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<header><h1>Why cleantech groups want the EU’s public lending arm to prop them up</h1><a href="" rel="author"></a><span class="title"></span><time rel="pubdate" datetime="2024-01-17T00:00:00-05:00">Jan 17</time></header><p><span data-contrast="auto">Governments around the world, led by the United States and Europe, are prodding their economies to adopt cleaner energy with a mix of largely two types of policies known often by their metaphors: Carrots (subsidies and tax credits) and sticks (mandates and taxes). </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Let’s add a third metaphor: Safety nets, which have traditionally been used as a metaphor to describe social programs like Social Security in the U.S. or universal healthcare in European nations. Let’s adapt it to a business lens to describe our focus here:</span><span data-contrast="auto"> publicly funded</span> <span data-contrast="auto">financial guarantees that help reduce the risk of investing in nascent clean energy technologies. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">These guarantees, or financial safety nets as we’re calling them, are currently the focus of a lobbying push in Brussels. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Interest groups representing Europe’s emerging cleantech sector are asking the European Investment Bank (EIB) to provide public guarantees that advocates say could speed up investments, help companies ramp up their manufacturing capacities and sell more equipment. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">We’ll explain the basics of how guarantees work and who can issue them before diving into the cleantech community’s specific asks and potential concerns with them.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">A financial guarantee is a pledge by a lending institution that it will step in and </span><span data-contrast="auto">provide compensation should a business transaction between two parties not go through. </span><span data-contrast="auto">There are different types of guarantees,</span><span data-contrast="auto"> and they</span><span data-contrast="none"> can be issued by both public institutions, such as the EIB, the World Bank or national credit agencies, and private institutions, like commercial banks.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Using guarantees is a complex process and we can’t get into all the details, but let’s look at how things generally work within the cleantech sector.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">An industrial firm selling a new, relatively unproven product, like an electrolyzer or a long duration energy storage system, must provide buyers with a financial guarantee, known in this context as a performance guarantee. The guarantee assures buyers that if something goes wrong — delays, functional issues, the firm goes bankrupt — the bank will step in and help make the buyer whole. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">To obtain a guarantee from the bank, manufacturers must put up collateral. If something goes wrong, the bank can collect that collateral </span><span data-contrast="auto">and use it to pay the buyer. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Compared to established industrial firms, emerging cleantech manufacturers are still small fry, lacking both an established credit history to secure good conditions on their guarantees and the money needed for collateral. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">That’s where an additional safety net comes in. </span><span data-contrast="none">Cleantech groups are ramping up lobbying in Brussels, calling on the EIB to provide</span> <span data-contrast="none">an additional layer of assurance, known as counter-guarantees, to back up cleantech investments. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">They’re asking for, in essence, a safety net to a safety net. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Cleantech groups want the EIB, as a public entity, to guarantee the guarantees issued by commercial banks to cleantech manufacturers. If something goes wrong, the bank will pay the buyer and then the EIB will pay the bank. Under this system, advocates</span><span data-contrast="auto"> say companies would get the guarantees they need without </span><span data-contrast="auto">necessarily</span><span data-contrast="auto"> tying up all their capital in collateral and could instead use that capital to ramp up manufacturing.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">The EIB, one of the world’s largest providers of climate finance, recently </span><a href="https://www.eib.org/en/press/all/2023-510-eib-commits-eur5-billion-to-support-europe-s-wind-manufacturers-and-approves-over-eur20-billion-in-financing-for-new-projects" target="_blank" rel="noopener"><span data-contrast="none">approved</span></a><span data-contrast="none"> these types of counter-guarantees for the bloc’s ailing wind sector. Specifically, the EIB will provide €5 billion to back up performance guarantees issued by commercial banks to companies manufacturing wind and grid interconnection equipment.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">Several cleantech start-ups and think tanks recently sent an </span><a href="https://www.energy-resilience.eu/cleantech-guarantees-advancing-decarbonization-by-financing-production-facilities" target="_blank" rel="noopener"><span data-contrast="none">open letter</span></a><span data-contrast="none"> asking the EIB to provide similar backup for their products.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">“Manufacturers are turning down orders because they don’t have working capital to place as guarantees,” creating a vicious cycle that prevents them from ramping up quickly enough, said </span><span data-contrast="auto">Jules Besnainou</span><span data-contrast="none">, executive director of Cleantech for Europe, one of the organizations that signed the letter.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Advocates say this is about how to finance the bloc’s green industrial transformation through tools that don’t require direct monetary support. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">“We need technologies to go green, but we can’t subsidize everything,”</span><span data-contrast="none"> said</span><span data-contrast="auto"> Tobias Lechtenfeld, </span><span data-contrast="none">executive director of the Tech for Net Zero Alliance, a network of climate tech startups and venture capital funds in Germany and neighboring countries, which also signed the letter.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">Still, </span><span data-contrast="none">in practice the proposed measure means the EIB would take most of the hit if something (bankruptcies, non-durable equipment, etc.) were to go wrong, likely prompting criticism and concern about wasting public money.</span><span data-contrast="none"> </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">For general projects, the risk is very low. The International Chamber of Commerce </span><a href="https://iccwbo.org/wp-content/uploads/sites/3/2022/04/icc-document-icc-gcd-performance-guarantees-study.pdf" target="_blank" rel="noopener"><span data-contrast="none">estimates</span></a><span data-contrast="none"> the average ultimate loss rate for performance guarantees is 0.2%. The open question is how much higher the loss rate would be for emerging cleantech, which is a higher risk business category, and how keen the EIB would be to bet on certain technologies.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">It’s unchartered territory, since many of these businesses do not represent a well-established sector like wind energy, said Ronan Palmer, associate director for clean economy at the environmental think tank E3G.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">“There’s a fear factor when there is a genuine uncertainty about whether the equipment and tech will work,” Palmer said. </span><span data-contrast="none">“We’ve been building wind turbines for 20, 30 years, we know how it works. But when you are building an electrolyzer, do you know if there will be a market for green hydrogen? How much maintenance will they need? The technology is not big enough to have an idea.”</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">In a written response to Cipher, an EIB spokesperson </span><span data-contrast="auto">did not confirm whether counter guarantees for emerging cleantech are on the table but pointed to its adoption of counter guarantees for the wind sector as the “most recent example of how the EU bank can back Europe’s green industry with targeted measures,” adding: “We aim to continue doing so in the future.”</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">By now you might be wondering if these guarantees are like the loan guarantee program housed within the U.S. Energy Department. Similar, but no! </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">Loan guarantees provide a promise to repay a loan if the borrower defaults. Like performance guarantees, these also help create a safety net for nascent new industries, albeit with political risk.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">The Energy Department program’s default rate over </span><a href="https://www.energy.gov/lpo/history" target="_blank" rel="noopener"><span data-contrast="none">nearly 20 years</span></a><span data-contrast="none"> is low — around 2% </span><a href="https://docs.house.gov/meetings/CN/CN00/20190430/109329/HHRG-116-CN00-Wstate-FosterD-20190430-SD003.pdf#:~:text=The%20LPO%20portfolio%20has%20a%20default%20rate%20of,first-time%2C%20commercial%20scale%20deployments%20of%20innovative%20energy%20technologies." target="_blank" rel="noopener"><span data-contrast="none">as of 2018</span></a><span data-contrast="none"> — and its high-profile successes include Tesla. Its most high-profile loan ever was an outlier and rather infamous failure, though: Conservatives argued the Obama administration wasted half a billion dollars of taxpayer money on solar manufacturer Solyndra, which went bankrupt after receiving the loan guarantee.</span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">While not exclusively targeting climate technologies, the EIB has been</span> <a href="https://sustainabilityguarantee.eif.org/" target="_blank" rel="noopener"><span data-contrast="none">offering</span></a> <span data-contrast="auto">since 2022 comparatively restricted and smaller loan guarantees to European small and medium-sized businesses in sustainability sectors. </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="none">As wonky as </span><span data-contrast="auto">financial guarantees are, advocates say arguments for them are simple. </span><span data-contrast="none"> </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">At stake is the EU’s industrial competitiveness, said Besnainou. </span><span data-contrast="auto"> </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><span data-contrast="auto">“Do we manufacture this cleantech in Europe, or the U.S. or China?” he asked. “We won’t have a long duration energy storage or electric industry in Europe if we don’t get these kinds of guarantees.”</span><span data-contrast="auto"> </span><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p><p><i><span data-contrast="auto">Editor’s note: </span></i><i><span data-contrast="none">Cleantech for Europe and Tech for Net Zero are supported by Breakthrough Energy, which also supports Cipher.</span></i><span data-ccp-props="{"201341983":0,"335559739":160,"335559740":259}"> </span></p>
Why cleantech groups want the EU’s public lending arm to prop them up
by -
January 17, 2024
Governments around the world, led by the United States and Europe, are prodding their economies to adopt cleaner energy with a mix of largely two types of policies known often by their metaphors: Carrots (subsidies and tax credits) and sticks (mandates and taxes). Let’s add a third metaphor: Safety nets, which have traditionally been used as a metaphor to describe social programs like Social Security in the U.S. or universal healthcare in European nations. Let’s adapt it to a business lens to describe our focus here: publicly funded financial guarantees that help reduce the risk of investing in nascent clean energy technologies. These guarantees, or financial safety nets as we’re calling them, are currently the focus of a lobbying push in Brussels. Interest groups representing Europe’s emerging cleantech sector are asking the European Investment Bank (EIB) to provide public guarantees that advocates say could speed up investments, help companies ramp up their manufacturing capacities and sell more equipment. We’ll explain the basics of how guarantees work and who can issue them before diving into the cleantech community’s specific asks and potential concerns with them. A financial guarantee is a pledge by a lending institution that it will step in and provide compensation should a business transaction between two parties not go through. There are different types of guarantees, and they can be issued by both public institutions, such as the EIB, the World Bank or national credit agencies, and private institutions, like commercial banks. Using guarantees is a complex process and we can’t get into all the details, but let’s look at how things generally work within the cleantech sector. An industrial firm selling a new, relatively unproven product, like an electrolyzer or a long duration energy storage system, must provide buyers with a financial guarantee, known in this context as a performance guarantee. The guarantee assures buyers that if something goes wrong — delays, functional issues, the firm goes bankrupt — the bank will step in and help make the buyer whole. To obtain a guarantee from the bank, manufacturers must put up collateral. If something goes wrong, the bank can collect that collateral and use it to pay the buyer. Compared to established industrial firms, emerging cleantech manufacturers are still small fry, lacking both an established credit history to secure good conditions on their guarantees and the money needed for collateral. That’s where an additional safety net comes in. Cleantech groups are ramping up lobbying in Brussels, calling on the EIB to provide an additional layer of assurance, known as counter-guarantees, to back up cleantech investments. They’re asking for, in essence, a safety net to a safety net. Cleantech groups want the EIB, as a public entity, to guarantee the guarantees issued by commercial banks to cleantech manufacturers. If something goes wrong, the bank will pay the buyer and then the EIB will pay the bank. Under this system, advocates say companies would get the guarantees they need without necessarily tying up all their capital in collateral and could instead use that capital to ramp up manufacturing. The EIB, one of the world’s largest providers of climate finance, recently approved these types of counter-guarantees for the bloc’s ailing wind sector. Specifically, the EIB will provide €5 billion to back up performance guarantees issued by commercial banks to companies manufacturing wind and grid interconnection equipment. Several cleantech start-ups and think tanks recently sent an open letter asking the EIB to provide similar backup for their products. “Manufacturers are turning down orders because they don’t have working capital to place as guarantees,” creating a vicious cycle that prevents them from ramping up quickly enough, said Jules Besnainou, executive director of Cleantech for Europe, one of the organizations that signed the letter. Advocates say this is about how to finance the bloc’s green industrial transformation through tools that don’t require direct monetary support. “We need technologies to go green, but we can’t subsidize everything,” said Tobias Lechtenfeld, executive director of the Tech for Net Zero Alliance, a network of climate tech startups and venture capital funds in Germany and neighboring countries, which also signed the letter. Still, in practice the proposed measure means the EIB would take most of the hit if something (bankruptcies, non-durable equipment, etc.) were to go wrong, likely prompting criticism and concern about wasting public money. For general projects, the risk is very low. The International Chamber of Commerce estimates the average ultimate loss rate for performance guarantees is 0.2%. The open question is how much higher the loss rate would be for emerging cleantech, which is a higher risk business category, and how keen the EIB would be to bet on certain technologies. It’s unchartered territory, since many of these businesses do not represent a well-established sector like wind energy, said Ronan Palmer, associate director for clean economy at the environmental think tank E3G. “There’s a fear factor when there is a genuine uncertainty about whether the equipment and tech will work,” Palmer said. “We’ve been building wind turbines for 20, 30 years, we know how it works. But when you are building an electrolyzer, do you know if there will be a market for green hydrogen? How much maintenance will they need? The technology is not big enough to have an idea.” In a written response to Cipher, an EIB spokesperson did not confirm whether counter guarantees for emerging cleantech are on the table but pointed to its adoption of counter guarantees for the wind sector as the “most recent example of how the EU bank can back Europe’s green industry with targeted measures,” adding: “We aim to continue doing so in the future.” By now you might be wondering if these guarantees are like the loan guarantee program housed within the U.S. Energy Department. Similar, but no! Loan guarantees provide a promise to repay a loan if the borrower defaults. Like performance guarantees, these also help create a safety net for nascent new industries, albeit with political risk. The Energy Department program’s default rate over nearly 20 years is low — around 2% as of 2018 — and its high-profile successes include Tesla. Its most high-profile loan ever was an outlier and rather infamous failure, though: Conservatives argued the Obama administration wasted half a billion dollars of taxpayer money on solar manufacturer Solyndra, which went bankrupt after receiving the loan guarantee. While not exclusively targeting climate technologies, the EIB has been offering since 2022 comparatively restricted and smaller loan guarantees to European small and medium-sized businesses in sustainability sectors. As wonky as financial guarantees are, advocates say arguments for them are simple. At stake is the EU’s industrial competitiveness, said Besnainou. “Do we manufacture this cleantech in Europe, or the U.S. or China?” he asked. “We won’t have a long duration energy storage or electric industry in Europe if we don’t get these kinds of guarantees.” Editor’s note: Cleantech for Europe and Tech for Net Zero are supported by Breakthrough Energy, which also supports Cipher.