Nov 27 2014

Analysis of inputs to public consultation on future of NER300

***UPDATE 9 Jan 2015: The EC’s official summary of the public consultation responses is now available here. NER300.com’s comments on this summary appear at the bottom of this article.***


On July 31 2014 a public consultation closed on ‘Emission Trading System (ETS) post-2020 carbon leakage provisions’. The consultation included the question, “Currently the European Commission implements the NER300 programme to provide from EU ETS specific support for large-scale demonstration of Carbon Capture Storage (CCS) projects and innovative renewable energy. 300 million allowances, representing ca. 2% of total phase 3 allowances, are dedicated for this purpose. What share of the post-2020 allowance budget should be dedicated to such innovation support?” with an invitation to respondents to explain their answer.

Respondents were asked to indicate whether they would allow their replies to be made public. These replies have been posted on the homepage of the public consultation. An analysis of them is given below.

Freshest thinking

The NGO Change Partnership offered advice on how the pot of a new NER300-type scheme could be filled with allowances: “The allowances should come from a combination of a ‘haircut’ on the Market Stability Reserve (MSR) together with a dedicated fund of allowances. This should replace any ‘New Entrants Reserve’. Importantly, allowances should not be monetised but used as collateral to leverage additional funding.” The MSR is a measure that would be applied to Europe’s Emissions Trading Scheme to adjust the amount of carbon allowances that are in the market, with the expected effect (at least in the near term) of boosting the carbon price. It could begin in the next 2 to 7 years, depending on the will of the Council and European Parliament. The mandate to launch additional calls under NER300 rules, or to start NER400 early, could be linked to this dossier.

Alstom, which has been involved in a number of awarded and un-awarded NER300 proposals, fleshed out Change Partnership’s ideas:

[…] We fully support the continuation of the NER300 beyond 2015 and before 2020. To be meaningful and credible, the Fund should make available a very large amount of money.

  • From the ETS: free allowances from the NER non-allocated in 2020, free allowances allocated to plants that will close before 2020 (IED regulation) and EUAs from the Market Stability Reserve could be monetised. Without being monetised, EUAs could also be used as collateral to leverage financing at an agreed carbon price.
  • From the 2014-2020 EU budget: ‘Smart or Inclusive Growth’ or ‘Sustainable growth: Natural Resources’ lines, European Structural and Investment Funds, Research Fund for Coal and Steel, Horizon 2020, Connecting Europe Facility and the tax on financial transactions.[…]

The need to look beyond NER300 for stimulating innovation in energy technology was a theme in a large number of responses. Only one respondent, Holcim, mentioned “risk-sharing” in its submission, of which the EUAs-as-collateral approach could be one example.

Veterans’ responses

Industry

The ‘veterans’ in this context are companies that had already applied for NER300 funding. Alstom, above, was one. Air Liquide described NER300 as Europe’s “only tool for funding large scale demonstration European projects” (supported by the European Industrial Gases Association). The utilities ENEL (responding via its Slovakian subsidiary) and RWE recognised the value of support for innovation in energy technology, but could not accept that distorting the Emissions Trading Scheme in the way NER300 has done is a price worth paying. This was a widely held view. ENEL wanted to see “analysis of [NER300’s] effectiveness and achievements”, which two other organisations, BDI and the Swedish Forest Industries Federation, also called for. Shell parted company from other oil companies and their associations by expressing its “full support” for NER300 and calling for any follow-up to be better resourced. Finally, Magnesitas Navarras, whose technological approach was confirmed ineligible by the EC in its answer to FAQ 29, looked on the bright side: “We are going to present the project in the topic LCE 15 under Horizon 2020.”

Associations

Companies that have tasted NER300 like it. That feeling is shared by their industrial associations. The two European renewable energy industry associations that responded, Ocean Energy Europe and EWEA, praised NER300. The CCS Association said NER300 had had “limited success” in promoting CCS and that a better funded future programme “should focus on delivering large-scale deployment of CCS in the EU post-2020.”

Member States

Estonia considered NER300 “an important funding programme for innovative carbon projects which helps to reduce greenhouse gas emissions and [which] should definitely continue after 2020.” The UK, whose three projects were between them awarded one sixth of the NER300 pot (more than any other Member State), would like any future pot of money for low carbon innovation not to be created by raiding allowances from the Emissions Trading Scheme. Poland shared this view, adding that if a new scheme were created the focus should move from CCS to technologies for cleaner combustion of fossil fuels. Regions also gave input. Wallonia and Flanders insisted on the principle of geographical balance. Bavaria, Thüringen and Vienna, which were the only other local government administrations to give a public reply, dismissed CCS.

NER300 newbies

The ‘newbies’ in this context are organisations from which nothing or little on NER300 has so far been heard or that have had no direct connection to the instrument. They include, above all, industrial sectors at risk of shifting production outside Europe if the EU puts too high a cost on carbon dioxide emissions. The EC intends these sectors to benefit from NER300-type funding in future.

To a great extent, however, the companies concerned and the associations that represent them reject the idea that they should give up any allowances that would otherwise be given to them for free. The taking of allowances that would otherwise have been freely allocated to new entrants was the way in which the original NER300 pot was formed. Solvay said, “The ETS is an instrument that must curb emissions at the lowest costs for participants,” echoed by Ineos, a manufacturer of oils and olefins: “The Commission should prioritise protection for industries at risk of carbon leakage to allow EU companies to remain competitive.”

One drawback noted by many of basing the pot size on a number of allowances is that the amount of money it ultimately contains will depend on an unknown quantity: the price at which the allowances are monetised. Eurometaux, repeated by 10 metal producers or their associations, pointed out that the availability of NER300 funding will be inversely proportional to the need for it: when carbon prices are high, this on its own can suffice as the driver of innovation, yet the NER300 pot will be huge. When they are low, the carbon price will not be sufficient, but the pot, if linked to it, will also be too small. USG proposed to deal with very large pots apparently by demanding more technical risk in projects: “The higher the carbon price is targeted to be, the higher the benchmark level should be.”

Support is stronger for the idea of linking the revenues from auctioned allowances to spending on low carbon innovation because this would not reduce the number of allowance available for free allocation. But can Member States be trusted to spend the revenues on ambitious technology programmes? The chemical industry lobbies CEFIC and VNCI think not. They both write, “It is seen as unlikely that Member States will free resources from auctioning revenues due to national budgetary challenges.”

A number of purists responded, opposing any use of the ETS to fund technology programmes and insisting that general taxation be the source of funding instead. This fully insulates the size (and therefore design) of the programme from the vagaries of the carbon market.

Recommendations

Broader

Many, from a variety of sectors, called for the future NER300 to be broader in scope:

In which direction should NER300 be broadened? The NGOs can perhaps provide a disinterested view

Energy efficiency in industry

Energy efficiency in buildings

Energy efficiency in fossil fuel combustion

General energy efficiency

Facilitate cross-border projects

EON & German Association of Energy and Water Industries

Calls every two years from now on

Bellona Europa

No returning of money in case of project failure

Swedish Steel Producers´ Association says NER300 payouts should not be reduced or cancelled if the project is built but ultimately does not perform, which is a feature of current NER300 rules that the cement industry (CEMBUREAU + 18) also considers to be a drawback.

Greater share of costs should be covered by EC?

Bellona Europa says, somewhat contradictorily, that “a higher share [should be] covered by the EC,” but also “any projects should require a substantial financial or in-kind commitment from industry”. Humberto Delgado Rosa (Director responsible for NER300 in DG CLIMA) speaking at The EU Energy Challenge said that the rules on NER400 were far from being decided and that an increase in the proportion of costs covered could be considered. He is unlikely to go as far as one respondent’s wishes: ‘Marek Kucharski Bełchatów’, writing as a citizen but using an email address of Polish electricity company PGE said grants of 100% of costs should be allowed for CCS. PGE had made the same statement at the SET Plan conference in Warsaw 2011.

CPUP

The International Association of Oil & Gas Producers and its member Total made an interesting point about CPUP. CPUP was based around the wrong metric for CCS plants: “The criterion should not be the extra cost per tonne of stored CO2, but rather the extra cost per kWh of electricity.”

“It’s the regulatory framework, stupid”

The paper industry (CEPI + five) said that success in energy innovation “is not so much a matter of budget allocated, but of policy uncertainty.” They were joined by three other Nordic associations/companies. The Swedish Forest Industries Federation wrote, “some of the [NER300 projects] have not been made. This is not due to the amount of allowances used for NER300 but to the low credibility of the European energy and climate policy. To increase the amount of NER300 allowances will not change this. A clear, transparent and stringent policy would mean much more.”

Avoid RES/CCS competition within the programme

Eurogas: “The direct competition with renewables under NER300 should be reduced and additional funding instruments for low-carbon investments be considered.”

Complexity

Many said NER300 should be made less complex, but without saying how.

Attitudes to CCS

The question of whether CCS is a valuable technology divided opinion as follows. The summary neglects the small number of replies declared to be personal responses.

Pro-CCS Anti-CCS
  • Eurometaux + 10 “Financing of CCS should not be a priority for the allowance budget.” But ERAMET is more conciliatory: “CCS can be a useful tool to decarbonise the power sector and also the industry.”
  • Regional public authorities as mentioned above
  • Central Europe Energy Partners (mentioned above) and Poland prefer efficiency in fossil fuel combustion
  • Danish Ecological Council
  • European Salt Producers’ Association
  • European Ceramic Industry Association + 55 companies and national associations representing the ceramics sector: “the Ceramic Roadmap shows that CCS will remain prohibitively expensive for some time after it is installed in other industries.” Also the Portuguese Association for Ceramics and Domestic Glass.
  • Terremilia (concerns over CO2 storage)
  • Wopfinger Baustoffindustrie
  • ver.di (German trade union)
  • Vetropack
  • Committee of PET Manufacturers in Europe (“Is CCS the correct or appropriate technology for Europe?”)
  • European Dairy Association + 2
    1. NER300.com’s comment

      Using EUAs to guarantee loans…? Why not. Change Partnership and Alstom propose a model set up and operated in a similar way to the EEEF. The selection process could be devolved entirely to the EIB or an agent and could be much lighter, for example, operated on a first-come-first-served basis. But an appetite exists also for free money. The future NER300 should continue to award a large part of its pot as cash.

      Like the respondents suggest, the rules governing the ranking of NER300 proposals make it difficult for the sponsor of a particular project to estimate his chance of success. Nonetheless, the rules do perform the difficult task of treating ‘apples and pears’ equally. If NER300 changed from a competition that pays up only upon reaching performance milestones (production of MWh or tonnes CO2 sequestered) to one where awards are paid regardless of ultimate performance, it would attract technology that is less mature. Reporting would still be mandatory and would become more onerous and similar to Horizon 2020‘s.

      In the case of a high carbon price, it would be wiser to fund more projects than to try to incentivise the building of projects using ever more speculative technology by, for example, offering ever higher awards per project. NER300 money handed out either in the conventional manner or as financial instruments is inappropriate for such technology.

      CCU, carbon capture and usage, should mostly be avoided. Many of the materials that could be made using CO2 have lifetimes that are too brief to be of any use for climate protection. Exceptions are materials that mineralise CO2, locking it into stable, long-lasting compounds. CCU is relevant to energy policy only by its application in methanation, a technique for storing energy also known as ‘power-to-gas’.

      EC’s official summary

      In view of the target of the public consultation, the EC should not be too surprised by the answers it has received. It concludes, “Many agree that the scope for future ETS-financed innovation funding should go beyond CCS to include support for low-carbon technologies in industry,” but this is to be expected if the question is being asked to sectors not currently in the programme (carbon leakage sectors). Similarly, in a survey targeting industry, it is to be expected that the part of the innovation chain area where it is seen as “most important” to “strength EU innovation support” should be “large-scale pilot [plants]”.

      “Some underlined that these funds could be used to ensure cheaper loans for industry,” writes the EC. Only two public responses mentioned this (see Freshest Thinking, above), but because it’s an interesting idea, it gets a mention.