Dec 15 2016

60% cap on ETS Innovation Fund’s refund rate – why?

The EC has not explained why it proposed that a project’s “relevant costs” under ETS Innovation Fund be refunded at a maximum of 60% and not some other rate.

In 2015 an internal working group in the EC, the Impact Assessment Board, saw a draft of the Impact Assessment and sent it back [See IAB negative opinion] to DG CLIMA saying “The Impact Assessment should clarify the method that was used to determine […] the funding rate”. DG CLIMA’s response, which satisfied the IAB, was to add an annex (Annex 14) to the Impact Assessment containing a sensitivity analysis for the effect of different funding rates on the amounts that the ETS Innovation Fund and Project Sponsor would need to cover for a project of given total cost. The result is straight-line charts (see below) whose shape offers no clue as to why 60%, specifically, was felt to be a threshold.

Furthermore, the assumptions used to draw the charts are flaky. Two approximations are used. The first is that total costs are twice additional (or in NER300’s language ‘relevant’) costs. The basis for this assumption is not explained, although the approximation affects the relative position of the sensitivity analysis curves. The second is that additional costs for a typical RES project are 100 M EUR. This appears to contradict the evidence. The average NER300 award for RES projects was 47 M EUR and they asked, on average, to have 39% of their relevant costs refunded. This means a better estimate of additional costs would have been 120 M EUR.




Source: copy-paste from EC’s Impact Assessment + additions (red outline).

The EC proposed 60% even though it noted, in July 2015, that “more extensive market testing” would be necessary to justify that or any other rate (see this article). The tender for the market testing would be only be issued one year later.

  1.’s comment

    Possibly 60% was chosen because it was the ‘centre of gravity’ between the maximum permissible coverage of investment costs under the current State Aid rules – RES: 65%; energy efficiency: 50%; CCS: 100% – weighted according to where the EC expects to see most ETS Innovation Fund projects. Still, different funding rates could have been proposed for each of these categories, as they are for State aid.

    These State Aid rules (details see Annex I of the Guidelines on State aid for environmental protection and energy 2014-2020) apply for the period 2014-2020, in which time only up to 50 M EUAs-worth of awards will be made. Most of the ETS Innovation Fund will be run during under the State Aid regime that will enter into force subsequently. Relevant State Aid Guidelines for that period will begin to be discussed in 2017. The Impact Assessment says ETS Innovation Fund’s rules need to anticipate them: “the maximum funding rates and further design of the operational modalities would need to be consistent with future State Aid rules.” MEPs, in their amendments to the draft legislation, agreed (see Compromise 12, adopted by ENVI committee today).