Climate wins, energy loses in new EU budget

February 11, 2013 | 00:00

Climate wins, energy loses in new EU budget

The proposed EU budget for energy interconnections and smart grids has been cut sharply under last week’s budget deal. Climate funds, however, are set to triple compared to today, as EU leaders agreed to commit 20% of all EU spending to climate action. Director-General for Energy Philip Lowe insists that less money in EU funds may not mean fewer projects, since 'a lack of money is not the main barrier to new energy infrastructure'.

Director-general for energy at the European Commission Philip Lowe insisted on Friday that a near-halving of funds for European energy infrastructure projects in the next EU budget was not a disaster: “You significantly lower the capacity to stimulate €200bn [total grid investment needed to 2020] but I’m not sure it’s a linear reduction,” he told a debate organised by think tank the European Policy Centre (EPC). In other words, less money doesn’t necessarily mean fewer interconnectors.

The debate’s timing couldn’t have been better: European heads of state and government were just shooting off to their hotels for a shave and change of shirt after a sleepless night of haggling over the next EU budget for 2014-20. The outlines of a deal had emerged and were officially confirmed by Friday evening: a budget of €960 billion for the EU for 2014-20, lower than the current budget (for the first time ever) and less than the Commission wanted (€1 trillion), but a deal nonetheless.

European Council president Herman Van Rompuy, who presided over the negotiations, called the deal “future-oriented”, “realistic” and “driven by pressing concerns”. The only part of the budget to get substantially more money was research, technology and innovation, up from €91 billion today to €126 billion for 2014-20. But one of the biggest losers – and what Lowe was referring to – was the so-called Connecting Europe Facility (CEF), a new pot of money proposed by the Commission to better “connect” Europe through cross-border transport, energy and broadband connections.

Money will come The Commission originally foresaw €50 billion for the CEF, with €9.1 billion of that for energy projects. Friday’s deal foresees just €29 billion and only €5.1 billion for energy projects. The money is in the form of grants and loan guarantees to kick-start difficult projects.

The Commission estimates that half of some €200 billion needed for pan-European energy infrastructure investments by 2020 is at risk of never materialising. But Lowe argued that less money in the CEF does not necessarily mean fewer projects because “that would underestimate other contributions”. He pointed to new rules adopted late last year to force average project permitting times down to 3.5 years from over a decade today. Experts have estimated that faster permitting could unleash half the missing investment.

“More important is a stable framework, then the money will come,” agreed Auke Lont, CEO of Norwegian grid operator Stattnet at Friday’s debate. Like Lowe, Lont believes an appropriate regulatory framework, not EU funds, is most important for future infrastructure investments. In this context he issued a warning about capacity markets: “Capacity markets could undermine investment in interconnections – if every country starts solving the problem [of variable renewables] by capacity markets, there is no need for interconnectors.”

Unattractive

Under every regulatory scenario however, the fact remains that there are cross-border infrastructure projects that are not commercially viable. It is these that are at risk from the CEF’s cuts, especially since the cuts will reportedly come from its grants rather than loan guarantees (€ billion in so-called project bonds). Grants and loan guarantees had been expected to raise €30 billion and €20 billion respectively.

There were fears that smart grid projects would be particularly badly affected, since they had been expected to draw their funds from the CEF’s broadband budget, through partnerships with telephone companiess. This budget was cut from €9.2 billion to €1 billion on Friday. But fewer projects than expected were ready to apply for these funds, says Gunnar Lorenz, head of networks at Eurelectric, representing electricity companies. “What’s most important is that smart grids are still on the list [of potential applicants for the energy funds],” he said. “They might be local projects but if we are looking to reach European energy and climate targets, smart grids are a tool to get there.”

Lowe pointed out that the CEF still represents a breakthrough because it is the first time EU money will help finance the actual construction of projects, rather than only feasibility studies. He also denied suggestions that the European energy sector is unattractive to investors: “Energy was their favourite sector before 2007,” he said, “because it offered solid returns with low risk.” He expects investors to re-engage when the economic situation picks up.

Historic step Meanwhile, one clear victor to emerge from Friday’s EU budget deal was EU climate commissioner Connie Hedegaard, who tweeted: “YES! Historic step for climate action! EU leaders agree to commit 20% of all EU spending to climate action, a tripling of funds!”

Environmentalists recognised the achievement, but reacted with caution. David Baldock, director for the Institute for European Environment Policy (IEEP) called it “a big step forward” and said it should translate into some €27 billion a year over the next seven years. He added that it remained “modest” compared to the investment needed, however. Markus Trilling from the NGO CEE Bankwatch, said it was unclear where the money would come from. “Cohesion policy [regional development funding] is THE investment area with the highest potential for low-carbon,” he explained. “Member states will have to put their money where their mouth is in their national spending plans, which are now under preparation.”

Friday’s deal still has to be approved by the European Parliament to become law. At first glance, the prospects for this are poor: on Friday, MEPs said they “cannot accept” it as it is. But some EU observers suggest this is posturing rather than serious opposition. Once approved, the budget will have to be translated into separate, more detailed legal texts. On the energy side meanwhile, European priority infrastructure projects are due to be selected by the Commission this year. They will be eligible for faster permitting and some, for CEF funding. As for the 20% climate spend, the proof that EU policy really is driving an interconnected, low-carbon future will come in actual investment figures further down the line.

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