Comments and proposal for amendments to Commission s proposal amending Dir. 2003/87/EC

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1 05 May 2008 Comments and proposal for amendments to Commission s proposal amending Dir. 2003/87/EC Euroheat & Power welcomes the new proposal that will set out the future regulatory regime for the period. The district heating sector is taking part in CO 2 trading, and is willing to share experience so that the new regime harness the full potential for CO 2 reductions on the heating market (see table 1 below). Euroheat & Power welcomes the intention to use benchmarks for allocation, simplify procedures for smaller and biomass-fired installations as well as the increased predictability that will result from the overall design of the new proposal. However, while the draft Directive in principle recognises the heat market and includes provisions for combined heat and power generation, we believe that the final version must draw an even clearer line between electricity and heat. The provisions must unambiguously allow for the allocation of free allowances to heat on the basis of benchmarks to ensure fair treatment in relation to small-scale fossil-fired installations (below 20 MW) which constitute the bulk of the heat market and are not covered by CO 2 trading or any other Community measure with a similar effect. Unlike electricity suppliers on the electricity market, district heating companies do not set the price on the heat market and therefore cannot pass through the additional CO 2 cost on their customers. The consequence of auctioning would thus inevitably be a loss of competitiveness for district heating though it is a proven solution for CO 2 abatement on the heat market. Our suggestions for amendments aim at ensuring that district-heating operators are treated the same way as the industrial sector. The use of benchmarks in the allocation methodology will ensure that emission trading reward the most efficient techniques on the heat market and does not lead to an overall increase of CO 2 emissions neither runs against the objectives of the EU such as development of cogeneration 1 and renewable energy sources 2. More on district heating and CO 2 trading at: 1 Directive COM 2004/8/EC on the promotion of cogeneration based on a useful heat demand in the internal energy market 2 Proposal COM(2008) 19 for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources

2 Reducing CO2 with district heating and cogeneration By the use of heat that otherwise would be wasted from a wide-range of sources (see picture), the district heating infrastructure is a position to harness the potential for CO2 savings on the heat market. 78%3 of district heat is based on surplus heat (i.e. from CHP) and renewable energy sources. Picture 1: District heating: providing the infrastructure for an energy-efficient and low CO2 heating market The ecoheatcool project, co-financed by the Intelligent Energy for Europe Programme, shows that doubling district-heating sales will bring a reduction of 404 million tons/year compared to 2003 situation (reference year for the project). This represents a reduction of 9,3% - nearly the commitment under the Kyoto protocole for period This reduction is comparable to the CO2 emissions from all fuel combustion of France, and shows that district heating is a proven solution that will participate to the development of more efficient and CO2-lean energy systems. More information under: 3 Figures for EU+EFTA

3 Transitional Community-wide rules for harmonised free allocation Proposal for Amendment to recital 16 Consequently, full auctioning should be the rule from 2013 onwards for the power sector, taking into account their ability to pass on the increased cost of CO2, and no free allocation should be given for carbon capture and storage as the incentive for this arises from allowances not being required to be surrendered in respect of emissions which are stored. Electricity generators may receive free allowances for heat produced through high efficiency cogeneration as defined by Directive 2004/8/EC in the event that such heat produced by installations in other sectors were to be given free allocations, in order to avoid distortions of competition. Consequently, full auctioning should be the rule from 2013 onwards for the power sector, taking into account their ability to pass on the increased cost of CO2, and no free allocation should be given for carbon capture and storage as the incentive for this arises from allowances not being required to be surrendered in respect of emissions which are stored. Production of heat through high efficiency cogeneration as defined by Directive 2004/8/EC for economically justifiable heat demand and heat supplied to efficient district heating qualifying under the Guidelines on State aid for environmental protection shall receive free allowances to ensure equal treatment with regard to other producers of heat that are not covered by the emission trading scheme in the event that such heat produced by installations in other sectors were to be given free allocations, in order to avoid distortions of competition. The heat market is competitive and its largest share, constituted by individual fossil-fired boilers, is not covered by the emission-trading scheme. District-heating installations are therefore not in a position to pass cost through to customers though they are the most carbon-efficient options. In order to avoid increase of emissions in the non-trading part of the heat market, installations should be handled the same way as the industry on markets with risk of carbon leakage. Rules on allocation Proposal for amendment to recital 18 Transitional free allocation to installations should be provided for through harmonised Community-wide rules ( benchmarks ) in order to minimize distortions of competition with the Community. These rules should account for of the most greenhouse gas and energy efficient techniques, substitutes, alternative production processes, use of biomass, renewables and greenhouse gas capture and storage. (..) Transitional free allocation to installations should be provided for through harmonised Community-wide rules ( benchmarks ) in order to minimize distortions of competition with the Community. These rules should account for of the most greenhouse gas and energy efficient techniques, including combined heat and power, substitutes, alternative production processes, use of biomass, renewables and greenhouse gas capture and storage. (..) The development of CHP is a declared objective of the EU. Along with other technologies mentioned here, the rules for allocation should make sure that emission trading work towards the development of technologies that have the bigger potential to reduce CO 2, in particular CHP. This amendment brings consistency with other provisions dealing with CHP in the proposal. Use of benchmarks Proposal for amendment to article 10a 1.

4 The Commission shall, by 30 June 2011, adopt The Commission shall, by 30 June 2011, adopt Community wide and fully harmonised Community wide and fully harmonised implementing measures for allocating the allowances referred to in paragraphs 2 to 6 and 8 in a harmonised manner. implementing measures, using benchmarks, for allocating the allowances referred to in paragraphs 2 to 6 and 8 in a harmonised manner. Use of benchmarks as mentioned in recital 18. Transitional Community wide rules for free allocation Proposal for amendment to article 10.a.1 The Commission shall, by 30 June 2011, adopt Community wide and fully harmonised implementing measures for allocating the allowances referred to in paragraphs 2 to 6 and 8 in a harmonised manner. Those measures, designed to amend nonessential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article [23(3)]. The Commission shall, by 30 June 2011, adopt Community wide and fully harmonised implementing measures for allocating the allowances referred to in paragraphs 2 to 6 and 8 in a harmonised manner. Those measures, designed to amend nonessential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article [23(3)]. The measures referred to in the first subparagraph shall, to the extent feasible, ensure that allocation takes place in a manner that gives incentives for greenhouse gas and energy efficient techniques and for reductions in emissions, by taking account of the most efficient techniques, substitutes, alternative production processes, use of biomass and greenhouse gas capture and storage, and shall not give incentives to increase emissions. No free allocation shall be made in respect of any electricity production. The measures referred to in the first subparagraph shall, to the extent feasible, ensure that allocation takes place in a manner that gives incentives for greenhouse gas and energy efficient techniques and for reductions in emissions, by taking account of the most efficient techniques including combined heat and power, substitutes, alternative production processes, use of biomass and greenhouse gas capture and storage, and shall not give incentives to increase emissions. No free allocation shall be made in respect of any electricity production. The development of CHP is a declared objective of the EU. Along with other technologies mentioned here, the rules for allocation should make sure that emission trading work towards the development of technologies that have the bigger potential to reduce CO 2, in particular CHP. This amendment brings consistency with other provisions dealing with CHP in the proposal. Allocation to heat producers Transitional Community-wide rules for harmonised free allocation Free allocation may be given to electricity generators in respect of the production of heat through high efficiency cogeneration as defined by Directive 2004/8/EC for economically justifiable heat demand to ensure equal treatment with regard to other producers of Amendment to article 10a.3 Free allocation shall be given, on the basis of benchmarks, to the production of heat through high efficiency cogeneration as defined by Directive 2004/8/EC for economically justifiable heat demand, and to heat supplied to efficient district heating

5 heat. In each year subsequent to 2013, the qualifying under the Guidelines on State aid total allocation to such installations in respect for environmental protection to ensure equal of the production of that heat shall be adjusted treatment with regard to other producers of by the linear factor referred to in article 9. heat that are not covered by the emission trading scheme. In each year subsequent to 2013, the total allocation to such installations in respect of the production of that heat shall be adjusted by the linear factor referred to in article 9. This amendment secures fair treatment of district-heating networks that are operating on a market with no pass-through possibilities, where most installations (individual boilers below 20 MW) are not covered by the EU ETS. It also avoids undue distortions of competition on the market for heat supplied to industrial installations cf recital 18. Heat supplied to industry Decreasing allocation Amendment to article 10a.7 Subject to Article 10b, the amount of Delete allowances free of charge under paragraphs 3 and 6 of this Article [and paragraph 2 of article 3c] in 2013 shall be 80% of the quantity determined in accordance with the measures referred to in paragraph 1 and thereafter the free allocation shall decrease each year by equal amounts resulting in no free allocation in An allocation based on benchmarks can tackle this issue. Carbon leakage Proposal for amendment to article 10a.9 At the latest by 30 June 2012 and every 3 years thereafter the Commission shall determine the sectors referred to in paragraph 8. In the determination referred to in the first paragraph the Commission shall take into account the extent to which it is possible for the sector or the sub-sector concerned to pass on the cost of the required allowances in product prices without significant loss of market share to less carbon efficient installations outside the Community, taking into account the following(..) At the latest by 30 June 2012 and every 3 years thereafter the Commission shall determine the sectors referred to in paragraph 8. In the determination referred to in the first paragraph the Commission shall take into account the extent to which it is possible for the sector or the sub-sector concerned to pass on the cost of the required allowances in product prices without significant loss of market share to less carbon efficient installations outside the Community or in the non-trading sector within the Community in the case when the majority of a sector is not covered by emission trading, taking into account the following (..)

6 The heat market presents different features in comparison with the electricity market. Operators covered by the emission-trading scheme (district heating) have no capacity to pass costs through due to the competitive nature of the heat market. In the same time, district heating is a proven solution in terms of CO 2 abatement. This amendment draws attention to the situation of a market which is significant in terms of potential emissions reduction, and whose largest share belongs to the non-trading sector. The European Commission should therefore duly consider the potential risks of carbon leakage within the Community when determining the sectors referred to 10a.8.

7 Euroheat & Power is the international association representing the combined heat and power (CHP), district heating and cooling (DHC) sector in Europe and beyond. Euroheat & Power unites 23 national CHP/DHC associations and has individual members (utilities, equipment suppliers and research institutes) in more than 32 countries. Contact: Sabine Froning, Managing Director Eloi Piel, European Affairs Officer Telephone: + 32 (0) Website: