What s in EU budget proposals and what will they bring for the local energy transition?

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1 Analysis of EU Commission technical proposals for EU budget After having published the main strands and priorities of the EU budget for the period on the 2 nd of May 2018, a month later the EU Commission has published its technical proposals for the future EU budget in the key areas for the local energy transition the Horizon Europe and LIFE funding programmes, the Connecting Europe Facility, the InvestEU fund and Cohesion policy & Regional Development. Energy Cities deciphers the Commission s plans for the next EU budget and how it will channel European funds for the local energy transition. Furthermore, we give an overview on the remaining issues to be negotiated on the future budget and outline how Energy Cities members can influence the decision-making process in EU Member States. What s in EU budget proposals and what will they bring for the local energy transition? Horizon Europe The successor programme of Horizon 2020 has a budget of ca. EUR 100 billion & is based on 3 pillars: - Open Science - Global Challenges & Industrial Competitiveness = includes the clusters Climate, Energy & Mobility as well as Digital & Industry and Food & Natural Resources - Open Innovation o Furthermore, in line with a stronger focus given to migration, security & defence, a European Defence Fund is established The cluster Climate, Energy & Mobility receives a budget of EUR 15 billion, an increase of +20% compared to funding under Horizon This cluster will focus on the following areas of intervention: - Climate science & solutions - Energy supply - Energy systems & Grids - Buildings and industrial facilities in energy transition - Communities and cities - Industrial competitiveness in transport - Clean transport & mobility - Smart mobility - Energy storage Under the Climate, Energy & Mobility cluster, the areas of intervention will deal with several thematics relevant for the local energy transition: o Under Energy systems & Grids, the focus will lie notably on Integrated approaches to match renewable energy production and consumption at local level including on islands, based on new services & community initiatives o Under Communities & cites, the focus will lie on zero-emission mobility, positive energy districts, urban social innovation and also a Global cities research agenda o Under Clean transport & mobility, a clear focus on electrification of transport, batteries for low- to zero-emission vehicles and interoperability

2 o Under Energy storage, focus will be on liquid & gaseous renewable fuels, batteries and low zero-carbon hydrogen including fuel cells Under the Food & Natural resources cluster, some areas of intervention are also relevant in terms of climate & energy at local level: o Under Agriculture, Forestry & Rural areas, focus will be notably on innovations in farming at the interfaces between agriculture, aquaculture, forestry and in urban areas and Land use, rural development & territorial linkages The Horizon Europe programme will maintain to a large extent the same administrative set of rules, funding rates & key indicators. Furthermore, it will focus on the following types of actions: - Research & innovation action - Innovation action - Innovation & market deployment action - Training & mobility action - Pre-commercial procurement action - Joint/coordinated public procurement of innovative solutions action - Coordination & support actions 35% of funding under the entire Horizon Europe programme will be dedicated to climate action (same as in Horizon 2020). LIFE programme Alongside the new proposal for the Common Agriculture Policy (CAP), where one key objective will be to increase the production of sustainable & renewable energy in the agriculture/forestry sectors, the EU Commission has also put forward a revamped & increased LIFE programme (+60% in funding). The LIFE programme now has a volume of ca. EUR 5,5 billion and is based on the following pillars: - Nature & biodiversity - Circular economy & quality of life - Climate change mitigation & adaptation = 1 EUR billion - Clean energy transition (new pillar compared to previous LIFE programme) = 1 EUR billion For the local energy transition, the pillars climate change mitigation & adaptation and clean energy transition are the most relevant from the new LIFE programme. The entire LIFE programme will have 60% of its funds dedicated to climate action, and will also have: - An increased focus on clean energy: One of the main aims of the new LIFE programme is to stimulate investment and support activities focused on energy efficiency, especially in European regions lagging behind in the transition towards clean energy; In terms of administrative set of rules, funding rates, key indicators and selection process, the new LIFE programme will largely use the same basis as the previous LIFE programme. Operating grants for NGOs in the field of climate, environment & energy will be maintained. Connecting Europe Facility Compared to the previous funding period ( ), the Connecting Europe Facility will see its funding nearly doubled in the coming period. Focusing on transport, energy and digital, especially the energy dimension of the Facility is of relevance for the (local) energy transition.

3 With a budget of EUR 8,7 billion, the energy pillar of the Connecting Europe Facility has the grand aim to complete the EU Energy Union and support Europe s clean energy transition following the (nearly completed) adoption of the Clean Energy for all Europeans legislative package. The energy pillar will dedicate at least 10% of its budget to support cross-border renewable energy projects, which is an important new addition to the Connecting Europe Facility. However, it looks like mainly cross-border projects between Member States as beneficiaries and project developers will be funded through the Facility. Otherwise, energy projects funded under the Connecting Europe Facility include improving interconnection, making grids smarter and more digitalized and strengthening the resilience of Europe s energy supply infrastructure. The Commission claims that the Connecting Europe Facility s investments would be dedicated to at least 60% to climate action but analysis by green think tanks and NGOs come to a very different assessment, as can be seen below: Divestment from fossil fuel related infrastructure and aligning EU investments with a net-zero emissions goal by 2050 All investments are undergoing a so-called climate proofing, but the terms are undefined (unlike e.g. in the Cohesion Policy, more on that later in the analysis); therefore, the space is open to still fund gas infrastructure as decarbonisation measure Upon publication of the Connecting Europe Facility proposal, an (unintentional) blunder was done by the Commission whether the Facility tackles climate change: Hopefully this mishap will be corrected in the final regulation of the Facility and will also include an explicit exclusion of funding fossil fuels to prevent using EU public funds to finance gas projects. The InvestEU Fund The new InvestEU fund replaces the Juncker Fund (European Fund for Strategic Investment) and seeks to expand and boost the potential of EU infrastructure investment funding. The EU Commission provides EUR 38 billion in guarantees, with the hope to leverage more than EUR 650 billion in investment in the next decade. The InvestEU mechanism will be structured as follows: - 4 areas of intervention = sustainable infrastructure, research, innovation & digitization (e.g. blockchain, Artificial Intelligence projects), SMEs and social investment/skills - 30% of projects funded under InvestEU shall be dedicated to climate action - In order to better account for the impact of investments in terms of climate, the InvestEU includes a provision to integrate the cost of GHG emissions and the positive effects of climate mitigation in its cost-benefit analysis = a step forward in the right direction as regards Divest; - Sustainability criteria for investments are mainly the ones already used in its Action Plan for Sustainable Finance, published in May. - In addition to the InvestEU funding programme, an InvestEU advisory hub (one-stop shop) will be set up, as well as an InvestEU portal (bringing together developers & investors) The Sustainable infrastructure investment window is the most relevant in terms of energy and climate investment under this priority, at least 50% of the investments have to be earmarked for

4 climate action, according to the Commission s proposal. Furthermore, the sustainable infrastructure window will focus notably on: - Smart and sustainable urban mobility projects (low-emission urban transport modes) - Supporting renewal and retrofitting of transport assets - Alternative fuels infrastructure, including electric charging infrastructure - Renewables and energy efficiency projects o There is no specific provision on the volume size of the projects, but as the proposal is drafted now, larger-scale (aggregated) projects will more likely receive funding In terms of management, the new InvestEU fund anchors all centrally managed financial instruments inside the EU in a single, streamlined structure. National promotional banks get a bigger role in managing InvestEU funds, to the detriment of the European Investment Bank. The governance and management of the fund is largely centralized. Cohesion Policy & Regional Development Alongside the Common Agricultural Policy, also the Cohesion & Regional Development policy pillar of the next EU budget has to face significant cuts due to Brexit. Nevertheless, the proposal for the future Cohesion policy in holds some positive surprises for channeling funds to the local energy transition. The 5 main objectives driving Cohesion Policy & Regional Development: - A greener, carbon free Europe, implementing the Paris Agreement and investing in energy transition, renewables and tackling climate change - A more connected Europe, with strategic transport and digital networks - A smarter Europe, through innovation, digitalization, economic transformation and support to SMEs - A more social Europe - A Europe closer to citizens, by supporting locally-led development strategies and sustainable urban development across the EU The main features regulating Cohesion Policy & Regional Development spending: - The main allocation method for Cohesion funds is still GDP per capita. However, the Commission proposes new criteria to better mirror the socio-economic situation = these criteria are youth unemployment, low education level, migration and climate change. Practically, the new criteria result in a EUR 30 billion funding shift from Eastern European Member States towards Greece, Italy and Spain Member States that suffered the most from the financial and migration crisis. Certain media see this shift also as an elegant way to react to the repeated rule of law breaches by e.g. Poland/Hungary, when infringement & legal procedures have not yielded much success. - A stronger use of financial instruments instead of grants - Globally lower EU co-financing rates in order to induce higher national co-funding & thereby more effective and efficient spending of public funds; the EU contribution is set at a maximum of 40-70%. - A stronger link between Cohesion policy intervention and the European Semester of economic policy coordination (EU s economic governance system)

5 - New preconditions for investments ( enabling conditions ) = most importantly, there is a proper Divestment rule by introducing an explicit exclusion of funding fossil fuels through Cohesion & Regional Development funds, which is a major step forward for climate action: - In total, 37% of Cohesion funding shall be dedicated to climate action, while 30% of Regional Development funding will be allocated to climate action, according to Commission figures which are still disputed by environmental NGOs that have calculated a lower % of funding. - A single rulebook is established and access to funds shall be simplified through less red tape - In terms of the governance and management of the funds, not much is changed compared to the principles of the previous funding period (e.g. shared management of funds between Commission and Managing Authorities, Partnership principle, etc.)

6 - In a surprising move of transparency, the Commission also already published Cohesion Policy allocations to the 27 Member States for , in current & constant 2018 prices: The main provisions, programmes and initiatives for local energy & climate action in the Cohesion policy & Regional development proposal: - The instruments of locally- & regionally led integrated territorial investments (ITIs) and community-led local development (CLLD) design and implementation of local growth strategies involving local authorities, civil society and businesses from the previous funding period will be continued also in the forthcoming period - The urban earmarking will be increased from 5% in to now 6% in the next funding period, meaning that 6% of Regional Development funds are allocated to local, urban and territorial (sustainable) investments - A new European Urban Initiative is set up, covering all urban areas in Europe and supporting all thematic areas of the EU Urban agenda, such as e.g. energy transition, climate adaptation, air quality, housing or circular economy. The European Urban Initiative shall consist of these three strands, all with regard to sustainable urban development: o (a) support of capacity-building; o (b) support of innovative actions; o (c) support of knowledge, policy development and communication

7 - A new so-called common provision regulation (CPR) allows for transfer of up to 5 % of the national allocation to the InvestEU fund for uses of budget guarantees. This can enable the proliferation of instruments to reduce cost of capital for RES deployment, which would be beneficial for local areas where there is not yet much renewable energy deployment - A link is established between Cohesion funds and the integrated national energy and climate plans under the EU Energy Union Governance regulation, fostering and supporting high ambition of Member States in terms of climate & energy: MS should take into account the content of their draft National Energy and Climate Plans and the outcome of the process resulting in Union recommendations regarding these plans for their programmes and financial needs allocated for low carbon investments" - The EU s outermost regions (mainly Islands) get a special allocation of EUR 1.6 billion from the European Regional Development Fund, in line with the new strong focus laid by the EU Commission on fostering the proliferation of clean energy systems on islands - The EU INTERREG programme (territorial cooperation) will be continued and have a budget of EUR 9,5 billion in the new funding period EUR 600 million less than in the previous period. The co-financing rate for INTERREG projects is set at a maximum of 70%. The selection criteria, key indicators and the general set-up of the INTERREG programme remains similar to the previous funding period. A new possibility is included for a region to use parts of its own allocation to fund projects anywhere in Europe jointly with other regions. - The Commission also proposes to create Interregional Innovative Investments. Regions with matching smart specialisation assets (i.e. smart specialization strategies) will be given more support to build pan-european clusters in priority sectors such as big data, circular economy, connected mobility, advanced manufacturing or cybersecurity. The aim of the Commission is to scale up bankable interregional projects that can create European value chains in the aforementioned priority sectors. - Moreover, the Commission has also proposed another new instrument, the European Cross Border Mechanism, to help overcome remaining cross-border obstacles by making it possible, on a voluntary basis, for the rules of one Member State to apply in a neighbouring Member States for a specific project or action limited in time. This could help more crossborder transport infrastructure or healthcare facilities see the light of day according to the Commission, but could be also of relevance for cross-border (experimental & local) energy projects depending on course of the outcome of the negotiations on the energy market components (Market Design) of the Clean Energy for all Europeans package.

8 Taking all this into consideration, what are the key remaining issues to be negotiated on the Commission s proposal for the EU budget ? - The encouraging proposals of the EU Commission on Horizon Europe and LIFE are a good starting point from which the level of ambition can be raised further. To advance on the next frontiers in the local energy transition mobilisation of all actors into the transition (social innovation) - the future Horizon Europe programme should make innovative partnerships as one of its funding cornerstones. The LIFE programme should focus to a large extent on fostering the symbiosis of climate mitigation and adaptation at local level, thereby supporting the 9,000 + signatories of the Covenant of Mayors for Climate & Energy in Europe to develop and implement their midand long-term Sustainable Energy and Climate Action plans (SECAPs) to make their territories sustainable, vibrant and fully resilient. - Cities need the rural level in their energy transition. The current division of EU programmes in energy, food, environment and climate is not encouraging a stronger link between the urban and rural territories. Therefore, a new innovative programme should support local energy and food interdependence infrastructures, mixing and making EU urban & agriculture programmes more complementary. Fostering alliances between territories should be the new normal and supported actively by EU funding, as they foster resilience, virtuous local socio-economic loops and contribute to bridging the urban-rural divide. - The clear divestment provision in the Cohesion policy and Regional Development proposals is the way to go forward in excluding public spending on fossil fuels: it is a provision that should be replicated throughout the entire EU budget, not only in this budget pillar. There shouldn t be a single EUR spent on fossil fuels in the next funding period, in order for the EU to respect its commitments under the Paris Agreement and get on a trajectory towards netzero emissions by A clear definition of what constitutes sustainable infrastructure spending excluding further EU investments in gas infrastructure should also be applied throughout the EU budget. - The energy transformation of Europe s territories will progress much faster through mutual learning and intense peer-to-peer exchanges. The newly proposed European Urban Initiative is a step in the right direction, and should build and expand on successful programmes such as URBACT or peer-to-peer actions offered in Intelligent Energy Europe and Horizon Furthermore, the proposed cuts to the crucial INTERREG programme should be abolished. - Cities need the EU, and the increase of the urban earmarking from 5 to 6% proposed by the EU Commission is a first step in the right direction towards a higher EU ambition on supporting local authorities in their energy transition. However, more is possible in this regard, especially by opening up the InvestEU fund or the Connecting Europe facility to funding local energy projects between urban areas in different Member States.

9 How can Energy Cities members influence the EU budget decision-making process in Member States? - By engaging with the MEPs of the European Parliament from their constituencies, and pressuring them to back a more ambitious EU budget for the local energy transition, - By advocating towards their national energy, climate & finance ministries for maintaining the Commission proposal as a bare minimum and showing the added-value of EU funds for the local energy transition - By sharing with Energy Cities their experience as beneficiaries from the previous EU funding period ( ), what lessons were learned and what should be improved for the future CONTACT David Donnerer Energy Cities david.donnerer@energy-cities.eu