EU Renewable Energy Financing Mechanism – A step closer towards an Energy Union?
16/02/2021

On 15 September 2020, the European Commission adopted an implementing regulation (the "Regulation") establishing the legal framework for the Union Renewable Energy Financing Mechanism (the "Financing Mechanism") provided in Article 33 of the Regulation 2018/1999 on the Governance of the Energy Union and Climate Action (the "Governance Regulation"). The Financing Mechanism aims to tender cross-border support for new renewable energy projects in the Union, allowing Member States to work together more easily in financing and deploying renewable energy projects, either as host or contributing countries.

The Financing Mechanism has both a gap-filling function, as it may help a Member State covering a gap in its indicative trajectory pursuant to Article 32 of the Governance Regulation, and an enabling function, as it should enhance renewable energy deployment across the Union, irrespective of a gap to the indicative Union trajectory.

This paper specifies the functions and functioning of the Financing Mechanism (1.), its potential benefits (2.) and the possible contribution to the achievement of the Energy Union (3.).

Although it is still too early to predict the extent to which this mechanism will be used, it can be argued that it constitutes a step closer towards an Energy Union. Indeed, the Financing Mechanism provides a tool to the European Commission to enforce non-binding targets for the deployment of renewables and allows for a certain Europeanisation of the support schemes, which remain until now largely national. Introduction

1. The legal framework

1.1 Functions of the Financing Mechanism

According to Ar cle 33 of Governance Regula on, the purpose of the Financing Mechanism is twofold.
On the one hand, in order to collec vely achieve the Un- ion binding target of 32% of renewable energy consump- on by 20305, Member States must contribute to this objec ve by increasing the share of renewables in their respec ve energy mix. In 2022, 2025 and 2027, the Mem- ber States will have to reach a reference point of at least respec vely 18%, 43% and 65% of the total increase in the share of renewable energy compared to the 2020 binding target of that Member State6, and its contribu- on to the 2030 target, as set out in their integrated na- onal energy and climate plans.7 The European Commis- sion can take correc ve ac ons when a Member State is not on track to achieve its target. One of these ac ons can consist in a voluntary payment to the Financing Mechanism – the so-called "gap-filling function".
On the other hand, the European Commission has to sup- port the ambi ons of Member States in the deployment of renewable energy sources through an enabling frame- work that aims to reduce costs and enhance regional co- opera on – the so-called "enabling function".

Different rules apply per func on, for example in rela on to the relevant award criteria (see 1.2).

1.2 Functioning of the Financing Mechanism

The Financing Mechanism enables the contribu ng Mem- ber States to pay nancial contribu ons into the scheme, which will be used for renewable energy projects in host Member States. A third (non-Union) country can also be a host country.8 In addi on, the Union itself and private en es can make a contribu on to a specific project.

In terms of functioning, the European Commission will call each year on the Member States to express their in-terest in participating as contributing and/or host Mem- ber State in grant award procedures. Interested Member States shall provide relevant informa on, such as preferred technology, environmental specifications or the maximum amount of capacity (step 1).9 For example, Spain, as a host country, might need to install 100-150 MW of new o shore wind capaci es and wishes to a ract foreign investments while retaining 30% of the sta s cal bene ts for its renewable energy objec ves. Germany, as a contribu ng country, might need to install either 1.000 MW PV or 500 MW wind onshore, or a mix of the two, depending on available capaci es in host countries.

Upon this information submitted by the host and contributing countries, the European Commission drafts a time- table and tender documents, states which preferences of the Member States it is going to take into account during the rst round, and pre-calculates the division of the sta- s cs for renewable energy (step 2).10 These dra calls are no ed to the Member States. The host countries may then con rm their interest through an irrevocable commitment (step 3). A erwards, the European Commis- sion communicates on the ceiling prices11 and the maxi- mum budget available for each call for proposal (step 4).12 Next, the contribu ng Member States commit to pay a contribu on to the Financing Mechanism in rela on to one or several calls and provide relevant informa on, including an indica on on which one of the two func ons (see 1.1) the payment is based (step 5).13 Following these commitments, the European Commission launches the call(s) for proposals to project developers (step 6). A er- wards, the proposals will be appraised by the European Commission (step 7) and the grants can be awarded (step 8).

In case where a Member State contributes to the Financing Mechanism by making a "voluntary"14 payment in light of the gap-filling function in their respective nati nal trajectories, this tender may only be allocated based on the lowest price as sole award criterion. A er receiving the bids, per host country, the European Commission ranks the di erent bids from compe ve to least com- pe ve into a list. If Germany for example commi ed to host maximum 500 MW of renewable projects, the most compe ve projects will be accepted up to a maximum cumulated amount of 500 MW, ranked based on the low-est bid.

On the other hand, where a Member State contributes in the context of the enabling func on, this contribu on may be allocated to joint projects, joint support schemes,small-scale or innova ve technology projects, or any other project that contributes to the enabling framework.15 The award criteria in this respect shall reflect the preferences of the Member States, for instance the environ- mental criteria.

The Regulation sets apart di erent principles for the award procedures to comply with, as to for example what kind of technologies could be used.16 In addi on, the Fi- nancing Mechanism awards subsidies for investment sup- port granted to increase the capacity for renewable ener- gy produc on or opera ng support to incen vise the opera on of renewable energy installa ons, by providing premiums in addi on to market revenues17 for example. The European Commission decides on the form of the support, taking into account the preferences of the host Member State.18

2. Potential benefits

The division of the allocation of grants will depend on who is inves ng, what is the func on of the investment, and the specific features thereof.
The renewable energy produced generates sta s cal bene ts for contribu ng Member States based on the expected life me of the installa on. All sta s cal bene- ts a er this period remain with the host Member State.19 By default, 80% of the renewable energy shall be allocated among the contribu ng Member State(s), 20% to the host Member State. The European Commission can decide otherwise and allocate 0% up to 50% of the bene- ts to the host Member State, based on the poten al costs or the likelihood that the call will a ract any sup- port. This division will be communicated by the European Commission together with its inten on to launch a call for proposal. Contribu ons by the Union or private inves- tors are taken into account for the Union's binding overall target. Whenever a third country is hos ng a project, 100% of the sta s cal transfers will be allocated to the contributing country.20

Beside the allocation of statistical benefits, this Financing Mechanism brings about bene ts for any par cipant thereof. For contributing countries, some of the bene ts are lower direct and indirect costs than deployment of an installa on21 on its own territory and lower transac on costs.22 These countries will also have access to poten al- ly cheaper renewable energy sources or to renewable energy sources that would otherwise be unavailable, al- beit in a sta s cal, or "virtual" so to say, manner since they could receive sta s cal bene ts only. The host Member States would have to depend less on import and could modernise their na onal energy system, in addi on to the improved air quality, environmental security and greenhouse gas emission reductions.

Project developers can bene t from the Financing Mech- anism that will iden fy suitable renewable energy instal- la on projects to be developed and receive support based on an EU-wide tender system. Several ques ons could arise, however, for these project developers, such as for example the auc on design in a cross-border auc- on implemented by the European Commission. Usually, tender volumes in terms of capacity (in MW) are the most commonly used form. The most common tender formats for renewable energy projects are sta c, where all bidders simultaneously submit their bids and prices are unknown to the other. Generally, the same prac ces apply for renewable energy projects. In addi on, private stakeholders, such as the project developers, may be consulted to state their opinion on the proposed tender design.23 It is important to stress that, although the rules of the na onal regulatory framework, as well as the na- onal market condi ons will remain largely unchanged in the context of tenders under this mechanism, these rules relate to the country where the installa on is built. One could think of corporate taxa on, condi ons for grid con- nection, environmental requirements and so on. For this reason, bidders from di erent countries inevitably face di ering circumstances, even though they are compe ng on the basis of a common support scheme design. There- fore, prepara on is key.

Furthermore, private investors are encouraged to invest in the Financing Mechanism in order to broaden their sustainable energy por olio and bene t from the Union- wide green labelling via guarantees of origin. The en ty is free to indicate a preference for tender procedure or a type of technology for which its support is intended. The European Commission has published a survey for private investors on this ma er, which seeks to collect replies to several ques ons, such as the objec ve that a contrib- u ng en ty seeks to obtain, the amount of energy sup- ported, the maximum nancial contribu on, the techno- logical focus of the auc on and whether or not the en ty would request the guaran es of origin.24 By means of this survey, the European Commission is preparing for the rst call for proposal. Nonetheless, for these private in- vestors, issues such as permi ng, but also an array of other prac cali es, could determine the feasibility of their investments.

3. A step closer towards an Energy Union

3.1 An alternative to a harmonised European support framework

The European Commission had been advoca ng for mar- ket-based support and cross-border coopera on with the ul mate ambi on of crea ng a harmonised quota sys- tem. Already in the late 1990s, the European Commission intended to harmonise the support of renewable electric- ity based on tradable green cer cates (TGC) system25, which was blocked by the European Parliament and sev- eral Member States. When dra ing the Third Energy Package, the European Commission endeavoured again to introduce an EU-wide tradable cer cate scheme,based on guarantees of origin (GO). 26
Virtual cross-border trade was necessary to give Member States su cient exibility to meet their targets and al- lowed for imports of renewable energy from third coun- tries, such as Norway. However, in the legisla ve process of the Renewable Energy Direc ve of 2009, the provisions for a tradable GO were removed, since it was opposed by the European Parliament. Therefore, the European Com- mission never succeeded at establishing a harmonised European support framework.
The Financing Mechanism is not a harmonised European support framework, although it o ers to all Member States the possibility to meet its renewable energy tar- gets, not (necessarily) by closing bilateral agreements, but by crea ng the opportunity to invest in renewable energy (of its choice) spread over the whole Union. This allows governments to compensate for the lack of do- mes c deployment by inves ng and s ll comply with the na onal indica ve renewable energy trajectory, without e ec vely implemen ng a harmonised European support framework.

In additon, with the adop on of this system, the Union e ec vely opens up borders for the achievement of the renewable energy target, by con rming and stressing that mee ng the target is not about mee ng the refer- ence points in their respec ve trajectories on the own territory of the Member State, but about nancing its relevant share in energy, wherever the project may be located in the Union.

3.2 An alternative to the Cooperation Mechanisms

In the context of the Green Deal, this Financing Mecha- nism adds a third possibility for Member States to meet the 2030 target for renewable energy. Currently, Mem- ber States primarily pursue this target through na onal support schemes, such as for example feed-in tari s/feed -in premiums and green cer cates mechanisms. The renewables deployment targets may also be pursued through coopera on mechanisms introduced by the Re- newable Energy Direc ve 2009 ("Coopera on Mechanisms"), such as statistical transfer agreements27, joint projects between Member States (and third countries)28 or joint support schemes.29

In a statistical transfer agreement, an amount of renewa- ble energy is deducted from one country's progress to- wards its target and added to another. For example, in October 2020, Belgium decided to conclude such sta s - cal transfer agreement with Denmark, for an amount of 22,5 million EUR, to achieve its renewable energy target for 2020. These sta s cal transfer agreements are considered as a cost-e cient instrument to ful l the renewable energy targets.30 Joint support schemes relate to two or more EU countries that co-fund a joint support scheme for renewable energy produc on. It can involve measures such as common feed-in tari , feed-in premium and cer- cate trading regimes.31 The joint projects (possibly with third countries) relate to the co-funding of a renewable energy project and share the renewable energy for the purpose of mee ng the targets. These projects are suita- ble to jointly develop technologies, save costs of renewa- ble energy target ful lment and prepare long-term elec- tricity imports/exports.32

One of the di erences between these Cooperation Mechanisms and the Financing Mechanism relates to the fact that no bilateral or multilateral agreements are required for the Financing Mechanism. Joint support schemes re- quire a deep coopera on between Member States who share similar technology preferences (such as for exam- ple the Joint Support Scheme for offshore wind energy between Belgium, Denmark, France, Germany, Ireland, Luxembourg, the Netherlands, Norway, Sweden and the United Kingdom), and/or have well integrated markets (i.e. Joint Quota System for Sweden, Norway, Denmark and Finland). The joint projects are raising interest, but are however considered as rather complex.33 Other downsides of these Coopera on Mechanisms relate to a certain level of e ciency that is required in order to bring about a successful Coopera on Mechanism, effciency can be gained when one of the Member States already has experience in the design, monitoring and implemen- ta on of a similar support scheme.34

The Financing Mechanism therefore differentiates from Cooperation Mechanisms by being centrally operated by the European Commission itself, although it can also facilitate joint support schemes and joint projects pursuant to its enabling func on to achieve the overall Union target. The European Commission has to take the ini a ve under the Financing Mechanism to introduce a project, where the contributifng State can decide how much it seeks to invest in what kind of renewable energy. Not only Mem- ber States benefit from this Financing Mechanism, but also third countries, private investors, and energy project contractors. In addi on, this Financing Mechanism also bene ts to the Coopera on Mechanisms as the Financing Mechanism can be allocated, within its enabling function, towards a joint product or a joint support scheme.

3.3 Implementation of the Financing Mechanism

As indicated, the European Commission can prompt a Member State to make a voluntary payment into the Financing Mechanism as a corrective action when the Member State is not on track with its indica ve trajecto- ry. Such payment is said to be voluntary, and the refer- ence points of the indica ve trajectory are considered as indica ve. In this respect, it seems that the era in which this Financing Mechanism has been adopted is di erent from the era in which the 2020 targets had to be met. These 2020 targets for renewable energy were binding targets for each Member State separately, where the failure to meet the targets could lead to nes, while to- day the objec ve is imposed on the Union.

One could ask whether it would not have been (more) opportune for this Financing Mechanism to had already been in place in order to achieve the 2020 targets. The Financing Mechanism would have made a good alterna- ve to a sta s cal transfer agreement, for example. In addi on, this may turn out as a rather bene cial scheme for countries such as Poland, Spain or Greece as host Member States, which have poten al but lack funds to invest in renewable energy. It is not said that, for exam- ple, Belgium would have been willing to invest sooner in projects in other Member States, considering that could be prone to (poli cal) cri cism since it is not bene ng its own na onal employment or industry. On the other hand, it has been proven that it is di cult for some Mem- ber States to comply with their respec ve targets for2020.35 Although the Member States do not individually have to meet binding targets for 2030, Member States still have to comply with specific reference points. In addition, one could argue that this Financing Mechanism was adopted precisely because na onal targets are not binding anymore.

In conclusion, even if the Financing Mechanism cannot have the same e ect as a genuinely harmonised system, it does create the opportunity to invest in renewable en- ergy over the whole Union. It can be emphasised that, because of its double goal, this system opens the Mem- ber States' borders for the achievement of the renewable energy target, and the non-complex system brings about bene ts for a lot of di erent par es, not only for the Member States, but also for private investors and devel- opers. This Financing Mechanism also seeks to achieve an economic op mum, where Member States are able to decide what is the most cost-e ec ve way to decarbon- ise their electricity consump on, by sponsoring renewables at home or abroad, since it both leads to the same quantity of GHG reduc ons at EU level. In this respect, the Financing Mechanism could be considered as one step closer towards an Energy Union. Nonetheless, con- sidering its poli cal angle, it remains to be seen whether the Financing Mechanism will be e ec vely used and whether its promising e ects on the Energy Union will be implemented in practice, including in the practicalities of its tender procedure.

 

David Haverbeke Partner,  david.haverbeke@fiedfisher.com

Samuel Verschraegen Associate, samuel.verschraegen@fiedfisher.com

Laura Pellens Associatelaura.pellens@fiedfisher.com

Elise Van Gerven Associate, elise.vangerven@fiedfisher.com

 

1 Implementing Regulation (EU) 2020/1294 of the Commission of 15 September 2020 on the Union renewable energy financing mechanism, Publ. L 303/1.
2 Regulation (EU) 2018/1999 of 11 December 2018 on the Governance of the Energy Union and Climate Action, amending Regulations (EC) No 663/2009 and (EC) No 715/2009 of the European Parliament and of the Council, Directives 94/22/EC, 98/70/EC, 2009/31/EC, 2009/73/EC, 2010/31/ EU, 2012/27/EU and 2013/30/EU of the European Parliament and of the Council, Council Directives 2009/119/EC and (EU) 2015/652 and repealing Regulation (EU) No 525/2013 of the European Parliament and of the Council, Publ. L 328/1.
3 The provisions and parameters used by the European Commission to determine the respective national indicative trajectories are included in article 5 of the Governance Regulation and in Annex II thereof.
4 For the relationship between the EU target and the national trajectories, see also article 3 of Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources, Publ. L 328/82. 
5 Article 3 Direc ve (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promo on of the use of energy from renewable sources, Publ. L 328/82.
6 See Annex I of the Governance Regula on for the 2020 targets. These binding na onal 2020 targets remain the respec ve baseline shares for each Member State. In other words, the share of renewable energy in their mix cannot go below this threshold. See Ar cle 3, paragraph 4 of Direc ve (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promo on of the use of energy from renewable sources, Publ. L 328/82.
7 Article 4(a)(2) of the Governance Regulation.
8 See 3.1.
9 Article 7 of the Regulation.
10 For example, 30% of the sta s cs for the host country and 70% for the contribu ng country.
11 The maximum price per kWh or kW that can be awarded within a speci c call and above which applica ons are excluded from the grant award procedure.
12 Article 9 of the Regulation.
13 Article 10 of the Regulation.
14 The Regulation states "voluntary" in ar cle 3(8), but in essence it is a payment in reac on to the recommenda ons of the European Commission, as referred to in ar cle 5 and 32 Governance Regula on. Therefore, it is to be seen whether this payment is genuinely "voluntary", depending on how strict the European Commission will enforce the indica ve trajectories.
15 Ar cle 15 of the Regulation.
16 Ar cle 16 of the Regulation.
17 Market premiums. See also Ar cle 4, paragraph 3 of Direc ve (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promo on of the use of energy from renewable sources, Publ. L 328/82.
18 Ar cle 17 of the Regulation.
19 Ar cle 27.3 of the Regula on.
20 Ar cle 27 of the Regula on.
21 Compared to only a clearly-de ned cost contributed to the Financing Mechanism.
22 The Member States can contribute to the Financing Mechanism and do not need to, for example, establish poli cal contacts for the deployment of installa ons in another Member State.
23 AURES II, The new renewable energy nancing mechanism of the EU in prac ce, h p://aures2project.eu/wp-content/uploads/2020/11/ AURES_II_D6_3_EU.pdf
24 Press release European Commission, EU renewable energy nancing mechanism: opening the way for private investment, 11 January 2021, h ps://ec.europa.eu/info/news/eu-renewable-energy- nancing-mechanism-opening-way-private-investment-2021-jan-11_en. The survey runs un l 15 February 2021.
25 David Jacobs, ‘Designing Financing Mechanisms for Electricity from Renewable Energy Sources: The Role of the European Commission as an Agen- da Shaper’, in Jale Tosun, Sophie Biesenbender, Kai Schulze (eds.), Energy Policy Making in the EU. Building the Agenda, London, Springer, 2015, p 117.
26 COM(2008) 30 nal, Proposal for a Direc ve of the European Parliament and of the Council on the promo on of the use of energy from renewa- ble sources.
27 Ar cle 8 of the Renewable Energy Direc ve
28Ibid., ar cles 9 and 11.
29 Ibid., ar cle 13.
30 Flemish Parliament, Commission of Energy, Request for explana on on the Flemish renewable targets 2020 of 14 October 2020. 31 ECOFYS, Coopera on between EU Member States under the RES Direc ve, 29 January 2014, p 4.
32 ECOFYS, Coopera on between EU Member States under the RES Direc ve, 29 January 2014, p 6.
33 ECOFYS, Coopera on between EU Member States under the RES Direc ve, 29 January 2014, p 6.
34 European Environment Agency (European Topic Centre on Climate change mi ga on and energy), "Cross-border regional coopera on for deploy- ment of renewable energy sources", h p://www.eionet.europa.eu/etcs/etc-cme, p. 19.
35 The state of play is indicated in the latest Renewably Energy Progress Report of the European Commission, (COM/2020/952), 14 October 2020, p. 6: "There are now twelve Member States (Bulgaria, the Czech Republic, Denmark, Estonia, (Greece es mated), Finland, Croa a, Italy, Cyprus, Latvia, Lithuania and Sweden) that have already achieved a share equal to, or higher than, their 2020 target. At the same me, during 2018, six Member States Spain, Italy, Lithuania, Hungary, Portugal and Romania have reduced their renewable energy share compared to 2017."

Zie ook : Fieldfisher (Belgium) LLP

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