Germany has finally published draft guidance on the long-awaited (Carbon) Contracts for Difference (or "CfD"). The first CfDs, previously announced in the European1 and German National2 Hydrogen Strategies of 2020, are expected to be auctioned at the end of this year. The Preparatory Procedure has already begun. The program will create an entirely new tool to decarbonise the industrial sector and encourage the transition to climate-neutral manufacturing within the industrial sector.
In the following, we explain the CfD Funding Program and outline the relevant legal framework. We then summarise the current developments in this respect. Finally, we look at other German and European support programs and briefly describe our conclusion.
The CfD Funding Program
The CfD Funding Program ("Förderprogramm Klimaschutzverträge"), by the German Federal Department of Economic Affairs and Climate Protection ("Bundesministerium für Wirtschaft und Klimaschutz", "BMWK"), aims to foster decarbonisation of the industrial sector. The program addresses enterprises that engage in highly emission-intensive undertakings. In the long run, the program is meant to help establish climate-friendly technologies, such as green hydrogen. The government support available under the program is meant to aid the initial funding for the breakthrough of such technologies since, as things currently stand, investing in climate-friendly technologies is often deemed unprofitable because of unforeseeable financial risks.
According to the BMWK, the Contracts for Difference3 are conceptually unique, although similar approaches are being pursued elsewhere (at least in other Member States of the European Union). They take the form of civil contracts between the Federal Republic of Germany as the donor and the receiving company as the donee. The civil nature of the contract was chosen to avoid the burden of inefficient bureaucracy.
Contracts for Difference imitate so-called "hedging-contracts", a familiar concept which originally appeared in the private sector. Thus, CfDs are hedging instruments: If a donee builds and operates a climate-friendly facility, the contract remedies the financial disadvantage incurred due to high expenses associated with "green" facilities compared to conventional facilities ("CapEx" and "OpEx").
The idea behind this concept is that the allowances will be returned to the government once the "green" technologies have outperformed conventional facilities and can thus be run at lower costs than their outdated counterparts. The margin between these costs is then to be paid back to the state as a profit. This reduction of expenses can reasonably be expected, partly due to the steadily rising prices for CO2 within the Emission Trading System ("ETS"), which is expected to happen within the 15-year contract period of the CfDs.
The selection of donees is set to be conducted through a bidding process, similar to other German funding programs designed to promote the energy transition. Contracts are to be awarded to the companies which project the lowest costs per avoided tonne of CO2. Admissibility for the bidding process will depend on the undertakings’ commitment to operate within sectors that participate in the ETS, the size of the project and its climate efficiency: The conventional ETS-reference facility must produce the equivalent of at least ten kilotons of CO2 per year and the new facility must save at least 90 per cent of that CO2-equivalent by the time the contract expires.4
The legal framework
The essential legal document for the program is the CfD Program Guidelines ("Förderrichtlinie Klimaschutzverträge", "FRL KSVs") published by the BMWK.5 The Ministry has yet to adopt its final draft. The FRL KSVs do not constitute substantial law on their own. They are not statutory law and merely consist of so-called "administrative regulations". Companies can rely on them based on the principles of equal treatment and non-discrimination and non-discriminatory public dealing.
According to section 3.1 of the FRL KSVs, the substantial rules on which the program relies are sections 23 and 44 of the German Federal Budgetary Regulations ("Bundeshaushaltsordnung", "BHOs"). These provisions allow for the authority to issue administrative acts assigning state aid to the successful bidders. These administrative acts, in turn, constitute the legal basis for awarding the contracts.
Whether the CfD Program will prevail depends on the European Commission’s approval of the program under European state aid rules.
Current developments
Since the BMWK, after consulting with the Federal Government, published the latest draft of the FRL KSVs on 5 June 2023, two main steps remain for the program before the first bidding round can take place:
- The program still needs to be officially adopted and remains explicitly subject to reservation.6 The alignment with national state aid rules is still under review and the European Commission still needs to approve the program. Until then, it is subject to necessary changes.
- On 6 June 2023, the Preparatory Procedure for the CfD Program began.7 The procedure serves to gather information in order to organise the upcoming bidding rounds. Companies interested in engaging in the bidding rounds are invited to participate in the procedure and submit their respective information to the BMWK. For companies intending to take part in the first bidding round, participation in the procedure is mandatory. The procedure is open for two months and closes on 7 August 2023. Participating companies are also welcome to suggest modifications to the FRL KSVs during the process.8
According to the BMWK, the first bidding round is expected to take place before the end of 2023.
Other Support Programs
On a national level, other support programs besides the CfD Funding Program include the Federal Funding Program for Energy and Resource Efficiency in the Economy ("Bundesförderung für Energie- und Ressourceneffizienz in der Wirtschaft")9 and the Funding Program for the Decarbonisation of the Industry Sector ("Förderprogramm Dekarbonisierung der Industrie").10 Unlike the CfD Funding Program, these support programs mainly address smaller undertakings. Support under these programs is largely exempted from the notification requirement under the General Block Exemption Regulation ("Allgemeine Gruppenfreistellungsverordnung", "AGVO").11 There was no adequate support program for larger undertakings before the CfD.
On the European level, similar support programs include the Net-Zero Industry Act12 and the EU Hydrogen Bank.13 These programs are part of the more recent efforts by the European Commission to foster the energy transition and were adopted by the European Commission in March 2023. However, the European Union has notyet implemented these programs. The Net Zero Industry Act aims to promote the emission-free generation of energy. Essential to the proposition are the provisions for streamlining the administrative approval of admissible undertakings, mainly by establishing a so-called "One-Stop-Shop", which means allocation of full authority for the approval to one distinct government agency, thus reducing inefficient bureaucracy. The EU Hydrogen Bank is a tool for initial funding; more specifically, funding for the market ramp-up of hydrogen.
Conclusion
Although there are still a few steps remaining, the Federal Government is now launching a new funding instrument which is aimed in particular at promoting the transition of energy-intensive industries to climate-friendly technologies, such as hydrogen. However, whether the (Carbon) Contracts for Difference prove to be a success remains to be seen in the upcoming years.
1 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS: A hydrogen strategy for a climate-neutral Europe, COM(2020) 301 final. Published on 8 July 2020. See pp. 17 and 27. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020DC0301, last visited on 21 June 2023.
2 The National Hydrogen Strategy. Version of June 2020. See p. 20, Measure 15. Available at https://www.bmbf.de/bmbf/de/forschung/energiewende-und-nachhaltiges-wirtschaften/nationale-wasserstoffstrategie/nationale-wasserstoffstrategie.html, last visited on 21 June 2023.
3 A draft (GER) of the CfD,\ version from 6 June 2023, is available at https://www.bmwk.de/Redaktion/DE/Downloads/J-L/klimaschutzvertrag-muster.pdf?__blob=publicationFile&v=4, last visited on 21 June 2023.
4 For further information on the CfD Funding Program, see the fact sheet (GER) published by the BMKW on 5 June 2023, available at https://www.bmwk.de/Redaktion/DE/Downloads/F/foerderrichtlinie-klimaschutzvertraege.pdf?__blob=publicationFile&v=4, last visited on 21 June 2023.
5 Guidelines for the promotion of climate-neutral manufacturing in the industry sector through Carbon Contracts for Difference ("Richtlinie zur Förderung von klimaneutralen Produktionsverfahren in der Industrie durch Klimaschutzverträge"). Version from 6 June 2023 (GER). Available at https://www.bmwk.de/Redaktion/DE/Downloads/F/klimaschutzvertraege-foerderrichtlinie.pdf?__blob=publicationFile&v=2, last visited on 21 June 2023.
6 See the announcement on the implementation of the Preparatory Procedure of the CfD Funding Program in accordance with the CfD Program Guidelines from 8 May 2023 ("Bekanntmachung der Durchführung des vorbereitenden Verfahrens einschließlich der Verfahrensregelungen gemäß der Förderrichtlinie Klimaschutzverträge vom 8. Mai 2023") in the
German Federal Bulleting (GER), BAnz AT 06.06.2023 B1, published on 6 June 2023. Available at https://www.bundesanzeiger.de/pub/publication/xHTZ6zQUdOsSbHLHjhg/content/xHTZ6zQUdOsSbHLHjhg/BAnz%20AT%2006.06.2023%20B1.pdf?inline, last visited on 21 June 2023.
7 See the announcement on the implementation of the Preparatory Procedure of the CfD Funding Program in accordance with the CfD Program Guidelines of 8 May 2023 ("Bekanntmachung der Durchführung des vorbereitenden Verfahrens einschließlich der Verfahrensregelungen gemäß der Förderrichtlinie Klimaschutzverträge vom 8. Mai 2023") in the German Federal Bulleting (GER), BAnz AT 06.06.2023 B1, published on 6 June 2023. Available at https://www.bundesanzeiger.de/pub/publication/xHTZ6zQUdOsSbHLHjhg/content/xHTZ6zQUdOsSbHLHjhg/BAnz%20AT%2006.06.2023%20B1.pdf?inline, last visited on 21 June 2023.
8 Further information on the Preparatory Procedure and all relevant documents is available online (GER) at https://www.bmwk.de/Redaktion/DE/Artikel/Klimaschutz/klimaschutzvertraege-vorverfahren.html, last visited on 21 June 2023.
9 Further information on the Federal Funding Program for Energy and Resource Efficiency in the Economy is provided by the Federal Office for Economic Affairs and Export Control ("Bundesamt für Wirtschaft und Ausfuhkontrolle", "BAFA") online (GER), available at https://www.bafa.de/DE/Energie/Energieeffizienz/Energieeffizienz_und_Prozesswaerme/energieeffizienz_und_prozesswaerme_node.html, last visited on 21 June 2023.
10 Further information (GER) on the Funding Program for the Decarbonisation of the Industry Sector is provided by the BMWK online (GER), available at https://www.bmwk.de/Redaktion/DE/Artikel/Industrie/dekarbonisierung-der-industrie.html, last visited on 21 June 2023.
11 COMMISSION REGULATION (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0651; as regards announced changes of the Regulation in 2023, see https://competition-policy.ec.europa.eu/system/files/2023-03/GBER_amendment_2023_EC_communication_annex_0.pdf, last visited on 21 June 2023.
12 Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on establishing a framework of measures for strengthening Europe’s net-zero technology products manufacturing ecosystem (Net Zero Industry Act), COM(2023) 161 final. Published on 16 March 2023. Available at https://eur-lex.europa.eu/resource.html?uri=cellar:6448c360-c4dd-11ed-a05c-01aa75ed71a1.0001.02/DOC_1&format=PDF, last visited on 21 June 2023.
13 COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on the European Hydrogen Bank, COM(2023) 156 final. Published on 16 March 2023. Available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52023DC0156, last visited on 21 June 2023.
Robert Woermann (White & Case, Legal Intern, Dusseldorf) contributed to the development of this publication.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2023 White & Case LLP
