european commissionec.europa.eu/competition/state_aid/cases/243663/243663_1389058_93_2.pdf · bem...

Őexcellenciája Dr. János MARTONYI Külügyminiszter Bem rakpart 47 H - 1027 BUDAPEST Commission européenne, B-1049 Bruxelles – Belgique Europese Commissie, B-1049 Brussel - Belgium. Telephone : 32 (0)-2 299 11 11.

EUROPEAN COMMISSION

Brussels,

C (....) ….

Subject: State aid/ Hungary SA.34355 (2012/N) Development tax allowance for Pannonia Ethanol Mohacs Zrt.

Sir, The European Commission ("the Commission") wishes to inform Hungary that, having examined the information supplied by your authorities on the State aid measure referred to above, it has decided not to raise any objections to the relevant measure as it is compatible with the Treaty on the Functioning of the European Union ("TFEU"). In taking this decision the Commission has relied on the following considerations:

PROCEDURE

(1) By letter of 14 February 2012, registered by the Commission on 16 February 2012, Hungary notified, according to Article 108(3) of the TFEU, the above mentioned individual aid measure.

(2) By letter of 3 April 2012, the Commission asked for supplementary information which the Hungarian authorities partially provided on 3 May 2012 (registered the next day). On 29 June 2012 the Commission made a further information request, also with reference to the incomplete information received. The Hungarian authorities provided additional information on 17 July 2012, registered on 19 July 2012 and on 7 September 2012, registered on 11 September 2012.

DESCRIPTION

Title

(3) Development tax allowance for Pannonia Ethanol Mohács Zrt.

* Covered by the obligation of professional secrecy.

2

Objective

(4) The planned individual aid concerns the granting of development tax allowances to Pannonia Ethanol Mohács Zártkörűen működő Részvénytársaság ("PEMZ" or "aid beneficiary") for regional development, once it constructed and it put in operation a new green field facility to produce bioethanol in Mohács (Baranya country, South Transdanubia, NUTS II region of Hungary). The start date of the investment is 4 April 2012 and it is planned to be completed in December 2013.

Beneficiary

(5) Pannonia Ethanol Mohács Zártkörűen működő Részvénytársaság ("PEMZ"), formed in 2011, is part of a large group of companies.

(6) Ethanol Europe Renewables Limited, an Irish company ("EERL"), formed Ethanol Europe III S.à.r.l., a Luxembourg limited liability company ("EE"), to own Pannonia Ethanol Mohács Zártkörűen Működő Részvénytársaság, a Hungarian company limited by shares ("PEMZ"). PEMZ is owned by EE, which in turn is owned by EERL. EE has no material assets other than its interests in PEMZ's project to build a 240 million litre per year ethanol facility ("investment project") in Mohács, Hungary. EERL's only other material asset is a sister 240 million litre per year ethanol project in Dunaföldvár, Hungary owned by Pannonia Ethanol Zártkörűen Működő Részvénytársaság, a Hungarian company limited by shares ("PEZ").

(7) EERL is ultimately owned by [… ]*. None of the [… ]*. citizens have any other or previous commercial interests in biofuels, outside the Pannonia Ethanol group. Most of the U.S. citizens have other and previous commercial interests in biofuels. Including seven, who are owners and/or directors of Platinum Ethanol LLC (Iowa), a 420 million liter ethanol production facility. The current corporate structure of EERL is provided below*.


3

(8) The aid beneficiary is not a firm in difficulty and the aid will not be used for financial restructuring of a firm in difficulty.

(9) The authorities of Hungary confirmed that the potential beneficiary of the measure has not received any State aid which is subject of an outstanding recovery order by the Commission. The authorities of Hungary are committed to suspend the payment of the notified aid if the beneficiary still has at its disposal an earlier unlawful aid that was declared incompatible by a Commission Decision (either concerning an individual aid or an aid scheme), until the beneficiary has reimbursed or paid into a blocked account the total amount of unlawful and incompatible aid and the corresponding recovery interest.

Legal Basis

(10) The individual aid application is based on the Commission approved "Development tax benefit scheme" (N 651/2006)1, which is implemented by Act No LXXXI of 1996 on Corporate income tax and dividend tax and by Government Decree No 206/2006 on Development tax allowance2.

(11) The Hungarian authorities confirmed that PEMZ will have to comply with the conditions of the original aid scheme (approved as state aid decision N 651/2006)

1 Adopted on 10.05.2007, B (2007) 1955 final. 2 The application for support is based in particular on Paragraphs (1)(b) and (12) of Article 22/B of Act LXXXI of 1996 on Corporate tax.


4

given that the amended aid scheme (approved as state aid decision N 685/2009)3 does not apply to the investment project.

Description of the aid measure

Description of aid scheme and procedure to apply for aid

(12) The form of aid is a tax allowance to be financed from the national state budget. In accordance with national legislation, the beneficiary can use the tax allowances in the form of tax credit (deduction from corporate income tax) in the first year after the completion of the investment (or alternatively, in the tax year of the completion of the investment) and in the next nine years, but not later than in the fourteenth tax year following the tax year in which the application is submitted. The aid is to be granted in the form of an abatement of up to 80% of national corporate income tax.4 The Hungarian authorities have confirmed that the calculations on the amount of tax allowances reductions from the corporate income tax for the period concerned (2014-2023) are in compliance with the applicable national rules.

(13) The tax allowances shall be established by the aid beneficiary itself on the basis of Act No LXXXI of 1996 on Corporate income tax and dividend tax and by Government Decree No 206/2006 on Development tax allowances.

(14) In the case of investment, the aid beneficiary should submit the registration form for aid to the Ministry of National Economy. The tax allowance is granted automatically to qualifying expenditure without discretion on the part of the authorities, if all criteria set out in the national legislation are fulfilled and the Commission approved it. Upon reception of the European Commission's approval decision, the Minister of Rural development informs the Minister of Taxation within eight days, and the later registers the aid beneficiary's tax allowances application.5

(15) The authorities of Hungary confirmed that the aid is granted automatically, should the conditions of the scheme be fulfilled. Under national rules, tax allowances can be drawn up with the condition, if the investment complies with all conditions of Act LXXXI of 1996 and governmental decree 206/2006.6 Among the conditions for aid, it is required that the investment should be maintained for minimum five years following the launching of the operations in the case of large undertakings.7 The authorities of Hungary confirm that the planned individual aid is in compliance with the applicable national legal provisions.

(16) The aid beneficiary submitted its tax relief application to the Hungarian government 21 December 2011. The Hungarian authorities provided the Commission services with the mentioned application by the aid beneficiary for development tax benefit. They have furthermore confirmed that the beneficiary submitted its application for aid as required by Hungarian law and that he had

3 SA.29994. Certain conditions of that original aid scheme (N 651/2006) were amended by decision SA 29994 (N 685/2009). The amended conditions nevertheless were approved only to a limited group of aid beneficiaries, as specified in that decision. 4See Act LXXXI of 1996 and Government Decree No 206/2006. 5 Article 10, paragraph (7) of 206/2006 governmental decree. 6 Article 3 (1) of 206/2006 governmental decree. 7 Article 3(2) of 206/2006 governmental decree.


5

submitted these forms in compliance with the applicable national rules. The aid application will be registered following its approval by the European Commission.

(17) The notification was also accompanied by a set of documents:

• A market study conducted by Agra CEAS Consulting Ltd. ("Agra CEAS study")8 providing for market analysis of ethanol production and co-product market analysis (animal feed);

• Annex V to the notification summarizing the investment project, business plan and financing;

• An Environmental Impact Study and Integrated Environment Use Permit Documentation by PROGRESSIO Mérnöki Iroda Kft ("Environmental Impact Study") to perform an environmental impact assessment procedure and Integrated Pollution Prevention and Control procedure ("IPPC procedure")9;10

• Additional information in letters dated 16 July 2012 and 7 September 2012 explaining compliance with applicable EU and national requirements in the field of environmental protection.

Project description

(18) PEMZ plans to construct and operate a new facility to produce bioethanol (Prodcom 15.92.11.00, CN 22.07, NACE-code 15.92). The production process also generates a waste by-product dry distillers' grain with solubles ("DDGS"). The production capacity of the plant in a "rolling week" (24/7- 353 days per year) based upon contractual guarantees from suppliers is approximately 200 million litres of bioethanol per year. The projected (full) production capacity of the plant in a "rolling week" based upon U.S. plants that are substantially identical to the plant in design and equipment is approximately 240 million litres of bioethanol per year.

(19) The project will consist of a dry mill plant operation and will process approximately 575 000 tons of corn annually to produce up to 240 million litres of fuel grade ethanol to be blended into gasoline (675 510 litres of ethanol per day). The project will also produce 175 000 tons of (on a dry-matter basis) of DDGS annually (485 tons of DDGS per day).

(20) From corn raw material, ethanol end-product will be produced with Distillers Grains with Solubles (DGS) by-product. When operating at its full capacity, the plant will absorb the majority of local (Mohács area) corn surplus.

(21) The project will generate about a third of its electricity needs itself, it will also produce 14 000 000 kWhs electricity. The Hungarian authorities have made a

8 Agra CEAS Consulting, Mohacs Plant: Feedstock and Market Due Diligence, March 2012. 9 Based on the Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control, OJ L 257, 10.10.1996, p. 26 (IPPC Directive). 10 PROGRESSIO Mérnöki Iroda Kft, Bioethanol Plant and Power Centre Mohács, Environmental Impact Study and Integrated Environment Use Permit Documentation, May 2012.


6

commitment that the undertaking will not receive a licence to sell electricity and will not place electricity on the market.

(22) Construction works on the site are scheduled for fall 2012 with a final completion of the plant in December 2013. Based on the data provided by the Hungarian authorities the project will reach its full production capacity in 2014.

(23) The Hungarian authorities submitted that although the Dunaföldvár PEZ11, another ethanol production project completed by Ethanol Europe, and the Mohács PEMZ project are two investments undertaken by the same group within a period of three years, those should not be considered as a Single investment project ("SIP"). The two investments do not relate to fixed assets "combined in an economically indivisible way".

(24) The authorities of Hungary submitted that the two projects cannot be viewed as being in "immediate geographic proximity". Mohács and Dunaföldvár are two very distinct towns, 100 kilometres apart and located in different counties within Hungary. They furthermore submitted regarding the physical or functional link between the projects, that there will be no physical link between the two plants. Both plants constitute autonomous production lines without any common infrastructure or any exchanges of any intermediate products. Each plant will have a distinct and separate management and workforce, with only limited potential overlap at top management, human resources and environmental health and safety levels. There will be no functional link between the two investments. As a supporting argument for two separate investment projects the Hungarian authorities submitted that the Mohács site was selected by the investor from among dozens of potential alternative locations (many of which were outside of Hungary).

Eligible costs, aid amount and aid intensity

(25) The amount of aid is calculated as a percentage of the eligible investment costs of the initial investment.

(26) Replacement investments are excluded from the aid scheme. Assistance for firms in difficulty and /or for the financial restructuring of firms in difficulty is excluded from the aid scheme. Land, buildings, plant/machinery (equipments) constitute the material assets, and all assets to be acquired are new. The aid in question is not related to any takeover. No costs related to the acquisition of assets other than land and buildings under financial lease are included as eligible expenditure.

(27) The investment has started on 4 April 2012. According to Article 1(f) of 206/2006 (X.16) Governmental decree, which is the national legislation implementing the Commission approved development tax benefit aid scheme (N 651/2006), for investments in connection to agricultural processing the expenses incurred before the aid was authorised by the Commission decision are not eligible.

(28) The authorities of Hungary confirmed that the calculations submitted with regard to the amount of eligible expenses are in line with the relevant provisions of

11 See Commission decision N 166/2010 "Development tax benefit - Pannonia Ethanol Zrt." dated 27 August 2010 as modified by the Commission decision SA.33053 dated 5 October 2011.


7

Article 1 (f) of 206/2006 (X.16) governmental decree. The calculations of eligible expenses are presented in the Table 1 below.12

(29) Under the Hungarian national law13 the aid beneficiary is entitled to draw on the tax allowance first time in 2014 and than for the 9 consecutive tax years (maximum in the 14th year following the date of submitting its application). The tables 2 and 3 below summarize the details for the HUF and EUR calculations of tax relief as planned by the aid beneficiary.

Table 2: Tax allowance calculation in HUF

ezer Ft / thousand

HUF (folyóáron /

current prices)

Árbevétel / Sales revenue*

Adózás előtti eredmény /

EBT*

Adófizetési kötelezettség / Tax payable*

Adókedvezmény /

Tax relief*

Adókedvezmény jelenértéke /

Present value of the tax relief*

2014

2015

2016

2017

2018

2019

2020

2021 - -

2022 - -

12 Based on HUF/EUR exchange rate of 291,58 on 14.02.2012 (day of notification to the Commission) and discount rate of 7,39% (using 2012 as base rate for the calculation of the present value). 13 Article 22/B(6) of Act LXXXI of 1996 on corporate taxation.


8

2023 - - Összesen /

Total 11,206,496

Table 3: Tax allowance calculation in EUR

ezer euró / thousand

EUR (folyóáron /

current prices)

Árbevétel / Sales revenue

Adózás előtti eredmény /

EBT

Adófizetési kötelezettség / Tax payable

Adókedvezmény / Tax relief

Adókedvezmény jelenértéke /

Present value of the tax relief

2014

2015

2016

2017

2018

2019

2020

2021 - -

2022 - -

2023 - - Összesen /

Total 38,434

(30) The authorities of Hungary confirmed that all calculations are in compliance with

the applicable national rules, including calculations on the amount of the planned tax allowances reduction from the corporate income tax for the period 2014-2020.

(31) The regional aid ceiling in the South Transdanubia region (Baranya country), where Mohács is located is 50%. For large investments, the aid intensity is reduced as follows: 100% of the regional aid intensity threshold until 50 million EUR costs of the project present value, 50% of the regional aid intensity threshold for part of the project costs above 50 million EUR until 100 million EUR and 34% of the regional aid intensity threshold for the part of the project cost above 100 million EUR on present value.

(32) Under point 67 of the Guidelines on national regional aid for 2007-2013 ("RAG")14, the allowable maximum amount of aid for large investment project is calculated according to the following formula: maximum aid amount = R x (50+0,50 x B+ 0,34 x C) where R is the unadjusted regional aid ceiling, B is the eligible expenditure between EUR 50 million and EUR 100 million and C is the eligible expenditure above EUR 100 million.15

(33) The Hungarian authorities confirmed the amount of the eligible expenses of EUR 105.492.307,68 at the present value. Based on the application of the following formula: 0,5 x (50000000+ 0,5 x 50000000+ 0,34 x 5 492307,68) with the base rate 6,39%, and therefore with the value of the discount rate 7,39%16, the Hungarian authorities confirmed following amount of the aid: EUR 38.433.692,31. While applying the scaling down mechanism under point 67 of

14 OJ C 54 of 04.03.2006, p 13. 15 Calculated on official exchange rates prevailing on the date of notification. 16 The present values in this decision are calculated on the basis of a base rate of 6,39%, applicable on the date of notification, on top of which 100 basis points need to be added according to the Commission Communication on reference rates (OJ C14, 19.1.2008, p. 6.).


9

RAG for large companies the amount of the state aid will result in the gross grant equivalents ("GGE")17 of 36,43%.18

(34) According to the information accompanying the notification, the beneficiary intends to draw on the tax allowance first time in 2014 until 2023 including. The calculation of the present value of the development tax allowance, as indicated in the table 2 and 3 above, used the base rate value (reference rate) of 6,39%, and therefore the discount rate of 7,39%, valid from 1 January 2012.19 Therefore the amount of the present estimations at current value and the real volume of the tax allowances may differ.

(35) The Hungarian authorities are aware of the fact that the aid beneficiary may not receive state aid in excess of the amount notified to and approved by the Commission. The Hungarian authorities committed themselves that the notified aid amount and the aid intensity, as calculated in this letter, will not be exceeded, even in case of higher or lower eligible costs.

Financing of the project and cumulation of aid

(36) It has been submitted that the aid beneficiary will finance the realization of the investment project from its own resources. The Hungarian authorities have confirmed that the aid beneficiary has secured all of its financing for the investment project subject to the approval of the notified state aid by the Commission. It is stated in the notification that PEMZ will not use any grants to finance the project, and the beneficiary's contribution will be 100% of the total financing of the investment project (beneficiary ´s equity and financial sources by lending institutions). The beneficiary makes a financial contribution of at least 25% of the total eligible costs and this contribution is free of any public support, including de minimis aid. Article 3(5)(a) of 206/2006 governmental decree requires that at least 25% of the investment resources should be from its own resources. The investment project shall be therefore financed partly by lending institutions and partly through the aid beneficiary´s equity.

(37) The authorities of Hungary state that the aid can not be cumulated with aid received from other local, regional, national or EU schemes to cover the same eligible costs.

(38) The Hungarian authorities also confirm that no additional support for the same project is requested from any other European or international financing institution which would lead to granting any type of a state aid. As described above (see paras (23) and (24) above) the Dunaföldvár PEZ, another ethanol production investment completed by Ethanol Europe in Hungary cannot be considered as a SIP along with the investment project in Mohacs. Therefore the state aid in the form of a development tax benefit for the Dunaföldvár investment project as

17 The aid intensity in gross grant equivalent (GGE) is the discounted value of the aid expressed as a percentage of the discounted value of the eligible costs. For aid which is individually notified to the Commission, the gross grant equivalent is calculated at the moment of notification. See RAG, para 41. 18 Based on HUF/EUR exchange rate of 291,58 on 14.02.2012 (day of notification to the Commission). 19 Based on the date of notification 12 February 2012, the rate was applicable as of 1 January 2012.


10

approved by the Commission20 and the notified aid for investment project in Mohacs cannot be considered as cumulation of aid.

(39) The regional investment aid shall not be cumulated with the de minimis support in respect of the same eligible expenses in order to circumvent the maximum aid intensities laid down in the approved regional aid map. The Hungarian authorities gave assurances that any divergences or missed announcement of data regarding state aids entails serious legal consequences, that the National Tax and Customs Administration (NAV) of Hungary is obliged to inspect at least once during a 3 year period following the first allocation of the development tax benefit according to the respective provisions of Hungarian law.21

Environmental aspects

(40) The Hungarian authorities gave the following commitments and assurances related to the environmental aspects of the investment project.

(41) The Hungarian authorities gave expressly assurances that the products produced by PMEZ in the investment project will meet all criteria as stipulated in Directives 2009/28/EC22 and 2009/30/EC23 as implemented in the Hungarian legislation cited below. They submitted that there could be no market for biofuels which did not fulfil the sustainability criteria as it is not of any interest to customers in target countries (see below para (42)). It follows that if the production of bioethanol is not sustainable, no sales and no profit can be made, so the aid beneficiary could not claim any aid since the aid is an abatement of income tax.

(42) Hungarian authorities provided for detailed explanation demonstrating the implementation of the sustainability criteria as provided for in the European legislation. Hungary has passed:

(a) Act CXVII of 2010 on the promotion of the use of renewable energy for transport purposes and on the reduction of greenhouse gas emissions from energy used in transport (the "Biofuels Act");

(b) Government Decree 343/2010 (XII.28) on requirements and certification of sustainable biofuel production (the "Biofuels Decree");

(c) Ministry of Rural Development Decree 42/2010 (XII.20) on the territories of sustainable production of raw materials for the purpose of biofuel production (the "MRD Decree").

20 See Commission decision N 166/2010 "Development tax benefit - Pannonia Ethanol Zrt." dated 27 August 2010 as modified by the Commission decision SA.33053 dated 5 October 2011. 21 According to Article 13 of Governmental decree No 206/2005 the national tax authorities are obliged to check the compliance with the conditions of the development tax allowances at least once during a 3 year – period following the first use of tax allowance. 22 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC, OJ L 140, 5.6.2009, p. 16. 23 Directive 2009/30/EC as regards the specification of petrol, diesel, and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC, OJ L 140, 5.6.2009, p. 88.


11

(43) Under Article 3, Section (1) of the Biofuels Decree, biomass is produced in a sustainable manner, if it is produced (i) from default suitable areas24 (which is the case for virtually all biomass used for the production of biofuels in Hungary) or from sensitive areas, subject to an audit on sustainability and (ii) there is compliance with the requirements and norms specified in (a) Annex II, Part A and Point 9 ("Environmental Protection") of the CAP Regulation25 and (b) Article 6, Section (1) of the CAP Regulation.

(44) Under Article 2 (a)-(c) of the MRD Decree, regardless of the land use designation (to clarify, non "default" areas could be land not zoned as agricultural or agricultural land not eligible for subsidies or could also be wetlands, forests, etc.), land qualified as sensitive for any of the reasons listed below, in January 2008 or thereafter, cannot be used to produce sustainable biomass:

(a) forests or other natural or near-natural wooded areas consisting of native tree species, representing high value for biodiversity;

(b) areas, representing high value for the biodiversity, that are (a) under environmental protection or are designated to be Natura 2000 areas, or are (b) nature protection areas recognised by international nature protection agreements or International Union for Conservation of Nature;

(c) high biodiversity grasslands (whether natural or artificial); and

(d) land defined as having "high carbon stocks" under Article 2 (1) (d) of the MRD Decree.26

(45) The Hungarian authorities gave specific commitments regarding the protection of Natura 2000 areas. These areas are defined according to Council Directive 79/409/EEC27 in the codified version of the Council Directive 2009/147/EC (on the conservation of wild birds)28 and Council Directive 92/43/EEC (on the conservation of natural habitats and of wild fauna and flora, "Habitats Directive").29

(46) The Hungarian authorities gave assurances that the investment project will respect the management requirements of the Natura 2000 areas including all guarantees regarding the protection of birds and habitats. Since the investment project involves a new construction of plant to which other infrastructure is related, an indication should be made whether these do not have any impact on Natura 2000 areas. Based on the above mentioned Environmental Impact Study, the Hungarian

24 Under Article 1 of the MRD Decree, the default areas are those arable lands for which a support application under the Single Area Payment Scheme was submitted in 2008. 25 Council Regulation (EC) No 73/2009 Establishing Common Rules for Direct Support Schemes for Farmers under the Common Agricultural Policy and Establishing Certain Support Schemes for Farmers. 26 Article 2 (1) (d) MRD Decree defines "land with high carbon stock" as: (i) wetlands, namely land that is covered or saturated by water permanently or for a significant part of the year; (ii) continuously forested areas, namely land spanning more than one hectare with trees higher than five metres and a canopy cover of more than 30% or trees able to reach those thresholds in situ; and (iii) land spanning more than one hectare with trees higher than five metres and a canopy cover of between 10% and 30% or trees able to reach those thresholds in situ. 27 Council Directive 79/409/EEC of 2 April 1979 on the conservation of wild birds; OJ L 103, 25.04.1979, p. 1. 28 Council Directive 2009/147/EC of the European Parliament and of the Council of 30 November 2009 on the conservation of wild birds (codified version); OJ L 20, 26.1.2010, p. 7. 29 Council Directive 92/43/EEC of 21 May 1992 on the conservation of natural habitats and of wild fauna and flora; OJ L 206, 22.7.1992, p. 7.


12

authorities demonstrated - while taking into consideration the impact range of the single impact factors and that of the combined impact areas - that the envisaged bioethanol plant will have no impact on the Natura 2000 areas designated within the region.30

(47) The Hungarian authorities submitted that the Council Directive 96/61/EC on Integrated Pollution Prevention and Control (IPPC Directive)31 has been implemented into the Hungarian legal system through an amendment of Act LIII of 1995 on General Rules of the Environmental Protection (Kvt.) and enactment of Governmental Decree 193/2001 (X. 19.). By means of references to the Environmental Impact Study, the Hungarian authorities assured that the technologies to be applied in the investment project comply with the best available techniques requirements under the EU legislation.32

(48) The Environmental Impact Study further assessed the impacts on the environment concerning following aspects: air, soil, water, noise, flora and fauna, built environment based on the qualification criteria of the expectable environmental impacts with the results tolerable (E). The environmental changes will remain well below the limit value or the expectation of the trade.33

(49) The Hungarian authorities confirmed that a system of wells around the plant shall be in place which will permanently monitor groundwater levels, collect such data and send them to the external monitoring centre where the data will be analysed and store. Under Government regulation No 346/2006 the inspectorates of environment and water have right of monitoring groundwater levels. In the event of water scarcity, the management of the plant can be asked to (i) implement a contingency plan to draw water from the deeper aquifer or from the Danube and/or (ii) come to an agreement with impacted users to relocate their wells.34

(50) From a general perspective the Hungarian authorities have committed themselves not to grant any aid to the aid beneficiary, should the latter not complete and satisfy all applicable environmental tests. The Hungarian authorities have confirmed that the transportation of raw materials and final products into and out of the plant by barges using the Danube as a port is one of future plans only. They committed that the development and operation of the port facilities on the Danube would only be put into practice if all environmental requirements under EU and national law (IPPC, EIA and Natura 2000 procedures in particular) have been met.

Regional development, objectives and coherence with rural development

(51) Documentation showing that the aid is targeted on clearly defined objectives reflecting identified structural and territorial needs and structural disadvantages35 was presented to the Commission services. The NUTS II region of South Transdanubia is an assisted area pursuant to Article 107(3)(a) of the TFEU with a

30 See Environmental Impact Study, p. 126. 31 Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control, OJ L 257, 10.10.1996, p. 26. 32 See Environmental Impact Study, p. 57 et seq. 33 See Environmental Impact Study, p. 77 et seq. and 14 et seq. 34 Act No 56 of 1995, on Water Management, as amended provides for further details. 35 Annex V.2 to the notification of the European Commission on Pannonia Ethanol Mohacs Zrt.'s application for development tax allowance, on the relevance of the aid to the clearly defined objectives as specified to Point 4.1 of Section III.12.B Supplementary information sheet for the aid for investment in connection with the processing and marketing of agricultural products.


13

standard regional aid ceiling for large enterprises of 50% of gross grant equivalent (GGE). 36 The study emphasizes that:

(a) During the realization phase of the project hundreds of people will be employed for the construction of the factory and during its production phase, 75 working places will be created.

(b) PEMZ will be able to buy a significant part of the produced corn surpluses when the plant operates at full capacity. According to the information submitted by the national authorities, Hungary has an annual surplus of 4 million tons of corn and the aggregate corn used by both Ethanol Europe's investments in Hungary would roughly be around 1 million tons.

(52) It is stated in the notification that the New Hungarian Rural Development programme for 2007-2013 emphasizes the particular importance of bioethanol production to achieve its objectives and it also emphasizes the need to address overproduction of maize. Detailed information has been provided along with the notification clarifying the compatibility of aid with the relevant rural development plan.37

(53) The Hungarian authorities have provided assurances that the investment project will not interfere with the implementation of the Hungarian rural development programme.

(54) In particular they have confirmed that the investment project will not interfere with the realisation of measures no. 121, 123 and 311 of the New Hungarian Rural Development programme for 2007 – 2013. Measure no. 121 concerns modernization of agricultural holdings. The investment project has no direct relationship to that measure. The Hungarian authorities put forward that it is likely that the investment project will facilitate the goal of that measure by creating demand for maize supplies. Measure no. 123 is concerned with increasing in the value of agricultural products. The Hungarian authorities put forward that when producing bio ethanol the maize which is currently a surplus production in Hungary will become a valuable raw material for ethanol production. Therefore, it seems that the investment project will increase the value of Hungary's agricultural products, by turning them into higher value products (ethanol). Measure no. 311 concerns diversification of non-agricultural activities. The Hungarian authorities put forward that the investment project will provide 75 manufacturing jobs in a rural area with no other ethanol plant within a 100 kilometre radius.

Reporting

(55) The Hungarian authorities confirmed the standard practice to provide to the Commission the following documents:

36 Commission Decision of 13 September 2006 on the Hungarian regional aid map, State aid N 487/2006 Hungary. 37 Annex V.3 to the notification of the European Commission on Pannonia Ethanol Mohacs Zrt's application for development tax allowance, on the compatibility of the State aid with the relevant rural development plan to Point 4.1 of Section III.12.B Supplementary Information Sheet for the aid for investment in connection with the processing and marketing of agricultural products.


14

(a) Within two months of granting the aid, a copy of the aid contract between the granting authority and the beneficiary;

(b) On a five-year basis, starting from the approval of the aid by the Commission, an intermediary report (including information on the aid amounts being paid, on the execution of the aid contract and on any other investment projects started at the same establishment/plant);

(c) Within six months after payment of the last tranche of the aid, based on the notified payment schedule, a detailed final report.

ASSESSMENT

Application of Article 107(1) of the TFEU

(56) Pursuant to Article 107(1) of the Treaty on the Functioning of the European Union ("TFEU"), aid granted by a Member State or through state resources in any form whatsoever that distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is prohibited, insofar as it affects trade between Member States.

(57) The financial support to PMEZ will be given by the Hungarian authorities in the form of corporate income tax allowances. The support can thus be considered as given by the Member State and through State resources within the meaning of Article 107(1) of TFEU. It is indeed established case – law that when the State foregoes tax revenue which is normally due, State resources are thereby engaged.38

(58) It is clear that the measure in question confers an economic advantage on its recipient. The financial support will relieve the aid beneficiary from expenses which it normally would have had to bear itself. This advantage is granted through State resources and it favours PEMZ located in Mohács.

(59) As aid is granted to a single company, the measure therefore is selective. The aid beneficiary is an undertaking exercising an economic activity within the meaning of EU law. 39

(60) According to the case law of the Court of Justice, the mere fact that the competitive position of an undertaking is strengthened compared to other competing undertakings, by giving it an economic benefit which it would not otherwise have received in the normal course of its business, points to a possible distortion of competition.40

(61) The financial support from the Hungarian authorities will be given for an investment resulting in the production of bioethanol. An aid to an undertaking affects trade between Member States where that undertaking operates in a market

38 See, inter alia, the judgment of the Court in case 173/73 Italy v. Commission [1974] ECR 709, paragraph 15. 39 Judgement of the Court in case C-41/90 Höfner and Elser [1991] ECR I-1979, paragraph 21. 40 Judgment of the Court of 17 September 1980 in Case 730/79 Philip Morris Holland BV v Commission of the European Communities [1980] ECR 2671.


15

open to intra-EU trade.41 Therefore, the present measure is liable to affect trade between Member States.

(62) In light of the above, the conditions of Article 107(1) of the TFEU are fulfilled. It can therefore be concluded that the proposed measure constitutes State aid within the meaning of that Article. The aid may only be considered compatible with the internal market if it can benefit from one of the derogations provided for in the Treaty.

Compatibility and legality of the aid measure

(63) The Hungarian authorities have fulfilled the individual notification requirement imposed in point 45 of the Community Guidelines for State aid in the agriculture and forestry sector 2007 to 2013 ("AGRI Guidelines")42 which requires that the aid has to be notified in accordance with Article 108(3) of TFEU and can be granted only after approval by the Commission (standstill obligation). In addition, the Hungarian authorities complied with their obligation under Section 4.3 of the Commission guidelines on national regional aid for 2007-201343 ("RAG") by submitting the respective notification form for the individual aid measure as a large investment project under point 64 of RAG.

(64) According to point 42(c) of the AGRI Guidelines, "aid for investment granted to companies active in the processing and marketing of agricultural products shall be declared compatible with Article 87 (3)(a) or (c) the Treaty44 if it fulfils all the conditions of the RAG. The relevant provisions concerned are fulfilled as follows:

(a) Assistance to firms in difficulty and/or financial restructuring of firms in difficulty is excluded (point 9 of RAG). As the Hungarian authorities indicated, the aid beneficiary is not a company in difficulty (see para (8) above).

(b) Regional investment aid is an aid awarded for an initial investment project (point 33 of RAG). Initial investment means an investment in material and immaterial assets relating to, inter alia, the setting – up of a new establishment (point 34 of RAG). The notified individual aid relates to setting- up a new bioethanol plant (see paras (4) and (12) above).

(c) All aid intensities must be calculated in terms of gross grant equivalents. The aid intensity in gross grant equivalent is the discounted value of the aid expressed as a percentage of the discounted value of the eligible costs. Following point 41 of RAG, in cases where aid is awarded by means of tax exemptions or reductions on future taxes due, discounting of aid tranches takes place on the basis of the reference rates applicable at the various times the tax advantages become effective. The Commission therefore notes that the calculations of present value of the State aid as specified in paras (32) to (34) above, can only be indicative. It has cross-checked the calculations provided by the Hungarian authorities.

41 See in particular the judgment of the Court of 13 July 1988 in Case 102/87 French Republic v Commission of the European Communities [1988] ECR 4067. 42 OJ C 319 of 27.12.2006, p 1. 43 OJ C 54 of 4.3.2006, p 13. 44 Article 107(3)(a) or (c) of TFEU in force.


16

(d) Due to the amount of eligible expenditure, the investment project falls under point 60 of RAG ("large investment project").

(e) Point 67 of RAG lays down the rules for the assessment of large investment projects, including the formula to scale down the allowable aid amount. Based on such calculations the Hungarian authorities confirmed the amount of aid EUR 38.433.692,31. While applying the scaling down mechanism under point 67 of RAG for large companies the amount of the state aid will result in the GGE of 36,43%. The Hungarian authorities committed themselves that the notified aid amount and the aid intensity, as calculated in this letter, will not be exceeded, even in case of higher or lower eligible costs.

(f) The notified investment is planned to be completed in the fourth quarter of 2013 and the aid is to be granted automatically after approval of the Commission decision (paras (14) (36) above). Hence the duration of the investment project is in line with the duration of the Hungarian regional aid map in force which expires on 31 December 2013.45

(g) Point 38 of RAG specifies the required incentive effect for regional aid in general. The only exception to those rules is in the case of approved tax aid schemes where the tax exemption or reduction is granted automatically to qualifying expenditure without any discretion on the part of the authorities (Footnote 41 of point 38 of RAG). The notified measure constitutes an individual aid granted under an approved aid scheme (N 651/2006 – Development tax benefit), where the beneficiary has a right to receive the aid for qualifying expenditure without discretion on the part of the authorities (para (14) above). The exception in footnote 41 of RAG applies to the present investment.46

(h) The Commission notes that the aid will be granted in the framework of an existing aid scheme pursuant to point 10 of RAG.

(i) Pursuant to point 39 of RAG, where the aid is calculated on the basis of material or immaterial investment costs (…) to ensure that the investment is viable and sound and respecting the applicable aid ceilings, the beneficiary must provide a financial contribution of at least 25% of the eligible costs, either through its own resources or by external financing, in a form which is free of any form of public support. As it was described in para. (36) above, this condition is met.

(j) Points 50-56 of RAG list the eligible expenses under RAG. Pursuant to point 50 of RAG, expenditures of land, building and plant/machinery are eligible for aid for initial investments. As described above in paras (26) and (32), the notified aid concerns expenses and eligible costs in accordance with the RAG. Replacement investments are excluded in line with point 34 of RAG. The aid is given to build new installation and does not concern takeovers, leases, intangible costs or consultation costs (para

45 Commission Decision of 13 September 2006 on the Hungarian regional aid map, N 487/2006, Hungary, Regional Aid Map 2007 – 2013. 46 According to Commission decision N 651/2006- Development tax benefit-Hungary of 10. May 2007, the incentive effect conditions as to point 38 of the RAG do not have to be fulfilled. See also paragraph (30) of Commission decision on C 31/2009 (ex N 113/2209)- Hungary LIP- Aid to Audi Hungaria Motor Kft.


17

(26) above). Therefore it is not necessary to analyse the compatibility of the aid measure with points 51-56 of RAG.

(65) Second-hand equipments are not concerned by the aid measure, thus point 44 of the AGRI Guidelines is not concerned. Point 47 of the AGRI Guidelines is also complied with.

(66) Documentation, in line with point 46 of the AGRI Guidelines, showing that the support is targeted on clearly defined objectives reflecting identified structural and territorial needs and structural disadvantages has been submitted (para (52) above).

(67) The Hungarian authorities accompanied the notification with documentation demonstrating that the State aid measure is consistent with the relevant Hungarian rural development program (paras (54) and (55) above), therefore point 26 of the AGRI Guidelines is complied with.

(68) In line with point 22 of the AGRI Guidelines, the Hungarian authorities submitted documentation on the assessment of the expected environmental impact of the aided activity (para (40) and following above). As set above the Commission has received assurances from the Hungarian authorities that all relevant applicable environmental rules will be respected. The Hungarian authorities are, however, reminded that the present decision is limited to the assessment of compliance with the internal market and with the applicable state aid rules (RAG and AGRI guidelines) only. The assessment of compliance with applicable environmental rules falls outside the scope of this decision.

(69) The Commission services take notes of the commitments by the Hungarian authorities regarding the (possible) development of port facilities on the Danube (see para (50) above). The Hungarian authorities are reminded that should they decide to develop or expand port facilities on the Danube as part of or connected to the activity of the bioethanol plant in Mohács, they will have to ensure full compliance with Article 6(3) of the Habitats Directive with regard to the impact assessment on the Natura 2000 sites.

Application of Article 107(3)(a) of the TFEU

Single investment project

(70) Point 60 of RAG states that in order to prevent that a large investment project is artificially divided into sub-projects to escape the provisions of these guidelines, such a project will be considered as a single investment project ("SIP") when the initial investment is undertaken in a period of three years and consists of fixed assets combined in an economically indivisible way. Economic indivisibility is assessed on the basis of technical, functional and strategic links and geographical proximity.

(71) The Hungarian authorities submitted that although the Dunaföldvár PEZ47 project and the Mohács PEMZ project are two investments undertaken by the same group within a period of three years, those should not be considered as a Single

47 The European Commission authorized development tax allowances to be granted to Pannonia Ethanol Zrt by its decisions Aid No N 166/2010, Pannonia Ethanol Zrt. Fejlesztési adókedvezménye (Development tax benefit for Pannonia Ethanol) and amending decision SA.33053 (2011/N) - Development tax benefit to Pannonia Ethanol Zrt.


18

investment project ("SIP") because the two investments do not relate to fixed assets "combined in an economically indivisible way".

(72) The authorities of Hungary argue that first and foremost the concept of geographical proximity needs to be regarded. The two projects can not possibly be viewed as being in "immediate geographic proximity". Mohács and Dunaföldvár are two very distinct towns, 100 kilometres apart and located in different counties within Hungary.

(73) In its previous decision practice48, the Commission has considered as SIP projects in particular those projects which took place on adjacent land, within the same city, the same industrial sites or in the same production site.

(74) The Hungarian authorities have confirmed and provided detailed information (para (24)) that there will be no physical link between the two plants in Mohács and Dunaföldvár, both plants constitute autonomous production lines without any common infrastructure or any exchanges of any intermediate products49 and either plant will have a distinct and separate management and workforce, with only limited potential overlap at Chief executive officer ("CEO"), Human resources and Environmental health and Safety levels.50 They also submitted (see para (24)) that the aid beneficiary has selected the Mohács site from several potential alternative locations..51

(75) The authorities of Hungary concluded that both projects are economically viable, independently from each other, and are totally divisible from each other: they are stand-alone projects to be carried out in two different counties, with the construction of two different plants and production sites. The two investments do not target the same supply of raw material.

(76) Ethanol Europe also commissioned a catchment analysis based upon GIS datasets. It is shown in the catchment analysis that the two plants in question will not compete with each other for corn supplies. The catchment analysis includes all four relevant Hungarian ethanol production sites (in addition to the Ethanol Europe plants, the other two production sites are owned, respectively, by Gyor and Hungrana that have no connection to Ethanol Europe). It is to be noted that the analysis does not take into account the possibility of the Mohács plant receiving (i) corn by truck from Serbia and Croatia and (ii) corn by rail from eastern Hungary, which the Dunaföldvár plant cannot do since it lacks the ability to receive corn by rail.

(77) In light of all the above, the Commission takes the view that the Mohács and Dunaföldvár projects are economically divisible and they should not be deemed to be part of one SIP.

48 See state aid decisions no. C 21/2008, Sovello AG (formerly EverQ GmbH), N 203/2008, LIP - Hamburger Spremberg GmbH & Co. KG, N 641/2009, LIP – Solibro GmbH and C 21/2007, MSF 2002 – “Individual aid to IBIDEN Hungary Gyártó Kft.” 49 See state aid decision no. C 21/2008, Sovello AG (formerly EverQ GmbH). 50 See state aid decision no. N 641/2009, LIP – Solibro GmbH. 51 See State aid decision no. C 21/2008, Sovello AG (formerly EverQ GmbH).


19

Compatibility with the rules under paragraphs 68(a) and (b) of RAG

(78) Since the notified total amount aid exceeds the applicable threshold as calculated pursuant to point 68 of RAG52, it is necessary to assess the compliance of the notified measure with points 68(a) and (b) of RAG.

(79) Aid to large investment projects falling under point 68 of RAG, and where

(a) The beneficiary accounts for more than 25% of the sales of the product(s) concerned on the market(s) before the investment or will account for more than 25% after the investment, or

(b) The production capacity created by the project is more than 5% of the market measured using apparent consumption data for the product concerned, unless the average annual growth rate of its apparent consumption over the past five years is above the annual growth rate of the EEA's GDP,

can be approved only after detailed verification, following the opening of the procedure provided for in Article 108(2) of TFEU, that the aid is necessary to provide an incentive effect for the investment and that the benefits of the aid measure outweigh the resulting distortion of competition.

(80) In order to carry out the relevant tests under points 68(a) and (b) of RAG, the Commission has first to establish the relevant product and geographical markets. The Member State should prove that the situations in points 68(a) and (b) of RAG do not apply (point 70 of RAG).

Relevant product markets

(81) Point 69 of RAG defines the “product concerned” as the product covered by the investment project and, that the "relevant product market" includes the product concerned and, where appropriate, its substitutes considered to be as such, either by the consumer (by reason of the product`s characteristics, prices and intended use) or by the producer (through flexibility of the production installation). Where an investment project involves the production of several different products, each of the products needs to be considered.

(82) The Hungarian authorities have indicated that the presently examined investment project concerns the production of bioethanol as final product. According to the Hungarian authorities, the production process generates a by-product, Dry Distillery Grain with Solubles ("DDGS"), but this must be considered as waste product that is always involved in this type of production process. In line with the established Commission practice concerning waste and by-products in investment aid projects53, the production involved by the present investment within the meaning of point 69 of RAG should be considered bioethanol production. For the sake of completeness the Hungarian authorities provided data on DDGS market as well (see paras (108) to (114)).

52 I.e on the basis of Point 68 of the RAG, the total amount of aid from all sources exceeds 75% of the maximum amount of aid an investment with eligible expenditure of EUR 100 million could receive. 53 Point 39 of Commission decision N 99/08, Bioethanol Plant Abengoa Bioenergy Germany GmbH. See also cases N 267/2004, Investment aid for the establishment of a bioethanol plant (Sachsen-Anhalt) and N 342/2006, Investment aid for the construction of a bioethanol production facility in Pischelsdorf (Niederösterreich).


20

(83) In order to define the relevant product market it is necessary to examine what other products could be considered as substitutes within the meaning of point 68 of RAG.

Bioethanol market

(84) Bioethanol is a final product and it will be sold under market conditions. It is stated in the notification that on the supply side the only substitutes to the fuel grade ethanol are industrial (technological) alcohol and beverage alcohol. A significant portion of existing bioethanol production capacity in the EU has the technological flexibility to produce ethanol of different quality. The PEMZ project does not have this technical capacity and is able to produce only fuel grade ethanol. On the demand side the fuel bioethanol has to be blended with petrol in order to use it as transport fuel. It is stated in the notification that, therefore, technically to a certain extent bioethanol and petrol are direct substitutes to each other.

(85) The product envisaged by the project does not replace any other products produced by the beneficiary (at group level). No other products can be produced with the same new facilities (through the flexibility of the production installations of the beneficiary) at little or no additional cost.

(86) According to submissions provided by the Hungarian authorities, on the supply side the only substitutes to the fuel grade ethanol are industrial (technological) alcohol and beverage alcohol. According to the beneficiary's statement, a significant portion of existing bioethanol production capacity in the EU has the technological flexibility to produce ethanol of different quality. The project does not have that technical capacity, and it is able to produce only fuel grade ethanol.

(87) On the demand side the fuel bioethanol has to be blended with petrol in order to be used as transport fuel. Therefore technically to a certain extent bioethanol and petrol are direct substitutes to each other.

(88) The Commission considers, in line with its earlier decision54, that there are no other significant competing products available so far on the market. Bioethanol is used in petrol engines, although technology is in place to use it also in diesel engines. Ethanol can be added to petrol in form of pure ethanol or ETBE (Ethyl tert-butyl ether). ETBE is a product derived from ethanol and therefore its use does not affect the overall demand for ethanol. Biodiesel is only used in diesel engines and so it does not compete with ethanol. Therefore, the relevant product market should be considered the bioethanol market in the transport sector.

54 State aid case no. N 99/08, Bioethanol Plant Abengoa Bioenergy Germany GmbH.


21

DDGS market

(89) The project will also consist of a dry mill plant operation and process approximately 575,000 tons of corn annually to produce up to 240 million litres of fuel grade ethanol to be blended into gasoline. When operating at full capacity, the plant will produce 485 tons of DDGS per day.

Electricity sales

(90) The Hungarian authorities have given commitments that no electricity will be produced for the market, but it will only be produced for the own consumption of the project.

Geographical markets

(91) Under point 70 of RAG, the Commission should normally – in the absence of specific atypical circumstances - examine what the state aid measure implies in terms of competition on the EEA market. Since trade in bioethanol within the EEA is extensive55, there are no regulatory or customs barriers to trade and sufficient market data is available, the Commission finds no reason to depart from the proposal of the Hungarian authorities to consider EEA as the relevant geographical market.56

Market share data on bioethanol

(92) In order to conclude whether the project is compatible with point 68(a) of RAG, the Commission has to analyse the market share of the aid beneficiary at the group level before and after the investment. The investment started in April 2012 and the full production will be reached in 2014. The Commission will examine the market share of Pannonia Ethanol and its group in 2011 and in 2015.

(93) The Hungarian authorities indicated the following production sites of bioethanol which Pannonia Ethanol and the group of companies to which it belongs operate in EEA: ethanol production facility in Mohács and Dunaföldvár (Hungary). According to the information provided by the Hungarian authorities [… ]* is an enterprise related to the Ethanol Europe group established [… ]*. The aid beneficiary intends to build another facility to produce bioethanol in the [… ]*.57

(94) The Hungarian authorities indicated that PEMZ plans to reach full operation in 2014 and to produce up to 200 million litres of ethanol in that year, which will be followed with the production of 240 million litres in 2015. Based on the performed study by Agra CEAS Consulting58 biofuel prices (fob Rotterdam T2)

55 According to DG AGRI sources for EU 27, the provisional figures for 2009 concern the total production: 49 214 427, import: 10 940 545 and export: 45 7275 (ethanol expressed in hectoliter of pure alcohol). 56 Also in line with its earlier State aid decision no. N 99/08 on Bioethanol Plant Abengoa Bioenergy Germany GmbH and State aid decision no. N 166/2010 "Development tax benefit - Pannonia Ethanol Zrt." dated 27 August 2010 as modified by the Commission decision SA.33053 dated 5 October 2011. 57 However, the Hungarian authorities have provided information that the [… ]* project has not made any material progress forward since February 2012 so now it is no longer theoretically possible for [… ]* production plant to be commercially operational in 2014. Therefore the presented table only includes estimated data for the year 2015 (with a token amount of 2014 ethanol that would be produced not commercially but as part of plant commissioning). 58 Mohacs Plant: Feedstock and Market Due Diligence, Report by Agra CEAS Consulting, March 2012, providing forecast for biofuel, including ethanol EU 27 until 2020.


22

for the period 2012-2020 were forecast using the Agra CEAS world biofuel and feedstock model under three different (constant) crude oil price scenarios (US$40/bbl, US$60/bbl and US$80/bbl). Under the baseline (US$60/bbl) scenario, the average EU ethanol price in the period to 2020 is forecasted at EUR 602/m3. Under a lower oil price (US$40/barrel) scenario, the average EU ethanol price is forecasted at EUR 565/m3 compared to EUR 642/m3 under a higher oil price (US$80/barrel) scenario.

(95) The estimates of all sales of the aid recipient on the relevant market (at group level in value and volume terms) from the year preceding the start year of the investment to the year following the full production of the envisaged product are provided in the Table 4 below.

Table 4: Estimates on sales and market shares

2011 2012 2013 2014 2015 EU-27 Fuel Ethanol Demand59 thsd. m3 5900 6200 8100 10000 12000

PEZ thsd. m3 168

(real sales)

237 (expected

sales)

237 (expected

sales)

237 (expected

sales)

PEMZ thsd. m3 200 237

[… ]* 60 thsd. m3 10 200

Total Production 168 237 447 674 Market share 0.00% 2.71% 2.93% 4.47% 5.62%

(96) The forecast of the beneficiary's market share is based on the assumption that the EU-27 fuel ethanol demand in 2014 will be 10,000 million litres and PMEZ Ethanol will produce 200 million litres per annum. The production of PEZ of 237 million litres per annum is also taken into consideration. Therefore its market share of EU-wide fuel ethanol is assessed by the Hungarian authorities to be 4.37%. The calculations for 2015 (where the production of [… ]* project has also been taken into consideration) show a market share estimation of 5,62% of EU-wide fuel ethanol.

(97) The methodology upon which the Hungarian authorities based their estimate and implicit price assumptions are the following: Industry production assumptions are based on data and forecast provided by Agra CEAS study.61 It is assumed that from 2011 when all Member States will put in place plans to meet the 2020 target set by the Renewable Energy Directive, all EU fuel ethanol production capacities will work at nearly full capacity to meet the growing demand. Price forecasts used are prepared by the same consultants and based on the complex analysis of the

59 These demand projections come from Table 4.8 of the Agra CEAS Study. 60 According to the information provided by the Hungarian authorities [… ]*. is an enterprise related to the Ethanol Europe group established [… ]*. The aid beneficiary intends to build another facility to produce bioethanol in the region [… ]*. However the Hungarian authorities have provided information that the [… ]* project has not made any material progress forward since February 2012 and so now it is no longer theoretically possible for [… ]* production plant to be commercially operational in 2014. Therefore the presented table only includes estimated data for the year 2015 (with a token amount of 2014 ethanol that would be produced not commercially but as part of plant commissioning). 61 Mohacs Plant: Feedstock and Market Due Diligence, Report by Agra CEAS Consulting, March 2012.


23

market conditions and econometric model taking into account correlations of different commodities on the EU and wider world market.

(98) The Commission considers that the figures submitted by Hungary on the fuel ethanol market62 situation correspond approximately to other data used by the Commission.63 Under the alternative Commission market size data, the market share would also be well below 25%. Therefore the Commission can accept the indicative forecasts as provided by Hungarian authorities.

(99) On the basis of the above, it can, therefore, be concluded that the market share of the group to which PMEZ belongs is well below the 25% threshold referred to in point 68(a) of RAG, before and after the investment.

(100) It must, however, be noted that in its previous decision64 the Commission has also analysed the impacts of import of bioethanol into the EEA by the companies belonging to the same group of companies as the aid beneficiary. As the Hungarian authorities submitted, the only company of potential relevance is Platinum Ethanol LLC, an US based company, which is also active in the bioethanol fuel production. It is submitted that the aid beneficiary has no access to data on Platinum Ethanol LLC ´s exports to the EU, nor to its plans and activities for the upcoming years. However, based on the assumption made by Hungarian authorities that the company were to export 400 million litres per annum (which is to be close to its full production capacity: approx. 420 million litres65) into the EU, the market share of the group to which the aid beneficiary belongs would still be well below 25% in any given year.66

(101) It can, therefore, be concluded that even under such a scenario the market share of the group to which PMEZ belongs would in any case be well below the 25% threshold as referred to in point 68(a) of RAG.

Production capacity

(102) In order to conclude whether the project is compatible with point 68(b) of RAG, the capacity created by the project must be less than 5% of the size of the market measured using apparent consumption data of the product concerned, unless the average annual growth rate of its apparent consumption over the last five years is above the average annual growth rate of the EEA`s GDP (“an over-performing market”).

(103) Therefore, the Commission should first assess whether the bioethanol market for transport sector is over-performing in the EEA, based on the average annual growth rate of the apparent consumption of the product.67

62 Based on the study: Mohacs Plant: Feedstock and Market Due Diligence, Report by Agra CEAS Consulting, March 2012. 63 Prospects for agricultural markets and income 2011-2020, Internal DG AGRI study, December 2011. 64 State aid/Hungary SA.33053 (2011/N) Development tax benefit to Pannonia Ethanol Zrt dated 5 October 2011, para 23. 65 See Fuel Ethanol Facilities Capacity by State and by Plant, USA, Official Nebraska Government website, http://www.neo.ne.gov./statshtml/122.htm, visited 30/08/2012. 66 Under the Agra CEAS market size estimates or the alternative Commission data. 67 Footnote 62 of the RAG defines the apparent consumption of the product concerned as ‘product minus export plus import”.

http://www.neo.ne.gov./statshtml/122.htm


24

(104) The Hungarian authorities submitted data according to which they estimate an average annual growth rate of the EEA's GDP over the five years between 2005 and 2010 as a Compound Annual Growth Rate (CAGR) 2.14%.68 They further estimate that the Compound Annual Growth Rate of apparent consumption of ethanol is about 12.1% on a volume basis and 12.8% on a value basis for the period 2005-2010, which percentages are based on official statistics.69 Even if the 2011 numbers are not yet available, the Hungarian authorities submitted that the results could not change the ultimate outcome of the analysis.

(105) The Commission cross-checked the Hungarian calculations. Complete exhaustive statistical information for apparent consumption of bioethanol in the transport sector is not available for the entire period of 2006-2010. The bioethanol consumption in the transport sector in the EU was in 2007: 1 200 510 (toe)70 and in 201071 2 684 857 (toe).72

(106) Since the information for apparent consumption of bioethanol in the transport sector is not available for the five years between 2006 - 2010, it is also necessary to examine the apparent consumption data for all uses of bioethanol.73 According to point 68(b) the apparent consumption of the product concerned is production plus imports minus exports. According to DG AGRI sources for EU 27, for 201074 the total ethanol production is 55 135 250, import 4 023 966 and export 659 044 (hectoliters of pure alcohol). Table 5 below summarizes the apparent consumption of pure alcohol between 2006 and 2010.

Table 5: Apparent consumption of ethyl alcohol (hectolitres of pure alcohol)

Year Apparent consumption Thereof fuel Growth in fuel ethanol consumption (%) 2006 39 639 750 16 735 061 - 2007 43 715 970 20 810 000 24,35 2008 52 863 860 29 131 475 39,99 2009 59 697 693 39 320 786 34,98 2010 58 500 172 38 963 604 - 0,91

Source: EU ethyl alcohol balance for respective years as published in OJ

(107) Based on the official statistics of the European Commission as published in the Official Journal of the EU (see above) the average annual growth rate of the apparent consumption of fuel ethanol in the five year time period between 2006 and 2010 is 24,60%. It follows from the above that the bioethanol market is overperforming in the EEA and it is therefore not necessary to apply the 5% threshold pursuant to point 68(b) of RAG. Therefore the Commission concludes that the investment project of Pannonia Bioethanol is also compatible with point 68(b) of RAG.

68 The Commission has verified that the calculation of the average annual growth rate of the EEA ´s GDP over the last five years as a Compound Annual Growth Rate (CAGR) uses Eurostat figures abstracted from www.eu.int.comm/eurostat; currently the figures can be found under "Themes/Economy and finance/National accounts/Annual national accounts/GDP and main aggregates". 69 As published in Official Journal of the European Union and excerpted from ec.europa.eu/agriculture/markets/wine/facts/index_en.htm). 70 Ethanol has a density of 0.789 tonne/cubic meter. 1 tonne / 0.789 = 1.27 cubic meter 1.27 cubic meter = 1270 liters. 71 The data for 2011 are not available yet. 72 Baromètre Biocarburant- EUROBSERV'ER-JUILLET 2009 and Baromètre Biocarburant-Juin 2008. Available at: http://www.eurobserv-er.org/downloads.asp. 73 For a similar approach, see earlier Commission decision N 99/08 on Bioethanol Plant Abengoa Bioenergy Germany GmbH. 74 The data for 2011 are not available yet.

http://www.eu.int.comm/eurostat

http://ec.europa.eu/agriculture/markets/wine/facts/index_en.htm

http://www.eurobserv-er.org/downloads.asp


25

Market share data on DDGS and production capacity increase

(108) It was established based on the information provided by the Hungarian authorities that bioethanol shall be considered as a final product for the notified investment project. According to the Hungarian authorities, the production process generates a by-product, Dry Distillery Grain with Solubles (DDGS), but this must be considered as waste product that is always involved in this type of production processes.

(109) DDGS have many substitutes from the viewpoint of the consumer and are a part of a much wider animal feed market. In line with previous Commission practice75, the animal feed market comprises all animal feed products with the exception of fish feed and pet food without a further distinction between feed for different types of animals.76 The animal feed market can be divided in single feed and compound feed market.

(110) Single animal feed are products which are which are made up of only one basic feed ingredient (e.g. scraps of soya or grain). In previous cases the Commission considered a further distinction of the single feed market in non-grain feed ingredients and grain feed ingredients. Compound feeds involve the mixing and compounding of different ingredients i.e. agricultural raw materials (mainly grains) on an average of 98% and a feed additive.

(111) The Hungarian authorities have demonstrated in the provided Agra CEAS study that the DDGS market is currently a small part of the entire EU feed market and it will constitute a small share of the entire feed market in 2020. The study estimates that the total output of 10.1 million tons of DDGS that could be produced in the EU 27 by 2020 would contribute approximately 6.7% to total EU-27 feed material consumption of 151.0 million tons in 2010.77

(112) On this market, taking into account the production of both PEZ and PEMZ facilities even including the potential [… ]* project, the Ethanol Europe group will have a negligible market share. Assuming that these three plants would produce 175,000 tons per annum of DDGS, the group will produce slightly over 500,000 tons per year of DDGS in the EU, representing a market share of around 0.5%. As stated in para (82) DDGS must be considered as waste by-product that is always involved in this type of production process. It is estimated that under the definition of the relevant animal feed market including feed cereals, oilcakes and meals and co-products of food industry the market volume reaches 130 mil tons per annum.78 Given the volume of DDGS the group will produce per annum no serious doubts arise that the production capacity created by the investment project within the meaning of point 68(b) RAG could reach the given threshold of 5% of the market.

(113) The Commission cross-checked the Hungarian calculations which appear to correspond to its own calculations. For the purpose of this decision the Commission can accept the approach and methodology chosen by the Hungarian authorities.

75 COMP/M. 2271 Cargill/Agribrands, para 8; Comp/M.5558 – Nutreco/Cargill; para 7. 76 Case No COMP/M.6573 - FORFARMERS/AGRICOLA, para 21. 77 Agra CEAS Study, page 7. 78 Agra CEAS Study, page 33.


26

(114) The Commission therefore concludes that Hungary has demonstrated that situations to which paragraphs 68(a) and 68(b) RAG refer do not apply to the products concerned by the notified investment aid.

(115) The Hungarian authorities gave commitment and provided all necessary information (paras (38) and (39)) to ensure that the notified aid for the investment project will not be cumulated with aid received from other local, regional, national or European Union sources to cover the same eligible costs. The risk of cumulation appears therefore avoided. Furthermore, the Hungarian authorities provided information on the rules governing incentive effect for the investment project concerned (para (64)(g)). It can be concluded that an exemption in accordance with footnote 41 of point 38 of RAG governing the incentive effect applies to the notified investment project.

(116) In the light of all above the notified investment aid complies with the relevant provisions of RAG and Chapter IV.B.2 of the AGRI Guidelines.

CONCLUSION

On the basis of the above considerations, the Commission has accordingly decided to consider the aid to be compatible with Article 107(3)(a) of the TFEU.

If this letter contains confidential information, which should not be published, please inform the Commission within fifteen working days from the receipt of the present letter. If the Commission does not receive a reasoned request by this deadline, you will be deemed to have agreed to the publication of the full text of this letter in the authentic language on the following webpage:

http://ec.europa.eu/competition/elojade/isef/index.cfm Your request should be sent by registered letter or fax to: European Commission

Directorate-General for Agriculture and Rural Development Directorate Agricultural Legislation Office: Loi 130 5/98A B-1049 Brussels Fax No: 0032 2 2967672

Yours faithfully, For the Commission Dacian CIOLOŞ

Member of the Commission

http://ec.europa.eu/competition/elojade/isef/index.cfm

european commissionec.europa.eu/competition/state_aid/cases/243663/243663_1389058_93_2.pdf · bem...

Documents