European Commission to investigate appropriateness of member states' energy 'capacity mechanisms'

The inquiry is the first to be opened by the European Commission under new sector-wide investigatory powers that were introduced last year. It has written to a "representative sample" of member states that either already have capacity mechanisms in place, or are considering them, to request further information about their national policies.

EU competition commissioner Margrethe Vestager said that member states had "a legitimate interest" in ensuring sufficient electricity supply, and reducing the risk to businesses and households of blackouts.

"This sector inquiry sends a clear signal to member states to respect EU state aid rules when implementing capacity mechanisms, and contributes to the Commission's goal to build a true energy union in Europe," she said.

An increasing number of EU member states have proposed the introduction of some sort of capacity mechanism to address concerns that existing electricity supplies may be unable to meet demand by 2020 whether due to market uncertainties, regulatory interventions or less stable supplies from renewables.

Capacity mechanisms can take a variety of forms but usually involve a combination of encouraging investment in new power generation, incentivising existing power plants to continue to operate or encouraging demand reduction when there are concerns that demand may not match supply. Typically, they offer financial returns to capacity providers on top of income obtained by selling electricity on the market, in return for maintaining existing capacity or investing in new capacity needed to guarantee security of supply.

The Commission has already recognised that capacity markets or similar interventions may be justified, as long as the measures are both necessary and designed in such a way that they do not distort or potentially distort competition in the EU's single market. Its 2014 guidelines on state aid for environmental protection and energy set out its criteria for assessing whether capacity mechanisms are in line with state aid rules for the first time. It has already approved a capacity mechanism put forward by the UK under these guidelines.

State aid sector inquiries were introduced as part of the Commission's state aid modernisation initiative, and allow it to develop a better understanding of a particular part of the economy or a particular state aid measure. They allow it to collect the views not only of member states as is the case in standard state aid inquiries, but also of market participants such as electricity generators, suppliers, network operators and demand response providers.

"The European Commission hopes that this state aid sector inquiry will ultimately increase the number of energy decisions made between neighbouring countries, as well as ensuring compliance with state aid rules," said state aid law expert Caroline Ramsay of Pinsent Masons, the law firm behind Out-Law.com.

"As this is the first time that the energy sector has been looked at from a state aid perspective, it is likely that the Commission will review market information that it already holds on certain state aid energy measures as a starting point in order for it to determine what information it needs to obtain from the wide variety of stakeholders that it can now openly approach. Therefore any stakeholder whose energy measures have previously been investigated should review their records and ensure they are up to date even where the state aid has been approved, particularly over the last 10 years," she said.

The Commission will initially gather information from public authorities and market participants in Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden as part of its inquiry, although it may extend its sample of member states at a later stage if its preliminary findings point to relevant developments in other countries. It intends to publish its preliminary findings before the end of this year, with a final report due by mid-2016.