EU cleantech policy: navigating the regulatory maze for investors

July 2024 | SPOTLIGHT | SECTOR ANALYSIS

Financier Worldwide Magazine

July 2024 Issue

Clean energy technologies, known as cleantech, play a vital role in the transition to carbon neutrality and net-zero emissions. Major economies around the world, including the European Union (EU), are shifting strategic priorities away from securing supplies of fossil fuels toward providing support for supply chains that are vital for the decarbonisation of the economy and promoting the cleantech manufacturing capacity required to meet ambitious green targets.

Largely in response to rising global cleantech competition, the EU has refocused its attention toward ensuring that efforts around the world do not undermine the competitiveness of Europe’s industry. In particular, the EU is closely monitoring major investments by the US through the Inflation Reduction Act (IRA) to create a domestic manufacturing ecosystem of cleantech, and China’s growing importance in a number of critical net-zero technology sectors.

The EU has been clear that public resources from the EU and member states alone will not be sufficient to cover the funding gap for cleantech investments in the EU. It has therefore aimed to create a conducive regulatory environment to help raise private financing for the green transition.

This article briefly describes the key regulatory instruments at the disposal of the European Commission (EC) and EU member states and how they may affect the cleantech investment landscape in the EU.

State aid

EU state aid policy provides numerous possibilities to support clean investments at member state level. The longstanding state aid regime, which governs the ability of member states to provide state subsidies to national businesses, has been relaxed in the last couple of years to encourage national support measures in sectors essential to the net-zero transition. The EC has revised a number of state-aid instruments, such as guidelines and temporary frameworks, to simplify the conditions for granting state support to companies driving the EU’s energy transition.

The centrepiece of the EC’s green state aid reforms was the new Temporary Crisis and Transition Framework (TCTF), adopted in March 2023. The TCTF introduced a major novelty: the EC may exceptionally approve the grant of aid to a company to match the level of subsidy that would be available outside of the EU, known as ‘matching aid’, or at least the amount needed to incentivise the company to locate the investment in the EEA. The aid may be granted for investments in cleantech industries such as the production of batteries, solar panels, wind turbines, heat pumps, electrolysers, equipment for carbon capture usage and storage, as well as key components designed and primarily used as direct input for the production of this equipment. This list of equipment closely follows the scope of the IRA. Given the exceptional nature of this aid, a number of conditions apply to qualify for matching aid. The TCTF is applicable until 31 December 2025.

Measures that meet the conditions set out in the TCTF must be notified to the EC, and the EC will approve the aid as compatible. This framework significantly accelerates the notification and approval procedure; for example, some approvals have been granted in less than one month following notification.

Germany was the first member state to take advantage of this new scheme: the EC approved €902m in aid for Swedish battery manufacturer Northvolt to support the construction of a production plant for electric batteries in Germany. The EC confirmed that, without the aid, Northvolt would have established the plant in the US where support was offered under the IRA.

The EC has also introduced a revised framework for Important Project of Common European Interest (IPCEI). The IPCEI framework applies to projects of strategic significance for the EU involving cross-border collaboration between member states and industry and is designed to facilitate the growth of new technologies and production processes in line with the EU’s green objectives. For instance, two IPCEIs on batteries have been launched with a total of €20bn of public and private investment in 68 projects throughout the EU. Likewise, two IPCEIs on hydrogen have been approved with public and private investments for a total of €26.4bn for 76 projects across the EU.

It is ultimately for member states to consider whether and how to use the possibilities provided for in the state aid framework to offer financing incentives to companies, which often depends on the member state’s financial capacity.

Anti-subsidy regulation

The EC has powers under the 2016 Anti-Subsidy Regulation to counteract economic injury to the European industry caused by the importation of subsidised products into the internal market.

In October 2023, the EC opened an anti-subsidy investigation into imports of battery electric vehicles from China. Unusually, the investigation was launched ex officio, in the absence of a formal industry complaint.

The investigation aims to protect fair competition in Europe and prevent distortion of the European market through state subsidies for Chinese products. The investigation will therefore determine whether the battery cars originating in China are being subsidised and whether the subsidised imports cause injury to the EU industry. If the conclusions are affirmative, the EC will examine whether the imposition of countervailing measures such as anti-subsidy duties are in the EU’s interest. The countervailing duties can be imposed on imports by all businesses, with the aim of offseting the advantage conferred by any subsidies on imports of Chinese battery cars to the EU. The EC is aiming to conclude this investigation by summer 2024.

Foreign subsidies regulation

The EC obtained powers in July 2023 under the new Foreign Subsidies Regulation (FSR) to investigate and remedy subsidies received from non-EU countries that distort the EU internal market and undermine a level playing field for EU businesses.

The FSR requires prior notification to and approval from the EC of transactions involving companies that have received financial support from non-EU governments. It also includes a new screening procedure for public tenders involving foreign-subsidised entities, and a broad investigation tool enabling the EC to investigate any commercial activity in the EU (deal-related or not) where foreign subsidies may have a distortive effect in the EU internal market.

This new instrument complements the EU’s state-aid rules, which deal with distortions in the internal market caused by subsidies awarded by EU member states, as well as anti-subsidy rules, which are limited to dealing with imports into the EU but do not address the situation where foreign companies carry out business within the EU on the back of domestic subsidies. The FSR will not apply where another legislation already applies to the foreign funding, for example activities falling under the remit of the Anti-Subsidy Regulation.

While the EU did not explicitly target any country when developing the FSR, the investigations launched to date signal that the EC is using the instrument to address perceived unfair competition by China through the grant of large state subsidies to domestic cleantech businesses, which leads to artificially cheap imports undercutting European competitors. The first notified cases referred for in-depth review concerned bids by Chinese companies in a tender for the provision of electric trains in Bulgaria and in a separate tender for the design, construction and operation of a solar park in Romania. The EC has since closed those in-depth investigations, as the bidders under investigation voluntarily withdrew from the tenders. In addition, the EC’s first ex officio investigation is looking into Chinese-made wind turbines in the EU. At the conclusion of those investigations, the EC has wide-ranging powers to accept remedies offered by the businesses concerned, rather than addressing concerns at a market-wide level.

Net-Zero Industry Act

On 6 February 2024, the EU Parliament and the Council reached a provisional agreement on the Net-Zero Industry Act (NZIA). The NZIA aims to scale up the manufacturing of cleantech in the EU, with the aim that Europe produces 40 percent of its net-zero technologies locally by 2030 and captures 15 percent of the global market value for these technologies.

While the Act does not offer new funding, it is intended to provide easier conditions and certainty to investors and promoters of cleantech manufacturing projects. The projects identified as having a greater potential for decarbonisation, such as solar panels, wind turbines, fuel cells, electrolysers, batteries and grid technologies, will benefit from fast-track permit procedures for construction or expansion and guidance in accessing finance.

The NZIA also encourages the diversification of supply chains for cleantech in public procurement. The Act introduces non-price criteria – such as sustainability and energy resilience – into public procurement rules that are designed to support European manufacturing by overcoming dependencies from single non-EU suppliers of cleantech.

The NZIA has been formally approved by the EU parliament and awaits formal approval from the Council. It will then be published in the Official Journal of the EU and will enter into force. It will be directly applicable in all member states.

Looking ahead

Europe is determined to lead the cleantech revolution. In line with this strategic priority, there are a range of EU measures on offer which provide a more supportive and fairer environment to finance the scaling up of European cleantech manufacturing capacity. Considering rising geopolitical tensions, there have been calls for the EU to develop a comprehensive and overarching green industrial policy at the EU level instead of facilitating support at the national level, something which has been resisted by many member states which see industrial policy as an issue of national sovereignty and competition.

At the same time, the EU is closely monitoring global investment flows in cleantech sectors. Businesses should be alive to the EC’s more assertive use of traditional tools, together with its use of new tools, to tackle what is considered to be unfair foreign support.

It remains to be seen whether the political momentum for a more aggressive focus on cleantech and protectionist measures will continue. European Parliament elections in June 2024 will lead to a new EC which will, ultimately, be responsible for addressing the calls for a more comprehensive EU cleantech strategy as well as the outcomes of the various ongoing investigations.

Giorgio Motta and Niels Baeten are partners and Lizzie Malik is a professional support lawyer at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. Mr Motta can be contacted on +32 2 639 0314 or by email: giorgio.motta@skadden.com. Mr Baeten can be contacted on +32 2 639 0321 or by email: niels.baeten@skadden.com. Mrs Malik can be contacted on +44 (0)20 7519 7463 or by email: elizabeth.malik@skadden.com.

Giorgio Motta, Niels Baeten and Lizzie Malik

Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates