines, and in particular Section E.3.1
thereof.

(9) It cannot be excluded that suppliers do not pass on the entire
benefit of the exemption and keep a small part of it through their
price negotiations with electricity generators using CMM. This is
nevertheless
In all previous cases
concerning exemptions or reductions from eco-taxes on electricity
charged to suppliers, the Commission has considered that the real
beneficiaries of the aid are the producers of electricity.

supposed to be minimal.

(10) [2001] ECR I-2099.
(11) NN 27/2000 — Germany, EEG law, OJ C 164, 10.7.2002, p. 5.

VI. CONCLUSION

(36)

For the reasons set out above, the Commission considers
that
the measure constitutes State aid within the
meaning of Article 87(1) of the EC Treaty. The aid is in
line with Article 87(3)(c) of the EC Treaty and the envir-
onmental aid guidelines.

(12) For the same reasoning see Commission Decision on State aid
N74/B/2002 — Finland; OJ C 59, 14.3.2003, p. 23, and in particu-
lar point 3.2.2 of the decision.

(13) See footnote 8.

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HAS ADOPTED THIS DECISION:

Article 2

Article 1

This Decision is addressed to the United Kingdom of Great
Britain and Northern Ireland.

instituted by
The exemption from the Climate Change Levy,
the Finance Act 2002, which the United
Section 126 of
Kingdom is planning to implement in respect of electricity
produced from coalmine methane from abandoned coalmines
is compatible with the common market within the meaning of
Article 87(3)(c) of the Treaty.

Implementation of
period of five years.

the aid is accordingly authorised for a

Done at Brussels, 17 September 2003.

For the Commission
Mario MONTI
Member of the Commission