EU taxonomy on Natural Gas
Originally published in our 28th January 22Newsletter
This week the EU College of Commissioners is expected to agree a final decision on the draft text of the EU Taxonomy complementary Delegated Act (DA) it published earlier this month on a role for natural gas and nuclear energy in the transition towards a predominantly renewables-based future energy mix.
Taking into account scientific advice and current technological progress, as well as varying transition challenges across Member States, the draft DA seeks to amend the Climate DA and the Article 8 DA – which came into force in December 2021 – by including technical screening criteria and additional disclosure obligations for activities in natural gas and nuclear energy. To classify investments in both energy sources as green, the draft sets out clear and tight conditions which will be periodically updated as technologies mature.
For natural gas, detailed conditions exist for new gas plants approved before the end of 2030. Life-cycle GHG emissions must be less than 270g CO2 equivalent per kilowatt hour or satisfy an average annual threshold of 550kg CO2 equivalent per kilowatt over 20 years. Additionally, if the plant is replacing traditional fossil fuels such as coal generation, a host of other conditions must be met – including a gradual but steady switch to low-carbon gases by 2036.
- On 20 January 2022, in advance of the January 21st deadline for comments back to the Commission, Eurelectric hosted a dedicated internal workshop on natural gas. During these workshops, members from National Associations reviewed the DA to determine the Eurelectric position on Gas. The early reportage from this workshop notes the following as potential issues for investors in gas plant;
• The cumulative requirements for natural gas-fired power plants may not enable the complementary DA to mobilise sufficient capital to satisfy the investment need for transitionary actives and (therefore) the value of separate disclosure requirements for natural gas-fired activities may be questioned.
• Emission performance standards based on direct emissions levels may be more welcome than life cycle emissions, as these do not rely on different methodologies and provide an immediate overview on emission levels.
• The proposed values for direct and average annual emissions (i.e. 270g CO2e/KWh and 550kg CO2e/KW respectively) cannot currently be met through the application of BATs with GHG emissions at 350 CO2e/KWh.
• Requirements related to the gradual use of renewable & low-carbon gases will need to be regularly assessed based on market availability and safety guidelines set by national regulatory agencies,
• The proposed gradual ramp-up (i.e. 30% from 2026, 55% from 2030, 100% from 2036) may be too optimistic – i.e. does not correspond to any factual scenario set by the European Commission in the Long-Term Energy Scenarios – and will require long-term blending commitments by operators.
• It is unclear how the proposed 550kg CO2e/KW annual average emissions threshold will be applied over the 20-year timeframe. Additionally, the proposed threshold could be inconsistent with the 3-year review clause (set in Art.19.5) as it would allow a potential front-loading of the overall emissions-budget in the first years of operation.
• Uncertainties on the ‘replacement’ clause (i.e. 1.b.iii) must be addressed by the final proposal as there is a lack of detail on the temporal correlation between closure of the coal-fired power plant and the commissioning of the substitute gas-fired power plant and on the number of gas-fired plants which can replace a single coal-fired plant (in compliance with the 15% capacity expansion limit). Additionally, some participants have advocated for the inclusion of replacement criteria for existing gas-fired power plants which might be retrofitted for the use of renewable & low-carbon gases.
• A 2030-sunset clause for construction permits may be needed as it would ensure enough flexibility to effectively address forthcoming issues related to supply security and coal-phaseout plans.