Draghi’s report: Boon or bane for cleantech financing?

In this week’s Power Playbook, Yusuf Latief looks into Mario Draghi’s The future of European competitiveness report and what it may entail for the cleantech sector.

It’s no exaggeration to say that one news item has been the main thing on our minds this last week: Europe’s competitiveness report from Mario Draghi, the Italian economist (and so much more) fondly dubbed ‘Super Mario’.

But, for cleantech financing, will Super Mario’s report be a bane or a boon?

Well, as is often the case with such mammoth amounts of detail, it seems to be a bit of both.

Not restricted to energy, Draghi calls for up to a whopping $880 billion of additional investments a year for Europe to catch up with competition from the US and China, alongside a new industrial strategy and a joint competitiveness and decarbonisation plan.

The report lists in granular detail Europe’s challenging road ahead to regaining its competitive edge, not only in energy but across sectors.

As such the report is extensive – just this week on Smart Energy International, I’ve already covered its call for a power grid strategy, and over on Enlit World, I’ve covered what it entails for energy at large.

When it comes to cleantech financing, three things really stand out: a squandered innovative edge, power grid financing on centre stage and battery tech’s hopeful growth.

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Squandering innovation

According to the report, although Europe is a world leader in cleantech innovation, it is squandering its early-stage advantages owing to the weaknesses in its innovation ecosystem.

More than one-fifth of clean and sustainable technologies worldwide are developed in the EU and the pipeline is still strong, states the report: around half of EU cleantech innovations at a launch or early revenue stage, 22% at scale-up stage and 10% is already mature.

However, since 2020, patenting in low-carbon innovation has slowed down in Europe, while in recent years the sector has seen its early-stage advantages being challenged.

For example, adds the report, from 2015 to 2019 the EU represented 65% of global early-stage venture capital for hydrogen and fuel cells, but this share declined to 10% from 2020 to 2022.

The cleantech sector is suffering from the same barriers to innovation, commercialisation and scaling up in Europe that afflict the digital sector: a total of 43% and 55% of medium and large companies, respectively, cite consistent regulation within the single market as the main way to foster commercialisation, while 43% of small companies identify lack of finance as an obstacle to growth.

Grids in the limelight

This lack of finance is not only in regards to tech innovation, but also to the power grid.

One phrase from the report has been repeating in my head since its release: “If there is one horizontal area in the energy sector whose importance cannot be overstated, it is the EU’s energy grids.”

As I reported earlier this week, a key call from the report has been Europe’s approach to the power grid. Draghi calls for the mobilisation of adequate public and private financing and to innovate grid assets and processes.

This very call was one welcomed by certain associations, as well as by the European Commission in their State of the Energy Union report, released Wednesday.

In this annual overview of the state of energy in the EU, both Draghi’s report and the report from Enrico Letta – member of the Chamber of Deputies of Italy and previous Italian prime minister – on empowering the single market are referenced, emphasising the importance of investing in Europe’s infrastructure networks, strengthening cross-border interconnections, upgrading the electricity transmission and distribution grids and expanding energy supply choices for industry.

CurrENT Europe, the association representing innovative grid tech companies, welcomed the report and its focus on grid financing in a Linkedin post:

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When I reached out to SmartEn for their response, the European business association for consumer-driven energy solutions cited certain recommendations as positive.

They reference the report’s recommendations for integrated planning among energy actors to prevent inefficient investment and that the EU should foster an enabling framework for flexible connection agreements. Through this, power system operators would connect industrial consumers even when the system lacks sufficient capacity to cover full consumption

An investor warning

And then there’s Eurelectric, who welcomed the report’s findings but also issued a warning.

A day following the report’s release, Europe’s electricity association Eurelectric responded with commentary, saying that, with the report, for the first time there is a clear call to common funding for electricity grids – at both the transmission and distribution levels – as an essential pre-requisite for achieving EU energy and decarbonisation objectives.

However, the association warns that some aspects of the report are not ‘market-friendly’ and could undermine investor confidence.

One such aspect includes “untested ideas” for reducing energy cost, such as granting temporary electricity price reliefs for energy intensives. According to the association, while this may appear beneficial at first, it would do more harm than good; a regulated price on clean electricity would destroy investment signals for clean power investors.

Additionally, the association cites the report’s suggested requirement to “supply a predefined minor share of their publicly subsidised production through PPAs at ‘production cost plus mark-up’ to specific industries exposed to international competition.”

According to Eurelectric, this would reduce incentives for generators to enter long-term contracts and discourage investment into clean power generation.

Battery growth

One of the more positive spins from the report, albeit used to illustrate a threat to the continent’s cleantech sector, was that of the EU’s improving battery outlook.

It is no secret that Europe is behind its global competition in market share for lithium-ion batteries. At just 6.5%, it has been trailing far behind the US and China. But, despite this, the report finds that public support for battery development and investment has been strengthening the continent’s position.

According to the report, spending for public research and innovation (R&I) for battery technology has risen by 18% per year on average over the past decade, with Europe ranking only behind Japan and South Korea as a location for patent applications.

The report cites IEA projections that the EU could meet its domestic demand for batteries by 2030, a result of planned investments more than tripling in the EU last year.

This capacity growth will increase Europe’s strategic resilience and benefit adjacent sectors such as automotives by shortening supply chains. However, many of these projects are at this stage still announcements, and actual development will depend on supporting policies from permitting to financing.

In addition, roughly half of the announced investment is from non-EU companies and, in most cases, projects are not taking place in the form of joint ventures.

Thus, despite its growth in battery tech, the report warns that the EU may be missing an opportunity to combine openness to inward foreign direct investment with the development of critical know-how among European manufacturers.

These of course are but a few of the takeaways from the report. Take for example, Philippe Zaouati, founder and CEO of French sustainable investment company Mirova, who discusses what the report may mean for sustainable finance:

So, what do you think? What does Draghi’s report herald for the future of cleantech financing and what priorities should be on our radar?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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