By Foo Yun Chee and Barbara Lewis
BRUSSELS (Reuters) - European Union regulators will investigate whether 11 European governments offer illegal subsidies to utilities to avoid blackouts, concerned this may also block the flow of cheaper energy between countries.
Capacity mechanisms are used in some EU countries such as Britain and France to fund electricity generation that may not be cost-effective but is needed to guarantee supply during peak demand.
The European Commission launched a full-scale inquiry into the issue on Wednesday, saying it would ask Belgium, Croatia, Denmark, France, Germany, Ireland, Italy, Poland, Portugal, Spain and Sweden for information on existing schemes or their plans to set up one.
It will also seek details from electricity generators, suppliers and network operators. A draft report is expected around the end of the year and a final report in mid-2016.
"This sector inquiry sends a clear signal to member states to respect EU state aid rules when implementing capacity mechanisms, and contributes to the Commission's goal to build a true Energy Union in Europe," European Competition Commissioner Margrethe Vestager said.
She said some governments might find it more efficient to upgrade their electricity grid connections with other countries than to build new power stations.
Reuters reported on April 1 that the EU executive would launch a probe into the sector.
Industry group Eurelectric, which represents companies such as Germany's E.ON (DE:EONGn), RWE (DE:RWEG) and Italian energy group Enel (MI:ENEI), says capacity markets must be properly designed to be part of an EU-wide energy market.
"We therefore urge policymakers to make sure that capacity markets go beyond national borders," Hans ten Berge, its secretary-general, said.
Greenpeace, which has long criticised the schemes as thinly-disguised subsidies for fossil fuel power plants, welcomed the probe.
"Instead of throwing polluting power companies a lifeline, Europe should be phasing out coal and replacing it with renewable energy and energy efficiency," said Greenpeace adviser Tara Connolly.
This is the second sector-wide investigation launched by Vestager following the probe into e-commerce announced last month. Inquiries into the pharmaceutical, banking and energy industries in recent years led to cases brought against several companies.
The Commission approved Britain's capacity mechanism in July last year, saying the 10-year scheme complied with EU rules.