July 12, 2021 — Each month, Capstone’s EU Energy Team highlights impactful policy developments investors should pay attention to. Below, read an excerpt from the latest publication.
EU “TEN-E” Rules to Phase Out Funding Oil and Gas; Exemptions for Malta and Cyprus Gas
Capstone believes the European Parliament will increase its emphasis on renewable energy when it takes up discussion of the Trans-European Networks for Energy (TEN-E) Regulation. Under the general approach the European Council adopted on June 11, oil and gas infrastructure projects are no longer eligible for funds and fast-tracked permits from the European Union, with exceptions for gas-to-hydrogen conversion projects and gas pipelines connecting Malta and Cyprus to the European grid. The renewables push from legislators is likely to focus on policies related to electrolysers and smart gas grids, deemed insufficient in the general approach by several states. Members of the European Parliament’s Committee on Energy are expected to reach a decision by July 15. Stakeholders within the gas industry are also watching to see whether gas is included as a transition fuel in the EU sustainable finance taxonomy before the year end.
In the past, gas infrastructure received funding from the European Union on the basis that the pipelines could carry hydrogen when it becomes available. However, lawmakers and environmental advocates criticized the rules as favoring gas, which has caused the EU to revise its approach.
Under the new general approach, only gas projects in Malta and Cyprus will retain the eligibility until they are fully connected to the European gas network. The agreement also stipulates that EU funding could go toward converting gas pipelines to carry hydrogen until 2028 and to continue carrying hydrogen-blended natural gas or biomethane until 2030. The projects would then have until the end of 2029, when the transition period concludes, to demonstrate how they can shift to carrying solely hydrogen. The gas/hydrogen blending component led 11 countries, including Germany, Spain, and Denmark, to withhold support from the general agreement and call for an outright ban on fossil gas. Dissenting countries have expressed hope that negotiations in the European Parliament, which has an equal say on the text, produce an agreement which does not fund fossil fuels.
On the other side of the spectrum, industry players and states such as the Czech Republic and Slovakia have supported allowing gas blending until 2035. More than 90 energy companies, manufacturers, and operators signed a joint letter to the European Commission, asking it to consider hydrogen blending for parts of Europe that cannot yet afford a dedicated hydrogen network. Signatories included Engagas (ENGGY), EnBW, and Naturgy Energy Group (NYGAS), as well as turbine manufacturers General Electric Co. (GE) and Baker Hughes Co. (BKR).
EU Council Adopts Connecting Europe Facility 2.0; €31.65B for Transport, Energy
Capstone believes the European Council’s allocation of €31.65 billion for the energy and transportation sectors is a significant step toward finalizing projects included in the TEN-E, and channels investment into green bunkering infrastructure for the maritime sector. The council adopted the EU’s Connecting Europe Facility 2.0 (CEF 2.0) program June 14.
CEF 2.0 promotes interconnected and multimodal transportation networks across Europe, with particular focus on rail, road, inland waterway, and maritime infrastructure. The Trans-European Transport Networks (TEN-T) for missing links and cross-border projects will be given funding priority. In the rail sector, the full deployment of European Rail Traffic Management System (ERTMS) network by 2030 was identified as a priority, with €1.56 billion of the transport budget set aside for rail projects. In the maritime sector, Capstone believes investments will increase for alternative green fuels with net-zero potential such as hydrogen, e-ammonia, and e-methanol. Investment in liquefied natural gas (LNG) infrastructure may benefit, pending the EU’s decision on the role of gas in the transition, for which a decision is expected before year end. The shipping industry is under pressure to reduce emissions, with environmental groups urging the European Commission to exclude LNG as a sustainable alternative in the upcoming Fit for 55 EU climate package, expected in July. However, Capstone believes the Commission is unlikely to rule out LNG from its transition plans as it adopts a flexible target-based approach, leaving bunkering decisions to the shipowners.
In the energy sector, €5.84 billion will be allocated for projects furthering the integration of European energy markets; creating more flexible transmission, distribution, and information sharing in networks; and promoting decarbonization objectives. Awarding will be directed on an ‘energy efficiency first’ basis. First included in the European Commission’s Energy Union Strategy, efficiency first designates the prioritization of energy efficiency, be it end-use saving or demand response, when allocating funds, particularly whenever they would cost less or deliver more than building new supply or networks.
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