Ever lower renewable energy production costs are hitting the headlines on a regular basis. Technologies such as onshore wind and solar photovoltaics have gone through a lengthy path of gradual, but continuous, improvement and are today usually competitive against fossil-fuel based electricity sources, especially in areas where the resource conditions are optimal for the technologies. But there are a myriad of other renewable energy technologies one or several steps behind on the commercialisation pathway, meaning they are much more costly or not yet even commercially available. If deployed at scale, these innovative technologies could also become cost-competitive in the future, potentially offering valuable services to the grid due to their dispatchability2 capabilities (as is the case with concentrating solar power and geothermal energy), higher capacity factors (as happens with offshore wind energy3 compared to onshore wind), or complementary generation profiles (an ocean energy farm, for example, will be more productive on a stormy day, whereas photovoltaic modules will produce considerably less due to the absence of direct sunshine).
Proving technologies at commercial scale leads to several other positive consequences: it greatly increases the potential for Europe to achieve its climate and energy targets, including energy security; it helps to unlock much needed private funding to deploy similar projects; and it supports the growth of a European industrial base that generates economic and social benefits. In addition, the diversification of energy production technologies allows countries to better exploit their indigenous sources and consequently to increase their share of renewables.
Despite their potential, innovative energy technologies covered by the Strategic Energy Technology Plan4
face severe financing difficulties in progressing from innovation to successful demonstration and deployment – the so-called commercialisation “Valley of Death.” A recent study
commissioned by DG Research & Innovation of the European Commission shed light on the problem. The study, led by ICF in association with London Economics and completed during the autumn of 2016, concluded that current grant, debt and equity provision for these projects at EU and Member State level is around EUR 4 billion until 2020. The figure may seem high, but it is a far cry from the total estimated investment needs for such large-scale demonstrators, which could reach EUR 28.4 billion during the same period (see Table 1).
Data to underpin ICF’s conclusions on the supply of funding was obtained through interviews with senior representatives from 29 market participants, including venture capital firms, asset managers, banks, sovereign wealth funds as well as energy utilities and engineering and industrial firms. Further consultations with 15 senior representatives from financial market participants were held to obtain additional insights and clarifications on some of the study’s emerging conclusions and potential future support mechanisms.
Lack of funding is by far the main factor accounting for the inability of many innovative energy demonstration projects to reach a Final Investment Decision. However, other reasons conflate the challenge.
For example, traditional investors in first-of-a-kind projects have either reduced their interest in this asset class for strategic reasons or else simply cannot afford to fund such projects off their balance sheet. Moreover, the fact that several countries have dismantled support schemes guaranteeing electricity prices to producers (e.g. feed-intariffs, power purchase agreements) has introduced a significant commercial risk that makes banks much more reluctant to provide loans. Increasing regulatory and capital adequacy requirements imposed on banks and insurance companies have further reduced their willingness to take risk.
The study went on to detail the forecast financial structures5 of 32 different energy projects in the low-carbon sectors identified above. The data gathered show that financing needs are complex and large variations in financing structures exist – even within sectors – due to different technologies, project scales, track record of sponsors, etc.:
- grants (i.e. public sector risk capital) play a very important role in many deal structures, with projects typically forecasting between 10-30 % of total funding or much higher amounts in some isolated cases;
- equity investment is forecast between 10-30 % of total funding in many projects, but is particularly high for several solar PV and ocean energy projects;
- debt requirements can be very large, varying from 10 % of total funding to more than 70 %. Mature sectors (e.g. fixed wind, solar PV) are typically able to raise higher debt levels, but the variation within the same sector and across sectors is considerable;
- bond finance and internal company financing is of limited relevance.
Despite the large funding gap affecting first-of-a-kind projects, there is currently an over-reliance on grant support across EU and Member State schemes – even though grants alone are clearly insufficient and projects typically require debt and equity as well. Most market participants consulted in the study felt that the European Commission should partially fill that gap by providing debt and/or equity support. Grant provision was still widely called for, however, both to support the feasibility and planning as well as construction phases of projects (when project risk is greatly elevated).
Aware of the “Valley of Death” finance gap, in June 2015 the European Commission and the European Investment Bank (EIB) launched the InnovFin Energy Demo Projects (EDP) facility. This financial instrument contributes to bridging that gap by supporting the commercial viability demonstration of first-of-a-kind innovative renewable energy projects. Support is provided through loans of between EUR 7.5 million and EUR 75 million. During a project’s first four years, while it is not yet bankable (i.e. during the design, construction and early operation phase), the European Commission’s Horizon 2020 R&I Framework Programme covers 95 % of any shortfalls. If this initial phase is successful, the project is deemed bankable, the Horizon 2020 guarantee is released (being recycled to fund new projects in the facility) and the project moves to the operational phase.
So far there have been 92 applications to InnovFin EDP with 59 projects identified as potentially suitable for support. Of these, one has been signed (see box), another approved by the EIB (signature will follow soon), and eight projects are currently being subjected to detailed technical and financial due diligence by the Bank. Nine applications have been rejected and seven put on hold, mainly on the grounds that the commercial risks of applicant projects is too high. After its initial warm up phase, InnovFin EDP seems now to be slowly entering cruise mode, with around half of the current funding envelope expected to have been disbursed by the end of 2017.
This success highlights the need to increase the current pilot allocation of EUR 150 million to InnovFin EDP. The European Commission is working towards at least doubling this amount by 2020, possibly by incorporating funds from other EU sources. Concurrently, based on the experience acquired so far, the Commission is working with the EIB to streamline the instrument and ensure that it is more agile and responsive to market needs – providing faster and more efficient support to high quality projects that unfortunately have found themselves trapped in the “Valley of Death.”
First loan under InnovFin Energy Demo project provides EUR 10 million to harness wave energy
A first-of-a-kind 350 kW wave energy demonstration project has been the first recipient of a EUR 10 million loan provided in July 2016 by the InnovFin Energy Demo Project (EDP) facility. The total project cost is EUR 19 million. The Finnish company AW-Energy is expected to start assembling their WaveRoller device off the coast of Peniche (Portugal) this summer.
The project is a remarkable example of how continued efforts in R&I, whilst demanding both time and sheer ingenuity, can also bear fruit. The device consists of an underwater panel attached to the seabed on a hinge which moves back and forth as the waves surge past it. Hydraulic pumps attached to the panel drive a motor which, in turn, drives an electricity generator. The resulting power is taken ashore by an undersea cable.
The device story dates as far back as 1993, when the concept was first invented by a professional diver. It then took ten years for thorough tests to be performed with a grant from the Finnish Technology Fund. European Commission support started in 2012, when it funded an operational prototype of the technology as part the 'SURGE' project (under the 7th European Framework Programme for R&D, the predecessor of Horizon 2020).
If the WaveRoller demonstrator project under InnovFin EDP is successful, the global market potential for the WaveRoller technology is high – estimated at over 200 GW based on feasible sites. AW-Energy aims to sell over 50 units in the first four years of WaveRoller's operation.
2 The power output of a dispatchable energy source can be increased or decreased (even turned off) at the request of power grid operators or of the plant owner.
3 Offshore wind has recently made great strides due to its record low cost of EUR 54.5/MWh in the Borssele auctions in the Netherlands.
4 Except nuclear energy, which is outside the scope of this article.
5 Projects in the ICF study were selected on the basis that they had yet to reach a Final Investment Decision and therefore could only provide a best estimate for the likely breakdown of their funding sources.
Nuno works as a policy officer in the field of energy for the Directorate-General Research & Innovation of the European Commission. His main duties are related to the Strategic Energy Technology Plan and to the risk finance instrument InnovFin Energy Demo Projects. Previously, he worked at the European Economic and Social Committee as Administrator of transport Opinions, in ICLEI – Local Governments for Sustainability as an EcoMobility Officer, and at the Porto Catholic University on projects dealing with sustainable urban development. Nuno holds a PhD in Territorial Engineering and a degree in Environmental Engineering.
* The author would like to thank the following for their input: Jonathan Lonsdale, Consulting Director of ICF, James Gardiner, Managing Consultant at the same company, Gwennaël Joliff-Botrel, Head-of-Unit “Energy Strategy” at the European Commission (DG RTD), and to Agustin Escardino Malva, Deputy Head of Unit “Renewable Energy Sources” at the same DG.