Gas-fired power’s EU taxonomy “green label” raises bond risks: T&E

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.

The leaked taxonomy act mirrors proposed gas market reforms that would replace much of the bloc's pipeline natural gas with gases such as biogas, bio-methane, and hydrogen that have "at least 70% less greenhouse gas emissions than fossil natural gas across their full lifecycle."

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.

Despite the EU's efforts, its green hydrogen supplies remain low, a problem that has inspired some concern.

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.

The US Government Accountability Office in December said the Energy Department wasted hundreds of millions of taxpayer dollars through aid to CCS demonstration projects that were never built due to high costs and other factors.

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