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”.