- Category: European Union Carbon Market Glossary
The Modernisation Fund is a funding instrument set up for the revised EU Emissions Trading System (EU ETS). The Modernisation Fund will support investments in modernising the power sector and wider energy systems, boosting energy efficiency and renewable energy, and facilitating a just transition in carbon-dependent regions in the 10 lowest-income Member States eiligible for support (Bulgaria, the Czech Republic, Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia).
Energy generation facilities using solid fossil fuels will not be eligible for support. An exception has been made for efficient and sustainable district heating in Member States with a GDP per capita at market prices below 30 % of the EU average in 2013 (Bulgaria and Romania). This exception only concerns 30 % of available funds for these Member States. The fund will be sourced with allowances corresponding to 2 % of the total quantity in phase 4, auctioned in accordance with the rules and modalities set out for auctions taking place on the common auction platform.
Depending on the extent to which the auction share is reduced for the purposes of the free allocation buffer, the amount of allowances available for the fund may increase by up to 0.5% of the total quantity of allowances (see Report of 17 December 2018 from the Commission to the European Parliament and to the Council on the functioning of the European carbon market, COM(2018) 842 final, p. 11).
European Commission Report of 26 October 2021 on the functioning of the European carbon market (COM(2021) 962 final) estimates that Modernisation Fund pools an approximate of EUR 25 billion, from the auctioning of over 643 million allowances in phase 4.
Fit for 55 amendments
European Commission Proposal of 14 July 2021 for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC establishing a system for greenhouse gas emission allowance trading within the Union, Decision (EU) 2015/1814 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and Regulation (EU) 2015/757 (COM(2021) 551 final, 2021/0211 (COD)) aligns the Modernisation Fund with the new climate objectives of the Union by requiring that investments are consistent with the objectives of the European Green Deal and the European Climate Law and by eliminating support to investments related to any fossil fuels, not only solid fossil fuels as is currently the case.
In addition, the proposal:
- increases the percentage of the fund that needs to be invested in priority investments;
- gives more prominence to renewable sources and energy efficiency investments in transport, buildings, waste and agriculture; targets energy efficiency as a priority area at the demand side, including industry explicitly as eligible sector; and
- includes the support of households to address energy poverty.
To address the distributional and social effects of the transition, the proposal provides for auctioning an additional 2,5 % of the cap to fund the energy transition of the Member States with GDP per capita below 65 % of the EU average in 2016-2018, through the Modernisation Fund.
It is noteworthy that on 1 August 2023 the European Commission opened the public feedback period on Commission Implementing Regulation amending Implementing Regulation (EU) 2020/1001 laying down detailed rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards the operation of the Modernisation Fund supporting investments to modernise the energy systems and to improve energy efficiency of certain Member States, Ref. Ares(2023)5328041.
The relevant Commission Implementing Regulation has been adopted on 22 November 2023 (see Commission Implementing Regulation (EU) 2020/1001 of 9 July 2020 laying down detailed rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards the operation of the Modernisation Fund supporting investments to modernise the energy systems and to improve energy efficiency of certain Member States).
On 23 November 2023 Commission Implementing Regulation (EU) 2023/2606 of 22 November 2023 amending Implementing Regulation (EU) 2020/1001 laying down detailed rules for the application of Directive 2003/87/EC of the European Parliament and of the Council as regards the operation of the Modernisation Fund supporting investments to modernise the energy systems and to improve energy efficiency of certain Member States has been published in the EU Official Journal.
The Modernisation Fund's investments
In its first year of operation, the Modernisation Fund made available €898.43 million to eight beneficiary countries to help modernise their energy systems, reduce greenhouse gas emissions in energy, industry, transport and agriculture and support them in meeting their 2030 climate and energy targets. Investments were confirmed in Czechia (€320 million), Estonia (€24.59 million), Croatia (€2.15 million), Hungary (€34.28 million), Lithuania (€28 million), Poland (€346.40 million), Romania (€22.99 million), and Slovakia (€120 million).
EU ETS Directive, Article 10d
1. A fund to support investments proposed by the beneficiary Member States, including the financing of small-scale investment projects, to modernise energy systems and improve energy efficiency, in Member States with a GDP per capita at market prices below 60 % of the Union average in 2013 (the “Modernisation Fund”), shall be established for the period from 2021 to 2030. The Modernisation Fund shall be financed through the auctioning of allowances as set out in Article 10.
Commission Delegated Regulation (EU) 2019/1868 of 28 August 2019 amending Regulation (EU) No 1031/2010 to align the auctioning of allowances with the EU ETS rules for the period 2021 to 2030 and with the classification of allowances as financial instruments pursuant to Directive 2014/65/EU of the European Parliament and of the Council, Recitals 4, 5