The Commission’s investigation into the Belgian capacity mechanism

Over recent years, we have witnessed multiple EU Member States bringing forward a range of capacity remuneration mechanisms to respond to pressure on their energy markets. While it is recognised that capacity mechanisms can be key to maintaining appropriate levels of security of supply and keep the lights on, they may also act as backdoor for support to specific technologies or give undue advantages to certain energy operators. Capacity mechanisms therefore risk being caught by the EU State aid rules and we have over the years seen the European Commission (“EC”) probing numerous national mechanisms to ensure State aid compliance. 

The EC’s ongoing probe 

As part of this overall trend, the EC in September 2020 opened an in-depth investigation to assess whether the Belgian capacity mechanism is in line with the EU State aid rules. The investigation has now reached its next step, as the EC has called on interested parties to express their views on whether the mechanism is necessary, proportionate and pro-competitive. Such comments are to be submitted to the EC by 16 November 2020. 

The upshot of the EC’s investigation may be a stamp of approval for the capacity mechanism as proposed by Belgium. However, the EC may also request that the mechanism undergoes changes to be brought in line with the State aid framework. The EC could even go as far as blocking the mechanism entirely. Such a stern outcome seems less likely. Indeed, while the EC sets a high standard, which is not always easy for Member States to live up to, the EC is generally keen to work with the Member State and find solutions to ensure that the mechanism is deemed fit for purpose. The outcome of the EC’s investigation therefore matters a great deal to stakeholders in Belgium’s electricity sector and beyond. 

The EC’s concerns

The EC’s probe is centred around three concerns:

• The EC is keen to identify the actual need for public support and assess whether the capacity mechanism is limited to what is necessary. For now, the EC doubts whether Belgian Authorities have identified the resource adequacy problem precisely enough and whether it has been properly analysed and quantified. Any views on whether the problem is overestimated, possibly leading to over-procurement of capacity, would therefore be key to present to the EC.
• The EC is also concerned that the mechanism may discriminate against certain technologies (such as renewable capacity) or unfairly limit participation of cross-border capacity. Given the EC’s focus on the EU meeting its ambitious green targets, measures that do not support sustainable energy initiatives will typically raise a red flag and end up in the crosshairs of the EC.
• The EC wants to understand whether the so-called “congestion revenues”, that would be earned by the transmission system operator (“TSO”) from the allocation of cross-border tickets, will be allocated in a way that effectively incentivises further interconnection between Belgium and neighbouring Member States.

What is in it for you?

At first blush, the EC’s investigation may look like a dry regulatory issue. However, for stakeholders in the Belgian energy sector, it is anything but. Indeed, the result of the EC’s investigation will affect energy markets both in Belgium and beyond given the links between Belgium and other Member States. Further, capacity mechanisms tend to “pick winners” as they, at least to some extent, define what constitutes “valuable” capacity. A response to the EC’s call for comments therefore presents companies with an opportunity to try to influence both the EC’s assessment and future Belgian energy markets.

Outlook

The federal government is on a tight schedule to get the capacity mechanism approved and implemented in time for it to be able to address security of supply issues that may occur, in particular from 2025 onwards, when all nuclear production capacity in Belgium must be decommissioned. For new installations to get built (or existing installations to get refurbished) by that time, the government aims to get everything in place still this year, in order to complete the first capacity auctions (for delivery at T-4) and have the TSO or central counter party enter into capacity contracts with capacity providers before the end of 2021. Considering the EC’s investigation, this timeline appears ambitious and would require the EC to fast track a decision. 

In any case, the relevant articles of the Electricity Law, introducing the Belgian mechanism, can enter into force only following a positive decision of the EC. We expect close contacts between the government and the EC to avoid a scenario where the government is sent back to the drawing table. Once approved (and possibly subject to certain changes), the government will gear up to get all necessary implementing legislation in place in order to launch the first auctions as soon as possible.

We continue to follow these developments closely and would be keen to assist you with all aspects relating to these matters.