State aid: Commission approves €1.2 billion Czech scheme to promote green district heating

The European Commission has approved, under EU State aid rules, a €1.2 billion Czech scheme to promote green and more efficient district heating mainly based on renewable energy The measure will contribute to the implementation of Czechia‘s National Energy and Climate Plan and to the EU's strategic objectives relating to the EU Green Deal, in particular the EU's 2050 climate neutrality target.

The Czech scheme

Czechia notified the Commission of its intention to introduce a €1.2 billion aid scheme aimed at promoting the decarbonisation and modernisation of heat generation units. The scheme, which will run until 14 January 2026, will be financed by the EU Modernisation Fund.

The scheme will support: (i) the installation of new heat generation units based on renewable energy or high-efficiency cogeneration to replace existing installations, and (ii) the modernisation of existing heat generation unit to operate with biomass instead of coal.

Under the scheme, the aid will take the form of direct grants to owners of existing heat generation units and district heating systems, as well as acquirers of new heat generation units.

Supported projects will have to achieve a minimum reduction of 15% in CO₂ emissions and of 10% in primary non-renewable energy consumption with respect to the levels before their implementation. In addition, projects for natural gas-fired high-efficiency cogeneration will be required to either enable the switch to renewable and low-carbon gases, or implement carbon capture storage or carbon capture utilisation technologies, to avoid lock-in of natural gas.

This scheme is expected to increase the share of renewable energy production in the district heating sector by approximately 8,022 TJ per year and to reduce CO₂ emissions by approximately 889,550 tonnes per year.

The Commission's assessment

The Commission assessed the scheme under EU State aid rules, in particular Article 107(3)(c) of the Treaty on the Functioning of the European Union (‘TFEU'), which enables EU countries to support the development of certain economic activities subject to certain conditions, under the 2022 Guidelines on State aid for climate, environmental protection and energy.

The Commission found that:

• The aid is necessary and appropriate for the modernisation and decarbonisation of the district heating sector in Czechia and that it has an ‘incentive effect'. As fossil fuels have a cost advantage over renewable heat and high-efficiency cogeneration, in the absence of aid, investments in new heat generation facilities would have been based on natural gas, potentially without the combined production of electricity, resulting in lower levels of energy efficiency. In addition, investments in the modernisation of existing heat facilities would have been delayed or not taken place at all.
• The aid is proportionate and limited to the minimum necessary. Beneficiaries will need to submit a complete funding gap analysis on the basis of a detailed methodology provided by the Czech authorities. This analysis aims to identify the net extra cost of the projects applying for support compared to the activity that would be carried out in the absence of aid. The aid granted to each beneficiary will be limited to the lower level between the total investment cost and the individual funding gap.

• The positive effects of the aid on the decarbonisation of district heating systems in Czechia outweigh any potential negative effects on competition and trade between Member States. The scheme will support the modernization and decarbonisation of the district heating sector, reducing greenhouse gas emissions, in line with the European Green Deal, without unduly distorting competition in the Single Market.

On this basis, the Commission approved the Czech scheme under EU State aid rules.

Background

The Commission's 2022 Guidelines on State aid for climate, environmental protection and energy provide guidance on how the Commission will assess the compatibility of environmental protection, including climate protection, and energy aid measures which are subject to the notification requirement under Article 107(3)(c) TFEU.

The new guidelines, applicable as from January 2022, create a flexible, fit-for-purpose enabling framework to help Member States provide the necessary support to reach the Green Deal objectives in a targeted and cost-effective manner. The rules involve an alignment with the important EU's objectives and targets set out in the European Green Deal and with other recent regulatory changes in the energy and environmental areas and will cater for the increased importance of climate protection. They include sections on energy efficiency measures, aid for clean mobility, infrastructure, circular economy, pollution reduction, protection and restoration of biodiversity, as well as measures to ensure security of energy supply, subject to certain conditions.

The guidelines allow Member States to support the production of heat from cogeneration plants linked to district heating sector, subject to certain conditions. These rules aim to help Member States meet the EU's ambitious energy and climate targets at the least possible cost for taxpayers and without undue distortions of competition in the Single Market.

The Energy Efficiency Directive of 2018 established an EU-wide binding energy efficiency target of at least 32.5% by 2030. With the European Green Deal Communication in 2019, the Commission reinforced its climate ambitions, setting an objective of no net emissions of greenhouse gases in 2050. The European Climate Law adopted in June 2019, which enshrines the 2050 climate neutrality objective and introduces the intermediate target of reducing net greenhouse gas emissions by at least 55% by 2030, sets the ground for the ‘Fit for 55' legislative proposals adopted by the Commission on 14 July 2021. Among these proposals, the Commission has presented an amendment of the Energy Efficiency Directive to develop a more ambitious binding annual target for reducing energy use at EU level.

The non-confidential version of the decision will be made available under the case number SA.103821 in the State aid register on the Commission's Competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the Competition Weekly e-News.