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EUROPEAN COMMISSION DG COMPETITION Markets and cases I: Energy and Environment State aid I Brussels, 09/08/2022 B.2 AG/IP/mkl D*comp(2022)6003166 Subject: SA.102988 (2022/N) – Estonia Support for the deployment of green hydrogen in the transport sector and as feedstock for the chemical industry, dated 13 May 2022 Dear Madam/Sir, By letter dated 13 May 2022, your authorities pre-notified to the Commission the above- mentioned measure. After an initial examination, the Commission has found the pre- notification to be incomplete in that the following information is missing: Block exemption The General Block Exemption Regulation (GBER) lays down ex ante compatibility conditions on the basis of which Member States can implement State aid measures without prior notification to the Commission. In particular, Article 41 GBER covers investment aid for the production of renewable hydrogen up to EUR 15 million per undertaking per project. Under this article, support can be granted to up to 45% of the net extra cost of the investment compared to a less environmentally friendly investment that would have been credibly carried out without the aid (e.g. production of hydrogen from steam reforming), with the possibility to further increase this aid intensity by up to 20 percentage points depending on the size of the undertaking and by up to 15% percentage points depending on the area where the project is located. Furthermore, where aid is granted through a competitive bidding process, support can reach up to 100% of the eligible costs. Article 36 GBER currently allows investment aid up to EUR 15 million enabling undertakings to go beyond Union standards for environmental protection or to increase the level of environmental protection in the absence of Union standards. It may apply to measures providing support for the installation of refuelling infrastructure for the beneficiary’s own use. For a project to be eligible under Article 36 GBER, the aid must be instrumental in reducing the impact that the beneficiary’s own activities have on the environment. The infrastructure must therefore be directly related to the exercise of the beneficiary’s activities and necessary to achieve an increased level of environmental protection (through the use of zero or low- emission vehicles in carrying out its activities) compared to the situation in the absence of the Please specify the name of the case and the case number in all correspondence. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11. Fax: (32-2) 296.12.42 Email address : [email protected] aid1. Also, they may not lead to a mere displacement of the pollution to other segments of the economy (in particular the fuel production). The basic aid intensity is 40% and can be increased further by 20 percentage points or 10 percentage points if the beneficiary is a small or medium-sized enterprise, respectively. However, semi-public infrastructure used both for the beneficiary’s own use and by third parties (e.g., to recharge or refuel the company staff’s personal vehicles, customers’ vehicles, suppliers’ vehicles, etc.) is not eligible for aid under Article 36 GBER (but can be declared compatible with the internal market under the CEEAG). Article 56b (aid for maritime ports) could also apply for refuelling stations that would supply hydrogen to vessels as hydrogen refuelling stations can qualify as port infrastructure under that article. Port infrastructure includes “alternative fuel infrastructure”, i.e. fixed, mobile or offshore port infrastructure allowing a port to supply vessels with energy sources such as (…) hydrogen, (…) which serve, at least partly, as a substitute for fossil oil sources in the energy supply to transport and which have the potential to contribute to its decarbonisation and enhance the environmental performance of the transport sector”. Article 36a GBER applies to aid for publicly accessible infrastructure granted following a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria. It currently allows investment aid up to EUR 15 million per undertaking per project and with an average annual budget of the scheme up to EUR 150 million, for the deployment of publicly accessible refuelling infrastructure for zero and low-emission road vehicles. Under this provision, Member States can grant investment aid for the construction, installation and upgrade of refuelling infrastructure, supplying road vehicles with renewable hydrogen. Article 36 GBER further covers investment aid for the acquisition of new hydrogen vehicles up to EUR 15 million per undertaking per project. Under this article, support can reach up to 40% of the extra investment costs necessary to go beyond Union standards or to increase the level of environmental protection in the absence of Union standards. The aid intensity can be further increased by up to 20 percentage points depending on the size of the undertaking and by up to 15 percentage points depending on the area where the project is located. The eligible costs are the extra investment costs compared to the costs of a reference (less environmental friendly) investment that would credibly be carried out without the aid (thus generally a diesel or a petrol car/bus/vessel). No aid may be granted to comply with applicable Union standards. In case of retrofitting of vehicles, all relevant investment costs can be considered as eligible. The GBER is currently undergoing a targeted revision. As part of the revision process, Member States were invited to participate to a second Advisory Committee that will be held on 28/09/2022 to share their comments on the amendment proposal shared in July. As set out in the amendment proposal, the Commission is planning to increase the notification thresholds applicable to the above article to EUR 20 million per undertaking per project, along with the introduction of a number of further simplifications. 1. In light of the information above, and the fact that the measure is expected to support 4-6 projects carried out by consortia with aid of €2-20 million per project, kindly explain why the aid measure cannot be (partially) block exempted. 1 This can be the case, for instance, of projects concerning the deployment of recharging or refuelling infrastructure located in depots, parking spaces or other private areas, to which the beneficiary alone has access, and that are necessary to refuel the vehicles used for the performance of the beneficiary’s economic activities. 2 Kindly respond to the questions below if you feel block exemption is not possible for (certain elements of) the measure. Description of the scheme: 2. You indicate in Annex 1 p. 3 that “Beneficiaries of the aid are companies operating in Estonia whose application is approved (applicants)”. Could you clarify whether applicants have already been selected? If this is the case, could you clarify whether the calculations submitted refer to the selected projects or whether they refer to the reference projects which are expected to be supported under the measure? 3. For the transport and the chemical sectors respectively, could you clarify whether only one integrated project for transport and only one for the chemical sector has been or is planned to be selected? 4. Could you provide additional information as to the assessment methodology that will be used to evaluate the project applications under the scheme? Incentive effect and necessity 5. As explained in CEEAG point 90, the necessity for aid must be demonstrated taking into account the counterfactual situation. Please explain what the counterfactual situation is considered to be for the chosen projects. This would generally correspond to the cheapest sustainable method of production, which a beneficiary (or beneficiaries) would choose to invest in, in the absence of aid. 6. CEEAG point 165 provides that where the investment concerns the acquisition or leasing of clean vehicles, the counterfactual scenario generally is the acquisition or the leasing of vehicles of the same category and the same capacity, at least complying with Union standards, where applicable, that would be acquired or leased without the aid. Could you please justify the choice of the counterfactual for the buses, vessels, cars to demonstrate that the counterfactual is of the same category and capacity and at least complying with Union standards. 7. CEEAG points 28, 38 and 90 require the incentive effect and necessity to be demonstrated through a quantification for the reference projects following the description in point 51. Please explain and justify the assumptions used for the analysis provided in the pre- notification documents, in particular the points below. a. Electricity prices: The scenarios provided assume that electricity can be sourced at around the average nightly electricity exchange price of €63/MWh in 2021. Do the assumptions concerning the internal rate of return of projects, and hence the aid amount necessary, still hold in light of the increased electricity, gas and fuel prices in Estonia 2022? Please provide data and updated calculations to support your response. b. Diesel costs: Please indicate whether diesel costs referred to in Annexes 3, 4 and 5 take into account the current increased fuel prices. c. Operating aid: Given that the analyses provided indicate that production and fuelling support will be necessary in almost all scenarios with even low electricity prices, how will the investment aid provided under the proposed measure lead to 3  the realisation of the projects? Will there be a complementary operating aid measure accompanying the current proposed measure? 8. To demonstrate the necessity of the aid for refuelling stations, can you refer to any public consultation, market study showing that refuelling stations would not be deployed without support. Reference can also be made to the number of hydrogen refuelling stations already existing in Estonia and the number of hydrogen vehicles registered in Estonia. Eligibility 9. We understand that the measure would rely on guarantees of origin to ensure that the electricity used for the production of hydrogen is renewable, which - under the draft EU framework - would not be sufficient to prove the renewable quality of the hydrogen produced. Please also note that footnote 54 of the CEEAG 2022 sets out that renewable hydrogen includes “on-grid electrolysers that have concluded renewables power purchase agreements with economic operators producing renewable electricity that fulfil the conditions set out in the Commission Delegated Regulation adopted pursuant to Article 27(3) Directive (EU) 2018/2001”. Can you further elaborate on the renewable hydrogen definition you plan to apply for projects financed under the measure until the EU framework is adopted? Furthermore, could you confirm that, once work to develop the EU regulatory framework for renewable fuels of non-biological origin under the Renewable Energy Directive is complete, the notified measure will be amended if necessary to comply with the requirements for renewable hydrogen and other renewable fuels of non- biological origin set out in the EU framework? 10. Will the projects supported under the measure exclusively produce hydrogen that meets or exceeds the criteria for renewable hydrogen or other renewable fuels of non-biological origin developed under Directive (EU) 2018/2001 and the relevant Commission Delegated Acts therein, or will they also produce hydrogen that does not meet the aforementioned requirements? 11. If projects will not exclusively produce hydrogen that meets or exceeds the criteria for renewable hydrogen or other renewable fuels of non-biological origin developed under Directive (EU) 2018/2001 and the relevant Commission Delegated Acts therein, please explain precisely under what conditions hydrogen production will be eligible to receive support and whether the projects supported would at least exclusively produce hydrogen that makes a substantial contribution to climate change mitigation according to the requirements set out in Regulation (EU) 2020/852 and the relevant Commission implementing legislation therein. 12. Section 4.1 of the CEEAG generally requires support to schemes to be open to all technologies that can contribute to the reduction or removal of greenhouse gas emissions. While limiting the eligibility of support under the scheme is possible, it should be duly justified on the basis of points 95-96 of the CEEAG. Kindly provide justifications for (1) limiting the measure to (renewable) hydrogen projects and (2) limiting the measure to the specific sectors chosen (transport and the chemical sectors) and excluding other competing sectors. 13. We understand that the measure envisages the construction of two electrolysers – one for the transport sector and one for the chemical sector. At the same time, the financial and economic analyses provided show that larger electrolysers require less support. Why is it not envisaged to construct a single larger electrolyser producing renewable hydrogen for both the transport and chemical sectors? 4 Proportionality 14. With reference to the requirements set out in CEEAG point 107 and the points 1-5 raised in Section D of the document submitted titled ‘Description of the proposed measure accompanying the pre-notification’, kindly provide the evidence justifying why aid under this measure should be directly awarded to certain beneficiaries, rather than being allocated through a competitive bidding process. Inter alia, please explain why the risk of strategic bidding cannot be satisfactorily mitigated in the design of a competitive bidding process to allocate the aid and determine the aid level, and any market surveys conducted that would gauge the potential market interest in the sectors to be supported. For the part of the measure linked to the acquisition of hydrogen vehicles and refuelling stations, please justify your reply also in the light of one of the reasons listed under point 176 and point 200 of the CEEAG. 15. According to CEEAG point 48 and 51, aid is considered proportional when it does not exceed the funding gap of the supported project, obtained comparing the profitability of the factual and of a credible counterfactual investment in the absence of aid. Please provide a quantification of the main cost and revenues of the counterfactual investment identified for the projects supported under the measure and explain how it will be ensured that the aid does not exceed the funding gap for each of the supported projects. 16. For the acquisition of hydrogen vehicles, in the absence of a competitive bidding process, the aid amount has in principle to be limited to 40% of the eligible costs. Eligible costs are the difference between the total cost of ownership of the hydrogen vehicle foreseen to be acquired or leased, and the total cost of ownership in the counterfactual scenario. Costs that are not directly linked to the achievement of a higher level of environmental protection are not eligible. For the calculation of eligible costs for buses, cars and vessels, we have seen that you included the costs of the counterfactual in Annexes 3, 4 and 5. It is however unclear to us whether the costs relate to the total costs of ownership of the counterfactual and whether they have been deducted. The draft scheme does not seem to require that total costs of ownership of the counterfactual be deducted from eligible costs and would invite your authorities to clarify this point. 17. For what concerns the acquisition of hydrogen vehicles and for the refuelling stations, we have also observed that the draft scheme does not yet determine the maximum aid intensity. Please clarify a) whether any maximum aid intensity is going to be set for hydrogen vehicles and what it would be and b) how Estonia is planning to determine the maximum aid amount for refuelling stations, i.e. by reference to a funding gap in line with point 201 of the CEEAG or by reference to a maximum aid intensity in line with points 202-203 of the CEEAG. Are there any concession or other benefits granted as part of the aid measure? If so, kindly explain how these fulfil the requirements set out in CEEAG point 112. Avoidance of undue negative effects on competition and trade and balancing 18. If the supported projects may also produce non-renewable hydrogen at certain times, kindly explain how the measure meets the requirements set out in CEEAG points 116 and 127, including the requirement not stimulate or prolong the consumption of fossil-based fuels and energy, and the requirement not to displace emissions from one sector to another. 5 19. Will any aid under this scheme be used to cover ‘dedicated infrastructure’? If so, kindly describe this dedicated infrastructure and how the provisions in points 124 and 125 will be respected. 20. Will the projects supported under the measure be permitted to provide indirect support to new electricity generation based on natural gas, for example by buying electricity generated by such generation from organised markets or PPAs? If so, pursuant to CEEAG point 129, could you kindly explain how a lock in of this generation would be avoided? 21. What proportion of the beneficiaries’ costs are short term variable costs like electricity costs (cf. quantification for CEEAG points 28 and 38)? Will the aid under this scheme primarily be used to cover short-term costs that may be variable? If so, kindly explain how the requirements to monitor and annually updating aid amounts set out in CEEAG point 122 will be fulfilled. 22. Kindly explain how the proposed aid measure will not lead to distortions of competition, for example, through increased market power, pursuant to CEEAG points 132 and 213. As far as the refuelling stations is/are concerned, please clarify whether eligible (integrated) projects could also include a network of refuelling stations (instead of only one station) and to what extent access to the refuelling station would be open to third parties. Without this information, the Commission is unable to define its position on the proposed measure. In your reply you are kindly requested to inform the Commission services whether or not any of the information is confidential2. Otherwise, the Commission services will consider that none of the information provided in your reply contains professional or business secrets. Yours faithfully, [e-signed, p.o An RENCKENS] Nicola PESARESI Head of Unit Contact person: Ivan PEARSON (+32 2 29 92635), Matt WIECKOWSKI (+32 2 29 53763), Alice GALLO (+32 2 29 93068), Nadine MULLER (+32 2 29 96602) 2 Commission communication on Professional secrecy 4582 of 1 December 2003 – Official Journal C 297, 9 December 2003 p. 6-9 6