The European Commission presented on 08.03.2018 the Action Plan on Financing Sustainable Growth (the sustainable finance) and, on 24.05.2018, proposals for legislative acts concerning this issue. Both the action plan and the mentioned legislative proposals are based on the recommendations of the expert group on financing sustainable economic growth. Below we present the position of the Polish Electricity Committee ("PKEE") on the European Commission's proposal ("KE") in the area of financing sustainable growth.
Key demands PKEE:
- Consideration the current shape of the energy mix of individual Member States in the criteriaThe Commission will use this information as a basis for evaluating economic activities to determine whether they are environmentally sustainable.
- Introducing a rule that the least-issued generation sources based on conventional sources with an emission standard below EPS 550 kgCO2/MWh (gas, nuclear) may meet the criteria assessing the environmental sustainability of economic activities, insofar as they contribute to the transformation of the energy mix of the Member State concerned. If the EC's legislative proposals are adopted as they stand, investments related to these sources will not be considered environmentally sustainable. As a result, this would entail a significant reduction in the possibility of financing them with funds from the private financial sector, even if there were no other alternatives to replace more carbon-intensive generation sources.
- The above criteria should promote investments in large-scale RES sources (above 100 MW)which will increase economies of scale in reaching climate targets. Large-scale RES projects should be rewarded under the Sustainable Economic Growth Financing Action Plan due to their significantly higher contribution to these objectives through significantly lower unit abatement costs, measured in EUR/tCO2 , compared to small-scale investments.
Financing sustainable economic growth - EC proposal
The EC estimates that in order to achieve the energy and climate goals by 2030, investments of EUR 180 billion are needed annually throughout the European Union. If the targets in transport, water and waste management are included, the amount rises to EUR 270 billion. The EC proposes to involve the private financial sector in the achievement of the above-mentioned goals by directing the funding stream to sustainable investments.
As part of its legislative proposals presented on 24 May, the EC has proposed the establishment of criteria for assessing economic activity to determine whether it is environmentally sustainable. This assessment can have a real impact on obtaining financing from the private financial sector for a given investment. Classifying a given investment as environmentally unsustainable in the light of the criteria proposed by the EC may mean that it will turn out to be less favoured by the private financial sector in comparison to the investment considered to be sustainable. As a result, it will become more costly. It may be caused by such factors as lower rate of return, higher risk or necessity of greater financial securities. In this way, incentives are created to discourage this type of investment, while at the same time encouraging the private financial sector to channel funding towards investments that are deemed environmentally sustainable.
Legislative proposals detailing the application of these criteria will be presented in the future. In line with the recommendations of the expert group on financing sustainable economic growth, the basic purpose of these criteria should be to indicate whether a given project can qualify for EU climate financing and to determine whether a given portfolio of investments contributes to sustainable economic growth. On the basis of the abovementioned criteria, an assessment will also be made of the degree to which a given investment is environmentally sustainable.
The criterion of contributing to minimizing climate change by stabilizing the concentration of greenhouse gases in the atmosphere by avoiding or reducing their emissions or by increasing the possibility of removing greenhouse gases is also worth mentioning here. Measures such as the following can be used for this purpose
1) generation, storage, use of energy from RES or climate neutral energy;
2) improving energy efficiency;
3. increasing clean or environmentally neutral mobility;
4) switching to the use of renewable materials;
5. enhancing carbon capture and sequestration;
6) extinction of anthropogenic greenhouse gas emissions, including from fossil fuel-based sources;
7. developing energy infrastructure for decarbonisation;
8. the production of clean and efficient fuels from renewable or CO2 neutral sources.
Moreover, the EC proposed to establish information obligations for institutional financial market participants with regard to how sustainability risks are taken into account in the investment decision-making process or in the financial advisory process. In the case of financial products with sustainable investment as an objective, the institutional financial market participant is required to publish information about these products such as a description of the sustainable investment and the methodology used to evaluate, measure and monitor the impact of the investment.
The EC also proposed to establish two types of indicators used as reference indices, i.e. indices providing a benchmark for determining the amount payable under a financial instrument or contract, or for measuring the performance of investment funds:
- low-carbon reference index which is an indicator where the underlying instruments, on the basis of which the indicator is calculated, are selected in such a way that the portfolio composed of those instruments has lower CO2 emissions compared to the portfolio of the underlying instruments,
on the basis of which the standard reference index is calculated;
- benchmark of positive impact on emissions, which is an indicator for which the underlying instruments, on the basis of which the indicator is calculated, are selected in such a way that the CO2 savings associated with those instruments are greater than the so-called carbon footprint of those instruments.
PKEE supports the necessity of engaging funds from the private financial sector in order to achieve the EU climate policy objectives. However, we would like to point out that the criteria proposed by the European Commission for assessing economic activity may significantly hamper the financing of investments aimed at modernising the Polish power sector and gradually replacing coal-fired power plants with technologies with lower CO2 emissions..
Taking into account the fact that the sector is to a large extent coal-based, the transformation of the electricity sector in Poland requires much higher investment outlays than in other Member States. It is estimated that Investment outlays necessary to decarbonise the sector for the period 2021-2050 will amount to ca. PLN 566bn. This is a huge challenge for a country whose GDP per capita is still one of the lowest in the European Union. Resources from the private financial sector can be an important source to support this challenge, in line with EU climate policy goals and the Paris Agreement. For this reason, we believe that criteria against which economic activities will be assessed to determine whether they are sustainable in terms of environmental should take into account the specific characteristics of the economies of individual Member States and in particular their current energy mix.
We propose to exclude from the criterion proposed by the EC minimising climate change investment in new low-carbon generation capacity, as long as it contributes to a low-carbon transformation of the energy mix in the Member State.
The modernisation of the power sector in Poland is currently based on, among other things, the construction of new generation capacity based on natural gas. Additionally, the construction of a nuclear power plant also remains a strategic option. If the EC's legislative proposals are adopted in their current wording, investments related to these sources will not be considered environmentally sustainable. As a result, this would significantly limit the possibility of financing them with funds from the private financial sector, even if there is no other alternative to replace the more emitting generation sources.
It should also be noted that in the case of RES sources, the criteria proposed by the EC will be used to assess the economic activity in order to determine whether this activity is environmentally sustainable, should take into account the size of the investment concerned and thus the economies of scale in achieving the climate objectives - emissions, due to the much higher contribution of large RES investments (above 100 MW) to these targets. For these investments the unit emission reduction cost measured in EUR/tCO2 is much lower (higher efficiency, higher amount of avoided CO2 emissions) compared to small investments. Hence, large-scale RES projects contribute more to reaching the climate targets and should therefore be rewarded in the Action Plan on Financing Sustainable Economic Growth.