Innovation required to counter climate change | Energy, Resources & Industrials | Deloitte Netherlands

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Innovation required to counter climate change

Climate Accord blog series

In order to counter the climate change, innovation is key. However, innovation can be time-consuming and expensive. The government realizes this and - more importantly - realizes that it is time for change. To reach the Climate Accord goals, the Dutch government has implemented a set of measures that consist of so-called ‘carrots and sticks’. Read our article below to find out more about these measures and what to look out for when securing funding for innovation projects.

Reason for innovation

The Dutch government has a big challenge to meet various climate goals on the short and long term. A lawsuit forces the government to speed up actions to reduce greenhouse gas emissions up to 25% by the end of 2020 compared to the emissions in 1990. Also, in light of the Paris agreement, in 2030 the emission of greenhouse gasses has to be reduced by 49% compared to 1990. 

To reach these goals, the Dutch government has implemented a set of measures that consist of so-called ‘carrots and sticks’. Sticks are measures implemented to punish undesired behavior, in this case: the emission of greenhouse gasses. Examples of such measures are taxes, fines and prohibitions. Carrots on the other hand are implemented to stimulate and reward behavior that contributes to meeting climate goals. Think of tax benefits, cheap funding, or even cash grants.

When it comes to these incentives, stimulating known technologies that benefit the reduction of greenhouse gas emissions will remain a focal point. However, disruptive technologies meeting a high level of innovation will be required to be able to meet the climate goals. Stimulating more of what we already know is great, but enhancing the opportunity for ‘groundbreaking’ innovations would be even better.

Innovation stimulation with grants and incentives

Between 2020 and 2030 government will spend approximately 300 million EUR per year to reduce greenhouse gas emissions. In total 60 million EUR is reserved for innovation, pilots and greenhouse gas emissions reducing technology:

  • 10 million EUR for hydrogen projects
  • 15 million EUR for Carbon Capture, Utilization and Storage
  • 30 million EUR for rapid execution of greenhouse gas emissions reductions
  • 5 million EUR for the circular economy

Also the government is investing 35 million EUR in innovation at electricity companies as they can be large contributors to reducing CO2 emissions. Furthermore, the government wants to change the energy regulations to make it easier to generate and store energy.

Stimulating innovation

As innovation comes at a cost, the government realizes that it needs more ‘carrots’ to stimulate innovation rather than use sticks to punish undesired behavior. Stimulation is available in different sectors and in different ways. For example the Dutch WBSO where innovation is stimulated through a tax credit for Dutch wage taxes is a nice example of a ‘carrot’ to stimulate innovation. This way companies are being stimulated to innovate in new products or production processes on their own production site.

However, to further stimulate innovation for environmental reasons (significant) cash grants are available to stimulate new (expensive) methods to generate renewable energy in a more (cost) efficient way. To be able to demonstrate these new methods the government is eager to stimulate these projects as it would otherwise be too expensive to innovate and demonstrate on an industrial scale. With the high costs of raw material and research costs it is nice to see that funding is available to have innovation stimulated. Some examples (but many more are available) are:

  • Subsidy Renewable Energy (SRE): Goal of this program is to stimulate innovation in the field of renewable energy. For example more efficient ways to produce renewable energy (such as improved efficiency of solar panels) or reduction of maintenance cost causing lower costs to produce renewable energy.
  • Demonstration Energy-Innovation (DEI+): Focus of the DEI+ program is on pilot and demonstration projects aiming to develop innovative technologies accelerating CO2 emission reduction.

Funding innovation

Stimulating innovation is not only done through tax credits or cash grants. Also certain finance products are available where through profitable conditions capital can be generated to finance the innovation. Achieving sustainability through innovation involves mobilizing public and private financing sources. 

It is currently difficult for projects with a social impact to obtain funding because of uncertainty about the risk-return ratio or because of long, uncertain return on investment. Public investment, as opposed to grants, is envisaged to stimulate investment in innovation through leveraging the multiplier effect. Each public investment will in turn generate investment worth several times the loan itself by attracting third party (private) co-investment. This creates the opportunity for innovative projects to close financing shortfalls by forming a consortium of Public and Private investors. By targeting the market gaps around sustainability, this encourages other financers to unlock investment that is currently slowed down or hindered by economic uncertainty.

Public financing sources are also available in the Netherlands. Most of the financing programs have connections with European financing programs. 

Examples of current funds (and as it is with the stimulation, there are more funds available) are: 

  • The European Fund for Strategic Investments (EFSI): This is a key investment initiative from the European Investment Bank’s Juncker Plan, to help overcome the current investment gap in the EU by funding projects with a higher risk profile than usually taken on by the Bank. Approximately 972,000 SMEs will benefit from this financing, as it focusses on sectors of key importance for the European economy, including:

            o     Strategic infrastructure including digital, transport and energy.

            o     Education, research, development and innovation.

            o     Renewable energy and resource efficiency.

  • The Connecting Europe Facility (CEF): This is a key EU funding instrument developed specifically to direct investment towards European transport, energy and digital infrastructure to address identified missing links and bottlenecks and promote sustainability.

Over longer periods of time multiple billions of euros will be available within in the Netherlands to finance innovation. Obtaining such funds could be an accelerator towards a more sustainable society and could have advantageous conditions too. Looking forward we will see the establishment of new funds to help close sustainability funding gaps, such as:

  • Invest-NL (2019-onwards): Invest-NL is planned to contribute to the financing of social transition challenges through investments in areas such as energy, sustainability and mobility with its own investment capital of 2.5 billion EUR. It is proposed to be a national financing institution that can submit projects as well as co-finance it.
  • InvestEU (2021-2027): this will bring together, under one roof, the EFSI and 13 EU financial instruments currently available.  Triggering at least 650 billion EUR in additional investment, the programme aims to give an additional boost to investment, innovation and job creation in Europe.

Deloitte has supported several entrepreneurs in obtaining available tax credits or cash grants for their innovation projects. We have also advised several innovators in securing funding, either through support in preparing a bankable business case or finding partners that can provide the necessary funding for these innovation projects.

Learnings from our experience: Securing funding from the European Investment Bank

The European Investment Bank can offer attractive funding for innovative companies at beneficial terms. Although the funding package enables a lot of companies to realize the envisioned growth, the process can be time-consuming and might seem bureaucratic. 

Please bear in mind that it is public money you’re applying for and if you come well-prepared, it can definitely be worth your while. 

Similar to e.g. applying for a European grant, in order to secure the funding (at beneficial terms), an adequate and thorough preparation is key. Make sure to read up on the definitions, that  you match all of the criteria of the funding solution you are going for and that you have an adequate (liquidity) runway to absorb any potential delays in the process (these things take time!). 

Conclusion

In order to counter the climate change innovation is key. However, innovation can be time-consuming and expensive. The government realizes this and - more importantly - realizes that it is time for change. To accelerate this change funds are available to enable the necessary innovation to make the change. Starting a project with the right type of funding is key. Be sure to make the right assessment before starting an innovation project. Tax credits, cash grants or favorable funding might be applicable to your project and must not be overlooked!

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