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Climate Action

Free allocation for the modernisation of the energy sector

On 14 July 2021, the European Commission adopted a series of legislative proposals setting out how it intends to achieve climate neutrality in the EU by 2050, including the intermediate target of an at least 55% net reduction in greenhouse gas emissions by 2030. The package proposes to revise several pieces of EU climate legislation, including the EU ETS, Effort Sharing Regulation, transport and land use legislation, setting out in real terms the ways in which the Commission intends to reach EU climate targets under the European Green Deal.

Electricity producers have been obliged since 2013 to buy all the allowances they need to generate electricity. However, certain EU Member States can provide free allocation to installations for electricity production for the modernisation of their respective energy sectors.

Article 10c of the EU ETS Directive provides a derogation from the general rules on no free allocation for electricity production.

Lower-income Member States may give free allocation, from the amount already allocated to that Member State for auctioning, to installations for electricity generation, in order to support investments which contribute to:

  • diversification of the energy mix and sources of supply
  • restructuring, environmental upgrading and retrofitting of the infrastructure
  • clean technologies
  • modernisation of the energy production sector and of the transmission and distribution sector

This provision was introduced for phase 3 of the EU ETS (2013-2020), when auctioning became the default method of allocating allowances for electricity generation.

In the context of the 2030 climate and energy framework, EU leaders decided that this free allocation should also be available during phase 4 of the EU ETS (2021-2030). They emphasised the need to improve transparency in order to ensure that the free allocation is used in the most effective way.

The ETS Directive therefore extends the availability of the optional free allocation for the lower-income Member States into phase 4. Additionally, it adds an option related to the Modernisation Fund and improves the transparency of the allocation process under Article 10c.

Member States’ use of the derogation

Out of the ten eligible Member States, only Bulgaria, Hungary and Romania have decided to provide free allocation under Article 10c of the ETS Directive in phase 4.

Czechia, Croatia, Lithuania, Romania and Slovakia decided to use the possibility to transfer all or parts of their Article 10c volumes to the Modernisation Fund, thereby increasing their respective volumes and share of the spending under the Fund. Estonia, Latvia and Poland were also eligible but chose not to use the Article 10c derogation, opting instead to have their allowances auctioned the normal way.

Eligible Member StatesMaximum Article 10c derogation
(40% of regular allowances)
Amount to be used under Article 10cAmount transferred from Article 10c to the Modernisation FundAmount to be auctioned
Bulgaria51 599 83851 599 83800
Czechia111 462 2810111 462 2810
Estonia17 583 7020017 583 702
Croatia11 957 70305 978 8525 978 851
Latvia3 794 677003 794 677
Lithuania8 696 81808 696 8180
Hungary34 610 75020 748 000013 862 750
Poland273 211 66500273 211 665
Romania91 673 7045 600 00086 073 7040
Slovakia33 228 414033 228 4140
Total637 819 55277 947 838245 440 068314 431 646

The three Member States that decided to provide free allocation must establish national frameworks for the implementation of Article 10c of the ETS Directive. These have to be cleared by the Commission under State Aid rules.

Between 2021 and 2030, the concerned Member States will organise competitive bidding processes to select the investments to be supported. Investments with a value of less than EUR 12.5 million can also be selected without competitive bidding based on objective and transparent criteria. Only Romania decided to make use of this latter option.

Up to 70% of the relevant costs of an investment may be supported using the free allocation.

Member States will report to the Commission on implementation of the selected investments. The Commission will publish these reports on this website.

Documentation

Commission Decisions on transitional free allocation for electricity generators

Hungary

Poland

Bulgaria, Czechia and Romania

Cyprus, Estonia and Lithuania

Guidance on and methodology for the application of article 10c

FAQ

Free allocation for the modernisation of the energy sector in phase 4 of the EU ETS (2021-2030)

Free allocation for the modernisation of the energy sector in phase 3 of the EU ETS (2013-2020)

Eight of the Member States which have joined the EU since 2004 – Bulgaria, Cyprus, Czechia, Estonia, Hungary, Lithuania, Poland and Romania – have made use of a derogation under Article 10c of the ETS Directive in phase 3. Latvia and Malta were also eligible but chose not to use this derogation.

The overall amount invested needed to match or exceed the value of the allowances allocated for free.

The rules for the free allocation, set out in the ETS Directive, were complemented by the ‘derogation package’ adopted in 2011. The European Commission approved all the applications received and cleared them under State Aid rules.