Such investment, from seed to early and growth stage capital, has been increasing in recent years, supported by governments, public sector institutions and a private sector keen to play its role. Yet, there seems now to be a harder focus and greater push among the public and private sectors to work together and accelerate the growth and development of critical climate technologies.
The announcement at COP26 of a pioneering partnership between the European Commission, European Investment Bank, and the Bill Gates-backed investment and policy advisory firm Breakthrough Energy, is symbolic of this greater drive to back and rapidly commercialise innovative technologies. Innovations that could enable the move to – and sustain – a zero-carbon economy.
Under the plans, the partnership, specifically with Breakthrough Energy Catalyst, will invest up to €820 million ($1 billion) between 2022-2026 to back these innovative technologies, which will help deliver the European Green Deal ambitions and the EU's 2030 climate targets.
The investments – targeting technologies with recognised potential to reduce greenhouse gas emissions, but which are currently too expensive to compete against fossil fuel-based technologies – will be directed towards EU-based projects across four key sectors: clean hydrogen; sustainable aviation fuels; direct air capture; and long-duration energy storage.
In supporting these technologies in the demonstration phase, the aim is to help create a market for them and drive down costs to a level that is eventually competitive with fossil-fuel based options.
The innovation component is crucial. There is essentially a decade to transform what are currently small-scale experiments into what we need – global-scale, low carbon technologies.
The EC, EIB, and Breakthrough Energy all have a history of backing and making seed and early-stage investments in green technology solutions. In 2019, for instance, the EC launched the Innovation Fund, one of the world’s largest programmes to finance breakthrough technologies for renewable energy, energy-intensive industries, energy storage, and carbon capture, use and storage.
The Innovation Fund will, together with Horizon Europe, the EU’s €95.5bn research and innovation funding programme, provide funding to the partnership. On the other side, Breakthrough Energy Catalyst will leverage equivalent amounts of private capital and philanthropic fund to support projects, which are expected to be selected in 2022.
What’s novel about the partnership is its groundbreaking approach to demonstrating how to finance, produce, and buy the new technology solutions that will “build a green future for all of us,” said Werner Hoyer, president of the EIB.
The EU climate bank has an important role to play in supporting the growth and development of the climate change technologies, a mission built-in to its climate action and environmental sustainability strategy, and new energy lending policy.
Key points include supporting the financing of €1 trillion of investments in climate action and environmental sustainability in the decade to 2030, alignment of all financing with the goals of the Paris Agreement, ending financing for fossil fuel energy projects, and substantially accelerating the financing of clean energy innovation, energy efficiency and renewable technology.
The importance of this last piece, says Edward Calthrop, head of climate policy unit, projects directorate, at the EIB, is underscored both by the need to address the immediate challenge of scaling-up and building out mature renewable energy technologies, and the reality that net zero could not be achieved through renewable solutions alone.
“The innovation component is therefore crucial,” says Calthrop. “There is essentially a decade to transform what are currently small-scale experiments into what we need – global-scale, low carbon technologies.”
The EIB’s new lending policy is designed to support this transformation, with the bigger aim of enabling the energy transition. A core part of it is no longer financing unabated fossil fuel projects, including gas, from the end of this year.
Importantly, while financing those projects will cease, there is scope, albeit restricted according to a set of strict criteria, for the EIB to continue to finance projects of oil and gas companies. That may seem inconsistent, but it is a needed compromise in order harness the unique skills, expertise, and experience of an industry that is investing substantially in developing low carbon tech solutions.
To qualify, the projects will, however, need to be “highly innovative and exactly the sort of projects that we need to see scaled-up so that we can reach those longer net zero objectives and where there are sufficient, wider learning benefits, to society at large,” says Calthrop.
He adds some of those projects could include carbon capture and storage, direct air capture, energy storage, renewable hydrogen, advanced biofuel, floating off-shore wind, and deep geothermal.
In general, these are some of the key innovative technologies in which substantial investment is increasingly being channelled in the hope that they cause a material shift in the energy transition.
“At this stage its critical we get to scale on all of them,” says Calthrop. “Some will succeed, and some won’t, but its important we back them to give us a chance of achieving what we need to achieve.”
He adds that while each of these different technologies offers great potential, “it is hard to see how we are going to get to net zero without hydrogen playing a significant role.”
“There is a certain amount of hype around hydrogen. But the conditions are good and there are very solid grounds to be optimistic about the ability to significantly reduce the costs on green hydrogen,” says Calthrop. “One of the key questions is what governments need to do to push it.”
Government support schemes, similar to those in place in Europe and throughout the world for renewable energy, will likely be an important and influential piece in this, and especially if the design of any new schemes is enhanced by learnings from the previous support mechanisms.
“The public sector is and needs to be looking at what lessons can be learned from the support for solar and wind, and how that applies to hydrogen,” says Calthrop.
“Overall, I think most countries are trying to learn the lessons from a contract for difference type approach. Essentially, the public sector is looking to the private sector to take on the technology risk, the operating risk, and to some extent shelter them from the volatility on the pricing side.”
This generally applies to developed and developing economies, although many developing economies are at a less advanced stage in their energy transition.
An accelerating transition
Multilateral development banks such as the EIB are playing an important role in supporting the transition in many of these economies, and especially in financing renewable energy projects, which is helping to lessen a dependence on fossil fuels to generate power in some regions, such as Africa.
“Many large African countries are already moving from the hundreds of megawatts into the gigawatts range of renewable capacity, but they need to scale-up further and faster,” says Calthrop. “That requires various measures to be in place, including an investment grade off-take structure, a standard PPA [power purchase agreement]. Also important is an environmental and social package that is robust, transparent, promotes high standards, and a procurement process that is clear and non-discriminatory. If countries can bring this together, they will be rewarded with very good [energy] prices.”
Another aspect that could prove to be a catalyst is rising local opposition to coal mining, which is beginning to kick-in in some countries, helping to accelerate the pace at which they transition. “Coal will continue to be used. But demand is growing hugely [for renewable energy], and MDBs have a role in aiding that, helping to integrate intermittent power around existing generation sources within the regional power market.”
Some of the same issues are also present in other regions, including Europe, where there are 10 EU countries that face specific energy investment challenges, according to the EU. To help address this, the EIB is working closely with EC to support investment via the €17bn Just Transition Fund, which finances up to 75% of the eligible project cost for new energy investment in these countries.
The overarching objectives of the fund are to alleviate the impact of the transition to carbon neutrality by financing the diversification and modernisation of local economies and mitigate the negative repercussions on employment. To achieve this, the fund supports investments in areas such as digital connectivity, clean energy technologies, the reduction of emissions, the regeneration of industrial sites, the reskilling of workers and technical assistance.
The energy transition is causing profound structural upheaval, which in turn presents a range of tough and complex social and political challenges. Yet the reality is that the world is moving away from fossils fuels, and that move will only accelerate, albeit at different speeds, from here.
“The market is pushing in a certain direction,” says Calthrop. “Even where there is a political will to try to restrain it, change may happen quicker than some politicians expect.”
Examples of the EIB's investment support
The EIB is supporting many different clean energy solutions throughout the world. Two examples of these solutions include Swedish start-up Nilar, which makes one of the world's most environmentally friendly batteries storing electricity from renewable energy, and Cabeolica wind farms on the Cape Verde archipelago.
