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The Modernisation Fund set up under the revised ETS Directive will more than double compared to the size initially envisaged, following the decision by five beneficiary EU Member States to increase the number of emission allowances they will transfer to the fund.

The Modernisation Fund will support low-carbon investments in the energy systems of ten lower-income EU Member States: Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia. Priority areas for the fund include renewable electricity, energy efficiency improvements, modernisation of networks and energy storage, and supporting a just transition in carbon-dependent regions. Each beneficiary Member State can determine the areas where it wants to invest.

The Modernisation Fund will be financed from the auctioning of emission allowances under the EU Emissions Trading System (EU ETS). Its initial size was set at 2% of the total allowances for the 2021–2030 period, i.e. around 310 million allowances. As of 2025, additional allowances may be added to the fund, depending on how much is needed for the free allocation to industry.

While the ETS Directive pre-defines the share that each beneficiary Member State receives from the Modernisation Fund, the beneficiaries can also transfer additional allowances to the fund. The additional allowances could come from the allowances concerned by the Article 10c derogation of the ETS Directive or from the allowances distributed among certain Member States for the purposes of solidarity, growth and interconnections.

Five beneficiary Member States (Croatia, Czechia, Lithuania, Romania and Slovakia) took advantage of either or both of these options when notifying their decisions to the Commission by the deadline of 30 September 2019. As a result, over 350 million allowances are estimated to be added to the Modernisation Fund, more than doubling its size.

The allowances of the Modernisation Fund will be auctioned on the common auction platform in equal shares for each year over the period 2021–2030.