The European Green Deal Makes Headway With The Modernization Fund

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The European Green Deal sets the blueprint for transformational climate change — it has the potential to make Europe the first climate neutral continent in the world.

All 27 EU Member States are committed to achieving this goal by 2050. To get there, they have pledged to reduce emissions by at least 55% by 2030, compared to 1990 levels. This will create new opportunities for innovation, investment, and jobs as well as to reduce emissions, create growth, address energy poverty, reduce external energy dependency, and improve health and well-being.

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Funded by revenues from the auction of emission allowances from the EU’s Emissions Trading System, the Modernization Fund aims to support 10 EU countries that have lower incomes as they join the transition to climate neutrality.

“The Modernization Fund is a crucial element for a fair transition,” explains Frans Timmermans, executive vice president for the European Green Deal. “We are investing some of the revenues from the EU emissions trading system in the modernization of the energy system in those Member States where greater efforts in this regard are needed and where GDP per capita is lower than elsewhere in the EU.”

With investment in renewable energy technologies, the EU is developing expertise and products that will also benefit the rest of the world. The shift to green transport means that leading companies can serve a growing global market. By working with international partners, they will work to reduce emissions together in global maritime transport and aviation. This year, the 61 investment proposals selected under the Modernization Fund focus on:

• electricity generation from renewables
• modernization of energy networks
• energy efficiency in the energy sector, in industry, in buildings, and in transport
• the replacement of coal generation with lower carbon intensity fuel

A December press release from the European Union described disbursements that were made in 2022:

• Croatia (€119.8 million): the production of electricity from renewable energy sources and battery storage to support electricity grid operation
• Czechia (€1.34 billion): the modernization of public lighting systems within municipalities, conversion of coal to biomass and gas in district heating and ETS installations, and increase of energy efficiency
• Estonia (€62.4 million): low emission, energy efficient public transport in Estonia
• Hungary (€74.3 million): optimization, digitization, and automation of manufacturing processes to reduce electricity consumption and material use in Hungary
• Lithuania (€85 million): renovation of public buildings, increasing energy efficiency, and development of renewable hydrogen production capacity in Lithuania
• Poland (€643.2 million): building heating plants based on renewable energy sources and improvement of energy efficiency in industry in Poland
• Romania (€1.39 billion): building 8 photovoltaic parks and two combined cycle gas turbine plants, replacing lignite with renewables and gas for power generation, and modernization of electricity networks
• Slovakia (€399.5 million): the rehabilitation and extension of district heating and cooling networks, and decarbonization projects in the industrial sector

This month’s disbursements continue the important spending from the Modernization Fund as per previous investment cycles. In the provisional deal reached on the strengthened EU Emissions Trading System, the Modernization Fund will increase its size, providing financial assistance to 3 additional Member States with their transition: Portugal, Greece, and Slovenia.

What is the Modernization Fund?

The Modernization Fund supports investments in the generation and use of energy from renewable sources, energy efficiency, energy storage, modernization of energy networks, including district heating, pipelines and grids, and just transition in carbon-dependent regions.

In its second year of operation, the Modernization Fund has disbursed a total of €4.11 billion in support of 61 projects in 8 beneficiary countries. These projects will help modernize energy systems, reduce greenhouse gas emissions in energy, industry, transport and agriculture, and improve energy efficiency. Supporting these investments will help those Member States to meet their 2030 climate and energy targets and accelerate the EU’s green transition.

The Fund operates under the responsibility of its beneficiary countries in close cooperation with the European Investment Bank (EIB), the European Commission (EC), and the Investment Committee set up for the fund.

The EU is responsible for:

• Chairing the Investment Committee
• Adopting the disbursement decisions and communicating them to the Beneficiary Member States, the EIB, and the Investment Committee
• Making a proposal for the establishment of the rules of procedure of the Investment Committee
• Reviewing and evaluating the performance of the Modernization Fund
• Performing information, communication and promotion actions relating to the Modernization Fund

Key steps in the financing process include:

• Member States select the investments they wish to submit for Modernization Fund support
• Member States submit the proposed investments to the EIB, the Investment Committee, and the EC at any time of the year
• The EIB confirms if the investment is a priority investment
• The EC takes a disbursement decision once an investment is confirmed as priority by the EIB, or recommended for financing by the Investment Committee as non-priority
• The EIB transfers the resources to the beneficiary Member States in accordance with the disbursement decision within 30 days
• The EIB acts as the auctioneer for the sale of EU allowances and receives the proceeds of each auction on behalf of the beneficiary Member States

The Fund complements other European instruments such as cohesion policy and the Just Transition Fund. It mobilizes significant resources, which can help beneficiary Member States support investments in line with the REPowerEU Plan and Fit For 55 package.

The European Investment Bank is responsible for:

• Auctioning the allowances which provide the resources of the Modernization Fund; these allowances will be auctioned in equal annual volumes from 2021 to 2030, in accordance with the Auctioning Regulation
• Confirming whether an investment is a priority or a non-priority one
• Conducting financial and technical due diligence of non-priority investments, including an assessment of the expected emission reductions
• Managing the assets of the Modernization Fund
• Transferring the respective resources to the beneficiary Member States following the disbursement decision of the Commission and keeping track of the use of Member State resources
• Providing the secretariat of the Investment Committee with appropriate documentation

In June, €2.4 billion was already disbursed to support 45 investment proposals, and it was complemented this month by a €1.71 billion disbursement to back 16 more investment proposals.

“We must urgently scale up investments to meet the 2030 climate and energy targets and lay the path for a carbon neutral Europe,” Ambroise Fayolle, European Investment Bank vice president, states. “I welcome the more than €4 billion in financing from the Modernization Fund in 2022 which shows its important role for the energy transition. As the EU climate bank, the EIB is working closely with the European Commission and EU countries by providing its expertise and services to help implement the Modernization Fund. We stand ready to continue the excellent cooperation as the Modernization Fund expands to more countries and increases in size.”