EU: the Green Deal Industrial Plan proposals unwrapped

On 16 March 2023, the European Commission published legislative proposals for two main components of the Green Deal Industrial Plan, the Net-Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRMA). Earlier that week, the Commission also unveiled proposals for the reform of the EU electricity market and amendments to the state aid framework, which expand support to the sectors that are key for the transition to a net-zero economy. All these proposals form part of a big push of the EU to upscale and speed up development of green technologies needed to meet the EU’s net-zero goals. Both Acts (together with other parts of the Green Deal Industrial Plan) are considered in part to be a response to the Inflation Reduction Act (IRA) which invests heavily in US domestic green technology (for more details on the IRA, see our blog post). The NZIA, the CRMA and electricity market reform are now open to stakeholder feedback until mid-May 2023.

Net Zero Industry Act

The NZIA sets a target of manufacturing 40% of all clean technology required to meet the REPowerEU and Green Deal objectives inside the EU by 2030. While earlier drafts included specific targets for certain sectors, those were removed to provide flexibility.

The NZIA applies to “net-zero technology manufacturing projects”, and those meeting specific criteria may receive the status of “net-zero strategic projects” and become the subject of additional support measures. The scope of the NZIA was subject to a significant debate, particularly regarding the inclusion of nuclear energy projects. The final text compromises by including small modular nuclear reactors (SMRs) and nuclear plants producing limited waste in the NZIA’s general scope, but they cannot be awarded the status of a strategic project.

Projects located in the EU and related to solar photovoltaic and solar thermal technologies, onshore wind and offshore renewable technologies, battery/storage technologies, heat pumps and geothermal energy technologies, electrolysers and fuel cells, sustainable biogas/biomethane technologies, carbon capture and storage (CCS) technologies and grid technologies may receive the status of “net-zero strategic project”. Member States, with the participation of the Commission, will be selecting strategic projects.

One of the main goals of the NZIA is to improve the permitting process for “net-zero technology manufacturing projects”. Member States will have to create a “one-stop-shop” permitting process for these projects, with permits issued within 12 months (9 months in the case of strategic projects) for construction projects with a yearly output of less than 1 GW, and 18 months (12 months in the case of strategic projects, except for geological CO2 storage sites) for construction projects with a yearly output of more than 1 GW or for which a yearly manufacturing capacity is not measured in GW. For the expansion projects, the permitting deadlines will be halved. The NZIA provides for limited exceptions where the deadlines could be extended. Strategic projects may be considered as having an overriding public interest, which then would enable their implementation even in the event of conflict with laws protecting the environment.

Earlier drafts of the NZIA included a “deemed approval” rule. However, this was substantially sized down in the final draft – only intermediary steps can be considered approved upon expiry of the relevant time bars, but the final decision will have to be explicit. While “deemed approval” is a traditional way to expedite permitting procedures, it may not always work in practice as project stakeholders might still be reluctant to rely on such deemed approvals.

The Commission and Member States will support the implementation of strategic projects, including through improved access to funding. The NZIA, however, does not specify any particular figures or sources of funds (which has been a main source of criticism). The Commission and Member States will establish a Net-Zero Europe Platform to identify financial needs, bottlenecks, potential best practices and offer advice on securing the required funding for projects.

The NZIA considers the contribution of contracts for net-zero technology towards sustainability and resilience criteria in public procurement procedures. The Commission is cautious about explicit “made in the EU” requirements and NZIA specifies that the Union’s international commitments should not be prejudiced. However, it encourages projects that contribute to the competitiveness of the EU’s net-zero industry supply chains and downgrades, for the purpose of public procurement, projects using products originating from a single source of supply, if more than 65% of the supply for that specific net-zero technology within the EU originates from that same source.

The Commission has set a target of achieving an annual injection rate of at least 50 million tonnes of CO2 into storage sites located within the EU by 2030. The Commission will give individual targets to oil and gas extractors who will have to report to the Commission on their progress towards meeting those targets, and such reports will be made public. Targets will be calculated on a pro rata basis according to each entity’s share in the oil and gas production from 2020 to 2023. In-scope entities may meet their targets by developing CO2 storage projects alone or in co-operation with other oil and gas producers or third parties. The Commission may adopt delegated acts regulating the process of meeting the targets and the content of the report. No specific sanctions are currently proposed for failing to meet these targets.

The Commission will support the establishment of Net-Zero Industry Academies to create a skilled workforce in net-zero technologies. Member States will be tasked with working on the equivalence of learning programmes and recognition of qualifications. The Net-Zero Europe Platform will support this.

Member States also have the option to establish regulatory sandboxes, which will provide a controlled environment that facilitates the development, testing and validation of innovative net-zero technologies for a limited time before they go to market.

Critical Raw Materials

The EU’s green transition is reliant on raw materials that are supplied by several third countries, raising concerns about the security and availability of these rare minerals and metals. The CRMA aims to address these concerns by promoting the mining and recycling of critical raw materials within the EU and diversifying supply sources.

The CRMA distinguishes between 16 “strategic raw materials” and 34 “critical raw materials”. The former, which include copper, lithium, nickel and rare earth elements for magnets, are considered essential for the green transition and receive greater support. The Commission will review and update the lists of strategic and critical raw materials every four years.

The CRMA sets targets for achieving by 2030: 10% EU extraction capacity of ores, minerals and concentrates; 40% EU processing capacity and 15% EU recycling capacity for strategic raw materials. Additionally, by 2030, the EU should not consume more than 65% of any strategic raw material, at any processing stage, originating from a single third country.

Similar to the net-zero strategic projects, CRMA sets out a framework for selecting and implementing strategic raw materials projects, which will be chosen by the Commission based on specific criteria, including their contribution to the EU’s strategic raw material supply security, sustainable implementation, and cross-border benefits across Member States. The Critical Raw Materials Board, comprising Member States and the Commission, will provide opinions but the Commission will not be bound by them. Strategic raw materials projects implemented in emerging or developing economies should be mutually beneficial for the EU and the relevant third country by adding value in that country. The decision on granting the status of strategic raw materials project should be taken only if the relevant Member State, where the project is implemented, does not object to it or, if a project is implemented in a third country, where such third country granted its approval. It is not the first time the Commission has suggested using these mechanisms – similar schemes of selected projects with special status getting preferential treatment have been suggested recently, for example, in the Chips Act’s Pillar II framework.

Critical and strategic raw materials projects will benefit from a “one-stop-shop” permitting process. However, specific deadlines are provided for strategic raw materials projects only. Permits must be granted within 24 months for the extraction of strategic raw materials projects and within 12 months for processing and recycling strategic raw materials projects. Unlike the net-zero strategic projects, the strategic raw materials projects involving only processing and recycling will have a “deemed approval” status upon the expiry of applicable time bars, except where an environmental impact assessment (EIA) is required. Strategic raw materials projects, similarly to the net-zero strategic projects, may be considered as having a purpose of overriding public interest.

The Commission and Member States will provide support to facilitate the projects’ access to funding. As under the NZIA, no specific figures and sources of funding are indicated. The Commission will set up a system to facilitate the conclusion of off-take agreements relating to strategic raw materials projects.

The Commission will monitor and stress test the supplies of critical raw materials and strategic stocks of strategic raw materials based on the information supplied by Member States. Member States will have to identify large companies that manufacture strategic technologies using strategic raw materials on their territory. Such companies will be obliged to perform an audit of their supply chain every two years. The Commission will also set up a system of joint purchasing of strategic raw materials which will be open to all interested EU entities and to Member States’ authorities.

Member States will also need to implement national programmes to increase the circularity of critical raw materials with special measures being provided for the recyclability of permanent magnets.

The Commission reserves again the right to adopt, through delegated acts, rules for the calculation and verification of the environmental footprint of different critical raw materials. If such rules are adopted for any critical raw material, any person that sells such raw material would need to provide an environmental footprint declaration, which must include a calculation of the environmental footprint based on the “most important impact category” identified by the Commission.

The CRMA requires Member States to adopt rules on enforcement and penalties for CRMA infringements within 12 months of its entry into force.

Changes to the state aid rules

The NZIA and the CRMA go hand in hand with proposed changes to the state aid rules, which are intended to provide easier access to funding for the green industry in the EU. The new Temporary Crisis and Transition Framework, adopted by the Commission on 9 March 2023, expands support to renewable energy, energy storage and the decarbonisation of industrial production processes. It also introduces new measures to accelerate investments in equipment manufacturing in key sectors necessary for the transition to a net-zero economy.

The Temporary Crisis and Transition Framework comes alongside an amendment to the General Block Exemption Regulation (GBER) which allows certain categories of state aid to be granted with only subsequent notification to the Commission. This gives Member States more flexibility to speed up investment and procure (additional) financing for clean tech production.

On 1 March 2023 the Regulation to introduce targeted amendments to the Recovery and Resilience Facility Regulation also entered into force, allowing Member States to integrate dedicated REPowerEU chapters into their existing Recovery and Resilience Plans. The Commission has issued new guidance on how to draft the REPowerEU chapters and encouraged Member States to provide support to companies through one-stop-shop permitting, tax incentives, and investments in upskilling the workforce.

Electricity market design reform

The Commission’s proposals to reform the EU power market, published on 14 March 2023, aim to stabilise energy prices by providing more predictable long-term price signals. They also seek to empower consumers and suppliers to participate more actively in the power and balancing markets, among other things through demand-response and storage solutions.

The Commission has decided not to intervene directly in the market mechanisms that regulate price formation on the short-term (spot) markets, which have worked well for most of the past 20 years since the start of liberalisation. Instead, consumers will have the right to lock in the price they pay for energy through long-term fixed contracts that suppliers will need to hedge for. At the same time, consumers will be able to have several power agreements in place at the same time, which should allow them to reap the benefits of price fluctuations (e.g. by using a variable contract for power needs that can be planned during low hours), while enjoying the stability of a fixed price contract for power needs that are less easily planned (“peak shaving”). Energy sharing between consumers will also be encouraged.

Corporate off-takers and renewable and low-carbon power producers will be able to achieve price stability and predictability either through (corporate) power purchase agreements, for projects that are privately funded, or two-sided contracts for difference, for projects that are publicly funded. The latter system offers producers a revenue guarantee, while on the other hand allowing governments to skim and redistribute windfall profits to (vulnerable) consumers. Forward contracts are pushed as another way to achieve price stability by allowing producers to hedge against future price fluctuations.

Next steps

Commentary on the NZIA, the CRMA and the state aid changes has been intense, with some criticising the Commission for not doing enough to address accusations that the EU is betraying free market principles to retain green industry development in Europe, while others criticise the lack of new/dedicated funding for EU cleantech investments.

The NZIA and the CRMA will now go through the ordinary legislative procedure, and further debates and changes are expected. Legislative bodies may face pressure from both the industry, pushing for more support and NGOs, concerned about the potential impact of strategic projects, especially in the mining sector, on the environment. Further discussion can be expected on the inclusion of nuclear energy projects and carbon utilisation (CCU) technologies into the NZIA, as well as on broadening the definition of net-zero technologies. The legislative procedure could take up to two years, but the expectation is that both the Parliament and the Council will move faster to get both Acts approved before the next European election in May 2024.

The Commission is also expected to move quickly with other parts of the Green Deal Industrial Plan, including a proposal on a European Sovereignty Fund before the summer of 2023 and a Communication on the initiative on carbon capture, utilisation and storage (CCUS) in Q4 2023. (For more details and context on the Green Deal Industrial Plan, see our previous blog post.)