Levelling the Playing Field: How the EU’s new Foreign Subsidies Regulation is shaping the energy sector

, by Georgiou Konstantina

Levelling the Playing Field: How the EU's new Foreign Subsidies Regulation is shaping the energy sector

The European Union has long championed competitive markets, striving to ensure a level playing field for all companies within its borders. On July 12, 2023, the EU took a significant step in this direction with the implementation of the Foreign Subsidies Regulation (FSR). This regulation is designed to address the market distortions caused by foreign subsidies, ensuring that companies benefiting from such subsidies do not gain an unfair competitive advantage in the EU’s single market. This development is particularly relevant to the energy sector, where foreign investments and state-owned enterprises play a crucial role.

The energy sector is not merely another part of the EU economy; it is fundamental to national security, economic stability, and environmental sustainability. Given its strategic importance, rigorous oversight is essential to prevent market distortions that could undermine these critical areas. The sector is often dominated by state-owned enterprises (SOEs) and heavily subsidized foreign companies, making the enforcement of the FSR especially pertinent.

The FSR introduces a comprehensive framework to regulate foreign subsidies within the EU, as companies involved in significant mergers or acquisitions are required to notify the European Commission if they have received foreign subsidies. This requirement is crucial to prevent transactions that could distort competition. Additionally, for large public procurement projects, such as the construction of energy infrastructure, companies must disclose any foreign subsidies they receive, ensuring transparency and fairness in the bidding process.

Moreover, the European Commission has the authority to initiate investigations into companies suspected of receiving distortive foreign subsidies, even if no formal notification has been made. This proactive approach is vital for addressing potential market distortions early. If a foreign subsidy is found to distort the market, the Commission can impose remedies.

The implementation of the FSR has significant implications for the energy sector. Foreign investments in the EU energy sector will be subject to greater scrutiny, which could influence how non-EU companies approach investments and partnerships within the EU. The regulation aims to ensure that EU energy companies can compete on equal terms with those receiving foreign subsidies, promoting fair competition and fostering innovation. Energy companies will need to adapt to new compliance requirements, ensuring transparency regarding foreign subsidies in their financial and operational disclosures. The FSR may also alter market dynamics, potentially affecting pricing, market entry, and competition strategies within the energy sector.

The FSR brings benefits, but also presents challenges. Compliance with the FSR can be complex and administratively demanding for companies. There are also potential geopolitical ramifications, as non-EU governments might respond negatively to the EU’s scrutiny of their subsidies.

Though the FSR’s implementation is recent, its impact is already evident in high-profile energy projects and transactions. In June 2024, the European Commission launched its first in-depth investigation under the FSR, examining the acquisition of PPF Telecom Group by Emirates Telecommunications Group to determine whether foreign subsidies could distort the EU market. Exactly before the FSR’s first official implementation, there was another notable case: Chinese solar panel manufacturers submitted bids to build a power plant in Romania. The European Commission suspected that these companies may have received government subsidies in China, breaching European regulations. Investigations have been initiated into two Chinese firms, LONGi Green Energy Technology Co. and Shanghai Electric Group Co., to determine if their competitive bids for an EU-funded solar park in Romania were unfairly influenced by foreign subsidies.

The scrutiny on these Chinese firms represents a significant step in the EU’s efforts to maintain fair competition. The Romanian solar park project, partly funded by the EU modernization fund, aims to boost the country’s renewable energy capacity. However, the involvement of heavily subsidized Chinese companies has raised concerns. The Commission’s investigation focuses on whether the subsidies allowed these firms to offer bids that undercut European competitors, potentially distorting the market. This case highlights the broader issue of how foreign subsidies can affect strategic sectors like renewable energy, which are crucial for the EU’s climate goals and energy security.

The investigations into LONGi Green Energy Technology Co. and Shanghai Electric Group Co. involve examining the financial assistance these companies received from the Chinese government. This includes subsidies for research and development, production facilities, and export incentives. The Commission is assessing whether these subsidies enabled the companies to propose lower prices that do not reflect the true market costs, thereby disadvantaging EU-based companies that do not receive similar support.

Similar scrutiny had been applied to Chinese electric vehicle manufacturers and biodiesel producers, highlighting the EU’s commitment to preserving fair competition across various sectors.

The FSR’s implementation represents a significant step towards safeguarding the EU’s strategic interests and ensuring fair competition in the energy sector. By addressing the distortive effects of foreign subsidies, the EU is not only protecting its internal market but also promoting a transparent and competitive environment conducive to innovation and sustainable growth. As the regulation continues to take effect, it will be crucial for companies to navigate these new compliance landscapes, ensuring their operations align with the EU’s commitment to fair competition. The EU’s vigilance in enforcing these rules will be essential in maintaining the integrity of its market and supporting its broader policy goals, including those related to energy transition and sustainability.

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