Sarah Fryer of Swan Energy has kindly summarized the technical changes coming to the EU ETS in Phase IV.
What are the anticipated changes in Phase IV of the EU ETS?
Phase III of the EU ETS will come to an end on the 31st December 2020, making way for Phase IV (2021-2030), which brings with it a number of changes to strengthen the EU ETS and to ensure that the declining quantity of freely allocated EUAs are effectively distributed. The changes introduced by the European Commission will come into force from the 1st January 2021, however some will need to be considered now in order to effectively prepare for the start of the new phase.
This Special Report covers the main changes and how they could affect your organisation. The changes covered include:
- Amendments to reporting requirements for full participants and opt-outs
- Tracking activity levels
- Dynamic free allocation
- Monitoring Methodology Plans
What type of participant are you?
There are different categories of EU ETS participant, the categories are established at the discretion of each Member State. For example, the UK has elected to continue to provide for 2 categories of installation: Full participant and Small emitter and hospital opt-out. The inclusion criteria for these schemes remain largely the same for Phase IV, other than a name change for the Small Emitters and Hospital Opt-out scheme to: “Article 27” scheme. An additional scheme has been introduced Article 27a, or the ‘Ultra-low emitter’ scheme. This scheme is for installations of any capacity but which have total CO2 emissions of <2,500 tCO2/year. Other EU member states are expected to keep their rules more or less the same.
The aim of the ultra-low emitter scheme is to reduce the administrative burden and cost for emitters that are often included in the EU ETS thanks to, typically, their use of stand-by generation. A good example of an Operator who is likely to fall into this category is a data centre. Data centres often have large stand-by electricity generation capacity, I.e. with a capacity >35MW(thermal), to provide resilience and security of electricity supply. Emissions from these installations are often low as the generators are only run in an emergency, if mains electricity is lost, or for testing purposes. The cost of administration, verification and Competent Authority subsistence fees is therefore often disproportional to the cost of emissions.
Activity Level tracking and dynamic allocation
Although it has always been a requirement of the Monitoring and Reporting Regulations for installations to track activity levels, there has never been a formal opportunity to do so. During Phase III, Full Participants have been required to complete an ‘Activity/ Capacity level change form’ annually which states whether or not the installation has undergone changes significant enough to cause partial cessation or significant capacity reduction. Allocation would previously only be affected if operations changed substantially. This is changing in Phase IV.
The introduction of “dynamic allocation” is designed to recognise that installations can change substantially and that their requirements for free allocation vary with those changes. As the level of free allocation available to Operators decreases (due to the linear reduction factor decreasing the overall free allocation pot), the European Commission want to ensure that distribution is fair and continually reflects operations. From the start of Phase IV, the level of free allocation will be adjusted symmetrically on a two-year rolling average of activity level if there is a variation of +/- 15% of the Historical Activity Level (HAL), determined in the NIMs exercise.
This additional reporting requirement will be through a form of ongoing NIMs. The activity level will be a separate report to the annual emissions report and will be required to be verified in the same manner. Operators should therefore anticipate Verification and Consultancy costs increasing to cover this increased workload. In preparation for this additional task, the European Commission have issued further Verification Guidance: Commission Implementing Regulation (EU) 2018/2067 to explain what should be reported and how to audit it.
Although this is a Phase IV measure, it will be required to be addressed from 2019 as the 2021 level of free allocation is now dynamic. If an installation’s activity level has varied by 15% of the HAL in 2019/2020, it could affect the level of free allocation in 2021. It is therefore anticipated that the first activity level report will be submitted during 2020.
The European Commission wants to promote energy efficiency so the guidance makes clear that if activity level decreases dis-proportionally to production by 15% and this reduction is due to energy efficiency gains, the level of free allocation will not be affected.
Monitoring Methodology Plan
To compliment the NIMs exercise, a Monitoring Methodology Plan (MMP) was also produced to explain the calculations and data sources used to calculate the 2013-2018 activity levels. This was known as the ‘backwards looking’ MMP. The Competent Authorities are now contacting operators and asking them to revisit their MMPs and update them accordingly, to account for activity levels from 2019 onwards, or ‘forward looking’.
What this will mean for you?
Operators that are Full Participants, should hear from their Competent Authority soon requesting an update to their MMPs. Over the next few months it is likely that information regarding activity level reporting will be issued and your Verifier and/or Consultant should be in touch to explain what the financial implications might be for your installation. Annual activity level reporting will then become a second report that is required to be submitted in addition to the annual emissions report, following a similar timeline, as set out below:
Source: http://petrolog.typepad.com/photos/blog_illustrations/euets_emissions_report_cycle.html (edited by Sarah Fryer)
If your installation is new, or you missed the opportunity to opt into Article 27 or Article 27a schemes but you are eligible, you will be given a second opportunity to do so in 2023, in preparation for stage two of Phase IV beginning in 2026.
For UK installations it is assumed that the UK will remain in the EU ETS or operate a symmetrical UK ETS scheme.
This special report has been kindly prepared by Sarah Fryer, Operations Director (and qualified EU ETS Verifier) at Swan Energy. If you have any questions about this summary you can contact your account manager or Sarah direct.
Swan Energy Ltd
Tel : 01484 843867
Mob: +44 (0) 7719961059
Address: 3 Ned Lane, Slaithwaite, Huddersfield, HD7 5HQ