The EU ETS and the Modernisation Fund: European Power sector’s perspective Krzysztof Laskowski Climate Policy Advisor, EURELECTRIC Brussels, 4 May 2016

EURELECTRIC represents the European electricity industry – across all the electricity value chain ENERGY POLICY & GENERATION ENVIRONMENT & SUSTAINABLE DEVELOPMENT MARKETS RETAIL CUSTOMERS DISTRIBUTION NETWORKS Introducing EURELECTRIC

EURELECTRIC supports the EU ETS reform A strengthened EU ETS should ensure cost-effective, technology-neutral and market-based delivery of the decarbonisation agenda

EURELECTRIC’s position on Modernisation Fund (Art 10d) We agree with EUCO Conclusions to set-up the Modernisation Fund Necessary to modernise the power systems of the eligible Member States in order to contribute to long term decarbonisation objective We disagree with the governance structure of the Modernisation Fund The beneficiary Member States should be responsible for determining the eligibility of projects in accordance with the subsidiarity principle, in consultation with the EC and with technical support from the EIB x

What is Modernisation Fund? In October 2014 Heads of States and Governments agreed unanimously to create Modernisation Fund to help less affluent Member States in their relatively bigger decarbonisation effort and secure their support of the EU % GHG reduction target A 2% EU ETS allowances reserve to help low-income Member States with GDP per capita below 60% of the EU average in their relatively larger effort to modernise the energy sector The use of this fund should serve the improvement of the energy efficiency and modernisation of the energy systems in the beneficiary Member States so as to provide their citizens with cleaner, secure and affordable energy Following the European Council Conclusions, the Commission proposed to create the Modernisation Fund with 310 M allowances with contributions from all EU Member States

The governance of the Modernisation Fund The reserve will serve to establish a fund which will be managed by the beneficiary Member States, with the involvement of the EIB in the selection of projects The fund shall be governed by an investment board and a management committee, which shall be composed of representatives from the beneficiary Member States, the Commission, the EIB and three representatives of non-beneficiary Member States. The investment board shall be responsible to determine an Union-level investment policy […] and investment selection criteria. If the EIB recommends not financing an investment and provides reasons for this recommendation, a decision shall only be adopted if a majority of two-thirds of all members vote in favour. The Member State in which the investment will take place and the EIB shall not be entitled to cast a vote in this case. European Council Conclusions (2014) Commission’s proposal (2015) Art. 10d(4)

Key discrepencies: the EUCO Conclusions vs. Commission’s proposal The Commission’s proposal extends the management of the Modernisation Fund to 3 non- beneficiary Member States and the EC. It introduces a system of voting, where 10 beneficiary Member States + 3 non-beneficiary Member States + EIB + EC have one vote each, which they cast to approve financing of an investment in an individual Member State through a simple majority vote (8 out of 15). This way a single beneficiary Member State can be easily outvoted and its proposed investment rejected. The EIB is given a power to veto financing an investment, which can only be overruled with 10 out of 13 votes as in this case the EIB and the beneficiary Member State in question are unable to vote. This leads to a peculiar situation where other Member States can take decisions about another Member State’s investments (and subsequently national energy mix) without the beneficiary’s involvment or say in the process, which is against the spirit of the art. Article 194 of the Lisbon Treaty.

What investors need from the Modernisation Fund? Long-term predictability and stability of legal framework with clear set of rules Simplified governance guaranteeing technological neutrality Reduction of unnecessary regulatory and administrative burdens Flexibility to evaluate and change investment strategy depending on the technological progress and market evolution Market-­based approach

EURELECTRIC’s recommendations regarding Modernisation Fund (part 1) The European Council agreed that the beneficiary Member States should be in control of the Modernisation fund “with involvement of the EIB in the selection of projects”. There is no mention of the Commission or other Member States in the Council conclusions. Therefore: We ask to respect the European Council conclusions and hand over the decision-making power over projects financed by the Modernisation Fund to the beneficiary Member States and believe that: Beneficiary Member States should be responsible for determination of the eligibility criteria for projects in accordance with the subsidiarity principle, in consultation with the Commission and with technical support from the EIB. Beneficiary Member States should be responsible for the approval of projects The EIB should be only responsible for monetising the allowances in the Modernisation Fund and for distributing the funding to the beneficiaries. The role of the EIB should thus be limited strictly to that of financial intermediary or coordinator.

EURELECTRIC’s recommendations regarding Modernisation Fund (part 2) Beneficiary Member States should ensure full transparency on the selection of projects and in this context we believe that the following criteria should apply: Investments must not interfere with the functioning of the internal market, and especially not disturb cross-border trade and regional approaches; Competition must not be distorted; Modernisation of generation and grid infrastructure and efficiency improvements need to be prioritised

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