Companies interested in receiving funding through a Carbon Contract for Difference (CCfD) still have until 7 August 2023 to participate in the so-called preliminary procedure. The procedure is based on the guideline for the funding of climate-neutral production processes in the industrial sector through CCfD, which the Federal Ministry for Economic Affairs and Climate Action (BMWK) published as a draft on 6 June 2023. A first draft of the funding guideline had already been presented last year.
With this tool, the BMWK aims to support companies from energy-intensive industries (e.g. steel, cement, paper or glass industries) in their transition to climate-friendly forms of production by covering the additional costs incurred by the construction or operation of climate-friendly plants when compared to conventional plants. In this way, around 350 megatons of CO2 equivalent are to be saved by 2045. In addition to reducing emissions, the BMWK hopes to create an incentive for companies to invest in climate-neutral technologies and infrastructure and to develop know-how for the construction, operation and financing of climate-friendly plants.
For interested companies, however, participation still is accompanied by a number of uncertainties. Changes to the substance of the current draft of the guideline are still possible. In particular, the BMWK mentions the conditions for the funding of hydrogen and CCU/CCS (Carbon Capture and Utilisation/Carbon Capture and Storage) technologies, as well as the question of the extent to which funding through a CCfD will be accompanied by an obligation to decommission existing conventional plants. The funding volume has also not yet been finalised, although the BMWK is planning with a mid-double-digit billion euro amount.
Individual levels of funding
Investments in climate-friendly plants represent a significant cost burden and a major price risk for companies. With the help of CCfD, the additional costs for climate-friendly production processes are to be absorbed. Under the CCfD companies receive a variable subsidy, the amount of which is measured according to the additional costs of the climate-friendly plant compared to a conventional plant.
The individual amount of funding for a project corresponds in principle to the difference between the base price established in the CCfD and the effective CO2 price. The base price (also known as the bid price) is calculated on the basis of the conventional production costs. It corresponds to the additional costs that a company estimates per tonne of avoided greenhouse gas emissions compared to the reference system. By expressing the base price in EUR/tonne of CO2 equivalent, it corresponds to a hypothetical CO2 price that would be required to put climate-friendly production on an equal footing with conventional production. The calculation of the base price, which can include both CAPEX and OPEX, falls under the responsibility of the companies. The effective CO2 price, on the other hand, takes into account costs and revenues resulting from the EU ETS for the project and the reference system. The higher the revenues and the lower the costs of the project compared to the reference system under the EU ETS, the higher the effective CO2 price. If the effective CO2 price exceeds the base price, the payment obligation is reversed, and the company pays back money to the state. However, the subsidy level also takes into account the actual development of the energy price for the conventional reference system. If the indexed energy prices for production in the reference system rise above the prices set by the administering authority in its call for proposals, the amount of funding is reduced.
The administering authority also has various options to ensure that the funding can be flexibly adjusted to changing conditions over time (especially energy price developments relevant for the project): In the call for proposals, it can stipulate a dynamic adjustment of the project’s energy carriers. This option, according to the guideline, shall be used for those energy carriers that are to be used in transformative projects, but for which long-term supply or hedging contracts with fixed prices are not offered or are only offered with considerable risk surcharges. In this constellation, the CCfD has a hedging function. Here, too, price indices for the different energy carriers are to be used to reflect the real price development in comparison to the prices set by the administering authority in the call for proposals.
On the one hand, this protects the company from the risks of rising energy costs for the transformative project. On the other hand, in constellations in which the real energy carrier prices of the project fall below the level of the energy carrier prices defined in the call for proposals and/or the real prices of the energy carriers of the reference increase, the amount to be paid out can be reduced or an obligation for the company to pay back money to the state can arise.
In order to avoid competitive disadvantages for funded companies in a (future) market environment in which the originally transformative production process has become price-setting, the draft guideline provides for the possibility of applying for the suspension of payment obligations under certain conditions. In addition, the draft guideline also provides for the possibility for the administering authority to adjust the payments to the energy carriers actually used in the project. This option would allow to hedge companies which plan to substitute energy carriers gradually.
Eligibility and contract design
Generally, projects aiming to produce industrial products that correspond to the products of the conventional industrial activities of the reference systems covered by the EU ETS in a transformative way, are eligible under the funding scheme. Projects must meet certain minimum requirements in comparison to the reference system: In terms of project size, the reference system using conventional production technologies would have to have emissions of at least 10 kt CO2 equivalent. Furthermore, after three years, at least 60% emission savings must be achieved compared to the reference system. Over the term of the CCfD, an emission reduction of at least 90 % must be possible. In addition, the electricity used must be generated entirely from renewable energy sources, which must be verified by means of guarantees of origin pursuant to § 3 no. 29 EEG. Green and blue hydrogen must meet the criteria of the EU taxonomy. The use of green hydrogen in production processes is particularly subsidised, whereby an increasing minimum use of hydrogen can be agreed on in the contracts.
Specific projects are not eligible: for instance, an exclusion applies to projects that do not manufacture industrial products or that are geared to the production of secondary energy carriers or hydrogen, insofar as this production does not serve as an intermediate product for the company’s own industrial production. Companies that fail to meet the requirements of the guideline on their own have the option of forming consortia and developing joint projects, which can also belong to different reference systems. However, the BMWK recently clarified that this possibility only exists under the condition that there is a technological connection between the manufacturing processes of the different products. This shall only be the case if an exchange of intermediate products or energy flows is technologically necessary with regard to the industrial end-products. Thus, for example, projects involving the supply of secondary energy carriers or hydrogen to several plants, between which there is no technologically necessary exchange of intermediate products or energy flows, are not eligible.
The individual contracts are to be concluded on the basis of a draft model contract for a period of typically 15 years. In addition to clauses on the suspension of payment obligations (e.g. if the specified GHG emission reduction targets are not met), the model contract also contains a differentiated system of contractual penalties (e.g. in the case of delayed project start) or termination rights (e.g. if minimum requirements are not met). In addition, when concluding a CCfD, companies commit themselves to a transformation path very strongly: deviations from the project defined in the original application are not possible without coordination with the administering authority. Strict conditions apply to the transfer of subsidised plants to third parties. Decommissioning of the plants during the term of the contract can lead to the obligation to repay the subsidies received.
Awarding of CCfD and role of the preliminary procedure
The CCfD are to be awarded through a bidding procedure in order to facilitate funding decisions in an efficient and low-bureaucracy way. The criterion of subsidy-cost-efficiency is of decisive importance for the awarding of a contract to a company. Companies that achieve relevant emission reductions with less additional funding will be ranked higher during the evaluation of the different bids. Funding from other schemes will be taken into account both during the bid evaluation process and when determining the specific funding levels over the term of the contract. In addition, the ability to achieve high emission savings during the first five years of the contract term is also considered positively when evaluating the bids.
During the current two-month preliminary procedure, interested companies are requested to submit a large amount of information on their planned transformative projects. The subsequent bidding procedures are to be designed on this basis. In order to ensure sufficient competition in the bidding procedures, the administering authority has the option of limiting the bidding procedures to certain industrial sectors or technologies. Therefore, participation in the preliminary procedure does not entail an entitlement to participate in the first bidding procedure. According to the BMWK the launch of the first bidding procedure is still subject to approval by the European Commission in the ongoing notification procedure and a positive review of the funding instrument by the Federal Ministry of Finance.
The BMWK plans to conduct the first bidding procedure as early as winter 2023. Companies wishing to submit bids in the first bidding procedure must participate in the preliminary procedure. Subsequently, further bidding procedures are to be carried out twice a year.
(27 July 2023)