Climate Action

Free allocation for the modernisation of the energy sector

Policy

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 States Maximum Article 10c derogation
(40% of regular allowances)
Amount to be used under Article 10c Amount transferred from Article 10c to the Modernisation Fund Amount to be auctioned
Bulgaria 51 599 838 51 599 838 0 0
Czechia 111 462 281 0 111 462 281 0
Estonia 17 583 702 0 0 17 583 702
Croatia 11 957 703 0 5 978 852 5 978 851
Latvia 3 794 677 0 0 3 794 677
Lithuania 8 696 818 0 8 696 818 0
Hungary 34 610 750 20 748 000 0 13 862 750
Poland 273 211 665 0 0 273 211 665
Romania 91 673 704 5 600 000 86 073 704 0
Slovakia 33 228 414 0 33 228 414 0
Total 637 819 552 77 947 838 245 440 068 314 431 646

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)

Which Member States are eligible to derogate from full auctioning for the energy sector in the period 2021-2030?

Ten Member States are eligible to provide free allocation to installations for electricity production to support investments in the modernisation, diversification and sustainable transformation of the energy sector. They meet the relevant criterion laid down in the ETS Directive of having a GDP per capita below 60% of the Union average in 2013.

These Member States are Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

Bulgaria, Hungary and Romania have decided to provide the free allocation under Article 10c of the ETS Directive in phase 4.

Are eligible Member States required to derogate from full auctioning for their energy sector?

No, the derogation from full auctioning for the energy sector is optional. Eligible Member States decide whether they want to make use of this option or not. They may also decide to transfer the volumes under this derogation to the Modernisation Fund (under Article 10d(4) of the ETS Directive), thereby increasing their volume and share of the spending under the fund.

Where Member States use the derogation or transfer the volumes to the Modernisation Fund, the number of allowances they can sell at auction is reduced accordingly, thus lowering their national auctioning revenues.

Bulgaria, Hungary and Romania have decided to provide the 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 fully or parts of their Article 10c volumes to the Modernisation Fund. Estonia, Latvia and Poland were also eligible but chose not to use this derogation. An overview table showing Member States’ choices is available here.

How many free allowances can eligible Member States provide under the derogation?

The total free allocation to companies in the energy sector shall be no more than 40% of the regular allowances which the Member State concerned will auction in the period from 2021 to 2030.

Eligible Member States making use of the derogation can decide to distribute fewer free emission allowances than the maximum amount determined in the Directive. An overview table showing Member States’ choices is available here.

Is there a limit on the number of free allowances that can be allocated to individual power installations in the eligible Member States?

The use of the free allocation for the energy sector is conditional on investments being made for the modernisation, diversification and sustainable transformation of the energy sector.

Up to 70% of the relevant investment costs may be supported using the free allocation, provided that the remaining costs are financed by private entities. To establish the maximum volume of free allocation, the market value of the allowances is used, which is calculated as the average of the price of allowances on the common auction platform in the preceding calendar year.

The aim of Article 10c is to modernise the energy sector, not to increase electricity supply. Therefore, if an investment leads to additional electricity generation capacity, a corresponding amount of electricity-generation capacity with higher emission intensity must be decommissioned.

For how long will the option of free allocation for the energy sector be applied?

After having been introduced at the beginning of phase 3 of the EU ETS, the derogation was prolonged for the full phase 4 of the EU ETS from 2021 to 2030.

The derogation will end at the conclusion of phase 4 of the EU ETS.

What conditions must Member States fulfil when using the option to derogate from full auctioning for their energy sector?

By 30 June 2019, any Member State intending to make use of the derogation of the free allocation were required to publish for public comments a detailed national framework setting out the competitive bidding process for selecting investment projects exceeding EUR 12.5 million. Bulgaria and Hungary have done so.

The competitive bidding process can take place in one or multiple rounds between 2021 and 2030 and must meet the following requirements:

  1. comply with the principles of transparency, non-discrimination, equal treatment and sound financial management
  2. ensure that only projects are eligible which meet the objectives of Article 10c to modernise, diversify and transform the energy sector
  3. define clear, objective, transparent and non-discriminatory selection criteria for the ranking of projects

These selection criteria must ensure that only projects which, inter alia, have a net positive gain in terms of emission reduction, clearly respond to replacement and modernisation needs and offer the best value for money are selected.

For investments with a value of less than EUR 12.5 million, Member States had the right to select projects based on objective and transparent criteria. For this, Member States had to publish the results of the selection process for public comments and submit the list of investments to the Commission. Only Romania has done so.

Finally, beneficiaries are required to report to Member States on the implementation of their selected investments by 28 February of each relevant year. On this basis, Member States will submit reports to the Commission, which the Commission will review and publish on this website.

Member States also have an obligation to ensure the proper execution of investments. In case the implementation of an investment is not completed and/or does not achieve the indicated emission reduction, Member States must ensure that beneficiaries repay the financial value of the free allocation already received.

What is the role of the European Commission in the implementation of the derogation?

The national frameworks for the implementation of Article 10c need to be assessed from a State Aid perspective. The Commission conducts this review and will issue a Decision in this respect at the end of the review process.

The free allocation will be provided to electricity operators only if they have been selected by competitive bidding or in a transparent procedure for smaller projects and after they demonstrate that the investments have been made.

Upon receiving Member States’ reports and notifications on the proposed allocation under Article 10c, the Commission will check whether (the changes to) the proposed free allocation are in conformity with the provisions of Article 10c and the State Aid Commission Decision.

If this is the case, the Commission will instruct the Central Administrator of the European Union Transaction Log and the Union Registry to enter the (changes to) the allocation tables under Article 10c.

Is the timing of free allocation under Article 10c of the ETS Directive linked to free allocation under the Member States ’ national implementing measures?

The implementation of the derogation under Article 10c of the ETS Directive, allowing for free allocation to the energy sector, takes place separately from the implementation of free allocation for industry and heat production.

The allocation to operators in the energy sector under Article 10c, therefore, does not need to happen in parallel to the allocation of free allowances in accordance with the national implementing measures under Article 10a of the ETS Directive.

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.

What was the issue to be addressed by this derogation?

When the ETS Directive was revised 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 phase 3 of the ETS (2013-2020), allowances should no longer be granted for free to power plants. These would instead have to buy all their allowances through auctions or on the secondary market.

However, to help modernise their energy sectors, ten new Member States were given the option under Article 10c of the ETS Directive to exempt themselves from the 'full auctioning' rule and to continue allocating a limited number of emission allowances to power plants for free until 2019.

Why was the derogation allowed?

This option was introduced as part of the overall compromise leading to the agreement on the so-called 'climate and energy package' reached by the Council and European Parliament in December 2008. The legislation was formally adopted in April 2009.

The main motivation for those Member States that asked for this provision appears to have been a desire to prevent sharp increases in electricity prices for households. Another motivation was to help the energy sectors in these countries cope more easily with the costs of making the transition to less carbon-intensive electricity generation.

Which Member States were eligible to deviate from full auctioning in their energy sector in phase 3?

Ten Member States were eligible since they met one or more of the relevant criteria laid down in the ETS Directive. These Member States were Bulgaria, Cyprus, Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and Romania.

The eligibility criteria were as follows:

  • In 2007, the Member State had no connection to the electricity grid operated by the Union for the Coordination of Transmission of Electricity (UCTE) which existed then; or
  • in 2007, the Member State had only one direct or indirect connection to the electricity grid operated by UCTE with a capacity of less than 400 MW; or
  • in 2006, more than 30% of the electricity generation in the Member State concerned was produced from a single fossil fuel and the GDP per capita (at market prices) did not exceed 50% of the EU average.

With the exception of Latvia and Malta, all eligible Member States made use of the derogation.

What conditions did Member States have to fulfil when using the option to derogate from full auctioning for their energy sector in phase 3?

The use of the free allocation for the energy sector was conditional on investments being made to modernise electricity generation.

Member States had to ensure that investments are undertaken in retrofitting and upgrading the infrastructure, in clean technologies and in diversifying the energy mix and sources of supply. For this purpose, Member States had to submit a national plan setting out the investments tied to specific installations to be financed through the free allocation in the entire period. The overall amount of these investments must match or exceed the market value of the allowances allocated for free.

Member States also had an obligation to ensure the proper execution of investments identified in the national plan. To this end, they had to put in place the necessary legal provisions, including penalties and corrective measures in case companies did not undertake the necessary investments.

What was the role of the European Commission in the assessment and implementation of the derogation in phase 3?

In the Communication, the Commission provided guidance with a view to ensuring the proper implementation of the derogation from full auctioning in the 10 Member States eligible to benefit from it.

The Communication also set out a transparent framework which the Commission used to assess any applications to use the derogation, which had to be submitted by the end of September 2011. The Commission could reject the application as a whole, or in part, if it deemed that it did not conform with the rules set out in the Directive and/or the Decision.

The assessment by the Commission particularly concerned:

  • the eligibility of the Member State concerned to apply for the derogation
  • the list of installations eligible to receive free emission allowances and the number of allowances to be allocated to each
  • the national plan listing the investments to be undertaken
  • the monitoring and enforcement provisions a Member State has to put in place with respect to the investments
  • information showing that no undue distortions of competition will be created

Once a derogation was granted, the Commission had to check annual reports on investments which Member States were obliged to submit. If these reports did not provide sufficient evidence that the investments had been carried out in accordance with the national plan, the Commission could consider this an illegal application of the ETS Directive and launch an infringement procedure.

Was there a limit on the number of free emission allowances that could be allocated to individual power installations in the eligible Member States in phase 3?

The number of free emission allowances to be allocated to each eligible installation in a Member State was determined by the allocation methodology applied.

There were two allocation methodologies, one using ex-ante efficiency benchmarks and the other based on the annual average verified emissions of the power plants concerned in 2005-2007.

The total number of free emission allowances allocated could not exceed the maximum number determined in the ETS Directive. To ensure this limit was respected, Member States could apply a correction factor.