Our Policy Update shares key news from the past month in Brussels, as well as its potential impact on EU cleantech. This month, we dive into:
— Cleantech as the EU’s strategic priority
— MEPs adopt position on permitting for renewables
— EU energy ministers agree on a gas price cap, joint purchasing and permitting
— The EU becomes the first jurisdiction globally to certify carbon removals
— EU Taxonomy remaining technical screening criteria: delayed or derailed?
— Reform of the EU Carbon Market (EU ETS)
On 4 December, European Commission PresidentUrsula von der Leyen gave a speech which heralded cleantech as a strategicpriority for the EU, while outlining three measures for the EU to “keep up inthe clean tech race” and “mitigate competitive disadvantages” where “the IRA orother measures create distortions”, which in turn risk a “leak away fromEurope” of “investments in strategic sectors”. The three measures outlined werefor the EU to:
1. Simplify and adapt European state aid rules to facilitate public investments by making “frameworks more predictable & simple”.
2. Come up with “new and additional funding at the EU level”.
3. Level the playing field by ironing out bubbling trade tensions with the US, aligning cleantech policies with EU allies, and establishing a Critical Raw Materials Act (President von der Leyen also mooted a CRM Club with the US to counter China’s supply chain monopoly).
On 30 November, Internal Market Commissioner Thierry Breton launched the Clean Tech Europe Platform, an initiative to “provide support for EU manufacturing” of strategic clean technologies such as wind, solar, electrolysers, heat pumps and the electrical grid.
Both leaders have been floating the creation of a “European Sovereignty Fund”, first mentioned by President von der Leyen during SOTEU22, which in Commissioner Breton’s words, should provide “adequate financial firepower”. Commissioner Breton has suggested it should be financed by joint EU borrowing.
Impact on cleantech:
High-level recognition that the cleantech race is a strategic priority forthe EU should spur momentum across the EU policymaking landscape to implement thisstrategic vision that is equally endorsed by EU countries, notably leaders in France and Germany. These arepositive signals that EU policymakers aim to increase funding for cleantech andsimplify and accelerate processes for providing financial support to cleantech,while coordinating support measures across EU countries to avoid fragmentation.
A well-capitalized European Sovereignty Fund providing additional funds in the form of grants, loans, public procurement and project finance for critical clean technologies such as renewable hydrogen, green steel, green cement, battery recycling, chemical recycling and electrification of transport over a 10-year timeframe, would be an essential step towards competing seriously in the global cleantech race.
However, it is vital that the concept of cleantech is not expanded and diluted to promote investment in technologies which are not actually cleantech. This requires a continued presence of cleantech leaders in the public debate, so as not to risk the term becoming a buzzword.
On 14 December, the European Parliament adopted its position on a proposal meant to speed up permitting for renewables, whereby MEPs reduced the maximum permitting period from 12 to 9 months provided deployment is to take place in ‘renewables acceleration areas’. Outside of such areas, the process should not exceed 18 months. Permitting times to install heat pumps and rooftop solar panels are to not exceed one month.
On 12 December European Commission President Ursula von der Leyen, together with Fatih Birol, the Head of the IEA, held a press conference for the release on the same day of an IEA report on how the EU can avoid gas shortages in 2023, which will likely be more difficult than it proved to be in 2022, given lower Russian gas imports, tighter LNG markets, and less beneficial weather than 2022’s unusual mildness. The report recommends practical measures which can be done in one year, including faster rollout of energy efficiency, renewables, and heat pumps.
Impact on cleantech:
As the IEA’s report highlights, cleantech is key to avoiding gas shortages in the short term. If an ambitious legislative text comes out of the upcoming interinstitutional negotiations, permitting reform promises to catalyze investments into innovative renewables and other cleantech by creating an enabling environment driven by both accelerated heat pump penetration and clean energy capacity additions. Additionally, this reform could serve as a template to fast track the permitting of innovative renewables more broadly.
European Parliament’s permitting decision: press release
On 19 December the EU’s energy ministers agreed to set a gas price cap, dubbed ‘Market Correction Mechanism’, which will be triggered when the month-ahead price exceeds €180 per megawatt-hour for three days (lower than the original proposal of €275 per MWh, but still much higher than current prices which themselves are historically unprecedented). Ministers also agreed on joint purchasing of natural gas, and on targeted amendments to the Renewable Energy Directive, proposed under REPowerEU, aimed at accelerating and simplifying permitting for renewables by establishing ‘go-to areas'. Finally, ministers regrettably settled for a less ambitious overall2030 target of 40% (instead of 45%) for the share of renewables in the EU’s energy mix.
Impact on cleantech:
Ultimately, the gas cap and joint purchasing will have only limited efficacy as they focus on the symptom of high gas prices as opposed to the cause (i.e., the fundamental problem of balancing supply and demand). To truly reduce gas demand and increase supply of clean alternatives, cleantech must be deployed at speed and scale, as recommended in the IEA’s aforementioned report on avoiding gas shortages in 2023. In this respect, ministers’ agreement on accelerating permitting is encouraging news that will boost cleantech development and deployment by accelerating renewables’ grid penetration in the short term. Moreover, it could serve as a test case for – ideally in the short term – expanding the scope of clean technologies benefiting from accelerated permitting.
On 30 November, the European Commission adopted a proposal for the first EU-wide voluntary framework to certify high-quality carbon removals. The proposal sets out:
As for next steps, the legislative proposal will now be discussed by the European Parliament and the Council.
Impact on cleantech:
By setting clear standards on what constitutes high-quality carbon removal, the proposal will help with the uptake of innovations in the space such as bio-energy with carbon capture and storage or direct air capture, and carbon farming. The certification will also resolve uncertainty caused by self-certification mechanisms, boost market confidence and address market concerns about safety and environmental impacts.
On 28 November, the Platform on Sustainable Finance (an advisory body to the European Commission on the Taxonomy Regulation) published a non-legally binding report with advice on a methodology and technical screening criteria for the climate and environmental objectives of the EU Taxonomy.
The report includes two parts. The first one provides a framework methodology to describe enabling activities, recommendations to the Commission on its further work on the Taxonomy, and an annex with dissenting views on technical screening criteria for logging and forestry. The second provides technical screening criteria for a number of activities including: demolition of buildings; marketplace for the trade of second-hand goods for reuse; provision of IT/OT data-driven solutions that provide a substantial contribution to the use and protection of water and marine resources; and finally, manufacture, installation, and servicing of high, medium and low voltage electrical equipment for electrical transmission and distribution that result in or enable a substantial contribution to climate change mitigation.
As for next steps, the Commission will have to:
Impact on cleantech:
Delaying the publication of the Delegated Act with the rest of the technical screening criteria hampers investors’, companies’, issuers’ and project promoters’ ability to fund cleantech innovation.
Between 16th-18th of December, a climate super negotiation occurred which expanded the scope of both carbon pricing to cover nearly all sectors of the EU economy but also the scope of the Innovation Fund. The overall emissions reductions trajectory for 2030 is of-62% against 2005 emissions, a much needed and significant increase from today. The tougher reductions will already start being applied in 2024 and will intensify between 2027-2030.
As part of this process, the voice of the cleantech community was heard and most of the positions explored in our report from early 2022 went through:
Revise benchmarks for measuring industrial decarbonisation. However, some unhelpful provisions were also agreed upon, such as the financing of REPowerEU via the Innovation Fund. This would have the immediate result of diverting away some of the precious and scarce resources available to spend on Innovation in the EU, in the period leading up to 2026. Furthermore, as REPowerEU has some fossil fuel infrastructure foreseen, extra scrutiny will be required on whether this deal actually implies that innovation money intended for the transition to a net-zero economy and cleantech will be redirected towards building stranded assets, such as gas related infrastructure.
Below you can find the most relevant provisions agreed, grouped by category, followed by an analysis of their impact on cleantech development in the EU.
Following strong requests from the cleantech community, the Innovation Fund was expanded in both size and scope from today, as follows:
a. Size increased from 450M (currently) to 575M allowances. While the price may vary, at today’s price, the size of the Fund is estimated to be 42.6 billion euros by 2030;
b. Following the increase in size, The Innovation Fund is repackaged to include a larger scope for financing upscaling of innovations and new technologies;
c. 30% of the new allowances will be devoted to Carbon Contracts for Difference (CCfDs);
d. Sector Specific calls be held, which gives cleantech innovators with solutions that outright design out the CO2 from their production processes to be more competitive than the incumbents pursuing only incremental improvements and therefore this would help breakthrough innovations to receive funding to scale up in the EU.
The extension of the EU ETS for buildings and road transport will be starting, for both private and commercial, in 2027;
To limit the impacts of this extension, the carbon price will be capped at €45/tCO2.
A Social Climate Fund will limit the impact on citizens by being frontloaded from 2026, 1 year before the entry into force of the second carbon market.
Impact on cleantech:
Most beneficial is the introduction of CBAM, as it creates demand for low-carbon industrial products and is therefore beneficial for cleantech industry development in the EU. Innovators looking to scale their activities will have an incentive to stay in the EU. Furthermore, the introduction of CBAM is going to signal the increasing cost of emitting carbon at a global level. A clear signal for the industry to invest in decarbonized processes now. This rhythm will not change, meaning that if CBAM does not work, free allowances will still be phased-out and EU countries will receive support.
The changed focus in the benchmark procedure means that different modes of production that have the same starting product are now measured according to the same standard. This will give a better standing to innovators in industries, such as steel, cement, hydrogen, etc.
Equally so, by introducing a conditionality mechanism for free allocation, this will encourage heavy industry to ensure they are not amongst the last 20% which has the potential to kick-start a race to introduce energy efficiency measures and invest in decarbonisation at least the equivalent of the free allocation which would be lost otherwise through this penalty.
While the size of the Innovation Fund is being expanded, it was agreed that 50% of the funding for REPowerEU would come out of the Innovation Fund. Additionally, while the fund – ostensibly – is to be replenished in the future, complex accounting maneuvers and long-winded processes mean that the defense of the Innovation Fund is a fight that will have to be fought again, going forward.