"Five to Twelve - The H2 Plain Talk": Climate Protection Agreements - Tricky and Overdue? How Do They Work and What is the Status of the Funding Instrument for the Transformation of Industry?

This is the aim of the "Funding Guideline for Climate Protection Contracts" (FRL KSV) published by the BMWK in June. In so-called "carbon contracts for differences" (ccfd), the state undertakes to compensate a company for the additional costs incurred by the company through the construction (CAPEX) and operation (OPEX) of more climate-friendly plants compared to conventional ones. The subsidy period is 15 years. The aim is to facilitate the switch to climate-friendly industrial processes. The funding is being put out to tender in order to drive forward the decarbonisation of industry. Only the most efficient projects are to be supported.

However, it has not yet been possible to carry out a bidding process, as the EU Commission has yet to approve the funding instrument. However, approval can be assumed, as similar programmes have already been approved in other member states. What do industrial companies need to know about the funding instrument? When will the first bidding processes begin? And what impact will the ruling of the Federal Constitutional Court of 15 November 2023 on the Climate and Transformation Fund (KTF) have on the funding amount? Read the answers to these and other questions in the text.

      1. To what extent do climate protection contracts increase the willingness of companies to switch to green energy sources such as green hydrogen?

Cäcilia Gätsch: Climate-friendly industrial processes are not yet profitable. However, energy-intensive industry in particular, as one of the largest greenhouse gas emitters, needs to switch to climate-friendly energy sources due to rising CO2 prices and dwindling emission allowances in European emissions trading. In order to compensate for the lack of profitability and thus enable the necessary switch, financial support from the state is required in the initial phase. This is where climate protection contracts come in. They guarantee financial security when switching to more climate-friendly systems that use green hydrogen instead of natural gas, for example, by offsetting the additional costs incurred. The subsidy amount is adjusted annually to the CO2 price in order to compensate only for the actual difference. This increases planning security for companies. The investment risk becomes calculable and the willingness to switch is increased. Climate protection agreements therefore create a more secure investment framework for industrial companies, which triggers green transformation processes in Germany and at the same time prevents companies from leaving the country.

      2. Which companies are eligible to apply?

Cäcilia Gätsch: To be able to apply for a climate protection agreement, the company must belong to a sector that is covered by European emissions trading. This is the chemical industry, for example. In addition, in order to apply, the current fossil-based production system must emit at least 10 kilotonnes (kt) of CO2 equivalent per year, whereby the relative greenhouse gas reduction compared to the reference system (i.e. the initial emissions) must be at least 60% from the third year after the start of operations of the project (be it commissioning or the start of a modified operation) at the latest. In order to achieve the 10 kt criterion, several companies can also join together to form a bidding consortium. Small projects with a funding requirement of less than 15 million euros calculated over 15 years are excluded from the application process.

      3. How do I obtain a climate protection contract as a company?

Cäcilia Gätsch: Eligible companies wishing to apply for a climate protection contract must first take part in a preliminary procedure. Participation in the preliminary procedure is a mandatory requirement for participation in the bidding process and serves to make the project to be funded more "tangible" and to demonstrate a certain degree of maturity. For example, companies are asked to provide general information about the project and to estimate the expected funding requirements. The information provided will be treated in strict confidence. Participation in the preliminary procedure is no longer possible for the first funding round.  However, the next round is due to start at the beginning of 2024. The climate protection contract will then be awarded in the subsequent bidding process.

     4. When can the first bidding process be expected and how exactly is the preliminary process linked to it?

Benita Stalmann: The BMWK had originally planned the first bidding process for the fourth quarter of this year, with two more to follow in each of the next two years.An average of 15 industrial projects are to be funded per round with around 50 million euros each.The BMWK intends to conclude funding agreements totalling a mid double-digit billion euro amount over the next few years.However, as the climate protection contracts are subject to authorisation under EU competition rules, the EU Commission must first approve the funding instrument. This is still pending.
The two-month preliminary procedure ran until the beginning of August this year. Companies wishing to apply were able to submit information on their planned projects. On the basis of this information, the BMWK selects the participants for the first bidding procedure - according to its own information, this is a permissible exercise of discretion by the BMWK under funding law - and also determines the exact structure of the bidding procedure. The background to this is that a standardised bidding procedure, in which projects with different industrial plants from different sectors compete against each other for funding, has not been common practice to date and the Ministry therefore only wants to derive a sensible structure for the bidding procedure on the basis of the information submitted. The BMWK reserves the right to decide whether preliminary procedures should also be carried out for the other planned bidding procedures.

     5. How exactly does the bidding process work?

Cäcilia Gätsch: The bidding procedure begins with the call for funding by an administrative body yet to be appointed by the BMWK, which contains information on the procedure, deadline and funding volume. Companies that have successfully participated in the preliminary procedure can bid on this call for funding with a bid price. This is the price that the bidding companies estimate to cover their additional costs for the project described in the preliminary procedure. Any subsidies received elsewhere will be deducted from this price.
The bids are evaluated at 80% on the basis of subsidy cost efficiency, with the most favourable project receiving the highest number of points. A further weighting criterion is the relative reduction in greenhouse gas emissions in the first five years after the start of operations of the project (20%). The relative greenhouse gas emission reduction is calculated as the sum of the planned greenhouse gas emissions of the project divided by the greenhouse gas emissions
of the reference system for the planned production volume. This data is used to rank the projects.
Those projects whose total funding amounts along the ranking do not exceed the funding volume advertised are awarded the contract, i.e. the right to conclude a climate protection agreement.

     6. How exactly does the funding work?

Cäcilia Gätsch: The special thing about climate protection contracts is that the annual funding amount paid out is not static, but is based on external factors such as the CO2 price and the price of energy sources, which changes over the years. The climate protection contracts therefore work in two directions. As long as the new, green production is more expensive than conventional production, money flows from the state to the company. As soon as climate-friendly production is cheaper than conventional production due to the rising price of CO2, the payment obligation is reversed: The subsidised companies then pay their additional income to the state. However, the climate protection agreement can be cancelled if the subsidised technology has become established on the market in order to increase the incentive to switch. By adapting to the real market situation, the most efficient subsidisation possible is ensured.

     7. What influence does the recent judgement of the Federal Constitutional Court have, which prohibited the reallocation of unused credit authorisations to combat the             corona crisis for use in the Climate and Transformation Fund (KTF)?

Benita Stalmann: As a result of the judgement, the German government now has around 60 billion euros less available in the KTF than it had planned. Among other things, the climate protection agreements for energy-intensive industry were to be financed from this fund. Finance Minister Christian Lindner announced last week that a new economic plan for the KTF would be drawn up for next year. Only commitments already made under the KTF, such as the assumption of the EEG levy and the promotion of building refurbishment, could be honoured for the time being. According to statements made by Economics Minister Robert Habeck one day after the judgement, the court decision primarily affects planned financing measures for the transformation of the industry. His statements revealed a clear intention to provide the necessary funding to support the industrial transformation process by other means if necessary. The discussion about suitable solutions is already in full swing. The proposals range from the legal independence of the KTF with its own debt facility, a temporary climate solidarity surcharge or an adjustment of the CO2 price through to a reform of the debt brake. It remains to be seen which proposal will ultimately prevail.

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