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.