Croatia received a green light from the European Commission ("EC") to support the construction and operation of a liquid natural gas terminal on the island of Krk ("Krk LNG Terminal Project"). The EC explained that "the project will contribute to the security and diversification of energy supplies without unduly distorting competition".
Despite creating some political and public turmoil, especially in relation to environmental and climate related questions, the Krk LNG Terminal Project has been listed as a European Union project of common interest in accordance with Regulation (EU) 347/20131 since 2013. The regulation lays down rules for the timely development and interoperability of trans-European energy networks (i) to ensure the functioning of the internal energy market and security of supply in the EU, (ii) to promote energy efficiency and energy saving and the development of new and renewable forms of energy, and (iii) to promote the interconnection of energy networks.2 The Krk LNG Terminal Project has been recognised as strategically important for the diversification of natural gas supplies into Central and Southeast Europe.
The Krk LNG Terminal Project presents a new gas supply route for Central and Southeast European countries, which requires the construction and operation of (floating) infrastructure necessary for the reception, storage, reloading and regasification of liquefied natural gas.3 The terminal has been designed to transport up to 2.6bln cubic metres4 of natural gas per year to the national transmission network from 2021.
The terminal will cost EUR 233.6m to build, with the Croatia State budget contributing EUR 100m. The rest will be financed through the LNG terminal company shareholders5 (EUR 32.2m) and the Connecting Europe Facility, which is centrally managed by the EC (EUR 101.4m).
Croatia will also grant a tariff compensation called a "security of supply fee", financed by levies charged by the gas transmission system operator to gas users along with gas transmission tariffs, in case revenues from the terminal fees are not enough to cover operating expenses. This also represents state aid.
EU state aid rules
The EC assessed the EUR 100m direct financial contribution by Croatia as well as the security of supply fee pursuant to the applicable EU state aid rules and in line with its Guidelines on State aid for environmental protection and energy 2014-20206 ("Guidelines").
The Guidelines set out the conditions under which state aid for energy and environment is considered compatible with the internal market. The EC identified several environmental and energy measures for which state aid is compatible, one of them being aid for energy infrastructure, subject to certain condition.7
When assessing the compatibility of state aid with the internal market, the EC takes into account "common assessment principles" which are: contribution to a well-defined objective of common interest, the need for state intervention, the appropriateness of the aid measure, the incentive effect, the proportionality of the aid, etc.8
State aid is considered compatible with the internal market in case it ensures an increased contribution to the EU's environmental or energy objectives without adversely affecting trading conditions to an extent contrary to the common interest.
The EC's decision
Pursuant to the EC's decision, the respective aid contributes to an objective of common interest. Moreover, the EC found public support for the Krk LNG Terminal Project (i) necessary, (ii) appropriate, and (iii) proportionate and therefore limited to the minimum necessary.
The EC emphasised that the Krk LNG Terminal Project could not be carried out without state aid, hence the aid measures are necessary. In this respect, the EC found that the revenues originating exclusively from the tariffs charged to the users of the LNG terminal would not be enough to recoup the investment costs and ensure the sufficient
1 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure and repealing Decision No 1364/2006/EC and amending Regulations (EC) No 713/2009, (EC) No 714/2009 and (EC) ("Regulation (EU) 347/2013").
2 Par. 17 of Regulation (EU) 347/2013.
4 This annual delivery of natural gas is expected in the first stage of the project, whereas further increases would depend on the future pipeline development in Croatia.
5 LNG Croatia d.o.o./LLC is the company responsible for the development of Krk LNG Terminal Project and is owned by state-controlled companies Hrvatska Elektropriveda (HEP) d.d. and Plinarco d.o.o., with 85% and 15% respectively.
7 Section 3.8. of the Guidelines.
8 For detailed explanation of common assessment principles please see Section 3.2 of the Guidelines.
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