"NER300" is the name of a financing instrument managed jointly by the European Commission, European Investment Bank and Member States, so-called because Article 10(a) 8 of the revised Emissions Trading Directive 2009/29/EC contains the provision to set aside 300 million allowances (rights to emit one tonne of carbon dioxide) in the New Entrants’ Reserve of the European Emissions Trading Scheme for subsidising installations of innovative renewable energy technology and carbon capture and storage (CCS). The allowances will be sold on the carbon market and the money raised - which could be 3 bn EUR if each allowance is sold for 10 EUR - will be made available to projects as they operate. More information is available under the tab Basics. Official information is available on the Commission website here.

NER300.com is an unofficial, independent portal dedicated to renewable energy and grid integration projects wishing to access this instrument, providing

• News
  ...to keep you up to date with the latest developments, key dates and deadlines
• Analysis
  ...understand the NER300 instrument and how to use it for your project
• Access to consultancy
  ...for specific guidance for your proposal.

Trading on 16 days between 5 and 31 December, the EIB sold 12 M NER300 (Dec-2013) EUAs at 8.15 EUR each, the EIB revealed tonight.

EUAs were monetised as OTC trades. In future, an average of just under 21 M EUAs will need to be monetised per month for the monetisation of 200 M EUAs to be complete by 2 Oct 2012. An extrapolation of the earnings achieved so far to the 200 M EUAs suggests they will create an NER300 pot for the first call of slightly more than 1600 M EUR.

1. NER300.com’s commentary

   Volumes monetised varied from 1.1 M EUA/day to 0.2 M EUA/day around the Christmas and the New Year holidays. Unfortunately, it was on 20 Dec, when the market was thinner, that the temporary uptick in EUA prices caused by the European Parliament Environment Committee vote to withhold allowances from Phase 3 of the ETS occured.

The EC announced on 2 December that the EIB had received the 300 M carbon allowances (also known as EUAs) that, once monetised, will form the NER300 pot. The monetisation of 200 M of them must be completed within 10 months of this date, i.e. 2 October 2012. This money will finance winning projects from the first call for proposals. This would mean that Award Decisions cannot be signed before that date, as until then the size of the NER300 pot will not be known with certainty.

The EIB said on 5 October 2011 that it intended “to sell [the remaining 100 M allowances] immediately after the conclusion of the sales of the first tranche”, but has backtracked from this position, recognising that, coupled with need to complete the early auctioning of 120 M Phase 3 EUAs by the end of 2013, EUAs might be over-abundant and attract very low prices. Now it says, “Sales of the second tranche may [...] not continue immediately after the first tranche is finalised and may only be completed by end 2013.” The investment bank Morgan Stanley had predicted this change of heart at a conference held the day after the original announcement was made.

An analyst interviewed by Bloomberg noted that in the week that followed the transfer to the EIB of EUAs, “December 2013 [traded EUA] volumes jumped to 16 percent of the market [...] from 9 percent”. NER300 EUAs are ‘December 2013′ EUAs (i.e. purchasers commit to buy them now at an agreed price but they are only delivered and paid for in December 2013), implying that monetisation has begun.

The EIB will produce monthly reports on overall EUA sales volumes achieved and aggregated prices obtained. The first of these, relating to monetisation in December 2011, will appear no later than 13 January 2012 [UPDATE: the EIB reported on 21 Dec that the first report "will be issued on or around Jan 11"]. This information will be tracked on this page of NER300.com.

The RES Group is the list of 34 projects whose total NER300 funding requests serve to determine the split of the NER300 pot between CCS and renewable energy projects. Projects that are in the RES Group stand a much higher chance than those that are not of ultimately receiving funding.

Procedures Manual Appendix A9 point 11 describes how to populate the RES Group in case there are subcategories with no projects and where overall, in the category to which the subcategory belongs, there are at least an equal number of eligible proposals as subcategories. But it is silent on how to deal with a situation that has arisen twice in the first call: the case where there are fewer projects put forward in a category than there are subcategories in the category. This happens twice: for the HYD category (0 proposals for 1 subcategory) and the GEO category (3 proposals for 4 subcategories).

Perhaps the fairest way to choose proposals to replace these absent ones would be to look at those subcategories that have been most oversubscribed in the first call and to take proposals from them. This would respond to the evident demand for funding in those areas. Furthermore, the EC could be confident of picking out a proposal that represents good value for money because these subcategories are the ones where competition is strongest. The subcategories having the highest numbers of proposals are thought to be WINd (floating wind turbines 25 MW) and BIOd (biofuels from directly-heated gasification).

From exchanges between at least one Member State and the EIB related to the EIB’s ongoing technical and financial due diligence assessment of NER300 proposals, it appears that the EIB expected project sponsors to ask for NER300 grants of exactly 50% of relevant costs. This is because Recital 6 of the Decision says, “[…] financing under this Decision should be fixed at 50 % of the relevant costs […]“. The EC is now being pressed to clarify whether Recital 6 should be applied strictly. Article 2(3), on which the Recital is based, appears to permit any funding request up to 50% of relevant costs by considering the action to take in a scenario where the NER300 funding request is less than 50% (“Where the total request for public funding is less than 50 % of the relevant costs, the total request for public funding shall be financed under this Decision.”).

It is not known how many in the EIB are labouring under the impression that Recital 6 must be applied strictly. Different (anonymous) desk officers within the EIB and within the private consultancies hired to assist it are responsible for different proposals and different parts of each proposal, with all correspondence passing through the address NER300«at»eib.org.

1. NER300.com’s recommendation and commentary:

   The EIB should disregard Recital 6. Recitals are non-legislative notes explaining and summarising the legislation that follows in the Articles. They are written after the Articles have been written. Where there is an inconsistency, or implied inconsistency, the intent of the Article should take precedence.

   Recital 6 would not be the first case of an inconsistency coming to light in the text after the Decision was adopted by the Member States. Heavy edits to Recital 12 were made between the version adopted with the Member States on 2 Feb 2010 and the version published in the Official Journal over nine months later. The edits made the Recital consistent with changes to the Articles negotiated in that meeting.

   Finally, the logic of Recital 6 is wrong. If NER300 funding requests were fixed at 50% of relevant costs, the possibility for competition between consortia on the amount of money that they ask for would be eliminated. Instead the Member States, through (for example) their choice of hypothetical reference plant, would control the competition.

Information released by the European Commission on 13 May on the number of proposals received per Member State and per renewable energy category has been combined in one table. It is available here.

The distribution of projects broadly reflects the distribution of the renewable energy resource concerned. Thus concentrated solar power proposals are to be found in the Mediterranean, with over half of CSP proposals from Cyprus. Geothermal projects have been proposed in central Europe (but none is in UK, Germany or France – countries where Enhanced Geothermal Systems demonstrations are running or had previously been announced) and ocean proposals come from countries with access to the Atlantic.

Among the surprises are that Austria did not put forward a smart grids (“DRM”) project, although it was an NER300 opportunity that, along with a biofuel subcategory and an onshore wind subcategory, it specifically drew attention to in its communication with potential bidders. Ireland and Denmark did not put forward a wind project. Spain avoided PV, and so did Malta although it has the best solar resource in Europe – this might in part be due to NER300 rules that required, effectively, that the MWs of capacity be connected at a single point making a decentralised project on the space-constrained Maltese islands impossible.

Also noteworthy is the dominance of northern Europe in bioenergy projects.

Further information on the proposals is available to NER300.com clients.

The number of NER300 project proposals forwarded by each Member State to the EIB for technical and financial due diligence has appeared on the European Commission’s NER300 site. Of the 153 proposals submitted in February, only 78 remain, with similar proportions of renewable energy and CCS proposals eliminated.

The NER300 competition rules, if strictly applied, would tend to give the greatest chance of winning funding to the countries that enter the greatest number of proposals.

The fact that the number of technical and financial due diligence assessments needed is now lower than the EC-EIB had planned (110 were expected) might mean they can be completed more quickly.

In the co-operation agreement between the EC and the European Investment Bank, published on 31 December 2010 in the Official Journal of the European Communities (OJ C 358, 31.12.2010, p. 1), timelines for the EIB’s work are estimated on the basis of 20 CCS proposals and 90 RES projects being submitted for the first call and half these numbers for the second call (Annex I).

Also revealed in the agreement (Art 16(2) d) are the fees the EIB will charge to the NER300 pot per proposal: 56250 EUR per RES project and more than double that figure for CCS projects. Some of this money will be required to pay the company to which the EIB will outsource a part of the proposal evaluations.

Monetisation

The monetisation of EUAs is contingent on the EUA Union registry being available (Art 11). Sources quoted in this Bloomberg story from 9 November make clear that they do not expect the registry to be ready in 2011. This explains why the Commission pushed back the likely date of Award Decisions from 31 December 2011 to “second half of 2012″.

Real-time tracking of the growth of the NER300 pot will be possible: “Reports setting out at least the overall volume and aggregated prices of the monetisation shall be published on the website of the EIB on a monthly basis, within two weeks of the end of each month over the monetisation period;” (Art 12(3) d).

Re-stream part 1 (“Overview of NER300 Call for Proposals – Timing; process; roles and responsibilities; technical and financial requirements” and “Selection process – eligibility; due diligence; ranking; geographical balancing”) here and part 2 (“Requirements for disbursement – legally binding instrument; knowledge sharing; monitoring, reporting and verification”) here.

Deadlines…

…for entry into operation of projects

The EC is giving itself until the second half of 2012 to sign NER300 grant agreements (“Award Decisions”). This is a good deal later than the date of 31 December 2011 that had been foreseen in February. The deadline for projects to become operational will be increased correspondingly such that they must enter into operation within 4 years of the award decision.

1. NER300.com’s commentary:

   Good news for CCS. Bad news for renewables projects that want to get going quickly. The reason for the delay is alluded to in the EC/EIB co-operation agreement.

…for submission of proposal to the Member State

The Call requires proposals to be submitted to the Member State within three months of the launch, meaning by 9 February 2011. The Commission clarified that Member States in fact have complete discretion to allow project sponsors to submit later or to revise submitted proposals providing they keep to the deadline of 9 May 2011 for forwarding the proposals to the EIB.

Revisions…

…to submitted proposals once they have been sent to the EIB

The EIB will allow changes to the data contained in proposals that establish its CPUP. This will occur if the EIB rejects the reason given by the project sponsor for one or more of the quantities that it used to determine CPUP. In that case, the EIB will substitute the rogue values with values that it deems reasonable and rank the proposal on that basis.

1. NER300.com’s commentary:

   Depending on the nature of the rogue quantity, the EIB might follow the project sponsor’s suggestion for the revision to the value, effectively giving project sponsors a second chance to get it right. These project sponsors might end up being rewarded for their carelessness if, in the time following submission to the EIB, they gather intelligence on how their competitors have bid, which they factor in to their suggestion to the EIB.

… by a Member State as the list of recommended projects is being drawn up

Once the due diligence assessment is complete, the EIB will reconfirm with the Member States the value and structure of the total public funding contribution of those projects that have made it onto the list of recommended projects (§103). The point was raised in the meeting that the Member States would have no option other than to confirm the commitment already given. Altering it would affect CPUP, either requiring the list of recommended projects to be recompiled (and potentially also the make-up of the Group that the project belongs to) or introducing the possibility of gaming by giving Member States the chance to bid low initial levels of state support in order to win the competition. The State Aid assessment (§83) would need to be redone if State Aid to a project is increased.

The EC expresses the desire to avoid subsidy competition between Member States in Recital 6, so NER300.com expects the further guidance it has promised on §103 to limit their room for manoeuvre.

A RES Group of 34 projects and a CCS Group of 8 projects

Surprisingly the Call does not explain how to create a RES Group of 34 projects (which corresponds to the total number of sub-categories across all RES categories) and a CCS Group of 8 projects if not all (sub-)categories are filled with a project that has passed the due diligence assessment and, where applicable, the competitiveness check. Article 8(2) second last sub-paragraph of the Decision specifically highlighted this as a problem area that the Call should address.

The EC instead provided answers in the meeting. A category with empty sub-categories will add a proposal to the RES/CCS Group from a sub-category for which an additional qualifying proposal is available. Two situations therefore exist that give rise to the possibility to fund multiple proposals in the same technology area in the 1st Call: the one outlined above, where there are insufficient or weak proposals in a particular (sub-)category but enough money is in the NER300 pot to fund more than one project in a sub-category populated with sufficient qualifying proposals, and the case described in §64 of the Call where the size of the NER300 pot exceeds the sum demanded by all the proposals in the CCS and RES Groups.

1. NER300.com’s commentary:

   Update 4 March 2011: The Procedures Manual, just made public, reveals how the EC will choose additional proposals from a RES category such that the number of proposals that the category sends to the RES Group matches the number of sub-categories it has (See Appendix A9.11). However, the action to take where there are fewer qualifying proposals in a category than there are sub-categories in the category remains undefined. This situation occurs twice in the proposals submitted for the first Call, for the GEO category and the HYD category. NER300.com proposes this solution.

Second call

The second call, intended to correct technical and geographic balance, might not even have CPUP as a selection criterion, said the EC.

Reference plant

NER300.com’s article on reference plants has been updated to reflect the information given in the meeting.

Further information and analysis is available to NER300.com clients.

EUAs are EU emissions allowances, electronic certificates entitling the bearer to emit one tonne of CO₂. CCS projects are exempt from the obligation to surrender allowances for the tonnes of CO₂ that they capture and store safely. Relevant costs, under the rules of NER300, are net of this ‘avoided cost’.

To complete its application, each CCS project will be required to give the ‘best estimate’ of its ‘operating benefit’ for the 10 years from which it starts operation, which implies that it will also need to provide its best estimate of the price of carbon going out well into the next decade.

1. NER300.com’s recommendation:

   Unlike reference plants, where the EC can argue that each Member State should set its own values for investment cost, operating cost and operating benefit, the carbon price will be the same for all projects. Proposals with different predictions can’t simultaneously be correct, so logic dictates that the EIB, when it performs its due diligence assessment, will have to apply a uniform price to all projects.

   It is current EC policy to remain steadfastly agnostic on the carbon price, so the danger of any prediction that is not arrived at by a strictly mechanical process advertised transparently and early and that exclusively uses data supplied by the project sponsors is that it will be seen by speculators as statement of intent.

   Such a process might take the form of averaging all the prices suggested by the different project sponsors. The sponsors might prefer to have an official CO₂ price prediction well in advance of the deadline for submissions, so they can build their bids around it, but this will prove politically unfeasible.