Article Index

 

 

The free allowances as of 2013 will be allocated on a first come, first served basis – this simple and short assertion produces, however, significant business and legal risks, in particular whether the pool of allowances in the 5% reserve does suffice for all interested in new investments (for instance in high-efficiency cogeneration).

 

 

Recently there can be observed a growing interest in investing in high-efficiency cogeneration, in particular natural-gas-fired. It is understandable, given the numerous incentives for such a choice, appearing in the Union legal measures. Also the recently-published European Commission’s Proposal of 22 June 2011 for a Directive of the European Parliament and of the Council on energy efficiency and repealing Directives 2004/8/EC and 2006/32/EC {SEC(2011) 779 final} {SEC(2011) 780 final} (COM(2011) 370 final) strongly emphasises the need for promotion of high-efficiency cogeneration and district heating as a pivotal means for energy efficiency improvement measures.

 


The legal measure commented upon in this post:

the European Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011 (“Decision”)



When it comes to the CO2 emissions abatement legal measures, high-efficiency cogeneration is, in principle, entitled as of 2013 to the free allocation of emission allowances in respect of the production of heating or cooling - under the specific rules provided for in the European Commission’s Decision determining transitional Union-wide rules for the harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of 27 April 2011 (meaning, in particular, that only part of the generation’s demand will be covered by the free allocation, with the necessity to acquire the rest in the market).

 

The partially only subsidisation of the heat generation with free CO2 allocation (the description of the exact manner for the said partial free allocation isn’t the subject of the present post), still, however, has a competitive edge over the electricity production, which - temporary derogation under Article 10c of the Directive 2003/87/EC excepting - is entitled to no free allocation.


‘New entrant’ means (Article 3(h) of the Directive 2003/87/EC):

— any installation carrying out one or more of the activities indicated in Annex I, which has obtained a greenhouse gas emissions permit for the first time after 30 June 2011,

— any installation carrying out an activity which is included in the Community scheme pursuant to Article 24(1) or (2) for the first time, or

— any installation carrying out one or more of the activities indicated in Annex I or an activity which is included in the Community scheme pursuant to Article 24(1) or (2), which has had a significant extension after 30 June 2011, only in so far as this extension is concerned.


If somebody, encouraged by the said legal incentives, took currently a decision to invest in a green-field high-efficiency cogeneration plant, his legal status on the ground of the emissions trading legislation would be a ‘new entrant’ (in the meaning defined in Article 3(h) of the Directive 2003/87/EC) as the opposite to ‘incumbent installations’ (defined in Article 3(a) of the Decision).

 

As the opposite to the incumbents installations (for which the relevant pool of allowances has been set aside) the ‘new entrants’ plants will have to compete with other enterprises (installations’ significant extensions including) for free allowances in the 5% reserve.


Pursuant to the Article 19(4) of the Decision, Member States shall notify to the Commission without delay the preliminary total annual amount of emission allowances allocated free of charge. Emission allowances from the new entrants reserve created pursuant to Article 10a(7) of Directive 2003/87/EC shall be allocated on a first come, first served basis with regard to the receipt of this notification.


Five percent of the Community-wide quantity of allowances over the period from 2013 to 2020 shall be set aside for new entrants, as the maximum that may be allocated to new entrants. Allocations shall be adjusted by the linear factor referred to in Article 9. No free allocation shall be made in respect of any electricity production by new entrants (Article 10a(7) of the Directive 2003/87/EC).

 

The wording of the said Article indicates that the point in time deciding about the precedence of the ‘new entrance’ investments with regard to the entitlement to the allocation of free emission allowances from the reserve is the moment of reception by the European Commission of the notification submitted by the Member State.



It should be noted, however, that the notification by the Member State to the European Commission constitutes only the last element of the sophisticated procedure leading to the allocation of free allowances for a ‘new entrant’.


For the simplification purposes the said process could be structured as follows:

 

division in sub-installations → continuous 90-day period → start of the normal operation →  verification → initial installed capacity established → one year deadline (for a submission of the application to the competent authority) observed (the term starts its running with the beginning of the installation’s normal operation) → standard capacity utilisation factor determined and published by (the European Commission) → activity level established.

 

In principle, preliminary annual number of emission allowances allocated free of charge for a given year is calculated by the Member State and corresponds to the activity level multiplied by the value of the benchmark.

 

The significant observation is that the investor (‘new entrant’) has little possibility to directly influence on the exact date of the notification made by the Member State to the European Commission regarding the preliminary total annual amount of emission allowances allocated free of charge, while the said date is decisive in that regard for the order of precedence of investments.

The Decision only mentions that the said notification should be made ‘without delay’ but the potential instruments at the disposal of investors when the term overruns could be problematic.

 

Such an arrangement for the whole process places unmanageable risks on potential new entrants and consequently could rise the risk premium charged.

 


 

It follows, moreover, that new investors have no certainty whether their investments will qualify for free emission allowances as of 2013, what places on their business plans another risk which is hard to manage. The above mentioned hypothetical high-efficient cogeneration plant, which will get free emission allowances from the said 5% reserve will achieve competitive advantage as compared to the similar plant, which in effect of the operation of the principle ‘first come, first served’ will not. Given the strong local character of the heat production and distribution, the distortion of competition as regards cogeneration plants will in the above-described case not be so significant as with regard to other industrial installations (not covered by the ‘carbon leakage’ list) with more extensive competition’s geographical area.

 

As a some sort of the remedy, I suppose, for the above threats, Article 19(6) was entered into the Decision. The said provision reads: ‘When half of the amount of allowances set aside for new entrants pursuant to Article 10a(7) of Directive 2003/87/EC, notwithstanding the amount of allowances available pursuant to Article 10a(8) of Directive 2003/87/EC, is issued or to be issued until 2020 to new entrants, the Commission shall assess whether a queuing system should be put in place to ensure that access to the reserve is managed in a fair way.’

 

It follows expressis verbis from that Article that the queuing system is dependent on the assessment of the Commission for a need for such a measure – it may, therefore, never materialise in practice. The specific rules governing the operation of such a queuing system also are not known at present.


In any case, the above-described provisions should be the subject of carefully consideration at the stage of outlining project projections and, furthermore, appropriately included in the investment feasibility study analyses.


Among the most important shortcomings of the process of allocation of emission allowances from a potential investor point of view seems to be the fact that at the start of the whole investment process and at the moment of taking of investment decision the said investor has no guarantee as to the future allocation – whether the investment qualifies in principle for free allocation as well as the exact number of carbon credits allocated. At the start of the investment in a hypothetically high-efficient cogeneration plant the investor has limited possibilities to assess whether in a few years perspective the 5% reserve wouldn’t be exhausted and this fact may influence on every business projections and investment financial arrangements.