On 31 May 2024, the European Commission (“Commission”) adopted an amendment to its Regional aid Guidelines (“RAG”), allowing EU Member States to grant higher amounts of aid to investment projects falling into the Strategic Technologies for Europe Platform’s (“STEP”) objectives in disadvantaged areas of the EU. STEP is an EU initiative designed to boost the EU’s industrial competitiveness and reinforce EU sovereignty by supporting critical and emerging strategic technologies and their respective value chains.

Key takeaways

• In the EU, large businesses can only receive State aid from Member States for their large investment projects (“LIPs”) in production facilities if their projects take place in disadvantaged areas of the EU. The conditions to access such State support and the maximum aid amount are laid down in the RAG.
• STEP’s objectives are to support the development and the manufacturing of clean tech, digital technologies, and bio-tech.
• The amendment to the RAG allows Member States to grant large businesses higher amounts of aid for their LIPs where they contribute to the STEP objectives.

Regional aid

Aid to large businesses pursuing LIPs is generally considered unnecessary and highly distortive because these businesses already have access to capital and are a significant presence on the market. Such aid can, in principle, only be authorised by the Commission under strict conditions and if it supports an initial investment in new production facilities, output diversification into new products, or a fundamental change in a production process.

The conditions for approval of regional aid are laid down in the RAG. The amount of aid for large projects is calculated as a complex equation. It is based on the investment costs of the project, as limited by a fraction that is decreasing to zero with the higher tranches thereof. Such limited costs are then multiplied by the maximum aid intensity applicable in that region, which ranges from 10% to 70% depending on its level of economic development. In any event, the aid amount cannot exceed the net extra costs of the project compared to the costs of the counterfactual scenario that would take place in the absence of aid. The percentages for disadvantaged areas are determined in Regional Aid Maps adopted by each Member State.

The RAG was last amended in 2021. As part of those amendments, the Commission notably increased – by 10% – the maximum percentage of eligible costs to take into account when calculating the aid amount that can be granted in disadvantaged territories of the EU that are most impacted by climate change. These “just transition areas” are territories qualifying for the “Just Transition Fund” (“JTF”), such as the Taranto area in Italy, the Nord Pas-de-Calais area in France, and the Uckermark area in Germany.

To account for the various crises impacting the EU since 2020, the Commission has adopted more relaxed State aid rules, allowing aid to be granted to large businesses to establish production facilities even outside disadvantaged areas of the EU. This exceptional stance was adopted under: (i) the “Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak”, which allowed aid for the production of COVID-19 relevant products, such as vaccines, until mid-2022, (ii) the “Chips Act” Communication, under which the Commission approves aid for the construction of chips manufacturing facilities, and (iii) the “Temporary Crisis and Transition Framework” (“TCTF”) that allows Member States to grant aid for facilities manufacturing equipment relevant for the transition towards a net-zero economy until the end of 2025 (e.g., batteries, solar panels, wind turbines, heat-pumps, electrolysers, carbon capture usage and storage, as well as key components and critical raw materials to produce such equipment) (see our blog post on this here).

STEP

STEP is part of the Green Deal Industrial Plan (“GDIP”) (see our blog post on this here) which aims to secure the EU’s open strategic autonomy. STEP’s objectives are to enhance the EU’s industrial competitiveness and reinforce EU sovereignty by supporting critical and emerging strategic technologies and their respective value chains in clean tech, digital technologies, and biotech.

It is the financial pillar of the GDIP to support investments in three key technology fields to reduce strategic dependencies: digital and deep tech innovation, clean and resource-efficient technologies, and biotechnologies (see the Guidance Note). It complements key regulatory initiatives such as the Net-Zero Industry Act and the Critical Raw Material Act (see our blog post on this here).

The STEP Regulation entered into force on 1 March 2024. With the exception of defence investment capacity that benefits from an additional budget of €1.5 billion, STEP does not provide for new funding, but merely allows existing EU funding programmes, such as Cohesion policy funds (including the JTF), the Recovery and Resilience Facility, and the InvestEU Fund, to re-allocate resources to support investments in production facilities contributing to the STEP objectives.

The adopted amendment to the RAG

Some EU programs – that can now be used to support investment contributing to the STEP objectives – distribute EU funds to the Member States for them to spend on the projects they have selected, such as the Recovery and Resilience Fund or the Cohesion Policy funds (including the JTF). In such a case, Member States granting those funds must comply with State aid rules, such as the RAG.

Member States may also decide to grant State aid to investments contributing to the STEP objectives from their own resources, provided they comply with the State aid rules.

The amendment to the RAG allows Member States to grant increased amounts of aid to investments contributing to the STEP objectives. The maximum aid intensity can be increased by up to 5% or 10%, depending on the level of economic development of the region. Member States that wish to make use of this possibility to grant higher amounts of aid on the basis of the RAG can submit amendments to their Regional Aid Maps for the Commission’s approval until 16 September 2024. The increase decided can then apply retroactively from 1 March 2024 (date of entry into force of the STEP Regulation) to 31 December 2027.

These increased percentages further expand Member States’ ability to scale-up tech manufacturing offered by the RAG, along with the TCTF and the Chips Act Communication. However, each State aid instrument contains its own conditions, requiring Member States to assess, case-by-case, the basis upon which they would support production facilities. Businesses seeking funding for their manufacturing projects may also have to assess the most adequate legal basis for their support, in particular when they do not rely on a scheme already designed by a Member State.

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Covington has deep experience in the State aid field and can help businesses to navigate the opportunities and pitfalls of the State aid rules, including businesses seeking authorisation of State aid supporting LIPs that contribute to the STEP objectives.