Category: Flaws in the Impact Assessment

The articles in this category refer to the passages in the Impact Assessment of the Emissions Trading Scheme proposal for 2021-2030 (SWD(2015) 135) related to ETS Innovation Fund. For a critique of the rest of the Impact Assessment see, for example, this study by the Impact Assessment Institute.
Jan 13 2017

Factual mistakes

…in amounts awarded

“23 projects were awarded €1.5 billion.”

— page 123 of the EC’s Impact Assessment

No. In the first call, only 1.21 bn EUR was awarded (Dec 2012 Award Decision), although the EC had raised 1.5 bn EUR for projects (July 2012 SWD). The EC preferred to roll some money over to the second call than to award it all in the first call.

… in size of the awards

“The NER 300 funding for RES projects ranges from €7 to €203 million.”

— page 126 of the EC’s Impact Assessment

Wrong: the smallest NER300 award is of 3.9 M EUR to a project in Latvia.

…in the amount of energy projects will produce

“The awarded RES projects are estimated to increase the annual EU renewable energy production by some 18 TWh”

— page 123 of the EC’s Impact Assessment

Wrong: it is 22.5 TWh. This number is obtained by dividing, for each RES project in the applicable amended award decision, the project’s maximum funding amount by the funding rate (or adjusted funding rate in the case of a part of the award being paid upfront), then summing the results and dividing by 0.75 to account for the fact that the maximum funding amount will have been irrevocably disbursed once 75% of bid production has been achieved. 18 TWh is number derived if you forget to divide by 0.75.

  1.’s comment

    The projected quantity of energy produced from NER300 installations, quoted as a ‘result’ of the programme, is in any case of doubtful relevance. A better way to evaluate NER300’s success would be to focus on its proximate aim, which is to bring about the rapid replication of the supported technologies without further special financial support. More suitable criteria for success would therefore have been the speed at which projects are built and at which a Project Sponsor or his competitors subsequently deploy the same technology, or a next-generation version of it. This is a view that Gernot Klotz who spoke at DG CLIMA’s first ETS Innovation Fund event, the June 2016 High Level Round Table on Low-Carbon Innovation, would share.

Jan 13 2017

False memories

Indicative shares that were never there

The Impact Assessment says,

“Indicative shares for CCS and RES projects with a smooth spill over possibility between the groups were crucial under the NER 300 programme to ensure the allocation of all available funds.”

(The association EURIMA happens to agree, calling for the principle to be maintained: “Criteria should be flexible enough so as to avoid that part of the funds remain unused if some of the selected projects do not materialise (as might be the case with CCS in the current NER 300 facility).”)

There were no “indicative shares for CCS and RES” in NER300. The shares of funding for CCS and RES depended on the amount of NER300 funding requested by confirmed projects. There was no way before running the competition to know how many confirmed projects in CCS and RES there would be or how much each, on average, would ask for. The text claims the “possibility for smooth spill-over” was crucial, but rules made the magnitude and direction of the spill unpredictable. Furthermore, they were never applied (in the first call, there were 0 confirmed CCS projects; in the second, the funding available exactly managed the funding requested by all the eligible projects in the competition).

…of the reasons for projects not being ‘confirmed’

The Impact Assessment says, of the first call,

“36 [projects] were either not confirmed by Member States or could not be supported due to insufficient funds.”

It would have been more accurate to write,

“36 were not confirmed by Member States either because of the maximum-3-projects-per-Member-State rule or because the EC did not invite them to confirm them.”

The EC requested the MS to confirm only those projects mentioned in the Staff Working Document of July 2012:

“In order for the Commission to adopt award decisions by end 2012, all Member States with candidate or reserve projects on the list in the Annex are requested to proceed swiftly to confirm for all candidates support as well as the national funding contributions”

The consequence of this was that when, at the last minute, the ULCOS CCS project withdrew, there were no projects the EC could award instead.

Jan 13 2017

Airbrushing history

The Impact Assessment says,

“The first call’s cycle lasted 25 months and this may seem as too long, but one has to bear in mind that the first call was also a learning curve for all involved parties. Considerable improvements, due to the streamlining of the process, were made during the second call and that lead (sic) to a much shorter cycle of 15 months.”

These sentences, while not strictly wrong, misrepresent the reason for the length of time to launch and conclude the first call. The circumstances that led to the protracted timing were never likely to be repeated in the second call or indeed in any subsequent call. This is because the delays were due to poor coordination with the process to set up the ‘single union registry’ for carbon allowances, which only needed to be done once.

The monetisation of the 200 million NER allowances for the first call could only begin with the registry in place (Bloomberg article 9 Nov 2011) and it was set up late. Within a couple of days of the adoption on 18 Nov 2011 of the regulation establishing the registry, the EC confirmed that it would “proceed swiftly with the European Investment Bank (EIB) to account opening to enable the delivery of allowances before the end of the month” (statement by Jos Delbeke).

Thus the start of the monetisation was pushed back, with a knock-on effect on the timing of the selection process (see official Summary Record of Climate Committee Meeting 14 Dec 2011).

The delays that the first call of NER300 would face were apparent to the EC even before it was launched. The EC updated the text of the Decision that had been signed off by Member States on 2 Feb 2010 (here) to extend an important NER300 deadline. Projects would no longer have to enter into operation no later than 31 Dec 2015, but within four years of the award decision.

Dec 15 2016

60% cap on ETS Innovation Fund’s refund rate – why?

The EC has not explained why it proposed that a project’s “relevant costs” under ETS Innovation Fund be refunded at a maximum of 60% and not some other rate.

In 2015 an internal working group in the EC, the Impact Assessment Board, saw a draft of the Impact Assessment and sent it back [See IAB negative opinion] to DG CLIMA saying “The Impact Assessment should clarify the method that was used to determine […] the funding rate”. DG CLIMA’s response, which satisfied the IAB, was to add an annex (Annex 14) to the Impact Assessment containing a sensitivity analysis for the effect of different funding rates on the amounts that the ETS Innovation Fund and Project Sponsor would need to cover for a project of given total cost. The result is straight-line charts (see below) whose shape offers no clue as to why 60%, specifically, was felt to be a threshold.

Furthermore, the assumptions used to draw the charts are flaky. Two approximations are used. The first is that total costs are twice additional (or in NER300’s language ‘relevant’) costs. The basis for this assumption is not explained, although the approximation affects the relative position of the sensitivity analysis curves. The second is that additional costs for a typical RES project are 100 M EUR. This appears to contradict the evidence. The average NER300 award for RES projects was 47 M EUR and they asked, on average, to have 39% of their relevant costs refunded. This means a better estimate of additional costs would have been 120 M EUR.




Source: copy-paste from EC’s Impact Assessment + additions (red outline).

The EC proposed 60% even though it noted, in July 2015, that “more extensive market testing” would be necessary to justify that or any other rate (see this article). The tender for the market testing would be only be issued one year later.

  1.’s comment

    Possibly 60% was chosen because it was the ‘centre of gravity’ between the maximum permissible coverage of investment costs under the current State Aid rules – RES: 65%; energy efficiency: 50%; CCS: 100% – weighted according to where the EC expects to see most ETS Innovation Fund projects. Still, different funding rates could have been proposed for each of these categories, as they are for State aid.

    These State Aid rules (details see Annex I of the Guidelines on State aid for environmental protection and energy 2014-2020) apply for the period 2014-2020, in which time only up to 50 M EUAs-worth of awards will be made. Most of the ETS Innovation Fund will be run during under the State Aid regime that will enter into force subsequently. Relevant State Aid Guidelines for that period will begin to be discussed in 2017. The Impact Assessment says ETS Innovation Fund’s rules need to anticipate them: “the maximum funding rates and further design of the operational modalities would need to be consistent with future State Aid rules.” MEPs, in their amendments to the draft legislation, agreed (see Compromise 12, adopted by ENVI committee today).