Andrei Marcu, Director, ERCSTMaciej Jakubik, Director, CEEPDomien Vangenechten, ERCST

Stateofplay

ImplementationofthefundingmechanismsintheEUETS

Brussels– 8/10/2019

1. Overviewofthefundingmechanisms

2. Reflectionsonstakeholdersentimentanalysis

3. ReflectionsonMemberStatedecisions

Agenda

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• Paperpublishedin2018:discussingwhatwasknownatthatpoint,andhighlightingissuestobeaddressedduringtheimplementationphase.

• Fiveworkshopsorganised:Brussels,Bucharest,Prague,SofiaandWarsaw

• Survey:representativesofMemberStates+representativesof70companiesandassociations

• Follow-upinterviewsandcorrespondencewithMemberStates

• Draftpaperpresentedtoday– publishedinthecomingweeks

ERCST & CEEP work: overview

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• Fourfundingmechanismsforthe4th PhaseoftheEUETS• Updateoftwoexistingmechanisms

• SolidarityProvision• Article10cDerogation

• Introductionoftwonewmechanisms• InnovationFund(successorofNER300)• ModernisationFund

Funding mechanisms: introduction

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Funding mechanisms: overview

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Funding mechanisms: interlinkages

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• 10%ofthetotalquantityofallowancestobeauctionedfrom2021onwardsaredistributedamongeligibleMemberStatesfor”thepurposeofsolidarity,growthandinterconnectionswithintheUnion”.

• Eligibility:MemberStateswithadomesticproductpercapitaatmarketpricesequaltoorbelow90%oftheUnionaveragein2013.

• Quantity:≈798millionEUAs

• Timeline:• MemberStatestodecidebySeptember30howtousetheflexibilitymechanism

Solidarity provision

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• Transitional freeallocationmaybegiventoinstallationsforelectricitygeneration:modernise,diversifyandtransformtheenergysector

• Eligibility:MemberStateswithadomesticproductpercapitaatmarketpricesbelow60%oftheUnionaveragein2013

• Quantity:• Upto40%ofspecificMSallowancestobeauctionedoverphase4≈648millionEUAs• Afterflexibility:upto60%ofspecificMSallowancestobeauctioned≈798millionEUAs

• Timeline:• MemberStatestodecidebyJune30onuseofArticle10c• MemberStatestodecidebySeptember30howtousetheflexibilitymechanism

Article 10c derogation

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• Somenotablechangescomparedtophase3:• CroatiaandSlovakiaarenoweligibletomakeuseofArticle10c,whileCyprusandMaltaarenotanymore;• Whileoverphase3Article10cDerogationwasoftenusedforthemodernisationofcoalplants,thisseemsnolongerpossibleinphase4.• Onlyupto70%oftheinvestmentcostsmaybesupported,providedthattheremainderisprivatelyfinanced.• A‘phase-outobligation’wasintroduced/whenaninvestmentleadstoadditionalelectricitygenerationcapacity,acorrespondingamountofcapacitywithahigheremissionintensityhastobedecommissioned.

Article 10c derogation

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Article 10c derogation

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Option1:projectsabove€12.5million

Competitivebiddingprocess

Projectsfinancedupto70%oftheinvestmentcosts(remainingcostsprivatelyfinanced)

Option2:projectsbelow€12.5million

SelectionbasedonobjectiveandtransparentcriteriabytheMS.

• Supportinvestments proposedbyMemberStates,aimedatmodernisingenergysystemsandimproveenergyefficiency

• Eligibility:MemberStateswithadomesticproductpercapitaatmarketpricesbelow60%oftheUnionaveragein2013

• Quantity:• Default:2%oftotalnumberofallowances≈310millionEUAs

• Freeallocationbuffernotused:upto2.5%oftotalnumberofallowances≈387.5millionEUAs

• Iffullflexibilityused:≈1685millionEUAs

Modernisation Fund

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• Timeline:• MemberStatestodecidebySeptember30howtousetheflexibilitymechanism• Implementingacttobeadoptedlaterthisyear/beginning2020.• InvestmentCommitteeisexpectedtobeestablishedbythesecondquarterof2020,withtheaimofhavingitsfirstmeetinginthethirdquarterof2020.

Modernisation Fund

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• ModernisationFundoperatesundertheresponsibilityoftheeligibleMemberStates.

• MSisrequiredtosendanyproposalforfundingtotheEuropeanInvestmentBankandtheinvestmentcommittee.TheEIBistaskedwithassessingwhetheraproposedprojectisapriorityprojectornot.

• Priorityarea:generationanduseofelectricityfromrenewablesources,theimprovementofenergyefficiency,exceptenergyefficiencyrelatingtoenergygenerationusingsolidfossilfuels,energystorageandthemodernisationofenergynetworks,includingdistrictheatingpipelines,gridsforelectricitytransmissionandtheincreaseofinterconnectionsbetweenMemberStates,aswellastosupportajusttransitionincarbon-dependentregionsinthebeneficiaryMemberStates.Investmentsinenergyefficiencyintransport,buildings,agriculture,andwaste.

• Non-priorityarea:projects ‘consistentwiththeUnion’s2030climateandenergypolicyframeworkandthelong-termobjectivesasexpressedintheParisAgreement’.Noinvestmentscanbemadeinenergygenerationfacilitiesthatusesolidfossilfuels,withtheexceptionofefficientandsustainabledistrictheatinginMemberStateswithaGDPpercapitaatmarketpricesbelow30%oftheUnionaveragein2013–RomaniaandBulgaria.

Modernisation Fund

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Modernisation Fund

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MSsubmitstheinvestmentproposal

Priority project

Non-priorityproject

Financeupto100%ofrelevantcosts

Assessproposalandissuesarecommendation

Investmentnotaccepted:MSmaynotfinancetheproject

Procedure1

Procedure2

EIB InvestmentCommittee

Financeupto70%ofrelevantcosts

KeyunknownslikelytobedeterminedintheImplementingAct:• whatinformationMemberStatesarerequiredtosubmittotheInvestmentCommitteeandthe

EIBwhenproposingprojects?

• provisionsfortheelectionofnon-eligibleMemberStaterepresentativestotheInvestmentCommittee.

• provisionsoutliningthedecision-makingproceduresbytheEIBandtheInvestmentCommittee.

• provisionsonhowandwhenallowancesaretobemonetisedbytheEIB.

• provisionstoensuretransparency,includingreportingrequirementsfortheMemberStates,theEIBaswellastheInvestmentCommittee.

• provisionsonhowtoensurethatthe70-30proportionbetweenpriorityandnon-priorityprojectsisrespected.

• provisionsforrecoveryrules.

Modernisation Fund

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• SuccessorofNER300

• Supportinnovationinlow-carbontechnologiesandprocesses

• Eligibility:projectsinallMemberStates

• Quantity:• Atleast450mEUAs• tobeincreasedbyunspentNER300fundsandupto50mallowancesifthefreeallocationbufferisnotfullyused

• Timeline:• CommissiondelegatedregulationadoptedonFebruary26,2019• FirstcallforproposalslikelyinJune2020

Innovation Fund

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• Flexiblefunding• Upto60%ofrelevantcosts• Bothup-frontandex-ante• Projectdevelopmentsupportpossible• Compatiblewithothertypesofsupport

• Callforproposals:• Determinespecificassessmentmethodology;• Determineeligibleprojects/sectors;• Anyadditionalcriteriaaimedatachievingageographicallybalanceddistribution

• Commissionhasdirectgovernance– butdelegatedtoimplementingbody?

• RoleofMemberStateslimited

Innovation Fund: some takeaways

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• Stakeholderexpectationsarehigh

Reflections on stakeholder sentiment analysis

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• Typesofprojectcompanieswanttoapplyforfundingwith?

Reflections on stakeholder sentiment analysis

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• Overall,ModernisationFundpreferredover10cDerogation• Morecompanieseligibleforfunding• Upto100%ofrelevantcostscovered• Nophase-outobligation

• Highlightedtheneedforflexibleinvestmentschedules– innovationfundfinanceruleswerewelcomed

• Severaluncertaintieswerehighlighted:• Eligibilityofcertaintypesofprojects(e.g.whatqualifiesasanon-priorityproject)• Makingdecisionswithoutallthelegislationbeinginplace(ModernisationFund?)• Impactoftherevisionofthestateaidguidelines?• ImpactofthefunctioningoftheMarketStabilityReserve?

Reflections on stakeholder sentiment analysis

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Reflections on Member State decisions

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MemberState

UseArticle10cduringphase4?Towhatextent?

TransfersolidarityallowancestoArticle10cDerogation?

Transfer10callowancestotheModernisationFund?Howmany?

TransfersolidarityallowancestotheModernisationFund?Howmany?

Bulgaria Yes40%ofallowancestobeauctioned

No No No

Croatia Yes20%ofallowancestobeauctioned

No Yes50%of10callowances

Likely notTobedecided

CzechRepublic

No No Yes100%of10callowances

Yes50%ofsolidarityprovisionallowances

Estonia No No No No

Hungary Yes40%ofallowancestobeauctioned

No No No

Reflections on Member State decisions

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MemberState

UseArticle10cduringphase4?Towhatextent?

TransfersolidarityallowancestoArticle10cDerogation?

Transfer10callowancestotheModernisationFund?Howmany?

TransfersolidarityallowancestotheModernisationFund?Howmany?

Latvia No No Tobedecided Tobedecided

Lithuania No No Yes100%ofArticle10callowances

No

Poland No No No No

Romania YesOnlysmall-scaleprojectsforatotalvalueof€112million

No YesAllbut€112millionusedforsmall-scaleprojects

No

Slovakia No No Yes75%ofArticle10callowances

No

Reflections on Member State decisions

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614

83

605

1925

310

648

649

1620

0 500 1000 1500 2000 2500

ModernisationFund

Article10c

SolidarityProvision

Auction

MillionofallowancesDefaultScenario MemberStatedecision

• ReasonstonotuseArticle10cvary:• LatviaandLithuania:alreadylow-carbonpowerproductionsystem• CzechRepublic:avoidunnecessaryadministrativecostsofmanagingtwomechanisms• Poland:deemedtobeaninefficienttool

• ReasonstouseArticle10c:• Hungary:Independentchoiceofprojectswithoutengagementofotheractors

• Flexibilitymechanismservesitspurpose:MemberStatesisabletopoolresourcesaccordingtotheirprioritiesandnationalcircumstances

• Article10callowancesareviewedandtreateddifferentlyfromSolidarityprovisionallowances

Reflections on Member State decisions

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• HowauctioningrevenuesareusedalsoinfluencesMemberStatedecisions

• Focuswillbeonpriorityareaprojects• FollowingMemberStatesdecisions,theoverallamountofArticle10c+ModernisationFundallowancesdecreasesbyabout260million• Thisdoesnotnecessarilymeanthattheoverallinvestmentsforclimateandenergypurposeswilldecrease– e.g.thePolishgovernmentisplanningtousetherevenuesofits10callowancestoestablishanewnationalfund.

Reflections on Member State decisions

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• Stakeholderinvolvementisnecessaryandbeneficial,andshouldbeensuredgoingforwardintheimplementationprocess

• Flexibilityisimportant• ModernisationFundpreferredoverArticle10cderogation• Flexibilitymechanism• Flexibleinvestmentschedules

• Transparency shouldbeakeyelementinthedesignanduseofallfundingmechanisms

• AnincreaseoftheEU2030climatetargetshouldnotresultinadecreaseinresourcesavailableforthefundingmechanismsduetothedecreasingcap–ideally,theyshouldevenbeincreased.

Conclusions and recommendations

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