Just months after its first investigation under the Foreign Subsidies Regulation (FSR) of Chinese train maker CRRC Corp, the European Commission has targeted two more companies participating in an EU tender, this time in the photovoltaic sector.

On April 3, 2024, the European Commission (EC) launched its in-depth investigation of the ENEVO Group and LONGi Solar Technologie GmbH consortium, as well as the Shanghai Electric UK Co. Ltd. and Shanghai Electric Hong Kong International Engineering Co. Ltd. consortium, both of which are participating in a Romanian public tender process.

What is the FSR?

The European Union’s FSR entered into force on January 12, 2023 and became applicable on July 12, 2023. It is aimed at distortions in the internal EU market attributable to financial subsidies given to companies doing business in the EU by non-EU governments.

The FSR initiated two required notification obligations for companies benefitting from third-country government support. The notifications are mandatory when the companies are engaged in merger and acquisition transactions and in public procurement tenders in the EU.

The notification obligations went into effect on October 12, 2023. In addition, the FSR gives the EC the power to begin an investigation if it believes competition could be distorted because support from a foreign government gives a company an advantage in operating in the internal EU market.

The new in-depth investigations again relate to a public procurement procedure.

What are these cases about?

The EC launched its latest in-depth investigations following notifications submitted to the EC by the two consortia.

ENEVO Group, the consortium leader, is a Romanian-based engineering and consulting company. LONGi Solar Technologie GmbH is fully owned and controlled by the Hong Kong-listed LONGi Green Energy Technology Co Ltd, active in the development, manufacturing, and servicing of solar wafers, cells, and modules.

Shanghai Electric UK Co Ltd and Shanghai Electric Hong Kong International Engineering Co Ltd are leading global suppliers of industrial-grade solutions for energy, manufacturing, and the integration of digital intelligence. They are fully owned and controlled by Shanghai Electric Group Co Ltd, which provides services for wind, solar, and hydrogen storage, as well as an integrated process for generation, grid, load, and storage.

Both consortia took part in a public tender procedure launched by a Romanian contracting authority (Societatea Parc Fotovoltaic Rovinari Est S.A.) for the design, construction, and operation of a photovoltaic park in Romania with installed power of 110 MW. This project is partially financed by the EU Modernization Fund.

After its preliminary review of the notifications received from both consortia, the EC decided to open in-depth investigations because there were prima facie “sufficient indications that both have been granted foreign subsidies that distort the internal market”. During its in-depth investigations, the EC will seek all information required to establish whether any foreign subsidies may have allowed the consortia to submit “unduly advantageous offers” in reply to the tender.

At the end of the in-depth investigations, the EC will determine whether there is a distortion of competition in the EU internal market due to the foreign subsidy. In such a case, the EC may (1) accept commitments proposed by the company if the commitments fully and effectively remedy the distortion or (2) prohibit the award of the contract by the Romanian government. If the EC concludes that no such distortion exits, it will issue a no-objection decision and business would proceed as usual.

The EC has until August 14, 2024 to make a final decision (or 110 working days after the submission of the complete notifications of the consortia on March 4, 2024). The opening of an in-depth investigation does not prejudge the outcome of the investigation. If a distortion is found, companies can be fined as much as 10% of their annual aggregate turnover or face periodic penalty payments of 5% of the average daily aggregate turnover in the preceding financial year if they do not comply with a decision imposing commitments.

Analysis of the case

As with the EC’s previous investigation into Chinese train maker CRRC Corp., these new cases tick all the boxes the EC needs to exercise the second and third uses of its new power to initiate in-depth investigations under the FSR.

First, both investigations again target subsidies originating in China.

Second, the European solar industry is one of the industries that has long been exposed to cheaper Chinese imports. Recently, this has been driven by a clean manufacturing boom in China and by US tariffs against Chinese imports, which have channelled Chinese excess productions to Europe. EU solar panel manufacturers have recently shut plants and called for more funding, less regulation, and better infrastructure.

Third, the solar industry has a long history of trade disputes. The EU is set to address the funding gap for the EU industry with its draft EU solar charter that is due to be discussed by member states’ energy ministers on April 15, 2024. The EU solar charter also aims at rapid implementation of the EU’s Net Zero Industry Act’s non-price criteria in energy auctions and public procurement and may introduce new design standards for solar panels. EU member states in turn will also need to build out grid connections, keep and attract a skilled workforce, and simplify administrative procedures.

Fourth, as with the first investigation, the EC is again seeking to demonstrate to EU businesses that the FSR is a tool to address the lack of a level playing field between European companies subject to EU state aid rules and non-EU companies that are not subject to any legal restrictions when receiving aid in their home jurisdictions.

Fifth and finally, the case sends another strong warning that notifications under the FSR can lead to undesired results in the form of an in-depth investigation by the EC into possible competition distortions caused by third-country support. Notifications to the EC under the FSR therefore need to be very carefully prepared and potential ramifications managed proactively.

Companies bidding for European tenders must factor in the risk of complaints from competing bidders who may seek to use the FSR procedure as a tool to disqualify them from the tender procedure.

The notification procedures are not only time consuming but also require a high level of disclosure. CRRC, when faced with the prospect of an in-depth investigation into its funding, withdrew from its bid in Bulgaria. This is a significant development. It means that a bidder can find itself de facto excluded from a tender process even before the EC has rendered a duly motivated decision, which begs the question of due process.