Fund it!
The transition to a net zero emissions world is estimated to cost trillions in global spending by governments, business and individuals. Even in a capitalist society, where the promise of a better future is intrinsic to the concept, the question, whether capitalism can be part of the solution rather than part of the problem, and how it can renew its promise of a better future, remains more open than ever before. In the deepening climate crisis, we encounter ourselves, increasing 60% today’s level of investment to fund the clean energy and to relocate investments from high-emission to low-carbon assets, becomes one of the mayor next decades´ challenge.
My takeaway about the cost of the transition is threefold. Inflow of billions of dollars is plainly needed, a notable increase in the investment percentage is expected and surely the cost of production is going to increase in a significant proportion. A sustainable transition to net zero can only be achieved if there is sufficient inflow of capital, and by now we should realize that public capital alone won’t be enough. Therefore, mobilizing private capital becomes crucial. Moreover, private capital is going to have to take a big step up, and quickly. There is a need to bring together different sources of public and private capital in technology-specific financing blueprints.
As the industry is pushing for a technology driven solution approach, it must rely on several technologies that are initially uncompetitive, relative to existing, and exposed to considerable uncertainty regarding how policy will develop or how enabling infrastructure will emerge. Certainly, one of the showstoppers in the investment arena is the risk, private investors are less likely to support high risk programs. A transformation that needs to happen in parallel is the one investors, banks and insurers are compelled to undertake, developing new products and services to help companies finance risky low-carbon capital expenditures and transfer new risks.
What are the investment firm looking for in first place?
These firms look at three dimensions:
Strategy and targets
Evidence of transition-related investment activity
Governance mechanisms to ensure that the transition takes place
Having a clear strategic roadmap and adhering to independent frameworks on top of having already started the company’s own small scale investment activity, are steps to take into consideration prior to start collaborating with other investment parties aiming to scale up.
Many of the disruptive technologies, which can decouple production from process emissions, have not yet reached significant levels of market penetration due to a large number of market and non-market barriers. Therefore, we are exploring public funding possibilities, focusing on the European programs designed to create innovation.
Once the innovation cycle has been proven, one of the biggest obstacles is the lack of funding for start-ups to scale up their technology. Realizing breakthrough ideas takes research, proof-of-concept and piloting steps, but making the technology an operating reality requires to have gone beyond the demonstration and scale up phases. The good news is that nowadays there are already funding mechanism that aim to build and operate large-scale industrial assets with breakthrough technologies. In Europe, one of the world’s largest funding programmes, the Innovation Fund helps businesses invest in clean energy and industry. In the two calls of the program, so far, the fast majority of the proposals are submitted by energy intensive companies. Hydrogen and CCUS are clearly representing the biggest project clusters, accounting for two thirds of the projects. Another example of venture fund which exclusively focused on the bioeconomy and the circular bioeconomy in Europe is the new European Circular Bioeconomy Fund. The fund targeted investments of €250 million, with a further €206 million in capital raised by the end 2021. In early 2022 the ECB Fund had smashed its funding target by raising €300 million.
When innovation by itself is not enough to enable change, we must reconsider whether the effort is ought to be widely undertaken, I mean, at a value chain level. A growing number of politicians and institutions are thinking in this direction and are starting to use a concept embodied in the Treaty on the Functioning of the European Union in order to address the market challenges of our time. The Important Projects of Common European Interest provision allows direct support to be given to companies seen as vital to European political and industrial objectives. 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.
IPCEI’s are a tool that targets to boost the development of strategic value chains, nevertheless there are other value chains which are already stablished and are more advanced in their “funding game”. Strengthening the collaboration of all actors and engaging with more stakeholders along the value chains can be pursued by public-private partnerships. For example, the Circular Bio-based Europe Joint Undertaking the remaining challenges of Europe’s bio-based industries. Moreover, they have a Strategic Innovation and Research Agenda (SIRA 2030) sets the specific goals, targeting 25% share of bio-based or renewable feedstock of the total volume of organic chemicals raw materials/feedstock used by the chemical industry in 2030. When it comes to investments, the Bio-based Industries Joint Undertaking (BBI JU, 2014-2021) will have attracted private investment of €2.73 billion by 2024, matched with €835 million support by the EU. The new Circular Bio-based Europe (CBE) Partnership (2021-2031) receives €1 billion EU contribution to further strengthen and scale up the EU bio-based sectors in all stages of the innovation cycle, to be coupled with at least the equal contribution by the private partner, the Bio-based Industry Consortium. the numbers demonstrate how powerful public-private partnership are.
On top of all these EU schemes, there are many other at national, regional and local levels, which increases de complexities in the funding arena but also brings more opportunities to be successful. Organizations have to take the matter seriously and start researching which one could be the best option for the project at hand.
