11 Jun 2019

The opportunities of the Modernisation Fund for the energy transition in Central and Eastern Europe

Mihnea Catuti / Milan Elkerbout

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As part of the post-2020 reform of the EU Emissions Trading System (ETS) for its fourth trading period, a new fund will be established with the purpose of supporting the modernisation of energy systems in Central and Eastern Europe. The Modernisation Fund represents an instrument for enabling investments in small-scale energy projects, improvements in energy efficiency, and the modernisation of energy systems in lower-income member states with a GDP per capita at market prices less than 60% of the EU average. The fund will be financed through the auction of up to 2% of the total EU ETS allowances (EUAs) for the period 2021-2030 (approx. 310 million with the current size of the EU ETS cap), amounting to a total of between €6.2 billion and €9.3 billion.[1] This paper highlights the opportunities that the EU Modernisation Fund can represent for the transition to low-carbon energy systems in Central and Eastern Europe by stimulating investments in renewable energy, energy efficiency (including in transport, buildings, agriculture and waste), energy storage, interconnections and just  transition in carbon-dependent regions. If used correctly, this instrument can represent a key source of financing for large-scale investments that are necessary in a long-term decarbonisation perspective. In order to simplify the management of ETS financing mechanisms and to increase the potential benefits of the Modernisation Fund, beneficiary member states could consider increasing its size by transferring their allocated allowances to the Article 10c derogation and/or distributed for the purposes of solidarity, growth and interconnections (Article 10(2)(b) of the ETS Directive).

[1] Estimation based on prices of €20/EUA and €30/EUA.