Carl BildtChef för UtrikesdepartementetArvfurstens palatsGustav Adolfs torg 1SE - 103 23 Stockholm

Commission européenne, B-1049 Bruxelles/Europese Commissie, B-1049 Brussel – BelgiumTelephone: 00- 32 (0) 2 299.11.11.

EUROPEAN COMMISSION

Brussels, 09.11.2011C(2011)7743final

In the published version of this decision, some information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of information covered by professional secrecy. The omissions are shown thus […].

PUBLIC VERSION

WORKING LANGUAGE

This document is made available for information purposes only.

Subject: SA.32263 (2011/N) – SwedenAid for the development of a demonstration plant for wave energy

Dear Sir,

The Commission wishes to inform you that it has decided to raise no objections to the above-mentioned case for the reasons set out below.

1. PROCEDURE

(1) The measure under assessment was pre-notified by the Swedish authorities on 14January 2011 and registered the same day under number SA.32263. On 17 February 2010, a meeting between the Commission, the Swedish authorities and representatives of the project partners was held.

(2) On 19 and 20 April 2011, the Swedish authorities notified the measure, according to Article 108(3) of the Treaty on the Functioning of the European Union ("TFEU"). The notification was registered on the same day under the mentioned SA-number.

(3) On 17 June 2011, the Commission requested additional information from the Swedish authorities, which was received by letter of 15 July 2011.

(4) On 2 September 2011, the Commission asked further questions, which the Swedish authorities replied to on 7 October 2011.

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2. DESCRIPTION OF THE MEASURE

2.1. Objective of the aid

(5) The aid will support an R&D project consisting of the development of a demonstrationplant for the production of electricity from wave energy. The aim of the aid is to promote certain R&D activities in the field of energy technology. In addition, the aid has a positive impact on environmental protection and security of energy supply.1

2.2. Granting authority and legal basis

(6) The aid will be provided by the Swedish Energy Agency on the basis of an aid scheme approved by the Commission in August 20082.

(7) The legal basis for the aid measure is Regulation (1988:764) on State support for the industry ("Förordning 1988:764 om statligt stöd till näringslivet") and Regulation (2008:761) on State support for research and development and innovation within the energy field ("Förordning 2008:761 om statligt stöd till forskning och utveckling samt innovation inom energiområdet").

2.3. The beneficiary

(8) Seabased Industry AB (hereinafter "Seabased"), a technology and equipment supplier,will receive the entire grant. Seabased is, together with Seabased Energy British AB and Seabased Energy USA AB, a subsidiary to Seabased AB (the group is hereinafter referred to as the "Seabased Group"). The Seabased companies were all founded as spin-offs from university research activities at Uppsala University. The two founders are private (natural) persons who via their respective companies have the decisive influence in the Seabased Group. By the time of the granting of the aid, the Seabased Group (including linked companies) had 47.4 employees, a turnover of € 2.3 million and a balance sheet total of € 5.6 million.

(9) Seabased will develop the technology for the project and will be the owner of all potential patents resulting from it. However, Seabased does not have the necessary knowledge to run a power plant, nor the concession rights and technical knowledge required to connect the plant to the grid, and could not fulfil the electricity producers’ responsibility of guaranteeing a steady flow of electricity into the grid (so-called balansansvar). Therefore, Seabased will carry out the project in collaboration with the electricity producer and distributor Fortum Group3 (hereafter "Fortum"). Fortum will own the demonstration plant and any electricity produced therein. It will contribute financially to the project by providing SEK 120 million to Seabased for the project and by carrying out some R&D activities itself. Fortum's main role in the project is to set the requirements for the wave energy production system, to be responsible for the connection to the grid and to run the demonstration plant. In 2009, Fortum's electric energy production in Sweden was approximately 25.5 TWh.

1 See more specifically paragraph 50 below.2 N 561/2007 – SE – Energy research, development and innovation scheme STEM, OJ C 238, 17.9.2008, p. 23 For this purpose Fortum Group has created the fully owned subsidiary Fortum Wave Power BV (hereafter

"Fortum Wave"), which is intended to be the responsible unit for its wave energy activities.

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2.4. Description of the project

(10) The planned demonstration plant, which will have a capacity of 10 MW and which will be located about 10 km off the West cost of Sweden, will consist of a system with 420 wave energy converters (WECs). Each WEC will consist of a point absorber (buoy) on the sea surface, which is connected to a linear electrical generator on the seabed via a wire. Each generator will be of 25 kW power and will have a translator that is pulled up by the buoy and down by a reverse force mechanism. The translator has magnets attached to it, which, as they move, generate electricity in the surrounding stator.

Figure 1: Wave Energy Converter, WEC

(11) Due to the nature of waves, each WEC will have a varying power output. In order to transform the electricity to 50/60 Hz alternating current and transmit it to the grid, Seabased will develop a marine electrical system consisting of two different sub-marine stations: a low voltage marine substation (LVMS) and a medium voltage sub-marine station (MVMS). On the seabed, several individual generators will be interconnected to one LVMS, which will rectify, invert and transform the variable alternating current received from the wave power plant to the desirable frequency, amplitude and voltage. By connecting a cluster of WECs to the LVMS, power variations will be evened out. Several low voltage sub-stations will be grouped together to a MVMS, which further will transform the voltage so that the electricity can be transmitted over long distances to the onshore grid. The WECs and the marine substations will be anchored at the seabed with gravity foundations in concrete, whichwill be designed and dimensioned on the basis of wave loads and seabed conditions.

(12) The LVMSs have not been tested in a full-scale setting and the prototypes built so far have shown that many areas have to be developed. To obtain a fully developed plant,

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the entire system needs to be developed, tested and operated on a sufficiently large scale to further investigate and test problems and opportunities. For this purpose, at least 10 LVMS are needed and each of them having at least 40 WECs connected.4

(13) The project will be carried out in two parts consisting of the following activities:

(i) Part 1 (2-3 years) consists of the design and development of the plant. This will be done in two phases:

− First phase: 42 WECs connected to 1 LVMS will be designed and developedand the system with all rectifiers, control equipment and other electronics will be improved. The R&D activities during this part of the project also include the development of safe and economic methods for transportation and deployment of the equipment. Moreover, the control system, which is necessary for the operation and monitoring of the plant, as well as ensuring the safety of the plant, will be developed.

− Second phase: The remaining nine nodes of the plant will be developed andthe connection to the grid and the control system, which has to be developed from scratch, will be essential. This phase will result in a wave energy plant with 420 WEC, 10 LVMSs, 1 MVMS, a 9.5 km long sea cable connected to the grid and a control system. It is not until this stage is reached that testing of the full plant can start and knowledge of its operation can be gained.

(ii) Part 2 (ca. 5 years) concerns experimental operation (test running) of the plant in various weather conditions and optimisation of the system. The main R&D activities to be carried out during this part of the project are optimisation of the energy conversion by use of regulated DC-levels, studies of the Smart-Grid concept, verification that the efficiencies on energy conversion agree with models, that the plant can handle over-loads and emergency situations, that the safety and monitoring is satisfying, that the impact on flora and fauna is acceptable and that the economic and commercial aspects are acceptable.

(14) Fortum has the right to terminate the project after the first phase of Part 1, if the expected outcome has not been reached. Otherwise, Fortum will own the full demonstration plant by the end of Part 1. Since the electricity produced during the testing of the plant cannot be stored, but has to be dispatched somewhere, some sales of electricity will take place. Any revenue from sales will belong to Fortum and is not expected to render the project profitable. By participating in the project, Fortum aims at obtaining knowledge and experience in the field of new renewable energy technologies. […]∗.5

(15) If the project is successful, it is not excluded that the plant remains in operation by Fortum after the end of the project. The purpose would be two-fold: first, it would

4 A system with 10 LVMS connected to one MVMS and the electricity transported by cable to shore enables: (a) the finalisation of the development of the LVMS, (b) the optimisation of the system in different climates via the control system, (c) increased R&D on the absorption, (d) obtaining information on the buoys'interference with each other in a large scale power plant and (e) development and testing of the MVMS.

∗ Business secret5 This is supported by an analysis by the technical consultancy firm SWECO Energuide AB (Final report of

15.1.2010 and letter of 9.10.2009). The fact that a 5-year depreciation period is in line with relevant accounting principles and gives a true and fair view is supported by audit firm Deloitte (letter of 5.10.2009).

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generate knowledge regarding the plant's life-time, wear and tear, etc; second, it would allow Fortum to recoup as much as possible of its losses from the project. […].[…] the plant is considered to be too small to be commercially viable. According tothe Swedish authorities, a plant will normally have to be 150-250 MW in order to be commercially interesting for a large-scale electricity producer. […], the Swedishauthorities will apply a mechanism under which any positive net present value (NPV)of Fortum's participation in the project would be paid to the Swedish authorities including interest. Fortum will have the responsibility and cost of de-commissioning.

2.5. Novelty of the knowledge resulting from the project

(16) There are currently a number on-going other wave energy technology projects, which are based on different technologies, mainly:

− Voith Hydro Wavegen Ltd has developed and is operating a commercial-scale pilotplant using Oscillating Water Column (OWC) technology in Scotland. The water column feeds two counter-rotating turbines, each of which drives a 250 kW generator. It is a shoreline-based concrete devise, placed on the sea bottom.6

− Oceanlinx Ltd has developed a plant using OWC technique for open water. Several projects have been carried out in Australia: the most recent one was a pre-commercial plant with a capacity of 2.5 MW, which in 2010 produced electricity to the grid for three months before it broke loose from its attachment and sank.7

− The Pelamis Ltd is a floating device with cylindrical hollow steel segments that are inter-connected by hinged joints. The technique has been deployed in Scotland and a scheme of devices is deployed in Portugal and is currently producing electricity to the grid.8

− The Wave Dragon uses a pair of curved reflectors to gather waves into the central receiving part, where they flow up a ramp and over the top into a reservoir, from which the water is allowed to return to the sea via low-head turbines. It has been constructed for location 5-25 km off-shore. A 20 kW prototype has been deployed in Denmark and a full-size demonstration device is under construction in Wales.

− The Archimedes Wave Swing consists of a buoyant cylindrical, air-filled chamber(the 'floater') that can move vertically. The device was developed for strong waves. A 2 MW Pilot scheme has been deployed and tested in Portugal.9

− The Oyster wave energy converter is a hydro-electric device which consists of a hinged mechanical flap connected to the seabed at 10 m depth. In 2009, the first full-scale demonstrator began producing power on Orkney. The installation of asecond device is planned for 2011.10

− CETO, developed by Carnegie Wave Energy Ltd, is a device consisting of a single piston pump attached to the seabed, with a float tethered to the piston. The device is being tested in Australia and other test projects are at planning or pre-construction stage.11

6 See e.g. http://www.wavegen.co.uk/what_we_offer_limpet_islay.htm. 7 See e.g. http://www.oceanlinx.com/index.php/current-projects8 See e.g. http://www.pelamiswave.com/our-projects/agucadoura9 See e.g. http://www.awsocean.com/archive-successful-testing.aspx?In=110 See e.g. http://www.aquamarinepower.com/technologies/oyster-2/11 See e.g. http://www.carnegiecorp.com.au/index.php?url=/projects

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− The Power Buoy uses an ocean-going buoy to capture and convert wave energy. A test device has been developed in Hawaii and was connected to the grid in 2010. Other projects are planned or running in Spain, Scotland and the US12.

− Wavebob is an axi-symmetric, self-reacting buoy, primarily operating in the heave mode. There is no requirement for deep water facilities or dry docks. An average electrical power of 500 kW is expected from North Atlantic sites.13

(17) There are thus many different wave energy technologies. Even the technology which is most similar to the one of Seabased, namely the Wavebob, is significantly different from Seabased's. First, Wavebob has its generating parts on the sea surface, while the Seabased system has its active generating parts on the seabed. Second, in order totransmit the electricity from the surface to the seabed Wavebob uses a hydraulic system where oil is pumped through a turbine and generator, whereas Seabased has a direct driven generator. Third, Wavebob has a 100 m long pipe that works as a fixed reference, while Seabased technogy uses the seabed as reference for the heaving buoy. Moreover, the Wavebob is kept in place with moorings while Seabased uses a gravitational foundation.

(18) Some of the novel features of the Seabased system as compared to other wave energy systems under development, are that: (i) all vulnerable units will be located on the seabed whereas most competing techniques locate these parts on the sea surface; (ii) Seabased's technology consists of a large number of WECs allowing repair and maintenance of individual WECs without interrupting the energy production of the plant; (iii) Seabased's technology can deliver electricity suitable for direct feeding into the grid by using the LVMS/MVMS system.

2.6. R&D categories and eligible costs

(19) The project consists of developing of a demonstration plant, which will be tested and optimised during a period of experimental operation. The activities to be carried out are inter alia combining, shaping and use of existing scientific, technological knowledge and skills for the purpose of producing plans and arrangements and designs for improved products and processes, in developing new technologies and processes, as well as in other activities aiming at conceptual definition, planning and documentation of new products and processes. Seabased will not receive any net revenue from the project.

(20) According to the Swedish authorities, the eligible costs concern exclusivelyexperimental development activities. The total eligible costs of Seabased amount to SEK 343.8 million (ca. € 37.5 million).

2.7. The aid instrument, amount and intensity

(21) The Swedish authorities intend to provide a direct grant of SEK 139 million (ca. € 15million) to Seabased. The grant will be paid in instalments over five years (2011-2015) and cannot be cumulated with aid from other local, regional, national or Community schemes to cover the same eligible costs.

12 See e.g. http://www.oceanpowertechnologies.com/projects.htm13 See e.g. http://www.wavebob.com/how_wavebob_works/

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(22) According to the Communication from the Commission on the revision of the method for setting the reference and discount rates14, a rate corresponding to the reference rate plus 100 basis points should be applied for discount purposes. The reference rate for Sweden was 1.02 % at the time of the preliminary granting decision by the Swedish Energy Agency, i.e. a discount rate of 2.02 % should be used. Such a rate results in a discounted value of the grant of SEK 130.4 million (ca. € 14.2 million). The aid thus corresponds to 41.8 % of the discounted value of the eligible costs.

3. ASSESSMENT

3.1. Existence of aid

(23) According to Article 107(1) TFEU, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, insofar as it affects trade between Member States, be incompatible with the internal market.

(24) The notified grant will be provided by the Swedish authorities from the State budget, i.e. it is financed from State resources. It will be granted exclusively to one company, which it will relieve from costs that should otherwise have been borne by thatcompany. It thus confers an advantage to this company. The beneficiary will be active in a sector that is open for competition and trade between Member States. The aid could improve the financial situation and enhance the market position of the beneficiary and thereby distorts or threatens to distort competition and affects trade between the Member States. Consequently, the notified measure constitutes State aid within the meaning of Article 107(1) TFEU.

3.2. Legality of aid

(25) The Commission notes that the Swedish authorities have complied with Article 108(3) TFEU by notifying the aid measure to the Commission and by not putting it into effect until the Commission's authorisation thereof.

3.3. Basis for assessment of compatibility of the aid with the TFEU

(26) According to Article 107(3)(c) TFEU, aid may be compatible with the internal market if it facilitates the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

(27) The Community Framework for State aid for research and development and innovation15 (hereafter "the R&D&I Framework") sets forth criteria based on which the Commission will assess whether aid for certain R&D activities is compatible with the internal market under Article 107(3)(c) TFEU.

14 OJ C 14, 19.1.2008, p. 6.15 OJ C 323, 30.12.2006, p. 1.

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(28) The objective of the notified measure is to promote R&D activities (experimental development activities). Such aid falls within the scope of application of the R&D&I Framework, as defined in section 2.1 of that Framework.

(29) The R&D&I Framework provides conditions for two levels of compatibility analysis:

− A general level of analysis: Chapters 5 (for this case, particularly section 5.1 Aid for R&D projects), 6 (Incentive effect and necessity of the aid) and 8 (Cumulation) lay down general conditions for the compatibility of R&D aid.

− A detailed level of analysis: For aid in respect of which the risk for distortion of competition is higher (e.g. where the aid amount exceeds certain thresholds), a detailed analysis has to be carried out in addition to the general one. The purpose of this analysis is to ensure that the benefits of state aid in terms of additional R&D outweigh the harm to competition and trade. Chapter 7 of the R&D&I Framework provides assessment criteria for positive and negative effects of the aid and the balancing of such effects.

(30) The notified aid amounts to SEK 130.4 million (ca. € 15 million) and the project underexamination consists exclusively of experimental development. According to section 7.1 of the R&D&I Framework, aid which is covered by the Framework and supports projects in which the supported activities are not predominantly fundamental research or industrial research, should be subject to a detailed assessment if the amount exceeds € 7.5 million per undertaking and per project. On that basis, a detailed assessment of the notified aid will be carried out.

(31) In order to carry out its assessment, the Commission first has to identify the aid beneficiary/ies. In this case, the entire aid amount was requested by and granted exclusively to Seabased, who will undertake all the R&D activities and incur all the costs which will be considered as eligible costs. It is thus clear that Seabased will benefit from the aid. As regards the collaboration agreement between Seabased and Fortum, the Commission notes that according to the information provided by the Swedish authorities, it was negotiated on commercial terms. Although Fortum, for the technical reasons set out in paragraph 9 above (concession rights, guarantee of steady flow into the grid, etc), will own the plant and any production thereof, its participation in the project is not expected to result in a financial advantage: the NPV of Fortum's participation is estimated at SEK […], leading to an internal rate of return (IRR) of […] %. This is well below the weighted average cost of capital that Fortum typically would have for this type of project, namely […] %.16 Moreover, in order to ensure that Fortum does not get a financial advantage in case the project is more successful thananticipated, the Swedish authorities have introduced a mechanism by which any positive NPV which will accrue to Fortum from the project will be paid to the State budget.17 The advantage which Fortum will get from its participation in the project is

16 The profitability forecast was based on a discount rate of […] %. This rate seems reasonable compared to e.g. UNs' Environment Programme Sustainable Energy Finance Initiative, "Private Financing of Renewable Energy – a guide for policymakers", December 2009, available at: http://sefi.unep.org/fileadmin/media/sefi/docs/publications/Finance_guide_FINAL-.pdf (return of 15 % for proven technologies, 25 % for demonstrator technology and more than 50 % for new technology).Moreover, it seems reasonable on the basis of decisions in similar cases (see footnote 19).

17 The fact that investment decisions regarding demonstration projects may be mainly driven by the strategic value of the project has been recognised by the Commission in previous decisions, see e.g. N 521/2008 –DE – Aid to off-shore wind part Borkum, "Alpha Ventus" (paragraph 130), OJ C 7, 12.1.2011, p. 1.

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thus a gain of knowledge and know-how, which could lead to a first-mover advantage, as well as a positive green image. However, any potential advantage is counter-balanced by the number of competing wave energy technology projects (see section 2.5 above) and the negative NPV associated with participation in the project. The fact that Fortum's participation is not financially attractive seems to be supported by the fact that other energy companies have rejected offers to participate in the project.18 On that basis, it is concluded that Seabased is the sole beneficiary of the aid.

(32) The analysis below follows the order of the criteria for detailed assessment, as presented in Chapter 7 of the R&D&I Framework. However, the assessment of the fulfilment of the general conditions is integrated in the appropriate part of the detailed assessment. More precisely, the fulfilment of the conditions of Chapter 6 regarding incentive effect and necessity of the aid is assessed under point 3.4.3 below, while the compliance with the conditions set out in section 5.1 Aid for R&D projects and Chapter 8 Cumulation is assessed under point 3.4.4 regarding proportionality.

3.4. Positive effects

3.4.1. Existence of a market failure

(33) According to points 1.3.2 and 7.3.1 of the R&D&I Framework, market failures may prevent the market from achieving optimal output, and State aid may be necessary to increase R&D in the economy only to the extent that the market, on its own, fails to deliver an optimal outcome. The analysis of the level of R&D activities as well as of market failures should be carried out at the Community level. The Commission will consequently analyse if the level of R&D activities undertaken within the EU would be inferior if the project would not be undertaken and, if so, if this result is optimal or if a market failure exists.

(34) In 2009, the Commission acknowledged in its Communication ”Investing in the Development of Low Carbon Technologies (SET-Plan)”19, that there is a significant need for demonstration plants, ranging from pilot to full scale, for demonstrations of new, CO2 efficient, technologies. It stated that the markets and energy companies acting on their own are unlikely to be able to deliver the needed technological breakthroughs in order to meet EU's energy and climate change goals. The Commission thus concluded that public financial support is crucial in establishing the new CO2 efficient technologies in order to minimize the financial risks associated with their introduction.

(35) Moreover, the Commission has not only acknowledged such a market failure in its decisions on previous similar state aid cases in the field of renewable energy technology20, but also by its own interventions to support R&D in this field under the current FP7 (e.g. Standpoint (Wavebob), Waveport, Marina Platform, Cores, Snapper

18 See paragraph 44 below19 Communication from the Commission to the European Parliament, the Council, the European Economic

and Social Committee and the Committee of the Regions: Investing in the Development of Low Carbon Technologies (SET-Plan)", COM (2009) 519 final, 7.10.2009

20 See e.g. Commission decisions on state aid cases N 493/2009 - FR - GAYA, OJ C 213, 6.8.2010, p. 9, SA.30266 - SE - GoBiGas, OJ C 196, 5.7.2011, p. 2, SA.30298 - SE - LignoBoost, OJ C 196, 5.7.2011, p. 6and SA.31083 - SE - Domsjö Fabriker, OJ C 180, 21.6.2011, p. 1.

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and Wavetrain 221). Therefore, there seems to be a general market failure in the area of the renewable energy technology at EU level.

(36) In view of the above, it can be concluded that there is a general market failure in the area of the renewable energy at the European Union level. Nevertheless, according tothe R&D&I Framework, the Commission must establish the specific market failure which the beneficiary is faced with and which justifies the aid subject to assessment.

(37) In this particular case, the Swedish authorities argue that there is a market failure which makes private investors reluctant to finance the project at hand due to problems posed by imperfect and asymmetric information and the high intensity of coordinationrequired. In addition, private investors are unable to appropriate benefits generated by the project in the form of knowledge spill-over and other positive externalities.

3.4.1.1. Imperfect and asymmetric information

(38) The Swedish authorities claim that, due to imperfect and asymmetric information, the market is not able to finance a project like the one at hand by itself. In particular,financial institutions would encounter problems to get a clear view of the risks and the profitability prospects of the project.

(a) Risk and complexity of research

(39) According to the Swedish authorities, the project involves a large number of important technical, market and financial risks, as well as environmental risks, namely:

(40) The main technical risks concern the development of a coherent system where 420 WECs, 10 LVMS and one MVMS will be assembled to a coherent system and connected to the grid. There are risks involved in the connection itself, i.e. to develop good connectors as well as creating a system to place and to connect individual parts in the most efficient way. The main risk at the system level is the development and operation of a control system for safe and efficient operation of the plant. Today no such system exists, but would have to be developed from scratch during the project. Such a system would handle inter alia a secure start-up and close-down of the entire wave energy plant, a limitation of energy production at high wave energies (due to limitations of the grid), warnings to operators, automatic failure modes and secure connection/disconnection of units at maintenance or failures. The fact that technical risks are indeed important in wave energy technology projects was last shown in the Oceanlinx project in 2010, where the plant after 3 months of deployment broke loose from its attachment and sank22.

(41) The project also entails market and financial risks (e.g. production costs, maintenance costs, system lifetime unproven, cost of raw material, related to regulation, safety,working safety, permits and changes in support levels). Although the financial risks to some extent are shared with Fortum, significant financial risks of a project failure orbudget deviations remain with Seabased.

(42) In addition, there are environmental risks (e.g. disturbance of maritime life, shipping, fishing, etc). These risks have however been studied at university level and where

21 See http://cordis.europa.eu/fp7/projects_en.html22 http://cleantechnica.com/2010/05/22/massive-offshore-waves-sink-australias-oceanlinx-wavepower-pilot/

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further analysed in the context of the judgement of the Swedish Environmental Court allowing the project to be implemented and are considered to be low23.

(b) Reluctance of banks to finance the project

(43) In the present case, investments of at least SEK […] million (€ […] million) are required during a period of 7-8 years (with the main part to be made in the beginning of the project). Due to the risks, any return is uncertain and since the capacity of the plant would be far below the one of a commercial plant, the project is not expected to be profitable. Seabased has therefore had difficulties to find financing for the project.

(44) Before Fortum decided to contribute to the project, Seabased faced rejections from several energy companies, which had been offered to participate in the project, mainly due to the fact that the technology had not been demonstrated24. […]25. Its […] decision to support the project was made under the conditions that (i) the State would provide the aid, (ii) Fortum's financial contribution would be limited to SEK 120 million and (iii) Fortum would retain the right to discontinue the project after the first phase of Part 1. In order to obtain financing for the project, Seabased also made more than ten unsuccessful attempts to obtain financing from banks and financial institutions26.

(45) The fact that a bank would not provide loans to a specific borrower is however not sufficient to point to a market failure, since this could rather reflect a risk/benefit assessment in view of the customer profile. In this case, however, the project is subject to important risks and, given the technological complexity of the activities to be carried out, financial institutions do not dispose of sufficient visibility to properly estimate the risks or the profitability of the project. Moreover, since the project involves high up-front investments, long duration and poor profitability prospects, it is difficult, if not impossible, to obtain bank funding, especially in a context of global financial crisis. This has been recognised by the Commission in previous decisions on similar cases27.

3.4.1.2. Necessary coordination

(46) The Swedish authorities refer to the existence of coordination problems linked with the project at hand, underlining the high intensity of the required collaboration, since it is necessary that a power company accepts to operate and own the plant, and to contribute its knowledge to develop a connection to the grid (see e.g. paragraph 9 above).

3.4.1.3. Knowledge spill-over

(47) The project will mainly be based on existing technology already patented by Seabased. Any new IPR resulting from the project (approximately 4-6 patents) will belong to Seabased.

23 See judgement of 24.6.2010 by Vänersborgs tingsrätt, the Environmental Court in case M 3086-09.24 Contacts with […] and […] are described in detail in the information submitted to the Commission.25 […].26 Detailed information regarding contacts with […], […], […], […], […], […], […], […], […] and […] has

been submitted to the Commission.27 See the mentioned State aid decisions in the GAYA case (paragraphs 87-94), the GoBiGas case (paragraph

67), the LignoBoost case (paragraphs 52-60 and 66) and the Domsjö case (paragraphs 61-71 and 78).

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(48) The main knowledge developed during the project will be general knowledge regarding the functioning of wave energy systems and cannot thus be appropriated. On the contrary, this knowledge is foreseen to be widely disseminated through various channels. First, the project will involve university students and teachers (in particular, studies of design of equipment, wave energy conversion in practice, basic electricity and the effects of an artificial reef). Second, Seabased also intends to disseminate knowledge internationally via its involvement in the EIT InnoEnergy project28 and in conferences and publications. The Swedish authorities will also retain the right to organise visits to the demonstration plant.

3.4.1.4. Other positive externalities

(49) According to point 1.3.2 of the R&D&I Framework, even though R&D projects often lead to other positive externalities for the society, these externalities are not taken into account by private undertakings. Such projects may therefore not be pursued unless there is public intervention.

(50) In the present case, the project contributes to several EU objectives, such as increased levels of R&D, environmental protection and security of energy supply. The research carried out under the project will contribute to the aim of the Europe 2020 strategy of R&D&I spending approaching 3 % of GDP by 201029. Furthermore, adapting the current energy system into a more sustainable one, less dependent on imported fuels and based on a diverse mix of energy sources, in particular renewables is one of the objectives of the Seventh Framework Programme (FP7) of the European Community30. As regards energy and climate, it contributes to the targets of the EU Energy Package31, i.e. reduction of at least 20 % in greenhouse gases and the increase of the share of renewable energies in EU energy consumption to 20 % by 2020. As for the binding renewable energy targets set out in Directive 2009/28/EC of the European Parliament and of the Council on the promotion of the use of energy from renewable sources32, the electricity produced through the project would according to the Swedish authorities contribute to achieving that target. For Sweden, the national target is set to a 49 % share of energy from renewable sources by 2020. Finally, the use of wave energy would lead to a higher level of security of supply.

3.4.1.5. Conclusion

(51) It is clear that the aid is aimed at correcting a specific market failure resulting from imperfect and asymmetric information, and from the inability to appropriate knowledge spill-over and other positive externalities. To a smaller extent, it is possible that there also is a market failure due to the rather high degree of collaboration required for the project.

28 The EIT (European Institution of Innovation and Technology) InnoEnergy project consists of participants from 13 universities, 10 research organisations and 13 companies around Europe.

29 Communication from the Commission: EUROPE 2020 – A strategy for smart, sustainable and inclusive growth, COM (2010) 2020, 3.3.2010, see e.g. p. 3.

30 Decision No 1982/2006/EC of the European Parliament and of the Council concerning the Seventh Framework Programme of the European Community of research, technological development and demonstration activities (2007-2013), OJ L 412, 30.12.2006, in particular pages 18 and 19.

31 Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: 2020 by 2020 - Europe's climate change opportunity, COM (2008) 30 final, 23.1.2008.

32 OJ L 140, 5.6.2009, p. 16.

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3.4.2. Appropriateness of the instrument

(52) An element in the balancing of positive and negative effects of the aid is whether and to what extent state aid can be considered as an appropriate instrument to increase R&D activities, given that other less distortive instruments may lead to the same result.

(53) According to the Swedish authorities, the notified aid is required in order to compensate for the market failure and enable the implementation of the project. In the field of renewable energy, tax incentives or other measures such as supply obligations are common. However, such more general measures would not be sufficient for overcoming market failures for projects as the one at hand with high up-front investments in early stages, high risks and very long pay-back periods. According to the Swedish authorities, neither a repayable advance nor a state loan would have increased the profitability of the project to a sufficient level. Therefore, the Swedish authorities found that a direct grant would be the most appropriate instrument to overcome the market failure described above.

(54) On that basis, the Commission finds that State aid in the form of a direct grant is an appropriate instrument in order to overcome the market failure and to enable the implementation of the project.

3.4.3. Incentive effect and necessity of aid

(55) State aid must have an incentive effect, i.e. result in the recipient changing its behaviour so that it increases its level of R&D activity. Identifying the incentive effect means assessing whether the planned aid will induce undertakings to pursue R&Dwhich they would not otherwise have pursued.

(56) As laid down in Chapter 6, second paragraph, of the R&D&I Framework, aid does not present an incentive for the beneficiary where the R&D activity starts prior to the beneficiary applying for aid to the national authorities. In the case at hand, Seabased submitted its aid application for the project on 4.5.2009, requesting a grant of SEK 139 million. By that time, none of the eligible costs had been incurred. In fact, although the aid was granted by the Swedish Energy Agency in its decision of11.2.2010, the R&D activities of the project has not started. This is because the beneficiary awaits the Commission’s approval of the measure before commencing the R&D activities, which supports the claim by the Swedish authorities that the project will not be carried out at all without the aid. There is thus no doubt that the formal condition relating to the presence of an incentive effect is fulfilled in the present case.

(57) However, when a measure is subject to a detailed assessment, the Commission requires that the incentive effect of the aid is substantiated more precisely in order to avoid undue distortion of competition. In its analysis, the Commission takes into consideration the following elements set out in point 7.3.3 of the R&D&I Framework: specification of intended change, counterfactual analysis, level of profitability, amount of investment and time path of cash flows, the level of risk involved in the research project and continuous evaluation. The Swedish authorities have provided all elements required under point 7.3.3 of the R&D&I Framework enabling the Commission to assess the incentive effect of the aid.

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3.4.3.1. Counterfactual analysis and specification of intended change

(58) According to the Swedish authorities, without the aid, the project would not be carried out at all by the beneficiary due to the financial and risk arguments outlined in section 3.4.1.2 above. For the reasons set out in paragraph 12 above, a project on a smallerscale would be of no interest, since it would not provide the necessary basis for development, testing and operation of the entire system on a sufficiently large scale.

(59) Compared to the counterfactual situation, the change brought about by the aid is therefore identical to the entire size and scope of the project, implying full-time employment of 109 staff assigned to the project (researchers, development engineers, foremen, management staff and workers). The aid results in an increase of the total R&D costs of the project by SEK […] million (out of which SEK 344 million are incurred by Seabased and the remaining part by Fortum). This can be compared with the normal level of annual R&D expenditure of Seabased, which is estimated to be ca.SEK […] million per year. In addition, additional R&D will be needed inter alia in order to continue to increase the absorption of the wave energy, to find new solutions for wave energy parks and new material for the buoys as well as to standardise the way of fixing the units and switch gears to the seabed depending on the structure of the latter.

3.4.3.2. Level of profitability

(60) According to point 7.3.3 of the R&D&I Framework, if a project would not in itself be profitable to undertake for a private undertaking, but would generate important benefits for society, it is more likely that the aid has an incentive effect.

(61) Since Seabased will not receive any revenue from the project at hand, it will not be profitable even with the aid. Any profitability of Seabased would occur in the verylong-term after the technology has been proven. It is thus not due to short- or even mid-term profitability prospects that Seabased wishes to carry out the project, but for potential profitability from other projects in the long-term. Any such profitability cannot be quantified at this stage.

3.4.3.3. Investment amount and cash-flow

(62) High start-up investment, low level appropriable cash flows and a significant fraction of cash flows arising in the very long-term future are considered positive elements in assessing whether aid has an incentive effect.

(63) The total costs of the project will be more than SEK […] million over 7-8 years. The investments will occur mainly during the first three years of the project. If there will be any income stemming from the project, this will belong to Fortum as the owner of the plant. Out of the total project costs, SEK […] million would be incurred by the research of Seabased. Without the grant, Fortum will not participate in the project and with a turnover of approx. SEK […] (ca. € […]) Seabased would not be in a position to finance the project from its own cash-flow. It can therefore be excluded that Seabased in the absence of aid could have financed the project from its own resources.

3.4.3.4. Continuous evaluation

(64) Measures which define well specified milestones resulting in the project being terminated in the event of failure or where a publicly available ex-post monitoring is

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foreseen will, according to point 7.3.3 of the R&D&I Framework, be considered more positively as regards the assessment of the incentive effect.

(65) In the case at hand, each payment requisition submitted to the Swedish Energy Agency must be accompanied by a status report containing a brief description of the status of the project and specifying its costs. An annual report of the work progress and deviations from plan, as well as important results achieved by the project and actual costs compared to budgeted amounts, must also be provided to the Energy Agency. Moreover, a written final report must be submitted to the Energy Agency at the end of the project. In addition to these reports, the Energy Agency requires to be informed when certain milestones of the project are reached. The project under examination is thus subject to continuous evaluation.

3.4.3.5. Conclusion

(66) In light of the above, given the project's high up-front investment costs, important risks and poor financial perspectives, the project would not be carried out with out the aid. Consequently, the Commission can conclude that the aid has an incentive effect and enables the implementation of the project.

3.4.4. Proportionality of the aid

(67) Section 5.1 of the R&D&I Framework sets out general conditions for analysing theproportionality of State aid for R&D projects. Compliance with these rules is examined in section 3.4.4.1 below, as regards research categories and eligible costsand in section 3.4.4.2 for aid intensity.

(68) The R&D&I Framework states that additional information is necessary to demonstrate the proportionality of aid above certain thresholds. In accordance with point 7.3.4 of the R&D&I Framework, the Commission analyses in section 3.4.4.3 of the present decision whether the fact that an open selection process has been carried out has contributed to ensure that the aid is proportional and in section 3.4.4.4 the extent to which the notified aid is limited to the minimum necessary.

(69) Finally, compliance with the cumulation rules set out in Chapter 8 of the R&D&I Framework is assessed in section 3.4.4.4.

3.4.4.1. Research categories and eligible costs

(70) In accordance with point 5.1.1 of the R&D&I Framework, the aided part of the research project must completely fall within one or more of the following research categories: fundamental research, industrial research, experimental development.

(71) The R&D activities conducted through the project at hand consist of developing a demonstration plant to produce electricity from wave energy. The project will be based on a technology which has not been proven and the activities will consist in combining, shaping and use of existing knowledge and skills for the purpose of producing plans and arrangements and designs for improved products and processes.

(72) According to point 5.1.1 of the R&D&I Framework, in its classification of different R&D activities, the Commission will refer to its own practice as well as to the Frascati

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Manual33. According to point 116 of the Frascati Manual, the construction and operation of pilot plants is part of R&D as long as its principal purposes are to obtain experience and to compile engineering and other data to be used in evaluating hypotheses, writing new product formulae, establishing new finished product specifications, designing special equipment and structures required by a new process and preparing operating instructions or manuals on the process.

(73) An examination of the activities to be undertaken during the project thus allow the Commission to conclude that they comply with the definition of experimental development given in point 2.2(g) of the R&D&I Framework, which consist in acquiring, combining, shaping and using existing scientific, technological, business and other relevant knowledge and skills for the purpose of producing plans and arrangements or designs for new, altered or improved products, processes or services. The development of commercially usable prototypes and pilot projects is also included where, as in the case at hand, the prototype is necessarily the final commercial product and where it is too expensive to produce for it to be used only for demonstration and validation purposes. Seabased will not receive any net revenue from the project. In order to ensure that the aid does not result in commercial profitability, the Swedish authorities rely on a mechanism by which any profitability of commercial use of the plant (although not on behalf of the aid beneficiary, but by Fortum) would be paid to the Swedish authorities.

(74) The Commission has verified that the eligible costs specified in the notification are in line with the eligible costs listed in point 5.1.4 of the R&D&I Framework:

– personnel costs are included to the extent that researchers, technicians and other supporting staff are employed on the research project;

– the only costs included for instruments, equipment, buildings and land are the costs corresponding to the life of the research project, as calculated on the basis of good accounting practise;

– costs of contractual research, technical knowledge and patents are bought or licensed from external sources at market prices; and

– other operating expenses (including e.g. the costs of materials and consumable supplies for the experimental development phase).

(75) The Commission can, therefore, conclude that the proposed aid is in compliance with points 5.1.1 and 5.1.4 of the R&D&I Framework.

3.4.4.2. Aid intensity

(76) According to point 5.1.2 of the R&D&I Framework, the maximum allowed intensity for aid for experimental development activities is 25 %. In this particular case, all eligible R&D costs fall within the definition of experimental development. The beneficiary of the aid is, in accordance with the definition provided in Commission Recommendation concerning the definition of micro, small and medium-sized enterprises34, a small enterprise. On the basis of section 5.1.3(a), a bonus of 20

33 The Frascati Manual on the Measurement of Scientific and Technological Activities, Proposed Standard Practice for Surveys on Research and Experimental Development, Organisation for Economic Co-operation and Development, 2002

34 Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises, OJ L 124, 20.5.2003, p. 36

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percentage points is allowed for small enterprises. The maximum allowed aid intensity would thus be 45 %. As shown in section 2.7 above, the support for the project will amount to ca. 41.8 % of Seabased's eligible costs. The Commission, thus, finds that the aid intensity in this case is below the one allowed by the R&D&I Framework.

3.4.4.3. Open selection process

(77) On 11 December 2008, the Swedish Energy Agency published a call for tender titled "demonstration and commercialisation of second generation biofuels and other energy technology", which attracted 39 responses of interest. The project under assessment, as well as four other projects, was selected for funding based on open, transparent and non-discriminatory criteria.

(78) However, the Commission does not find that the open selection process in this particular case is a relevant factor for the assessment of proportionality as specified in point 7.3.4 of the R&D&I Framework. This is because its purpose was to identify eligible projects and not multiple potential candidates for the same R&D project, which could have had a limiting effect on the eligible costs.

3.4.4.4. Aid limited to the minimum necessary

(79) In addition to the general provisions regarding proportionality, in cases with detailed assessment the Commission assesses in accordance with point 7.3.4 of the R&D&I Framework whether the aid is limited to the minimum amount necessary to implement the project in question.

(80) According to the Swedish authorities, the aid amount is the minimum required by the beneficiary in order to carry out the project. It is not only limited to, but is slightlybelow, the maximum allowed under the R&D&I Framework. The grant does not render the project profitable, neither for the beneficiary nor for its collaboration partner. On that basis, the Commission considers the aid to be proportional and limited to the minimum necessary.

3.4.4.5. Cumulation of aid

(81) According to Chapter 8 of the R&D&I Framework, the aid ceilings fixed in that Framework apply regardless of whether the aid is financed entirely from State resources or is partly financed by the Community. The Swedish authorities have confirmed that the aid measure at hand cannot be cumulated with aid received from other local, regional, national or Community schemes to cover the same eligible costs. The conditions set out in Chapter 8 of the R&D&I Framework are thus met.

3.4.4.6. Conclusion

(82) The aid intensity is below the maximum allowed by the R&D&I Framework, the aid amount is limited to the minimum necessary and cannot be cumulated with other aids for the same eligible costs. The Commission thus finds that the aid is proportionate.

3.5. The distortion of competition and trade

(83) As set out in section 7.4 of the R&D&I Framework, the Commission focuses its analysis of the distortions of competition on the foreseeable impact the R&D aid has

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on competition between undertakings in the product markets concerned. The relevant markets for the case at hand are identified in section 3.5.1 below.

(84) In the following sections, the potential effects of the aid on these markets will be analysed. As set out in point 7.4, fifth paragraph, of the R&D&I Framework there are three distinct ways in which R&D aid can distort competition in product markets: it can distort the dynamic incentives of market players to invest (crowding out effect) (section 3.5.2), it can create or maintain positions of market power (section 3.5.3) and it can maintain an inefficient market structure (section 3.5.4).

(85) Moreover, it is stated in point 7.4, third paragraph, of the R&D&I Framework that in certain cases the results of R&D are in themselves traded in so-called technology markets, for instance via patent licensing. In such cases, the Commission may also consider the effect of the aid on competition in the technology markets.

3.5.1. Identification of the relevant markets

(86) The project under assessment concerns R&D for the development of a demonstrationplant producing electricity from wave energy. In case of success, Seabased aims at selling fully constructed wave energy plants and the connected maintenance service. It does not intend to sell the technology as such or sell only parts of the plants, nor to itself become an electricity producer/distributor. However, in exceptional situations, for environmental, geographical, political or other reasons, Seabased may not be able to transport the entire equipment to the deployment site from its manufacturing site and may not be able to establish a factory in a convenient location. In such a situation, Seabased may consider to grant a license to another company to manufacture and deliver its technology in specified cases.

(87) While electricity is a commodity and there is substitutability between electricity from renewable energy and electricity from conventional sources, this is not the case for the upstream markets which are subject to assessment in this case. With respect to the technology market, a potential buyer of a license normally already has invested in a production plant for a specific technology. It appears that the market which could be affected if Seabased in certain cases licenses its technology to another supplier would therefore be the wave energy technology market. As for the product market, the buyers are often large multi-national companies which choose to diversify their portfolios of different energy generation technologies. It seems thus that the relevant market is a wider market, namely the one for renewable energy generation systems.

(88) The markets which could be affected by the aid are therefore:

(i) the wave energy technology market (3.5.1.1) and

(ii) the market for supply of renewable energy generation systems (3.5.1.2)

(89) Since Seabased does not aim at licensing the IPR for its technology separately, but only in combination of supplying its technology to a customer, the impact on the technology market will be similar to the one on the market for supply of renewableenergy generation systems.

(90) The Commission notes that the beneficiary is presently not active on any of these markets. The definition of the relevant markets will be subject to a forward-looking analysis focusing, on the on hand, on the use of the product and on the substitutes

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from a demand perspective (the product market) and, on the other hand, on the most appropriate limitations of that market from a geographical dimension.

3.5.1.1. Wave energy technology market

(91) Licenses for producing wave energy generation systems could be traded internationally, on a market which is global. Although the possibility of generating electricity from the sea has been recognised for many years, the wave energy technology market is still in its infancy. Although the market has a high potential, since the potential of wave energy technology is high (see paragraph 95 below) and the demand is expected to grow rapidly, there is no commercial application in permanent operation at significant power levels.

(92) Wave energy conversion is being investigated in a number of EU Member States (e.g. the United Kingdom, Denmark and Portugal), as well as in Canada, China, India, Japan, Russian and the USA.35 Different wave energy technologies are at different stages of maturity and there has only been a few commercial applications (e.g. byWave Dragon, Pelamis Wave Power and AWS Ocean Energy). There are thus somesmall actors on the market.

(93) As described in section 2.5 above, there is a large number of on-going and planned wave energy technology projects at different stages of maturity. In addition, the technology competes to some extent with other ocean energy technologies, such as the ones using tides, currents, salinity gradiant and thermal gradiant. Furthermore, the technology also competes with the ones for renewable energy and even for energy based on fossil fuel as a whole.

3.5.1.2. Market for supply of renewable energy generation systems

(94) This market is global and is, e.g. due to policies of the Community as well as of the Member States, expected to grow rapidly. In 2009, the total production capacity for renewable energy systems was estimated to 1,230 GW36. Seabased estimates that the corresponding figures for the coming years will be ca. 1,000-3,000 GW per year.

(95) The market for supply of renewable energy generation systems consists of enterprises that construct and sell systems for different energy types (e.g. nuclear, gas, hydro, wind, solar, geothermal, biomass, hydrogen, fossil fuel), as well as enterprises focusing on power generating systems for only one energy type. Many of the current actors on the market for energy generation systems are large multinational companies, such as ABB, Alstom, Siemens, Areva, GE Energy and Caterpillar, which are active in the field of renewable energy generation systems37. Smaller providers are also active on this market along-side such large players.

35 See e.g. the Voith Hydro Wavegen, the Oceanlinx, the Pelamis, the Wave Dragon, the Archimedes Wave Swing, the Oyster wave energy converter, the CETO, the Power Buoy and the Wavebob technologies.

36 Global status report, Renewables 2010, available at: http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR_2010_full_revised%20Sept2010.pdf

37 E.g.: ABB (solar power, wind power, hydro power, wave energy), Alstom (hydro power, wind power, geothermal power), Siemens (hydro power, wind power, solar power, geothermal power), Areva (solar power, wind power, biomass power, hydrogen power) and GE Energy (solar power, wind power).

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(96) The potential of the global wave energy technology segment alone is estimated to at least 2,000 TWh/year.38 This estimation is however limited to deep water regions (>100 m) and high wave energy density levels (>20 kW/m). Technologies as the one at hand will however also be possible to use in more shallow regions and in regions of lower energy density. Seabased therefore estimates that the potential market for wave energy would be substantially higher than 2,000 TWh/year. Leading manufacturers in ocean energy include Aquamarine Power, Pelamis Wave Power, Marine Current Turbines, Open Hydro and Ocean Power Technologies. Many of these firms are landing contracts to build generation facilities in Australia, Brazil, Canada, South Korea, Spain and Sweden.39

3.5.2. Distorting dynamic incentives

(97) According to the R&D&I Framework, the main concern related to R&D aid is that competitors' dynamic incentives to invest are distorted. When an undertaking receives aid, this generally increases the likelihood of successful R&D of that undertaking leading to a future increased presence on the product market. This may lead competitors to reduce the scope of their original investment plants (crowding out).

(98) In its analysis of the potential distortion of dynamic incentives, the Commission considers the following elements: aid amount, closeness to the market, open selection process, exit barriers, incentives to compete for a future market and product differentiation and intensity of competition.

3.5.2.1. Aid amount

(99) In nominal terms, the maximum aid amount is SEK 139 million, which will be disbursed over five years. Although the aid amount is significant in itself, the Swedish authorities underline that the aid is strictly limited to the minimum necessary, since it does not render the project profitable. This should limit any distortive effects that the aid may have. Moreover, as described in section 2.5 above, a large number of R&D projects aiming at developing and demonstrating technologies for the production wave energy are under way. The aid amount is not of such magnitude that it would deter Seabased's competitors to maintain or even reinforce their R&D investments.

3.5.2.2. Closeness to the market

(100) The more the aid measure is aimed at R&D activity close to the market, the more it is liable to develop significant crowding out effects. In the case at hand, given that the project covers exclusively experimental activities and that the demonstration plant will be in operation, the project must be considered as being close to the market. Nevertheless, the project has a long duration and the demonstration plant will have a maximum capacity which is far below the one of a commercial plant, which means that the R&D activities are still relatively far away from the market for supply of renewable energy technologies and that the effect on the electricity production and distribution markets will be very limited.

38 See e.g. http://www.altprofits.com/ref/report/ocean/ocean.html 39 See e.g. Renewables 2010 "Global Status Report", REN21, available at:

http://www.ren21.net/REN21ProductsServices/Publications/GlobalStatusReport/Renewables2010GlobalStatusReport/tabid/5824/Default.aspx

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3.5.2.3. Open selection process

(101) The Swedish Energy Agency published a call for tender on 11 December 2008 “Call for interest for demonstration and commercialisation of second generation biofuels and other energy technology", which attracted 39 responses of interest. Following evaluation of the applications, the project and two other projects were selected for funding based on open, transparent and non-discriminatory criteria. The Commission considers that the fact that the aid beneficiary was selected after an open and transparent selection process based on objective criteria can be regarded positively since it may have encouraged competition between companies active on the market.

3.5.2.4. Exit barriers

(102) Point 7.4.1 of the R&D&I Framework indicates that the existence of exit barriers may reduce distortions of competitors' dynamic incentives. The reason is that competitors are more likely to maintain (or even increase) their investment plans when exit barriers to the innovation process are high. This may be the case when many of the competitors' past investments are locked in to a particular R&D trajectory. As described in section 2.5 above, other actors on the relevant markets are undertaking or have already undertaken high investments invested in competing wave energy technologies, which creates relatively high exit barriers in the concerned markets.With the long term commitment these companies have made to their projects, it is unlikely that they would abandon them as a result of the success of the project under assessment. On the contrary, the aid subject of this decision could further incentivise the market players to increase their R&D activities in order to remain competitive.

3.5.2.5. Incentives to compete for a future market

(103) R&D aid may lead to a situation where competitors to the aid beneficiary renounce competing for a future market, because the advantage provided by the aid reduces the possibility for them to profitably enter this future market. As mentioned above, Seabased will only to a limited extent be able to protect the resulting knowledge by intellectual property rights. Moreover, any first-mover advantage obtained by Seabased would due to the knowledge spill-overs of the project therefore be very limited in time. In fact, the knowledge spill-overs may positively contribute to the dynamics of the market. Therefore, and also taking into account the fact that therelevant markets are rapidly growing ones with several actors carrying out competing projects, the Commission concludes that there is no significant risk that the aid will discourage competitors to compete on the relevant markets in the future.

3.5.2.6. Product differentiation and intensity of competition

(104) According to point 7.4.1 of the R&D&I Framework, where product innovation concerns developing differentiated products (related e.g. to distinct standards, technologies and consumer groups) and when there are many effective competitors on the market, competitors are less likely to be affected by the aid. As indicated above, there is a large number of on-going and planned wave energy projects. In addition, due to the planned dissemination of the results from this project and since the results can be used in other applications in the ocean energy area, the project is likely to spur increase in R&D by other companies. Therefore, it is unlikely that the aid will stifle the intensity of competition.

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3.5.2.7. Conclusion

(105) The supported activities are by definition close to the market and, in case of success,the aid will result in a first-mover advantage. The aid thus has the potential of leading to crowding out effects. However, this is counter-balanced by several factors, namely: the limited aid amount, high exit barriers and the level of competition on the relevant markets. In addition, as the European Union and several Member States have sent political signals to significantly develop these markets in the next few years, they are expected to undergo substantial growth. Competitors of Seabased are thus unlikely tostop their R&D activities in reaction to the project at hand, but will probably maintain or even reinforce their R&D in this field. It can thus be concluded that the aid will not have the effect of distorting the dynamic incentives of the relevant markets.

3.5.3. Creating market power

(106) As mentioned in point 7.4.2 of the R&D&I Framework, aid in support of R&D may have distortive effects in terms of increasing or maintaining the degree of market power in product markets. Market power is the power to influence prices, output, the variety or quality of goods and services, or other parameters of competition on the market for a significant period of time, to the detriment of consumers.

(107) The Commission is concerned mainly about those R&D measures allowing the aid beneficiary to transfer or strengthen market power held on existing product markets to future product markets. The Commission is therefore unlikely to identify competition concerns related to market power in markets where each aid beneficiary has a market share below 25 % and in markets with a market concentration with Herfindahl-Hirschman Index (HHI) of below 2000.

(108) In its analysis of creation of market power, where relevant the Commission takes into account the following elements: market power of aid beneficiary and market structure, level of entry barriers, buyer power and the selection process.

3.5.3.1. Market power of the beneficiary and market structure

(109) Where the recipient is already dominant on a product market, the aid measure may reinforce this dominance by further weakening the competitive constraint that competitors can exert on the recipient undertaking. Similarly, state aid measures may have significant impact in oligopolistic markets where only a few players are active.

(110) At present, Seabased does not hold any market share on any market. In case of success, the aid may provide Seabased with a first-mover advantage. It is not possible to estimate Seabased's future market share of the wave energy technology market. However, it should be noted that the main technology is already patented and any new intellectual property rights stemming from this project are expected to be rather limited. […]. Furthermore, any future market power of Seabased is likely to becounter-balanced by the fact that there are several on-going competing, but slightly different, wave energy technology projects world-wide40.

(111) In case of success, the project at hand can lead to the creation of a market share of the market for supply of renewable energy generation systems (of which wave energy

40 See section 2.5 above.

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generation systems can be regarded as a segment). Due to the immaturity of the wave energy technology segment, there are no available estimates of shares on this segment. However, on the market for supply of renewable energy generation systems, Seabased estimates that its market share would be very limited: The total production capacity for renewable energy systems in the coming years is estimated by Seabased to be ca. 1,000-3,000 GW per year. If Seabased manages to increase its capacity to 400-500 MW per year, it could obtain a market share of no more than 0.05 % (500 MW / 1000 GW) of the global market for supply of renewable energy generation systems. Also on a more limited market including only wind and solar power generation systems, the market share of any future production of Seabased would be of less than 1.3 %.

3.5.3.2. Level of entry barriers

(112) In the field of R&D, significant entry barriers may exist for new entrants. These barriers include legal entry barriers (in particular intellectual property rights), economies of scale and scope, access barriers to networks and infrastructure, and other strategic barriers to entry or expansion. For the technology market, there is of course an entry barrier in the form of patents. However, the number of new patents stemming from this project is rather limited, since the new knowledge generated through the projects is expected to be mainly of a general character and will be widely disseminated. In addition, as mentioned in section 2.5, there are several on-going competing, but slightly different, wave energy technology projects world-wide. In these competing projects, the main patents have already been appropriated. Also on the market for supply of renewable energy generation systems, there are certain entry barriers, such as investments and concession rights.

3.5.3.3. Buyer power

(113) The potential buyers of wave energy technology are several companies of relatively modest size. Such buyers have rather limited buyer power. As for the market for supply of renewable energy generation systems, the buyers are in general large energy companies with a strong bargaining power towards producers, which can serve to counter any market power produced by the aid.

3.5.3.4. Conclusion

(114) Taking into consideration that the beneficiary currently has no position on the relevant markets, the fact that the concerned markets are rapidly emerging ones and that the buyers on the market for supply of renewable energy generation systems have significant market power, the Commission finds that the aid is not likely to reinforce,maintain or create significant market power in favour of the beneficiary.

3.5.4. Maintaining inefficient market structures

(115) R&D aid must not support inefficient undertakings and thus lead to market structures where many market players operate significantly below efficient scale. It its assessment of the market structure, the Commission will consider whether the aid is granted in markets featuring overcapacity, in declining industries or in sensitive sectors. Concerns are less likely in situations where R&D aid aims at changing the growth dynamics of the sector, notably by introducing new technologies.

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(116) Based on its Annual Report of 201041, Seabased is not a company in difficulties and there are no indications that it would be an inefficient undertaking. The concerned markets are not in decline, but are on the contrary expected to continue to grow considerably during the coming years due to climate change and energy policies. The Commission hence finds that there are no indications that the aid would contribute to maintaining inefficient market structures. On the contrary, the fact that a new actor enters the relevant markets could even create an incentive for stronger competition.

3.6. Balancing test

(117) Pursuant to section 7.5 of the R&D&I Framework, the Commission balances the effects of the measure in light of the positive and negative elements assessed above and determines whether the resulting distortions adversely affects competition and trading conditions to an extent contrary to common interest.

(118) Following a detailed assessment, the Commission considers that the project suffers from market failure since the market would not deliver the product without aid because of imperfect and asymmetric information, linked to the level of technological and commercial risks of the project, and to the inability to appropriate knowledge spill-overs and other positive externalities. Being necessary for the project to be carried out, state aid has a clear incentive effect and is moreover limited to the minimum necessary and proportionate. Due to the number of players on relevant markets, the very limited forecasted market shares of the beneficiary and the expected growth of these markets, the negative effects of the aid are limited. The aid measure does not support the creation of a position of market power nor maintain inefficient market structures.

(119) Since the positive effects of the measure significantly outweigh its negative effects, the Commission finds that the balancing test for the aid under assessment is positive.

4. DECISION

(120) The Commission considers the notified aid compatible with Article 107(3)(c) TFEU and has accordingly decided not to raise objections to the implementation thereof.

(121) The Commission reminds the Swedish authorities of their obligations to submit an annual report on implementation of the aid.

(122) The Commission further reminds the Swedish authorities that, in accordance with Article 108(3) TFEU, all plans to alter the project must be notified to the Commission.

If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site:

http://ec.europa.eu/eu_law/state_aids/state_aids_texts_sv.htm

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Your request should be sent by registered letter or fax to:European CommissionDirectorate-General for CompetitionDirectorate for State AidState Aid GreffeB — 1049 BrusselsFax No: +32 2 296 1242

Yours faithfully,For the Commission

Joaquin ALMUNIAVice-President