Key energy takeaway’s from the Queen’s Speech

The Queen’s Speech delivered on 10 May 2022 announced a new energy bill (the “Bill“), which expands on the UK Government’s Energy Security Strategy, announced in April 2022.

The Bill aims to reduce the UK’s exposure to the volatility of global gas prices, focuses on developing an energy system based on renewable energy and low carbon technologies and builds on the COP 26 Summit initiatives.

The key proposals of the Bill include:

  • Extending the price cap: The Bill will extend the energy price cap beyond 2023. The price cap was increased by 54% in April 2022, driven by high gas prices, which have increased significantly during 2021 and more so as a consequence of the Russian invasion of Ukraine and related sanction measures.
  • A focus on decarbonisation: The Bill includes plans to increase investment in growing the consumer market for heat pumps, which factor into the UK government’s plans to reach net zero. The government will look to set a new market standard and create a trading scheme, which intends to help support innovation and help lower the cost of heat pumps over time. The Bill will also appoint Ofgem as the new regulator for heat networks in an effort to ensure consumers get a fair price and a reliable supply of heat. This will enable the first-ever large-scale hydrogen heating trial, which will inform the role of hydrogen in heat decarbonisation in 2026.
  • Competition in Britain’s onshore electricity networks – The Bill will introduce competition in Britain’s onshore electricity networks, with the hopes of encouraging investment and innovation, through which consumers could see savings of up to £1 billion by 2050 on projects tendered over the next ten years.
  • Establishing a new Future System Operator (FSO) – The Bill proposes the establishment of a new FSO tasked with strategic oversight across electricity and gas systems. The FSO is intended to look at Great Britain’s energy system as a whole, integrating existing networks with emerging technologies such as hydrogen and providing strategic oversight across both the electricity and gas systems.
  • Nuclear- The Bill will create a regulatory framework for fusion energy, and will allow for the safe and cost-effective clean-up of the UK’s legacy nuclear sites to ensure that the UK is a responsible nuclear state
  • Carbon Capture Usage and Storage – The Bill will introduce new business models for Carbon Capture Usage and Storage (CCUS) transport and storage, as well as low carbon-hydrogen and industrial carbon capture. This follows the release of the government’s hydrogen strategy in August 2021, which outlined a target of 5GW of low carbon hydrogen production capacity by 2030. The Bill aims to reduce the risk of fuel supply disruption by giving government powers to direct, require information from and provide financial assistance to core fuel sector businesses.
  • The Levelling Up and Regeneration Bill – the Queen’s Speech also provided details on the Levelling Up and Regeneration Bill, which was introduced to parliament on 11 May 2022 and aims to reform the planning system in Britain, which is vital for hitting the UK’s target of 50GW offshore wind by 2030.

The Bill will include a number of proposals to facilitate investment in the infrastructure necessary to achieve the Government’s decarbonisation objective. In doing so, it builds on the commitments in the British Energy Security Strategy (see our briefing here) and the Ten Point Plan for a Green Industrial Revolution (see our briefing here). However, many of the key details are as yet unclear – it is a case of “watch this space” as the Bill will be presented fully in due course.

Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612

Charging forward – Ofgem’s drive to electrify transport

On Saturday, 4 September 2021, Ofgem (the energy regulator in Great Britain) published its plans to further support the UK’s transition to electric vehicles (EVs) in the deployment of EVs and their integration into the electricity system. Ofgem aims to get the network ready for EVs and ensure there is sufficient network capacity for EV uptake, all while aiming to avoid unnecessary investment into the network and keep consumer costs down.

Phasing out petrol and diesel cars and vans

Ofgem’s latest announcement reinforces its commitment to decarbonising transport which has already seen Ofgem commit £300 million to support the installation of 1,800 ultra-rapid charge points in the UK (announced in May 2021), with this initial support considered only a starting block to the over £40 billion to be invested in Britain’s energy networks in the next seven years.

These building blocks are all part of the bigger plan to phase out all new petrol and diesel cars and vans in the UK by 2030 and have all new cars and vans fully zero emission at the tailpipe by 2035. In so doing, and as announced by the UK Government in November 2020, the UK aims to become the fastest nation in the G7 to decarbonise cars and vans.

Growing demand for EVs

Less than a year after the Government’s announced ambition to decarbonise transport, the plan for EVs appears to be on track with over 500,000 ultra low emission vehicles (ULEVs) currently registered in the UK, along with forecasts that more than one in seven registrations in the UK in 2021 will be plug-in vehicles, and an estimated 14 million EVs will be on UK roads by 2030. ULEVs use low carbon technologies and emit less than 75g of CO2/km from the tailpipe, and include pure EVs, fuel cell EVs, plug-in hybrids and extended range EVs. These ULEV thresholds are also those used for the UK Government’s consumer incentive scheme, the Plug-in Car Grant (PiCG), and are also the thresholds used for zero emission vehicles (ZEVs).

Increasing need for electricity

By 2035, the Climate Change Committee has forecast that about 370,000 public charge points will be needed and Ofgem estimates that up to 19 million home charge points may be required (research has shown that a key factor in 36% of households not getting an EV is the lack of charging points near their homes). By 2050, electric cars and vans are expected to need 65TWh to 100TWh of electricity annually, an increase of 20% to 30% over today’s levels. The Competition and Market Authority (CMA) market study into EV charging completed in July 2021 has also identified areas in the nascent charging industry where greater competition is required (e.g. along motorways).

Getting EV network ready

Ofgem’s strategy is primarily focused on (1) ensuring that EV charge points are able to connect to the grid in a timely and cost efficient manner, (2) enabling further efficiency in the grid through smart charging and vehicle-to-power (V2X) technology, and (3) encouraging consumer participation in the EV transition as EVs become effectively part of the electricity system.

Addressing uncertainty

A major challenge to ensuring sufficient network capacity is that of when and where EV uptake is likely to happen, and having identified EV uptake, the challenge is the time needed and connection charges involved in implementing an EV charging infrastructure. The uncertainty surrounding the location and pace of EV uptake means Ofgem cannot currently approve full five-year programmes of work in advance.

In an effort to address this uncertainty in future EV location uptake, among other issues, distribution network operators (DNOs) will be required to forecast local EV uptake and consumer behaviour through price controls for electricity distribution networks (RIIO-ED2), thereby incentivising improvements to the connection process. DNOs will also be required to engage with local stakeholders and assess local EV investment needs and, under RIIO-ED2 licence obligations, DNOs will be required to publish digitalisation strategies.

Using smart charging

The use of smart charging will be incentivised through the use of special tariffs (e.g. Market-Wide Half-Hourly Settlement and Time of Use), progressing smart charging (e.g. pre-set charging at off-peak times), working with the Government and industry to remove barriers for V2X, and developing data and communication for dynamic smart charging.

Reducing barriers to connection

In an effort to reduce barriers to network connections, Ofgem will remove connection costs associated with reinforcement of shared networks and will publish their Final Access and Forward-Looking Charging Significant Code Review (SCR) decision in 2021, with changes to be implemented from 2023. The SCR looks at proposals for distribution connection charging, definition and choice of access rights, and transmission charging for small distributed generation.

A greener, fairer future

Ofgem will continue to engage with key stakeholders and encourage ongoing engagement and greater consumer participation through supporting product development and extending consumer protections to new products and services.

On EV flexibility and interoperability, Ofgem will publish in 2022 a joint BEIS/Ofgem EV Flexibility Policy Statement, which will include reviews of charge point interoperability, driving consumer engagement with smart technology, and improving data flow between charge points, operators and networks.

A Retail Strategy on how best to support consumer participation and ensure consumer protection will also be published, and work with BEIS and the Government will continue in an effort to identify gaps in the current framework of consumer protection and ensure fair pricing in the aim of enabling the transition to EVs and achieving a greener, fairer future.

Key contacts

Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679
Sarah Pollock
Sarah Pollock
Partner, London
+44 20 7466 2786
Nick Pantlin
Nick Pantlin
Partner, London
+44 20 7466 2570
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537
Barbara McNulty
Barbara McNulty
Associate, London
+44 20 7466 3184

 

 

Fit for 55 – EU recognises the need for a broad alternative fuels infrastructure across Europe

In the context of the ‘fit for 55’ package, published on 14 July 2021, the European Commission proposed the adoption of a new Regulation for the deployment of an alternative fuels infrastructure; the new Regulation will repeal Directive 2014/94/EU (DAFI).

The initiative seeks to ensure the availability and usability of a dense, widespread network of alternative fuels infrastructure throughout the European Union (EU), with the aim that all users of alternative fuel vehicles (including vessels and aircraft) will be able to move through the EU with ease, enabled by key infrastructure such as motorways, ports and airports. The specific objectives of the proposed Regulation are to: (i) ensure minimum infrastructure to support the required uptake of alternative fuel vehicles across all transport modes and in all EU Member States to meet the EU’s climate objectives; (ii) ensure full interoperability of the infrastructure; and (iii) ensure comprehensive user information and adequate payment options.

Background

The Commission’s proposal represents a recognition that mobility brings many socio-economic benefits to the European public and to European businesses, and also has a growing impact on the environment, including in the form of increased greenhouse gas emissions and local air pollution, and that the EU is still missing a complete network of alternative fuels infrastructure.

The Commission carried out an ex post evaluation of the DAFI, which found that it is not sufficient for the purpose of reaching the EU’s increased climate targets for 2030. The main issues include that Member States’ infrastructure planning often lacks the necessary level of ambition, consistency and coherence, leading to insufficient and not-well distributed infrastructure. Further interoperability issues with physical connections persist, while new issues have emerged over communication standards, including data exchange among the different actors in the electro-mobility ecosystem. Additionally, there is a lack of transparent consumer information and common payment systems, which limits user acceptance. Without further action by EU institutions, this lack of interoperability and easy-to use recharging and refuelling infrastructure is likely to become a barrier to growth in the use of low and zero-emission vehicles, vessels and, in the future, aircraft.

By ensuring that the necessary infrastructure for zero and low-emission vehicles and vessels is in place, this initiative will complement a set of other policy initiatives under the ‘fit for 55’ package that stimulate demand for such vehicles by setting price signals that incorporate the climate and environmental externalities of fossil fuels; such initiatives include the revision of the Emissions Trading System (Directive 2003/87/EC), and the revision of the EU Energy Taxation Directive (Directive 2003/96/EC).

Key provisions

Simplification

The review of DAFI increases the overall policy ambition and also includes some important simplification aspects, which primarily affects charge point operators and mobility service providers. The setting of clear and common minimum requirements aims to align business operations, as businesses will face similar minimum requirements in all Member States, and the new requirements will simplify the use of the infrastructure by private and corporate consumers (who currently face a plethora of use approaches) and enable better business service innovation. With these proposed changes, consumer trust in the robustness of a pan-European network of recharging and refuelling infrastructure may increase and thereby support the overall profitability of recharging and refuelling points, and support a stable business case. It is aimed that all market actors and user groups will benefit from lower information costs and, in the case of market actors, lower legal compliance costs in the medium term, as the requirements for infrastructure provisioning under the proposed Regulation will be better harmonised. Public authorities may also benefit from a coherent EU-wide framework that is aimed at making coordination with public and private market actors easier.

Coverage of publicly accessible recharging points

The proposal sets out specific provisions for the rollout of certain recharging and refuelling infrastructure for light- and heavy-duty road transport vehicles, vessels and aircraft.

Road transport

Member States are required to ensure minimum coverage of publicly accessible recharging points dedicated to light- and heavy-duty road transport vehicles on their territory, including on the TEN-T core and comprehensive network. In particular, Member States must install charging and fuelling points at regular intervals on major highways, at every 60 kilometres for electric charging and every 150 kilometres for hydrogen refuelling.

Further provisions are introduced to ensure the user-friendliness of the recharging infrastructure. These include provisions on payment options, price transparency and consumer information, non-discriminatory practices, smart recharging, and signposting rules for electricity supply to recharging points.

Member States are also required to ensure until 1 January 2025 minimum coverage of publicly accessible refuelling points for liquefied natural gas (LNG) dedicated to heavy-duty vehicles on the TEN-T core and comprehensive network.

Vessels

Member States must ensure installation of a minimum shore-side electricity supply for certain seagoing ships in maritime ports and for inland waterway vessels. The proposal also defines the criteria for exempting certain ports and sets requirements to ensure a minimum shore-side electricity supply.

Member States are also required to ensure an appropriate number of LNG refuelling points in maritime TEN-T ports and to identify relevant ports through their national policy frameworks.

Aircraft

The proposed Regulation sets out minimum provisions for electricity supply to all stationary aircraft in TEN-T core and comprehensive network airports.

Provisions for Member States’ national policy frameworks

The provisions for Member States’ national policy frameworks are reformulated under the proposal, which makes provision for an iterative process between Member States and the Commission to develop concise planning to deploy infrastructure and meet the targets as provided in the proposed Regulation. It also includes new provisions on formulating a strategy for the deployment of alternative fuels in other modes of transport together with key sectoral and regional/local stakeholders. This would apply where the Regulation does not set mandatory requirements but where emerging policy requirements connected to the development of alternative fuel technologies need to be considered.

The approach to governance includes reporting obligations corresponding to provisions for Member States on national policy frameworks, and national progress reports in an interactive process with the Commission. It also sets requirements for the Commission to report on Member States’ national policy frameworks and progress reports.

Data provision requirements

Data provision requirements are set out for operators or owners of publicly accessible recharging or refuelling points on the availability and accessibility of certain static and dynamic data types, including the establishing of an identification registration organisation (IDRO) for the issuing of identification (ID) codes. Under this provision, the Commission is also empowered to adopt further delegated acts to specify further elements as required.

Common technical specifications

The existing common technical specifications are integrated with a set of new areas for which the Commission will be entitled to adopt new delegated acts. These will build on, as deemed necessary,  standards developed by the European standardisation organisations (ESOs).

The proposal also includes detailed provisions on national reporting by Member States to support the implementation of the Regulation, and common technical specifications or areas where delegated acts will need to be adopted to define common technical specifications.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Francesca Morra
Francesca Morra
Partner, Milan
+39 02 3602 1412

 

Fit for 55 – EU proposes energy taxation overhaul to meet its climate reduction targets

As part of the European Green Deal and the ‘fit for 55’ legislative package, the European Commission introduced in July 2021 a legislative proposal for a recast of the Energy Taxation Directive. The amendments are intended to assist the EU in meeting its climate policy objectives, including the 55% net emission reduction target by 2030 and climate neutrality by 2050.

The Energy Taxation Directive (2003/96/EC) was originally introduced in 2003 and laid down a harmonised structure and minimum excise duty rates for the taxation of certain energy products and electricity, based on their volume. The Commission considers that – in light of the EU’s environmental objectives – this approach is no longer fit for purpose. In particular, this is because the current legislation effectively favours the use of fossil fuels rather than encouraging a reduction in greenhouse gas emissions.

Key changes

The objective of the proposed revision is to support a switch to cleaner energy, more sustainable industry and more environmentally friendly choices. To this effect, the proposal introduces the following main changes to the current framework.

Revision of minimum excise rates for energy products and electricity

The proposal increases and adjusts minimum rates for energy products and electricity. The rates are intended to reflect the energy sources and their environmental impact and are designed to ensure that the most polluting fuels are taxed the highest:

  • Conventional fossil fuels, such as gas oil and petrol, and non-sustainable biofuels: These are considered to be the most-polluting types of energy and will thus be subject to the highest minimum rate (the so-called “reference rate”) of €10.75/GJ when used as a motor fuel and €0.9/GJ when used for heating.
  • Natural gas, LPG, and non-renewable fuels of non-biological origin: These energy sources are fossil-based and can support decarbonisation in the short and medium term. As such, only two thirds of the reference rate will apply to this category for a transitional period of 10 years, i.e. a minimum rate of €7.17/GJ when used for motor fuel and €0.6/GJ when used for heating. Following this transitional period, they will be taxed at the same rate as conventional fossil fuels, i.e. the full reference rate.
  • Sustainable, but not advanced biofuels: To reflect these products’ potential in supporting decarbonisation, 50% of reference rate applies, i.e. a minimum rate of €5.38/GJ when used as motor fuel and €0.45/GJ when used for heating.
  • Electricity, sustainable biofuels and biogas, and renewable fuels of non-biological origin such as renewable hydrogen: The lowest minimum rate of €0.15/GJ applies. The rate is set significantly below the reference rate as electricity and the listed fuels are capable of significantly supporting the EU’s climate action objectives.
  • Low-carbon hydrogen and other low-carbon fuels: These energy products will also benefit from the minimum rate of €0.15/GJ for a transitional period of 10 years after which they will be subject to a minimum rate of €5.38/GJ.

Importantly, energy products and electricity used for chemical reduction and in electrolytic and metallurgical processes are excluded from the taxation.

Unlike under the current regime, the above minimum rates are to be adjusted annually by the Commission by way of a delegated act, to reflect changes in the harmonised index of consumer prices excluding energy and unprocessed food as published by Eurostat.

Simultaneously, Member States will be encouraged to support vulnerable consumers and households through this green transition, including by way of lump sum transfers or access to financing for low-carbon and energy efficient goods and appliances. Furthermore, Member States will be able to exempt vulnerable and energy poor households from taxation on the supply of heating fuels and electricity.

Extension of excise rates to additional energy products

The proposal extends the taxation to certain previously exempted products, uses and sectors. This includes, in particular:

  • Kerosene used as fuel in the aviation industry, specifically for intra-EU passenger flights. The excise duty for aviation fuel will be increased gradually over a transitional period of 10 years, after which the reference rate (i.e. the highest minimum rate and the same that applies to petrol used in road transport) will apply.
  • Heavy oil used in the maritime industry, specifically in intra-EU ferry, fishing and freight vessels.
  • The use of energy for mineralogical processes.

The extension of taxation to the previously exempted air and maritime transport (and the fishing sector) is driven by the desire to achieve a more equitable distribution of environmental costs in the transport sector.

Furthermore, to encourage a cleaner energy transition, sustainable and alternative fuels will benefit from a zero rate minimum tax rate for a transitional period of 10 years when used for air and maritime / fishing navigation.

Elimination of Member States exemptions / reductions

The current energy taxation framework leaves significant scope for the introduction of national exemptions / reductions for specific energy products / sectors by individual Member States. The Commission notes that – in practice – this has led to a de facto favouring of the use of fossil fuels in the EU (such as various reductions for diesel), while contributing to the fragmentation of the EU’s Single Market (given the different rates applicable to energy use across Member States). As such, the Commission proposes to phase out most of these exemptions, and revise the legislation in a way which leaves much less leeway for Member States to apply taxes which are below the minimum harmonised rates.

Comments

The Commission’s proposed revision of the Energy Taxation Directive, if adopted, will have the effect of significantly redrawing the EU’s energy landscape. It will provide consumers with clear incentives for the use of cleaner sources of energy but will inevitably make some of the more traditional (and polluting) energy sources (such as petrol) more costly. The Commission expects that this will be counterbalanced by Member States adopting national measures to support the most vulnerable households, but what happens in practice remains to be seen.

In terms of legislative procedure – given that the proposal concerns the harmonisation of taxation (more specifically that of excise duties) – it will have to adopted by way of the “special legislative procedure” which requires unanimity in the Council (effectively unanimity among the 27 EU Member States). The European Parliament will have to be consulted but otherwise will play a minor role in this process.

In the Council, some opposition and requests for the softening of the proposal can be expected in particular from Central and Eastern European Member States. This is mainly because of the additional burden the proposal will place on their national economies as well as due to their generally more sceptical views concerning the need to tackle climate change.

The Commission’s proposal envisages the application of the new rules from 1 January 2023. While this is admittedly an ambitious target, given the EU’s emphasis on its Green Deal initiatives, there is a high likelihood that the new legislation will be adopted by then.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lode Van Den Hende
Lode Van Den Hende
Partner, Brussels
+32 2 518 1831
Eric White
Eric White
Consultant, Brussels
+32 2 518 1826
Lukas Maly
Lukas Maly
Associate, Brussels
+32 2 518 1843

Fit for 55 – EU paves the road for stronger emissions standards for cars and vans

On 14 July 2021, as part of its ‘fit for 55’ package of policies to combat climate change (which we reported on here), the EU has proposed new legislation to strengthen CO2 emissions standards for new passenger cars and light commercial vehicles. The new measures are intended to amend the current framework establishing automotive CO2 emission standards so that it aligns with the EU’s new ambition of reducing greenhouse gas emissions (GHG) by 55% from 1990 levels by 2030.

Context and objectives

In its explanation of the need for the ‘fit for 55’ package, the EU noted that transport is the only sector where GHG emissions have been increasing, with emissions from road transport accounting for almost 20% of total EU GHG emissions. The EU also recognised the importance of the automotive industry for the European economy, with the sector accounting for over 7% of the EU’s GDP and providing jobs to just under 15 million Europeans.

Against that background, the new measures are intended to serve three specific objectives:

  1. contribute to the EU’s climate objectives for 2030 (55% reduction of GHG emissions compared to 1990 levels) and 2050 (climate neutrality in the EU) by reducing CO2 emissions from cars and light commercial vehicles;
  2. provide benefits to consumers and citizens from a wider deployment of zero-emissions vehicles (ZEVS), including better air quality and more affordable ZEVS as a result of (i) increased supply of ZEVS in the market and (ii) long-term energy savings from the use of ZEVS which should offset their initial procurement cost; and
  3. stimulate innovation in zero-emission technologies to ensure Europe remains a leader in automotive R&D investment, and ensure Europe is able to keep up with its competitors (mainly Japan, South Korea, China and the US) in the global race to electrify light vehicles.

Increased GHG reduction targets

The new measures propose to adjust emission targets as follows:

  • increase the 2030 CO2 reduction targets for new passenger cars from 37.5% to 55% of the current baseline level of 95g/km;
  • increase the 2030 CO2 reduction targets for light commercial vehicles from 31% to 50% of the current baseline level of 147g/km, with the revision of CO2 targets for heavy-duty vehicles to be proposed to the EU Commission in 2022;
  • create an EU fleet-wide target of 100% reduction in GHG emissions for all new cars and light commercial vehicles from 1 January 2035 (which would effectively end the sale of petrol and diesel vehicles); and
  • introduce a review mechanism requiring the EU Commission to review the effectiveness and impact of the new measures in 2028 and submit a report to the European Parliament and European Council.

The new arrangements will also introduce other key measures to ensure coherence with existing regulatory standards for automotive emissions. For instance, recognising that manufacturers will have to supply significantly more ZEVS on the market under stricter standards, as of 2030 the incentive mechanism for zero- and low- carbon emission vehicles (ZLEVS) which exists under the current regime will be removed. Under the current regime, manufacturers are incentivised from 2025 to supply ZLEVS to the market on a “bonus-only” basis, with no direct consequences for a manufacturer not meeting the required ZLEV benchmark level. This mechanism will remain in place from 2025-2030 to incentivise manufacturers’ decarbonisation efforts during this period, but the EU Commission considered that allowing it to subsist beyond 2030 would risk undermining the effectiveness of the new measures.

Similarly, in light of the increased GHG reduction targets and to avoid market distortion, the exemption currently available to manufacturers responsible for between 1,000 and 10,000 passenger cars per year or between 1,000 and 22,000 light commercial vehicles per year to derogate from their specific emissions target will be removed from 2030 onwards. Only manufacturers responsible for less than 1000 new vehicles per year will be able to apply for this derogation.

Compliance monitoring & reporting

The new regulatory measures will introduce a new requirement for the EU Commission to report on the progress toward zero emissions from road transport and assess the need for possible additional measures to facilitate this transition. The first report will be due by 31 December 2025, and the EU Commission will be required to provide additional reports every two years thereafter.

There are no changes proposed to the  monitoring system already in place to assess Member States’ compliance with the current regulatory requirements. The existing regime requires Member States to report annually to the EU Commission on CO2 emissions and the weight of all newly registered cars and vans, and manufacturers have the opportunity to notify to the EU Commission any errors in this provisional data. Additionally, the current regulation provides that from 2022, Member States’ national authorities will need to provide the EU Commission with data on real-world fuel and energy consumptions of cars and vans.

By proposing no changes to the compliance monitoring regime or to the level of the excess emissions premium (still set at €95 per gram of CO2 per kilometre), the EU aims to ensure that the new regulatory measures will neither increase administrative costs for manufacturers and national authorities, nor enforcement costs for the EU Commission. Excess emission premiums will continue to be imposed on manufacturers when their average specific emissions exceed their prescribed targets in any given year (as provided for under the current regime), and possible revenues from these excess emissions premiums will remain part of the general EU budget whilst decreasing the Member States’ own contributions to the EU budget.

Relationship with the wider regulatory context

The new regulatory arrangements are intended to complement  the Effort Sharing Regulation by reducing road transport emissions and so helping Member States to meet their emissions targets under the Effort Sharing Regulation. As both the new regulatory measures and the Effort Sharing Regulation incentivise electrification of vehicles, they also both contribute to energy efficiency objectives.

By setting CO2 emissions standards and supporting the introduction of new ZEVS to the market, the new measures are also complementary to the Renewable Energy Directive, which will decarbonise the production of electricity used in electric vehicles and incentivise the uptake of low renewable and low carbon fuels.

Finally, there are important inter-dependencies between the new measures and the Alternative Fuels Infrastructure Directive, which, under the ‘fit for 55’ package, will require Member States to deploy additional recharging and refuelling infrastructure, in parallel with the supply of ZEVS.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Tom Marshall
Tom Marshall
Partner, London
+44 20 7466 7470
John Williams
John Williams
Of Counsel, London
+44 20 7466 2392
Reza Dadbakhsh
Reza Dadbakhsh
Partner, London
+44 20 7466 2679
Steven Dalton
Steven Dalton
Partner, London
+44 20 7466 2537

Fit for 55 – EU increases use of energy from renewable sources by 2030 in proposed amendments to the Renewable Energy Directive

Reducing greenhouse gas emissions by 55% by 2030 entails a significant increase in the share of energy production from renewable sources in order to develop an integrated energy system.

In light of the new targets, the 32% share of renewable energy to be developed by 2030 set by the Renewable Energy Directive (RED II) is no longer sufficient and it will have to be increased to 38%-40%, according to the Climate Target Plan forecasts.

At the same time, it will be necessary to implement a series of cross-cutting measures in different sectors, in line with the energy system integration and the strategies for the development of hydrogen, offshore renewable energy and biodiversity.

In a nutshell, the objectives of the revisions proposed for RED II are to increase the use of energy from renewable sources by 2030, to foster a better integration of the energy system and to contribute to climate and environmental objectives, including the protection of biodiversity, also providing a response to the intergenerational concerns associated with global warming and the loss of biodiversity.

The revision of RED II is essential for two reasons: (i) to achieve the climate objective, and to protect the environment and health, and also (ii) to ensure Europe’s energy independence from third countries and contribute to the creation of a strong technological and industrial leadership of the European Union, capable of supporting employment and economic growth.

Background

In the European Commission’s view, acting at a European level, developing renewable energy policies common to all Member States is certainly more efficient and effective than individual actions by Member States and can jointly address the transition of the European energy system in a coordinated manner, avoiding excessive fragmentation of legislation and regulation and providing investors with greater certainty and stability.

Moreover, joint action ensures a net reduction in greenhouse gas emissions and pollution, protects biodiversity and exploits the advantages of the internal market, economies of scale and technological cooperation. In any case, the achievement of a higher share of energy produced from renewable sources will depend, in a final analysis, on the national contributions of each Member State: the more ambitious and cost-effective these are, the more effective the agreed common legal and political framework will have been.

In particular, the Commission considers it necessary for Member States to take action to simplify the authorisation procedures for the construction of renewable energy plants.

In the context of public consultations that preceded the publication of the ‘Fit for 55’, stakeholders pointed out that the lack of simplification of permits and administrative procedures is still the greatest barrier to the development of renewables. Simplifying administrative procedures would facilitate the phasing out of fossil fuels. In this regard, it should be noted that RED II had already introduced clear deadlines for the conclusion of authorisation procedures (generally two years), a single point of contact for applicants as well as the adoption of clear guidelines procedures. Through these provisions, which represent the political compromise reached in the RED II adoption phase, the aim was to tidy up the complex and time-consuming national procedures, which often bear disproportionate deadlines and rules.

The provisions of RED II, to date, have not been implemented in Member States (the transposition deadline was set for 30 June 2021). Therefore, despite requests from industry, the Commission has deemed premature to amend these specific provisions of RED II before any assessment of national implementing regulations can be carried out.

Key amendments

Definition of renewable fuels of non-biological origin

The first amendment concerns the definition of renewable fuels non-biological origin (advanced biofuels). The proposal also sets out the insertion of new definitions, including those of renewable fuels, bidding zone, smart metering system, recharging point, market participant, electricity market, industrial battery, domestic battery, electrical vehicle battery, state of health, state of charge, power set point, smart charging, regulatory authority, bidirectional charging, normal power recharging point, industry non-energy purposes, plantation forest and planted forest.

Public support schemes

Obligations to minimise the risks of unnecessary market distortions resulting from support schemes and to avoid supporting certain raw materials for energy production in line with the cascading principle are strengthened. It is also introduced the obligation to phase out, with some exceptions, support for electricity production from biomass from 2026.

Calculation of the share

The calculation method of the share of energy from renewable energy sources is amended so that (a) energy from renewable fuels of non-biological origin must be accounted in the sector in which it is consumed (electricity, heating and cooling or transport), and (b) the renewable electricity used to produce renewable fuels of non-biological origin is not included in the calculation of the gross final consumption of electricity from renewable sources in the Member State.

Cross border pilot project

Member States are obliged to implement a cross border pilot project within three years and to cooperate on the amount of offshore renewable generation to be deployed within each sea basin by 2050, with intermediate steps in 2030 and 2040.

Energy system integration

Other proposals regard enhancing energy system integration between district heating and cooling (DHC) systems and other energy networks, by requiring Member States to develop efficient DHC to promote heating and cooling from renewable sources (RES). In order to facilitate system integration of renewable electricity, the following measures are provided:

  • Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are required to make available information on the share of RES and the greenhouse gas content of the electricity they supply – in order to increase transparency and give more information to electricity market players, aggregators, consumers and end-users;
  • battery manufacturers must enable access to information on battery capacity, state of health, state of charge and power set point to battery owners as well as third parties acting on their behalf;
  • Member States must ensure smart charging capability for non-publicly accessible normal power recharging points – due to their relevance to energy system integration; and
  • Member States must ensure that regulatory provisions concerning the use of storage and balancing assets do not discriminate against participation of small and/or mobile storage systems in the flexibility, balancing and storage services market.
Industries

With respect to industries, mainstreaming renewable energy in industry is given an indicative target of an annual average increase of renewable energy of 1.1 percentage points and a binding target of 50% for renewable fuels of non-biological origin used as feedstock or as an energy carrier. It also introduced a requirement that the labelling of green industrial products indicates the percentage of renewable energy used following a common EU-wide methodology.

Energy poverty

The recast of RED II also provided for an extended set of measures to force Member States to ensure the accessibility of measures to all consumers, in particular those in low-income or vulnerable households, who would not otherwise possess sufficient up-front capital to benefit.

Transports

RED II is also amended by increasing the ambition level of renewables in transport by setting a 13% greenhouse gas intensity reduction target, increasing the sub-target for advanced biofuels from at least 0.2% in 2022 to 0.5% in 2025 and 2.2% in 2030, and introducing a 2.6% sub-target for renewable fuels of non-biological origin.

This proposal also introduces a credit mechanism to promote electro-mobility, under which economic operators that supply renewable electricity to electric vehicles via public charging stations will receive credits they can sell to fuel suppliers who can use them to satisfy the fuel supplier obligation.

European Union database

The scope of the European Union database is extended so that it can cover other fuels, and not only those in the transport sector. This will enable the tracing of liquid and gaseous renewable fuels and recycled carbon fuels as well as their life-cycle greenhouse gas emissions. The database is the monitoring and reporting tool where fuel suppliers must enter the information necessary to verify their compliance with the fuel suppliers’ obligation.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 3602 1405
Andrea Leonforte
Andrea Leonforte
Senior Associate, Milan
+39 02 3602 1379

Fit for 55 – EU adjusts efficiency targets in proposed amendments to the Energy Efficiency Directive

On 14 July 2021, the European Commission published its ‘fit for 55’ package providing a set of measures aimed at reaching the target of a 55% reduction in greenhouse gas emissions by 2030 (compared to 1990 thresholds). Such legislative proposals represent a pragmatic response to the European Green Deal, presented on 11 December 2019, which aims to make Europe the first climate-neutral continent by 2050.

The ‘fit for 55’ package impacts on a variety of policy areas, including energy efficiency and renewables.

The proposal for amendments to the Energy Efficiency Directive

By proposing amendments to the energy efficiency directive (EED), the European Commission acknowledges the fundamental role played by energy efficiency in achieving the full decarbonisation of Europe by 2050 and it recognises that, although the EED strengthened the EU energy efficiency policy framework, it still has some significant weaknesses and, therefore, further efforts are needed.

In light of this, the Commission proposed to amend the EED so as to exploit potential energy savings, which still remains large in a multitude of sectors such as transport, buildings, information and communication technology, industry and households. An increase in energy efficiency and a reduction in energy use can be achieved by reference to the abovementioned sectors by means of concrete actions, to be carried out at Member State level.

The amendments proposed by the Commission are also considered being the most effective solution to alleviate energy poverty levels across Member States (which are continuously increasing due to raising energy costs and unemployment within the European Union).

Background

The Commission’s amending proposal represents a recognition that the existing legislation is insufficient to the roadmap towards climate neutrality. Public consultations launched by the Commission have highlighted that the majority of stakeholders support the necessity of implementing further energy efficiency measures. In particular, 86% of respondents – among business associations, companies and NGOs – expressed views that energy efficiency should be a significant tool so as to achieve the ambitious climate targets for 2030 as well as the European Union’s carbon neutrality by 2050.

Before presenting the package of proposals, the Commission conducted an extensive impact assessment in order to evaluate the opportunities and costs of the green transition and has identified specific measures in order to make it just and fair. The main impact of these proposals will be a decrease in energy use in the European Union, resulting in an enhancement of human health, due to the reduction of the emissions of air pollutants, and an increase of environmental benefits stemming from reduced need for fuel supply, reduced infrastructure needs and lower emissions to water. At the same time, the improvement in energy efficiency will give raise to higher investments in energy savings and transition performance, so that the capital costs are expected to return in a few years.

Additionally, the proposal sets out measures specifically aimed at balancing any possible detrimental impact on those economies that may be significantly affected by changes in industrial structure or employment as a result of the energy transition towards decarbonisation.

In the context of the European framework, Member States will be required to define their own levels, so that, de facto, they will retain the same level of flexibility in terms of selecting their policy mix, sectors and the approach to achieve the required energy savings by 2030.

Key amendments

Alignment of efficiency targets

Efficiency targets are adjusted and aligned with the new energy efficiency target for 2030. The European Union targets are set in terms of the level of final and primary energy consumption to be achieved in 2030. National contributions remain indicative. However, benchmarks and new delivery mechanism are proposed.

Energy efficiency first

A new provision on the Energy Efficiency First principle is introduced. It includes an obligation to consider energy efficiency solutions in policy and investment decisions in both energy and non-energy sectors, including social housing.

Lower public energy consumption

The public sector is obliged to reduce its energy consumption for public services and installations of public bodies. Other subsectors affected by this obligation are transport, public buildings, spatial planning, and water and waste management.

Renovation obligation

The scope of the renovation obligation is broadened, being applied to all public bodies and all administration levels in all public activities sectors (including healthcare, education and public housing). The alternatives that allowed Member States to reach similar energy savings through other measures than renovations have been removed.

Public procurement

Public procurement provisions are strengthened by extending the obligation to take into account the energy efficiency requirements by all public administration levels, and by removing conditionalities with regard to cost-effectiveness, and technical and economic feasibility. Member States may require public bodies to consider where appropriate circular economy aspects and green public procurement criteria in public procurement practices.

Global warming potential

Contracting authorities may require that tenders disclose a Global Warming Potential of new buildings, in particular for new buildings over 2,000 square metres.

Energy savings obligation and energy poverty

Annual energy savings obligations are increased up to 1.5% for all Member States, which are required to implement policy measures as a priority among vulnerable customers, people affected by energy poverty and people living in social housing, enabling funding and financial tools. The national policy mix must ensure that people affected by energy poverty will be not jeopardised by energy savings.

Consumer protection

Consumer protection is strengthened by introducing basic contractual rights for district heating, cooling and domestic hot water in line with the provisions set out under Directive 2019/944 (the Energy Directive). In particular, Member States are required to establish the concept of vulnerable customers by also taking into account final users who have no direct or individual contract with energy suppliers. Obligations towards consumers are also strengthened, providing for, among other things, out-of-court mechanisms for the settlement of disputes.

Certifications

New and different qualification, accreditation and certification schemes are set out for different energy services providers, energy auditors, energy managers and installers. Member States will be required to update these schemes every four years starting as of December 2024.

Energy efficiency investments

Member States are required to report on energy efficiency investments (including on energy performance contracts executed) and to set out project development assistance mechanism at national, regional and local levels to promote investments to help reaching the higher energy efficiency targets.

More on the Fit for 55 suite of proposals

For more, see also our Decarbonisation Hub where you can also access our full series of posts – Fit for 55: A greener transition for Europe.

Contacts

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 3602 1405
Andrea Leonforte
Andrea Leonforte
Senior Associate, Milan
+39 02 3602 1379

Changes to the carbon capture readiness requirements

BEIS has published a call for evidence on changes to the Carbon Capture Readiness (CCR) requirements. The proposed changes would significantly expand the categories of plants that would have to demonstrate they are decarbonisation ready as part of their permitting process, and it is important that all developers of thermal generation plant (including bioenergy) follow these developments.

As part of this expansion the CCR requirements have been renamed the ‘Decarbonisation Readiness’ (DR) requirements to reflect the expanded scope. The requirements will continue to apply to only England and Wales. We have summarised the key proposals below.

Removing the 300MW threshold and increasing the scope

Currently, in order to secure planning permission, generation plants of 300MW or more (subject to exceptions) are required to have space set aside for carbon capture technology. BEIS is considering removing the 300MW limit in order to remove market distortion for plants sized over 300MW and support the rapid decarbonisation of the electricity system. The effect would be to include small distributed generation such as gas peaking facilities.

The proposals are intended to apply to both refurbishing and building new combustion power plants in the scope of the DR, although other existing combustion power plants would not be included. Quite what qualifies as refurbishment is being considered.

BEIS is also considering applying the DR requirements to a wider range of generation plants, including heat generation, biomass energy from waste (EfW) and combined heat and power (CHP), on the basis that these plants may still emit significant amounts of carbon dioxide, and to encourage decarbonisation of these technologies. Furthermore, BEIS has noted that is needs to consider if combustion plants used only for heat should be covered by the DR.

Moving from the planning permission process to the environmental permitting process

It is proposed that the DR would be moved from the planning consent process to the environmental permitting process. The rationale given by BEIS is that:

  • a large number of projects that have already received development consent under the Planning Act 2008 but have not yet been built (and presumably have not yet secured their environmental permits) could then be subject to the DR when they come to apply for their permits;
  • for plant below 50 MW in England and 10 MW in Wales, planning consent is via the town and country planning regime administered by local authorities, some of whom lack sufficient capability, resourcing and/or expertise to assess DR, whereas the environmental regulators do have technical expertise (if not necessarily expertise to assess economic feasibility of implementing carbon capture solutions). Indeed, the Planning Inspectorate currently consults with the environmental regulators on CCR elements of relevant planning consent applications;
  • it allows DR to be applied to refurbishment, although we note that refurbishment may also require planning permission and on the other hand does not necessarily require a permit variation;
  • environmental permitting is according to BEIS a more flexible regime allowing the DR to be amended and updated more readily, as technology and policy develops; and
  • the environmental regulators have tried and tested systems for compliance monitoring, inspection and audit, reporting and enforcement, and paying permitting fees & charges.

BEIS also acknowledges there are certain negatives in making the change:

  • where development consent is granted before the environmental permit is issued, there is a risk of having to amend the development consent to accommodate the permit’s DR requirements. However, this is not an issue particular to DR, it also applies for example to required minimum/maximum stack heights where the planning and environmental authorities often have differing objectives. The call for evidence notes that “developers are encouraged to pursue such considerations linked to their applications for an environmental permit and planning consent in parallel“, in order to minimise issues around alignment;
  • investors may be concerned about the ability of the environmental regulator to vary the DR conditions over time. (The permitting regime includes the power for the regulator to propose permit variations by notice to the permit holder and most permits are periodically reviewed); and
  • the inclusion of DR in environmental permits may interfere with the requirement on permit holders to apply best available techniques (BAT) in a way which could create confusion and additional burdens.

The Environment Agency (EA) and Natural Resources Wales (NRW) would be responsible for the implementation of this in England and Wales respectively.

This would mean that the DR could be applied to all power plants requiring a new environmental permit to be issued, which currently includes almost all new build combustion plants. On this basis, BEIS is considering whether to introduce exemptions and/or transitional arrangements whilst they bring this into force. Exemptions for plants with low load factors (less than 50 hours per year) or very low total emissions are being considered, among others. Power-plants that are built to be low-carbon, for example those fitted with carbon capture and storage (CCS) on their total capacity should be exempt.

The intention is for these requirements to be in place by 2023.  BEIS has made it clear, however, that the requirements would not apply to  plants that secured an agreement in a Capacity Market auction held prior to the date of implementation.

Hydrogen Readiness

BEIS may introduce the option to comply with DR through conversion to hydrogen in addition to the retrofitting of CCS technologies. In this case, new assessments for hydrogen conversion readiness would need to be developed.

BEIS proposes to update the 2009 CCR requirements to include conversion to hydrogen-firing. Developers would be able to demonstrate ‘Hydrogen Readiness’ through four assessments:

  • that sufficient space is available on or near the site to accommodate any equipment necessary to facilitate hydrogen conversion;
  • the technical feasibility of conversion to 100% hydrogen-firing;
  • that the site’s location enables the transport of hydrogen to the site and/or that hydrogen can be produced and potentially stored at the site (although this requirement may be made non-compulsory in the short term); and
  • that it is likely to be economically feasible, within the power station’s lifetime, to convert to hydrogen combustion. It has been proposed that it may not be necessary to pass this test, but that it would be necessary to show that there are no technical barriers to future decarbonisation.

BEIS is also considering requiring plants that are deemed ‘hydrogen ready’ to be technically capable of burning a blend of hydrogen fuel from the first date of operation, with the proportion of hydrogen required being dependent on the date of construction.

Contacts

Sarah Pollock
Sarah Pollock
Partner, London
+44 20 7466 2786
Silke Goldberg
Silke Goldberg
Partner, London
+44 20 7466 2612
Catherine Howard
Catherine Howard
Partner, London
+44 20 7466 2858
Julie Vaughan
Julie Vaughan
Senior Associate, London
+44 20 7466 2745

European Commission publishes proposals for European Green Bond Standard

The European Commission (the Commission) published a draft legislative proposal for the long-awaited European Green Bond Standard (EU GBS) which was published alongside the Strategy for Financing the Transition to a Sustainable Economy on 6 July 2021. The EU GBS is intended to be a voluntary “gold standard” for green bonds and will provide a framework for issuers to issue bonds that can be designated as ‘European green bonds’ or ‘EU GBS’ provided that the proceeds of the bond are allocated to assets and expenditure in full compliance with the requirements of the EU Taxonomy Regulation (the EU Taxonomy). The EU GBS will be open to all EU and non-EU issuers, including corporates, sovereigns, financial institutions, governments and other public bodies and is intended for a broad range of securities, including covered bonds and asset-backed securities. Some requirements of the EU GBS are in line with existing practice in the debt capital markets, but others go further (such as EU Taxonomy alignment, some reporting requirements and the supervision of external reviewers) as discussed below.

What are the key features of the EU GBS?

  • Voluntary: The voluntary nature of the EU GBS will welcomed by market participants. Given that the ESG bond markets are already well developed, the voluntary label will likely compliment existing labels and minimise disruption to the market.
  • Alignment with EU Taxonomy: The EU GBS requires that issuers must allocate 100%. of the proceeds raised by the bonds to economic activities that meet the EU Taxonomy requirements by the time the bonds mature. One potential issue with alignment is that the proposals do not provide for flexibility in situations where the technical screen criteria (i) may not be directly applicable as a result of the innovative nature, the complexity, the location and/or other legitimate factors of the projects, or (ii) have not yet been developed. This may likely impact whether issuers decide to use to EU GBS label, particularly non-EU issuers.
  • Grandfathering: To account for possible changes to the EU Taxonomy technical screening criteria, the proposal contains partial grandfathering to allow issuers to make use of the delegated act applicable at the time of issue. However, this is time limited such that issuers must apply the amended delegated act within five years after its entry into application.
  • Requirements and reporting: The EU GBS sets out some detailed requirements, particularly on pre- and post-issuance reporting. Prior to issue, issuers will be required to publish a ‘green bond factsheet’ setting out the concrete funding goals and environmental objectives of the bonds. The concept of a factsheet is not dissimilar to bond frameworks which are typically published by green bond issuers, however, the EU GBS sets out a prescribed format in the form of a template. The factsheet will be subject to a ‘pre-issuance review’ by a registered external reviewer to ensure that the bonds meet the requirements of the EU GBS. Once the bonds have been issued, issuers will be required to provide yearly allocation reporting until full allocation and obtain a post-issuance review by an external reviewer following full allocation. Issuers are also expected to publish at least one impact report on the overall environmental impact of the bond.
  • External reviews: The EU GBS sets out detailed provisions on external reviewers of EU GBS.  They are required to register with the European Securities and Markets Authority (ESMA) to perform their role and will need to meet the conditions for registration on an ongoing basis. ESMA is empowered to develop draft regulatory technical standards specifying conditions for registration, organisational requirements, qualifications of senior management and staff, internal policies and procedures, as well as assessment methodologies.
  • Transition: The EU GBS is focused on use of proceeds green bonds. It does not address social bonds, although issuers will have to respect minimum social safeguards under the EU Taxonomy. The Commission has suggested that further proposals may be issued in respect of transition bonds and sustainability-linked bonds in due course. In addition, on transition, the proposals set out ways in which the EU GBS could be utilised by issuers to support their sustainability transition, ie, by funding long term EU Taxonomy-aligned projects or acquiring EU Taxonomy-aligned assets. The EU Taxonomy also sets out criteria for some transition activities.

Next steps

 The proposals will now be submitted to the European Parliament and among Members of the Council of the European Union as part of the co-legislative process.

Contacts

Amy Geddes
Amy Geddes
Partner, London
+44 20 7466 2541
Minolee Shah
Minolee Shah
Professional Support Lawyer, London
+44 20 7466 2074