State aid: Commission approves €150 million Finnish strategic reserve to support security of electricity supply

The European Commission has approved, under EU State aid rules, a €150 million Finnish capacity mechanism to safeguard security of electricity supply in Finland. The measure will also help reducing CO₂ emissions in the electricity sector, in line with the EU Green Deal, and it will contribute to the objectives of the REPowerEU Plan to reduce dependence on Russian fossil fuels.

Executive Vice-President Margrethe Vestager, in charge of competition policy, said: “The Finnish measure approved today is a well-designed capacity mechanism that will contribute to ensuring security of electricity supply. At the same time, the capacity funded through the measure will not participate in electricity markets, limiting any potential distortion of competition.”

The Finnish strategic reserve

Finland notified the Commission a €150 million Finnish capacity mechanism in the form of a strategic reserve. Capacity mechanisms have the important objective of ensuring security of electricity supply. A strategic reserve is a type of capacity mechanism and has to be set up in line with the requirements of the Electricity Regulation.

The measure aims to ensure a balance between electricity demand and supply during peak consumption periods in Finland. Consumption peaks typically occur during winter months, influenced by the outside temperature and the length of the cold spell. Finland has historically relied on electricity imports from neighbouring countries to manage such peaks. Until 14 May 2022, about 1,400 MW of the approximately 5,000 MW interconnection capacity between Finland and its neighbouring countries was served by Russia. However, in the context of Russia's war of aggression against Ukraine, Russia decided to cut off electricity exports.

The strategic reserve measure, which will be in place until 2032, will support (i) electricity generation units, (ii) demand-side response units and (iii) storage units, with the objective of ensuring their availability when the balance between supply and demand may be at risk of creating shortages. Electricity generation and storage units will offer their availability to start supplying electricity, while demand-response units will offer their availability to reduce electricity consumption. Capacity funded through the measure will not participate in electricity markets for the duration of the strategic reserve, thus limiting the distortion on these markets.

The projects that will benefit from the aid will be selected through a transparent, non-discriminatory competitive bidding process, where beneficiaries will compete on the basis of offers relating to the lowest amount of aid per MW of capacity (also considering technical and environmental aspects, such as flexibility of the units and CO₂ emissions).

The Commission's assessment

The Commission assessed the measure under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (‘TFEU'), which enables Member States to support the development of certain economic activities subject to certain conditions, and the Guidelines on State aid for climate, environmental protection and energy 2022.

The Commission found that:

• The measure has an ‘incentive effect', as the beneficiaries would not keep operating existing units or invest in additional units to the same extent without the public support.
• The aid has a limited impact on competition and trade within the EU. In particular, it is necessary and appropriate to ensure security of supply, in line with the Finnish targets. In addition, it is proportionate, as the level of the aid corresponds to the effective financing needs. Moreover, necessary safeguards limiting the aid to the minimum will be in place, including a competitive bidding process for awarding the aid. Finally, distortions of energy markets are minimised, as the capacity funded is held outside of the electricity markets.
• The measure brings about positive effects that outweigh any potential distortion of competition and trade in the EU.
• The aid complies with the relevant provisions on capacity mechanisms and strategic reserves included in the Electricity Regulation.

On this basis, the Commission approved the measure under EU State aid rules.

Background

The Guidelines on State aid for climate, environmental protection and energy 2022, applicable as from January 2022, create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the Green Deal objectives in a targeted and cost-effective manner. The rules align with the important EU's objectives and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and cater for the increased importance of climate protection. They include sections on aid for renewable energy, energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.

Capacity mechanisms have the important objective of ensuring security of electricity supply. But if they are not well designed, they may lead to higher electricity prices for consumers, give undue advantages to certain energy operators or hinder electricity flows across EU borders.

The Electricity Regulation establishes rules to ensure the functioning of the internal market for electricity and defines a framework for regularly assessing the forecast level of security of supply in the EU. Whenever a risk is identified, Member States need to review the functioning of electricity market, and consider removing the distortions, which may cause the risk. In case such approach is insufficient to address the identified risk, Member States may introduce a capacity mechanism, subject to design requirements to ensure cost-efficient, cleaner and proportionate measures to deliver security of electricity supply.

The Finnish strategic reserve is the first capacity mechanism assessed under the 2022 Guidelines on State aid for climate, environmental protection and energy.

The non-confidential version of the decision will be made available under case number SA.55604 in the State aid register on the Commission's competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the Competition Weekly e-News.