Earlier this month the European Commission published its decision on the allocation of the revenue from 300 million allowances from the New Entrant Reserve (NER300) to fund up to 12 commercial scale carbon capture and storage (CCS) demonstration projects and 34 projects demonstrating innovative renewable energy technologies.

NER300 is Phase III of the European Union Emission Trading Scheme (EU ETS). With a current total value of approximately €3.7 billion the NER funding represents a significant boost to CCS and renewables in Europe.

The decision comes in the wake of the adoption by the European legislators of the Climate Change Package in 2009, containing a Carbon Capture and Storage Directive.

Key elements of the decision

The decision provides for the funding of a minimum of eight and, subject to the availability of funds, a maximum of 12 commercial scale carbon capture and storage projects (CCS demonstration projects) in four different technology categories:

  • pre-combustion power generation of 250 MW
  • post-combustion power generation of 250 MW
  • oxyfuel power generation of 250 MW
  • industrial applications (refineries, cement kilns, iron and steel and aluminium production) storing at least 500 kt CO2 per year

The decision specifies that at least three of the funded CCS demonstrations projects should store CO2 in hydrocarbon fields and at least three in saline formations.

In addition, the decision provides for the development of a total of 34 projects demonstrating innovative renewable energy technologies (RES demonstration projects), which will be chosen from the following categories:

  • biofuels projects converting lignocelluloses to electricity or ethanol (subject to sustainability criteria and minimum size thresholds)
  • concentrated solar power
  • photovoltaic electricity generation
  • geothermal systems with a nominal capacity of 5MWe
  • onshore and offshore wind generation
  • wave and tidal energy devices
  • hydropower
  • distributed renewable management (smart grid) applications

To secure funding all demonstration projects have to meet certain criteria, which include:

  • capacity thresholds
  • a realistic prospect of the first phase of the project entering into operation by 31 December 2015
  • relevant national permits being in place and consistent with relevant requirements under EC legislation, or the permitting procedures being sufficiently advanced to ensure that operation could commence by 31 December 2015 for the first tranche
  • the project operator making a binding commitment to knowledge sharing (as defined in the decision)
  • the projects being located in the territories of a Member State, its exclusive economic zone and/or its continental shelf

In addition, CCS demonstration projects have to meet supplementary criteria:

  • each project has to implement the full CCS chain (capture, transport and storage)
  • each demonstration project must implement heat integration at the capture stage of the process
  • the capture rate must be such that at least 85% of CO2 in the flue gases is captured
  • each project has to contain an independent research block dedicated to ensuring the safety of storage sites and the improvement of monitoring technologies, especially in relation to brine migration, its possible pathways and impacts

No more than three projects in any one Member State will receive funding.

Up to 50% of costs can be funded

The decision provides that a maximum of 50% of the relevant costs for a CCS or RES demonstration project can be funded via the NER300 mechanism.

However, where a project eligible for funding under the NER300 mechanism is also eligible for funding from the European Energy Programme for Recovery (EEPR) the funding receivable from the NER300 will be reduced by the amount of co-financing received from the EEPR.

EIB to assess and recommend projects for award of funding

Calls for proposals will be published in the Official Journal of the European Union. The selection of projects to be funded will be made as a result of co-operation between the European Commission, the European Investment Bank (EIB) and Member States. Member States will be responsible for evaluating projects and assessing whether they meet the eligibility criteria before deciding which projects will be submitted to the EIB, and will inform the Commission accordingly. The EIB will then assess the financial and technical viability of the project, reviewing the technical scope, costs, financing, implementation, operation issues, the environmental impact and the procurement procedures for the proposed project. Based on this due diligence the EIB will make recommendations on award decisions to the Commission. Pursuant to Article 108(3) of the Treaty on the Functioning of the European Union, Member States will need to notify the Commission if any arrangements for the project constitute State Aid to allow the selection procedure and the State Aid assessment to be performed together.

On the basis of the EIB recommendations, and after re-consulting with the relevant Member State, the European Commission will confirm, where appropriate, the value and structure of the funding the project will receive. This will be communicated to the relevant Member States in award decisions.

Award decisions will be conditional upon all relevant national permits being issued; approval by the Commission of any State Aid for a project; and final investment decisions being reached by the sponsors. These conditions must be satisfied within 24 months of adoption of the award decisions, or in the case of CCS demonstration projects with saline aquifer storage, within 36 months.

Knowledge to be shared

Member States must ensure that all project operators, consortium members, suppliers and subcontractors of demonstration projects funded under the NER300 mechanism share information regarding:

  • technical set-up and performance
  • cost levels
  • project management
  • environmental impact
  • health and safety
  • CCS storage site performance

with other project operators, public authorities, research institutes, non-governmental organisations and the general public on an annual basis in accordance with the specifications set out in the relevant call for proposals.

First funding awards to be made by 31 December 2011

Funds will be awarded in two rounds, the first of which will take place by 31 December 2011 (with the expectation that these projects should be operating by 31 December 2015 at the latest) and the second by 31 December 2013. It is the Commission's intention to use the second round to balance the project portfolio and ensure that an appropriate geographical spread of projects deploying all of the key technologies is achieved.

More good news for UK projects

In the meantime, the UK is slowly putting together its domestic CCS funding proposals. Changes have been proposed by the Government to the new Energy Bill which will extend the domestic support regime to gas as well as coal fired projects.

The energy regulator, Ofgem, has also published the results of a year-long assessment of changes required to the energy markets. Some of the proposals, which include a minimum carbon price and the reintroduction of capacity payments, would serve to support CCS projects in addition to nuclear and renewables.