The European Commission has proposed a funding programme worth billions for the period 2021-2030 (with some amount possibly made available before 2021). Called ETS Innovation Fund, it will build on the NER300 programme which saw 2.1 bn EUR awarded to 38 innovative renewable energy and one CCS project. ETS Innovation Fund will additionally include measures to decarbonise industrial production.

The debate on ETS Innovation Fund’s function and form is underway now. In 2017 the European Parliament and Council of Ministers will likely adopt the primary legislation that will set it up.

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Oct 09 2017

Response to the Climate Strategy & Partners summary report

Under contract to DG CLIMA, a team of consultants wrote up four “sectoral roundtables” held between January and April in 13 reports. These have not been published. Instead, a 24-page summary of the summaries prepared by Climate & Strategy Partners (CS&P) was published and presented on 12 June 2017. It contains many familiar ideas, several contradictory ones and a curious lack of awareness of the constraints that the European Commission, European Parliament and Council of Ministers had been placing on ETS Innovation Fund.

Disbursement based on milestones is capped at 40% of the support

Stakeholders want, CS&P reports, “I.F. funding [to] be provided when the project has a funding gap, leading to a form of contracted ‘funding against milestones’ approach.” But a cap of 40% on the proportion of support that “may not be dependent on verified avoidance of greenhouse gas emissions” has been hard-coded into ETS Innovation Fund’s legislative text. This is equivalent to saying that maximum 40% of support can be provided when milestones on the path to operation are met. The rest can only be released as the project operates.

The European Parliament would like to push 40% up to 60%, but even if the Council agrees, the fact remains that a large chunk of ETS Innovation Fund will be governed by the same constraint that NER300 faced. The discussions with stakeholders about whether and how to set up a revolving fund, who should manage it and the return it should generate will, at most, apply to 60% of the ETS Innovation Fund budget. This was not explained to the participants in DG CLIMA’s meetings.

“Transparent and clear criteria for project selection”

That’s what the stakeholders want, says CS&P. And again: “Participants were clear that any criteria […] should apply fairly to all proposals in order to compare them on an objective common basis.” But many of the criteria they want taken into consideration are ill-defined and unclear, like “Potential for developing profitable and volume business” or “Duration: Whether it is a short/long-term project (faster projects should be prioritised);”

NER300, the EC reminds us in its Impact Assessment, came with some fluffy criteria, too. For example, projects had to have “a cost-effective CO2 reduction potential,” “be ready to be demonstrated at a scale which is easily conducive to further scaling up” and be “innovative in relation to the state-of-the-art”. It reconciled these with the need to be “objective and transparent” by, in the case of the “innovation” requirement, defining what “innovative” meant for different technologies in consultation with stakeholders, and in the case of the others, bundling them all together in a pass/fail “eligibility check” performed as part of the proposal evaluation process. This cleared the way for the selection of projects to then be done by a genuinely objective metric (“Cost Per Unit Performance”). ETS Innovation Fund, similarly constrained, may be given the same treatment.

To get the most out of the roundtables and of the invitation-only written consultation that ran in parallel, the EC or the consultants should have asked where to draw the line between eligibility and selection criteria. The Impact Assessment had even identified this as an area to explore (“It should be noted that innovation should be used either as an eligibility criterion or as a ranking one, to avoid confusion in the selection process.”).

Furthermore, the EC / consultants could have briefed the participants to focus on the eligibility criteria that the European Parliament adopted on 15 Feb (box below), since a list drawn up within the legislative process would in any case trump a stakeholder-drafted one. This list was known before the first roundtable, on 17 Feb. By doing these things, the stakeholders’ input could have built on rather than duplicated the work being done elsewhere.

  1. Projects shall focus on the design and development of breakthrough solutions and implementation of demonstration programmes;
  2. The activities shall run close-to-market in production plants to demonstrate the viability of breakthrough technologies in overcoming technological as well as non-technological barriers;
  3. Projects shall address technological solutions that have the potential to be of widespread application, and may combine different technologies;
  4. Solutions and technologies shall ideally have the potential to be transferred within the sector and possibly to other sectors;
  5. Projects where the anticipated emissions reductions are significantly below the relevant benchmark value shall be prioritised. Eligible projects shall either contribute to emissions reductions below the benchmark values referred to in paragraph 2 or shall have future prospects to significantly lower the cost of transitioning towards low-emissions energy production; and
  6. CCU projects shall deliver a net reduction in emissions and a permanent storage of CO2 across their lifetime.

— European Parliament’s proposed guidelines for “criteria to be used for the selection of projects that are eligible”

Side note

Speaking at EUSEW DG CLIMA staff member Filippo Gagliardi said the consultation on ETS Innovation Fund had yielded “a number of interesting proposals on how to rank projects.”

Member States involved in project progress

This is another area where stakeholders may have wasted their time. If the EC had wanted ETS Innovation Fund to work differently to NER300, it would not have proposed to leave the current text of the ETS Directive unchanged: “Support for these projects shall be given via Member States”. EP and Council have not touched it, either. So while CS&P has found that “Experts [want] ‘control of the process [to] be at the EU level and [to] allow for direct IF feedback with applicants (not via member state institutions)'”, a change compared to NER300 seems unlikely. Elsewhere CS&P reports, “the Innovation Fund should include ‘mechanisms to ensure proper coordination between EU and national funding'”, so maybe strong oversight by Member States is in fact desirable.

Time travel

“Avoid confusion and overlap with other funding instruments,” recommends the report four times in its 24 pages. But what are these other instruments? The bulk of ETS Innovation Fund’s budget will be available only after 2020. No EU instruments for that period have yet been defined. It will be for those future instruments to fit around ETS Innovation Fund, not vice versa.

This has not stopped CS&P and DG CLIMA speculating that there will be a “successor to Horizon 2020” (see CS&P’s presentation and DG CLIMA’s — Fig 1). They show Horizon 2020’s successor to fully overlap with ETS Innovation Fund, suggesting neither believes this particular recommendation will be taken on board.

Fig 1: They said ‘No overlap’. To differentiate ETS Innovation Fund from Horizon 2020, the form in which projects are selected, funding is provided, and the conditionality attached to funding could be different. With the enlargements to ETS Innovation Fund’s scope, however, the similarities are growing between ETS Innovation Fund and research Framework Programmes like Horizon 2020.

Supports the findings of a Sept 2016 report

A report that covers the question of how to finance First-of-a-Kind commercial-scale demonstration projects (at least in the energy field) more comprehensively than CS&P’s was done under contract to DG Research in 2016. The report was called ‘Innovative Financial Instruments for First-of-a-Kind, commercial-scale demonstration projects in the field of Energy’. It recommended building up Innovfin EDP as a source of debt and creating a Strategic Energy Technology Equity Fund to meet “a clear need for more equity provision for FOAK projects in the EU.”

Suddenly ETS Innovation is about products, not just processes… (!)

The Parliament has convinced the Council to allow support to flow to “products substituting carbon-intensive ones”. In fairness to CS&P and its collaborators, this could not easily have been foreseen, and their report has almost nothing to say on the matter. Its heading “Process, Product or System Innovation” suggests that stakeholders had been invited to consider products in their deliberations, but their examples almost exclusively concern process innovation, occasionally system innovation. They had shown interest in products at the High Level Round Table on Low-Carbon Innovation, which DG CLIMA hosted on 9 June 2016.

Any comments on “breakthrough” technology?

Parliament and Council look set to underline ETS Innovation Fund’s applicability to “breakthrough solutions”. The CS&P report says, “The idea of ‘breakthrough technologies (and business models), rather than incremental innovations’ was highlighted several times.” It doesn’t, however, attempt to categorise the participants’ project examples into “breakthrough” and “non-breakthrough” in a consistent way. The report links the form of financing appropriate for a technology to the technology’s maturity: “The I.F. should mainly offer grants, complemented with partial grants and / or de-risked loans or equity (depending on the maturity of the technology) with higher levels of grant intensity for early stage projects.”

Enthusiasm for two-stage calls

“Experts clearly favour a multi-stage process (‘funnel-type application procedure’) with a consensus opting for a two-stage process (for simplicity, clarity and to reduce administrative burdens),” writes CS&P. This is surprising. Many of the industries that will be targeted by ETS Innovation Fund are currently the object of the SPIRE (‘Sustainable Process Industry through Resource and Energy Efficiency’) part of Horizon 2020. SPIRE is unusual in that stakeholders have a lot of control over the Horizon 2020 budget. “The Commission commits to maintain regular dialogue with the Private Side during the preparatory phase of the drafting of the work programmes,” says its Contractual Arrangement, where ‘Private Side’ is a group of companies representing resource- and energy-intensive industry, and ‘work programmes’ are 2-year (sometimes 3-year) spending plans. In Work Programme 2016-2017 and Work Programme 2018-2020, SPIRE stakeholders got their funding from one-stage calls, probably because that’s what they wanted.

Single-stage calls are also the norm for Horizon 2020 energy demonstration projects. Such projects are identified as ‘IA’ in the table on page 137 of the Work Programme 2016-2017. The EC thinks adding 5 months to the evaluation process by requiring a second stage would be unpopular for industry-led consortia.

Oct 08 2017

ETS Trilogue: agreement within sight on ETS Innovation Fund?

Scope-widening idea #1: products

In May, the Council agreed to extend ETS Innovation Fund’s scope beyond processes to products, proposing to insert “as well as products” into the European Commission’s proposal. At the trilogue of 27 June, the Parliament insisted on keeping its wording, “products substituting carbon intensive materials”, because it felt this would free ETS Innovation Fund to develop materials that provide the same service as ones produced by energy-intensive industries, but that come from entirely different industries and lower-carbon supply chains. The Council accepted. The Parliament’s text was taken up in the revised negotiating mandate handed by COREPER to the Estonian Presidency in Sept 2017.

Setting ETS Innovation Fund on this course will be difficult. As shown below (under heading ‘60% vs 75% and 40% vs 60%’), both Parliament and Council (known collectively as ‘the legislator’) want a considerable proportion of support to be “dependent on verified avoidance of greenhouse gas emissions”. To “verify” avoidance, the substitution of carbon-intensive materials will have to be proved. This will not be easy.

    Missing an “in”

    The current text relating to products could be interpreted in two ways. It could be, “ETS Innovation Fund supports products substituting carbon intensive ones”, which implies various market-pull policies like price support to encourage end-consumers to shift from one product to another. It could alternatively be, “ETS Innovation Fund supports innovation in products substituting carbon intensive ones”.

    It remains to be seen whether the legislator chooses to remove this ambiguity. One way to allow only the latter interpretation would be by inserting the word “in” before “products”:

    …shall be available to support innovation in low-carbon technologies and processes, including environmentally safe carbon capture and utilisation (CCU) that contributes substantially to mitigate climate change, as well as in products substituting carbon intensive ones produced, in […] sectors listed in Annex I

Scope-widening idea #2: breakthrough technologies

Another idea of the European Parliament’s to be taken by up the Council at the last minute is to open ETS Innovation Fund to “breakthrough technologies”. This text appears in the Oct 2 update to its negotiating mandate: “Technologies receiving support shall not yet be commercially available, but shall represent breakthrough solutions or be sufficiently mature to be ready for demonstration at pre-commercial scale”. The word “or” suggests that the legislator sees these categories as distinct. The EC, for its part, thinks breakthrough technology is already within the scope of its proposals for ETS Innovation Fund. This is clear from the references to “breakthrough” that appear throughout its explanation of its design, written in 2015.

If the phrase “breakthrough technologies or” nonetheless nudges ETS Innovation Fund towards less mature technologies, the need to deliver “verifiable greenhouse gas avoidance” puts a limit on how speculative they can be.

What size of fund?

Commissioner Cañete wanted Parliament and Council to meet each other somewhere between their respective positions, but Council seems willing to negotiate only on the source of the allowances, not the final amount (see Oct 2 negotiating mandate update), which is left as per the EC’s proposal of 400 M. This website made the prediction in January that allowances from both the auctioned and free-allocated parts of the ETS would feed the ETS Innovation Fund. It remains to be seen whether the second part of the prediction, namely that the origin of allowances will be used to justify an ex-ante split between the shares of the pot going to energy vs industry projects, will come to pass. The European Parliament wants allowances to be taken from the auctioned share. The Council wants the first 300 M to come from the freely-allocated share and 100 M from the auctioned share.

Council ignores “leverage instruments”

The Council has ignored the Parliament’s reference to “leverage instruments”. If the final text omits this reference, it will be difficult for the Commission to create a “fund” from ETS resources in the sense of portfolio of investments that generates a return. It would still at least be possible for part of the allowances to be put towards Innovfin EDP or a similar debt instrument. This is compatible with the primary legislation behind the NER300 Decision, which the primary legislation behind ETS Innovation Fund will closely resemble.

60% vs 75% and 40% vs 60%

The Parliament wants the relevant costs of projects to be supported up to 75%, instead of 60% as proposed by the Commission. Up to 60% of this support would be paid out on the achievement of milestones in project development on the way to becoming operational, instead of 40%. The Council is open to compromise.

All wrapped up on time?

In a statement to NER400.com just before the Sept trilogue, Fredrick Federley (MEP representing the committee with co-lead on ETS Innovation Fund, ITRE, in the trilogue) said, “We see the Council’s position as a first bid. This is not going to be settled today. The Council has moved a bit but many details remain to be sorted out, such as sourcing of the fund.” The expectation, however, is that agreement on all points will be reached at the next trilogue on October 12. This will allow the EU to go to the next major UN climate conference in Bonn 6-17 November with its house in order.

  1. NER400.com’s comment

    Opaque like many other trilogues

    Last year the European Ombudsman Emily O’Reilly published recommendations on improving the transparency of trilogues. She came out against publishing the versions of the evolving agreement that are produced before each meeting because “the public” might get the idea that the text they contain is “set in stone”. Her recommendation continues,

    The public, which might not be aware of the delicate negotiating strategies of the co-legislators regarding such concessions, could be seriously misled. Facing such a risk, participants might refrain from making any serious concessions. Thus, early disclosure could potentially damage the negotiation process.

    — Para 54 OI/8/2015/JAS

    This, of course, is utterly bogus. Firstly, who is “the public”? Probably not the proverbial man-in-the-street, but the rather the policy wonk, clued-up on the lawmaking process. If a trilogue concerns a newsworthy topic, then the man-in-the-street will mostly likely learn of it through a reporter or commentator who is familiar with the workings of the EU and able to explain them. Trilogue texts already contain flags saying that the text can change, e.g. as at the link above where a compromise is offered “in the context of the overall package”.

    Secondly, even accepting that there may exist a group of people who are obsessed with following trilogues but who are too stupid to absorb the concept of nothing-being-agreed-until-everything-is-agreed, it is preposterous that lawmaking could be impaired as a consequence. This would never be allowed in any other context. Arcane procedures are used to carry out parliamentary business in democracies across the world all the time.

    To her credit, O’Reilly seems to acknowledge this. Her recommendations will allow greater scrutiny of this increasingly used procedure. The paragraph including the phrases above is the only one of the 69 to start with a qualifier: “It is arguable that…”, hinting at the arguments she may have had with those fighting to keep interim versions of the agreement secret.

    Half a year after O’Reilly published her recommendations, trilogues again came in for criticism.

    ***UPDATE 11 Oct 2017: The Ombudsman’s office has written to NER400.com referring to a letter sent to the EC insisting on timely and substantive follow-up on her recommendations. She has asked for a response from the EC by 30 November 2017, and, in identical letters, responses from the European Parliament and Council. Reference is also made to a case before the European Court of Justice, De Capitani v Parliament (T-540/15), which covers access to the evolving agreement reached between Parliament and Council during trilogues, known as the “4-column document”.

Jun 09 2017

Previewing Monday’s DG CLIMA event: the sectoral roundtable wrap-up

This article previews some of the ideas that might be aired at DG CLIMA’s event on 12 June 2017, Final event: Presentation of the report of recommendations from the sectorial consultation roundtables.

What kind of fund is ETS Innovation Fund?

The financial community understands “fund” as something quite different to the way the word is usually used in Brussels. A banker told the roundtable he was chairing, “I didn’t hear the word ‘IRR’ once […]. There’s quite a lot of work to be done on how this fund is going to look like a fund.” Tomas Wyns, in his January 20th presentation, displayed slides saying that Innovation Fund “can enable/provide next layers of finance (equity, mezzanine, senior & minor debt, guarantees)”. The roundtables did not reach consensus on which of ‘enable’ or ‘provide’ the Innovation Fund should aim to do.

Grants, please

“The line ‘grants are highly appreciated’ could be the quote of the day,” joked Vincent Gilles, the moderator of the finance session for renewables and storage at the 6 April event. Various speakers had spoken up for grants while recognising the usefulness of other forms of financing.

Size of projects

“Investment needs for industry-size low carbon plants/processes may be in the range of 0.5-1 bn EUR for one single large process,” wrote Wolfgang Eichhammer on his January 20th slides. The rapporteur for the ferrous metals roundtable sensed tacit agreement for the suggestion that a commercial first-of-its-kind demonstration project could cost twice that amount. This would imply 300 M EUR of funding, said Theo Henrar, thinking of his company’s clean steel production technology ‘Hisarna’. This is line with the maximum found to be necessary by the consultancy Adelphi.

While stakeholders have argued about the extent to which ETS Innovation should fund early-stage research, Jos Delbeke (Director General of DG CLIMA) has clear ideas: “It is a fund for demonstration new technologies in the private sector […] and not PhDs”. This was also the line he took in June 2016.

Rules of the game

Summing up the deliberations of the renewables roundtable on 6 April, Hans Bünting said “There are a lot good things that can be taken from NER300 into the new fund. There are some proven procedures and principles but also of course there’s some room for improvement […]: clear and transparent selection criteria which go beyond the technology evaluation.” Patrick Clerens shared the following on behalf of the energy storage sector: “It is really necessary to make sure that on one side we have technology neutrality but if you end up with the situation that of the 5-6 sectors that could make up the fund only one is selected [there should be possibility “to balance out” the funding].”

The cement sector came up with a number of specific ideas for project selection rules including a ranking criterion that evaluates the CO2 saving of demonstration projects in different sectors against a recognised benchmark.

The metals sector pleaded for a programme that is “simple and flexible as possible in all respects such as what TRL levels to be financed, number and size of applications, funding tools applied, their tenor, potential interaction with other funding tools, etc.”

But the EC dampened expectations that Innovation Fund would be a one-stop shop providing all financing needs. Artur Runge-Metzger said on 20th January, “What we know from the experience of NER300 is that this will require a more flexible approach than we had in the past. It might require a more tailored approach. This might imply an increase in administrative complexity. It’s not going to be as simple and straightforward as the NER300. The instrument must be manageable. The one-stop shop sounds absolutely great, but it could be a big marketplace with many things and could create complication.”

  1. NER400.com’s comment

    The strangest feature of these roundtables was that participants were not briefed on the primary legislation now being negotiated between Council and European Parliament. The time spent discussing the desirability of making NER300 support dependent on reaching construction milestones rather than on successful plant operation was time wasted. Payment-by-milestones will be allowed to between 40% to 60% depending on whether the final text more closely reflects the Council’s or EP’s wishes.

    Equally, there was no point complaining about the involvement of Member States in the ETS Innovation Fund (which many did). Their involvement is about to be fixed in law. Neither Commission, Council or EP have proposed to change the wording that shaped NER300, namely that “support for projects shall be given via Member States”.

    Given the closeness of the text being finalised now to the text that defined NER300, it is difficult to see how the two could operate very differently.

May 16 2017

Steps in the shaping of ETS Innovation Fund

***UPDATE 25 June 2017: DG CLIMA has uploaded the presentations made in the workshops and its conference report. No attendance lists, though.***

UPDATE 24 May 2017: Registration open for “Presentation of the report of recommendations from the sectorial consultation round tables” (wrap-up event ‘Conference 3’) — deadline 7 June. Agenda.***

This table recaps the different stages in the shaping of ETS Innovation Fund. The next event is the wrap-up event on 12 June. Registration not yet open.

Timing What Output
08 May to 31 July 2014 Public consultation 1: “Consultation on Emission Trading System (ETS) post-2020 carbon leakage provisions” Analysis
19 Dec 2014 to 17 Mar 2015 Public consultation 2: “Consultation on revision of the EU Emission Trading System (EU ETS) Directive” Analysis
15 July 2015 ETS and Impact assessment Europa.eu
9 June 2016 Conference 1: “High Level Round Table on Low-Carbon Innovation” Article
20 Jan 2017 Conference 2: “Finance for innovation: Towards the ETS Innovation Fund”


6 Feb Sectoral roundtables:

  • Ferrous metals
  • Non-ferrous metals


3 non-public reports: innovation needs for both sectors + joint report on financing needs
23 March Sectoral roundtables:

  • Oil & refining
  • Chemicals & bio-based
  • Pulp & paper


4 non-public reports: innovation needs for both sectors + joint report on financing needs
6 April Sectoral roundtables:

  • Cement & lime
  • Glass & Ceramics
  • Renewable energies
  • Storage


6 non-public reports: innovation needs for all sectors + joint report for cement & lime and glass & ceramics on financing needs + joint report for renewable energies and storage on financing needs

The EC said it would publish the questions put to the participants in these workshops, but it has not. It also said it would publish the presentations, but it has not, possibly because speakers refused to allow this.

April Online survey Survey of about 150 companies or associations by CLIMA’s consultants to gain knowledge of specific projects’ financial needs and asking pointed questions about the design of ETS Innovation Fund.
12 June Conference 3: Wrap-up of stakeholder roundtables

Each sectoral roundtable report is presented by its writer. A consolidated summary of the full thirteen, which the EC should have in its possession “by the end of May” (Doubrava, 6 April) is published by the EC. It will include a list of the participants in the roundtables.

This final event “is probably where we from the Commission side will become a bit more outspoken in terms of what we think could fly from all the ideas we have been hearing,” said Artur Runge-Metzger on 20 Jan.

  Public consultation 3 Described by Runge-Metzger as a “web-based stakeholder consultation”, he downplayed its usefulness because he said it will not afford the opportunity for stakeholders to be questioned by each other and the Commission, unlike the roundtables. Director-General Jos Delbeke, speaking on 12 June 2017, confirmed it would happen, with a 12-week deadline to respond. That was confirmed on 19 Sept in a presentation by Head of Unit Peter Wehrheim
2018 Impact Assessment written; operational rules defined From the Wehrheim presentation at the link above
2020, maybe 2019 First ETS Innovation Fund awards made Artur Runge-Metzger on 20 Jan 2017: “ETS Innovation Fund will provide money as of 2020 – around that date. Maybe it’s 2019 if we are lucky.” Wehrheim presentation 19 Sept 2017 (link above): “Launch the Innovation Fund close to or before 2020.”
May 07 2017

Job opening at DG CLIMA

***UPDATE 28 June 2017: a new member of staff has been hired.***

DG CLIMA is looking for a replacement for one of its team managing NER300 and ETS Innovation Fund, among other responsibilities. It is offering a position for a Contract Agent (FG IV). The job description is here.

Jan 15 2017

2017 predictions for ETS Innovation Fund

By the end of Feb 2017 the European Parliament and Council are expected to have taken their respective positions on the Phase 4 of the Emissions Trading Scheme, including the outline of ETS Innovation Fund. By the end of the year, agreement between the two institutions will likely have been reached. In parallel, DG CLIMA will, in the background, prepare draft secondary legislation to create an ETS Innovation Fund consistent with Parliament and Council’s wishes. Here are some predictions for where we might end up a year or a year-and-a-half from here.

ETS Innovation Fund divided into indicative shares for industry and energy

Recognising the difficulty in comparing projects in such different areas as low-carbon processes in industry, renewable energy production, CCS and energy storage against each other, the EC will propose ex ante an indicative share of the ETS Innovation Fund pot for the main categories of eligible technology. This is standard practice in the EC’s other major funding programme for innovation in energy, Horizon 2020. But the EC will be sure to keep a mechanism that allows it to transfer budget from one category to another. Such a mechanism existed in NER300 and was very useful when CCS proved to be much less commercialisable than initially supposed.

The European Parliament’s Innovation Fund amendments will almost all disappear in trilogue

‘Trilogue’ refers to the untransparent phase of EU lawmaking, when, away from public view, the small number of MEPs most closely involved in drafting the European Parliament’s position (Rapporteurs and Shadow Rapporteurs) and representatives from the Council (from the country holding the Presidency) discuss how to reconcile their sets of amendments. The EC mediates.

The European Parliament will try hardest to defend the increase in the Innovation Fund size from 400 to 600 million EUAs. Both rapporteurs, Ian Duncan and Fredrick Federley proposed this in their initial draft responses (article here and here). The EC seems quite supportive.

The allowances could potentially come from two places: the pool of allowances that would otherwise be auctioned, or from the pool that are allocated for free. There seems to be agreement on the source of the first 400 million: the freely allocated share. ITRE’s suggestion of taking the additional 200 million from the auctioned share, to which the 50 million to be transferred into ETS Innovation from the Market Stability Reserve originally belonged, will be adopted. [CORRECTION: Amendment 46 of the European Parliament’s report states they should come from the auctioned share.]

The Council, keen to see small projects funded and a good spread of projects between countries, will in turn demand that the maximum payment one project can get will be reduced from 15% of the expected total pot to 10%.

In addition, the origin of allowances will be used to determine the indicative split between industry and energy projects. The power sector obtains its EUAs from auctioning, so it will seem fair that 250 M out of 650 M EUR is for energy projects. Heavy industry, meanwhile, is freely allocated most of its allowances, so indicatively 400 M will be for industry.

ETS Innovation Fund will remain, essentially, a grant-funding scheme

Schemes that provide non-grant finance to innovative energy (or low-carbon industrial) projects are growing in number and capacity. EFSI has been launched and will be extended. EDP Innovfin, which can support riskier projects than its predecessor, the Risk-Sharing Finance Facility, will also soon be given a cash infusion from the awards made to cancelled NER300 projects.

Sources of grant funding are less common. ETS Innovation Fund’s niche will be that it provides grant funding, to be complemented by the panoply of financial instruments available from other facilities. This approach will be popular with stakeholders. Focusing ETS Innovation Fund on one form of funding will be found to minimise the complexity of administering ETS Innovation Fund, particularly the ranking of projects. This is important as many stakeholders have appealed for simplicity.

The practice of periodically ‘flushing’ cash from failed ETS Innovation Fund projects to EDP Innovfin (or its post-2020 successor), established in NER300, will become standard. The possibility to directly send a portion of the 650 M EUA to EDP Innovfin will not be excluded either.

Targeted calls

One of the biggest decisions the EC will need to make is whether to keep a project’s “innovative-ness” as an eligibility criterion, or make it a selection criterion. In NER300, innovative-ness was an eligibility criterion: a project had to respond to one of a list of defined technological challenges. If it did, it progressed to the next stage of scrutiny. If innovative-ness were a selection criterion, calls could be more open as there would be no need to define ex ante the technology challenge that projects should address.

Different approaches will be taken for energy projects and industrial projects.

Energy projects will need to meet one of a list of defined technological challenges. In contrast to NER300, that list will be updated often in a relatively transparent process. Stakeholder groups will be consulted, possibly as part of a SET Plan exercise.

The industrial sectors targeted by ETS Innovation Fund are those in Annex 1 of the Emissions Trading Directive. Each will have its own set of options for reducing CO2 emissions per unit output. Luckily, there will be no need to anticipate them all because it will be possible for the EC simply to say that projects must deliver a specific CO2 emission of at least 20% better than best-available-technology. The greater the CO2 reduction beyond that threshold, the better the project’s standing in the competition. Such benchmarks exist, for example to determine the number of EUAs to allocate to industrial plants for free. This approach will be consistent with the European Parliament’s wishes and have the support of a leading NGO in the ETS Innovation Fund debate, Carbon Market Watch.

Jan 15 2017

Wrap-up of 2016: state of play in European Parliament and Council

This article is adapted from a piece written for Carbon Pulse of 15 Dec 2016.

The end of 2016 saw the two lead committees on ETS Innovation Fund in the European Parliament, ITRE and ENVI (shorthanded to “European Parliament” in the rest of this piece), adopt their amendments to the European Commission’s (EC’s) proposals. First ITRE voted, on 10 Nov; then ENVI on 15 Dec.

Member States were not ready to adopt their set of amendments on the Emissions Trading Scheme at the Environment Council meeting of 19 Dec, but from the document reflecting the state of their discussions, and their statements in the meeting (Sweden, Luxemburg, Czech Republic, Germany, Estonia), it looks like their position on ETS Innovation Fund is settled.

European Parliament going for a big and generous Innovation Fund — Council reluctant to follow

Like ITRE, ENVI wants a bigger Innovation Fund, made up of 600 million allowances, not the 400 million proposed by the EC. The EC had proposed that a maximum of 15% of the allowances could go to one project. MEPs did not decrease this limit to compensate the increased size of the Fund.

Innovation Fund’s predecessor, NER300, capped “relevant costs” at 50%, and this equated, typically, to around 30-40% of project CAPEX. ENVI voted to be more generous with Innovation Fund, allowing requests of up to 75% of relevant costs, but MEPs never put forward analysis to support that decision. The Commission did not set a good example: its defence of a 60% cap, set out in the Impact Assessment accompanying its proposals, is threadbare (see this article for more). The Council sticks with the EC’s cap nonetheless.

Enlarged scope: European Parliament and Council want funding for energy storage technologies

The co-legislators want ETS Innovation Fund’s scope enlarged: energy storage technologies should be included. They underlined the need to fund CCU — carbon capture and use, which was implicitly already covered by the EC’s proposal — where it “contributes substantially to mitigating climate change” (Council’s phrasing). The European Parliament also underlined bio-based materials.

European Parliament wants even looser link between project performance and award payout

ENVI Rapporteur Ian Duncan was keen to break the link between a project’s performance and its right to keep its award. The Committee took up his suggestion to allow up to 60% of the award to be paid out on effort alone: provided a project meets milestones in construction and commissioning it can keep up to 60% of its award. This would mean, in the extreme case, that only 40% would be payable on the project actually working.

The Member States prefer not to depart from the Commission’s proposals, by which no more than 40% of the award may be paid out on effort alone.

Council makes the 50 M EUAs from the Market Stability Reserve an integral part of ETS Innovation Fund

The Council re-arranged the EC’s text relating to ETS Innovation Fund to more clearly show that the 400 M carbon allowances for ETS Innovation Fund and 50 M allowances from the Market Stability Reserve will be put towards one and the same funding programme.

European Parliament votes for fuzzier selection criteria

MEPs want energy projects in the ETS Innovation Fund to be selected in part for their “future prospects to significantly lower the costs of transitioning towards low-emissions energy production”. Again, the Council prefers the Commission’s language, namely to use “objective and transparent” selection criteria. This was the principle that governed NER300’s design, interpreted in the NER300 Decision to mean that all projects would compete on a measure known as “cost-per-unit-performance”. That measure allowed the many and disparate renewable energy projects to be compared with each other, and was computable from nothing more than those projects’ internal financial and production forecasts.

Roland Schulze, the EC’s counterpart in the European Investment Bank for NER300, gave his views on ETS Innovation Fund’s selection process on 16 Jun 2016.

Jan 13 2017

Factual mistakes

…in amounts awarded

“23 projects were awarded €1.5 billion.”

— page 123 of the EC’s Impact Assessment

No. In the first call, only 1.21 bn EUR was awarded (Dec 2012 Award Decision), although the EC had raised 1.5 bn EUR for projects (July 2012 SWD). The EC preferred to roll some money over to the second call than to award it all in the first call.

… in size of the awards

“The NER 300 funding for RES projects ranges from €7 to €203 million.”

— page 126 of the EC’s Impact Assessment

Wrong: the smallest NER300 award is of 3.9 M EUR to a project in Latvia.

…in the amount of energy projects will produce

“The awarded RES projects are estimated to increase the annual EU renewable energy production by some 18 TWh”

— page 123 of the EC’s Impact Assessment

Wrong: it is 22.5 TWh. This number is obtained by dividing, for each RES project in the applicable amended award decision, the project’s maximum funding amount by the funding rate (or adjusted funding rate in the case of a part of the award being paid upfront), then summing the results and dividing by 0.75 to account for the fact that the maximum funding amount will have been irrevocably disbursed once 75% of bid production has been achieved. 18 TWh is number derived if you forget to divide by 0.75.

  1. NER400.com’s comment

    The projected quantity of energy produced from NER300 installations, quoted as a ‘result’ of the programme, is in any case of doubtful relevance. A better way to evaluate NER300’s success would be to focus on its proximate aim, which is to bring about the rapid replication of the supported technologies without further special financial support. More suitable criteria for success would therefore have been the speed at which projects are built and at which a Project Sponsor or his competitors subsequently deploy the same technology, or a next-generation version of it. This is a view that Gernot Klotz who spoke at DG CLIMA’s first ETS Innovation Fund event, the June 2016 High Level Round Table on Low-Carbon Innovation, would share.

Jan 13 2017

False memories

Indicative shares that were never there

The Impact Assessment says,

“Indicative shares for CCS and RES projects with a smooth spill over possibility between the groups were crucial under the NER 300 programme to ensure the allocation of all available funds.”

(The association EURIMA happens to agree, calling for the principle to be maintained: “Criteria should be flexible enough so as to avoid that part of the funds remain unused if some of the selected projects do not materialise (as might be the case with CCS in the current NER 300 facility).”)

There were no “indicative shares for CCS and RES” in NER300. The shares of funding for CCS and RES depended on the amount of NER300 funding requested by confirmed projects. There was no way before running the competition to know how many confirmed projects in CCS and RES there would be or how much each, on average, would ask for. The text claims the “possibility for smooth spill-over” was crucial, but rules made the magnitude and direction of the spill unpredictable. Furthermore, they were never applied (in the first call, there were 0 confirmed CCS projects; in the second, the funding available exactly managed the funding requested by all the eligible projects in the competition).

…of the reasons for projects not being ‘confirmed’

The Impact Assessment says, of the first call,

“36 [projects] were either not confirmed by Member States or could not be supported due to insufficient funds.”

It would have been more accurate to write,

“36 were not confirmed by Member States either because of the maximum-3-projects-per-Member-State rule or because the EC did not invite them to confirm them.”

The EC requested the MS to confirm only those projects mentioned in the Staff Working Document of July 2012:

“In order for the Commission to adopt award decisions by end 2012, all Member States with candidate or reserve projects on the list in the Annex are requested to proceed swiftly to confirm for all candidates support as well as the national funding contributions”

The consequence of this was that when, at the last minute, the ULCOS CCS project withdrew, there were no projects the EC could award instead.

Jan 13 2017

Airbrushing history

The Impact Assessment says,

“The first call’s cycle lasted 25 months and this may seem as too long, but one has to bear in mind that the first call was also a learning curve for all involved parties. Considerable improvements, due to the streamlining of the process, were made during the second call and that lead (sic) to a much shorter cycle of 15 months.”

These sentences, while not strictly wrong, misrepresent the reason for the length of time to launch and conclude the first call. The circumstances that led to the protracted timing were never likely to be repeated in the second call or indeed in any subsequent call. This is because the delays were due to poor coordination with the process to set up the ‘single union registry’ for carbon allowances, which only needed to be done once.

The monetisation of the 200 million NER allowances for the first call could only begin with the registry in place (Bloomberg article 9 Nov 2011) and it was set up late. Within a couple of days of the adoption on 18 Nov 2011 of the regulation establishing the registry, the EC confirmed that it would “proceed swiftly with the European Investment Bank (EIB) to account opening to enable the delivery of allowances before the end of the month” (statement by Jos Delbeke).

Thus the start of the monetisation was pushed back, with a knock-on effect on the timing of the selection process (see official Summary Record of Climate Committee Meeting 14 Dec 2011).

The delays that the first call of NER300 would face were apparent to the EC even before it was launched. The EC updated the text of the Decision that had been signed off by Member States on 2 Feb 2010 (here) to extend an important NER300 deadline. Projects would no longer have to enter into operation no later than 31 Dec 2015, but within four years of the award decision.