NewGround Law ESG newsletter: REPowerEU away from Russian Fossil Fuels

NewGround Law ESG newsletter: REPowerEU away from Russian Fossil Fuels
By: Harry Swindin and Erwin Noordover

At NewGround Law, we recognise the importance of Environmental, Social and Governance (ESG), both to our firm and our clients. We are not the only ones who think this. The values and principles relating to the three aspects of ESG are already significantly altering capital flows, stakeholder engagement as well as national and international regulation. We vow to stay ahead of these trends. We believe that doing so will place us in an optimum position to capitalise on these changes as they materialise. Hence, the experts at NewGround Law have created a weekly newsletter to help those around us stay on top of the: key developments shaping the ESG landscape across Europe.

Plans to ‘REPowerEU’ away from Russian Fossil Fuels are announced
This week, the European Commission unveiled its strategy to reduce its reliance on Russian fossil fuels as a result of the war in Ukraine.[1] In total, the EU will mobilise EUR 300 billion to fund the key elements of the plan, which include energy-saving, diversifying supplies and supporting international partners, accelerating the rollout of renewables, reducing fossil fuel consumption in hard-to-decarbonise industries and smart investment. As a result of the strategy, it is expected that the EU will end its reliance on Russian fossil fuels by 2027.

The strategy impacts much of the legislation created under the EU’s Green Deal, which generates policy initiatives to make Europe carbon-neutral by 2050. One target which has been adjusted is the renewable energy target, which originally aimed to make Europe’s energy supply 40% renewable by 2030. This has now been increased to 45%. Similarly, the Commission has increased the Unions 2030 energy efficiency target from 9% to 13%.

Various other legislative and non-legislative actions are being considered and/or adopted by the Commission. This includes forming policies aimed at reducing energy usage through behavioural change, encouraging Member States to reduce VAT on energy efficiency products, introducing a possible legal obligation for Member States to have a diversified gas supply, creating new plans for increasing renewable hydrogen and decreasing biomethane and issuing guidance on renewable energy and power purchase agreements.

One point of particular interest for stakeholders in the energy industry is the Commission’s announcement that it will encourage states to enable faster permitting for renewables projects. The strategy advises that states should ‘swiftly map, assess and ensure suitable land and sea areas that are available for renewable energy projects and commensurate with their national energy and climate plans’. The Commission will also propose – within their upcoming Nature Restoration Law – that Member States should take into account the allocation of ‘go-to’ areas for renewable projects.

In addition, the Commission issued a recommendation on speeding up permit-granting procedures for renewable energy projects and facilitating Power Purchase Agreements. In particular, the recommendation calls for Member States to implement faster and shorter procedures, facilitating citizen and community participation, improving national coordination between different authorities, clear and digitalised procedures, sufficient human resources and skills, better identification and planning of locations for projects, easier grid connection and facilitating power purchase agreements.[2]

A further area of interest within the strategy is the introduction of an EU Solar Strategy. The strategy will aim to double solar PV capacity by 2025 and install 600GW by 2030. There are four main components of the strategy; shortening and simplifying permit procedures (as above), ensuring sufficient resources and trained staff, setting up an alliance for the solar energy industry and the rapid roll-out of solar energy through the EU Solar Roof Initiative. The final component is pertinent to the real estate industry as it places new requirements on certain buildings. From 2026, it will be mandatory to install solar panels on new government and commercial buildings of more than 250 m2. For existing government and commercial buildings of more than 250 m2, this will apply from 2027. From 2029, this will apply to residential houses.

Many more updates are expected in the coming months in relation to the deployment of the REPowerEU strategy.

Record Growth for Renewables according to a Report by the IEA
The promising developments for the renewable energy sector in the REPowerEU strategy were accompanied by a report by the International Energy Agency (IEA) which found that new capacity for generating renewable energy increased by a record 295 gigawatts in 2021.[3] This progress is largely attributed to significant increases in solar power in the EU, Latin America and China. Within the EU, renewables capacity increased by almost 30% in 2021. The IEA stated that growth may have been even higher if it wasn’t for post-pandemic supply chain issues.

The IEA expressed concern, however, for the uncertainties surrounding the wind industry. In 2021, new onshore wind capacity dropped 32% compared to the previous year. Policy uncertainty as well as complex permitting regulations are attributed to this decline.

Looking forward to the remainder of 2022, the report expects global annual renewables capacity to continue to grow to 320 gigawatts. Furthermore, solar is expected to be the fastest growing renewable energy source in 2022, followed by wind and hydropower. The IEA expects the rising costs of fossil fuels to mean that renewable energy prices remain competitive despite increased charges for installing solar PV and wind plants.

According to the report, the outlook for 2023 and beyond is less optimistic. The IEA expects growth of renewables to plateau in 2023 due to an absence of concrete policy commitments. The IEA states that nations must follow the EU’s lead on policy implementation if progress is to continue.

The Netherlands Pledges with Three EU Counterparts to build 150GW of Offshore Wind Capacity
In the same week that the IEA report and the REPowerEU strategy were published, Germany, Belgium, the Netherlands and Denmark pledged to generate 150GW from wind farms in the North Sea by 2050.[4] Under the agreement, the four countries will cooperate on the construction of the wind farms as well as the infrastructure required for them to function.

The declaration, which was signed by leaders of the four countries and attended by European Commission President Ursula von der Leyen, did not make clear what share of the 150GW the Netherlands will be responsible for. This is likely to be announced later in the year by climate minister Rob Jetten. At present, Dutch offshore wind capacity is around 2.5 GW.[5]

If successful, the capacity produced under this declaration will make up half of the EUs total offshore wind capacity 2050 target of 300GW, as set by the REPowerEU strategy. However, to do so the projects must first overcome the short and medium term issues identified by the IEA’s report, such as supply chain issues and regulatory difficulties. This is likely to be a pertinent case study for those assessing the EU’s progress towards its targets under the REPowerEU strategy.

EU Green Bonds Standard Proposal Update
Green Bonds may be issued by public or private institutions and are a key way of financing sustainability-linked projects. This week, two major stories surfaced which are likely to spur growth in the usage of these types of bonds. The first update concerns EU green bonds.

MEPs from the Economic and Monetary Affairs Committee have announced their proposals for the ongoing development of an EU Green Bond Standard (EuGB).[6] The aim of this proposed legislation is to create a uniform standard for companies and public authorities that use green bonds to raise funds on capital markets to finance investments, while meeting tough sustainability requirements and protecting investors.[7]

Back in July 2021, the Commission issued a proposal regulation on European green bonds.[8] The key requirements of this were; (1) taxonomy alignment – the funds raised by the bond should be allocated fully to projects that are aligned with the EU taxonomy, (2) transparency – full transparency on how the bond proceeds are allocated through detailed reporting requirements, (3) external review – all European green bonds must be checked by an external reviewer to ensure compliance with the Regulation and taxonomy alignment of the funded projects and (4) supervision by the European Securities Markets Authority (ESMA) of reviewers – external reviewers providing services to issuers of European green bonds must be registered with and supervised by the ESMA.[9]

The Economic and Monetary Affairs Committee has now reviewed and revised the legislation and has made some significant alterations. The first of these is to widen the scope of the regulation to better regulate the entire green bond market rather than only creating an EuGB label as previously suggested. Secondly, all EuGBs will have to have verifiable transition plans to prevent greenwashing. Next, stronger supervision for those issuing green bonds is required in order to enforce the rules. Finally, increased transparency for green bonds used for nuclear and gas activities.

The committee must now negotiate their proposals with Member States. These talks will begin in the coming weeks.

The Netherlands to issue between EUR 4-5 billion in Green Bonds
On 14 June 2022, the Netherlands will issue EUR 4-5 billion in green bonds as the country aims to continue to build a robust green capital market.[10] The Netherlands was the first country with a triple-A credit rating to issue a green bond back in 2019. The Dutch State Treasury Agency (DTSA) said in a statement on May 12, that the upcoming bond issuance will be used to fund projects in renewable energy, energy efficiency, clean transportation and climate change adaptation.

The DTSA updated its existing Green Bond Framework to ensure the bonds were up to two key standards.[11] Firstly, the bonds have been aligned with the updated EU Taxonomy Regulation. As a key part of the EU’s Sustainable Finance Strategy, the taxonomy creates a legally-binding classification system for economic activities with potential environmental benefits, thus forging a common language between investors and other entities.[12]

Secondly, the Green Bond Framework has also been redesigned to be compliant with the EU Commissions proposal for a European Green Bond Standard. As the Dutch bond issuance was announced prior to the previous story from the Economic and Monetary Affairs Committee, it is not yet clear whether the Dutch bonds will adhere to the original standard made by the Commission or the updated one. This is likely to be announced prior to the issuance of the bonds.

The bonds will be available from June 14 via a Dutch Direct Auction. Green Investors can receive beneficial treatment during the issuance process as a result of the green investor rule. To be eligible to fall under this rule, investors must meet certain criteria and also submit an Investor Representation Letter (link provided).[13]