Briefing: Is European cleantech on track for net zero? A question of finance

When considering how the EU is to meet its 2030 decarbonisation target, analysing the growth of Europe’s manufacturing and deployment of more mature cleantech is crucial. Here, the private finance picture looks positive, with investments into cleantech increasing on average 101% annually between 2017 and 2022 - demonstrating both increased investor interest in the sector and the rapidly expanding size of the market. 2021 saw an increase of €7.5bn invested over 2020, for a high point of €12.3bn overall, while 2022 saw a slight drop to €10.6bn.

This positive trend is no call for complacency - when examined in the global and political context of cleantech investment, there is still room for improvement. Firstly, this positive upward trend is a global, rather than a European, phenomenon, and when compared to other large global markets, the EU private capital stack is somewhat smaller. This disparity threatens European cleantech progress, as more vibrant private capital ecosystems in other jurisdictions will attract European innovators to relocate outside of the EU, slowing progress towards increased capacity of the European cleantech industrial base.

The EU’s own goals as far as cleantech manufacturing should be incorporated into this analysis – as they set the benchmark for the bloc’s cleantech ambition. A current focus of EU policymaking has been building up EU cleantech manufacturing, in the face of increasing competition from the US (through, most notably, the Inflation Reduction Act) and China, as well as other large economies. There is also a need to build up manufacturing to a level which can ensure the resilience of the EU cleantech industry, whose strong material dependency on China could pose a problem if current geopolitical and trade tensions spill over into a conflict.

To address these dual competitiveness and resilience challenges, the EU has proposed its Green Deal Industrial Plan, which includes a relaxation of state aid rules (Temporary Crisis and Transition Framework), the Net Zero Industry Act (a regulatory framework setting targets for EU manufacturing and accelerating permitting timelines, among other provisions) and the Strategic Technologies for Europe Platform (a funding mechanism for strategic technologies, including but not limited to cleantech).
Therefore, it is important to track cleantech investments against the investment needs to achieve those goals. Recent Agora Energiewende modelling projects the base case of current investment trends out to 2035, to show the size the industry is likely to reach if current trends continue. It then compares this base case to the investment needs of a European cleantech industry of a size that will ensure supply resilience or reach the goals as set out by the Net Zero Industry Act.
To achieve the NZIA scenario, investments would have to increase 83% against the base case. This means that private investment will have to increase if late-stage EU cleantech is to deliver the competitiveness and resilience which policymakers increasingly demand. Judging by historical trends, private investment cannot be expected to fill this gap alone, and therefore it is important that innovative public financing solutions are developed to make up for any shortfall and ensure the accelerated expansion of the industrial base.