Consultation response – New State aid Framework accompanying the Clean Industrial Deal Communication

Consultation response

The SASHA Coalition welcomes the CISAF as a key tool for decarbonising EU shipping and aviation and building these sectors’ global competitiveness. Renewable fuels of non-biological origin (RFNBOs), namely renewable hydrogen and synthetic fuels, present the only credible pathway for meeting shipping and aviation’s climate targets in FuelEU Maritime and ReFuelEU Aviation without jeopardising EU biodiversity goals. Yet the development and deployment of these fuels is stunted by high risk premiums for private investment and by competition from cheaper yet unsustainable biofuels. Unlocking Member States funds via the CISAF can help unblock this impasse, enabling the EU to decarbonise and cultivate a competitive advantage in these sectors.

However, the CISAF must be designed to ensure only the most promising clean technologies receive State aid, and to maximise the aid’s efficacy and efficiency. Representing innovative, trailblazing companies in green shipping and aviation, the SASHA Coalition secretariat urges DG COMP to give these clean industries-in-waiting the opportunity to flourish and lead the EU in accomplishing its Clean Industrial Deal objectives. As such, our contribution to this consultation proposes two primary changes:

1. Prioritising funds for RFNBOs that have the lowest lifecycle emissions by excluding biofuels from accessing State aid.

2. Allocating aid on the basis of output rather than in the form of lump sums distributed project-by-project.

Biofuels cannot provide reliable clean energy in the long run. The quantity of truly sustainable biomass is extremely limited, meaning that biofuels are incapable of decarbonising aviation and shipping, while unsustainable biomass has higher lifecycle emissions than RFNBOs, particularly when considering indirect land use changes (ILUC). In addition, many biofuel production pathways pose serious risks to biodiversity, to the extent that meeting fuel demand with biofuels would render EU biodiversity targets unachievable.

Biofuels also present a dead-end to competitiveness. The limited supply of sustainable feedstocks combined with competing demand from other sectors will quickly drive up the competitive prices biofuels enjoy today. Overreliance will create dependence on imports with dubious sustainable credentials, impairing progress to net zero as well as energy security. Furthermore, biofuels are already technologically advanced and are not the most valuable recipient of State aid for cultivating competitiveness in industries that would otherwise struggle.

Truly sustainable renewable hydrogen-derived synthetic fuels must be prioritised over biofuels. Financing biofuels not only inefficiently uses public money on non-solutions but also diverts them away from truly clean RFNBOs with a competitiveness opportunity, that are struggling to develop. State aid must follow, at least in part, a merit order that prioritises RFNBOs as the sector that a) has the greatest potential to decarbonise shipping and aviation, b) is the least able to develop without support, and c) has the greatest potential for competitiveness.

Beyond prioritising RFNBOs over less sustainable alternatives, State aid should also incentivise their use in sectors of strategic importance for EU climate goals, and for achieving long-term competitiveness. While renewable hydrogen and synthetic fuels are of unique importance to achieving net zero, they are only of value in select use cases: hard-to-electrify sectors including aviation and shipping. Furthermore, their deployment outside of these use cases, for example in household heating or road transport, would hinder progress to net zero and impair competitiveness by displacing cleaner and resilient sector-specific solutions.

An output-based State aid mechanism should be employed over project-by-project distribution. This would:

• Better attract private investment.

• Simplify State aid distribution.

• Incentivise efficiency and ensure public finances are used effectively.

• Prevent large incumbent companies from outcompeting innovative small companies for aid, which is currently the case because of the complex State aid application process and negotiations.

Optimising the CISAF and delivery of State aid to advance the EU Clean Industrial Deal goals depends on output-based distribution, for example via contracts for difference.

Please provide any comments specific to section 4.1 of the draft framework (“Aid schemes to accelerate the rollout of renewable energy”).

We welcome the inclusion of RFNBOs as eligible for state aid, but they need enhanced support, considering the industry’s infancy and potential for competitiveness. Above all, currently low levels of RFNBO production are not set to meet the demand required by the RefuelEU Aviation and FuelEU Maritime net zero trajectories. Support should be enhanced by:

1. Specifically prioritising RFNBOs for State aid, for example by dedicating a portion of EU funds to co-fund State aid for RFNBO producers, as a means of amplifying and incentivising aid in a strategically targeted manner.

2. Disqualifying biofuels from accessing State aid, due to their limited contribution to decarbonisation and EU competitiveness, and lower need for support. This would be coherent with the welcome decision to disqualify RFNBOs for electricity generation (32), in that it prohibits public funds supporting activities counterproductive for climate action and competitiveness.

A significant shortcoming of the draft text is that the current project-based model for aid distribution will limit RFNBO production. The CISAF currently links aid for renewable energy to investment costs (41), which dramatically reduces aid efficiency and efficacy. It should instead employ an output-based model that links aid to performance. Such an approach would simplify and speed up State aid allocation, incentivise efficient use of aid, create predictable aid flows, and better support small companies and startups pioneering innovation.

Please provide any comments specific to section 5 of the draft framework ("Aid to deploy industrial decarbonisation").

Measures regulating allocation of aid of unsustainable energy sources divert aid from truly sustainable alternatives, and fund competition to renewable hydrogen. Biomass for industrial heat generation must not just be de-prioritised (i.e. 73) but disqualified. This should equally be the case in other relevant points (75b, 81, 82, 106, 107). Natural gas should be disqualified since EU emissions accounting methodologies underestimate methane leakage across gas value chains (73, 75b, 82, 107). In fact, EU lifecycle emission accounting may underestimate methane slip from LNG supply chains by as much as a third, and regulations on biomass production may contain loopholes that may leave emissions from indirect land use changes (ILUC) unaccounted for.

Rather than create extra compliance burdens by compelling developers to measure GHG emissions from low-carbon hydrogen, State aid can be simplified by excluding biofuels and fossil-based hydrogen from State aid, for the reasons outlined above.

If you consider that the prioritisation of technologies for decarbonisation of industrial heat in this section on decarbonisation and energy efficiency is not appropriate (see point (73)), please explain and provide evidence for other criteria you would consider more appropriate.

As stated above, regulations on the use of unsustainable energy sources for industrial heat must be tighter. Biomass and natural gas for industrial heat generation must be disqualified for State aid. Using these energy sources would slow the development of sustainable alternative means of heat production, such as industrial heat pumps, that will also be important in parts of the RFNBO value chain, e.g. for DAC. The inclusion of biomass and natural gas is contrary to the intentions of the CISAF.

For aid schemes covering investments relying wholly or partly on the use of hydrogen, section 5, point (82), the new framework takes into account the fact that Article 22a of  Directive (EU) 2018/2001 on the promotion of the use of energy from renewable sources (RED) establishes targets for renewable fuels of non-biological origin (RFNBO) for hydrogen in industry. The draft framework does so by laying down a minimum share of renewable hydrogen calculated by reference to the average share of electricity from renewable sources in the Member State concerned, as such project-level contribution to meeting national targets established by EU law is considered a positive effect in the balancing exercise under Article 107(3)(c) TFEU. If you consider that the scope for aid for investments for industrial use of hydrogen should be defined differently, please provide justification and any available evidence for the scope of projects for which you consider that State aid for other types or combinations of hydrogen is required.

The intention of not disproportionately channelling aid to States with larger pre-existing renewable generation capacity is correct, however hydrogen from biomass and fossil-based hydrogen should not receive State aid.

If you consider that the safe harbour for natural gas based projects in this section on decarbonisation and energy efficiency is not appropriate (see point (101)), please explain and provide evidence for an alternative presumption you would consider more appropriate.

The measures here are not appropriate since regardless of its short-term necessity in select instances, natural gas should not receive State aid. If natural gas is to be permissible under the conditions outlined in (101b), phase out “by the end of the project’s lifetime” is an inadequate timeline that must be stricter to incentivise transitioning away from fossil fuels. In addition, not all forms of hydrogen outlined in (82) should be eligible – rather renewable hydrogen should be differentiated from hydrogen produced via natural gas. Striving for use of natural gas hydrogen is contradictory with the prevention of fossil fuel lock-in stipulated in (100). Finaly, penalties for non-compliance must outweigh potential cost-savings associated with continued use of natural gas.

These comments apply to point (114) equally.

Please provide any comments specific to section 6 of the draft framework ("Aid to ensure sufficient manufacturing capacity in clean technologies").

The technologies listed (122) should include DAC and associated equipment, and fuel cells, as key components of RFNBO production, and green shipping and aviation.

The complexity of rules in this section serves as further evidence of the need to adopt an output-based system. The burdens of proof placed on manufacturers in section 6 – such as “not crowd[ing] out production capacity” (138) or causing “substantial job losses in existing locations within the EEA” (139) – are near impossible to accurately evaluate and may severely limit access to State aid. Once again, this will disproportionately affect small developers with less time and resources to dedicate to demonstrating compliance.