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The Norwegian State aid review: a silent controversy

The Norwegian Environment Agency (NEA) is, in an internal process, reviewing the documentation requirements for industries that are seeking State aid for indirect emissions costs. This includes reviewing how industries shall prove that 30 % of electricity consumption comes from renewable sources, in cases where they decide to opt for such requirement to receive State aid. We see two main scenarios that can play out during this review: (1) a likely move away from the current practices to a market-based approach; or (2) a less likely scenario where the NEA doubles down on the current location-based approach. The agency is estimating to publish more information before the end of September 2023, after their internal scrutiny is completed.

The Norwegian review is taking place amid the allegations of double counting that recently caused the AIB to suspend all exports of Icelandic GOs between 27 April and 02 June this year. With further clarification pending, the sole use of location-based reporting of market participants has been standing at the center of the Icelandic controversy. We see similar risks with the current Norwegian requirements to prove the consumption of electricity from renewable electricity under the country’s State aid scheme for indirect emission costs. A non-compliance complaint under the AIB could potentially result in an export ban of Norwegian GOs.

In the face of this situation, we see a likely impact on the GO market as the NEA inevitably will induce market confidence for Norwegian GOs or create greater uncertainty. In the event of an export ban imposed by the AIB on Norwegian GOs, prices in Norway would significantly decrease, while GO prices in AIB member countries outside of Norway would increase. According to our long-term GO price forecast model, we would see a price increase for EECS GOs of about 4 EUR/MWh for the 2024 vintage compared to a scenario where such a ban is not introduced. Meanwhile, if the NEA adopts a market-based approach, we see alignment with AIB policy. The demand for GOs could then also increase from affected Norwegian industries to the extent that they opt for this condition and are not already sourcing renewable electricity. This could support a moderate increase in prices and provide greater market certainty in the EECS region.

Norwegian State aid regulations for indirect emission costs

According to the Norwegian State aid scheme for indirect emission costs, a beneficiary of State aid, with an electricity consumption that exceeds 5 GWh during at least one of the last four years (which for 2022 was all beneficiaries), needs to conduct an energy audit and:

  1. implement recommendations of the audit report, to the extent that the pay-back time for the relevant investments does not exceed 3 years and that the costs of their investments are proportionate,
  2. ensure that at least 30 % of their electricity consumption comes from renewable energy sources, or
  3. invest a significant share of at least 50 % of the aid amount in projects that lead to substantial reductions of the installation’s greenhouse gas emissions and well below the applicable benchmark used for free allocation in the EU Emissions Trading System.

This is close to identical to the wording of the European Commission’s State Aid Guidelines. The only difference is found with respect to alternative (b), which under the Commission Guidelines hold that State aid beneficiaries can opt to ‘reduce the carbon footprint of their electricity consumption, so as to cover at least 30 % of their electricity consumption from carbon-free sources’, on top of conducting an energy audit.

With respect to condition (b), it is for the support year 2022 in Norway sufficient to refer to the Norwegian Water Resources and Energy Directorate’s (NVE's) climate declaration for physical electricity supply (‘klimadeklarasjon for fysisklevertstrøm’) (from herein after ‘Climate Declaration’) for the years 2019-2021. It does not consider the retirement of GOs within and outside of Norway. Instead, the NVE’s Climate Declaration is based on the NVE’s assessment and calculations of electricity production, imports, and exports. It was developed following a request of the previous Norwegian Government and in response to criticism in the then-sitting Parliament of the GO system and calls for Statnett to leave the AIB. The current Government has also indicated that it wants to leave the GO system, but that it is low on the priority list. The coming decision by the NEA could provide some insight into the matter, with the possibility of a make-or-break impact.

Because of the overwhelming production of electricity from renewable sources in Norway, the NVE’s Climate Declaration for 2019-2021 saw a yearly average of 96 % from renewable sources of final electricity consumption. Consequently, the existing practice concerning Norwegian State aid for indirect emission costs essentially means that all applicants with an energy audit are eligible for State aid for the year 2022. They do not have to do any actual energy transition measures. However, according to sources at the NEA, the current use of the NVE’s location-based calculations has been a temporary solution that is likely to be discontinued. Still, we have been informed that all options are being evaluated. This includes market-based approaches. They are estimating to publish more information before the end of September.

Risks with a location-based approach

Based on indications from the NEA and regulatory developments within the EU/EEA region, we see it as unlikely but still possible that the Agency is doubling down on its current practice to allow for a location-based approach under the State aid scheme for indirect emission costs. The potential risk associated with such an approach is that the Norwegian authorities can be seen as not taking measures to prevent double counting of attributes contained in GOs. A substantial portion of GOs from Norwegian renewable electricity production is being exported, some of which may be used to meet the requirements to receive State aid for indirect emission costs in other countries. Based on our review of the Commission’s State aid approval letters, we assess that such risk already exists for GO of 2022 vintage in relation to the AIB members Finland, Czech Republic, Greece and Slovenia and the non-AIB member Poland. These countries have, according to our interpretation, introduced schemes where State aid beneficiaries could comply with requirements to receive State aid by sourcing unbundled GOs for 2022. Theoretically, this also applies to France, where the option to source GOs exists in case the country’s location-based energy mix does not meet the threshold (see table 1). However, in practice, France is not affected due to the high share of nuclear production in the country.

It is important to note, however, that the European Commission’s State Aid Guidelines for indirect emission costs do not provide any clarification on how an entity should prove that 30 % of its electricity consumption comes from carbon-free sources and when such conditions should be fulfilled with respect to the year(s) State aid is being paid out for. Some countries allow State aid beneficiaries some time to comply with conditions, while other countries require that the conditions are met for the year(s) State aid is being granted. Subject to the European Commission’s State aid approval process, it is up to each country to decide on such details, which includes documentation requirements to prove that 30 % of the electricity consumption comes from renewable sources. However, any practice adopted can be judged against other rules and obligations, whether they come from EU/EEA or AIB membership. This is where the risk emerges.

If the NEA were to double down on its location-based approach or any method that disregards GOs, we foresee one potential scenario where the AIB Board may decide, after scrutiny of its Compliance Assessment Panel, that the Norwegian issuing body (Statnett) and its superior bodies are not doing enough to prevent double counting and double claiming. In line with the temporary export ban imposed on Icelandic GOs, similar measures could in such a case be imposed by the AIB on Norwegian GOs. There is also a possibility that individual countries, where the use of market-based approaches to the State aid carbon-free electricity condition, could justify restrictions to import Norwegian GOs. We assess that this risk also has existed for the vintage 2022, considering the overlapping use of location- and market-based approaches under the different State aid schemes for indirect emission costs, but we have not seen any non-compliance allegations. It is possible, however, that the Icelandic case has opened for greater scrutiny.

In the Icelandic case, which revolved around the omission of the issuing body to address issues of double counting and double claiming, the GO export ban was conditionally lifted on 2 June 2023 after Landsnet (the Icelandic issuing body) provided more information on the issue, while the German issuing body, UBA, still had its ban in place until 28 July 2023. If we were to see a similar development with respect to Norwegian GOs, it would cut the supply of almost 150 TWh of GOs annually to the EECS region, if we assume annual GO supply from renewable sources that reflects the average of issued Norwegian GOs in 2021 and 2022. This should significantly lower prices in Norway while boosting GO prices in AIB member countries outside of Norway. According to our long-term GO price forecasting model, an export ban on Norwegian GOs would result in a price increase for EECS GOs of about 4 EUR/MWh for the 2024 vintage compared to a scenario where such a ban is not introduced.

Impact of a State aid-supported market-based approach

Another scenario, however, could be that the NEA decides to adopt a market-based approach to the State aid requirement, which considers unbundled and/or bundled GOs. The demand for GOs would then increase from the affected Norwegian industry to the extent that it does not already source carbon-free electricity. According to numbers provided by NEA, beneficiaries of State aid for indirect emission costs would require 11.2 TWh of renewable electricity for 2023, if we assume a final electricity consumption equal to the average of beneficiaries’ 2021 and 2022 consumption (see table below). That represents 41 % of the annual average canceled GOs for electricity consumption in Norway during 2021 and 2022, if using a shifted method that looks at cancellations made during the disclosure period between 1 April of the vintage year and 31 March of the following year.

If we assume that all companies opt to cover 30 % of their respective electricity consumption with electricity from renewable sources through such a market-based approach, it could boost GO prices from the wider EECS region to degrees dependent on market boundary restrictions. A potential restriction could be that a market-based approach requires GOs to be bundled with Power Purchase Agreements (PPAs). Such an approach would respond to the previously mentioned criticism expressed by members of Parliament of the GO system’s disconnect from the physical electricity flow. It would also align with the practice recently expressed through the PPA between Statkraft and Hydro. It supplies the large aluminum producer Hydro, who has been a strong critic of unbundled GOs, with bundled GOs, indicating that there is some acceptance among the Norwegian industry to such a market-based approach.

Market impact

We see a looming GO price risk as a result of Norwegian requirements concerning State aid for indirect emission costs and the AIB’s move to take a more active governance role. The uncertainty is unlikely to fade until we see Norway either exiting the AIB or aligning its policy with the AIB. We have identified two main scenarios: (1) a likely move away from the current practices to a market-based approach; or (2) a less likely scenario where the NEA doubles down on the current location-based approach. In the case where the Norwegian authorities opt to continue the current practice of disconnecting State aid payouts from the delivery of GOs, an AIB reaction in the form of an export ban could result in potentially significant bullish consequences for the EECS market while being bearish for Norwegian GOs.

In case the Norwegian authorities land on a market-based approach that considers unbundled and/or bundled GOs, we see a moderate bullish impact for Norwegian and, depending on market boundary restrictions, the wider EECS GOs as Norwegian-domestic demand for GOs could increase. Regardless of the outcome of the NEA’s review process, there will likely be consequences for the GO market, as a decision inevitably will provide confidence or uncertainty with respect to Norwegian GOs.