Scaling Cleantech Requires EU Capital Market Rethink
Victor van Hoorn, newly-appointed Director of Cleantech for Europe, says that “targeted regulatory intervention” may be needed to integrate cleantech into Europe’s competitiveness agenda.
Last September former European Central Bank (ECB) President Mario Draghi presented a report entitled ‘The Future of European Competitiveness’.
In the report, Draghi placed green technology squarely at the centre of European competitiveness. He emphasised that Europe is a world leader in the cleantech sector. However, for it to remain there innovators and policymakers need to make sure they continue to deliver cleantech at scale.
Europe isn’t doing all that badly. According to the report, more than one-fifth of clean and sustainable technologies worldwide are developed within the EU, with a fifth of these moving beyond the early revenue stage and 10% described as ‘mature’.
However, there is always room for improvement. Much of this will depend on attracting the right kind of financing going forwards.
The cleantech opportunity
Delivering a keynote address this week at the World Economic Forum in Davos, European Commission (EC) President Ursula von der Leyden reiterated the bloc’s commitment to cleantech.
“Not only must we continue to diversify our energy supplies, and expand clean sources of generation from renewables and, in some countries, also from nuclear,” she said. “We will have to invest in next-generation clean energy technologies, like fusion, enhanced geothermal, and solid-state batteries.
“We must also mobilise more private capital to modernise our electricity grids and storage infrastructure. We must remove any remaining barriers to our Energy Union. And we must better connect our clean and low-carbon energy systems.”
The EC will be presenting a new Clean Industrial Deal in February, which will touch on many of these points. With incoming US President Donald Trump signalling a backpedalling on sustainable energy policies, a committed cleantech strategy in Europe is more vital than ever.
“It is important that we balance the imperative to safeguard our security against our opportunity to innovate and enhance our prosperity. In this spirit, we will need to work together to avoid a global race to the bottom,” said van Leyden.
According to Victor van Hoorn, newly-appointed Director of Cleantech for Europe, there is still a lot of work to be done in scaling up some of this technology, to bring marginal costs down and make the sector a viable component of Europe’s competitive agenda.
“We have seen this dramatically with solar PV, wind and lithium-iron batteries,” he said. “A lot of clean technologies should in principle be able to follow a similar cost reduction path, although the speed and scale of that will depend per technology.”
He pointed out that many of these are “on the cusp of” scaling up, but they are being held back by capital markets that have only a lacklustre enthusiasm for sustainability.
“If you’re talking about real cleantech in terms of decarbonising some of [Europe’s] industrial processes, this can be a long investment cycle and it’s hard [to tap funding],” said van Hoorn.
Founded in 2021, Cleantech for Europe is a policy advocacy group that seeks to, in its words, “bridge the gap between cleantech and policy leaders”.
The right kind of financing
One of the central challenges is attracting the right kind of finance for moving beyond the incubation period.
“In the early stages of the growth trajectory of a company it is critical to get access to equity [investors] who are willing to take on entrepreneurial and technology risks to try it out. But once the technology is proven, firms want to bring it to scale. This is no longer a matter of tapping the equity markets. It is a question of tapping the debt market,” said van Hoorn.
The sustainable policy expert joined Cleantech for Europe from ICI Global, where he was head of European operations. In his new role, he plans to make sustainable financing for scaling up cleantech a core priority of his advocacy work.
“I would say there are three factors standing in the way of more sustainable debt financing,” said van Hoorn. “One, technological novelty. Two, the customer order book – there are not necessarily a lot of customers lined up at the beginning, which means there may not be much cashflow coming in. Three, a lack of historical track record.”
This makes it very hard to tap traditional bank finance, unless cleantech projects are derisked first. For example, Europe’s wind and solar sectors have been able to access bank loans thanks to guarantees provided by the European Investment Bank (EIB).
However, while the EIB is a useful tool for greasing the cogs of sustainable finance, its scope is limited. For example, the EIB’s wind sector focus comes from the EC’s Wind Package of September 2023, which is specifically dedicated to that industry. Van Hoorn said that such guarantees could help in other value chains as well if they were available.
Outside of traditional bank finance, private markets can also provide a good source of sustainable finance. But there are challenges here as well. In particular, private credit markets are far shallower in Europe than they are in the US.
While US private debt markets have well over US$1.5 trillion AUM, European markets have less than a third of this, according to data provider Preqin. Within this only a small slice of private credit gets allocated for sustainable financing projects.
Van Hoorn said that it is an “open question” as to what to do about this. Cleantech for Europe will publish a paper on the topic in the coming weeks, featuring recommendations for taking things forwards.
“To create appetite by asset managers to launch funds, you will need institutional investor demand from pension funds and insurers,” said van Hoorn, suggesting this market may lack incentives to increase their exposure to cleantech.
Regulatory change might be needed, he suggested, to address long-term investors’ challenges in matching these assets with future liabilities, potentially requiring “very targeted regulatory intervention on the prudential side”.
Keeping focus
With a new administration in the White House causing ripples in the sustainable investment community, it is more important than ever to maintain Europe’s focus on clean technology, said van Hoorn.
He added that what matters is the long-term trend. While “there can be this instinctive reaction to go back to ‘business as usual’” in times of uncertainty, that is not what appears to be happening in other parts of the world. He used China as an example.
“[China] has drastically accelerated the deployment of clean technologies, and they’ve brought down the costs of production very fast. Whether this be solar panels, batteries or electric cars, the cost is all going down,” said van Hoorn.
Europe is not moving quite as fast, but momentum is building. In an open letter to the EC, published this week, 102 cleantech start-ups, scale-ups, investors and ecosystems from across Europe expressed support for the Clean Industrial Deal.
They said that it must focus on two “decisive market signals”: helping industries become more competitive by adopting state-of-the-art cleantech, and targeted public de-risking mechanisms. This would include expanding EU funding and guarantees “to unlock cleantech’s full potential”, said the letter.
“The EU is facing a perfect storm with a dangerous geopolitical environment, structurally higher energy costs than economic competitors and looming threats of physical and trade wars,” the signatories asserted.
“In these moments, it is easy to lose sight of our strengths and assets: one of the world’s most highly skilled workforce, strong research and innovation – particularly in cleantech, a strong industrial base specialised in high-quality manufacturing and potentially the world’s largest – but crucially incomplete – single market.”
Van Hoorn expects to see continued debate taking place this year over short-term fixes to Europe’s economy versus a long-term strategic shift.
“The question for me is going to be: do we just help [key sectors of the economy] with a short time horizon in mind, just to help them survive, or do we do things smartly and say: okay, what is the journey those sectors need to go on to be competitive, not only in the next two years, but ideally the next 10 years?” said van Hoorn.
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