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Glossary · Energy industry & energy transition

State aid law

State aid law EU Law support scheme Capacity mechanism CfD electricity market competition energy transition

State aid law lays down the rules under which state support for undertakings, sectors or certain economic activities in the European internal market is examined, limited or approved. In the electricity system, this concerns, for example, the support of renewable energies, capacity mechanisms, contracts for difference, power plant reserves, hydrogen projects, electricity price compensation, exemptions from levies or grid charges, transformation aid for industry and state-backed investment programmes.

Legal basis: Articles 107 and 108 TFEU

The basis is found in European primary law. Under Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), aid granted by a Member State or through state resources is in principle incompatible with the internal market. This applies to aid of any kind if it favours certain undertakings or the production of certain goods, distorts or threatens to distort competition, and affects trade between Member States. In practice, it is examined whether all criteria are met at the same time: the recipient is an undertaking, the resources are state resources and attributable to the state, an economic advantage arises, the measure is selective, and it can distort competition and affect trade between Member States. If even one criterion is missing, there is no aid in the legal sense.

The prohibition is not absolute. Article 107(2) TFEU lists aid that is compatible with the internal market by law, for example aid to make good the damage caused by natural disasters. Paragraph 3 lists aid that the Commission may declare compatible. For the energy sector, point (c) is particularly important: it permits aid to facilitate the development of certain economic activities, provided it does not adversely affect trading conditions to an extent contrary to the common interest. Point (b) also covers important projects of common European interest and remedying a serious disturbance in the economy of a Member State. Temporary crisis frameworks, among others, were based on this provision.

State aid law therefore does not prohibit state support as a matter of principle. It regulates the conditions under which such support is permissible. The typical examination covers whether the measure serves a recognised objective, whether it has an incentive effect, that is, whether it triggers investments that would not otherwise take place, whether it is necessary, appropriate and proportionate, and whether its negative effects on competition and trade are outweighed by its benefits. For this purpose, the Commission often requires a competitive tender, a design that is as technology-neutral as possible, or a justification of why a more narrowly tailored instrument is necessary. Duration, price caps, claw-back mechanisms, transparency and reporting obligations and evaluations can also form part of the conditions of approval.

Procedure: notification, exemption, guidelines

State aid law takes effect above all through procedures. Under Article 108(3) TFEU, new aid must in principle be notified to the European Commission in advance (notification). Until it is approved, it must not be implemented (standstill obligation). Aid granted unlawfully can be recovered. Notification is more than an administrative step: ministries and undertakings already align the design of an instrument, while it is being developed, with the justifications that can be sustained before the Commission.

For climate, environmental protection and energy aid subject to notification, the Commission has set out its assessment standard in the Guidelines on State aid for climate, environmental protection and energy 2022 (German: KUEBLL, English: CEEAG). They apply to aid granted from 27 January 2022 and specify Article 107(3)(c) TFEU. The CEEAG cover, among other things, the following areas: the reduction of greenhouse gas emissions including renewable energies, energy efficiency, security of supply, energy infrastructure, the closure of coal-fired power plants and reductions of certain electricity levies for energy-intensive undertakings. Nuclear energy is expressly not covered. In addition, there is the General Block Exemption Regulation (GBER): measures that comply with its conditions and thresholds do not require individual notification. Very small amounts can also remain outside the notification obligation as de minimis aid.

Temporary frameworks are also relevant. During the energy price crisis, the Temporary Crisis and Transition Framework (TCTF) allowed faster aid. On 25 June 2025, the Commission replaced it with the Clean Industrial Deal State Aid Framework (CISAF), which applies until 31 December 2030. CISAF above all facilitates state aid schemes for the roll-out of clean energy, industrial decarbonisation and manufacturing capacity for clean technologies. The CEEAG continue to apply in parallel, in particular for more complex measures.

Not every state energy policy is state aid

A common mistake is to equate state aid law with every form of state intervention. Energy policy works with many instruments: laws impose obligations, regulation determines grid charges and connection conditions, public procurement purchases services, taxes and levies change prices, and budget funds finance programmes. What is decisive is whether a selective economic advantage from state resources flows to an undertaking or to a definable group of undertakings. A general CO₂ pricing must therefore be assessed differently from targeted relief of individual sectors from electricity costs. A technical grid connection rule is something different from a subsidy for a specific installation. Likewise, the financing of regulated electricity grids through grid charges is not the same as an investment subsidy. However, if individual consumers are exempted from grid charges or levies, this can become relevant under state aid law. An illustrative image: general rules of the game apply to all players, whereas aid gives individual players a head start.

The distinction from competition (antitrust) law is also important. Antitrust law targets anti-competitive behaviour by undertakings, such as price fixing or the abuse of a dominant position. State aid law is addressed to the Member States and examines whether state action distorts competition. Both areas of law interlock but answer different questions.

Where state aid law takes effect in the electricity system

The electricity system requires high investments and long planning horizons. Many installations do not pay off through short-term wholesale prices alone. As soon as the state guarantees revenues, assumes risks or specifically favours certain actors, state aid law moves into the centre.

  • Renewable energies: State aid law influences whether support rates are determined by tender, how a market premium is designed and how strongly generators remain exposed to price signals. Where support amounts are determined in a competitive bidding process, the CEEAG in principle dispense with a detailed individual calculation of the funding gap.

  • Contracts for difference: In contracts for difference, a target price (strike price) is agreed. If the market price is below it, the state counterparty pays the difference. In a two-sided CfD, the generator must repay additional revenues above the strike price. The one-sided market premium, by contrast, pays only when prices are low. Since the EU electricity market reform, Article 19d of the Electricity Market Regulation (as amended by Regulation (EU) 2024/1747) requires that direct price support for investments in new installations generating electricity from wind, solar, geothermal, run-of-river hydropower and nuclear energy be designed in principle as two-sided CfDs or equivalent schemes. This applies to schemes from 17 July 2027. The Commission also examines these design principles in the state aid procedure. This includes, for example, that supported installations continue to be operated in a market-oriented way and that additional revenues are used appropriately.

  • Security of supply: Capacity mechanisms, such as a capacity market or strategic reserves, remunerate not the kilowatt-hour generated but the provision of available capacity. They can support security of supply, but can also preserve existing power plants or exclude new competitors. It is therefore regularly examined whether a security-of-supply problem has been demonstrated, whether the market cannot solve it by itself and whether the instrument is open to different providers, that is, to power plants, storage, demand-side management and cross-border capacity.

  • Industry and hydrogen: Electricity price compensation, reduced levies, carbon contracts for difference and possible industrial electricity prices are examined to determine whether they prevent carbon leakage, that is, the relocation of production to countries with lower climate protection costs, or whether they merely secure existing cost structures. Criteria are the group of beneficiaries, counterparts, duration, incentive effect and compatibility with the EU's climate targets.

Approval does not automatically mean good market design

Approval under state aid law merely states that a measure is compatible with EU law under certain conditions. It does not prove that the measure is optimal in terms of energy economics, socially balanced or favourable for the budget. Even an approved mechanism can produce windfall effects, set wrong location incentives or give too little consideration to flexibility. Conversely, a politically plausible instrument can be legally difficult if it favours certain undertakings without sufficient justification. If the funding need is set too high, costs for the budget or electricity customers rise. If it is set too low, investments fail to materialise. A tender that is defined too narrowly weakens competition. A tender that is too open lets technologies compete against each other that do not provide the same service to the system.

The Commission thus does not prevent national energy policy: Member States continue to choose their energy mix themselves. However, they must justify selective advantages and make them compatible with common rules. This prevents financially strong states from permanently favouring their undertakings and distorting the European electricity market or the markets for industrial products and hydrogen. At the same time, it can delay programmes if objectives, instruments and evidence are not properly prepared. This is shown, for example, by in-depth investigations into nuclear projects with long-term CfDs.

Distinction from support, regulation and system costs

Support is the political or financial act; state aid law is the assessment standard for it. Regulation sets rules for markets and grids. It becomes relevant under state aid law only when it creates selective advantages from state resources. System costs describe the overall economic costs of the electricity system. State aid law, by contrast, asks whether a state assumption of costs or risk hedging is compatible with the internal market. If a market remunerates flexibility, a price for a system service initially arises. If the state additionally supports certain flexibility providers, this can turn into aid. For the assessment, what matters is who pays, who benefits, how selective the measure is and whether a competitive procedure limits the advantage.

Good aid designs limit windfall effects, preserve price signals, open up competition and define clearly which service is paid for. Poor designs conceal costs, favour established actors, mix industrial and security-of-supply policy objectives or create permanent subsidies without a verifiable counterpart. State aid law is therefore no obstacle to the energy transition. It provides the framework within which state intervention is justified, limited and placed within the European electricity and economic area.

Sources

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Edited by eCMS on 11.11.2026 15:24

© 2026 Erik Schmidt. All rights reserved. Quotations with a link to the source are welcome.