Modernisation Fund

Modernisation Fund

In order to support the implementation of the EU's energy and climate change objectives up to 2030 in EU countries with a GDP per capita of less than 60% of the EU average (compared to 2013), a new instrument to finance the modernisation of the energy system and the improvement of energy efficiency, the so-called Modernisation Fund (MF), has been created in accordance with Article 10d of Directive (EU) 2018/410 of the European Parliament and of the Council in order to strengthen cost-effective emission reductions and low-emission investments.

This instrument will operate from 2021-2030 and will be funded by the sale of 4.5% of the total pool of CO₂ emission allowances under the EU Emissions Trading System (EU ETS). These allowances will be sold by the European Investment Bank (EIB) in semi-annual tranches.

The new Directive (EU) 2023/959 of the European Parliament and of the Council of 10 May amended Directive 2003/87/EC establishing a scheme for greenhouse gas emission allowance trading within the Union and Decision (EU) 2015/1814 on the establishment and operation of a market stability reserve for the Union greenhouse gas emission allowance trading system. Under the provisions of the new Directive, the value of the MF was increased by an additional 2.5% of the allowance pool and three additional Member States - Greece, Portugal and Slovenia - were qualified to co-finance investments related to improving energy efficiency/reducing greenhouse gas emissions under the MF.

The current Beneficiary Member States (BMS) are Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

In connection with the above-mentioned amendment to the EU ETS Directive, the MF will be distributed to 13 Member States, of which Poland currently receives 34.2% of the available pool of funds. The value of the final MF pool will depend on the current price of allowances.

The mechanism of the Modernisation Fund in Poland was implemented within the framework of the Greenhouse Gas Emission Trading Scheme Act. According to the Act, the National Fund for Environmental Protection and Water Management (NfEP&WM) acts as the national operator of the Modernisation Fund, while the MF funds represent the revenues of the NfEP&WM, which are collected in a special NfEP&WM account. MF funds are used to finance investments under the NfEP&WM's so-called "priority programmes". Funding for projects is provided in both repayable and non-repayable forms.

The amendment of the European Parliament Directive also introduced changes in the scope of projects, designated as so-called priority areas, within which beneficiaries can apply for funding. At present, at least 80% of the funds within the basic pool of 2% and 90% within the additional pool of 2.5% of the funds from the Modernisation Fund are used to support investments in the following priority areas:

1. the generation and use of electricity from renewable sources, including renewable hydrogen;
2. heating and cooling from renewable sources;
3. the reduction of overall energy use through energy efficiency, including in industry, transport, buildings, agriculture and waste;
4. energy storage and the modernisation of energy networks, including demand-side management, district heating pipelines, grids for electricity transmission, the increase of interconnections between Member States and infrastructure for zero-emission mobility;
5. support for low-income households, including in rural and remote areas, to address energy poverty and to modernise their heating systems; and
6. a just transition in carbon-dependent regions in the beneficiary Member States, so as to support the redeployment, reskilling and up-skilling of workers, education, job-seeking initiatives and start-ups, in dialogue with civil society and social partners, in a manner that is consistent with and contributes to the relevant actions included by the Member States in their territorial just transition plans.

Poland's Modernisation Fund - institutional set-up

In order for the scheme to be financed from the Modernisation Fund, the Polish government is required to submit the proposed support area to the European Investment Bank (EIB) and the Investment Committee for confirmation that the project meets the conditions set out in the EU ETS Directive.

At least 90% of the Fund's resources will be allocated to projects included in the list of priority areas and a maximum of 10% to projects not included in the list (90/10 rule).

If the investments planned to be financed under the selected priority schemes of the National Fund for Environmental Protection and Water Management are confirmed as belonging to one of the priority areas, they will benefit from a simpler financing path. After a positive opinion on the draft of priority programme (scheme) from the Ministry of Climate and Environment, the scheme proposal is submitted to the EIB. After the EIB confirms that the investment falls within the priority areas, the priority scheme, after approval by the Board of Directors and/or the Supervisory Board, is directed towards implementation (organisation of the call for applications, evaluation of applications/projects, management of the contracts concluded). Investments that do not belong to the priority areas must be subject to closer control, including an assessment by the Investment Committee and the EIB of their technical feasibility, financial profitability and the possibility of achieving the planned emission reductions as part of their implementation.

The amendment to the EU ETS Directive currently places particular emphasis on conducting public consultations. In the case of large-scale project and schemes proposals and a review of planned investments, consultations are required before they are submitted to the EIB. Member States organise consultations in accordance with their national regulations. They have discretion as to the identification of relevant stakeholders and the appropriate duration of consultations.

Modernisation Fund in Poland - implementing rules

 

All schemes supported by the Modernisation Fund are in line with Article 10d of Directive (EU) 2023/959 of the European Parliament and of the Council amending Directive 2003/87/EC, as they will promote the reduction of greenhouse gas emissions in a cost-effective and economically efficient manner, which is the main objective of the Directive. They will lead to the modernisation of energy systems and the improvement of energy efficiency.

The schemes will contribute to the implementation of commitments under the United Nations Framework Convention on Climate Change, the Kyoto Protocol and the Paris Agreement, as well as the updated contribution of the EU and its Member States to the UNFCCC, which are international legal instruments committing countries to reduce greenhouse gas emissions.

The schemes are consistent with Poland's energy policy until 2040, the reduction targets resulting from the Paris Agreement and EU legislation, and the assumptions of the National Strategy for Responsible Development.