In order to achieve the target of reducing emissions by 55% by 2030, the European Commission has proposed that the share of renewable energy in the power mix increases to 40% from 32%. Together with the EU’s 2050 targets for the production of green hydrogen, an electricity-intensive process, this will require new sources of renewable energy. This briefing titled “The EU Renewable Energy Financing Mechanism – Will it Incentivise Investment?” by Clifford Chance looks at the EU Renewable Energy Financing mechanism, which is designed to incentivise and support the development of renewable energy projects, reinforcing cooperation among EU Member States. REGlobal presents an extract from this briefing.

Key issues

  • The EU will introduce a novel renewable energy financing mechanism under which Member States will make voluntary financial contributions to support new RES projects in EU countries interested in hosting such projects.
  • The Commission will organize competitive tenders for investment or operating aid if there is sufficient interest on the part of the contributing and host Member States.
  • Member States struggling to reach their RES targets but that are able to finance projects in Member States with high RES potential can cover this gap and receive RES statistics increasing their national RES share.
  • Member States decide whether they want to participate and under what conditions: contributor countries define volumes and maximum financial contributions, while host countries determine technologies, overall volumes and project sizes.
  • The first tender is expected to take place by the end of Q1 2022.

To support renewable energy projects and incentivise the uptake of renewable energy sources (RES) across Europe, the EU has established a novel RES financing mechanism (REFM), under which Member States will make voluntary financial contributions to support new renewable energy projects in EU countries interested in hosting such projects, through competitive tenders for investment or operating aid. Member States participating in the scheme will be able to include part of the statistics from the projects they are financing in their own national renewable energy targets. Host countries will retain the remaining statistics to help meet their targets.

The idea is that a Member State that struggles to reach its RES target, such as Luxembourg or the Netherlands (due to limited space and a high concentration of energy- and emission-intensive industries respectively), but at the same time is able to finance projects in Member States with high RES potential can cover this gap and receive RES statistics increasing its national RES share towards its target.

Res Financing Mechanism – Key Elements

Regulation 2018/1999 on the Governance of the Energy Union and Climate Action (Governance Regulation) provides that where the Commission finds that Member States fall below or struggle to meet their RES targets it will ensure that additional measures are implemented in order to cover the gap. Article 33 of the Governance Regulation sets out the framework for one of those measures: the REFM. The recently adopted Regulation 2020/1294 on the Union renewable energy financing mechanism (REFM Regulation) sets out the detailed rules for how the REFM will operate. This supports the European Green Deal objectives, the 55% target for cutting CO2 emissions by 2030 and the new proposed renewable energy target of 40% by 2030.

Currently, the REFM is in the implementation phase, and the Commission has a leading role. At the end of last year the Commission conducted an informal, non-public expression of interest (EOI), whereby Member States expressed their interest in participating in the mechanism to host projects (hosting Member States) or providing finance (contributing Member States) or both. Depending on Member States’ willingness to finance and host RES projects, the Commission will organise competitive tenders with specified ceiling prices.

In January 2021, the Commission carried out a survey of private entities comprising a seven-point questionnaire to gather feedback on potential participants to the mechanism, in preparation for the first call for proposals.

Calls for Expression of Interest

Under Article 7 of the REFM Regulation, the Commission will call on Member States annually to express their interest in participating as contributing Member States and/or hosting Member States in grant award procedures. The Commission will share an indicative timeframe covering the procedural steps from the expression of interest to the calls for proposal, as well as an indication of when the Commission intends to organise the next call for EOI.

At that stage, Member States interested in hosting the RES projects must provide the Commission with certain minimum information such as the preferred technologies, the minimum share of statistical benefits they are seeking and the maximum capacity of renewable energy available for projects on their territory.

In parallel, Member States interested in contributing financially to the development of RES projects must provide the Commission with some preliminary information including the maximum intended financial contribution, the maximum budget per kWh/kW that they are willing to disburse for their statistical benefit and the preferred technologies.

The Climate, Infrastructure and Environment Executive Agency (CINEA) will be in charge of carrying out the call for proposals and the tender process on behalf of the Commission. CINEA will have to take into consideration several factors such as the form of grants (i.e., investment or operating aid, the ceiling price and the eligible technologies).

With respect to the eligible technologies, based on publicly available information, it appears that priority may be given to solar and wind power. However, the definition of energy from renewable sources derives from the Renewable Energy Directive 2018/2001 (RED II) and includes all renewable non-fossil sources, namely wind, solar (solar thermal and solar photovoltaic) and geothermal energy, ambient energy, tide, wave and other ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas, and biogas.

One of the most complex and controversial parts of the process will be the calculation of the ceiling price by the Commission. The Commission has stated that it will take into account the information provided by Member States, relevant comparators such as results of past calls, cost studies, as well as results from modelling exercises where appropriate.

The ceiling price should ensure that the actual support payments from the tender are equal to or lower than the maximum price, providing, therefore, a conservative estimate for the actual support costs that contributing Member States will ultimately have to cover. Only in the worst case scenario where, for example, there is minimal competition, could the award price in the tender equal the ceiling price.

Call for proposals and grant of awards

Based on the binding commitments of the contributing Member States and hosting Member States the Commission will launch a call (with several grant award procedures) or several concurrent calls for proposals. However, if the interest expressed by Member States is limited or the related transaction costs would be excessive, the Commission may decide to not launch a call for proposals.

The draft calls for proposals will include inter alia the ceiling price, the technology, the volume to be tendered and the type of aid (e.g., investment or operating aid). At that stage, Member States which have expressed an interest are consulted on the draft call for proposals, while private stakeholders, such as project promoters, may also be invited to provide feedback on the proposed tender design.

Under the Governance Regulation, funding can come from payments by Member States, Union funds or private sector contributions.

Distribution of RES statistics

Under Article 27 of the REFM Regulation, 80% of renewable energy generated by installations supported by the mechanism will be statistically allocated and distributed to contributing Member States and 20% to hosting Member States. The REFM pools all RES statistics transferred to it and redistributes them to the contributing countries in accordance with financial contribution to the mechanism.

The calculation of the share of energy from renewable sources and the statistical transfers between Member States is already provided for and described in Articles 7 and 8 of the RED II respectively.

Next Steps

Based on the binding commitments by hosting Member States and the binding commitments by contributing Member States, the Commission will launch the call or calls for proposals. The first call for proposal was expected to take place in the course of the first half of 2021; however, it appears that Member States are still reviewing the contributions and projects that they would be willing to fund and host respectively. Therefore, the first call for proposals is now expected to take place towards the end of 2021 or early 2022.

The complete briefing can be accessed here