BRUSSELS INSIDER #1 - July 3, 2018
New “climate proof” EU budget supports spending on gas and is unclear about smart grids
by Sonja van Renssen
Energy and climate projects are centre stage in the European Commission’s recommendations for an EU budget for 2021-27. Notably the Connecting Europe Facility (CEF) foresees a doubling of funds for energy infrastructure projects. But where is the commitment to phase out fossil fuel subsidies? Why does gas still seem to get support? Will there finally be more smart grids projects? And could new incentives for “synergy” projects accelerate e-mobility? Energy Post examines the Commission’s budget plans for energy and climate action.
The European Commission has spent the last two months painstakingly putting out proposal after proposal for the next EU budget, which will run from 2021-27. In Brussels, it’s called the EU’s multiannual financial framework or MFF, and it’s a big deal. In terms of total spend, it’s only about 1% of the combined Gross National Income (GNI) of the EU’s Member States, but politically, it says everything about what the EU’s priorities are.
This will be the EU’s first post-Brexit, post-Paris Climate Agreement budget. Headline proposals came out on 2 May. We reported on them here and you can read a short recap of the basics in the box at the end of this article. Since then, the Commission has followed up with proposals for the 37 programmes that will actually implement the MFF. If that sounds like a lot, it’s down from 58 today. “The complete package is now on the table,” the Commission said in a note ahead of a summit of European heads of state and government in Brussels last week.
In that same note, the Commission reiterated that it wants Council and Parliament to agree the new budget “before the European Parliament elections [in May] next year”. That is a very ambitious timeline. Not least because the same note recalls that the last three budgets (since 2000) took 20, 22 and 20 months of negotiation respectively. The Commission seems to be counting on Brexit and the urgency of framing a future for the EU-27 to move things along.
Certainly at their summit last week however, there was little time for the MFF after migration and security. European leaders merely committed to reach a deal “as soon as possible”. In response, NGO Climate Action Network (CAN) Europe urged Member States to “worry less about the timeline” and more about how to make the budget “fit for the Paris [Climate] Agreement”. It wants 40% of all future funds to benefit climate action – as suggested too by French President Emmanuel Macron.
Fossil fuel exclusion
In its headline proposals in May, the Commission proposed to spend a quarter of its next budget on climate action. That’s up from a fifth today, or just over €100 billion extra. As we reported at the time however, it’s how that money is accounted and spent that really matters.
So did we get a meaningful climate mainstreaming strategy? Did we get clarity on how the non-earmarked three-quarters will be spent? It probably depends on who you ask. “We’ve not got nearly as much clarity as we would have liked,” says Jonathan Gaventa, Director at climate think tank E3G.
There is only one place where the Commission clearly proposes to exclude investments in fossil fuels, for example. That’s in the proposals for the European Regional Development Fund (ERDF) and Cohesion Fund i.e. regional development money. These funds “shall not support investment related to production, processing, distribution, storage or combustion of fossil fuels” (with the exception of investment related to “clean vehicles” – more on that later). The same article bans ERDF and cohesion funds from going towards nuclear decommissioning.
The exclusion of fossil fuels makes sense from the perspective of the EU’s G7 commitment to phase out subsidies to them by 2025. But nowhere else in the budget proposals is this commitment to be found. Instead, in its proposals for the EU’s main infrastructure fund, the Connecting Europe Facility (CEF), the Commission talks about “climate proofing” investments in line with guidance yet to be developed by the Commission. In its proposals for a future R&D programme for Europe, “Horizon Europe”, there is little attention to climate-proofing at all.
“Different budget instruments use the term in different ways and some miss it entirely,” sums up Gaventa. Stakeholders are equally wary of the Commission’s proposals to account for what is climate-related expenditure (versus how to climate-proof what is not). In addition to the Commission’s headline goal for 25% climate spend, the individual programme proposals each have their own goal for this.
Electricity vs. (green) gas
Leader of the pack is the CEF, which is expected to contribute 60% of its funds to climate action. The Commission is explicit about what counts: 100% of spend on “railway infrastructure, alternative fuels, clean urban transport, electricity transmission, electricity storage, smart grids, CO2 transportation and renewables energy” and 40% of spend on “inland waterways and multimodal transport, and gas infrastructure – if enabling increased use of renewable hydrogen or biomethane”.
You can imagine the displeasure of some NGOs at seeing gas in that list. “There appear to be no rules to ensure subsidised pipelines do not carry fossil gas,” responded Antoine Simon, a campaigner at Friends of the Earth (Foe) Europe. “The EU is being pushed by the gas industry to rebrand gas pipelines as ‘green’ thanks to highly expensive and unproven ‘green’ gas technologies.”
To put these comments in context, FoE Europe has previously highlighted that although the CEF is supposed to spend more on electricity than gas projects, until earlier this year it had spent twice as much on gas as electricity (€1 billion vs. €530 million). Now, with about half its budget disbursed, it’s at €1.3 billion vs. €1.2 billion. NGOs like FoE Europe argue that the EU has no business investing in gas when it is committed to tackling climate change and phasing out fossil fuel subsidies. The European gas industry has jumped on “green” gas however, as avenue to a long-term future.
That said, the Commission has been increasing its emphasis on electricity projects, in the belief that electrification can drive the decarbonisation of other secors such as transport, industry and heating and cooling. In its new proposals for the CEF, it explicitly says it will “aim at increasing the number of cross-border smart grid, innovative storage as well as carbon dioxide transportation projects”. The latter sounds like a bid to keep carbon capture and storage (CCS) hopes alive.
Smart grids and synergies
The problem is that although the CEF is getting more money (for energy, €8.7 billion, up from €4.7 billion today), its priorities and strategy are “unchanged”, says Gaventa. In practice, the funds will still flow to Projects of Common Interest (PCIs) as defined under the EU’s 2014 Trans-European Energy Networks (TEN-E) regulation. In practice, that means big, cross-border transmission-level projects.
Without opening up the TEN-E regulation or otherwise changing the eligibility criteria for CEF projects, Gaventa is not very hopeful that the EU will get far beyond the two smart grids projects it could claim to have funded to the tune of €72 million (vs. €2.5 billion for big electricity and gas projects) earlier this year.
Within the CEF, smart grids do have a potential opening in new incentives for “synergy” projects that cut across the transport (€30.6 billion), energy (€8.7 billion) and digital (€3 billion) portfolios. NGO Transport & Environment (T&E) said in a press release that this “could accelerate investment in smart charging, smart grids, and energy storage”. “This plan can help build the infrastructure needed to make the e-mobility revolution happen in Europe,” believes T&E freight policy officer Samuel Kenny.
T&E too however, raised a warning flag over the eligibility of gas projects for EU funds. The Commission says examples of potential synergies “include connected and autonomous mobility, clean mobility based on alternative fuels, energy storage and smart grids”. Natural gas (LNG and CNG) is defined as an alternative fuel under the EU’s alternative fuel infrastructure directive. “It’s worrying that some within the European Commission still seem to think the EU needs to help the gas industry create a market for CNG and LNG vehicles,” said Kenny.
The incentives for synergy projects include “the possibility to apply the highest co-funding rate of the sectors concerned” and “for each sector to accept as eligible costs ancillary elements pertaining to another sector, for instance renewable energy generation within a transport project”. The latter is up to a ceiling of 20% of the total costs of the project.
Finally, for the first time ever, cross-border renewables also get their own funding stream, within the CEF. The Commission proposes to allocate just under a billion (10% of the CEF’s energy budget) to cross-border renewable energy planning and deployment. This seems all the more useful in light of the refusal by Member States to make such cooperation mandatory in a new EU renewable energy directive for 2030 agreed in mid-June.
Horizon Europe and InvestEU
The Commission is looking for synergies across funds and policies in a concerted effort to come up with a budget that is fit for the future. Even with all of the proposals of the last two months, a lot remains to be thought through.
Some programmes have tremendous potential, but few details yet on how they will be executed. That goes for Horizon Europe, the €100 billion research and innovation framework that will succeed Horizon 2020.
Horizon Europe has a 35% climate mainstreaming commitment, but it is not clear yet what Europe’s cross-cutting R&D “Missions” will be and how they will be defined.
The same is true for InvestEU, a new initiative that will group all of the EU’s financial instruments (i.e. non-grants), building on the European Fund for Strategic Investments (Efsi). It commits to 50% climate action in its “sustainable infrastructure” window and proposes “climate tracking” for everything else – based on a taxonomy for green investment due to be developed under new EU sustainable finance proposals. Only problem is, the expert group for that has only just been appointed. There will be a limit to how much MEPs and Member States are prepared to sign off without knowing more.
The European Commission’s proposals for the next EU budget for 2021-27
On 2 May, the European Commission proposed a €1,135 billion budget for the EU for 2021-27. Its political significance is huge. It also acts as a springboard for private sector investment, can help plug market gaps and in some countries actually makes up a big share of public spend (e.g. Central and Eastern Europe). The budget as proposed is bigger than the current budget, although the EU will go down from 28 to 27 Member States after Brexit. Most of the increase is down to inflation and economic growth, the Commission says. But the challenge remains to fit in new priorities (notably migration and security), while losing a major contributor. The UK’s departure will leave a €12-14 billion annual gap. This is why the Commission has included a fresh push for “own resources” – including a fifth of all EU Emission Trading Scheme (ETS) revenues – in its proposals. Nevertheless, the bulk of the next budget (nearly 90%) will still depend on national contributions. To cope, the Commission has proposed to trim agriculture and regional development spend by 5% and 7% respectively. In contrast, research and innovation spend is due to go up to €100 billion. Overall, the increases and the cuts are more moderate than expected. But Member States are unhappy anyway: France about agriculture, wealthier states about having to pay more, poorer states about losing out on regional development aid, countries like Hungary and Poland about a new proposal that links EU funds to respect for EU values.