Category: Public debate

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.

Jun 09 2017

Previewing Monday’s DG CLIMA event: the sectoral roundtable wrap-up

This article previews some of the ideas that might be aired at DG CLIMA’s event on 12 June 2017, Final event: Presentation of the report of recommendations from the sectorial consultation roundtables.

What kind of fund is ETS Innovation Fund?

The financial community understands “fund” as something quite different to the way the word is usually used in Brussels. A banker told the roundtable he was chairing, “I didn’t hear the word ‘IRR’ once […]. There’s quite a lot of work to be done on how this fund is going to look like a fund.” Tomas Wyns, in his January 20th presentation, displayed slides saying that Innovation Fund “can enable/provide next layers of finance (equity, mezzanine, senior & minor debt, guarantees)”. The roundtables did not reach consensus on which of ‘enable’ or ‘provide’ the Innovation Fund should aim to do.

Grants, please

“The line ‘grants are highly appreciated’ could be the quote of the day,” joked Vincent Gilles, the moderator of the finance session for renewables and storage at the 6 April event. Various speakers had spoken up for grants while recognising the usefulness of other forms of financing.

Size of projects

“Investment needs for industry-size low carbon plants/processes may be in the range of 0.5-1 bn EUR for one single large process,” wrote Wolfgang Eichhammer on his January 20th slides. The rapporteur for the ferrous metals roundtable sensed tacit agreement for the suggestion that a commercial first-of-its-kind demonstration project could cost twice that amount. This would imply 300 M EUR of funding, said Theo Henrar, thinking of his company’s clean steel production technology ‘Hisarna’. This is line with the maximum found to be necessary by the consultancy Adelphi.

While stakeholders have argued about the extent to which ETS Innovation should fund early-stage research, Jos Delbeke (Director General of DG CLIMA) has clear ideas: “It is a fund for demonstration new technologies in the private sector […] and not PhDs”. This was also the line he took in June 2016.

Rules of the game

Summing up the deliberations of the renewables roundtable on 6 April, Hans Bünting said “There are a lot good things that can be taken from NER300 into the new fund. There are some proven procedures and principles but also of course there’s some room for improvement […]: clear and transparent selection criteria which go beyond the technology evaluation.” Patrick Clerens shared the following on behalf of the energy storage sector: “It is really necessary to make sure that on one side we have technology neutrality but if you end up with the situation that of the 5-6 sectors that could make up the fund only one is selected [there should be possibility “to balance out” the funding].”

The cement sector came up with a number of specific ideas for project selection rules including a ranking criterion that evaluates the CO2 saving of demonstration projects in different sectors against a recognised benchmark.

The metals sector pleaded for a programme that is “simple and flexible as possible in all respects such as what TRL levels to be financed, number and size of applications, funding tools applied, their tenor, potential interaction with other funding tools, etc.”

But the EC dampened expectations that Innovation Fund would be a one-stop shop providing all financing needs. Artur Runge-Metzger said on 20th January, “What we know from the experience of NER300 is that this will require a more flexible approach than we had in the past. It might require a more tailored approach. This might imply an increase in administrative complexity. It’s not going to be as simple and straightforward as the NER300. The instrument must be manageable. The one-stop shop sounds absolutely great, but it could be a big marketplace with many things and could create complication.”

  1. NER400.com’s comment

    The strangest feature of these roundtables was that participants were not briefed on the primary legislation now being negotiated between Council and European Parliament. The time spent discussing the desirability of making NER300 support dependent on reaching construction milestones rather than on successful plant operation was time wasted. Payment-by-milestones will be allowed to between 40% to 60% depending on whether the final text more closely reflects the Council’s or EP’s wishes.

    Equally, there was no point complaining about the involvement of Member States in the ETS Innovation Fund (which many did). Their involvement is about to be fixed in law. Neither Commission, Council or EP have proposed to change the wording that shaped NER300, namely that “support for projects shall be given via Member States”.

    Given the closeness of the text being finalised now to the text that defined NER300, it is difficult to see how the two could operate very differently.

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.

Jun 13 2016

DG CLIMA’s public meeting on ETS Innovation Fund: who said what

The Commission workshop High Level Round Table on Low-Carbon Innovation was held on 9 June to gather stakeholders’ views on the future ETS Innovation Fund. The Director General of DG CLIMA, Jos Delbeke, chaired it for the four hours that it lasted. The EIB, represented by Roland Schulze, took the floor several times, too. Their comments, quoted below, are the most noteworthy.

The roundtable brought forward more ideas for ETS Innovation Fund than the debates in June and July the European Parliament and Council (article).

Let’s pick a small number of areas to focus on

Gernot Klotz (President, K4I) was in favour of a competition limited to a few areas, saying, “It needs some top-down approach because it needs focus.” Commissioner Cañete took note of this request to “not try to spread the support all over the place,” as did Delbeke: “We should be very clear about which technology we want.” He had heard other stakeholders join Klotz, including Martin Porter from the Industrial Innovation for Competitiveness initiative (I24C) who said, “We can’t hide away from the need to make certain choices on the technologies to choose.” The think tank Bruegel had also called for this (among other measures) in its position paper of 2015: “develop a more methodological approach to technology selection”.

But 11 days later those following the evening event Innovation: the Way to a Low-Carbon Economy? took the opposite view. See tweet below.

Funds for making green products not green manufacturing

Some industry speakers (and some MEPs) wanted ETS Innovation Fund to directly support production of manufactured goods rather than improvements to the manufacturing process. Crucially the products would have to serve a green purpose. Roland Merger, Vice President Corporate Technology at BASF, was the first to suggest the idea and it found support from Nicolas de Warren of his competitor Arkema. The steel sector, also represented on the panel, was split. Thyssen Krupp’s Head of Innovation Strategy & Projects Markus Oles felt one has “a better chance to reduce in total our emissions in process than if we are only focused on products” and implied through his example that the cement sector would agree. The Director General of Eurofer Axel Eggert, meanwhile, said that so long as there was no worldwide price on carbon emissions, product innovation was the more viable way forward. [NER400.com comment below]

Alternatives to the “focus-on-products” and “focus-on-processes” approaches were put forward. Gernot Klotz called for NER400 to support “value chains” (the network of suppliers and other firms who make an installation possible) as opposed to installations by themselves. “Through the supply of technological elements,” he said, “other countries can participate and benefit, like in the car and ICT industries”. I24C wanted support for a similar concept that it called “ecosystems”.

Projects that take in whole value-chains or ecosystems would be bigger than ones with a smaller scope, implying less work for the EC per euro of support paid out by ETS Innovation Fund. Jos Delbeke pointed this out (see box immediately below).

“The alternative for us as a policy body is in the line of asking industry to make a cluster across sectors resulting in a project bigger than a project in my little sector. There is more a vision about what needs to be done, and there are more industrial players and more industrial sectors. If the consequence of that is bigger projects, we would be willing to take that because it would mean for us less bureaucracy because you would do more coordination. The more you go for tiny projects, the more we pay in terms of resources, man time for dealing with them all.”

— Jos Delbeke

Roland Schulze of the EIB, who has been closely involved with the predecessor of ETS Innovation Fund — NER300 — since its earliest days, repeatedly drew attention to the difficulty of fairly evaluating competing proposals that deal in product innovation or that set the challenge at a very high level, by demanding, for example that a project deliver a ‘functionality’ like thermal comfort. He visited or revisited the topic in every one of the three times he took the floor and was backed up by Martijn Overgaag of Ecofys (see box immediately below).

EIB official pushing for a clear and simple competition

“The idea to simplify on […] functionalities is very attractive. However, I think it will make it even more complicated to measure the value for money impact. […] If it would go that way […] we need to make sure there is no competition among other funds and they are not contradicting or the impact is anyway lost.” He does not want to see overlaps in the kinds of project that the EU’s different funding instruments serve.

“In my personal view, I think process innovation would be more effective with regard to contributing to positively to the objective of achieving a low-carbon economy because it is much more measurable and one can allocate it in the context of reducing CO2 emissions. […] A grant funding mechanism for innovation needs to have a clear indicator to measure that the public funding impact leads to tangible effects in the economy so that the public funding can see some value for money.”

“In principle I’m agnostic about process or product innovation. The challenge is how can one then identify a proper indicator to then make sure that public grant funding mechanisms will bring value for money. That is a task one has to think about very thoroughly. LCA (lifecycle assessment) very much depends on how one draws the boundaries around the calculation. It is probably not that easy [to draw the boundaries fairly]. I said I’m agnostic but from the clear measurement of an impact, process innovation is much easier.”

— Roland Schulze [NER400.com comment below]

Delbeke aligned himself with de Warren when he summed up the discussions: “We had the discussion on whether we should strive for optimising process emissions […] or whether we should go for product innovations […]. We concluded that in fact the best way to look at this is that there are a number of functionalities that we want to reach and at least five were suggested: we need more for insulation, lightweighting of materials, energy storage, lighting, improved energy efficiency in renewable energy not least of photovoltaic panels.” But Delbeke appeared to acknowledge Schulze’s concerns: “There were four or five elements that I noted from our discussion, of which ‘Keep it simple’. NER300 was overly complicated but the more we were going into the discussion I was holding my breath because if we have to put that into operation it could become as complicated as the NER300.” His willingness to imagine an ETS Innovation Fund that would fund product development did not seem totally sincere. He had also said, “You will hardly hear anyone in DG CLIMA talking about green industries and normal industries. We don’t do that. A windmill is steel, is concrete, is chemicals. These are traditional products that are combined in a very intelligent manner.” If DG CLIMA’s general attitude is to reduce a piece of technology to its inputs, it is hard to see how it will take precisely the opposite position in the case of ETS Innovation Fund to create a list of ‘green’ end-products.

A measurable selection criterion for the competition

Leaving to one side the question of whether environment-enhancing end products or rather the industrial processes that make them should be proper object of ETS Innovation Fund, one idea that resonated with the room was to select projects according to their ability to reduce greenhouse gas emissions. Merger said “We should look at which reduction potential in terms of carbon emissions they have” and Oles agreed that this metric should be used to “prioritise” proposals. At an event in May by Carbon Market Watch Tomas Wyns had introduced his report The Final Frontier. An idea it contained, to require industrial ETS Innovation Fund projects to demonstrate CO2 savings of at least 20% compared to a benchmark, found its way into amendments by the two leading European Parliament MEPs for the ETS Directive (and by several other MEPs), and Wyns plugged his idea at this event, too.

Graeme Sweeney, Chairman of the Zero Emissions Platform promoting CCS savaged the idea of requiring electricity-generating projects to achieve reduction in the levelised cost of electricity by 20% for the reasons given in this article. It, too, had found its way into the amendment proposed by Federley. He said, “It is barking mad.” Delbeke recognised that different approaches would be needed for both: “In each category you can go for the lowest cost of carbon. The story we have heard today from the manufacturing industry is very different and the game is more complicated than the lowest cost of carbon saved. That is one of the conclusions I take with me. The discussions we are having squarely confirm that when it comes to the allocation of funds to the manufacturing industry unlike the renewable sector, it’s a very different process we are faced up to and we need more and better ideas than may have worked for renewables under NER300.”

Europe first!

Klotz saw reducing the EU’s dependence on imported components as an important aim for ETS Innovation Fund. He challenged the audience, “Do we favour that all these processes [to develop technology] happen in Europe and get added value for Europe, because you can easily build a smart city with Amreican ICT, with solar panels from China and with materials from Saudi Arabia.” Delbeke took note. Two hours later, in his wrap-up, he said, “Do we want to maximise part of the low carbon activities inside the European Union and the answer was clearly ‘yes’ and for that we need the continuation of demonstration plants […] [where] low carbon technology that is not yet ripe for uptake by the market can be brought into the market. There were suggestions of how to maximise the European content. The European first idea was mentioned. It was not pursued much more,” but he implied that the mission “to maximise the European presence in low-carbon technology” is worthwhile.

Knowledge-sharing — speakers silent

A questioner twice asked the panellists for their views on ETS Innovation Fund’s knowledge-sharing rules. No answer came. Then Delbeke tried a third time, “The point that we were not hearing anything about was the knowledge-sharing that was repeatedly brought on the table. Any comments on the obligations under the current NER300?”

Only Merger responded, saying, “For me the main point is that how you do it is clear from the start so that when you apply for a project you do not end up with lengthy discussions and then you can make your decision whether you want to be part of the project or not.”

The Commission proposed no knowledge-sharing conditions for ETS Innovation Fund (see post). Delbeke offered this clue as to why that might be: “It was a heated point I remember when we adopted NER300 and the lack of clarity that is there now cannot be attributed to the Commission but to very difficult compromise making in the institutions.” Some MEPs want knowledge-sharing rules back put in.

Tolerant of failure

Delbeke appealed for NER400 to tolerate failure: “If you take risk, you are not always going to see success everywhere. You will also see a failure. Do we have a culture of accepting or do you want one or the other official — Commissioner or who else — to be blamed and to be taken up in a political scrutiny process that is as far as that is concerned not a pleasant one.” He retained the idea as one of the five mentioned in his summing up, although whether he meant “risk” or “expectations” is not clear: “We need to in particular manage the risk much better. […] We should get out of the blame game. If a technology does not make it nobody should have to be blamed.”

He had support from industry speakers: Klotz and Francesco Venturini, ENEL Green Power CEO.

A focus on demonstration projects

Commissioner Cañete defended the EC’s proposal to focus on demonstration projects: “Europeans have been very intelligent in delivering resarch in the past, but now we have to deliver innovation and every speaker has said we have given less attention than in the past. Big research budgets, but not concentrate on how we bring the patents to the market, how we develop the projects, and all the difficulties involved in that along the way. It’s complicated to patent. It’s much more complicated to bring a product to the market and make the consumers accept it.” Delbeke was blunter: “No research, no laboratories, no PhDs, but demonstration projects, pilot projects in industry.”

But what kind of demonstration projects? Delbeke said, “The intent is still to be clarified to what extent we go for breakthrough technologies breaking through, disrupting or whatever the name can be or on the other hand the rolling out of very interesting technology that are already known and are very interesting but for which the delta remains significant” [“delta” being the difference in cost between the output of the eco-friendly technology and that of the equivalent dirtier incumbent].

Next steps

  • Delbeke said, “We have lots of other policies […] [We do our] innovation policies collectively with a number of DGs, like DG Grow, DG RTD etc.” A coordination meeting with other DGs would take place immediately after the meeting.
  • Of his openness for fresh thinking from the Council and European Parliament he said, “We are motivated to make something more specific than what is there in the ETS proposal. In the ETS proposal, it was capturing a lot of ideas but in a not-too-specific manner, so the co-legislators will have to put more flesh on the bones and whatever is not spelt out in the Directive will have to be spelt out later in an Implementing Decision. So once the ideas are clear we can come forward with more operational thoughts about what needs to be done.”
  • Of the timing (note the meeting was held before the Brexit referendum result) he said, “Our thinking is open, but only for a while because legislation will be adopted, presumably second half 2017, so it’s now time to take heart and conclude in the next couple of months because otherwise the opportunity for modification of our proposal that was deliberately left more open compared to the NER300 but without having filled out the last detail yet.”

  1. NER400.com’s comment

    Roland Schulze is right to insist on a clear selection criterion for the projects in the competition, especially as the competition will span a wide range of very different technologies. Basing selection on non-quantitative criteria like a degree of innovativeness will make it harder for the losers to accept the result.

    Product innovation would not be an appropriate object for ETS Innovation Fund even if the products eligible for funding are useful for shifting to a low-carbon economy. The focus, for projects in industry, must be on cutting process emissions because ETS Innovation Fund’s purpose is to help European companies protect themselves from carbon leakage. The risk of carbon leakage (i.e. the risk of an industry shifting to a part of the world where environmental standards are lower) is not reduced by helping those companies make their products more attractive to consumers, at least not directly. Delbeke is right to be sceptical.

Jun 08 2016

Knowledge-sharing rules erased from the ETS legislative text

The ETS Directive 2009 put a requirement on the owners of installations that were awarded NER300 money to share results and experiences from its operation. The EC proposed removing this from the legislative text governing ETS Innovation Fund, leaving the only reference to knowledge-sharing in the recitals.

Neither Federley nor Duncan have so far drafted amendments that would put knowledge-sharing back into the legislative text. ***UPDATE 13 Sept 2016: The Greens-EFA have proposed amendments requiring knowledge-sharing (ITRE: 439; ENVI: 441)***

Stakeholders’ views

(as expressed in the public consultation on revision of the EU Emission Trading System (EU ETS) Directive)

BDEW and IOGP are pro. BDEW: “Projects shall be selected on the basis of objective and transparent criteria that include requirements for knowledge-sharing.” IOGP: “Pre-commercial/demonstration programmes should stimulate and maximise learning, as well as sharing and broadening knowledge in areas where there are gaps. This would increase confidence in CCS and also improve public support.” Finnish Forest Industries Association is anti: “More limited knowledge sharing. IPR should secure noticeable exclusive rights to the industrial player for more than 5 years.”

Shell says, “It would be beneficial if the EU Commission clearly defined foreground and background knowledge, with clear protection provided for knowledge developed by a company prior to it submitting an application.” [Editor’s note: The distinction is clear in the EC’s Horizon 2020 programme and was made clear as NER300 developed.]

  1. NER400.com’s comment

    MEPs or the Council should put knowledge-sharing rules into ETS Innovation Fund. They should be more robust than those of NER300, not less, and proportionate to the nature and amount of funding/finance required from the Fund.

    Companies that do not get awards must be allowed to stand on the shoulders of the lucky ones that do by learning from their mistakes or successes. Info on the installation’s performance should be published in the form, for example, of high-resolution time-series data-sets. This is necessary to make swift progress in bringing climate-protecting technologies to market and is consistent with the EC’s agenda on Open Data, recently given support in the Council.

Jun 07 2016

Attitudes to CCS, CCU and coal’s place in NER400

This article is written from the published responses to the European Commission consultation on revision of the EU Emission Trading System (EU ETS) Directive, which closed on 16 March 2015.

***UPDATE 17 June 2016: Information on the Belgian government’s position has been published (integrated below).***

CCS

Pro

Except for the companies trying to earn money from CCS technology and the associations that support them, Sandbag is the most fervently pro-CCS respondent. It said, “The Commission should bring forward proposals for an EU-wide target for greenhouse gas sequestration, in order to stimulate Member States to offer the support to CCS, as has happened successfully with the Renewables targets.” (Editor’s note: a future article will cover its radical position on earmarking in ETS Innovation Fund).

Two speak up for ‘Bio-CCS’, in which the CO2 released from the combustion of biomass is stored rather than vented to the atmosphere, Bellona and Magnus Nilsson Produktion. The latter says, “Storing 80% of the emission from a coal plant is not good enough while storing 25 % of the CO2 from a biomass fuelled plant is extremely interesting. It might be worth favouring CCS in combination with biomass use.”

Austrian Federal Economic Chamber — Wirtschaftskammer Österreich (WKÖ) says, “So far, the funding of renewable energy projects has been the main focus of the NER 300. However, more effort should be undertaken to realise European projects for CCS.”

CCS is the third priority of Carbon Market Watch / Nature Code and five other NGOs, and then only for industrial applications, not power generation (the line taken by MEP Gerben-Jan Gerbrandy, also).

Member States

Speaking at the Green Growth Summit on 17 September 2015, Amber Rudd (the UK’s Secretary of State for Energy and Climate Change), said that the fact that ETS Innovation Fund would be “open to Carbon Capture & Storage (CCS) and industrial low carbon projects for first time” was one of three things the UK liked about the EC’s proposals for Phase IV of the ETS. On 26 November, however, the UK government cancelled funding for its own flagship CCS programme.

The Belgian government, in three lines on ETS Innovation Fund in its position paper circulated to the Council of Ministers, wrote, “Specific projects for the capture or use of carbon dioxide should also be eligible for funding from this innovation fund.”

Anti

Projekt21plus: “We have to note that we see critical aspect about the technology of CCS, concerning acceptance and feasibility and are not in favor to support further research in CCS with EU finances.”

Glass for Europe and 11 glass companies say CCS is a “very costly end-of-pipe technique, subject to critics and lack of acceptance.”

CEMBUREAU is also put off by the cost: “The most important point for CCS is that the operational costs of a plant equipped with post-combustion carbon capture technology are expected to be double the cost of a conventional cement plant.” So are CIPCEL and CPME: “For years the NER300 program has targeted CCS linked to power generation and the result is disappointing due to the massive infrastructure costs and time needed to implement CCS properly.” EPF says, “The NER300 programme hasn’t been fully implemented because of the huge cost of CCS projects.” Its solution would be to trap CO2 by making durable products out of wood.

Metal producers are also inclined to scepticism. Aluminium producer Trimet: “it should be scrutinized whether the funding of CCS technology is still appropriate”. Aurubis (copper producer) asks whether resource-efficiency and a list of other technologies would be more cost-efficient than CCS. It and Royal DSM (generalist materials producer) wonder whether CCS is the right “focus”.

Opposition is found in central Europe from two Czech organisations (CEZ and Czech chamber of commerce) and the Polish government (including more recent statements). Bavaria (Bavarian State Ministry of the Environment and Consumer Protection) is condemnatory: “CCS is no realistic option in near future.”

CCS in industry

The European Lime Association, EuLA, points out that in lime manufacture, “68% of the total CO2 emissions are so-called ‘process emissions’ originating from the decarbonation of the limestone.” The challenge of decarbonising sectors with a high proportion of “irreducible ‘process’ emissions” was highlighted by its Spanish member, ANCADE. E3G appears to consider that they as well as chemicals, pulp & paper, and steel “should be given ‘priority focus'” as “electrification is not a viable option” for them.

Different technological responses are proposed to tackle process emissions. EuLA favours CCS, but UNESID, which represents steel manufacturers, proposed moving from carbon to hydrogen as a reducing agent: “The case of hydrogen is a clear case in which a demonstration or pilot plant would need a very tailor-made support, since these kind of plants neither are or are expected to be profitable in a short/medium even long term. It would need [an] affordable and widespread [hydrogen] generation and distribution.”

CCU — carbon capture and use

CEEP is the most enthusiastic supporter of CCU, more so than when it responded to the 2014 public consultation (compare 2015 “We strongly advise including CCU as having a substantial chance of success” with 2014: “new developments concerning a decrease of CO2 emissions should be supported starting from power production efficiency, no matter if it is based on coal, gas or other sources of energy such as RES and the utilisation of CO2“).

CEMBUREAU: “Given the issues related to CO2 storage, R&D related to new alternatives to reuse or valorize the CO2 captured should be promoted and financially supported. […] Regulatory barriers, such as the one related to the ‘Transferred CO2‘ (included in the MRV of the EU-ETS for the period 2013-2020) which only allows the subtraction of the transferred CO2 if it will be ‘for the purpose of long-term geological storage’ should be removed.”

Projekt21plus “could imagine” a programme “with focus on recycling of carbon instead of storage” providing it does not lead to “any additional emissions”. It singles out methanation, which is a technique for storing electricity also known as ‘power-to-gas’, as an example of where such recycling would be “imaginable”. Two other respondents, ENAGAS and IOGP, referred to power-to-gas as a technology to store electricity (ENAGAS advocating the use of gas in transport applications). Others spoke about electricity storage more generally (see below). Exclude coal from ETS Innovation Fund’s scope, Projekt21plus proposes.

Royal DSM, Aurubis and VIK (materials / power) wonder if CCU isn’t more cost-efficient than CCS. [Editor’s comment: maybe, but the two technologies serve different purposes]

Coal

Martin Korolec, Poland’s Government plenipotentiary for climate policy, wrote that ETS Innovation Fund “should be eligible for all low-emission energy technologies, including clean coal technologies.”

Polish Lime Association (Stowarzyszenie Przemyslu Wapienniczego) said, “the development of so-called clean coal technologies and low-emission and high-efficiency coal technology should find its place in the development of climate policy.”

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:

try6

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. NER400.com’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

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. NER400.com’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)