A solar panel manufacturer laying off employees. A battery manufacturer that Europe rejected because of American subsidies. A green hydrogen project stalled due to a lack of electricity.
These are a handful of the early results of the European Union Innovation Fund, a €40 billion investment instrument at the heart of Europe’s plans to decarbonize the economy by mid-century. It is also part of the EU’s counterbalance to the US Inflation Reduction Act: officials hope the subsidies will deter key industries from moving their operations abroad.
Although the fund is still relatively new and is supporting dozens of projects, including the world’s first major green steel plant, some of them – especially in the manufacturing and hydrogen sectors – have struggled to get off the ground.
The Innovation Fund is one of the programs that must succeed to ensure that new technologies can quickly play a major role in reducing EU emissions, said Marcus Ferdinand, head of analysis at Oslo-based research firm Veyt. If the initial stumbles prove to be a widespread trend, it will be a worrying sign for the bloc’s ability to meet its 2040 climate targets.
Since its launch four years ago, the fund has allocated more than €6 billion to scaling up clean technologies, such as capturing CO2 from some of Europe’s biggest polluters, such as French industrial gas giant Air Liquide SA and Swiss cement maker Holcim Ltd. major energy producers such as Shell Plc and German utility RWE AG in their efforts to produce hydrogen. And it supports large-scale factories that make equipment for solar panels, batteries and other renewable energy technologies.
Manufacturing projects are among those that have faced the most difficulties. The fund has paid out at least three-quarters of a billion euros to manufacturers, half of whom have announced plans to halt operations, lay off staff or abandon projects entirely, according to an analysis of project data by Bloomberg Green.
Kurt Vandenberghe, director-general of climate at the European Commission, said the EU expected some of its bets not to work. The fund is intended to invest “in the new, innovative activities of the future,” Vandenberghe said. “This means that not all projects will necessarily come to fruition as there is significant risk. Otherwise we shouldn’t do it, if the market continues this on its own.”
And bad bets don’t necessarily mean a lot of money was wasted. The funding is paid out in phases, so projects that fall through don’t get the bulk of it, and the EU can direct that spending elsewhere. Those who do not make a final investment decision will not receive any financing at all.
But it still means valuable time lost for decarbonisation – and an erosion of Europe’s competitive advantage as companies leave.
The Innovation Fund raises its billions from the polluting industries it hopes to clean up. Under the European cap-and-trade emissions trading system, polluters are allocated a fixed number of permits each year. Industrial polluters, who have few options to decarbonize, currently get most of their permits for free, while energy producers have to buy them. Companies must surrender a permit for every ton of CO2 they discharge into the atmosphere.
EU governments sell the permits at auction and put part of the proceeds into the Innovation Fund. The idea is essentially that polluters pay, but some of their money comes back to them in the form of subsidies or subsidized new technologies that can help them cut emissions and lower their bills in the future.
This will be especially important as the EU will tighten its carbon market in the coming years and reduce the number of permits issued for free. Industries will be forced to reduce or pay for carbon emissions. Businesses could choose to close completely, as some did when faced with higher costs after Russia’s invasion of Ukraine.
“Right now, Europe is essentially decarbonizing through deindustrialization,” said Ann Mettler, vice president for Europe at Breakthrough Energy, a consortium of nonprofits and venture capital funds backed by Bill Gates that invests in green technologies. An investment of 40 billion euros over ten years “is significant, but whether that is a game changer is also the question – whether that is really enough,” she said. (Michael Bloomberg, the founder and majority owner of Bloomberg News parent Bloomberg LP, is an investor in Breakthrough Energy Ventures.)
Green producers in Europe are confronted with the attraction of attractive American subsidies on the one hand and competition from cheap Chinese products on the other.
Freyr Battery Inc. received a €100 million grant for its Giga Arctic project in Norway, but announced last November that it was limiting spending on that project to focus investment on the US. (Although Norway is not an EU member state, it participates in its emissions trading system.)
One of the largest subsidies to date was €200 million for Swiss solar panel manufacturer Meyer Burger Technology AG to build new production facilities in Germany and Spain. The company has since announced plans to close a production facility in Germany as it moves its operations to the US. According to a spokesperson, the company is in discussions with the committee about the possibilities.
“The European Union must ensure a level playing field for its domestic solar industry by limiting dumping and products made with forced labor,” the spokesperson said by email. “Without this system, the production of solar panels today no longer makes economic sense” in Europe.
Another solar equipment manufacturer, Sweden’s Midsummer AB, was awarded more than €30 million for an initiative known as Project DAWN to build a factory that will produce a thin, lightweight rooftop solar panel. Last year, the company launched plans to lay off employees as part of a cost-cutting drive for its Swedish operations, after announcing a loss of more than 200 million Swedish krona ($18.5 million).
A company spokesperson says these two efforts go hand in hand as the company reconfigures its operations to be more competitive in the face of cheap imports. “The cost-saving measures certainly give us more power to accelerate and implement ‘Project DAWN’,” says Peter Karaszi, head of communications at Midsummer.
One of the fund’s largest technological bets concerns hydrogen. The gas does not produce CO2 when burned and, when produced via renewable electricity (so-called green hydrogen), can be a climate-friendly alternative to natural gas or coal. Hydrogen projects account for more than a quarter of the money awarded by the Innovation Fund to date.
But the technology appears not to be as economically viable as once thought. Green hydrogen is much more expensive than the type that is currently produced with natural gas. Projects intended to scale up the industry and reduce costs have faced trials and tribulations.
One of these was a plan by a division of the German utility Uniper SE to produce green hydrogen at a location on the outskirts of Rotterdam. In many ways it is an ideal location, close to major industrial users and right on the coast, giving it easy access to the growing fleet of offshore wind farms in the Dutch North Sea.
But rising costs of electricity, labor and financing in recent years have made green hydrogen even more expensive, making it difficult to attract potential customers.
“It is currently too expensive,” says Dyonne Rietveld, general manager of Uniper in the Netherlands. “Interest rates and the costs of grid connection fees and the risk profile of power purchase agreements kill investment decisions.”
The company also found it nearly impossible to sign a contract with a new offshore wind farm that would guarantee electricity on a timeline fast enough to meet Innovation Fund requirements. Ultimately, Uniper returned the prize. The project managers hope to find other means to build the site later this decade.
Another project that returned the money to the EU aimed to link cheap hydrogen production in Portugal with high industrial demand in Northern Europe.
“There was a lot of hype about hydrogen and now we had to be more realistic,” says Catherine MacGregor, CEO of Engie SA, one of the companies behind the project.
Other green hydrogen developers are still trying to make it work despite difficulties. German energy company Iqony GmbH has received 49 million euros to build a factory near Düsseldorf that will produce hydrogen using electricity from a wind farm in the North Sea. As the company moves forward with the project, it faces many of the same uncertainties as Uniper. In fact, it is almost impossible to sign a contract with a wind farm to secure the energy, because Germany has failed to add much new capacity in its sea in recent years. At the same time, energy prices have risen, says Tanja Braun, general manager of the Iqony project, known as HydrOxy Hub.
While a lack of power is hampering projects in Europe’s industrial heartland, places with an abundance of green electricity are showing signs of promise.
One of the largest grants the Innovation Fund has offered to date was awarded to a division of Australian mining giant Fortescue Ltd. The proposed project in Norway would produce hydrogen using the abundant hydroelectric dams that provide the country with almost 90% of its energy. Fortescue would use that hydrogen to make ammonia, which could be used as a clean fuel by the shipping industry. The company is currently completing key engineering and design work and is on track to make a final investment decision next year, said Thor Magnus Rovik, country manager for Fortescue’s operations.
The difference between early success in Scandinavia and that in continental Europe could be a lesson for European green subsidies. Europe has now started submitting bids for a new financing mechanism designed to support green hydrogen – an offshoot of the main Innovation Fund. The first €800 million auction round for the Hydrogen Bank will award a maximum fixed subsidy of €4.50 per kilogram of gas produced. That will benefit places like Scandinavia and the Iberian Peninsula, where renewable energy is cheaper and more plentiful, according to BloombergNEF.
Compared to the main Innovation Fund, which chooses winners based on meeting certain criteria, the Hydrogen Bank allows more market influence to choose winners based on price. Ultimately, says the EU’s Vandenberghe, innovation is “about creative destruction.”