The EU Emissions Trading System (ETS) is the world’s largest carbon-pricing system and aims to reduce greenhouse gas emissions.

On 1 January 2021, as well as seeing further updates to the system (which we have covered here), Phase IV of the ETS will begin and run to 2030. During Phase IV, some of the revenues from the auctioning of emissions allowances will be set aside to create two major funding instruments promoting the transition to a low-carbon economy and supporting innovative greenhouse gas reduction projects. The Modernisation Fund and the Innovation Fund (as they are known) expect to make an estimated €24bn available to participants.

The Modernisation Fund


The Modernisation Fund, one of the key funding instruments of the EU Green Deal, is designed to help 10 low-income EU member states (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia) reduce the climate impact of their energy systems by funding modernisation projects.

The total revenues of the Modernisation Fund may amount to around €14bn over Phase IV, depending on the carbon price (ie revenues from the auctioning of 2 per cent of the total allowances for 2021-2030 under the ETS plus certain additional allowances transferred to the Modernisation Fund by certain beneficiary member states).

The shares of the available funding available to each member state are listed in Annex II b of the ETS Directive.

Which investments can be funded by the Modernisation Fund?

The Modernisation Fund supports investments consistent with the 2030 climate and energy objectives of the EU. The majority of the resources of the Modernisation Fund must be invested in the following priority areas:

  • the generation and use of electricity from renewable sources;
  • the improvement of energy efficiency;
  • energy storage;
  • the modernisation of energy networks; and
  • helping carbon-dependent regions in the beneficiary member states transition to a low-carbon economy, eg by redeploying, reskilling or upskilling workers.

‘Non-priority investments’ are subject to stricter suitability assessments.

How does the financing progress work?

The financing process under the Modernisation Fund is structured as follows:

  • Member states select the investments and submit an investment proposal. (No direct applications by individuals are accepted.)
  • The European Investment Bank (EIB) decides whether such investment proposals are priority or non-priority investments. For non-priority investments, further assessments are conducted.
  • An Investment Committee – which consists of a representative from each beneficiary member state, the Commission and the EIB, and three representatives elected by the other member states for a period of five years – assesses the proposals and makes an investment recommendation.
  • The Commission makes its investment decision (on a biannual basis) based on the EIB’s and the Investment Committee’s assessments.
  • The EIB transfers the funds to the beneficiary member states within 30 days.

The Innovation Fund


Just like the Modernisation Fund, the Innovation Fund is funded by the auctioning of emission allowances under the ETS. Also, unspent funds from the predecessor funding initiative, the NER300 programme, will be allocated to the Innovation Fund. It is expected that around €10bn will be made available.

The Innovation Fund focuses on supporting innovation in energy-intensive industries, renewable energy, energy storage, and carbon capture, use and storage.

Which investments can be funded by the Innovation Fund?

The Innovation Fund focuses on highly innovative flagship projects that can help significantly reduce carbon emissions. It aims to offer a risk-sharing mechanism for eligible ('first-of-a-kind') projects, which must however be sufficiently mature in their development process.

The Innovation Fund also targets small-scale projects costing under €7.5m. For these, simplified application and selection procedures apply.

How does the financing (and application) process work?

Project promoters can apply by submitting their projects during an open call for proposals. The application process (except for small-scale projects) consists of two main stages:

  • ‘Expression of interest’-stage: The project is assessed for their effectiveness, innovation and maturity. Projects that meet only the first two criteria may, however, be eligible for project development assistance. The best-ranked 70 projects are invited to the full application stage.
  • ‘Full application’-stage: Projects selected in the ‘expression of interest’-stage are further assessed on the following criteria on the basis of a scoring system:
    • the project’s potential to reduce greenhouse gas emissions;
    • how innovative it is;
    • how mature it is (planning, business model, financial and legal structure, etc);
    • the potential for widespread application or replication; and
    • cost efficiency in terms of emission avoidance.

Assessments and ratings are provided by external evaluators based on all selection criteria. There is no minimum threshold per individual criterion, but a minimum total score is required for a not to be rejected and an overall ranking is established among the projects.

As the case may be, additional criteria may be applied based on the geographic location of the project. Also, in the course of a call for proposals, specific scoring and ranking methodologies as well as simplified selection criteria for small-scale projects may be introduced. There is an online portal for funding and tenders.

The Innovation and Networks Executive Agency (INEA) will be responsible for managing the calls for proposals, supporting applicants and disbursing the Innovation Fund grants. It will also be possible to obtain technical expert feedback from INEA with respect to individual projects and innovations.

Grants will be awarded subject to the availability of the Innovation Fund revenues and paid in lump sums.

The Innovation Fund will support up to 60 per cent of project-related capital and operational costs and up to 40 per cent of the funds can be distributed in the preparation phase (ie prior to the construction phase being commenced) based on pre-defined milestones. Payments will not depend on the costs actually incurred but on the proper implementation of the action, achievement of the results and completion of the work packages. Also, the maximum grant amount will only be paid out, if the project is properly implemented throughout its term.

Innovation Fund grants are not considered state aid and may therefore be combined with public support by a member state. INEA will, however, check whether the project receives additional Union funding and may adjust the grant accordingly.