Why the EU Innovation Fund matters for net-zero technology funding

CATF experts unravel the pivotal role of the EU Innovation Fund in steering Europe towards a net-zero future. In this blog, we explore the role of the Innovation Fund and what needs to be done to effectively fund low-carbon technologies. Our next blog focuses on the range of projects, from hydrogen to carbon capture, that will shape Europe’s journey towards 2050 climate neutrality. 

The Innovation Fund is the EU’s flagship programme for the demonstration of innovative low-carbon technologies. Currently equipped with around €40 billion (from 2020 to 2030) and financed from the auctioning of the EU Emissions Trading Scheme (ETS), solutions supported by the Fund include carbon capture, utilisation and storage, manufacturing of low- and zero-carbon products, innovative renewable energy generation technologies, and energy storage.

 

The Innovation Fund supports highly innovative projects, aiming for European leadership in clean technologies. If selected, bidders can benefit from up to 60% of their total project investment and operational costs being covered. Selection eligibility covers the project’s level of innovation (from significant advancements to breakthroughs), its level of maturity, (including technological readiness and financial viability), although applicants often find balancing these two criteria challenging. It also covers scalability, (from the project site to the sector and economy-wide), and how cost-effective it will be in achieving greenhouse gas (GHG) emissions reductions. Grants are flexibly disbursed and based on project financing needs, accounting for the milestones achieved over the project lifetime.  

What is new? 

Since its establishment in 2020, the Innovation Fund has been continuously evolving as a means to provide funding in a more flexible way, extending its scope, and offering a simpler selection process. Earlier in 2023, it was overhauled to reflect the revision of the EU ETS Directive and further changes have been introduced, including an increase in the total size of the Innovation Fund from 450 million to around 530 million EU ETS allowances (with an estimated total of EUR 40 billion available for projects based on a carbon price of EUR 75 per tonne of CO2 ), adding new sectors to project eligibility (maritime, aviation, road transport and buildings) and introducing competitive bidding schemes for renewables-based hydrogen as a new financial instrument.  

What is missing? CATF recommendations 

CATF welcomes the Innovation Fund’s increase in funding available and a more flexible approach to the next phase of the allocations, which will support a faster, simpler, and more-focused EU decarbonisation strategy. However, CATF believes that the EU Innovation Fund can go even further in its scope, scale, and eligibility criteria. It must also be noted that applicants frequently cite the substantial administrative burden of the application process, which can pose a barrier, particularly for smaller companies. 

1.  Scaling up the Innovation Fund for EU’s climate goals 

Substantial additional funding through the Innovation Fund is essential for the EU to meet its climate and energy targets. Despite the Fund’s increased size to an estimated total of €40 billion, the European Commission estimates an annual investment shortfall of €700 billion to achieve a 55% reduction in greenhouse gas emissions by 2030 and to reach its Net Zero Industry Act objectives. CATF recommends enhancing the Fund’s strategic impact by increasing funds and flexibility beyond the current 20% budget for large-scale projects. 

2. Expanding auctions and funding beyond the Innovation Fund with a two-stage process 

The first stage, like the current one, involves a Europe-wide call for projects funded by EU ETS allowances from the Innovation Fund. The second stage provides grants to projects that clear the Innovation Fund assessment but lack further EU-level funding, supported by contributions from their home Member State’s funds. The European Commission is considering providing auction services to Member States, a positive move. This could greatly benefit emerging sectors like hydrogen and carbon capture and storage, needing early-stage subsidies. Implementing a standardised EU-wide subsidy framework is vital to prevent market fragmentation and ease the funding process for developers. 

3.  Resource-saving as an eligibility criterion for scalability assessment in Innovation Fund projects. 

Currently, scalability is rated at local, sector, and economy-wide level in equal proportions, which dilutes the flagging of unsustainable practices, as projects that are unsustainable at economy might be considered scalable locally or even at the sector level scale (e.g., power-to-hydrogen-to-power or hydrogen for heating in buildings). The use of scarce resources needs to be considered at the economy scale rather than at a local or sector scale. 

4. Including total funding needs in cost efficiency criteria for true capital allocation efficiency 

Given the mix of subsidy schemes, like Horizon Europe, InvestEU, or Member State funding, a project may appear cost-efficient if it receives substantial external funding, thus requiring minimal support from the Innovation Fund. However, this doesn’t necessarily align with EU taxpayer or economic interests. Therefore, cost efficiency evaluations should encompass the full life cycle funding of a project, including Member State support, ETS free emission allowances, indirect support, and the use of subsidised resources. 

5.  Expanding competitive bidding to accelerate EU climate neutrality goals 

The EU should broaden its competitive bidding framework, currently focused on renewable hydrogen, to encompass other key net-zero strategies crucial for the 2050 climate neutrality goal.  

Europe’s renewable hydrogen sector confronts significant challenges, including the need for affordable, high-capacity renewable energy, the development of competitive supply chains, and scaling up electrolyser production. With renewable hydrogen not yet able to meet demand, alternative, scalable low-carbon hydrogen production methods, like steam methane reforming (SMR) or auto-thermal reforming (ATR) with CCS, should be prioritised. These technologies, along with hydrogen production from nuclear power, are vital interim solutions and should qualify for Innovation Fund support. 

CATF recommends that the Innovation Fund’s bidding scheme cover all cost-efficient, low-carbon hydrogen production methods, aligning with the European Commission’s Do No Significant Harm criteria. Hydrogen production should be evaluated on GHG emission savings, with criteria based on comprehensive life cycle assessments (see CATF’s Hydrogen Lifecycle Analysis Tool) and robust GHG emissions methods. 

6.  Prioritising low-carbon hydrogen projects in key sectors  

CATF welcomes the incorporation of the shipping, aviation, road transport and building sectors in the revised EU ETS Directive, which consequently also broadens the Innovation Fund’s sectoral scope.  

However, CATF advocates for low-carbon hydrogen projects to target and replace existing grey hydrogen production first, specifically in production processes where currently the largest quantities of fossil fuel-based hydrogen are utilised. Hydrogen deployment should be prioritised in ‘no regrets’ end use sectors, where the use of other energy-efficient or cost-effective decarbonisation options is not feasible. These include refineries, ammonia, (petro)-chemicals, and methanol production. To steer the produced hydrogen volumes into specific demand sectors with the highest abatement costs and no other efficient decarbonisation option available, project applicants participating in Innovation Fund funding calls should be required to demonstrate that their produced volumes will be supplied to these priority sectors. 

7. Expanding the Innovation Fund to include CO₂ infrastructure projects and harmonising with other infrastructural funds and support instruments.  

The Innovation Fund should be extended to cover standalone CO₂ infrastructure projects and harmonised with other infrastructural funds, such as the Connecting Europe Facility (CEF) – which is already enabling CO₂ infrastructure development through Projects of Common Interest (PCIs). This expansion and alignment will foster a more cohesive and robust strategy for carbon capture and storage deployment across Europe, ensuring the necessary CO₂ infrastructure is in place to handle the required capture volumes. To achieve these goals, the Fund should support projects which are beyond first-of-a-kind (FOAK). Linked to this, the European Commission could explore the integration of additional criteria in project evaluations for carbon capture and storage projects, specifically relating to how projects could contribute to achieving the objectives of the (NZIA) regulation, in terms of realising the proposed annual CO₂ injection storage target by 2030. 

8.  Establishing a dedicated funding stream for emerging Carbon Dioxide Removal (CDR) technologies in the Innovation Fund 

A further refinement to the Innovation Fund could be the establishment of a dedicated funding stream for CCS-based carbon dioxide removal (CDR) technologies, such as bioenergy with carbon capture and storage (BECCS) and direct air capture with carbon capture and storage (DACCS). CDR, which is at a nascent stage, requires substantial innovation support to get off the ground. Currently these technologies are evaluated under the category of energy intensive industries, masking any funding specifically dedicated to CDR, which could create difficulties in tracking and optimising support for these technologies. This could also allow for tailored evaluation criteria, suited to CDR’s unique climate benefits and challenges, thereby ensuring that projects are assessed on their merit and potential impact in the context of carbon removal, rather than emissions reductions.