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Competition, Contracts and Electricity Markets

Competition, Contracts and Electricity Markets

A New Perspective

Loyola de Palacio Series on European Energy Policy

Edited by Jean-Michel Glachant, Dominique Finon and Adrien de Hauteclocque

This book fills a gap in the existing literature by dealing with several issues linked to long-term contracts and the efficiency of electricity markets. These include the impact of long-term contracts and vertical integration on effective competition, generation investment in risky markets, and the challenges for competition policy principles.

Chapter 10: Long-term Contracts and State Aid: A New Application of the EU State Aid Regime or a Special Case?

Leigh Hancher

Subjects: economics and finance, competition policy, energy economics, industrial organisation, law - academic, energy law


Leigh Hancher 1 INTRODUCTION This chapter examines two recent decisions adopted by the European Commission (EC) against Poland and Hungary, condemning power purchase agreements (PPAs) as state aid within the meaning of Article 107(1) Treaty on the Functioning of the European Union (TFEU) (ex Article 87(1) EC). The energy sector has yielded abundant case law on the definition of state aid within the meaning of Article 107(1) TFEU in the past decades. Given the long history of state intervention in and through the energy sector, this is perhaps not so remarkable. The two decisions discussed in this chapter may, however, signal a significantly new direction in the application of the European state aid rules to deal with what is essentially a competition-related problem, that is, market foreclosure caused by long-term vertical contracts. But it is crucial to point out that a state-aid analysis pursues a different line of investigation from that followed in a typical Article 81 EC (now Article 101 TFEU case). Under the latter article the standard ‘test’ is whether the contracts in question would have prevented efficient alternative suppliers from accessing customers, hence reducing consumer welfare. The application of this test requires complex market-based analysis. The two state-aid decisions discussed here, in effect investigated where it was most efficient to allocate risk in energy markets and to some extent attempted to analyse how different forms of vertical arrangements could deliver this allocation of risk. However, as is explained below, the decisions did not put...

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