State aid N 521/2008 Germany Aid to Offshore Wind Park Borkum, "Alpha Ventus"

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1 EUROPEAN COMMISSION Brussels, K(2010)7256 endgültig In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus [ ]. PUBLIC VERSION WORKING LANGUAGE This document is made available for information purposes only. Subject: State aid N 521/2008 Germany Aid to Offshore Wind Park Borkum, "Alpha Ventus" Dear Sir, (1) The Commission wishes to inform you that it has decided not to raise objections to the notified measure, because the aid can be found compatible with the internal market in accordance with Article 107 (3) (c) TFEU and Article 61 (3) (c) of the EEA Agreement. 1. PROCEDURE (2) In reply to an aid application of 27 September 2006, Germany provisionally granted on 28 September 2006 aid of up to 30 Mio, subject to a stand still clause, for the planning, building and operation of an offshore wind park (Alpha Ventus, hereafter: AV). On 20 October 2008, Germany notified the aid to the Commission as R&D&I aid under the Community Framework for State aid for Research and Development and Innovation 1 (hereafter: the "R&D&I Framework"). The Commission requested supplementary information by letter of 11 December A first meeting with Germany took place on 18 February Germany submitted its reply on 6 May (3) The Commission requested further information by letter of 23 June A second meeting with Germany took place on 8 September 2009 and Germany submitted its reply on 15 October In that reply Germany supplemented the original notification and submitted information for the measure as environmental investment aid under the 1 OJ C 323, , p. 1. Seine Exzellenz Herrn Dr. Guido WESTERWELLE Bundesminister des Auswärtigen Werderscher Markt 1 D Berlin Commission européenne, B-1049 Bruxelles Belgique - Europese Commissie, B-1049 Brussel België Telefon: (0)

2 Community Guidelines on State aid for environmental protection 2 (hereinafter: "the EAG"). (4) The Commission requested further information with letter of 16 December 2009, to which Germany replied on 19 February Germany has submitted additional information on 23 April 2010, 2 June 2010 and 4 June (5) The Commission has requested further information with letter of 17 June 2010, to which Germany replied on 16 July and 11 August DESCRIPTION OF THE MEASURE 2.1. The project (6) The Alpha Ventus wind park is a project carried out by Deutsche Offshore-Testfeld und Infrastruktur GmbH & Co. KG (hereinafter: "DOTI"). DOTI, employs around 30 persons among which, according to the job descriptions, there are no researchers. The project started on 1 October 2006, hence after the aid application to the national authorities of 27 September 2006 and the provisional granting letter of intent (hereinafter: "LOI") (unverbindliche Inaussichtstellung) dated 28 September Four weeks later, the LOI was transmitted to DOTI on 24 October On 29 September 2006, the DOTI shareholders, E.ON Energy Project GmbH (hereinafter: "E.ON"), Vattenfall Europe New Energy GmbH (hereinafter: "Vattenfall" and EWE AG (hereinafter "EWE"), the turbine manufacturers REpower and Multibrid, the German Ministry for Environmental Affairs and other entities involved in AV and the RAVE-research project signed a joint declaration on their intention to build the AV offshore wind park. (7) The project consists of constructing and operating 12 wind turbines of 5 MW capacity each plus the installation of a power transforming platform in the North sea, about 50 km away from the German mainland in water depth of around 30 m. The turbines used are among the largest turbines existing. Two different suppliers for turbines (Multibrid and REpower) and two different support structures were deliberately selected to gain additional experience. (8) According to Germany, the project risks (logistics, weather, saltwater, water depth) are considerable. (9) In parallel to the AV wind park, a research project called RAVE with a budget of 50 Mio of public support has been established. RAVE consists of several projects which enable interested third parties such as research organisations or turbine manufacturers to conduct research at the AV wind park. The 50 Mio aid to RAVE projects, of which at least 35 Mio have already been granted to several smaller projects, is however not part of the notification. The RAVE projects have not been notified, as they fall under the approved German energy research scheme (see paragraph (16)) and remain below the thresholds for individual notifications. (10) Germany has confirmed that the AV wind park will not constitute an innovation cluster in the meaning of point 2.2. (m) of the R&D&I Framework. 2 OJ C 82, , p. 1. 2

3 (11) As to the history of the project, the German government intended to encourage investment in deepwater offshore wind parks. Germany explained that a substantial number of offshore wind park projects had been approved earlier, but that none of those projects was realised by then. Therefore, Germany contacted a number of interested parties, but only the DOTI-shareholders EWE, Vattenfall and E.ON were willing to undertake such a risky project. In particular, the wind turbine manufacturers were not in a position to invest in the offshore wind parks. Germany stressed the importance of the political signal from such an aid granting decision for the development of offshore wind energy. (12) After the provisional granting letter, the German feed in tariff for offshore electricity was increased. Furthermore, the requirement to build the connection from the wind park to the mainland grid was transferred to the mainland grid operator (E.ON Netz GmbH). These measures improved DOTI's revenues and lowered its costs compared to the initial plans. During the implementation of the project the investment costs and the expected operating costs increased significantly The beneficiaries (13) Direct beneficiary of the 30 Mio aid is DOTI, the joint venture of Vattenfall, E.ON and EWE. (14) Indirect beneficiaries of the 30 Mio grant are DOTI's shareholders EWE, Vattenfall and E.ON. Vattenfall and E.ON are among the largest energy producers in Europe, while EWE produces, sells and distributes gas and electricity in Northern Germany. Initially, DOTI was owned by EWE only. E.ON and Vattenfall, as mutually agreed between the companies and the German government, only joined the company after the German competition authority (Bundeskartellamt) formally approved the participation of E.ON by letter of 8 November 2006 and the participation of Vattenfall by letter of 5 March Then, all three companies held one third in DOTI. However, towards the end of 2008, the ownership structure changed and EWE increased its share to almost 50%, while the participation of E.ON and Vattenfall was diluted to just above 25%. (15) As to selection of beneficiaries, Germany refers to the call for interest regarding research and development in renewable energy, which was published one week before the granting of aid. This call for interest refers to research projects and mentions requirements such as sharing the research results Legal basis (16) The German authorities informed the Commission that the legal basis under which it intends to grant the aid is the German energy research programme (Energieforschungsprogramm der Bundesregierung), approved by Commission decision N 454/05 of On the basis of the Energy Research Programme, Germany published a call for interest (Förderbekanntmachung) regarding research and development in renewable energy on 21 September (17) Germany notified the aid under the R&D&I Framework and subsequently also under the EAG, without however conceding the applicability of the latter Aid instrument (18) The German authorities intend to grant 30 Million to support the investment into AV. 3

4 The grant is subject to a standstill clause related to the notification to the Commission. Therefore, the grant will be disbursed only after the Commission's approval. (19) The duration of the notified project was the period to erect the wind park from 1 October 2006 until 31 March Information on the incentive effect to carry out the project The incentive effect for DOTI (20) Germany stated that DOTI itself had no business plan, but that the DOTI shareholders did each their own assessment The incentive effect for EWE (21) Germany provided information on a draft letter of intent jointly written by EWE and E.ON of 17 March 2006 which stresses that due to the specific project data and risks the two partners think that the project will not be realised without external aid. The partners agree in that draft letter of intent that the investment can only be done if an Internal Rate of Return (IRR) of (6-8) % is achieved. In an from E.ON to EWE, dated 21 March 2006, two options were described. The first option was to go ahead without aid and an IRR of (4-6) %, or, secondly, to ask for the usual IRR requirements and negotiate with the government and accept lengthy negotiations, in order to achieve an acceptable profitability. The recommended option is the second one. (22) For EWE, Germany provided a bar chart produced by EWE in 2009, showing how the expected profitability evolved over time. According to that document, the expected 2006 profitability (including aid) was (3,5-5,5) % after tax ((6,5-8,5) % before tax). Germany also provided a table from EWE which seems to date from 2007 and which roughly confirms the figures from the bar chart. In 2007 EWE expected a profitability of (5 7,5) % without aid and (7 9) % with aid. (23) Germany also provided a note for the meeting of the Board of Directors (Aufsichtsrat) of EWE on 4 October 2006, which mentioned that an economical implementation (wirtschaftliche Umsetzung) of the project without aid would not be possible. The note continues that this is why Germany had confirmed 30 million of aid. The note also refers to another note to be presented to the Board of Directors once the tendering procedure is terminated. An investment decision would be taken if the project is economically feasible The incentive effect for E.ON (24) For E.ON, the state of discussions of 17 March 2006 is already described in paragraph (21) referring to a joint E.ON/EWE document. In addition to that, other documents have been submitted. (25) For E.ON, Germany submitted an internal note by the E.ON board dated 26 March 2007, which approves the project. This note estimated the expected return including aid at (3,5 4,5) %, hence 'substantially below the cost of capital of (5,5 7) %'. The note suggests nevertheless approving the project as 'it offers a strategically important gain in Business secret 4

5 experience for offshore wind parks with comparably low financial means'. The board note of March 2007 does not discuss scenarios without aid. In a letter of March 2009, provided by Germany, E.ON stated that the aid was decisive, but that the aid was not mentioned in the note to the board because there was no legal certainty that the aid would be finally granted The incentive effect for Vattenfall (26) In a note from Vattenfall dated 8 August 2006, its negotiation position vis-à-vis E.ON and EWE concerning the participation in DOTI was prepared. The note cites a number of reasons why Vattenfall should invest in off-shore wind energy. However, the when and how is under discussion, as the previous aid policy and the profitability have prevented an investment in offshore wind energy. With reference to negotiations with the DOTI partners and the Minister for Environmental affairs, the note proposes to the Vattenfall board to invest in DOTI. The investment should produce an IRR of (5 6,5) % with 5 million earmarked as R&D money (outside the profitability calculations) by each of the DOTI partners and 30 million aid by the ministry. (27) Vattenfall has also provided board minutes of a meeting on 8 August 2006, pointing out that "There was unanimity that in spite of the political background of the project attention needs to be paid to an adequate return of (5,5 7) %. ("Einigkeit bestand darin, dass trotz des Forschungscharakters und des politischen Hintergrundes des Projektes auf eine angemessen Verzinsung von (5,5 7) % zu achten sei.") (28) In Vattenfall board meeting minutes of 26 September 2006, a meeting with the State Secretary of the Ministry for Environment was summarised. The negotiation mandate of the Vattenfall representative for a meeting on 29 September 2006 was to announce the participation of Vattenfall in AV, taking into account the framework conditions (adequate return on the investment part, financial contribution by the Ministry for Environment). (29) In the minutes of the Vattenfall board meeting of 4 October 2006, the Vattenfall representative reports from the last negotiation with the State Secretary of the Ministry for Environment. The Vattenfall participant notes that the DOTI partners have agreed to lower their profitability requirement to (5 6,5 ) %. In return, the Ministry's representative confirmed to adapt the offshore aid. ("Das BMU habe im Gegenzug im Rahmen der Verhandlungen eine Anpassung der Offshore Förderung zugesagt."). (30) In a profitability calculation (Wirtschaftlichkeitsrechnung) of 17 October 2006 Vattenfall notes that the energy companies reduce their usual profitability requirements to (5 6,5) % as their contribution to the project. The contribution of the Ministry is, according to that calculation, aid amounting to 30 million. (31) Vattenfall has furthermore provided a note to the board, dated 31 October The note describes the project as a research project, to which the profitability requirements for investments are not applicable. On the basis of two different financing assumptions and a Weighted Average Cost of Capital (hereinafter WACC) of (5 6,5) %, the IRR is expected to reach (4 6,5) % or (4 6,5) %. In contrast, if the project was not considered as being a research project but an investment (WACC of (8 9,5) %), the expected IRR was only (3,5 4,5) % and would remain largely below the Vattenfall requirements for normal Business secret 5

6 investments. These estimates were made under the assumption that aid is granted. According to a note by Vattenfall of 27 October 2006 annexed to the above mentioned note of 31 October 2006, the profitability requirements for investments in the core business are (8 9,5) %. (32) According to spreadsheets created by Vattenfall dated 28 September 2006 and 30 March 2007, the project profitability would rise from (1,2 1,5) % to (2,5 3,5) % with aid. Those detailed spreadsheet distinguish the scenarios with aid and without aid The incentive effect for all DOTI partners (33) All three DOTI partners had a number of joint meetings with representatives from the Ministry of Environment. In minutes written by the Ministry of a 'summit' meeting on 14 July 2006 between the minister and the three DOTI partners, it is mentioned that the amounts invested by the companies need to be split in a R&D component and in an investment component ("investive und Forschungsmittel") in order to improve the compatibility of the measure with the internal profitability requirements. (34) In a meeting on 30 August 2006 between the DOTI partners and the State Secretary of the Ministry for Environment, the minutes written by the Ministry mention that AV is economically not acceptable for DOTI without adequate aid Information on allegedly eligible project costs according to the R&D&I Framework (35) Germany, as requested by Commission services, provided data for possible assessment under the R&D&I Framework that distinguished two periods for the calculation of the project costs. The first period is the initially notified period of the project. The second period lasts from April 2010 until the end of the wind park, i.e. the decommissioning of the wind park in (36) As regards the first period, Germany considers that 153 Mio to be regarded as eligible for aid. Of those, according to Germany, 105 Mio are experimental development and 48 Mio industrial research. During that first period net operating profits are 10.9 Mio (sale of electricity ( 13.7 Mio) minus operating costs ( 2.8 Mio)). (37) The second period lasts from the end of the first until the decommissioning of the wind park in During that second period, the net operating profit, as described by Germany, takes into account the revenues and the operating costs during that period. The operating revenues from the sale of electricity are 444 Mio (ca. 30 Mio/year). The operating costs are 143 Mio (ca. 10 Mio/year). The remaining depreciation over the period is 120 Mio and the demolition costs are 10 Mio. The net present value (NPV) of the stream of net operating profits (revenues minus operating costs minus depreciation minus demolition cost minus cost increase) is 38 Mio. (38) Germany, however, underlines that a calculation of the allegedly eligible costs during that second period should and could not be made due to uncertain data and submitted the calculation mentioned only after three requests. (39) Based on these figures, Germany estimates the project costs (initial investment minus net 6

7 operating profits) over the whole period to be around 100 Mio Information on allegedly eligible project costs according to the EAG (40) In order to allow the Commission to assess the aid under the EAG, Germany calculated the eligible costs as the difference of the net costs between the AV project and a conventional project for the initial five year period of the project starting in October 2006 after the preliminary granting of the aid on 28 September (41) Points (105) and (106) of the EAG indeed stipulate that for renewable energy, eligible investment costs must be limited to the extra investment costs borne by the beneficiary compared with a conventional power plant with the same capacity and net of any operating benefits and operating costs related to the extra investment for renewable sources of energy and arising during the first five years of the life of this investment. Therefore, with regard to the notification as environmental aid, Germany calculated the eligible costs as the difference of the net costs over the first five years between the AV project and a conventional project. As the conventional reference project Germany has chosen a gas fired plant. (42) Germany has supplied information regarding the first five years of operation from the perspective of 2006, the time of the aid application. AV is expected to generate during this five year period operational profits (net present value) of Mio after an initial investment (excluding research related costs) of Mio into the production of energy from renewable sources. The conventional reference investment (fictive gas power station) would cost 16.5 Mio for the initial investment and generate net operational profits of Mio over 5 years. (43) Germany has supplied updated information regarding the first five years of operation: From the perspective of 2010, taking into account the cost increase and the increase of the feed in tariff, AV is expected to generate during this five year period operational profits (net present value) of Mio after an initial investment (excluding research related costs) of Mio. The conventional reference investment (fictive gas power station) would cost 16.5 Mio for the initial investment and generate net operational profits of Mio over 5 years. (44) Germany calculated the additional cost of the environmentally friendly wind park as follows from a 2006 perspective: (a) Investment wind park Mio minus alternative investment 16.5 Mio = Mio additional investment costs (b) (c) Wind park's net operational benefits (operational benefits minus operational costs) of Mio. minus net alternative investment's operational benefits of Mio = Mio Conclusion: additional investment cost Mio minus additional net operational benefits Mio. = Mio (45) From the calculation above follows that the aid amount of 30 Million would result in an aid intensity of 22.9%. (46) In view of important cost changes during the implementation of the projects, Germany also submitted information on the additional cost of the environmentally friendly wind park, 7

8 calculated as follows from a 2010 perspective: (a) Investment wind park Mio minus alternative investment 16.5 Mio = Mio additional investment costs (b) (c) Wind park's net operational benefits (operational benefits minus operational costs) of Mio. minus net alternative investment's operational benefits of Mio = Mio Conclusion: additional investment cost Mio minus additional net operational benefits Mio. = Mio (47) From the calculation above follows that the aid amount of 30 Million would result in an aid intensity of 15.8%. (48) Germany has furthermore explained that the aid amount does not exceed the expected lack of profitability including a normal return over the time horizon for which the investment is fully depreciated. From a 2006 perspective, the expected IRR with aid over 16 years would have been (4,5 6) % with a NPV of Mio. The comparable IRR for the gas power station would have been for the same time horizon 33.3%. Also from a 2010 perspective, taking into account the higher investment costs, the IRR of the project is expected at (3 4) % with a NPV of Mio. The comparable IRR for the gas power station was still 33.3% from the 2010 perspective, unchanged compared to ASSESSMENT 3.1. Presence of State Aid pursuant to Article 107 (1) TFEU and notification of the aid (49) A measure constitutes State aid under Article 107(1) TFEU if it fulfils four conditions. Firstly, the funding comes from the State or from State resources. Secondly, the measure confers an advantage to certain undertakings or economic activities. Thirdly, the measure is selective. And fourthly, the measure affects trade between Member States and distorts or threatens to distort competition in the internal market. (50) The 30 million provided to DOTI constitute a direct grant paid with State resources to specific beneficiaries that compete with other European companies in the energy sector; it therefore fulfils all the conditions for the existence of State aid stipulated in Article 107(1) TFEU. Given that DOTI was set up by its three shareholders for the only reason of carrying out the AV project, it shall be considered that there is also indirect aid to DOTI's shareholders, i.e. E.ON, EWE and Vattenfall. The compatibility analysis will therefore also focus on the three shareholders as indirect beneficiaries. (51) The German authorities have notified a grant of 30 Million on the basis of Article 108 (3) of the TFEU. The payment of the grant is subject to the Commission's approval and thereby respects the standstill clause of Article 108(3) of the TFEU Applicability of the R&D&I Framework (52) Prior to a compatibility assessment, it shall be analysed if Germany correctly invokes the applicability of the R&D&I Framework for an assessment of the aid granted. Business secret 8

9 (53) At first the Commission notes that under point 2.1, 5 th paragraph, the R&D&I Framework is declared to be applicable also in cases of R&D&I in the environmental field, provided the other conditions for applicability stated in the Framework are met. (54) Under points 5.2 to 5.8 the R&D&I Framework lists a number of activities that potentially qualify for research funding. While the activities mentioned under points 5.2 to 5.7, i.e. aid for technical feasibility studies, aid for industrial property rights costs for SMEs, aid for young innovative enterprises, aid for process and organisational innovation in services, aid for innovation advisory and innovation support services or the loan of highly qualified personnel are obviously not part of the notified measure, the Commission has assessed whether the notified measure could constitute aid for innovation clusters in the sense of point 5.8 of the R&D&I Framework. (55) However, Germany explicitly stated, see above (10), that it did not intend to run the AV wind park as an innovation cluster as defined in the R&D&I Framework. As a consequence, the notified measure does not qualify as an innovation cluster in the meaning of point 5.8 of the R&D&I Framework either. (56) Having clearly excluded applicability of points 5.2 to 5.8 of the R&D&I Framework, the Commission focussed on whether the notified project falls under aid for R&D projects in the sense of point 5.1.of the R&D&I Framework. (57) While the R&D&I Framework defines in point 2.2. (e) to (g) the research categories of fundamental research, industrial research and experimental development as falling within the Framework's applicability, in point it further refers to the Frascati Manual 3 when classifying activities allegedly falling under the said categories. (58) When assessing which research category could be applicable in the case at hand, the Commission could exclude the category of fundamental research as defined under point 2.2 (e) of the R&D&I Framework, since contrary to what is requested there, the AV project is not merely experimental or theoretical but rather obviously has a direct practical application in view. (59) As for industrial research as defined in point 2.2 (f) of the R&D&I Framework, the Commission notes that commercially usable prototypes are clearly excluded from the scope of this provision. Given that the AV project is designed to be a wind plant commercially usable, albeit only with a limited capacity, the Commission concluded that the project is beyond the boundaries of industrial research. (60) Having excluded the applicability of both fundamental and industrial research, the Commission examined whether the project could qualify as experimental development in line with point 2.2 (g) of the R&D&I Framework. The Framework stipulates that under certain conditions the development of commercially usable prototypes and pilot projects can qualify as experimental development. (61) Under point 2.2 (g), first paragraph, the Framework defines experimental development as aiming at producing plans and arrangements for designing new, altered or improved products, processes or services. 3 Organisation for Economic Co-Operation and Development,

10 (62) While under point 2.2 (g), second paragraph of the R&D&I Framework, the development of commercially usable prototypes and pilot projects can, under certain circumstances, qualify as experimental development, the Frascati Manual further defines pilot plants under point 116 as follows: (63) "Pilot plants to 116. The construction and operation of a pilot plant is a part of R&D as long as the principal 4 purposes are to obtain experience and to compile engineering and other data be used in: Evaluating hypotheses. Writing new product formulae. Establishing new finished product specifications Designing special equipment and structures required by a new process. Preparing operating instructions or manuals on the process." (64) Under point 2.2 (g), third paragraph of the R&D&I Framework, experimental testing of products, processes and services are declared to qualify as experimental development provided that they cannot be used in industrial applications or commercially. (65) When assessing, whether the conditions stated in recitals (61) to (64) above are met, the Commission took into consideration the following factors: (66) Firstly, it has to be underlined that the notified project does not comprise any costs for research personnel. While research on the AV facilities is carried out in the RAVE project that is not part of the notified AV project, see recital (9), the primary recipient of aid under the current notification, DOTI, only employs around 30 persons among which, according to the job descriptions, there are no researchers. (67) In addition, it seems important that the AV project combines certain innovative elements (offshore and installation logistics, power connection) with pure investment elements (purchase of turbines) which constitute the bulk of the eligible costs. While it appears clear that many of these elements (blades, turbines, and logistics) are innovative and the development of these components may have benefited from State aid to their manufacturers, it shall be noticed that their development or manufacturing is not part of the notification. (68) Furthermore, as to offshore and installation logistics used in the AV project, the Commission considers that this type of action in fact relies on proven methods and for this reason cannot be classified as research related actions. Therefore and in view of the above, the Commission considers that the aided project would not meet the condition of aiming at producing plans and arrangements or designing new, altered or improved products, processes or services. (69) Concerning the potential applicability of provisions on prototypes and pilot projects, the Commission is not convinced that the AV project meets the conditions set in the R&D&I Framework together with the Frascati Manual. The reason for this is that, notably in the 4 Format change for reasons of clarity. 10

11 absence of any research staff, obtaining experience and compiling engineering and other data to be used in evaluating hypotheses, writing new product formulae, establishing new finished product specifications, designing special equipment and structures required by a new process and preparing operating instructions or manuals on the process does not seem to be "the principal purpose" of the Alpha Ventus project as required under point 116 of the Frascati Manual. (70) Finally, the Commission found that the AV project does not fall within experimental production and testing of products, processes and services as stipulated under point 2.2 (g) of the Framework, since the commercial use of AV, although very limited, is obvious. (71) Taking into account these arguments, the Commission does not consider that the AV Wind Park constitutes a research project in the meaning of the R&D&I Framework, the purpose of which could fulfil the definitions of the relevant research categories stipulated in the R&D&I Framework. (72) The Commission therefore concludes that the notified measure does not fall within the scope of the R&D&I Framework Applicability of the Environmental Aid Guidelines (73) Chapter 1.5 and 2.1 of the EAG describe the scope of the EAG and the measures they cover, which include support for the production of energy from renewable energy sources. (74) In general, the project serves to achieve an improvement of the environment in the future. Experiences gained from installing and operating Alpha Ventus will be used by both the beneficiaries of the project, the producers of certain components and RAVE to further develop similar projects in deep water and to make them more efficient. However, only in the longer future the know-how gained can be used for strategic decisions and the implementation of large scale off shore projects, allowing the production of larger quantities of green electricity. In this sense, the AV project may contribute to develop profitable off shore wind parks, which electricity will replace energy produced from fossil fuels, reduce CO 2 emission and mitigate climate change. (75) However, the AV project is not a site for the production of green electricity in the ordinary sense. It targets at setting up a demonstration project and a test field for the production of electricity off-shore in deep water. At the time of the application, such production sites for renewable energy had not yet been thoroughly tested and little information on the specific technical requirements, risks and challenges had been available. Recent press reports indicate that since its starting of operation in 2010 this wind park encounters technical difficulties in its operation. (76) As Germany explained, the AV demonstration project should serve for acquiring a first experience with this kind of technology for electricity production. Accordingly, its size in terms of capacity (60 MW) was small and its design did not follow a strict economic logic or the logic of an investor seeking to maximize the project's return. Therefore, the investment cost largely exceeded amounts which may have allowed a reasonable profitability rate. (77) The specificities of the AV-Wind Park, as described, serve the purpose of gaining experience with existing technology of wind turbines in a new environment (off-shore) despite significant additional costs compared to a land based energy plant and not benefiting 11

12 from economies of scale, for the sake of maximum experience rather than maximum production of green electricity. Moreover, to maximise the experience with deep water off shore electricity production the beneficiaries of the aid have installed different technologies (e.g. for the turbines), which also did not allow economies of scale. These characteristics and aspects of the project lead to the conclusion that the production of green electricity was not the primary objective of the wind park but a by-product allowing to reduce the financing gap to implement a project whose primary objective was the demonstration of a technology untested in deep waters. (78) In this respect, the project set-up does not follow the economic logic inherent in the EAG, i.e. allowing for State aid in order to render an environmentally friendly, but in comparison to a less environmentally friendly alternative non-profitable project for the production of green energy profitable. Moreover, the project does not at this stage entirely comply with the environmental logic of the EAG concerning the production of renewable energy either: it is only by using the experiences from this demonstration project and tested technology that it will allow in the future to increase the share of renewable energy compared to overall energy produced. (79) State aid for research, development and innovation in the environmental field is subject to the rules of the R&D&I Framework, but as concluded above in part 3.2, the project does not fall into the scope of the R&D&I Framework. (80) The market diffusion stage of eco-innovation (the acquisition of an eco-innovation asset), though, is covered by the EAG (point 63). Eco-innovations may receive an additional state aid bonus. However, the AV off shore wind park does not correspond with the definition of an eco innovation (point 70 No. 4 EAG), since the off shore energy production does not imply new production processes, new products or services, and new management and business methods. In contrast, the project concerns only a well known production process under different framework conditions (off shore). Further, it targets not primarily the production of energy but testing the facility under these specific conditions. Since the eco-innovation bonus is only a top-up for environmental aid that per se falls within the scope of the EAG, the existence of such a bonus does not enlarge the scope of the EAG. (81) Given the above considerations and taking into account the specific character of AV as a demonstration project and the small amount of renewable energy produced, the Commission considers that the aid for this project does not fall within the scope of the EAG. (82) The Commission therefore considers that there is a gap in specific State aid rules regarding the AV project. Based on this conclusion, the Commission proceeded to assess the proposed aid directly under Article 107(3)(c) of the TFEU Assessment under Article 107(3) of the TFEU (83) The Commission acknowledges AV's long term benefits for the European Union, which are first of all environmental benefits deriving from large scale follow-up projects. Taking into account that, as concluded above, no specific legal basis appears applicable, the Commission has examined whether the aid could be approved on the basis of the TFEU. 5 (84) Having examined the project, the Commission considers that AV can have long term 5 In this context, the Commission has taken into consideration that it has already earlier approved a scheme for "wave and tidal stream energy demonstration" (N 318/2005) partially on the basis of the TFEU. 12

13 environmental benefits in the form of facilitating large scale follow-up projects. Thereby, the project serves to achieve an improvement of the environment. Experiences gained from installing and operating Alpha Ventus will be used by both the beneficiaries of the project, the producers of certain components, RAVE and third parties, which will gain access to the results, to further develop similar projects in deep water and to make them more efficient. In the longer future the know-how gained can be used for strategic decisions and the implementation of large scale off shore projects allowing the production of significantly larger quantities of green electricity. The AV project thereby will contribute in the longer term to develop profitable off shore wind parks, which electricity will contribute to the RES share in the European energy mix, reduce CO2 emission and mitigate climate change. (85) To be considered compatible, an aid should pursue an objective of common interest in a necessary and proportionate way and should not adversely affect trading conditions to an extent contrary to the common interest. Accordingly, the Commission did examine the following questions: (a) Is the aid measure aimed at a well-defined objective of common interest (i.e. does the proposed aid address a market failure or another objective of common interest)? (b) Is the aid well designed to deliver the objective of common interest? In particular: (c) Is the aid measure an appropriate instrument, i.e. are there other, better-placed instruments? (d) Is there an incentive effect, i.e. does the aid change the behaviour of firms? (e) Is the aid measure proportional, i.e. could the same change in behaviour be obtained with less aid? (f) Are the distortions of competition and the effect on trade limited, so that the overall balance is positive? (86) The Commission will in its balancing of the positive and negative effects of the aid take into account that the project would in the long term provide environmental benefits and that it appears to be clearly in line with the European climate policy (e.g. reduction of CO2 emissions). For the balancing test, it will, where appropriate, assess similar criteria as established in the EAG and in the R&D&I Framework for the detailed economic assessment for investment aid above certain thresholds Compatibility of the aid (87) Renewable energies such as wind power, solar energy, hydropower and biomass play a major role in tackling the challenge of reducing global warming. In January 2007, the Commission published a Renewable Energy Roadmap outlining a long-term strategy. It called for a mandatory target of a 20% share of renewable energies in the EU's energy mix by The target was endorsed by EU leaders in March To achieve this objective, the EU adopted a new Renewables Directive in April 2009, which set individual targets for each Member State. It requires each Member State to increase its share of renewable energies such as solar, wind or hydro in the EU's energy mix to raise the overall share from 8.5% today to at least 20% by (88) The Commission acknowledges that off shore wind energy is a key technology for the achievement of the 2020 energy and climate objectives. Furthermore, it considers support to 13

14 increase the learning rate of great importance for innovative technologies such as wind off shore in order to bring costs down. (89) To avoid a distortion of competition in this promising area of energy production, the Commission examines whether the measure proposed by Germany is in line with State aid rules. Further to its strategic objectives, the project pursues at first hand environmental objectives by preparing the next steps for the production of off-shore wind energy, carrying out a demonstration project in this field and at the same time actually producing small amounts of energy from renewable sources. (90) According to the information provided by Germany, the project is not a usual investment project for the production of electricity from renewable energy sources, as it is envisaged under the EAG. In particular, from a commercial and operational point of view, the project has not been optimised in terms of costs for the production of green electricity and is clearly different from a standard investment in the production of green electricity. Germany underlines that AV is first of all a demonstration project and testing field: The energy produced by the project is rather limited, only 12 turbines of 5 MW are used; Those turbines have been ordered from two different producers (6 each); The turbines have two different support structures ('jacket and tripods'); 6 turbines have been built 'ready to use', 6 more have been supplied as a cooperation between the turbine manufacturer, the support structure producer and a logistics company; A large number of instruments for measuring which serve the RAVE project raise the project's costs. (91) Notwithstanding the assessment whether the aid was necessary to encourage an environmentally more friendly behaviour of the recipient of the aid (compared to the scenario without the aid), in principle the project targets at serving environmental purposes, namely promoting the future production on energy by off shore wind parks located in deep water. (92) Due to the high aid amounts involved, a detailed assessment will be conducted on the basis of the positive and negative elements of the aid in question. As regards positive effects, the aid must address a clearly identified market failure, be an appropriate instrument, have an incentive effect and be proportionate. The negative impact of the aid on competition and trade needs to be limited. Positive and negative elements will be weighted and balanced against each other Common objective and existence of a market failure (93) The Commission will verify whether the State aid is targeted at a market failure by having a substantial impact for the benefit of the European Union (e.g. on environmental protection). In this context, particular attention must be paid to the expected contribution of the measure to the environmental protection. At the time when the beneficiary applied for support to the project, market players had not reached the industrial scale for deep water wind parks due to technological and commercial uncertainties, and because such projects require significant amounts of investment. In particular, the quick optimisation of this technology was not provided for by other market players and the German authorities consider that in absence of the AV project, the available technology would be a less energy efficient one. (94) In case of success of the AV wind park, the environmental benefits would be the 14

15 implementation of off shore wind parks in deep water. If the project was not carried out, it is likely that such wind parks would be constructed only at a later stage or in a less optimised form. Apparently, the environmental benefits consist, at this stage of the optimisation, of an environmentally friendly technology. Compared to the counterfactual scenario (no investment in an off shore deep water wind park), the demonstration project may lead to improve framework conditions for deep water wind parks and by this increase in the future considerably the production of green electricity by improving applicable technologies. (95) Germany has undertaken that the know-how acquired by the AV demonstration project will be as a matter of principal published and will be available for any interested third party. Information and findings of DOTI will be available for DOTI's competitors. Additionally, DOTI will inform competitors via its extensive public relations policy on experiences, which will include e.g. basic findings with the operation of the installed 5 MW units and the tripod and jacket foundations in large distance from the coastal line. Further information will be disseminated, e.g. on international conferences, in workshops and seminars, which will be accessible for third parties from the sector, and as well by articles in professional journals. (96) The AV project contributes to the objective: Fighting Climate change and ensuring the energy policy objectives need substantial investments in clean technologies and production, in a very short time period. Innovative projects in these sectors are therefore needed to guarantee that Europe's objectives are reached. In assessing the Alpha Ventus project, the Commission is taking note of the contribution of such a project to the European interest. (97) The aided project has also direct environmental benefits (production of renewable electricity) but of a limited magnitude since it is a demonstration project with a small capacity. In addition and more importantly, the project can be considered to produce indirect environmental benefits by generating know-how that can be used for further full scale renewable offshore plants. (98) On the side of potential benefits, offshore wind parks appear particularly environmentally friendly because they produce electricity from energy sources. From the human perspective they may cause less visual concerns (e.g. deterioration of view on landscapes), noise and shadow in populated areas and do not consume scarce ground for their construction. The overall environmental balance and impact can be considered positive as long as potential negative effects on the environment due to constructing methods (e.g. underwater noise, sea bed integrity) and location of wind farms (related to bird collision) are being properly addressed. Further, being used as a research platform for RAVE, the project will allow gaining knowledge on the specific environmental concerns of off-shore wind parks technically fully developed, due to higher wind speeds off-shore facilities may become more efficient than alternative installations on shore. The above mentioned benefits were not fully reflected in the price of electricity at the time of granting the aid. Therefore, taking into account all these benefits that are however difficult to quantify in monetary terms, it appears justified to compensate for at least a part of the extra costs. (99) Both in the construction phase and during its operation, offshore wind parks face a larger risk compared to conventional power plants or other installations producing electricity from renewable energy sources as on shore wind parks. Rough and deep waters, high waves and higher wind speeds may damage the equipment and result also in additional difficulties to maintain and operate them. From the information submitted by Germany it follows that even the feed-in tariff provided for this form of electricity does not sufficiently compensate for 15

16 the cost involved in these risks. At the time when the project has been set up, such costs for an environmentally friendly energy production have not been adequately internalised by market mechanisms and suggest a market failure. (100) It seems that the notified wind park project will in the long run achieve environmental benefits that could not have been attained without the aid. On this basis the Commission considers that the aid may address a market failure and result in better environmental protection Appropriate instrument (101) In a next step, the Commission has analysed whether the aid instrument is appropriate or if other, e.g. regulatory measures, are better suited to overcome a market failure. (102) The German legislation does not impose upon energy companies to construct plants using renewable energy sources instead of conventional production facilities. Provided that they respect the standards applicable (notably as regards air pollution), conventional installations may be authorized and built. (103) The production of wind energy on offshore sites may be necessary due to the lack of appropriate sites (e.g. noise, deterioration of landscapes). However, the German administration does not force the producers of wind energy to use offshore sites for this kind of installations by legal means. On the contrary, the required technology was not sufficiently developed at an industrial scale to balance the financial and technological risks of such a project that it would allow Germany to impose legal obligations. For these reasons, the option not to grant aid for such projects and to make them mandatory for the production of green electricity does not seem appropriate. (104) To achieve its renewable energy targets, Germany supports both energy production of on shore and offshore wind parks. Therefore, it appears not possible to introduce legislation stipulating that only offshore wind parks, in particular a demonstration project, would get a construction and operation permission. In contrast, the market oriented economy leaves it up to investors to chose the technology and location best suited for producing energy. (105) Taking into account that no mandatory standard exists to enforce investments in demonstration projects for offshore wind parks, which know-how could be used for the construction of future large scale projects and that the project cost largely exceed the cost of the conventional production of energy, the aid may be considered being an appropriate instrument to achieve the environmental objectives Incentive effect and necessity of the aid (106) The Commission usually considers that aid does not present an incentive effect for the beneficiary in cases in which the project already started prior to the aid application by the beneficiary to the national authorities. Since the beneficiary applied for the aid before starting the project the aid may provide an incentive for a more environmentally friendly behaviour. In addition to this formal element, State aid must always have an incentive effect and must result in the recipient changing its behaviour to serve the interest of the European Union. The Member State should prove that without the aid, in the counterfactual situation, the more beneficial alternative serving the common interests would not have been retained and provide information demonstrating that the counterfactual situation is credible. 16