Bolder, Faster, Clearer: Turning the GDIP into a Cleantech Competitiveness Engine
February 9, 2023
I. A global context urging Europe to react to keep its frontrunning role in climate policy
The global cleantech race is core to the successful implementation of the Paris Agreement. The Agreement itself specifically refers to accelerating, encouraging and enabling innovation to unfold for a sustainable, long-term effect (Art. 10). This race has been accelerated by worsening climate and energy crises, and necessity to re-shore critical industries and materials. The European Union and its Member States are frontrunners in creating the legal framework required for Paris Agreement implementation, including through the first of a kind European Climate Law covering nearly a whole continent. Now, countries like the United States and China are committing significant resources to the cleantech race as well, and recently in the form of aggressive industrial policy combining subsidies, production incentives and access to finance.
On February 1st, the European Commission presented its Green Deal Industrial Plan (GDIP), meant as a response to the Inflation Reduction Act. Such a response was sorely needed because while the EU is a cleantech innovation powerhouse, it still struggles to scale and industrialise these technologies across Europe, due to a lack of dedicated support for the next generation of industry, and dearth of scale-up capital. This situation can be reversed only through a clear focus on supporting the European cleantech innovators to commercialise and scale in the EU. However, a clear and exclusive focus on scaling up clean technologies is still missing from the European Commission’s Green Deal Industrial Plan.
II. As the European Union, we are only as strong as our collective efforts
Cleantech for Europe is a network of 22 European venture capital investors, supporting more than 500 companies active in the climate and energy space, as well as a coalition of 12 of the most successful European scale-up innovators, eager to share their lessons of success but also to receive dedicated attention to the bottlenecks they are still facing in the EU. Cleantech for Baltics, Cleantech for Nordics, Cleantech for France and Tech for Net Zero Allianz represent local and regional cleantech ecosystems and show that cleantech is an EU-wide opportunity
In November, we issued a call for the European Institutions to prioritise speed, scale and simplicity for European innovators to scale up cleantech and for the EU to develop, as a result, its own strategic sovereignty and competitiveness that yields global leadership. It is most encouraging to see several of these considerations adopted and incorporated in the Green Deal Industrial Plan Communication. However, we find that a clear focus on the successful scaling of clean technologies across the European Union is still missing, and we believe that more can be done to create the market signals and environment for European cleantech innovations to scale into tomorrow’s industries.
Following a series of consultations involving road-mapping exercises, input to surveys, one-on-one interviews and several coalition-wide discussions, we have assembled a series of recommendations which we believe would place the European Union on an equal footing with its main partner, the United States, when it comes to providing an attractive environment for innovators and industrial frontrunners. The GDIP is a great start, a collection of many good ideas, and shows the determination of the EU to become the industrial leader of the next decades. For instance, proposals on fixed premiums and faster permitting and certification are excellent for cleantech competitiveness. The proposals we make focus on demand creation, infrastructural needs, financing, regulation, supply-chains, skills and would, if taken together, amount to a EU Cleantech Strategy which we believe is sorely and urgently needed.
III. An EU Cleantech Strategy
To address this generational challenge, the EU should adopt a comprehensive strategy to scale up clean technologies, by creating strong enough market and funding signals to catalyse private investment and create a pan-European cleantech race. We propose to:
Set clear sectoral priorities and targets focused on boosting clean technologies, taking into account the EU’s needs and competitive strengths
Send a strong enough market signal of available funding and guaranteed demand to avoid “cleantech leakage” of promising technologies to other jurisdictions; Instead of a subsidy race, focus on improving existing instruments to focus them on the cleantech scale-up race, and pick low-hanging fruits while large packages are being negotiated
Set a vision for a whole-of-EU cleantech strategy, compared to 27 approaches that would further fragment us
In the document below, we make concrete proposals that Member States could push for to strengthen the EU’s response, advocating for competition-based instruments stimulating market demand to accelerate the development and deployment of clean technologies throughout Europe.
As a way to visualise the challenge and opportunity, below is a conceptual framework to compare policy packages and their potential for cleantech impact.
Proposal 1: Set clear sectoral priorities and targets
In the Inflation Reduction Act, critical sectors and technologies are clearly identified, and each associated to a subsidy package of tax breaks, grants or loans. As an example, it allocates more than $5 billion to low-carbon construction materials, including more than $2 billion for public procurement and deployment of low-carbon construction materials. This provides innovators and investors with clear signals to invest in production capacity.
In comparison, the GDIP fails to identify critical cleantech sectors and propose clear objectives for each. It punts this decision to the Net-Zero Industry Act, which could delay the market signal by 12-18 months.
We propose the GDIP already integrate a list of sectoral priorities, for example including:
Solar, wind energy and heat pumps as the most mature, ready-to-be deployed solutions
Innovative renewables such as ocean energy, advanced geothermal and floating offshore wind as the next generation of baseload power for the EU
Renewable hydrogen for industrial decarbonisation
Batteries, electric vehicles and charging infrastructure
Grid improvements and long-duration energy storage to support the future electricity system
Green Steel & construction materials to replace high-emission incumbent technology
Even better would be to already have manufacturing or production targets as part of the GDIP, including those already committed under REPowerEU, such as for renewable hydrogen.
Such targets can also be accompanied with clear plans for phasing out the previous generation of technologies, taking the example of the 2035 phase-out of fossil fuels-based cars.
Proposal 2: Focus on financing and demand to create strong market signals
At its core, the Inflation Reduction Act is an effective market signal, giving innovators and investors the confidence that their capacity building will pay off in the US. As a result, many EU cleantech innovators are already considering focusing their expansion plans to the US. Recent comments by Northvolt, one of the EU’s most successful cleantech scale-up, exemplify this point.
To stem the risk of “cleantech leakage”, the EU can start by low-hanging fruits, mobilizing existing resources but simplifying their access for cleantech innovators:
Turn the EU Innovation Fund into a scale-up engine: we have already earmarked tens of billions of euros for clean technologies via the Innovation Fund. But this funding is far from being easily accessible to cleantech start- and scale-ups and often focussed on high-emission industry incumbents instead. Unlike the US approach, where the Department of Energy mobilizes hundreds of sector experts who pro-actively reach out to the most innovative companies to offer funding, the EU asks for months-long applications and uses ‘financial maturity’ as a screening criterion, closing the door to the most innovative companies and missing the point that public funding is there specifically to de-risk first deployments. As a result, Innovation Fund projects are won mainly by large industrials who have the capacity to write the grants but focus on the least disruptive technology choices (especially CCUS), instead of replacement technologies. We should urgently strengthen and reform the Innovation Fund to build internal capacity instead of relying on external evaluators, and actively seek and finance the most promising EU clean technologies. It could also rely more on the EIB’s expertise in the space.
Expand on the “fixed premiums” proposal: the Commission proposal to launch an auction for a 10-year fixed premium for the production of renewable hydrogen is very timely. We propose to increase its funding, and propose auctions for other critical sectors, including innovative renewables and green steel.
Encourage the EIB to develop scale-up instruments: the EIB is already the main financier of the cleantech scale-up, through its venture debt and impact finance. They are the best-positioned actor to tackle critical funding bottlenecks for clean technologies, including performance guarantees for scale-ups, working capital finance and subordinated debt for first-of-a-kind projects.
Encourage the EIF to mobilize institutional capital: to date, banks, pension funds and insurance companies have been unable to invest in clean technologies, because EU cleantech funds are too small for their investment criteria and risk-return ratios are not aligned. The EIF could act as a syndicator of private capital, creating a multi-billion euro fund of fund to invest in cleantech funds across Europe, accelerating the creation of cleantech growth funds to support the scale-up effort.
It is also critical to mobilise both public and private demand for clean technologies. The Commission’s proposal to mobilise green public procurement is welcome, but should be coupled with:
Clear and binding manufacturing and deployment targets for sectors (see above). This creates lead markets and clear demand signals.
De-risking by stronger certainty of price and demand using structures like the Hydrogen Bank or fixed premiums, but across all critical sectors.
Incentives for buying clean technologies by large EU companies, with tax credits for buying green steel, low-carbon cement, electric vehicles etc.
Build coalitions of private companies acting as off-takers for clean technologies on the model of the US’ First Movers Coalition.
On the regulatory side, the Commission’s proposals on accelerating permitting and creating regulatory sandboxes for faster testing and certification of products are very welcome. The acceleration of permitting procedures should be extended to all manufacturing of clean technologies in critical sectors.
Proposal 3: Focus on EU-wide build-up instead of national races
The scale-up of clean technologies presents a once-in-a-generation challenge for the EU, but the economic opportunities that it creates are distributed across the continent. In 2022, we tracked cleantech investments in 24 of the 27 member states. Access to renewable resources could also expand the EU’s industrial base beyond existing basins to benefit more member states. But this pan-European opportunity depends on the EU acting as one. EU failures in the cleantech space comes from fragmented markets, in which innovators have to invest significant resources to operate in each member state.
The proposed State Aid reform is especially risky in this regard: it risks creating an intra-European cleantech race instead of pan-European collaboration to build critical value chains. We propose to focus the State Aid reform on building up cleantech infrastructure, including via more IPCEIs for all critical cleantech sectors, channeling billions of euros into large, cross-border infrastructure or cleantech projects instead of subsidising large national champions.
Indeed, the need for infrastructure investment is acute. Our electricity grid is not yet built for the near future of massive development and use of solar panels to power homes and electric vehicles to commute, given long-duration energy storage helping alleviate the intermittency of renewables. A combination of State Aid and Electricity Market Design reform should create the conditions for a significant build-up, integration and future-proofing of the European electricity grid, by adopting the latest flexibility technologies, increasing capacity and enabling the business models for large-scale energy storage. The goal should be an EU grid designed, planned and built to allow for an abundance of renewable sources, enabling EU companies to produce their future products from renewable electricity. This new grid should be considered a competitive advantage as well as a unifying force among EU members.
The global cleantech race is also a race to build up our supply chains. Today, EU cleantech companies are already suffering from delays, high prices and materials shortages. While trade will play an important part, we propose to strengthen the EU’s response by:
Completing a mapping exercise to identifying the current bottlenecks experienced by the critical cleantech sectors today, and the ones they will experience as their sectors undergo fast growth by 2030-2035
Prioritise and build the shortest supply chains possible for equipment, such as electrolysers. This would ensure energy security, sustainability and competitiveness. It means strengthening our industrial base to be able to build and assemble EU-made equipment.
In the context of Critical Raw Materials, create a European Critical Materials Recovery plan, to make sure we create the recovery and recycling capacity to replace a significant share of virgin materials.
Bringing European cleantech players together to contribute to the above.
The GDIP highlights the need for fast-increasing the skills and talent pool for the wide deployment of clean technologies, identifying that “the vacancy rate have doubled in sectors considered key for the green transition between 2015 and 2021”.
This can be addressed with an EU Cleantech Skills Framework. Reconversions from fossil-based industries to net-zero energy jobs and increased manufacturing of new components can be a major labour opportunities for the EU. We recommend to:
Start by mapping the labour and skills needs across the EU, focusing on current and future needs as we scale up critical value chains.
Co-develop intensive training and re-training programs to meet these needs, based on collaborations between the cleantech industry and academia, and focused on short immersive cycles of skills instead of longer degrees. In addition to the Academies proposed in the GDIP, help scale private skilling initiatives, such as Verkor’s Battery School in France or Woltair’s heat pump installation training centers in Czechia.
Prioritise engineering and mechatronics in sustainability-related research to maintain the high level of innovations born in hardware cleantech solutions in energy, transportation, agriculture, materials and the built environment.
Prioritise engineering and installation skills across the EU, while also developing entrepreneurial and digital skills in parallel, so that all skills required are available across the EU to create cleantech companies and deploy their innovations. The distribution of skills should be accessible and available to all EU 27 equally.
While we scale up clean technologies and accelerate deployments across the EU to meet 2030 goals, there is also an opportunity to support the next generation of innovation, which will enable 2050 goals. This can be done by channelling funding for early-stage innovation in regions which have attracted less cleantech investment in the past decade. For instance, the European Institute of Innovation and Technology Climate-KIC has supported such activities for over a decade, but today is closing down its financial support for flagship projects such as Climate-KIC Accelerator and Climate Launchpad. We need a clear signal that a replacement is being prepared that will catalyse investment in clean tech in Member States which have attracted less than cleantech capital to date and have a smaller available pool of resources to draw upon at national level.