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The EU's "green label" for natural gas-fired power finance
should spur the use of blends of low-carbon gases and natural gas,
but financiers may be put at risk by it phasing out in eight
years.
The EU Taxonomy Regulation's First Delegated Act entered into
force on 1 January, naming which technology investments are in step
with the EU as it moves towards carbon neutrality and using mostly
renewable energy.
Since the passage of these policies, investors have a green
light to invest in EU-certified "green" technologies, in particular
renewable energy.
Large EU companies will use these documents when they report on
their investments under the EU's Non-Financial Reporting Directive
(NFRD).
But a Second Delegated Act touching two hot-button technologies,
natural gas-fired- and nuclear power, is set for passage by the
middle of this year.
After the European Commission (EC) launched a 31 December
consultation, member states and an expert advisory group have until
12 January to comment on this act before it is finalized and sent
to co-legislators in Parliament and the Council.
Member states are gearing up for a fight over a potential veto
as it works its way past co-legislators.
The leaked draft is already stoking
controversy. Austria's Climate Ministry, supported by Denmark,
Germany, Luxembourg, and Portugal in November, threatened legal action in the
European Court of Justice over a green label for nuclear.
Germany's incoming chancellor, Olaf Scholz, has been pressured to block nuclear and
natural gas-fired power plants in the taxonomy.
Other countries, such as China and Russia, exclude gas-fired
power production from their national taxonomies.
Even while natural gas benefits from the act, the EC still wants
to spur renewable, or green hydrogen's use. Hydrogen's "green
label" in the First Delegated Act "clearly favors (renewable) green
hydrogen," over the kind produced from natural gas, with a
threshold for hydrogen production set at 3 metric tons (mt) CO2e
per mt of H2 on a lifecycle basis, according to Baker &
McKenzie Associate William-James Kettlewell.
Natural gas green bonds may be at risk
An NGO has expressed doubts about the security of natural gas
investments created using the new green criteria.
Luca Bonaccorsi, director of sustainable finance at NGO
Transport & Environment (T&E), told Net-Zero Business
Daily that green bonds issued under the criteria will need to
be grandfathered because the criteria will cease to apply to new
natural gas-fired power plants in 2030. This creates the potential
for legal disputes related to those bonds, he said.
To earn the "green" label, the fossil fuel, gas-fired generation
facilities must be permitted for construction by 2030 and meet
strict criteria. They must either meet emissions criteria now met
only by renewable energy, or possibly by using carbon capture and
storage (CCS), or they can make a promise to replace
fossil-fuel-fired plants and blend their natural gas feedstock with
more and more low-carbon gas starting in 2026.
Even when a gas power plant replaces fossil fuel-fired
generation, it must comply with emissions criteria. IHS Markit
analysts suggest that plants used part-time, for example as a
backstop for renewables, can comply with one option to keep annual
GHG emissions below an average of 550 kg of CO2e/kW for the output
energy of the facility's capacity over 20 years.
When a fossil fuel-gas-fired power plant replaces a coal plant,
the member state in which it is located must promise to phase out
coal-fired power in its EU-mandated National Energy and Climate
Plan.
France's EU Commissioner Thierry Breton has argued "gas is not
the best to achieve our goal because you generate some CO2, but at
least it's better as a transition than coal."
Compliance with the criteria is verified by an independent third
party that must deliver annual reports to the EC.
But despite the EC's intention to displace coal-fired power,
Bonaccorsi does not think that the taxonomy will spur investments
in the most environmentally friendly gas-fired power technology,
combined-cycle gas turbines. "Based on existing trends, the
criteria, which are very generous and essentially allow [natural]
gas without abatement, I think [investors'] money will go to the
cheapest one, simple turbo gas generators, which will be rather
disastrous, as according to EU criteria, this turbine will not be
compliant (with the taxonomy) anymore as of 2030," he said.
He added that this was why environmental groups and some states
are opposing the act.
Investors could be left holding the bag with legal issues or
stranded assets, he said. "Essentially what it does is it
encourages money flowing into stuff that will not be green soon,
and investors will be stuck with green bonds that aren't green
anymore, but that need to be grandfathered because they were used
to set up plants that are no longer green," said Bonaccorsi.
New niche carved out for hydrogen, biogas
IHS Markit analysts observe that the criteria in the proposed
act seem intended to spur demand for low-carbon gases.
This is because the criteria forbid any power generation system
whose direct emissions exceed 270 g CO2/kWh, which means that it
excludes all existing unabated natural gas power plants, according to an NGO network,
the Environmental Coalition on Standards.
The emissions threshold is one that gas turbine association
EUGINE fought against in an August letter.
Also, green-labeled power plants must use blends containing 30%
renewable or low-carbon gases as of 1 January 2026, and at least
55% of renewable or low-carbon gases as of 1 January 2030. They
must completely switch to renewable or low-carbon gases by 31
December 2035.
Bonaccorsi expects the plants will use mostly biogas and green
hydrogen, despite uncertainty around the limited supply and
relatively high cost of green hydrogen. "The alternative would be
biofuels, but there just isn't enough biofuel to run the gas
system, so the truth is that the only way you'll be able to use the
turbines now is with carbon capture," said Bonaccorsi.
José Donoso, chairman of the US-based Global Solar Council,
opposed gas in the taxonomy. He said that capital should instead go
to renewables and network flexibility assets such as energy
storage.
The United Nations-supported investor group Principles for
Responsible Investment noted the International Energy Agency had
suggested no new investments alongside phasing out existing
gas-fired power by 2035.
CCS questions linger
There are also technical criteria laid out in an annex for the
CCS facilities that would be used in potential abatement, but
Bonaccorsi does not think this technology will be used in the short
term.
"You know as well as I do the technology is not there. It is not
cheap enough to be economical, so it is meaningless. I mean, it's
something that politicians like to talk about," said
Bonaccorsi.
IHS Markit's Carbon Capture and Storage Indexes, which predict
and evaluate the capital and operating costs for a portfolio of CCS
projects, show that costs for CCS transportation and storage
operations rose in 2020.
Posted 08 January 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability