Temporary free allocation of emission allowances for power plants beyond 2012 - guide

24 May 2012
by eub2 -- last modified 24 May 2012

The European Commission has adopted a framework under which EU Member states may compensate some electro-intensive users, such as steel and aluminium producers, for part of the higher electricity costs expected to result from a change to the EU Emissions Trading Scheme (ETS) as from 2013. The rules ensure that national support measures are designed in a way that preserves the EU objective of decarbonising the European economy and maintains a level playing field among competitors in the internal market. The sectors deemed eligible for compensation include producers of aluminium, copper, fertilisers, steel, paper, cotton, chemicals and some plastics.

In which Member States is temporary free allocation for power plants allowed, and why?

When the revised directive (Directive 2009/29/EC)governing the EU Emission Trading System (EU ETS) was adopted in 2009, it was decided to introduce a harmonised EU-wide approach to the allocation of greenhouse gas emission allowances to installations covered by the system.

In particular it was agreed that, from the start of the third phase of the EU ETS (2013-2020), allowances should no longer be granted for free to power plants, which would instead have to buy all their allowances through auctions (or on the secondary market).

However, to help modernise their electricity sector, 10 new Member States (Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania) were given the option of gaining temporary exemptions from the 'full auctioning' rule and continuing to allocate a limited number of emission allowances to power plants for free until 2019. This option was introduced as part of the overall compromise on the so-called 'climate and energy package' of legislation reached by the Council and European Parliament.

The main motivation of the Member States which asked for this provision has been a desire to prevent too sharp increases in electricity prices for households. Another reason was to help the power sector in these countries cope more easily with the costs of making the transition to less carbon-intensive electricity generation.

With the exception of Latvia and Malta, in September 2011 all eligible Member States submitted applications for clearance to allocate a limited number of allowances to power plants for free beyond this year in order to finance investments in the energy system.

Why has the Commission issued Decisions approving the applications by Cyprus, Estonia and Lithuania when, under the legislation, a Decision is required only if it decides to reject an application?

The EU ETS Directive indeed foresees that applications are considered tacitly approved if the Commission does not reject them. However, the Commission has decided to issue Decisions even in cases where it raises no objections, for two main reasons:

1. The Commission wants to provide legal certainty to the Member States and the power generators concerned on the quantity and terms of the transitional free allocation;

2. Given that the allowances allocated for free will be deducted from the auctioning rights of the Member States concerned, the Commission wants to provide clarity to the market on the quantity and expected timing of the free allocation to power generators.

Are the quantities of free allowances laid down in the Commission Decisions final or are changes still possible?

The quantities of free allowances approved by the decisions represent the maximum amount that can be handed out. Member States could decide to reduce them provided this is done in a non-discriminatory, objective and transparent manner.

Member States must ensure that at least the equivalent value of the free allowances is invested in modernising their electricity generation through investments set out in a national plan included in their applications.

If the investments cannot be undertaken as foreseen in this national plan, the monitoring and enforcement provisions of the Member States ensure that the value of the allowances will be repaid by the power generators to the Member State. Where a Member State envisages handing out the allowances only upon evidence that the investments have been undertaken, the allowances will be auctioned on the relevant phase 3 auction platform at the latest in the third year after the investment was to have taken place.

On the basis of the annual reports to be submitted by the Member States, the Commission will check that the relevant monitoring and enforcement provisions are properly applied in all cases.

How did the Commission assess these applications?

The Commission examined the eligibility of the Member States; the eligibility of the power plants that are due to receive free allowances, including the allocation rules applied; the eligibility of investments identified in the national plan; and the monitoring and enforcement provisions set out in the applications.

What if an application does not fulfil the requirements laid down in the Directive?

If the Commission concludes that an application or any aspect thereof do not comply with the relevant legal provisions, it will reject the application as a whole or the non-compliant parts of it. The Directive requires the Commission to do so within six months of receiving the relevant information.

What about the outstanding applications?

The Commission is still assessing the applications from Bulgaria, Czech Republic, Hungary, Poland and Romania. Decisions will follow before the summer break.

In its Decisions, the Commission states that it considers the allocation of allowances free of charge to involve state aid. What implications does this have for the current Decisions?

This implies that Member States are required to notify applications also under State aid procedures. Decisions pursuant to Article 10(c) of the ETS Directive are without prejudice to Member States' State aid notification obligations pursuant to Article 108 of the Treaty. The Commission will have to assess whether the allocation of allowances and the corresponding investments in the National Plan of these Member States are in line with EU State aid rules as set out in the Commission Guidelines on the application of State aid rules to the ETS.

Source: European Commission