The EFTA Surveillance Auhtority clears a large Norwegian state aid package to CCS chains

By the decision delivered in Full-Scale CCS Project (decision of 17 July 2020 no. 85378), the EFTA Surveillance Authority (ESA) approved investment aid and operating aid granted by Norway to Norcem AS (Norcem), Fortnum Oslo Varme AS (FOV) and Northern Lights (NL) for the construction and operation of a full-scale project for the capture, transport and storage of CO₂ (the CCS Project). The legal basis on which the ESA cleared the notified financing measures of the CCS Project was Article 61(3) of the EEA Agreement. These measures were found to be compatible with the functioning of the EEA Agreement given that they met the relevant compatibility conditions in the European Environmental Aid Guidelines (EEAG).

The facts of the case

On 2 July 2020 Norway notified investment aid and operating aid to finance the implementation of the CCS Project over a period of 10 years. The publicly-funded CCS Project consists of three elements: a number of CO₂ capture plants (the Capture Projects); two ships for the transport of liquified CO₂ and a storage facility (the Transport and Storage Project). While NL was the only admitted participant to the Transport Project, FOV and Norcem joined the Capture Projects. Norcem is the only cement producer in Norway and FOV operates a waste-to-energy plant. FOV provides waste incineration treatment services to public authorities and businesses. Heat generated from waste incineration is recycled to power and also in district heating and cooling in the Oslo area.

Notified aid have the legal nature of direct grants and cover a share of the capital expenditure (investment aid) and operational expenditure (operating aid) to be incurred by beneficiaries in the construction and running of the facilities needed for the execution of the CCS Project. According to the estimates submitted by Norway to the ESA, investment aid and operating aid should amount to NOK 15,675 million and NOK 7,826 million, respectively. This amount corresponds to 80% of the capital and operational expenditure of the aid recipients.

The decision of the ESA

After considering the notified measures as aid within the meaning of Article 61(1) of the EEA Agreement, the ESA went on to assess whether such measures could be declared compatible with the EEA Agreement. In that regard, the relevant legal basis that comes to play is the rules in paragraphs 13(h) and 159 of the EEAG. According to this rule, aid to the CO₂ capture, transport and storage covering all elements of the CCS chain qualifies for the exemption from state aid rules in Article 61(3)(c). Because the notified measures consist of investment aid and operating aid to projects covering the whole CCS chain, they fall within the scope of the EEAG. And the ESA reached the conclusion that the notified investment and operating aid fulfilled the following compatibility conditions in the EEAG.

a)Objective of common interest

As stated by the EEAG, CCS is a tool to mitigating climate change and as such contributes to a common objective of environmental protection. Importantly, the Project could be the first large-scale industrial project in Europe and, if successful, may be imitated by others. Indeed, in spite of being in use for some time, the CCS has not yet reached full commercial-scale demonstration level for the whole process chain.

b)Need for state intervention

The ESA believes that the notified aid addresses a market failure because there are insufficient incentives for investing in CCS technology. As a result, there is no demand for it and no private investment in large-scale CO₂ transport and storage facilities.

c)Appropriateness of the state aid

The ESA stressed that investment and operating costs of CCS installations are high and are not mandatory under the national laws of the Member States of the EU and EFTA. The documents submitted by Norway show that without the aid the Capture Projects as well as the Transport and Storage Project have a negative NPV (net present value). A general rule of investment appraisal is that a project with a negative NPV should be not chosen.

d)Incentive effect

This condition is to be assessed with a counterfactual, comparing the level of activity of the aid recipient with and without aid. As said above, the funded projects have a negative NPV and also a lower IRR (internal rate of return) the estimated risk adjusted cost of capital of beneficiaries. On these grounds the ESA took the view that the aid has effectively determined a change in the behaviour of Norcem, FOV and NL as to whether to invest or operate the relevant elements of the Project.

e)Proportionality

The eligibility costs permitted by the EEAG are the funding gap that is the difference between the positive and negative cash flows over the lifetime of the investment. The ESA was satisfied that the data furnished by Norway proved that the notified aid do not exceed the funding gap of the Capture Projects and the Transport and Storage Project. As said above, these are lossmaking projects under all the considered scenarios, even in presence of aid. And the agreements entered into by Norway with the beneficiaries contained effective tools to prevent overcompensation such as maximum return levels and a Gain-Share Mechanism. The latter is of particular relevance should the feared funding gap be bridged by market developments or enactment of new regulation.

f)Avoidance of undue negative effects on competition and trade

When assessing the potential negative effects on competition of aid, the ESA looked in particular at the first mover advantage that aid recipients would have over competitors from the knowledge of CCS technology learnt through the implementation of the Project, in the shape of exclusive IPRs. These concerns, however, are dispelled by the comprehensive knowledge sharing agreements included in the agreements concluded by Norway with the aid recipients. First, contractual provisions require aid beneficiaries to use only technology that is openly available in the market, which should stimulate transfer knowledge in favour of operators of other CCS plants. Second aid recipients have to licence patented technology, the development of which has been partially or fully developed by state aid. Indeed, such IPRs will have to be available on non-discriminatory terms to all interested undertakings in the EEA. The ESA believes that such arrangements may reduce the potential competitive advantage of aid recipients over competitors. Crucially, aid recipients will have no exclusive technologies on which to compete with other operators.

In addition to that, the ESA took into account other factors that contributed to avoid the risk that the notified aid could distort competition. With regard to the FOV Capture Project, the ESA remarked that distortion of competition in the relevant market for the provision of incineration treatment services of residual waste to be recycled in electricity and district heating is unlikely. Price is the most important competition factor in this market and the above described arrangements should avoid the risk of overcompensation. As for the Norcem Capital Project, the beneficiary will certainly incur in additional significant costs in implementing it. The project will not enable Norcem to increase its sales because its plants are already closed to full capacity. The only expected benefit for Norcem is to develop capacity to meet increasing demand for sustainably produced cement.

Lastly, concerning the NL Transport and Storage Project, NL will operate its plants in compliance with an ‘open access’ principle. In other words, third parties will be given access to the NL facilities on a non-discriminatory basis and on the basis of future agreements subjected to governmental approval. This regulator framework should prevent NL from charging excessively high access fees or refusing access to its facilities. That way, NL should have an incentive to grant access to third parties.   

 

Conclusion

Full-Scale CCS Project is the last of a raft of decisions handed down by the ESA concerning aid granted by Norway to CCS plants. Indeed, Norway has been developing this technology since more than 15 years as an effective climate change mitigation tool. Its strategic objective is to develop a full-scale CCS chain in the short term so to meet the ambitious climate targets set out in the European Green Deal at the lowest cost possible.

That said, Full-Scale CCS Project is unprecedented given the size and complexity of the funded project. This is the largest ever aid to CCS plants considered and approved by the European Commission or ESA. Concerning the compatibility conditions discussed in this decision, in addition to the effective measures to ensure that the intensity aid does not exceed the funding gap, the ESA attached a particular attention to the arrangements aimed at preserving the competition health. Knowledge sharing mechanism obliging aid recipients to licence IPR developed via the implementation of the publicly-funded projects is then pivotal to prevent beneficiaries from exploting their post-project market position. This objective is also pursued by the obligation of aid recipient to give third parties non-discriminatory access to their facilities.