EU approves Croatia LNG support measures

The European Commission has found Croatian plans to support the construction and operation of a liquefied natural gas (LNG) terminal at Krk island to be in line with EU State aid rules.

Image courtesy of LNG Croatia

The project will contribute to the security and diversification of energy supplies without unduly distorting competition, the commission said in its statement.

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

The measures approved will support the construction and operation of a floating LNG terminal, consisting of a floating storage and regasification unit (FSRU) and the connections to the national gas transmission network.

The LNG terminal is designed to transport up to 2.6 billion cubic meters per year (bcm/y) of natural gas into Croatia national transmission network as from 2021.

The total investment costs to build the terminal amount to €233.6 million ($260.4 million). This will be financed through a direct equity contribution of €32.2 million from the LNG terminal company shareholders, a contribution of €101.4 million from the Connecting Europe Facility, and a direct financial contribution of €100 million from the Croatian State budget.

In addition, Croatia will grant a tariff compensation called ‘security of supply fee’, which is financed by levies charged by the gas transmission system operator to gas users along with gas transmission tariffs, in case revenues from the terminal fees are not sufficient to cover operating expenses.

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

The Commission assessed these support measures and found that the aid measures are necessary, as the project would not be carried out without them.

In this respect, the Commission’s financial analysis has shown that the revenues originating exclusively from the tariffs charged to the users of the LNG terminal would not be enough to recoup the investment costs and ensure a sufficient remuneration of the LNG promoter.

It also found the aid measures are proportionate and therefore limited to the minimum necessary, as they will only cover the “funding gap”, that is the difference between the positive and negative cash-flows over the investment lifetime, discounted to their current value (using the cost of capital).
Therefore, the Commission concluded that the measures are in line with EU State aid rules.

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

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

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