Ambitious ESG legislation and call for careful action to Austrian banks and insurers – The Austrian Renewable Energy Expansion Act Package 2021

Veröffentliche eine Notiz:

On July 7, 2021, the Austrian Federal Parliament passed the Renewable Energy Expansion Act Package^[1] (REEAP), consisting of the main Renewable Energy Expansion Act^[2] (REEA) itself and of concomitant changes to the following federal statutes^[3]:

1. Green Electricity Act 2012^[4]
2. Electricity Sector Act 2010^[5]
3. Natural Gas Act 2011^[6]
4. Energy Steering Act 2012^[7]
5. Federal Act on the Regulatory Authority for Electricity and Natural Gas (E-Control Act)^[8]
6. Federal Act on Definition of Uniform Standards for Construction of Alternative Fuels Infrastructure^[9]
7. Heating and Cooling Network Expansion Act^[10]
8. High Voltage Power Lines Act^[11]
9. Power Lines Act^[12]

REEAP was intended to transpose the EU (recast) Renewable Energy Directive (RED II)^[13] into Austrian law, but went further into the normative Environmental-Social-Governance (ESG) direction than the original EU text which was largely energy-focused. Lending and servicing decisions by Austrian banks and insurers may thus end up being more nuanced than might have been expected in what is in effect a state-backed financial subsidy package. 

Against the background of individual provisions for Photovoltaic [PV], biomass, wind, solar, etc., postulation of investment and subsidy criteria per asset class, and the calibration of the general (oversight and support) administrative setup, we believe that the points in REEA where Austrian lenders and insurers should be paying particular attention are the following:

1. The state will provide investment grants to cover part of the construction and retrofitting outlays of renewable energy generation plants^[14].

2. When in production, the state undertakes to cover the difference between market and producer prices through “market premia” (paybacks), however in reference not to some regulatory price calculation but rather to actual market prices as gleaned through the local energy trading market^[15].

3. Legal structures eligible for funding and operating subsidies now include “Renewable Energy Communities” (REC – already provided for in the EU RED II, article 22) and “Citizen Energy Communities” (CEC), whose main economic purpose must not be financial gain^[16]. Their expected purpose is to create and exploit their own renewable energy facilities for own consumption, however they will have the right to sell excess capacity to the trading market.

4. Criteria for approving funding and operating subsidies can be extended, at the joint discretion of the Federal Ministers for a) climate protection, environment, energy, mobility, innovation and technology and b) digitalization and economic affairs, to include specific Eco-Social (ESG) ones^[17], in particular relating to:

1. The promotion of equal opportunities, gender equality and equal treatment among workers.
2. Measures to ensure workplace health and safety.
3. Conformance to general employment law, and respect for collective employment agreements.
4. Safeguarding of local (in the sense of European) content of production and operational capacity.

5. Produced and traded renewable energy amounts must at all times be accompanied by a Certificate of Origin (CoO), validating its provenance (geography, facility) and sustainability credentials. In Austria, said CoOs are to be issued, inventorized and maintained by a designated regulatory authority. Initially, this is to be the same authority as promulgated by the Federal Act on the Regulatory Authority for Electricity and Natural Gas (E-Control Act), namely “E-Control Austria”^[18]. 

We find it expedient to comment on the above in some detail, in particular as to how these stipulations can be implemented into business processes by the banking and insurance community:

Credit approval and borrower review

Points 1. and 2. are obviously impacting directly the financials of the credit approval and borrower review processes. Given the volatility of energy source prices in general and the idiosyncrasies of energy trading in particular, it will be important to have access to (in-house or external) resources who understand the assumptions behind renewable energy price modelling across energy types and geographies. Depending on individual business case, renewable production-trading-consumption grids may span the entire gamut from the provincial (PV-facility serving several rural communities) to the international (large-scale transmission and storage of hydropower from facilities located near the Austrian border). In short, there will be need for expert and possibly localized industry know-how able to validate the economic fundamentals of investments and operations. It should not be assumed that this know-how will be provided by the applicants, industry bodies or state (federal, or Land-) authorities, as the assumptions behind the numbers may not be equally valid across stakeholders. Of course, project finance is different than energy trading, hence different pools of expertise will be needed to be made use of, even for the same energy type and geography. In summary, existing resources may have to be re-assessed in light of the idiosyncrasies (lifecycle, volatility, geographical dispersion, scale spectrum) of the renewables market vis-à-vis the traditional energy one.

As a final point around 1. and 2., what exactly constitutes a renewable energy source may become a matter of evolving policy rather than of economics. It is only last month that energy and economy ministers from 10 (ten) EU member states (Bulgaria, Croatia, Czechia, Finland, France, Hungary, Poland, Romania, Slovakia and Slovenia) called for nuclear energy to be declared part of the official EU green finance taxonomy^[19]. The initiative appears to have had the tacit support of 2 more (Netherlands and Sweden)^[20]. The policy maneuver was countered almost immediately and rather forcefully by 5 (five) anti-nuclear member states^[21], counting, importantly, also Austria and Germany among them. Our point is simply that lending and insurance decisions around renewable energy investments must take into account – even domestically – political risk and be supported by processes, experts and systems that are at least flexible enough to accommodate shifting facts and assumptions behind the numbers of a business case. At the absolute minimum, they should be calibrated from the stand-point of robust auditability – it would not be feasible for a bank or an insurer to have to justify a historical business decision, whereby even minor voids or inconsistencies in the decision-making records create the potential for major reputational risk.

RED II

On point 3. above, the REEA (as also the source RED II) is completely silent as to the admissible forms of incorporation of Renewable Energy Communities and Citizen Energy Communities. It also does not specify what variability is acceptable when deciding that the main economic purpose is not “financial gain”. Different forms of incorporation have different reporting obligations, different registration requirements – and, importantly, different data repositories that a bank or insurance can use. For example, Austrian legal entities within the meaning of the Beneficial Owners Register Act (BORA)^[22] can be retrieved (for onboarding and ongoing KYC purposes) from the Beneficial Owner Register^[23]. General associations, however, are subject to the Austrian Law on Associations^[24], and some data about them (more, if “legitimate interest can be justified” – but not certain if simply in PDF form) can be retrieved from the Austrian Central Register of Associations (AT-ZVR)^[25]. Will the current KYC processes be able to accommodate this moving target? And, what happens if some members of said communities (which, note, as per REEA can be any combination of natural persons, SMEs, official state bodies, etc.) represent mixed Austrian and international interests? 

REEA also does not specify what variability is acceptable when deciding that the main economic purpose is not “financial gain”. The act as it stands appears to allow both direct ownership of renewable energy-relevant assets by the REC/CEC as well as use of third-party assets in the sense of operating leasing arrangements. Will a bank or insurer be able to have sufficiently accurate accounting information to justify a funding or coverage decision? And, what happens if the bank estimates (or, should have estimated) that existing financing arrangements make the Energy Community a sufficiently profitable one to the effect that its renewable energy business (generation, transmission, sale of excess capacity) becomes demonstrably a lucrative main economic activity? Will the bank have to notify any monitoring authority? Will the bank at least have to internal processes in place to monitor such situations?

Eco-Social [ESG] criteria

Point 4. (addition of Eco-Social [ESG] criteria) is simply stating the obvious expectations of a fair society and a fair business environment. We would thus respectfully suggest that Austrian banks and insurers should already begin designing and implementing processes to actively seek, document, corroborate, register and update this information in a way similar to credit approval steps. It is not obvious how and with what frequency to retrieve accurate information about, e.g., gender equality and health & safety in the working environment of a generic applicant for renewable energy funding. However, it is also not impossible. As a general comment, we would expect that ESG criteria will come to eventually occupy the same gravitas as credit risk criteria for both funding approvals and borrower reviews. If the need (and the legal duty) is there, then banks and insurers will have to create the appropriate business capability – in-house or externally sourced. Suffice it to say that legal and regulatory duties create statutory and regulatory reporting obligations. In the EU, there are already concrete regulatory proposals afoot^[26] to amend the Capital Requirements Regulation and Directive in order to specifically include ESG add-ons to the banking prudential framework. In summary, even though the REEA simply gives the option to the two Austrian federal ministers to implement such ESG funding and operational subsidy criteria for renewable energy investment approval, EU political winds point to the direction of this option becoming a reality sooner rather than later. 

Renewable Energy Certificates of Origin

Point 5. (Renewable Energy Certificates of Origin) will be a necessary part of process and product standardization in renewables lending and insurance. First of all, it will facilitate creation of technical rules that can be implemented through questionnaires and attestations by in-house and external experts, possibly also through automation in straight-through-processing mode across industry databases. Second, it will in principle allow for negotiability, risk transfer and securitization of positions. Third, due to the expiry-date feature of said certificates, it can be made part of borrower review processes and thus help better risk-manage the lending or insurance exposure. Fourth, it can help avoid the “green-washing” reputational risk across the financial services industry. We thus believe that among the REEA provisions it will be the most direct to implement; on account of the cross-institution nature of the information represented by it, it can actually be made into a national Austrian Blockchain business case with short pay-back period. 

How can IBM help Austrian Banks and Insurers align with the Renewable Energy Expansion Act Package?

If you would like to discuss your strategic vision or tactical needs in the area of ESG implementation, Renewable Energy Lending and Insurance Digitalization, please feel free to contact Ms. Marinela Bilic-Nosic and Johannes Giannakouros.

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Authors

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References

^[1] Erneuerbaren-Ausbau-Gesetzespaket – EAG-Paket, https://www.ris.bka.gv.at/Dokumente/BgblAuth/BGBLA_2021_I_150/BGBLA_2021_I_150.html

^[2] Bundesgesetz über den Ausbau von Energie aus erneuerbaren Quellen (Erneuerbaren-Ausbau-Gesetz – EAG) [StF: BGBl. I Nr. 150/2021], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20011619

^[3] The English translation of each individual act mentioned conforms to the official “List of Austrian laws in English”, available under https://www.ris.bka.gv.at/RisInfo/LawList.pdf, if present on the list; if not, translation is provided by the authors. The links supplied are always to the official, German language, versions of the acts. 

^[4] Bundesgesetz über die Förderung der Elektrizitätserzeugung aus erneuerbaren Energieträgern (Ökostromgesetz 2012 – ÖSG 2012) [StF: BGBl. I Nr. 75/2011], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20007386

^[5] Elektrizitätswirtschaft neu geregelt wird (Elektrizitätswirtschafts- und –organisationsgesetz 2010 – ElWOG 2010) [StF: BGBl. I Nr. 110/2010], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20007045

^[6] Bundesgesetz, mit dem Neuregelungen auf dem Gebiet der Erdgaswirtschaft erlassen werden (Gaswirtschaftsgesetz 2011 – GWG 2011) [StF: BGBl. I Nr. 107/2011], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20007523

^[7] Bundesgesetz über Lenkungsmaßnahmen zur Sicherung der Energieversorgung (Energielenkungsgesetz 2012 – EnLG 2012) [StF: BGBl. I Nr. 41/2013], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20008276

^[8] Bundesgesetz über die Regulierungsbehörde in der Elektrizitäts- und Erdgaswirtschaft (Energie-Control-Gesetz – E-ControlG) [StF: BGBl. I Nr. 110/2010], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20007046

^[9] Bundesgesetz zur Festlegung einheitlicher Standards beim Infrastrukturaufbau für alternative Kraftstoffe [StF: BGBl. I Nr. 38/2018], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20010261

^[10] Bundesgesetz, mit dem die Errichtung von Leitungen zum Transport von Nah- und Fernwärme sowie Nah- und Fernkälte gefördert wird (Wärme- und Kälteleitungsausbaugesetz – WKLG) [StF: BGBl. I Nr. 113/2008], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20005917

^[11] Bundesgesetz vom 6. Feber 1968 über elektrische Leitungsanlagen, die sich auf zwei oder mehrere Bundesländer erstrecken (Starkstromwegegesetz 1968) [StF: BGBl. Nr. 70/1968], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=10006274

^[12] Bundesgesetz vom 6. Feber 1968 über elektrische Leitungsanlagen, die sich nicht auf zwei oder mehrere Bundesländer erstrecken [StF: BGBl. Nr. 71/1968], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=10006275

^[13] Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources (recast), https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02018L2001-20181221

^[14] REEA, § 55. – § 63., incl.

^[15] REEA, § 9. – § 17., incl. and § 45. – § 53., incl.

^[16] REEA, § 79. – § 80., incl.

^[17] REEA, § 6a.

^[18] https://www.e-control.at/en/econtrol

^[19] https://www.world-nuclear-news.org/Articles/Ten-EU-nations-call-for-nuclear-s-inclusion-in-tax

^[20] https://www.euractiv.com/section/energy-environment/news/eu-countries-ramp-up-pressure-to-grant-nuclear-a-green-investment-label/

^[21] https://www.euractiv.com/section/energy-environment/news/five-eu-countries-form-anti-nuclear-alliance-at-cop26/

^[22] „Bundesgesetz über die Einrichtung eines Registers der wirtschaftlichen Eigentümer von Gesellschaften, anderen juristischen Personen und Trusts (Wirtschaftliche Eigentümer Registergesetz – WiEReG)“ [StF: BGBl. I Nr. 136/2017], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20009980.

^[23] „Register der wirtschaftlichen Eigentümer“, https://www.bmf.gv.at/services/wiereg.html, entry searches under https://wieregms.bmf.gv.at/at.gv.bmf.wiereg-p/wiereg?execution=e1s1

^[24] „Bundesgesetz über Vereine (Vereinsgesetz 2002 – VerG)“ [StF: BGBl. I Nr. 66/2002], https://www.ris.bka.gv.at/GeltendeFassung.wxe?Abfrage=Bundesnormen&Gesetzesnummer=20001917.

^[25] “Zentrales Vereinsregister”, https://www.bmi.gv.at/609/zvr.aspx, entry searches under https://www.bmi.gv.at/609/abfragen.aspx

^[26] „Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor“ [2021/0342(COD)], https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0664