This June 8th, the European Union’s (EU) Modernization Fund allocated EUR2.4bn to invest and upgrade energy systems, greenhouse gas emissions in energy, and transport. The objective is to advance seven beneficiary countries’ efforts in the attainment of their 2030 net-zero goals, with a particular focus on climate and energy targets. 

The significant increase in investment for the third investment cycle sees a flow of investment to Romania (EUR1.3bn), Czech Republic (EUR520mn), Poland (EUR244.2mn), Lithuania (EUR85mn), Hungary (EUR74.3mn), Slovakia (EUR49.5mn), and Croatia (EUR40mn) (1). 

Established during the EU Emissions Trading System’s (ETS) reform in 2018, the Modernization Fund is a new financing tool aimed at supporting 10 lower-income EU Member States, in their transition to climate neutrality. This fund, as shown in Figure 1, services multiple objectives:

• Help the beneficiary states meet their 2030 climate and energy targets. 
• Increase energy security and develop self-sufficient energy networks. 
• Bolster the financing of renewable energy sources. 
• Promote and exchange an energy efficient first principle best practice among beneficiary states.

In conjunction with the European Green Deal, which aims to make climate-neutral by 2050, the Modernization Fund further facilitates the transition to a low-carbon economy. It achieves this by fostering innovation, encouraging investments in renewable energy, enhancing energy efficiency, and promoting the development of clean technologies. Additionally, considering the recent Russia-Ukraine conflict, the Modernization Fund also has the wider goal of supporting the beneficiary states’ path to energy independence from Russian-supplied gas.

What can be financed?

The Modernization Fund supports investments that comply with the 2030 climate and energy objectives of the European Union, as well as the Paris Agreement signed in December 2015 (3). The majority of the resources and financing which comes from revenues generated by 2% of auctioned emission allowances is one of the key funding instruments. The table below shows the total amount of allowances per beneficiary Member State for the 2021-2030 period.

Included within the financing requirements, it is stated that no support is available for solid fossil fuel projects (coal, oil, and gas). The only exception that applies is “efficient and sustainable district heating” in Bulgaria and Romania (4).

For the vast majority of investments, at least 70% of the financial resources from the Fund shall be used to support ‘priority investments’ as specified in Article 10d(2) of the Emissions Trading Scheme (ETS) Directive. These include:

• Generation and use of electricity from renewable sources.
• Improvement of energy efficiency (including transport, buildings, agriculture, and waste).
• Energy storage.
• Modernization of energy networks (including district heating pipelines, grids for electricity transmission, increase of interconnections among Member States).
• Support to a just transition in carbon-dependent regions in the beneficiary Member States (including support to the redeployment, re-skilling and up-skilling of workers, education, job seeking initiatives and startups, in dialogue with social partners).

Investments that meet the criteria for the Modernization Fund but do not fall within the priority areas are classified as “non-priority investments.” The Modernization Fund can provide financial coverage for up to 70% of the associated expenses of non-priority investments, provided that the remaining costs are funded through private sources (5).

Some of the key project proposals for each of the seven beneficiary countries include:

• Czech Republic: Support for photovoltaic power plants with installed capacity above 1 MW of the “RES+” Programme (New renewable energy sources).
• Croatia: State Aid Scheme to support the production of electricity from renewable energy sources from the Modernization fund.
• Hungary: Energy efficiency improvements of district heating infrastructure.
• Lithuania: Renovation (modernization) of public buildings owned by municipalities, increasing energy efficiency in them.
• Poland: Development of the power grid for future electric car charging stations.
• Romania: Construction of a Photovoltaic Park on the Waste Pile Pinoasa Open Pit Mining Unit.
• Slovakia: State Aid Scheme to support the production of electricity from renewable energy sources from the Modernization Fund.

Typically, once approved by the European Investment Bank as a ‘priority investment’, progress on seeing through the development of the project will then begin.

Criticisms and Shortcomings

While The Modernization Fund seeks to encourage sustainable investments by promoting the use of innovative technologies and supporting the development of green industries, areas of concern remain. The current design lacks clarity as to what ‘priority investments’ mean. For example, the fund allocates a 70% investment if the project includes renewable energies. However, the remaining 30% leaves space for coal, oil and gas ‘non-priority’ investments to fill the gap in a project.

Another shortcoming of the Modernization Fund is the lack of a defined framework to verify the financial and climatic viability of a project. The result is a beneficiary Member State may conclude with the exception of the European Investment Banks’ own assessment to determine ‘priority and non-priority investments’, that an investment in coal, oil or gas is more beneficial from a cost and strategic standpoint. Moreover, without considering the local community’s long-term energy requirements a miscalculated decision to invest in an energy project using non-renewable means is likely to hinder the Member States’ and Blocs’ collective efforts to meet its 2030 targets set out in the EU Green Deal.

Within the financing requirements of the Modernization Fund, the only exception given to Romania and Bulgaria to support their “efficient and sustainable district heating” also incentivizes Member States to set a low bar when planning their investments. This exception shows how a ‘loophole’ can be exploited which has been the case with Romanian coal utility, Oltenia Energy Complex and its proposed plan’s ability to reduce CO2 emissions in line with EU climate targets (6). By enhancing monitoring and evaluation mechanisms, these measures will ensure better compliance with established criteria and guidelines for the funding of projects.

Overall, the Modernization Fund’s recent EUR2.4bn investment in seven beneficiary countries plays a vital role in aligning the EU’s 2030 climate ambitions with its Green Deal. To maintain consistency, it is important to emphasize the long-term value ‘priority investments will deliver for Eastern Europe. Transparency, stakeholder participation, and technical guidance are necessary for project selection. However, additional technical guidance is required to refine the process companies take to invest and upgrade energy systems, greenhouse gas emissions in energy, and transport (7).

Sources

https://modernisationfund.eu/modernisation-fund-invests-e2-4-billion-to-accelerate-the-green-transition-in-7-beneficiary-countries/

https://climate.ec.europa.eu/eu-action/funding-climate-action/modernisation-fund_en

https://www.un.org/en/climatechange/paris-agreement#:~:text=To%20tackle%20climate%20change%20and,2015%3A%20the%20historic%20Paris%20Agreement.

https://caneurope.org/content/uploads/2021/04/Policy_briefing_Modernisation-Fund_April_2021.pdf

https://modernisationfund.eu/investments/

https://caneurope.org/content/uploads/2021/04/Policy_briefing_Modernisation-Fund_April_2021.pdf

https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3126