Modernisation Fund

The Modernisation Fund is a dedicated funding programme to support 10 lower-income EU Member States in their transition to climate neutrality by helping to modernise their energy systems and improve energy efficiency.

The beneficiary Member States are Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia.

The Modernisation Fund will support investments in:

• Generation and use of energy from renewable sources
• Energy efficiency
• Energy storage
• Modernisation of energy networks, including district heating, pipelines and grids
• Just transition in carbon-dependent regions: redeployment, re-skilling and upskilling of workers, education, job-seeking initiatives and start-ups

The Modernisation Fund is recognised in the European Green Deal Investment Plan as one of the key funding instruments contributing to the objectives of the European Green Deal.

The Modernisation Fund is funded from

• revenues from the auctioning of 2% of the total allowances for 2021-30 under the EU Emissions Trading System (EU ETS)
• additional allowances transferred to the Modernisation Fund by beneficiary Member States – 5 opted to do so (Croatia, Czechia, Lithuania, Romania and Slovakia).

The table below shows the total amount of allowances per beneficiary Member State for the period 2021-2030. The total initial size of the Modernisation Fund is 2% of the ETS cap.

The total revenues of the Modernisation Fund may amount to EUR 48 billion from 2021 to 2030 (at EUR 75 / tCO2), depending on the carbon price. Out of this amount, around EUR 28 billion comes from allowances that beneficiary Member States have transferred to the Modernisation Fund from their resources under Article 102(b) and 10c, and around EUR 20 billion comes from the auctioning of 2% of the total EU ETS allowances from 2021 to 2030.

The Modernisation Fund will contribute to the significant investment needs of the 10 lower-income Member States to modernise their energy systems. The Modernisation Fund will:

• Help the beneficiary Member States meet the 2030 climate and energy targets and play an active role in EU transition to climate neutrality
• Increase energy security in the beneficiary Member States by supporting increased interconnections and modernisation of energy networks
• Enhance the financing of renewable energy sources
• Help make the economies and the energy sectors of the beneficiary Member States greener and cleaner
• Promote exchange of best practices among the beneficiary Member States.

The Modernisation Fund will operate under the responsibility of the beneficiary Member States, who will work in close cooperation with the European Investment Bank (EIB), the Investment Committee set up for the fund and the European Commission.

Key steps in the financing process:

• Member States select the investments they wish to submit for Modernisation Fund support. No direct applications by project proponents can be sent to the EIB or the Commission.
• Member States submit the proposed investments to the EIB, the Investment Committee and the Commission. Submissions can be made on a rolling basis, but the Investment Committee will meet twice a year, as of 2021.
• The EIB confirms if the investment is a priority investment as defined by the ETS Directive. For non-priority investments, the EIB conducts a technical and financial due diligence assessment and the Investment Committee assesses the proposal and makes its recommendation on its financing.
• The Commission takes a disbursement decision once an investment is confirmed as priority by the EIB, or recommended for financing by the Investment Committee as non-priority. There will be two disbursement decisions per year, covering investments in all beneficiary Member States.
• The EIB transfers the resources to the beneficiary Member States in accordance with the disbursement decision within 30 days.

More information: Modernisation Fund: How it works

The ETS Directive foresees that the Modernisation Fund shall operate under the responsibility of the beneficiary Member States. The ETS Directive defines the roles and responsibilities of the beneficiary Member States, European Investment Bank (EIB), the Investment Committee and the European Commission.

Beneficiary Member States

The beneficiary Member States are responsible for:

• Implementing the Modernisation Fund on their territory
• Selecting the investment proposals they would like to support from their Modernisation Fund share
• Submitting an indicative overview of their planned investments to the Commission, EIB and the Investment Committee
• Submitting the investment proposals for confirmation by the EIB or the Investment Committee, and providing the information needed for their assessment
• Paying off the support to the project proponents or scheme managing authority(ies) upon the disbursement decision of the Commission
• Participating in the Investment Committee
• Monitoring and submitting annual reports on the implementation of the Modernisation Fund investments, including notifying the Commission of any discontinued investments and recovered funds as appropriate
• Auditing the project proponents or scheme managing authorities, submitting the results of these audits to the EIB and the Commission
• Taking appropriate measures to ensure that the financial interests of the Modernisation Fund are protected, including recovery actions

European Investment Bank

The European Investment Bank is responsible for:

• Auctioning the allowances which provide the resources of the Modernisation Fund: these allowances will be auctioned from 2021 to 2030, in accordance with the Auctioning Regulation
• Confirming whether an investment is a priority or a non-priority one
• Conducting financial and technical due diligence of non-priority investments, including an assessment of the expected emission reductions
• Managing the assets of the Modernisation Fund
• Transferring the respective resources to the beneficiary Member States following the disbursement decision of the Commission, and keeping track of the use of Member State resources
• Providing the secretariat of the Investment Committee

More information: Modernisation Fund: What can be financed

Investment Committee

The Investment Committee will meet twice a year to assess non-priority investment proposals and discuss any other business relevant for the operation of the Modernisation Fund.

It will be composed of:

• 10 representatives, one per beneficiary Member State
• 3 representatives from non-beneficiary Member States, elected by all non-beneficiary Member States
• 1 representative from the EIB
• 1 representative from the Commission (chair)

Non-beneficiary Member States can join the Investment Committee also as observers. The members of the Committee will serve on a pro-bono basis, need to be free from conflict of interest and their CVs will be published.

The Investment Committee is responsible for:

• Issuing recommendations on the financing for non-priority investments
• Providing an annual report of its activities

More information: Modernisation Fund: Investment Committee

European Commission

The European Commission is responsible for:

• Taking the disbursement decision once an investment has been confirmed by the EIB or recommended for financing by the Investment Committee
• Chairing the Investment Committee
• Ensuring compliance with the ETS Directive and the implementing act on the Modernisation Fund

To obtain financing, the beneficiary Member State has to:

• demonstrate that the investment complies with the ETS Directive requirements
• have sufficient funds available on its Modernisation Fund account
• provide evidence that the investment proposal is in line with the State aid rules
• confirm that the investment complies with any other applicable requirements of Union and national law
• confirm that there is no double funding of the same costs with another Union or national instrument.

Priority investments have to fall into a priority area as defined by the ETS Directive, with the EIB confirming this.

The share of the funds allocated to priority investments has to be at least 70% of the total amount of funds used by the beneficiary Member State. The Commission will check this for each beneficiary Member State before issuing each disbursement decision.

The Modernisation Fund leaves the beneficiary Member States the freedom to decide on the form of support: they can use grants, premium, guarantee instruments, loans or capital injections.

The support granted by Member States using Modernisation Fund resources needs to be compliant with the State aid rules.

Co-financing from private and public entities is possible, as long as State aid rules are respected and the same costs are not already funded by another Union or national instrument (no double funding).

Member States could draw on existing national funds and/or European instruments, such as:

• InvestEU programme
• Connecting Europe Facility, including its energy projects (Projects of Common Interest)
• European Structural and Investment Funds, including the Cohesion Fund and the European Regional Development Fund
• Just Transition Fund

On 28 September 2020, the European Commission organised a live-streamed conference to present the Modernisation Fund in more detail, explain how it interacts with other funding instruments and facilitate the exchange of best practices on its implementation.

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