The EU Net-Zero Industry Act enters into force

On 29 June 2024, the Net-Zero Industry Act ("NZIA") entered into force. The primary aim of the NZIA is to ensure that the EU has access to secure and sustainable net-zero technologies by scaling up their manufacturing capacity within the EU.

Here are the key takeaways:

• The NZIA focuses on 19 Net-Zero Technologies ("NZTs"), including renewable fuels of non-biological origin ("RFNBOs"), solar, wind, nuclear, batteries, and carbon capture and carbon storage technologies. The Regulation sets non-binding benchmarks for 40% local production of such technologies by 2030 and 15% global market share by 2040.
• To reach those benchmarks, Net-Zero Technologies Manufacturing Projects ("NZT Manufacturing Projects") will benefit from streamlined permitting procedures. Further, NZT Manufacturing Projects that are deemed "strategic" will benefit from expedited permitting timelines.
• The NZIA introduces a target of achieving an annual injection capacity of at least 50 million tons of CO2 by 2030. Oil and gas producers identified by Member States must contribute to this target, according to a proportion to be defined by the Commission for each individual producer. Member States must adopt penalties for non-compliance.
• National public procurement procedures for NZT Manufacturing Projects must include requirements for achieving a minimum level of environmental sustainability, to be set out in future implementing regulations. In addition, for any given NZT Manufacturing Project, the contracting authorities and entities must consider the project's so-called "resilience contribution", which relates to supply chain diversification. When the majority (or a near majority) of a specific net-zero technology (or any of its main components) originates from a third country, the contracting authority or entity must impose specific public procurement conditions to reduce dependency on that country.
• Auctions to deploy renewable energy sources and schemes that incentivize households, companies, and consumers to purchase NZT final products must also be designed to favor bidders that contribute to increasing the sustainability and resilience of the supply of NZTs within the EU.
• Member States may establish regulatory sandboxes, i.e., schemes enabling companies to test technologies in a controlled real-world environment under monitoring by a competent authority.

Fostering Net-Zero Technology Manufacturing in Europe

Net-Zero Technologies and Associated Benchmarks

The NZIA identifies 19 NZTs, including any technologies that relate to hydrogen, solar, wind, sustainable biogas and biomethane, batteries, carbon capture and carbon storage, and nuclear. This means an NZT can be a technology producing (i) an end product, (ii) a specific component for the production of any of the concerned products, and (iii) machinery primarily used to produce such products.

The NZIA sets two non-binding benchmarks: the EU should aim to produce 40% of its NZTs locally by 2030 and reach 15% of the global market value for these NZTs by 2040.

To reach these benchmarks, the NZIA requires Member States to establish a "one-stop shop" for the granting of permits (whether the permit sought relates to a new or an extension of an existing NZT Manufacturing Project). The permit-granting process must also follow the relevant timeframe set by the NZIA (maximum 12 to 18 months, excluding the time needed to complete environmental impact assessments under Directive 2011/92/EU).

Member States are required to collect and provide reports to the Commission, enabling it to monitor progress towards the benchmarks. When the Commission observes that the benchmarks will not be reached, it will publish recommendations, such as expanding the list of NZTs, as part of the Annual Reports on Competitiveness of Clean Energy Technologies under Regulation (EU) 2018/1999.

Net-Zero Strategic Projects

Promoters of NZT Manufacturing Projects can apply to the relevant Member State authorities for recognition of their project as a "Net-Zero Strategic Projects".

This status must be granted within one month if the NZT Manufacturing Project is located within the EU and fulfills at least one the following criteria: (i) it increases manufacturing capacity of a component or a segment of the NZT supply chain, (ii) it has a clear positive impact on the EU's net-zero industry supply chain or downstream sectors by providing access to the best-available NZTs or to products produced in a first-of-a-kind manufacturing facility; and (iii) it manufactures NZTs through practices that implement improved environmental sustainability or circularity features. The Commission will adopt guidelines to further specify these criteria by February 2025.

Member States are required to grant Net-Zero Strategic Projects the highest national significance possible. Net-Zero Strategic Projects will also benefit from expedited administrative and litigation procedures, including shorter permit-granting processes than NZT Manufacturing Projects (3 to 6 months shorter).

Public Funding

Although the NZIA does not introduce new EU financial resources, NZT Manufacturing Projects are likely to facilitate access to public funding. In particular, under the Strategic Technologies for Europe Platform ("STEP") various EU funding programs will also be re-packaged and amended to allow EU funding for critical technologies in the fields of: (i) deep-tech innovation; (ii) clean and resource-efficient technologies (such as renewable energy); and (iii) biotechnologies.

Furthermore, State aid rules have been temporarily relaxed to allow Member States to support investments in the manufacturing of equipment relevant for the transition towards a net-zero economy - namely batteries, solar panels, wind turbines, heat pumps, electrolyzers, and equipment for carbon capture usage and storage, as well as the key components and critical raw materials necessary for their production (see our previous blogs on the Critical Raw Materials Act, the Temporary Crisis and Transition Framework, and the Regional aid Guidelines).

Net-Zero Acceleration Valleys

Member States may designate Net-Zero Acceleration Valleys (the "Valleys"), where clusters of companies manufacturing a certain technology are concentrated. Member States should adopt concrete measures to increase the Valleys' attractiveness for manufacturers (e.g., through the construction of necessary infrastructure, or support for private investments). Investments to set up Valleys - particularly in less developed and transition regions, and assisted areas - may benefit from public support, including from the European Regional Development Fund and on the Cohesion Fund, the Just Transition Fund, and the European Social Fund Plus, subject to compliance with State aid rules.

Scaling up of CO2 Injection Capacity

The NZIA sets another target: an EU annual injection capacity of at least 50 million tons of CO2 in storage sites by 2030, to facilitate the development of carbon capture and storage projects. Concretely, this leads to the following requirements for Member States and companies:

• By December 2024, Member States must make publicly available data on where CO2 storage can be permitted on their territory.
• From December 2024, Member States must report annually on existing CO2 capture projects, those in progress, and national support measures for the promotion of CO2 capture projects (whether already or still to be adopted).
• By September 2024, Member States must identify oil and gas producers with exclusive rights to prospect or explore. These producers must individually contribute to the CO2 injection target of 50 million tons by 2030, pro rata their share in the EU's crude oil and natural gas production from 2020 to 2023. They must submit biennial reports detailing their progress, which will be made public. By 2026, Member States must adopt penalties for companies failing to meet their proportional contribution requirements.

CO2 storage projects will be recognized as Net-Zero Strategic Projects, if they are located in the EU, contribute to the CO2 injection target of 50 million tons by 2030, and the project promoters applied for a safety permit under Directive 2009/31/EC.

Environmental Sustainability and Resilience Contribution

The NZIA sets out detailed rules on specific sustainability and resilience contribution factors that Member States must take into account when (i) awarding tenders in public procurement procedures, (ii) designing auctions for the deployment of energy from renewable sources, and (iii) setting up new - or updating existing - schemes benefitting households, companies or consumers that incentivize the purchase of NZT final products.

Public procurement

Public procurement procedures for NZT Manufacturing Projects (excluding, notably, RFNBOs and CO2 transport technologies) must incorporate minimum mandatory requirements for environmental sustainability. These environmental sustainability requirements will be specified in an implementing act by March 2025.

In addition, for any NZT Manufacturing Project, the contracting authorities or contracting entities must take into account the "resilience contribution". The resilience contribution seeks to diversify the supply chain of NZTs in the EU. Where a single third country's supply of a specific NZT or its main components within the EU either (i) exceeds 50%, or (ii) has increased by at least 10 percentage points for two consecutive years to reach at least 40%, contracting authorities and contracting authorities must impose certain conditions to reduce dependency on that third country.

Auctions

When designing national auctions for the deployment of NZTs that relate to renewable energy technologies (e.g. solar, wind, heat pumps, renewable hydrogen, sustainable biogas or biomethane, and e-SAF), Member States must incorporate: (i) pre-qualification criteria relating to: responsible business conduct, cybersecurity and data security, and the ability to deliver the project fully and on time; and (ii) pre-qualification criteria or award criteria to assess the auction's sustainability and resilience contribution. (Note that all "pre-qualification criteria" must be met in order to participate in the tender; and "award criteria" are used to rank projects in the auction.) The Commission will provide further clarification on those criteria to be used in auctions through an implementing act by March 2025.

Other Forms of Public Intervention

When setting up new - or updating existing - schemes benefitting households, companies or consumers that incentivize the purchase of NZT final products, public authorities must design the schemes so as to promote the purchase of products with a higher "sustainability and resilience contribution". The resilience contribution is assessed based on whether an NZT (or any of its main components) originates from more than 50% from a single third country. The NZT's sustainability contribution must be evaluated against at least one of the following criteria: (i) environmental sustainability, (ii) contribution to innovation, or (iii) contribution to energy system integration.

Other Measures to Reinforce the NZT Manufacturing Ecosystem

The NZIA sets out additional measures designed to strengthen the NZT manufacturing ecosystem in the EU. These includes measures for the establishment of a new Strategic Energy Technology Plan Steering Group (SET Plan Steering Group), supportive measures to set up European Net-Zero Industry Academies, and supportive measures for the creation of Net-Zero Regulatory Sandboxes.

**References to EU above should be read to also refer to the European Economic Area ("EEA"). The NZIA has been published in the Official Journal with the marking "Text with EEA relevance". The NZIA is currently being considered by the European Economic Area European Free Trade Association ("EEA EFTA") members (i.e., Iceland, Liechtenstein, and Norway), and is likely to be soon incorporated into the EEA Agreement.

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Covington has been closely following the development of the NZIA, and other instruments that form part of a broader array of legislative initiatives and communications to improve the "European open strategic autonomy", including the adopted Critical Raw Materials Act and the adopted Chips Act. Covington can assist businesses in the green energy sector to navigate the risks and opportunities offered by these instruments for their future projects and investments in the EU or elsewhere.

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