Capacity Mechanisms in Finland and Sweden and Their Compatibility with the Environmental and Energy Aid Guidelines

Electricity consumption and production should be balanced all the time to keep the electricity flow available. However, the consumption varies depending on the time of the year and day, being highest on cold winter mornings and lowest on summer times. On the other hand, amount of renewable electricity has increased previous years, which has made conventional electricity unprofitable and some conventional electricity producers have therefore already left the market. At the same time, renewable electricity, e.g. wind, is dependent on the time of the year and day. This has led to a situation, where the amount of inflexible electricity sources has increased and the threat for power outages has become more actual. Therefore, the countries must secure the balance between consumption and production, for example by enacting capacity mechanisms, to secure the security of supply and the generation adequacy. European Union published Communication from the Commission, Guidelines on State Aid for environmental protection and energy 2014-2020 (2014/C 200/01) (the “EEAG”) in 2014, and the Report from the Commission, Final Report of the Sector Inquiry on Capacity Mechanisms {SWD(2016) 385 final} (the “State aid sector inquiry”) in 2016. EEAG includes possibility for the Member States to grant aid to secure the generation adequacy in electricity sector (capacity mechanism). However, to be compatible with the EEAG and thus with the internal market, these capacity mechanisms should meet seven criteria; objective of common interest, need for state intervention, appropriateness of the aid, incentive effect, proportionality of the aid, avoidance of undue negative effects on competition and trade and transparency. The aim of this thesis was to examine how compatible capacity mechanisms in Finland and Sweden are with the EEAG. The Finnish capacity mechanism as well as the Swedish capacity mechanism were enacted before the launch of the EEAG and therefore they are based on other state aid exemptions; so-called SGEI Exemption and TFEU Article 106(2). However, these exemptions require less than the EEAG requires. The Commission has not analysed the compatibility of the Finnish and Swedish capacity mechanisms with the internal market and there is always a risk that the Commission decides to initiate an examination of their compatibility. If the Commission states that the capacity mechanisms do not meet the requirements of the SGEI Exemption or the TFEU Article 106(2), they should meet the requirements of the EEAG. Even though the measures in Finland and Sweden are quite similar, the result in the analysis was partially different. Outcome of the analysis was that both capacity mechanisms fully met only two requirements out of seven requirements; requirements of incentive effect and avoidance of undue negative effects on competition and trade. In addition, it was hard to say whether the capacity mechanisms meet the requirement of transparency, since there was no information available on the amount of the aid and thus whether the aid exceeds the amount of EUR 500,000. The major reason why the Finnish capacity mechanism does not fully meet the requirements of the EEAG is that Finland assesses the need for the capacity mechanism every fourth year, which is why the system is not based on an up-to-date information. In addition, the system does not have an end-date but is instead meant to be a permanent system, which is not compatible with the requirements of the EEAG. The biggest reason why the Swedish capacity mechanism cannot be deemed to be compatible with the EEAG is that Sweden assesses the need for the capacity mechanism too rarely, so the decisions are not based on an up-to-date information. In addition, Sweden has not published the indicator on which it has based its assessment on need of the capacity mechanism and the estimations of the generation adequacy situations in the future in Sweden are not consistent with the analysis of ENTSO-E