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.