Changes in heat flows between installations made after 30 June 2011 may significantly impact the level of free allocation of permits and, pursuant to the rules governing the EU ETS as from 2013, it may be sometimes effected in quite surprising way.
Allocation of free emission allowances as regards heat is a complex issue under EU ETS rules.
The importance of this topic has not vanished with the completion of the allocation procedure for the period 2013 – 2020 as installations are all the time subject to ongoing changes reflecting economy cycles, technology development, evolving business strategies, finally, also current changes in factual circumstances.
It is noteworthy that not all of the above modifications influence on the volume of permits granted. Only significant changes (extensions as well as reductions) are relevant (criteria determining which capacity changes are “significant” pursuant to Article 3(i) – (k) of Benchmarking Decision see here).
Another useful observation is that significant changes in installations between 1 January 2005 and 30 June 2011 impact the historical activity level, while changes after 30 June 2011 are subject to new entrant/closure regulations. New entrant/closure regulations provide also for rules on cessation of operations of the installation (partial cessation including).
So, changes in heat flows between installations made after 30 June 2011 may significantly impact the level of free allocation of permits.
When it comes to heat, the chart of technical connections is of crucial importance. The regulations require that each operator should clearly list its technical connections. All connected installations and entities have to be identified and notified to the competent authorities.
Guidance Document n°6 on the harmonized free allocation methodology for the EU-ETS post 2012 Cross-Boundary Heat Flows Final version issued on 14 April 2011 explained that, in principle, heat is eligible for free allocation if it can be regarded as covered by the ETS and if it is not produced via electric boilers. This is in particular likely to be the case for measurable heat directly linked (combustion process or exothermic production process) to source streams which are contained in the monitoring plan of an installation covered by the EU ETS (exceptions to this rule see here).
No distinction is made between heat from different sources (e.g. produced from different fuels, produced by boilers or CHP, heat as by-product of a benchmarked production process, etc.).
Below are outlined the most common and simple situations of heat exchanges between installations and their influence on allocation of free allowances.
Heat flows between two ETS installations
As a general rule, free allocation is given to the heat consuming installation.
The carbon leakage factor to be used is the carbon leakage exposure factor for the heat consumer, i.e. the importing sub-installation.
Heat flows from an ETS installation to a non-ETS installation or entity
Allocation in case heat flows from an installation that is in the EU ETS to an entity that is not in the EU-ETS since it does not perform an activity listed in Annex I of the EU ETS Directive, e.g. a heat producing installation delivers its heat to private households through a district heating network.
In this situation, free allowances are given to the heat producer for the heat exported.
The non-ETS entities are by default deemed not exposed to carbon leakage.
The carbon leakage exposure factor for carbon leakage exposed sectors can only be used if the heat exporter provides satisfactory evidence that it exports heat to a non-ETS entity that is exposed to a significant risk of carbon leakage: the operator will for example provide a list of his customers consuming the heat, along with the NACE codes of these customers and the amounts of heat delivered to them.
If the heat is exported to more than one non-ETS entity with different exposure factors, then the heat exporting sub-installation needs to be split in two sub-installations.
A special situation exists if the non-ETS entity consists of private households and ETS installations provide heat to these private households (this situation isn’t covered here).
Heat flows from a non-ETS entity to an ETS installation
This type of heat flow occurs when a heat importing installation is in the EU ETS and receives heat from a heat exporter that is not in the EU ETS because it does not perform an activity listed in Annex I of the EU ETS Directive. This can for example be:
- An installation for the incineration of municipal waste selling the heat produced to a ceramics plant
- A 5 MW CHP selling the heat produced to a mineral wool plant
The consumption of heat produced outside ETS is not eligible for free allocation.
The carbon leakage exposure factor to be used is the carbon leakage exposure factor for
the heat consuming sub-installation.
The above mentioned Guidance Document n°6 on the harmonized free allocation methodology for the EU-ETS post 2012 Cross-Boundary Heat Flows Final version of 14 April 2011 refers to some useful examples that sometimes may appear not in line with the prima facie interpretations on the manner of allocation (for instance an ETS installation that produces paper consumes heat from an external 5 MW boiler that is not covered by an EU ETS permit - in this case, the heat delivered to the EU ETS installation is not eligible for allocation).
As is also noteworthy, when an ETS installation that produces paper consumes steam from a 40 MW CHP unit that is covered by the same GHG permit, the heat consumed by installation is eligible for free allocation either under the product benchmark subinstallation (if any) or the heat benchmark sub-installation.