May 26 2016

Key European Parliament deadlines related to ETS Innovation Fund (ITRE)

Situation 25 May 2016:

Exchange of views on working document 17/03/2016
Consideration of draft opinion 13/06/2016
Deadline for amendments 6pm 15/06/2016
Consideration of amendments (optional) 12/07/2016
Deadline for compromise amendments 12 noon 03/10/2016
Vote ITRE 13/10/2016
May 26 2016

ETS Innovation Fund discussion at Carbon Market Watch report launch

MEPs Jo Leinen and Gerben-Jan Gerbrandy yesterday co-hosted the launch of Carbon Market Watch’s report ‘The Final Frontier — Decarbonising Europe’s energy intensive industries‘ in the European Parliament. Carbon Market Watch says its “findings highlight that claims by polluters that their industrial sectors cannot be decarbonised — often used as means to justify special treatment — are grossly unsubstantiated”. Femke de Jong, EU Policy Director at Carbon Market Watch, put up this slide comparing the quantity of freely-allocated allowances to industry with the amount to be targeted on innovation, but stopped short of repeating her organisation’s call for an ‘NER1000’ made in October 2015:


MEP Fredrick Federley’s proposal to increase the size of the Innovation Fund from 450 M allowances to 600 appeared to have CEFIC‘s explicit support. William Garcia, Executive Director for Energy, Climate and HSSE at CEFIC said, “The larger the fund is the better. 400 M EUAs is a very good start but maybe not enough”.

Federley said, “If we create an Innovation Fund, it’s important to know that the funding is being used. We know from NER300 there’s a lot of money not being used.”

He took a hypothetical example to defend his line that location should not be a consideration in the selection of projects for funding or financing: “If an industry in Portugal comes up with the best ideas to decarbonise then that is where the Innovation Fund’s means should be used. Theoretically this could happen and we should not stop that process.” However, he expects that Council will “endorse [the EC’s proposal for geographical balance] because every government wants to go home feeling it has secured so-and-so millions of euros of investment in its country”.

Gerben-Jan Gerbrandy, responding to a question by IOGP, said, “I’ve always supported the development of CCS technology but I’ve always foreseen that it shouldn’t be the oil and gas companies that are going to use that technology. I think we have to focus on process CO2 because there the biggest difficulties lie.”

May 26 2016

One instrument or two? A plea to ITRE and ENVI MEPs (and the Council)

It is not 100% clear whether the EC wants to create one instrument combining 400 M monetised EUAs and 50 M other monetised EUAs, or two instruments each fed by their respective source. The text in its proposal on an ‘Innovation Fund’ is divided into two sections (see page 19 here). The first refers to 400 M EUAs, uses language from the European Council Conclusions of 23-24 Oct 2014 and does not specify from which part of the ETS the EUAs should be drawn. The second refers to 50 M EUAs to come specifically from the MSR and uses language from the MSR Decision.

The 400 M EUA section talks of the need to support projects in “geographically balanced locations”, while the 50 M EUA section says projects in “all Member States” will be supported. The 50 M EUA endowment will “include small-scale projects,” while the 400 M EUA block puts no restrictions on size. The 400 M EUA section talks of the conditions for disbursement, while the 50 M EUA section describes the competition, saying it must be run on “on the basis of objective and transparent criteria”.

  1.’s comment

    It’s a mess

    While there is ambiguity in the legal text, the official detailed Q&A, by contrast, makes it clear that the EC wants to launch one single ‘Innovation Fund’, not two funds with different rules. Table 41 of the Impact Assessment suggests the same thing. Amendments by Parliament and Council will hopefully iron out inconsistencies in phrasing in the legislative text so that it reads more like a description of a single, unified instrument. A sub-paragraph could describe where the 450 M EUA will come from, saying that 50 M EUA of them are from the MSR and constitute the portion that will be available before 2021.

May 05 2016

First MEP amendments to ETS Innovation Fund rules published

Fredrick Federley, the lead MEP in the drafting of amendments related to ETS Innovation Fund, has published his amendments to the European Commission’s proposal. There are five, numbered 19-23. His other amendments concern other rules for the Emissions Trading Scheme.

Most were trailed last week, but not the one reproduced below. In it Federley proposes “Eligible CCS and innovative renewable energy projects should reduce the levelised costs of electricity production with the technology by at least 20%.”:

Amendment 20
Proposal for a directive
Article 1 – paragraph 1 – point 5 – point f

Directive 2003/87/EC
Article 10a – paragraph 8 – subparagraph 2

Text proposed by the Commission Amendment
The allowances shall be made available for innovation in low-carbon industrial technologies and processes and support for demonstration projects for the development of a wide range of CCS and innovative renewable energy technologies that are not yet commercially viable in geographically balanced locations. In order to promote innovative projects, up to 60% of the relevant costs of projects may be supported, out of which up to 40% may not be dependent on verified avoidance of greenhouse gas emissions provided that pre-determined milestones are attained taking into account the technology deployed. The allowances shall be made available for innovation in low-carbon industrial technologies and processes and support for demonstration projects for the development of a wide range of CCS and innovative renewable energy technologies that are not yet commercially viable. Eligible low-carbon industrial projects shall contribute to emissions reductions of at least 20% below the benchmark as set out in paragraph 2 and should enhance competitiveness and productivity. Eligible CCS and innovative renewable energy projects should reduce the levelised costs of electricity production with the technology by at least 20%. In order to promote innovative projects, up to 60% of the relevant costs of projects may be supported, out of which up to 40% may not be dependent on verified avoidance of greenhouse gas emissions provided that pre-determined milestones are attained taking into account the technology deployed. The Commission shall publish before 2018 the state aid guidelines for Member State co-financing of eligible projects.
  1.’s comment

    The eligibility criterion proposed for industrial projects seems reasonable: it is quite likely that a plant that incorporates a green process does so at higher cost than one that uses a dirty process, and that a difference remains no matter how many optimisations are made to the greener process.

    It’s different for installations producing renewable energy (“energy” — Federley appears only to consider electricity). The game here is to use ETS Innovation Fund money to improve a technology that already produces zero-carbon electricity, so Federley’s ‘levelised cost of electricity’ is badly defined: he cannot mean that the installation put forward for the competition will produce energy at 80% of the cost of the current generation of that technology or the installation would not need any ETS Innovation Fund money. As to the alternative possibility, namely that he is referring to the levelised cost of electricity of the technology once the ETS Innovation Fund project is over and the technology is widely deployed, that amount will be highly speculative at the time the NER400 proposal is submitted, making it an unsound eligibility criterion.

May 05 2016

Which EUAs to monetise for ETS Innovation Fund, and when should the proceeds first be awarded?

***UPDATE 13 Sept 2016: MEPs have noticed Change Partnership’s idea — see below.***

Fredrick Federley, in his amendment 22, proposes using 150 M more EUA (EU Emissions Trading System Allowances) for ETS Innovation Fund than the 450 M EUA proposed by the European Commission. His extra EUAs would be ‘Phase’ 3 ETS allowances (i.e. related to reaching the 2020 target of a 20% cut in CO2 emissions) that have not been released to emitters so far.

He has support for this position from ZEP and Alstom, who called on the EC in their response to the March 2015 ETS Review public consultation, to “monetise free allowances from the NER non-allocated in 2020 and free allocations allocated to plants that will close before 2020”. He has Shell‘s support, too. Shell would like to create an ‘allowance pool’ that could contain allowances “from within the Market Stability Reserve (MSR) [and] the remaining [un-allocated] allowances at the end of each ETS phase”. These would be monetised “in tranches properly sized to maintain the necessary supply”. TVU says something similar. (See ‘When is the right time to monetise allowances’ for more)

But Eurelectric and four others from the electricity industry are opposed. They say, “in order not to undermine the Market Stability Reserve (and functioning of the ETS), it is important that the Innovation Fund (NER400) is fed by phase IV allowances, and that all unallocated allowances from phase III go directly to the MSR.” The CCSA, Alstom and IETA also eye up the “significant amount of funding returned to EU institutions as a result of successful NER300 applicants not taking projects through to delivery. This funding is readily available and would not further impact on the ETS market as allowances have already been monetised.”

Having your cake and eating it?

ZEP and Alstom also suggest “Without being monetised, allowances from the ETS could be used as collateral at an agreed carbon price.” Bellona explains the idea as follows “A ‘guarantee fund’ should be set up to guarantee targeted support for CCS in cases where the EUA price falls below a minimum threshold – a determined ‘strike price’ – and therefore the NER400 fails to deliver the necessary funding.” Scotland Europa and CCSA have a different name for the process: ‘backstopping’. The original promoter of the idea is the NGO Change Partnership, which did not make a contribution on the topic of NER400 to the public consultation, or if it did, it was not published.

S&D MEPs in the Environment Committee of the European Parliament put forward an amendment supporting Change Partnership: “The leveraging can take the form of future contracts based on an anticipated CO2 price of 30 euros/t by 2030 and guaranteed/refundable by the ECB.” (409)

  1.’s comment

    The approach carries some risk for the carbon market. If carbon prices are high and so is demand for EUAs, the mechanism will keep prices high. If carbon prices fall and the guarantee fund must be called upon, the effect of the guarantee fund will be to drive prices lower. It is a source of volatility. Many contributors call for a schedule published well in advance for when exactly allowances will be monetised (said by TVU & Shell above and see ‘When is the right time to monetise allowances’).

More NER300-like funding before 2022?

At the time that the public consultation was running, an agreement was being finalised between the EC, European Parliament and Member States on the MSR. The possibility of an early start to ETS Innovation Fund or of another round of NER300 using allowances from the MSR was felt quite keenly by the stakeholders. Indeed, the European Parliament’s proposed amendments in that regard were eye-catching (see article from March 2015).

Ocean Energy Europe called “on the Commission to take the necessary steps for the renewal, before 2020, of NER300 or a similar instrument that has the same focus and encompasses renewable energies.” ZEP, CCSA and IETA made the same request. ROAD (the Netherlands’s flagship CCS project) said, “The Innovation fund should start as soon as possible and not in 2021. In fact, some projects should already be operational in 2021.”

Their message was taken up by the UK, with DECC (the UK ministry responsible for NER300) calling on the EC to consider “an early start to the application and award process for a limited number of projects that might be up and running and ready to receive operational funding as soon as the first allowances are monetised in 2021.” Scotland Europa says the fund “should be open for application in 2017 to allow its release in 2018.”

May 05 2016

When is the right time to monetise allowances?

Before ETS Innovation Fund can begin to disburse money to projects, EU ETS carbon allowances will need to be sold. Federley, lead MEP on ETS Innovation Fund, hedges his bets on the timing of the sale of the EUAs:

“The monetisation of allowances for the innovation fund shall time the auctioning of allowances in such a way to provide certainty of available funds, while avoiding a negative impact on the orderly functioning of the carbon market.”

Amendment 23 Fredrick Federley Draft Opinion

CEPS hints at the problems caused by fluctuating EUA prices: “With the significant volatility in EUA prices, the NER has not been able to provide a stable pool of money, especially for the larger projects, including CCS. A mechanism that would make the funds more predictable for such projects is something that should be considered.” Projekt21plus agrees: “Currently when the price for allowances is at a quite low level, the support for the innovation fund is at a quite low level as well. We prefer a future structure of the programme which is independent from the variability of prices for emission allowances and deliver a reliable basis for financing innovation projects seriously.”

Perhaps the solution lies in doing what was suggested by Catalonia: “The EIB could sell in advance a portion of credits before the call of proposals”. This approach could satisfy DECC’s wish for “further clarity on how the funding will be handled, both to ensure that projects of each type are considered for and able to receive funding, and to have a greater understanding of the number of projects that could be funded in each area.”

The electricity sector speaks as one to say, “The timing of inflow of these NER400 allowances into the market should also be made predictable for market parties” with support from Hungary and IETA, which adds that the release should be “gradual and clarified well in advance”. But they are countered by voices saying the EIB could be given the freedom to be a little cannier in when it chooses to monetise EUAs. CEPS: “The EIB is currently strictly required to act as a price-taker. It could be considered to allow the EIB more freedom in determining when to monetise, so that the total amount of funds available would be maximised.” DECC: “The timescale for the auctioning of any allowances for the Innovation Fund [NER400] (as well as the Modernisation Fund) needs to be carefully considered to maximise the value of the Fund whilst minimising the impact on the wider carbon market. This may suggest a more flexible or staggered approach than was adopted in the NER300.” EFET (on a collision course with IETA): “Allowing the European Investment Bank more freedom in determining when to monetize allowances (setting temporal windows) will enable to maximise revenues and exploit the Fund as a market stabilizer.”

Burdening the EIB

What if allowances don’t fetch the price expected at the time the programme is designed? The Polish Electricity Association would pass all EUA price risk to the EIB: “It could be considered to determine in the future ex-ante the minimum value of allowances to be auctioned and have e.g. the EIB to cover potential differences between actual carbon prices and the previously determined floor price.” The think-tank Bruegel has suggested the same thing: “A public bank (eg the European Investment Bank) would offer contracts that agree to pay in the future any positive difference between the actual carbon price and a target level. Investors would bid to acquire such contracts to hedge their investments. Hence, public budgets would be significantly exposed to the functioning of the ETS.” (See also ‘Merging: towards a “NER 2020” and a “Horizon 400”?’ for Estonia’s wish for MS and EIB to share the risk of project underperformance)

May 05 2016

EPP Group sets out its priorities for ETS reform

A short article on its website sets them out.

Part of its proposed reforms relate to ETS Innovation Fund. Its clearest line is, “The allowances for the innovation fund should be taken from the auction share rather than from the free allocation share.”

  1.’s comment

    There are other statements on ETS Innovation Fund, but they are rather cryptic. It’s difficult to infer anything more than a vague enthusiasm for CCS (Carbon Capture and Storage) and CCU (Carbon Capture and Usage) from the lines below:

    “Innovation fund (to be financed by allowances from the auction share): we should ensure that CCS and CCU projects can trigger support under the innovation fund/support, topping up the existing amount of allowances in the innovation fund.”

    It also says, “Small projects as well as projects in non-ETS sectors should be supported”, but is unclear whether it is talking about them being supported in ETS Innovation Fund, or through Member States’ auctioning revenues.