State aid to boost supply of renewable and low-carbon hydrogen

For the second time the European Commission (Commission) has approved state aid for an Important Project of Common European Interest (IPCEI) in the hydrogen value chain based on article 107 (3)(b) of the TFEU. This concerns the IPCEI Hu2Use project involving 13 EU member states that will provide up to € 5.2 billion of state aid to 29 companies. It is expected to boost the supply of renewable and low-carbon hydrogen. The production of hydrogen and the necessary infrastructure are considered as indispensable for the energy transition we are facing. Without state aid, hydrogen projects are less likely to go ahead. State aid rules allow support of this type of project as well as other projects aimed at achieving environmental goals. In this case the Commission approved the aid under the Communication on the Criteria for the analysis of the compatibility with the internal market of State aid to promote the execution of important projects of common European interest (Guidelines).

Communication on IPCEI

Pursuant to article 107 (3)(b) of the of the Treaty on the Functioning of the European Union (TFEU) state aid to promote the execution of an important project of common European interest may be declared compatible with the internal market by the Commission. In its Guidelines the Commission has set out the criteria it applies when assessing state aid granted to promote the execution of IPCEIs. It follows from these Guidelines that in order to qualify as an IPCEI, a project must be important quantitatively or qualitatively, meaning it should be particularly important in size or scope or imply a very considerable level of technological or financial risk, or both.

General criteria

In determining whether or not a project falls within the scope of Article 107(3)(b) TFEU, the Commission will apply the following general criteria:

• Aid must concern a single project, which is clearly defined in terms of its objectives as well as the terms of its implementation, or an integrated project. An integrated project is a project inserted in a common structure, roadmap or programme aiming at the same objective and based on a coherent systemic approach.
• The project must represent a concrete, clear and identifiable important contribution to the EU’s objectives or strategies and must have a significant impact on sustainable growth. The Commission takes into account EU strategies including the European Green Deal, the Digital Strategy, the Digital Decade and European Strategy for Data, the New Industrial Strategy for Europe, and Next Generation EU.
• It must be demonstrated that the project is designed to overcome important market or systemic failures, preventing the project from being carried out to the same extent or in the same manner in the absence of the aid.
• In principle, the project must involve at least four member states and its benefits must extend to a wider part of the EU.
• The benefits of the project must not be limited to the companies or sector concerned but must be of wider relevance and application to the economy or society in the EU through positive spillover effects.
• Important co-financing by the beneficiary or beneficiaries is necessary.
• The project must comply with the principle of ‘do no significant harm’ to environmental objectives within the meaning of Regulation 2020/852.

Specific criteria

In addition, the following specific criteria are taken into account.

• Research & Development & Innovation projects must be of a major innovative nature or constitute an important added value in the light of the state of the art in the sector concerned.
• Projects comprising of first industrial deployment must allow for the development of a new product or service with high research and innovation content or the deployment of a fundamentally innovative production process. First industrial deployment consists of the upscaling of pilot facilities, demonstration plants or of the first-in-kind equipment and facilities covering the steps subsequent to the pilot line including the testing phase and bringing batch production to scale, but not mass production or commercial activities.
• Infrastructure projects in the environmental, energy, transport, health or digital sectors must be of great importance for the environmental, climate, energy, transport, health, industrial or digital strategies of the EU or contribute significantly to the internal market.

Compatibility: balancing test

If it is determined on the basis of these criteria that a project is an IPCEI, the Commission will carry out a balancing test to assess whether the expected positive effects of the aid outweigh the possible negative effects.

To that end the aid must be necessary and proportional. Aid is necessary if, without the aid, the realisation of the project is impossible, or only be possible on a smaller scale, with a more narrow scope, or not with sufficient speed, or in a different manner that would significantly restrict the expected benefits. In view of that, information must be submitted on the counterfactual scenario, which corresponds to the situation where no aid is awarded. The counterfactual scenario may consist in the absence of an alternative project, where evidence supports that this is the most likely counterfactual, or in an alternative project considered by the beneficiaries. In the absence of an alternative project, the Commission will verify that the aid amount does not exceed the minimum necessary for the project to be sufficiently profitable. The maximum allowed aid will be determined with regard to the identified funding gap in relation to the eligible costs. If justified by the funding gap analysis, the aid intensity could cover all of the eligible costs. The aid may also be cumulated with EU funding or other state aid, provided that the total amount of public funding granted in relation to the same eligible costs does not exceed the most favourable funding rate. To prevent overcompensation, the Commission may request the member state(s) to implement a claw-back mechanism.

Furthermore, to prevent undue distortions of competition, the aid measure must be appropriate to address the objective of the project. The Commission will consider and aid measure not to be appropriate if other less distortive policy instruments or other less distortive types of aid instruments make it possible to achieve the same result. Also, in assessing the negative effects of the aid measure, the Commission will focus on the foreseeable impact the aid may have on competition between undertakings in the product markets.

IPCEI Hy2Use: hydrogen

The Commission’s decision on the IPCEI Hy2Use is not yet available, but from its press release it follows that it will cover a wide part of the hydrogen value chain by supporting:

• the construction of hydrogen-related infrastructure, notably large-scale electrolysers and transport infrastructure, for the production, storage and transport of renewable and low-carbon hydrogen; and
• the development of innovative and more sustainable technologies for the integration of hydrogen into the industrial processes of multiple sectors, especially those that are more challenging to decarbonise, such as steel, cement and glass.

The Commission has found that the IPCEI fulfils the required conditions set out in the Communication:

• The project contributes to a common objective by supporting a key strategic value chain for the future of Europe, as well as the objectives of key EU policy initiatives such as the European Green Deal, the EU Hydrogen Strategy and the REPowerEU Plan.
• All 35 projects aim at developing technologies and infrastructure that go beyond what the market currently offers and will allow for major improvements in performance, safety, environmental impact, as well as on cost efficiencies.
• The IPCEI involves significant technological and financial risks. Therefore, public support is necessary to provide incentives to companies to carry out the investment.
• Aid to individual companies is limited to what is necessary, proportionate and does not unduly distort competition. The total planned maximum aid amounts are in line with the eligible costs of the projects and their funding gaps. Furthermore, a claw-back mechanism applies.
• The results of the project will be widely shared by participating companies. As a result, positive spill-over effects will be generated throughout Europe.

State aid opportunities

The ambitions of the EU and several member states to significantly reduce CO2 emissions in the coming years and become climate neutral by 2050 require large investments in the energy sector. To achieve these targets, the aim is to deploy hydrogen on a large scale. This also requires large investments from both companies and governments. With the decision regarding this IPCEI project the Commission demonstrates that the state aid rules provide sufficient flexibility to attain climate goals. In case of non-IPCEI projects, other state aid rules may apply to state aid, such as the Guidelines on State Aid for climate, environmental protection and energy 2022. Both the authorities concerned and the companies involved, should always identify all possibilities and limitations offered by the various aid frameworks in order to make the best possible use of state aid opportunities for the specific project.