The EU has strengthened its position as a global leader on climate action by announcing targets to reduce greenhouse gas emissions by at least 55 per cent by 2030, relative to 1990 levels, and to achieve climate-neutrality by 2050. To deliver on these targets, it will be crucial for ambitious policy initiatives from member-states to complement EU-level policy, enabling substantial decarbonization and investment in a diverse portfolio of clean technology options and infrastructure.
The SDE++ scheme in the Netherlands could become a model for how to design decarbonization policy on a national level.
SDE++ is the expansion of the Netherlands’ already successful renewable energy subsidy scheme, (formerly called SDE+). With this expansion, the government of the Netherlands has taken concrete steps to incentivise private investment into decarbonization technologies. The final round of applications for SDE++ subsidies, which has promised €5bn ($6 bn) for its first round of funding taking place in 2020, has closed this week. If successful in leading to technology deployment, the scheme could potentially become a model for how to design decarbonization policy on a national level.
The SDE++ scheme now invites industry projects to bid for funding based on their expected carbon reduction impact, broadening the historic sole focus on generated renewable energy, representing an encouraging expansion in thinking around practical near-term climate action.
The Dutch government recognition of the importance of CO2 reduction is encouraging, especially alongside the complimentary expansion of renewable energy production. Increased climate ambition necessitates a focus on a diverse decarbonization portfolio that straddles all sectors. SDE++ is particularly useful because it could help boost investment in hard to decarbonise sectors such as heavy industry, which not only accounts for about one quarter of EU emissions but has long been a blind spot for climate action.
The Dutch minister of economic affairs and climate policy, Eric Wiebes, confirmed the broadening of the SDE scheme in September 2020. SDE++ will include support for a broad range of technologies that reduce emissions such as electric industrial boilers, industrial heat pumps, electrolytic hydrogen, and carbon capture and storage in addition to expanded programs for renewable energy (e.g., geothermal).
These technologies can help reduce emissions from hydrogen, cement, and steel production among other applications.
The Dutch government’s development of the SDE++ scheme demonstrates that it plans to support industry to implement and scale up clean technology and infrastructure.
Furthermore, the inclusion of carbon capture in the SDE++ is a key step forward for European decarbonisation, as it demonstrates increasing confidence and endorsement of these technologies. The revised SDE++ could therefore catalyse the deployment of proven emissions reductions technologies and complements other sources of clean energy and decarbonization across a broad range of sectors, including industry, mobility, electricity, agriculture, and the built environment.
This is vital, as a diverse decarbonization portfolio is expected to deliver faster and more cost-effective decarbonisation, allowing for near-term climate wins. In fact, IPCC research shows that embracing all carbon abatement options is critical to ensure the successful delivery of global carbon reduction goals at least cost. Fatih Birol, executive director of the International Energy Agency, has repeatedly stressed the need to implement all clean energy options to reach desired levels of emission reductions. He also recently stated that it is “virtually impossible” to reach climate neutrality without carbon capture.
If successful, SDE++ may provide a template for EU member states to support a gradual scale-up of decarbonization technologies that will lead to a decline in CO2 emissions across the continent, putting the EU well on the road to climate neutrality. SDE++ will also complement the EU Emissions Trading System (EU ETS), as the Dutch government is incentivised to drive industry interest in its SDE++ scheme. The intention would be to phase out the subsidy over time with changes in demand and innovation.
How will SDE++ work?
Projects granted funding will receive subsidies via a carbon contract-for-difference (CFD) mechanism, whereby the difference between the actual cost of applying the technologies and the commercial value of the product the technology delivers or the value of the avoided CO2 is subsidised. In effect, the SDE++ will subsidize only the excess cost of projects delivering renewable energy and/or reducing CO2, as the subsidy amount will adjust with changes in market value, enabling cost-effective and fast Co2 reduction mechanisms.
For electric boilers, that might be the difference between the cost of steam produced with clean electricity and the cost of steam produced with natural gas. For CCS it could be the difference between the cost to capture, transport and store CO2 and the cost to emit CO2 under the EU emissions trading system*.
The mechanism is structured so that only the true incremental cost for industry to undertake carbon reduction projects is funded, and support will be time-limited, reducing over time as the market value of the EU ETS allowances increases.
This is an important feature showing how the EU ETS can be connected to national-level innovation policy. The SDE++ model translates the EU recognition of the importance of financing a range of low carbon technologies such as carbon capture and storage and low carbon hydrogen to the national level. In Europe, coordinating activities to promote a range of solutions will better position the advancement of carbon-reduction goals, and SDE++ could potentially complement the EU’s Connecting Europe Facilities, Projects of Common Interest, and the €10 bn Innovation Fund.
However, there is still room for improvement. For example, in the hydrogen context the mechanism currently only covers the difference between conventional (high-emitting) and clean or low-carbon hydrogen production. In order to kickstart a hydrogen economy in industry, the SDE++ mechanism should aim to provide funding for all the incremental costs of clean or low-carbon hydrogen compared to conventional fuel (e.g., natural gas). Assumptions about grid carbon intensity and operating hours of electrolyzers eligible for subsidy will also need to be reviewed.
With the final round of applications closed, it will be interesting to see which projects express interest in the SDE++. The expansion to include a broader range of decarbonization technologies is welcome, as is the complementary nature to EU-level policies. It is premature to say which projects will gain from the scheme, but CATF will be monitoring any progress with an eye to sharing learnings and supporting our broader decarbonization efforts in the EU.
Olivia Azadegan is a Consultant with CATF on hydrogen and carbon capture and holds a Public Policy Masters from the London School of Economics.
*For more information on CATF’s position on the ETS, please see our comment here.