Category: Broad features

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 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.

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)

Apr 25 2016

Forms of financing

The idea that ETS Innovation Fund money could be handed out in the form of refundable finance is barely considered in the March 2015 public consultation responses, but it is given serious consideration by the EC, featuring as ‘Option 2’ in its Impact Assessment (see section 8.1.4). Svebio was one of the few organisations to comment on it: “One should consider changing NER financing to an investment support scheme for innovative carbon technologies, and set up an investment fund administered by EIB.” Rockwool is similar: ETS Innovation Fund “needs to be better aligned with other policies and measures where investment efforts are focused on the most cost-effective areas. Good examples can be found in the off-the-shelf financial instruments now being developed to help innovative business models develop in industry as well as in the buildings renovation sector, where public funding (guarantees) and financing are needed to leverage private financing in the European Fund for Strategic Investments (EFSI).”

Scotland Europa: “Its modalities should set minimum parameters which allow packages to be designed to fit projects. This would better take account of the differences for each sub-sector. Flexible risk funding would attract private investment. […] This was shown to work for Scotland (Pentland Firth)”.

WWF + 8 environmental NGOs: “De-risking (venture) capital and debt by grants and loans as a tool to facilitate access and enhance entrepreneurship and the market readiness of low-carbon products and processes [should be an aim of ETS Innovation Fund].”

Estonia: “We suggest to consider the approach where the EIB alone or EIB together with the Member State are co-guarantors of the project. The risks would be shared so that the risk of the Member State will not exceed 50% and will enable the project to receive crucial pre-operation investment.”

Apr 25 2016

Money spread evenly to all countries?

Small member states, in particular, speak up in favour of maintaining the rules of NER300 that limited the amount of projects a single country could be awarded.

NER300’s rules related to spreading projects between countries were very soft. While it is true that Article 8 (4) stipulated “at least one […] project shall be funded within one Member State”, this was on condition that that project had already been selected as a winning project by the usual mechanisms of proposal evaluation. The rule was therefore redundant.

In favour of spreading the money
between many countries
Keen to allow the concentration of projects

Member States:

  • Hinted at in the European Council’s 23-24 Oct 2014 Conclusions, “Investment projects in all Member States, including small-scale projects, will be eligible”.
  • Stated in the MSR Decision reached between the European Parliament and Council, which was published in the Official Journal on 6 Oct 2015, “… with projects in all Member States including small-scale projects…”
  • Spelt out in the public consultation closing March 2015:
    • Estonia: “Estonia also believes that the new fund should still follow the principle of even geographic allocation of the available financing”
    • Czech Republic: “Also, regional distribution of beneficial projects among Member States should be promoted so that ideally every Member State has at least one project selected.” [Remark: NER300 contained this rule (see introductory paragraphs) but with a caveat that rendered it inoperable. The Czech Republic did not protest at its weak implementation.]
    • Anonymous member state: “The aspect of geographical balance in selection of projects should be strengthened.”
  • Stated at the Environment Council 26 Oct 2015: Bulgaria, Lithuania and Slovakia
  • Fortum and Svebio both say, “There should not be any earmarking between Member States,” with Svebio adding, “The selection of projects should be solely based on their merits.”
  • Projekt21plus says, “For serious progress in innovation and in reaching a lower level of emissions, it should be free how many projects are supported by the new NER400 programme, even at the risk of concentrating several projects just in a few number of Member States.”
Stakeholders:

  • CEEP: “Countries with GDP below 60% of the EU average, should be given priority in access to such funds.” [Remark: This will be the explicit aim of a parallel ETS funding scheme, the Modernisation Fund, detailed in proposed new Articles 10c and 10d of the ETS]

The Impact Assessment says, “[The minimum of three projects per Member State] could be maintained or adjusted to 4 projects per Member State, dependent on other design features such as the maximum funding rate and the resulting total number of projects. This element will be subject to a future implementing measure and will be assessed in this context.”