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The Connecting Europe Facility for Energy: Funding fiction, failing climate

‘The stuff of fairytales’ is often what people say when they hear commoner-to-princess stories like those of Kate and Meghan, witness the Northern Lights, or marvel at Leicester City winning the Premier League in 2016.

But it’s definitely not the phrase you want to hear when it comes to the EU’s funding priorities for the energy transition. And yet a Bankwatch report released last week reveals that, in 2024 alone, the Connecting Europe Facility (CEF) – a key EU energy infrastructure fund – sunk EUR 454 million into fantasy energy technologies like fossil gas-sourced hydrogen with carbon capture.

Public funding props up fantasy fuels

Since it was established in 2024, the CEF has been heavily financing projects that have very little to do with climate action and everything to do with the survival of the fossil-fuel industry. Yet this substantial outlay could have been invested in proven and mature solutions such as electricity interconnections, smart grids, and grid flexibility.

According to both the International Energy Agency and the International Panel on Climate Change, investments in renewables, energy efficiency, and electrification, combined with cuts to fugitive methane emissions, have the potential to meet over 80 per cent of the world’s decarbonisation needs by 2030. Yet while Europe’s electricity grids are in desperate need of funding to the tune of almost EUR 600 billion, the CEF is betting EU money on all the wrong kinds of energy projects under the guise of the energy transition.

Hydrogen produced from fossil gas with carbon capture has a negative climate impact, largely due to its lifecycle methane emissions and the cost and inefficiency of carbon capture technologies. In fact, their combined track record is distinctly unimpressive. By 2022, after decades of research and public funding, carbon capture and storage had sequestered just 0.1 per cent of global energy-related carbon dioxide emissions. Today, 99 per cent of hydrogen produced globally still comes from fossil fuels. These technologies are not the answer to Europe’s liveable, climate-resilient future.

No matter which way you slice it, carbon capture is not a commercially viable solution for reducing carbon emissions, and its actual impact is negligible compared to the vast swathes of public money it’s already managed to capture.

Industry interests and the competitiveness myth

These glaring failures should matter deeply to the European Commission, which seems intent on adhering to the new Brussels dogma of ‘security and competitiveness’. Yet fossil gas-based hydrogen and carbon capture – both fully endorsed by the Commission – fail the competitiveness test spectacularly. Carbon capture projects routinely underdeliver, with most only operating in the context of fossil-fuel processing or production, which ultimately defeats the very purpose of decarbonisation.

What’s more, the financial ramifications of the hydrogen and carbon-capture hype for citizens has been blatantly ignored. Our analysis shows that the main beneficiaries of CEF funding are gas transmission system operators and fossil-fuel giants like Shell, Equinor and Eni.

These industry heavyweights have long lobbied aggressively for false solutions and greenwashing tools that waste precious financial resources. And it’s no surprise how we got here. The oil and gas industry held close to 900 meetings with Von der Leyen’s cabinet during her first term between 2019 and 2024. In fact, the industry spent a whopping EUR 75 million each year on lobbying during this period.

Even more concerning is the central role played by the gas lobby – represented by the European Network of Transmission System Operators for Gas (ENTSOG) – in shaping EU energy planning. ENTSOG – an industry group comprising the very companies that profit from transporting gas between EU Member States – is now trying to replicate their tried-and-tested model with hydrogen. The bigger the hydrogen network, the more these operators stand to gain.

Additionally, the repercussions of the Clean Industrial Deal on future funding for hydrogen and carbon capture will reveal just how ugly this story could become. Launched by the Commission in February 2025, the Deal is set to result in loosened regulations and increased money flows to these technologies, which would represent a major loss for climate. And the warning signs are already visible in the Commission’s current draft of the Low-Carbon Hydrogen Delegated Act – a key component of the Deal – which sets criminally weak standards that fail to limit methane emissions.

Will the EU fund a sustainable future?

Publicly funded decarbonisation projects must serve the public interest. They should also be functional, efficient, and effective. Instead, the EU’s current strategy is designed to subsidise the already ridiculously wealthy fossil-fuel industry by supporting their greenwashing efforts. Meanwhile, as the EU struggles to reduce emissions from the energy sector, over 1,700 gigawatts of solar and wind power across Europe awaits connection to the grid.

More promisingly, the upcoming EU grids package, expected by the end of 2025, provides a crucial opportunity to fix these issues. But it will only succeed if lawmakers put down the axe when it comes to environmental rules. We already have the solutions. Now we just need to fund them.

The EU must mobilise and direct its resources to develop a renewables-based, flexible, and smart electricity grid without destroying nature or undermining the hard-won environmental safeguards that protect it. But above all, it must stop subsidising fossil fuels. Otherwise, reaching the ambitious 2030 climate goals will remain a costly pipe dream.

EIB–EBRD mutual reliance: A threat to environmental and social accountability

Initially, the agreement will apply to a small number of carefully selected projects to test the new approach and procedures. But even at this early stage, doubts remain about the robustness of safeguards and the institutions’ ability to uphold accountability in co-financed projects, mainly due to the EIB’s comparatively weaker environmental and social due diligence and complaints mechanism.

Under the agreement, selected projects will be appraised and monitored solely by the designated leading institution – either the EIB or the EBRD – using its own environmental and social policies and standards. While EIB and EBRD standards share a certain level of similarity, the EBRD’s standards are more operationally detailed and require compliance with good international practice, as outlined in its relevant guidance note. The EIB, however, has yet to develop a similar guidance note, despite committing to do so in 2022.

Two sides of the same story

Perhaps the most significant discrepancy lies in the banks’ approaches to due diligence. The EBRD is actively engaged throughout project preparation, consultation, implementation and monitoring. In contrast, the EIB heavily relies on project promoters to provide information and assurances of compliance. This difference may lead to variations in the quality of project preparation depending on which institution leads.

It’s also likely to affect how the banks’ accountability mechanisms assess potential complaints about environmental and social issues or transparency, as past experience has already shown. For example, both the EIB Group Complaints Mechanism (EIB-CM) and the EBRD Independent Project Accountability Mechanism (IPAM) received similar complaints regarding the route selection and environmental and social impacts of a section of the co-financed pan-European Corridor Vc near the city of Mostar in Bosnia and Herzegovina.

However, the two mechanisms reached contradictory conclusions regarding standards, environmental impact assessments, and public consultations. While the EIB-CM found no major shortcomings, the IPAM found the project non-compliant with several of the EBRD’s environmental and social standards. These gaps can be attributed not only to differences in standards, but also to how the mechanisms themselves operate.

Multilateral development banks, including the EIB and the EBRD, are expected to provide access to independent, safe, and effective accountability mechanisms, in line with the internationally recognised effectiveness criteria for non-judicial grievance mechanisms set out in the UN Guiding Principles on Business and Human Rights. However, Bankwatch research reveals that the EIB-CM has consistently fallen short of fulfilling its mission in an independent, efficient, and meaningful way, leaving communities affected by EIB operations at risk.

Additionally, the EIB-CM fails to meet key UN criteria on independence, legitimacy, transparency, accessibility, and effectiveness. Despite the dedicated efforts of EIB-CM staff to deliver meaningful outcomes for complainants, the EIB’s institutional response to EIB-CM recommendations has often been inadequate, resulting in little substantive improvement. This raises serious doubts about whether the EIB-CM alone can ensure accountability and access to remedy when handling complaints related to environmental and social matters in co-financed projects.

Time to fix the system

The EIB now has a unique opportunity to improve its complaints mechanism, which is currently under review. A recently appointed external panel of experts is expected to release a report with recommendations for improvement in the coming weeks, and non-governmental organisations have already identified priority areas and policy recommendations.

These include strengthening the EIB-CM’s independence within the EIB’s structure, clarifying its mandate on the delivery of remedy, improving the case-handling process to make it more inclusive, equitable, transparent and safe, and enforcing the EIB-CM’s monitoring function.

With joint initiatives between the banks set to increase under the agreement, both institutions must strengthen not only their environmental and social safeguards, but also their accountability mechanisms, aligning them with the best available policies and practices to prevent any weakening of stakeholders’ rights.

The upcoming EIB-CM revision should fully adhere to both good international practice and the effectiveness criteria set out in the UN Guiding Principles on Business and Human Rights. For the EU’s public development bank, this reform is long overdue.

Estfeed Datahub: Powering Estonia’s digital energy future

A positive example of progress in this area is Estonia’s Estfeed Datahub, a platform that supports smart data sharing in the electricity market. Launched in September 2024 by Elering, Estonia’s national electricity and gas transmission system operator, this innovative tool not only increases market efficiency but also empowers individuals and communities to participate in the energy transition.

Smart data exchange for a more connected market

One of Estfeed’s main advantages is that it enables energy market participants to rapidly save and exchange information in a secure way. Estfeed’s users include network operators and manufacturers, management service providers, private-sector companies, individuals, and research institutions. Since April 2025, the platform has transitioned to a 15-minute data exchange cycle, making data exchange even faster.

Estfeed’s main purpose is to enable seamless data exchange within an open electricity market. To this end, it uses a central data warehouse that operates on the principles of ensuring fairness and transparency for all market participants1, as outlined in Elering’s data exchange explainer video.

Estfeed is designed to support fast switching processes and gives users access to energy and gas consumption data along with other useful information like weather forecasts and electricity prices2. Importantly, users retain full control over their data. It also facilitates data exchange between countries, supporting cross-border energy services.

By improving energy efficiency in this way, the platform helps to make energy consumption more affordable. This means both consumers and energy companies can make better-informed decisions based on accurate measurement data.

How does it work?

Estfeed Datahub collects data from electricity and gas metres, network operators, and energy producers. Consumers have the final say on which service providers they share their data with.

The platform then securely transmits the data. Once consent is granted, service providers gain access to the consumer’s metered data in the form of real-time consumption or hourly electricity usage. Finally, this information is transferred to machine-readable formats.

This infographic illustrates how the datahub operates:

What makes Estfeed so effective?

Estfeed is considered an example of best practice because it supports the development of new technologies and services in the energy market. It’s also a useful tool for energy communities and individuals who produce their own electricity. Encouragingly, similar data platforms are becoming more common across Europe.

But what makes Estfeed truly unique is its capability to share data beyond borders. By bringing together data sources, software solutions, and consumers in one hub, the platform is taking an important step towards improving energy efficiency and streamlining the integration of renewable energy sources.

Estfeed is a strong example of how digital tools can promote grassroots engagement and drive decentralisation. By giving users direct access to their energy data, platforms like Estfeed empower individuals to make informed choices and actively participate in the clean energy transition.

Beyond improving efficiency and encouraging innovation, Estfeed also makes this shift feel tangible and achievable. As digital infrastructure becomes more central to the energy system, innovative solutions like this are set to play an increasingly important role in bringing about a cleaner and more democratic energy future.

The EBRD’s first Impact Report: A welcome step, but does it tell the whole story?

The report replaces the EBRD’s Sustainability Report, which focused on what the EBRD did, rather than what it changed. Yet even the new format struggles to demonstrate how public investments are transforming lives, improving governance, or driving green and democratic transitions. The methodology still relies heavily on client-reported data and internal validation, with little evidence from the final beneficiaries and those most affected: workers, entrepreneurs and communities.

The lack of tools to measure impact on democratic institutions is striking, especially given the EBRD’s Article 1 mandate. United Nations Sustainable Development Goal 16, which focuses on fostering peace, justice and strong Institutions, receives the least attention. To address this shortcoming, we recommend that the EBRD include indicators on civic and citizen engagement as well as policy dialogue.

Some transparency wins are worth noting: the EBRD reports on its underperformance, referencing 24 projects that delivered less than 20 per cent of its objectives in 2024. It attributes this underperformance to causes like macroeconomic shocks, weak governance, early loan repayments, and compliance issues. Yet deeper insights into patterns categorised by country, sector, and risk are notably absent.

On the green transition, headline figures on projected carbon dioxide reductions from increased renewable energy capacity are encouraging, but there’s more than meets the eye. The EBRD’s investments in gas infrastructure, waste incineration, and forest biomass have not been considered. Some projects lauded for environmental gains, such as the electric trolleybuses scheme in Kyrgyzstan, haven’t even become operational.

The report is more concrete when reporting on human capital investments in skills development, gender-focused finance, and improved workplace standards. But transparency around financial intermediaries, used largely for women-in-business support, remains a challenge. Has funding truly advanced women’s economic empowerment, or just ticked boxes? The EBRD should track long-term indicators like gender wage gaps, cases of gender-based violence and harassment, and the representation of women in leadership roles at both corporate and community levels across all its investments.

Alarmingly, some projects praised for promoting inclusion, such as cotton farming in Uzbekistan, have instead led to the economic displacement of thousands of farmers. This underscores the urgent need for robust ex post impact assessments to capture the real outcomes of investments.

The report also notes that countries with the lowest ‘transition scores’, such as those in Central Asia and the southern and eastern Mediterranean region, are also the countries where the EBRD invests most heavily and expects the highest transition impact. Yet there is little clarity on how and whether the EBRD’s current approach to investment, policy dialogue, and technical assistance actually supports systemic change.

This first Impact Report is an important step. But it’s only the beginning. For future editions, the EBRD must sharpen its focus on outcomes that matter: inclusion, democracy, environmental integrity, and accountability. Because the true measure of impact isn’t what’s projected on paper – it’s what communities experience on the ground.

Serbia’s district heating crisis: Gas dependence fuels price volatility

The sector’s financial health has been deteriorating rapidly. In 2023, for the first time, Serbia’s entire district heating sector recorded losses amounting to EUR 10 million, according to a recent analysis. The sector’s liquidity has also plummeted, with working capital deficits reaching approximately EUR 202 million (RSD 23.7 billion) – the highest shortfall in the past five years. To keep heating services operational during the 2023/2024 winter season, the sector accumulated EUR 36.4 million in additional debt, primarily due to soaring gas prices, alongside politically driven overemployment and existing investment burdens. One of the critical issues facing the sector is its unbalanced energy mix, with fossil gas accounting for 77.7 per cent of all sources. More significantly, 90 per cent is imported. In May 2022, Serbia signed a three-year gas supply agreement with Russia – at a time when the EU was actively working to reduce energy ties with the aggressor state. Serbia’s decision to deepen its dependence on Russian gas was primarily driven by a desire to stabilise energy prices.

However, recent market developments have rendered the agreement largely ineffective, despite a new annex signed in May 2025. Although the contract sets a fixed price for gas, it caps annual volumes at 2.2 billion cubic metres, forcing Serbia to turn to the more expensive open market once the limit is exceeded. Additional imports from Azerbaijan, covering 15 to 18 per cent of annual consumption, have also proven more costly.

Complicating matters, the oil-indexed pricing formula and regulatory rules set by the Energy Agency of the Republic of Serbia (AERS) have led to a price surge for market participants. Between October 2024 and March 2025, gas prices for district heating systems rose by 26.5 per cent. This significant increase has placed a heavy burden on public utility companies, driving up operational costs and threatening the financial viability of an already vulnerable sector.

Stalled reforms

Serbia’s district heating sector is now entering a critical phase. By the end of 2023, 12 companies reported losses exceeding their equity, while 18 assumed liabilities surpassing their total capital – clear indicators of deep financial instability. With heavy reliance on imported fossil fuels leaving them exposed to global price fluctuations, district heating companies are unable to prioritise new technologies and decarbonisation projects without first undergoing economic consolidation and sectoral restructuring. Until then, long-term viability remains a pipe dream.

Despite this mounting urgency, the Serbian government has yet to come up with a credible, long-term restructuring plan, as acknowledged during the 23rd Summit of District Heating Associations in June 2025. This policy vacuum continues to stall essential reforms and leaves utilities focused on short-term survival rather than on long-term modernisation.

Coordinated efforts urgently needed

At the summit, Serbia’s deputy energy minister confirmed the government had no contingency strategy for the sector, aside from limited energy efficiency measures under a public project supported by the state and the European Bank for Reconstruction and Development (EBRD). The project applies an energy service company (ESCO) model to support multi-family residential buildings, but it offers little to address the wider crisis facing many of the country’s district heating utilities. Unless the government swiftly changes course, they could shut down within less than five years. A shift towards renewable energy sources is clearly essential – not only to reduce Serbia’s exposure to the volatile fossil-gas market but also to restore financial and operational stability. To achieve this, the government must overhaul its fuel mix by prioritising sustainable local power sources such as wind and solar to secure the nation’s energy future. In parallel, the introduction of carbon pricing and a structured phase-out of fossil-fuel imports are required to support this transition and make it more affordable over the long term.

Deploying technologies such as geothermal, solar thermal, and heat pumps would diversify the current system to a considerable extent, providing secure heating and a reliable pathway for phasing out fossil gas by 2050. But without a clear national roadmap, institutional backing, and targeted investments in renewables, Serbia has no chance of meeting its energy transition goals – leaving its citizens exposed to the rising costs of an outdated heating system.

International financial institutions like KfW and the EBRD can play a key role in supporting the Serbian government to develop and implement more bankable, technically sound projects based on these sustainable renewable technologies. Their involvement must provide the credibility, financing models, and technical expertise needed to finally move from strategy to execution.

Restoring the Dnipro: Ukraine’s water crisis and the path to Europe

Ukraine’s water woes

According to 2021 data from the World Meteorological Organization, the negative trend of diminishing water reserves is increasing worldwide due to both climate change and human activity. Over the past two decades, terrestrial water storage – encompassing all water on the land surface and beneath, including soil moisture, snow and ice – has dropped at an average rate of 1 centimetre per year. The situation is worsened by the fact that only 0.5 per cent of its water is usable for drinking.

Similarly, findings by Ukraine’s Accounting Chamber indicate a deterioration in the water condition of water bodies across the country. The risks of failing to meet the water resource needs of both the population and the national economy are mounting, as are the risks of inadequate preservation and replenishment of these vital resources.

This is evidenced by a 2021 Accounting Chamber report on an audit assessing the effectiveness of a proposed nationwide programme aimed at developing water management and improving the ecological condition of the Dnipro River basin.

According to this report, the World Bank then ranked Ukraine 125th out of 180 countries in terms of per capita access to drinking water, positioned between African countries such as Chad and Sudan, while the Centers for Disease Control and Prevention listed Ukraine among countries with the most dangerous and unpalatable tap water.

Similarly, Ukraine has made little headway in overcoming either the shortage or declining quality of its freshwater resources, with the WWF Water Risk Filter tool indicating that the state of freshwater ecosystem services in Ukraine had already crossed the ‘high-risk’ threshold on its way to being assigned a ‘very high risk’ status.

Regrettably, the water management programme in question, specifically designed to tackle these issues, was never implemented due to a lack of funding. Since then, Russia’s war has severely impacted the condition of the country’s water bodies.

Despite these challenges, Ukraine’s deputy health minister has re-emphasised the pressing issues related to the availability and quality of drinking water in the country, particularly in the context of Ukraine’s European integration efforts. In short, Ukraine has considerable work to do before it brings its national water standards in line with those of the EU.

What does the future hold for the Dnipro?

The National Ecological Centre of Ukraine (NECU) has raised concerns about the ongoing exploitation of the Dnipro, warning that continued misuse could lead to its complete ecological collapse. As a vital source of drinking water and a key resource for cities along its banks, the Dnipro must be protected. The NECU stresses the need to reduce the pressures placed on the river by hydropower production and navigation, and to halt the discharge of polluted wastewater into its waters.

One major issue highlighted is the massive environmental damage caused by artificial structures, especially hydroelectric power stations. Long before it was destroyed in June 2023 by Russia’s military, the Kakhovka hydropower plant had been highly problematic. Constructed in the 1950s, its reservoir flooded vast areas of natural landscape, submerging valuable ecosystems and altering the natural flow of the Dnipro.

Source: https://www.unian.ua/society/velikiy-lug-velichezniy-holodilnik-dlya-vsiyeji-planeti-vin-vplivatime-na-klimat-zemli-ekolog-vadim-manyuk-12657741.html

Numerous herbaceous plants and wildlife species have returned, signalling the river’s gradual revival. Left undisturbed, this area has the potential to become the largest floodplain wetland in Europe – possibly even Ukraine’s largest biosphere reserve. Environmentalists believe that restoring the reservoir could lead to a new ecological catastrophe.

To support recovery efforts, the Odesa branch of the NECU has developed an interactive map documenting the impact of the Kakhovka explosion. This tool is expected to play a key role in planning the restoration of the affected regions.

Plans without protections

Over the past decade, the Ukrainian government has repeatedly considered the development of a continental waterway connecting Gdansk and Kherson – known as the E40 waterway. In 2015, its estimated cost exceeded EUR 2 billion, and it would be significantly higher today.

Environmentalists have long opposed the project due to its far-reaching ecological consequences. If built, the waterway would affect 193 protected areas in the Polissia region – an area roughly the size of Belgium, representing 5 per cent of Ukraine’s total territory.

Given the potential harm, there is an urgent need to restore legal safeguards. Specifically, the requirement for conducting strategic environmental assessments for recovery and regional development plans, and environmental impact assessments for individual projects, must be reinstated. These safeguards were temporarily suspended during martial law.

The EU’s guidelines for expanding the Trans-European Transport Network (TEN-T) include an indicative extension into Ukraine. The EU’s TEN-T map of inland waterways and ports shows a planned waterway route along the Dnipro and Prypiat rivers via the Kyiv reservoir.

This inclusion prompted concerns within the European Parliament, particularly regarding the Chornobyl Biosphere Reserve, part of the Emerald Network of protected sites. The European Commission has since confirmed that, as of July 2022, the indicative TEN-T map for Ukraine includes both the Dnipro and Prypiat rivers, with the inland waterway set to culminate at Chornobyl Biosphere Reserve.

Map illustrating the proposed E40 waterway route extending upstream along the Pripyat River, with proposals to straighten and deepen the natural river channel in the direction of Chornobyl (blue line). Source: TENTec Map Viewers.

Despite this proposed mapping, the Commission stated that it had not been informed of any specific Ukrainian plans for inland waterway infrastructure. It also confirmed that full compliance with Ukrainian environmental laws is required, regardless of the temporary martial law amendments.

Back in 2015, an environmental impact assessment of the E40 project was carried out in a limited format. Even then, the authors concluded that it was impossible to determine which of the proposed routes would be least harmful to the environment at that stage of planning.

Meanwhile, several Ukrainian MPs have pushed for amendments to the current environmental legislation that would permit more uncontrolled economic activities on lands classified as part of Ukraine’s Water Land. This includes significant pressure from commercial interests seeking to exploit areas like the Chornobyl exclusion zone – now undergoing ecological restoration – for economic purposes, despite its value as a unique and recovering natural reserve warranting further preservation and study.

Are development banks investing wisely?

Following the destruction of the plant, several development banks announced their intention to support the reconstruction of Ukraine’s hydropower infrastructure upstream of the site. Under an agreement signed in June 2023, the European Bank for Reconstruction and Development (EBRD) secured EUR 200 million in loans and grants for Ukrhydroenergo, Ukraine’s largest hydropower company, as part of a broader EUR 600 million support package.

Additionally, a memorandum of understanding signed in March 2024 between Ukrhydroenergo and the European Investment Bank (EIB) outlined a potential additional loan of EUR 100 million. Negotiations with the World Bank are also ongoing.

However, many argue that these funds should not be used to rebuild outdated, vulnerable hydropower systems. Instead, development banks should support modern infrastructure designed to adapt agriculture, industry, and municipal water systems to the present reality – one in which the Kakhovka reservoir no longer exists.

A positive step forward

In a welcome move, in December 2024, the Ukrainian government adopted a new version of the national transport strategy until 2030, along with an operational plan for implementation until 2027. This new strategy no longer includes the E40 Gdansk–Kherson waterway project, effectively shelving it for the foreseeable future.

While this is a significant victory for environmental advocates, further action is needed. Specifically, the Pripyat River should be removed from the list of potential E40 waterway routes. This would go a long way towards establishing the prerequisites for its protection as part of the Chornobyl Biosphere Reserve under the Emerald Network. Encouragingly, on 13 May, the Ukrainian government designated the Prypiat river mouth a wetland of international importance.

Charting a new course

Despite these challenges, prospects for the Dnipro are promising. Ukraine’s drive towards EU membership provides a strong platform for aligning its policies with European environmental legislation. A strong example of this is the introduction of river basin management planning.

However, bridging the gap between policy declarations and actual implementation will require concerted efforts, sustained commitment and, most importantly, an understanding among decision makers of the urgency and national significance of restoring the Dnipro – Ukraine’s most vital river.

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