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August 11, 2021

EU Commission’s “Fit for 55” Proposal, Part of the European Green Deal, Seeks to Create an Action Plan for Achieving Climate Commitments

Prepared by Kristi Ghosh, Renewables Advisory Analyst, Altenex Energy

This post was originally featured in our recently published Q2 Renewables Market Report – a comprehensive assessment of current power purchase agreement (PPA) pricing developments, policy updates, insights on PPA evaluation, and trends shaping the global renewable energy market. Download a copy of the full report.

New revisions to EU legislation under the European Green Deal may impose new costs on large energy buyers and encourage private companies to set more ambitious targets.

A new package of proposals titled “Fit for 55” has been recently released by the European Commission, laying out mechanisms to achieve the EU’s ambitious carbon emissions reductions.

“Fit for 55” will be a component of the European Green Deal
“Fit for 55” is the latest component of the European Green Deal, an umbrella package of legislative initiatives focusing on clean energy, agriculture, buildings, mobility, and climate action.
Originally presented in December 2019, the European Commission has since bolstered the Green Deal with specific targets to reduce carbon emissions by 55% by 2030, and to achieve carbon neutrality by 2050. It represents a proposal of legislative changes seeking to prepare the EU for achieving these climate goals.
“Fit for 55” was released on July 14, 2021 and will now be negotiated by the European Parliament and the 27 member countries and before its final adoption and implementation.  

Three components of the plan are anticipated to be particularly impactful to large energy buyers:

  • Revised EU Emissions Trading System expands sectors covered, and introduces lower emission allowances at a faster rate, driving up the price of allowances;
  • New Carbon Border Adjustment Mechanism imposes new costs on energy-intensive businesses who are importing products from abroad;
  • Revised Renewable Energy Directive requires new sectors to adjust to more ambitious renewable energy targets, but also may reduce buyers’ risk in contracting with new-build development assets by streamlining permitting processes.

The Edison Energy team has reviewed the proposals and prepared the following analysis of several key provisions.

EU Emissions Trading System (ETS)

Current Status: Today, the EU Emissions Trading System (ETS) is the main regulation aimed at direct carbon emission reduction. The EU ETS created the first, and largest, carbon market in the world. The system covers the sectors of electricity and heat generation, energy-intensive industries, and commercial aviation within the European Economic Area. The ETS works as a “cap and trade” mechanism: facilities can emit a certain amount of greenhouse gases within the cap and buy (or, for some sectors, will receive for free) emissions allowances. If the facility reduces its emissions, their allowances can be traded to those who are short of allowances. Every year, every facility has to prove their amount of allowances match their amount of emissions; otherwise, fines may apply.

Currently, the EU ETS allowances are targeted to cut the relevant facilities’ emissions by 43% by 2030 compared to 2005 levels. The 2021 cap is fixed at 1,571,583,007 allowances (each allowance covers one tonne of CO2/other GHG) and reduces 2.2% annually until 2030.

Expectations: The revised EU ETS proposes:

  • Increased reduction of the annual emissions cap to 4.2% per year, compared to 2.2% previously;
  • Extended scope of the EU ETS to sectors including buildings, transportation, and the maritime sector;
  • Free allowances will remain, but for some sectors will depend on the decarbonization efforts.

Impact: More aggressive annual emissions caps will drive the increase of emission allowances price. The widened scope of sectors involved in the ETS imposes additional facilities to plan for the financial impact to their business. Large energy buyers will likely need to take a close look at their budgeting for compliance with the ETS and explore ways of reducing the amount of greenhouse gases they emit.

Carbon Border Adjustment Mechanism

Current Status: Not applicable, as this is a completely new legislation.

Expectations: The Carbon Border Adjustment Mechanism (CBAM) is intended to level out carbon costs paid by European and foreign industries and manufacturers. The proposal of the CBAM regulation includes the following provisions:

  • Sectors required to comply will be electricity, cement, fertilizers, aluminum, and iron and steel, excluding natural gas and refined products;
  • Importers will have to buy CBAM certificates to cover the embedded emissions, both direct and indirect;
  • CBAM certificate prices will be set weekly, based on the average prices of EU carbon allowance auctions. Iceland, Norway, Liechtenstein, and Switzerland will be excluded from the new regulation.

Impact: The CBAM will put financial pressure on importing producers heavily relying on carbon-intensive sources. Businesses in these sectors will need to budget for new costs and may want to investigate ways to source their inputs differently. The first phase of the CBAM 2021-2025 will only require reporting. Starting in 2026 the importers will have to surrender the CBAM certificates.

Renewable Energy Directive

Current Status: The EU’s current renewable energy target, as stated in the Renewable Energy Directive, requires Member States to secure 32% of their electricity from renewable sources by 2030. Presently, it is a challenge to work towards this goal, as some EU countries’ regulatory and business environments impose challenges for renewable energy project developers to bring their projects into operation, and for offtakers and end consumers to purchase and consume renewable energy. Among these challenges are long and difficult permitting procedures, high financial risks associated with long-term renewable power purchase, and lack of clear position on the Renewable Fuels of Non-Biological Origin (RFNBOs, including green hydrogen).

Expectations: The revised Renewable Energy Directive includes the following changes:

  • New target for renewable energy consumption set at 40%; new energy efficiency target 38%;
  • Stricter requirements for bioenergy;
  • Simplification of the existing administrative and permitting procedures for new renewable energy plants, including more objective and transparent rules, and more predictable and reasonable timeframes;
  • An increased role of Power Purchase Agreements as an integral tool for renewable energy development; eliminating the barriers for the developers and offtakers, including provision of credit risks for energy buyers and obligation to transfer the GOs to the buyers;
  • Issuance of GOs for renewable energy to be extended to include energy produced with the support of government subsidies;
  • Facilitation of permitting procedures for offshore installations and harmonization across sea basins;
  • Clear definition of renewable hydrogen, underlining exclusive use of renewable electricity in its production.

Impact: Higher renewable energy targets at the national level for a wider number of sectors will force large energy buyers to increase their renewable energy procurement and consumption. The simplified permitting procedure should facilitate this transition and help businesses to reduce their financial risks, making Corporate PPAs a very attractive procurement option. The clearer position on renewable hydrogen validates its use by industries in their production as a means of reducing their GHG emissions.

The “Fit for 55” package is a very thorough and comprehensive climate legislation that will affect energy buyers the most. We at Edison Energy provide a suite of specialized services across sustainability, analytics, renewables, supply, demand, and efficiency, in order to help our clients to resolve the key challenges of cost, carbon, and the complex choices in energy. Contact us to know more.

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