Developing strategic value chains
How are the strategic value chains being developed?
Let’s begin with understanding what value chains are and why do they matter. A value chain is a business model that describes the full range of activities needed to create a product or service, from the raw materials to the sales and marketing activities, covering manufacturing, operations and logistics. In his 1985 book Competitive Advantage, Porter asserts that value chain analysis is directly linked to competitive advantage. Nowadays, industries must adapt and modernise if they are to stay ahead of the game. Industrial systems rely on proper working value chains, hence, a strategically value chain results from a prioritisation effort in order to effectively maximize the value versus the endeavours required to improve the value offering to the customers.
Strategic value chains are developed, for example, stimulating the markets with investments, targeting important market failures or societal challenges that could not otherwise be addressed. At a European level this is exactly what the Important Projects of Common European Interest are trying to reach. On the surface IPCEIs are another type of funding mechanism, yet it goes deeper than a budget commitment with a purpose within a timeframe, the concept is embodied in the Treaty on the Functioning of the European Union. IPCEIs is a relatively unknown provision of EU State aid law, which seems to be gaining support among a growing number of politicians and institutions. This provision has been little used until now, nonetheless it allows direct support to be given to companies seen as vital to European political and industrial objectives.
IPCEIs enable Member States to offer support to first industrial deployment through repayable advances, loans, guarantees or grants and by a more flexible approach to State Aid. In order to be eligible, projects must be co-financed by beneficiaries, ensure common benefits, and demonstrate their innovative capacity and high added value. In other words, projects must involve more than one Member State and focus on delivering value in strategic value chains across the EU.
IPCEIs began supporting infrastructure projects connecting countries, after that starting point, in recent times, three research, development and innovation IPCEIs have been approved. Microelectronics and battery value chains are the first two strategic areas being granted under the IPCEI framework. Hydrogen technologies and systems and Low-Carbon Industries have been identified as two out of six additional key strategic value chains for joint or coordinated investments and actions.
Along 2022, large health, hydrogen, cloud computing and semiconductor IPCEIs preparations have been more advanced in preparations and slowly are becoming a reality. The best examples are the two hydrogen IPCEIs approved by the Commission, Hy2Tech and Hy2Use.
IPCEI Hy2Tech
This IPCEI covers a wide part of the hydrogen technology value chain, for example hydrogen generation, fuel cells, hydrogen storage, transportation and distribution, and end-user applications, especially in the mobility sector.
Member states will provide €5.4 billion in public funding, which is in turn expected to unlock an additional €8.8 billion in private investment.
IPCEI Hy2Use
This IPCEI supports, on the one hand, the construction of hydrogen-related infrastructure, in particular large-scale electrolysers and transport infrastructure; and, on the other, the development of innovative and more sustainable technologies for the integration of hydrogen into industrial processes in multiple sectors, especially those that are more difficult to decarbonise.
Member states will provide €5.2 billion in public funding, which is in turn expected to unlock an additional €7 billion in private investment.
While both IPCEIs address the hydrogen value chain, Hy2Use focuses on projects that are not covered by Hy2Tech, namely hydrogen-related infrastructure and hydrogen applications in the industrial sector. In total the European hydrogen value chain will receive €10.6 billion in public funding in order to ramp up the development of this strategic value chain.
Today, hydrogen is primarily used to produce chemical products, therefore I would have expected to see more involvement from these industrial applications. Ammonia and chemical are projected to continue being the biggest demand drivers for hydrogen usage. Moreover, other sectors which will be big consumers of clean hydrogen include refining, production of electricity-based fuels and the steel sector.
All things considered, as IPCEI are being used more, the framework needs stricter governance and transparency mechanisms. Question then remains, how should the “industrial champions” participate in the development of strategic value chains, where they play a key role, if they are not directly involved in the Important Projects of Common European Interest selected?
