Detailed rules on the operation of the Innovation Fund should be established taking into account lessons learnt from the NER300 programme established under Directive 2003/87/EC and implemented on the basis of Commission Decision 2010/670/EU2; notably the conclusions of the Court of Auditors report3 should be taken into account.

In order to cover the lower profitability and the higher technological risks of the eligible projects compared to conventional technologies, a significant part of the Innovation Fund financing should be provided in the form of a grant. Detailed rules on the disbursement of grants should therefore be established.

As the risks and profitability of eligible projects may differ across sectors and activities of those projects and may also evolve over time, it is appropriate to allow for a part of the Innovation Fund support to be provided through contributions to blending operations under the Union investment support instrument, as well as in other forms provided for in Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council4 (the ‘Financial Regulation’).

It is appropriate to consider the difference between the total costs of an eligible project and the total costs of an equivalent project using conventional technology as relevant costs for the purposes of financing under the Innovation Fund. However, in order to avoid excessive administrative burden for small-scale projects and address their particular difficulties in obtaining financing, the relevant costs of a small-scale project should be the total capital expenditure cost of such a project.

With a view to making adequate financial resources timely available to the eligible projects, the disbursement of grants should be based on the achievement of milestones. For all projects, the milestones should include financial close and entry into operation. As some projects might need the support to be disbursed at a different point in time, it is appropriate to provide for the possibility to determine additional milestones in the contractual documentation.

In order to increase the probability of success of the projects, the possibility to disburse a part of the grant prior to the entry into operation of a project should be established. The disbursement of grants should in principle start at the financial close and continue during the development and operation of the project.

The major part of the Innovation Fund support should depend on verified avoidance of greenhouse gas emissions. Substantial underperformance on planned greenhouse gas emission avoidance should therefore lead to the reduction and recovery of the amount of the support dependant on such avoidance. The reduction and recovery mechanism, however, should be flexible enough to take into account the innovative nature of projects supported by the Innovation Fund.

Grants under the Innovation Fund should be awarded following a competitive selection process, via calls for proposals. In order to reduce the administrative burden for project proponents, a two-phase application procedure should be established, comprising an expression of interest and the full application.

Projects applying for the Innovation Fund support should be assessed on the basis of qualitative and quantitative criteria. The combination of such criteria should ensure the completeness of the project assessment in terms of its technological and business potential. To ensure fair and merit-based selection, projects should be selected based on the same selection criteria, but be evaluated and ranked first vis-à-vis other projects in the same sector and subsequently vis-à-vis projects across sectors.

Projects whose planning, business model and financial and legal structure appear insufficiently mature, in particular in light of a possible lack of support by the Member States concerned or of the necessary national permits, should not be selected for Innovation Fund support. However, such projects may be promising. Therefore, the possibility to provide development assistance to such projects should be laid down. Project development assistance should in particular benefit small-scale projects and projects in lower-income Member States to help achieving a geographically balanced distribution of the Innovation Fund support.

It is important to achieve a geographically balanced distribution of the Innovation Fund support. To prevent a situation where some Member States are not sufficiently covered, the possibility should be laid down to establish additional selection criteria aimed at achieving geographical balance in a second or subsequent calls for proposals.

The Commission should ensure the implementation of the Innovation Fund. The Commission should however be enabled to delegate some of the implementation actions, such as the organisation of the call for proposals, pre-selection of projects or contractual management of grants, to implementing bodies.

The revenues of the Innovation Fund, including the revenues from the allowances monetised on the Common Auction Platform in accordance with Commission Regulation (EU) No 1031/20105, should be managed in accordance with the objectives of Directive 2003/87/EC. The Commission should therefore carry out that task itself and be enabled to delegate this task to the European Investment Bank.

The Commission should apply different rules depending on the mode of the implementation of the Innovation Fund. Where the Innovation Fund is implemented in direct management, the provisions of this Regulation should be fully aligned with the provisions of the Financial Regulation.

Member States should play an important role in the implementation of the Innovation Fund. In particular, the Commission should consult the Member States on the key implementation decisions, as well as on the development of the Innovation Fund.

The Innovation Fund should be implemented in accordance with the sound financial management principles as laid down in the Financial Regulation.

Clear reporting, accountability and financial control arrangements should be laid down in order to ensure that the Commission receives complete and timely information on the progress of projects supported by the Innovation Fund, the entities managing the Innovation Fund apply sound financial management principles, and the Member States are in a timely manner informed about the implementation of the Innovation Fund,