The European Commission has announced that it has opened an in-depth State aid investigation into UK plans to give financial support to the biomass conversion of the coal fired Lynemouth power plant.
As part of the UK's electricity market reforms, eight renewable energy projects - including the Lynemouth project - have been earmarked by the government to receive support in the form of a 'Contract for Difference'. Through Contract for Difference, the UK government sets a sale price - known as a 'strike price' - for the electricity produced by a power plant or other renewable energy generator. When the average wholesale price of electricity is below the strike price, the plant receives a top-up payment from the government. The arrangement means the power plant can sell its electricity into the market profitably.
The European Commission is responsible for ensuring that State support for businesses complies with EU State aid rules. It has the power to approve State measures that promote the generation of energy from renewable resources, but only where those measures comply with strict rules. In broad terms, the Commission has to be satisfied that the financial support from public funds does not exceed the level necessary to allow the project to go ahead. It must also assess whether the positive effects of the project in achieving EU environmental and renewable energy generation objectives outweigh any negative effects on competition in the market for biomass.
Following an initial investigation, the Commission was concerned that the key cost parameters set by the UK might be too conservative. If this were the case, then the actual rate of return generated by the power plant would be significantly higher than the rate of return estimated by the UK government. This would, in turn, lead to a higher level of public financial support for the project than was necessary - so called 'overcompensation' - which would amount to illegal State aid.
The in-depth investigation will allow the Commission to assess whether its concerns are justified. It is also inviting comments from interested third parties, which it will consider before making a final decision on whether the project can proceed.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.