What is the link between the RepowerEU plan and the EU ETS?
May 31, 2024
What is the link between the RepowerEU plan and the EU ETS?
The RepowerEU plan, designed to enhance energy independence and sustainability through green finance, is partly funded by carbon allowance sales. However, injecting allowances into the market to get funds has caused prices to drop, leading to a shortfall in expected revenues for this responsible investment and sustainable investment plan, even though the EU ETS will recover. This has impacted climate finance initiatives, despite efforts towards carbon neutrality and the use of green bonds.
The RepowerEU plan is a response to the political disruptions caused by the war in Ukraine and the following energy crisis. It is a legislative package aiming at making Europe independent from Russian energy sources and make it more sustainable and effective when it comes to power production and usage. The RepowerEU plan is funded by €72 billion in grants and €225 billion in loans. A part of the initiatives will be using money generated from the sale of carbon allowances. As a reminder, European Union Allowances (EUAs) are issued by the EU commission and a part of them is sold through auctions. So, it has been decided that €20 billion worth of allowances will be injected earlier than expected, to raise the necessary funds. However, this supply calendar change impacted EUA prices, which dropped from over €90 in March 2023 to as low as €50 by February 2024. Despite generating €4.4543 billion from EUA sales by 2024, (22.27% of the total funds to be generated by the EU ETS), the EUA sales proceeds fall short of initial expectations due to lower-than-anticipated prices, resulting in a delay of €255.5 million in expected revenues to reach the RepowerEU objectives.
How much does the RepowerEU plan cost?
The RepowerEU plan and the European Union Emissions Trading Scheme
Is the EU ETS bringing enough money for the RepowerEU plan?
How much does the RepowerEU plan cost?
The financing of the RepowerEU plan
The RepowerEU plan will mobilize €300 billion in total with around €72 billion from grants and €225 billion in loans. In the “grants” category, there are funds coming from the auctioning of EUAs. €8 billion are sourced from Member States' anticipated auctioning of emission allowances, while €12 billion are drawn from the Innovation Fund. The European Union allowances corresponding to those funds are scheduled for auctioning by August 2026.
€113 billion for renewables and hydrogen infrastructure (€86 billion for renewables and €27 billion for hydrogen) by 2030,
€56 billion for energy efficiency and heat pumps by 2030,
€41 billion for adapting industries to reduce fossil fuel usage by 2030,
€37 billion to increase biomethane production by 2030, and
€29 billion to enhance the power grid by 2030 to facilitate increased electricity consumption.
The RepowerEU plan and the European Union Emissions Trading Scheme
The RepowerEU plan and EU ETS supply
The European Union is “injecting” €20 billion worth of allowances into the market to fund the RepowerEU initiative. These allowances are “a borrowing from future allocations”. While this injection temporarily increases supply and impacts prices negatively in the short term, it will result in a sharper decrease in supply from 2026 onwards, effectively balancing out demand and supply dynamics in the future.
The RepowerEU plan impact on the EU ETS: not a surprise
Several NGOs and carbon market analysts, such as the WWF or Sandbag, had foreseen the potential negative impact of the supply adjustment as early as 2022. In a report published in May 2022, when EUAs were valued at EUR 91 and market sentiment was bullish, concerns were raised by those institutions about the market's ability to withstand disruptions caused by the RepowerEU plan (given the market structure with the Market Stability Reserve as it is currently designed). Even at that time, there were concerns EUA prices could plummet to as low as EUR 60 due to these supply changes. And they ended up being right, even if back then, it was brave to talk about such low levels.
The RepowerEU plan and carbon allowance prices
Between March 2023 and February 2024, European Union allowances (EUAs) experienced a notable decline in prices. This downward trend is attributed to various factors, but mainly this injection of EUAs ahead of the projected budget, leading to a supply-demand imbalance. With more EUAs entering the market amid an economy facing reduced economic activity and lower emissions, there was less need for entities to purchase EUAs, resulting in a decrease in prices. This shift saw EUA prices dropping from over EUR 90 in March 2023 to as low as EUR 50 by February 2024.
Is the EU ETS bringing enough money for the RepowerEU plan?
How much has the auctioning of carbon allowances already brought to the RepowerEU plan?
The 2024 revenues from EUA sales for the RepowerEU program amounted to EUR 1.6261 billion, compared to EUR 2.8282 billion in 2023, bringing the total to EUR 4.4543 billion. The cumulative EUAs sold for the plan currenlty stands at 62,797,500 units.
Is the EU ETS bringin enough funds to the RepowerEU scheme so far?
The EU ETS has contributed 22.27% of the necessary funds for the RepowerEU plan thus far. However, this falls short of initial expectations. Policymakers had projected an average EUA price of EUR 75 based on market conditions at the scheme's introduction, but recent prices have been lower, averaging EUR 60 in 2024. Consequently, there is currently a delay of EUR 255.5 million in the expected revenues corresponding to the volumes sold.
The EU ETS will recover for the supply disruptions in supply will tighten faster
The supply disruptions caused by the RepowerEU plan will gradually be rectified in the coming months and years, leading to a sharper decrease in supply levels by as early as 2025. This will tighten the market and increase prices. This trend has already begun, as evidenced by the rebound in EUA prices from the EUR 50 range to EUR 69 at the time of writing.
Key Takeaways
The RepowerEU plan aims at enforcing energy independence and sustainability in Europe, addressing political disruptions triggered by the Ukraine war.
It entails a €300 billion initiative funded by €72 billion in grants and €225 billion in loans, including €20 billion generated from the sale of carbon allowances (EUAs).
Despite generating €4.4543 billion from EUA sales by 2024, constituting 22.27% of the total funds expected, lower-than-expected prices have led to a shortfall, with a delay of €255.5 million in expected revenues to reach the RepowerEU objectives.
The RepowerEU funding needs have made regulators change the supply calendar in carbon markets - they have “taken out EUAs from future budgets” and have injected them earlier, temporarily increasing supply.
This injection of allowances has caused a decline in EUA prices, as it has increased supply in a market temporarily characterized by a lower industrial activity and less CO2 emissions.
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