Modernising energy systems in central and eastern European states

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The Modernisation Fund, MF is a recent European Union program to support 10 EU member states in the central and eastern parts (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia) to meet EU-2030 energy targets by helping to modernise energy systems and improve energy efficiency. The MF operates under the responsibility of the ten beneficiary member states in close cooperation with the European Commission and the European Investment Bank, EIB.

The MF is another sign of European solidarity in action: during its first year in operation, it has provided concrete support to beneficiary countries, enabling them to reduce their greenhouse gas emissions in key sectors. Thus, the MF helps to deliver on the EU’s climate and energy targets and make the “green deal” a reality. In reaching the EU’s 2030 energy and climate targets, the MF helps ten countries by financing the modernisation of energy systems, improving energy efficiency, use of renewable energy and facilitating a “just transition”.
During 2021, the first year in action, the MF supported 26 investment proposals in eight beneficiary countries to modernise their energy systems and improve energy efficiency; it made available about € 900 million to eight beneficiary countries to help modernising energy systems, reduce greenhouse gas emissions in energy, industry, transport and agriculture and support these states 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).

The MF is a recent European endeavor: although the initial step in MF was the EU Directive 2003/87/, of 13 October 2003, which established a system for greenhouse gas emission allowance trading within the EU member states. The so-called emission trading system, ETS is aimed at contributing to the levels of emission reductions that were considered scientifically necessary to avoid dangerous climate change.
See Directive (with amendments of up to 2018) in:

In total, the EU ETS presently regulates emissions from more than 10 400 power and heat plants and manufacturing installations, as well as around 350 aircraft operators flying between European Economic Area (EEA) airports. In the most recent estimate for 2020, European Securities and Markets Authority, ESMA calculated the overall trading activity in emission allowances at around €687 billion. The EU carbon market also felt the effects of the pandemic in 2020; thus in the wake of the crisis, the price of emission allowances dipped to €14.71 from the average level of €24.84 in 2019.

Funded mostly by revenues from the auction of emission allowances from the EU’s Emissions Trading System (ETS), the MF aims to support ten EU countries with lower-income in their transition to climate neutrality by modernising their power sector and wider energy systems, boosting energy efficiency, and facilitating a just transition. The EU ETS is a cornerstone of the EU’s policy to combat climate change and reduce greenhouse gas emissions in a most cost-effective ways; it is the world’s biggest and first major carbon market. Set up in 2005, the EU ETS is the world’s first international emissions trading system.
More on ETS in:

The MF supports states’ investments in generation and use of energy from renewable sources, in energy efficiency and storage, in modernisation of energy networks, including district heating, pipelines and grids, and just transition in carbon-dependent regions.
The MF complements other European financial instruments, such as the cohesion policy and the Just Transition Fund; the MF operates under the responsibility of its beneficiary countries in close cooperation with the European Commission and the European Investment Bank, EIB.
Source: and

As part of the EU “sustainable energy week (EUSEW in October 2021), the European Commission organised a special session to make a managerial account of the first investments in decarbonising the energy systems in the central and eastern European states, the so-called CEE countries. The European Commission outlined the MF’s contribution to the European green deal and the EIB’s role in the MF’s implementation. Managing authorities of beneficiary states presented their experience, identified best practices and decarbonisation strategies involving the MF resources, as well as interactions with other EU financial and planning instruments.
In the seven-year financial package, the MF intends to invest about €2.4 billion to accelerate the green transition in 7 beneficiary countries; thus, MF invested nearly €900 million during first year of operation.

Legal background
In July 2020, the Parliament and the Council adopted Commission Implementing Regulation nr. 1001 laying down detailed rules for the application of Directive 2003/87 as regards the MF operation in supporting investments to modernise the energy systems and to improve energy efficiency of “certain member states”. The regulation established the MF for the period 2021-30 to support investments in modernising energy systems and improving energy efficiency in certain EU states; the ten CEE benefiting states are: Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.
According to the EU “green deal’s” investment plan, the MF should contribute to the attainment of the green deal’s objectives by supporting green and socially just transition.
More on the “implementing regulation” in:

The “selected” central-eastern EU states are responsible for: – selecting the investment proposals they would like to support from their MF’s share; – submitting an indicative overview of their planned investments to the Commission, the EIB and the Investment Committee; – submitting the investment proposals for confirmation to the EIB and the Investment Committee, and providing the information needed for their assessment; – monitoring and submitting annual reports on the MF’s implementation of investments; – auditing the project proponents or scheme managing authorities, submitting the results of these audits to the EIB and the Commission; and – taking appropriate measures to ensure that the MF’s financial interests are protected, including recovery actions.
Reference to:

The MF has already supported 26 investment proposals in the areas of electricity generation from renewable sources, modernisation of energy networks and energy efficiency in the energy sector, in industry, in buildings, in transport as well as in agriculture. The following investment proposals have been already supported by the MF: – energy efficiency and renewable energy use in Croatia; – the implementation of photovoltaic installations in Czechia; – the improvement of energy efficiency and renewable energy use in Estonia; – the establishment of energy communities in Hungary; – the improvement of energy efficiency in agriculture in Lithuania; – the development of power grids for future electric car charging stations in Poland; – the modernisation of energy networks in Romania; and – the modernisation of energy networks in Slovakia. Latvia has been the only country so far that apparently did not prioritise investments in the modernisation of the national energy network; however it is not too late to get involved…
The deadline for beneficiary member states to submit investment proposals for potential support by the Modernisation Fund for the next disbursement cycle is 16 August 2022 for non-priority proposals (i.e. investments that fall outside the Fund’s priority areas), and 13 September 2022 for priority proposals (i.e. investments that fall under the priority areas).
Source: (8 June 2022).

Financing and support
The Modernisation Fund is funded from two sources: a) as revenues from the auctioning of 2% of the total allowances for 2021-30 under the EU Emissions Trading System (EU ETS); b) as additional allowances transferred to the MF by ten beneficiary member states.
The majority of the MF-resources (at least 70%) must be invested in priority areas specified in the above mentioned ETS Directive (art. 10d,2); investments in the following areas are regarded as priority investments: – generation and use of electricity from renewable sources; – improvement of energy efficiency: incl. in transport, buildings, agriculture and waste, except in energy efficiency related to energy generation using solid fossil fuels; – energy storage; – modernisation of energy networks: incl. district heating pipelines, grids for electricity transmission and increase of interconnections among the member states; and – support to a just transition in carbon-dependent regions in the beneficiary member states, incl. support to the redeployment, re-skilling and up-skilling of workers, education, job-seeking initiatives and start-ups, in dialogue with social partners.
All investments qualifying for the MF, but falling outside the priority areas are considered as non-priority investments; the MF can cover up to 70% of the relevant costs of non-priority investments, as long as the remaining costs are financed from private sources.


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