State aid: Commission approves public support for Croatian LNG terminal at Krk island

 31 July 2019

The European Commission has found Croatian plans to support the construction and operation of a liquid natural gas (LNG) terminal at Krk island to be in line with EU State aid rules. The project will contribute to the security and diversification of energy supplies without unduly distorting competition.

Commissioner Margrethe Vestager, in charge of competition policy, said: "The new LNG terminal in Croatia will increase the security of energy supply and enhance competition, for the benefit of citizens in the region. We have approved the support measures to be granted by Croatia because they are limited to what is necessary to make the project happen and in line with our State aid rules."

The measures approved today will support the construction and operation of a floating LNG terminal, consisting of a floating storage and regasification unit (FSRU) and the connections to the national gas transmission network. The LNG terminal is designed to transport up to 2.6 billion cubic meters per year (bcm/y) of natural gas into Croatia national transmission network as from 2021.

The total investment costs to build the terminal amount to €233.6 million. This will be financed through:

• a direct equity contribution of €32.2 million from the LNG terminal company shareholders;
• a contribution of €101.4 million from the Connecting Europe Facility, which is centrally managed by the European Commission, through the Innovation and Networks Executive Agency (INEA);
• a direct financial contribution of €100 million from the Croatian State budget.

In addition, Croatia will grant a tariff compensation called ‘security of supply fee', which is 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 sufficient to cover operating expenses.

Croatia notified the Commission of the €100 million direct financial contribution, as well as of the security of supply fee. Both support measures involve State aid under EU rules.

The Commission assessed these support measures under EU State aid rules, in particular under the 2014 Guidelines on State Aid for Environmental Protection and Energy. The Commission found that:

• the aid measures are necessary, as the project would not be carried out without them. In this respect, the Commission's financial analysis has shown 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 a sufficient remuneration of the LNG promoter;
• the aid measures are proportionate and therefore limited to the minimum necessary, as they will only cover the "funding gap", that is the difference between the positive and negative cash-flows over the investment lifetime, discounted to their current value (using the cost of capital).

Therefore, the Commission concluded that the measures are in line with EU State aid rules, as they contribute to further key strategic objectives of the EU, including diversifying gas supply sources and increasing the EU's security of gas supply, notably in the Central and South-Eastern regions, without unduly distorting competition.

Background

The KrK LNG Terminal has been included in the lists of European Projects of Common Interestsince 2013, given its strategic importance for the diversification of natural gas supplies into Central and South-Eastern Europe.

The LNG terminal will deliver gas to the Croatian national transmission network, connected with Slovenia, Italy and Hungary, as well as with other EU countries via non-EU Member States such as Serbia and Montenegro.

The beneficiary of the aid measures is the terminal promoter, LNG Croatia d.o.o. (LLC), owned by Hrvatska Elektroprivreda (HEP) d.d., the Croatian state-owned gas and electricity incumbent, and Plinacro d.o.o., the national gas transmission system operator (TSO), with 85% and 15% respectively.

The fees applied by the terminal to its users are fully regulated (set by the Croatian Energy Regulator) and the terminal is subject to third-party access, in line with internal market legislation.

The Commission notes that this State aid decision is taken without prejudice to the obligation of Croatia to comply with other EU law provisions, notably to ensure that the project meets all the requirements of the EU environmental legislation (including Environmental Impact Assessment Directive).

The Commission's 2014 Guidelines on State Aid for Environmental Protection and Energy allow Member States to support the production of electricity from renewable energy sources, subject to certain conditions. These rules aim to help Member States meet the EU's ambitious energy and climate targets at the least possible cost for taxpayers and without undue distortions of competition in the Single Market.The non-confidential version of the decision will be made available under the case numbers SA.51983 in the State Aid Register on the Commission's competition website, once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.