(EU) 2020/1294 Regulation on the Renewable  Energy Financing Mechanism, which came into effect from the beginning of 2021, stems from article 33 of the Governance Regulation (EU) 2018/1999 of the Clean energy for all Europeans package.

The main objective of this Regulation is to enable EU countries to cooperate in the take-up of RES projects. Under this mechanism, EU countries can voluntarily pay into a fund (contributing countries) whereas others can bid to access the money in return for building projects on their territory (hosting countries). Competitive tenders for grants will be held to allocate funding under the Mechanism. These grants can cover either the installation of a renewable-production facility with certain capacity (investment support) or the actual production of renewable energy (operating support).

The private sector can also participate in the mechanism either as a private investor making a payment to the mechanism or as a project developer competing for support in the tenders that will be published by the Commission.

For contributing countries, the advantages can be outlined as such:

* They can finance RES projects elsewhere that are potentially more cost effective than renewable energy produced on their own territory would be.

* They can access RES production that is absent or scarce on their own territory.

* They can count part of the RES statistics from a financed project in a host country to their own national renewable energy target.

* The mechanism can reduce transaction costs compared to the traditional cooperation mechanisms, given that no direct link or negotiation is required between the contributing and the hosting countries.

* The Governance Regulation states that from 1 January 2021 onwards, the share of energy from renewables shall not fall below the 2020 target. However, this share is not ensured for all Member States. Subsequently, by participating in the mechanism, they may manage to stay above this baseline.

The advantages for host countries are summarized as follows:

* they can receive additional local investment in RES projects without burden to the national budget.

* they can enjoy the benefits in terms of local employment, lower greenhouse gas emissions, modernization of the energy system and reduced dependency on imports.

However, hosting countries may face certain challenges, as outlined below:

* Tenders implemented by the mechanism make use of the host country’s RES deployment potentials. Potential sites are, as a result, no longer available for national deployment supported under a national state – aid scheme and the national contribution to the EU target. However, participation in the mechanism is voluntary and Member States can define the volumes they want to participate with, the regions and the types of sites to be eligible for participation.

* Member States may experience system integration costs due to increased RES deployment. These costs are related to grid extension and – in countries with high structural grid congestion – increased re-dispatch costs.

* Host countries may experience some transaction costs with regards to reforms in their legal and administrative framework. This mainly includes monitoring and communicating of production over time.

The abovementioned challenges may limit public and political acceptance of acting as a host and potentially induce resistance against additional RES deployment. Moreover, unstable regulatory regimes and cumbersome planning permissions are more likely to hinder RES development than the actual financing part of RES projects. These barriers can be addressed through sufficient updates of planning instruments such as National Energy and Climate Plans (NECPs).

In addition, the funds distributed under the Mechanism, could be allocated to small-scale or innovative projects in regions with emerging renewables sectors. In such cases, loans and grants could significantly reduce the cost of capital, therefore overcoming barriers to RES investments. In turn, this may contribute to a greater expansion in capacity to the benefit of the developers of emerging technologies.

Furthermore, in the context of the coronavirus pandemic, the financing mechanism will make it easier for regions to get projects off the ground at a time when their local economy is under pressure. To this end, EU countries can use this mechanism as an instrument to implement their recovery plans.

                                                                                                                                                                                                                 Edited by Dafni Sotirchou