Investing in European fuel security - funding commercial deployment of advanced biofuels

Overview

Development of advanced biofuels carries a number of risks for potential investors, including:

  • Long-term sourcing of reliable supplies of feedstocks (waste streams, residues and energy crops), which do not currently all have well-developed supply chains;
  • Deployment of innovative conversion technologies with high capex and opex, which have not been proven under commercial conditions;
  • Dependence on a stable and supportive long-term regulatory framework (including consistent policy and financial incentives) at national or EC level.

Due to a combination of these risk factors, it has been less attractive for investors to develop advanced biofuels projects in Europe. European technology developers are increasingly looking at opportunities outside the EU in North and South America and China.

While policy uncertainties have had an impact on advanced biofuels investments in Europe, on a positive note institutional investors are increasingly moving towards renewable energies and away from fossil fuel investments, which offers a potential opportunity for companies developing advanced biofuels and bioenergy technologies (see below).

Impact of policy on European investment in advanced biofuels

Risk sharing through Public Private Partnerships between industry, Member States and investors is seen as the best way forward.

EC initiatives and programmes such as NER300, Horizon2020, EIBI, ERA-NET+, BBI offer public co-funding towards the capital costs of industrial-scale demonstrations of advanced biofuels and bioenergy. The Expert study on Financial instruments for the SET-Plan (including authors from financial organisations, such as the European Investment Bank, The European Private Equity and Venture Capital Association, Insurance Europe, the World Bank, and the Climate Change Capital) concluded that financial instruments, loans and guarantees are potentially available. A range of potential support mechanisms are outlined in the report.

InnovFin Energy Demonstration Projects (EDP) facility

In June 2015, the EC and the European Investment Bank launched the InnovFin Energy Demo Projects (EDP) Facility, which enables the EIB to finance innovative first-of-a-kind demonstration projects in the field of renewable energy and hydrogen/fuel cells. The EIB provides loans between EUR 7.5m and EUR 75m.

InnovFin – EU Finance for Innovators is a joint initiative by the EIB Group and the European Commission under Horizon 2020, the EU framework for research and innovation ("R&I") 2014-2020. InnovFin builds on the success of the Risk-Sharing Finance Facility developed under the seventh EU framework for research and technological development (FP7), which for the period 2007-2013 financed 114 R&I projects of EUR 11.3bn and provided loan guarantees for another EUR 1.4bn.

The new facility will support cutting-edge energy technology projects that may otherwise not be bankable during their pre-commercial stage, covering the higher risk faced during the construction and initial operating stages. Specifically, InnovFin Energy Demo Projects will provide loans to first-of-a-kind commercial-scale industrial demonstration projects in the fields of renewable energy and hydrogen and fuel cells, helping to bridge the gap from demonstration to commercialisation and contributing to the broader objectives of the Energy Union and the Strategic Energy Technology (SET) Plan.

The need for a supportive and stable regulatory framework after 2020

Even with support available, a number of NER300 projects on advanced biofuels have been withdrawn, citing uncertainty about long-term biofuels policy as a deciding factor. For example, investors have been unnerved by the recent changes to rules on state aid for biofuels and the non-inclusion of biofuels targets in the policy framework for climate and energy in the period from 2020 to 2030, and the ongong political debates over proposals to amend the Renewable Energy Directives and Fuel Quality Directives. This debate was overcome only in September 2015 when the amendment of the Renewable Energy was accepted by the European Parliament and the Council (EU/2015/1513).

Hence the dilemma is:

  • advanced biofuels technologies are available at industrial scale;
  • finance is potentially available to construct the facilities demonstrating integration of these technologies and commercial operation of value chains (from feedstock supply to end product) on a single site;
  • but, crucially, there is no certainty of consistent long-term policies in support of biofuels markets after 2020, offering clear opportunities to profit from this high-risk technology investment in future.

This means it is more attractive for investors to look at other technology areas or other parts of the world.

From the perspective of industry and investors, the solution is for EU Institutions to set long-term targets for renewable transport fuels in Europe and increase coordination of policy areas to achieve those targets. If not, Europe may not only end up dependent on imported energy, but even more dependent on importing sustainable energy technologies.

Institutional investment in renewable energy including bioenergy and biofuels

The media has recently highlighted a number of prominent institutional investment funds that are moving away from fossil fuels and/or looking to make investments in renewable energy, including advanced bioenergy:

In 2014 Norway’s Government Pension Fund Global (GPFG), worth $850bn (£556bn), removed investments made risky by climate change and other environmental concerns, including coal, oil sands, cement and gold mining. The Fund revealed a total of 114 companies had been dumped on environmental and climate grounds in its first report on responsible investing [Source: The Guardian].

Also in September 2014, the BBC in the UK reported that "The Rockefeller Brothers Fund is joining a coalition of philanthropists pledging to rid themselves of more than $50bn (£31bn) in fossil fuel assets. Some 650 individuals and 180 institutions have joined the coalition." [Source: BBC website].

Valerie Rockefeller Wayne, a great-great-granddaughter of 'Rockefeller and a trustee of the fund, is quoted by the Washington Post as saying "There is a moral imperative to preserve a healthy planet."

Google has pledged to invest in green energy, and the Google Ventures Portfolio includes the Cool Planet project. Cool Planet (with investors including BP, Google Ventures, ConocoPhillips and GE), is using a thermo-mechanical fractionation system (pyrolyzer) to convert wood waste and energy crops into hydrocarbon chains (gases). These are converted via catalysts to high-octane, renewable gasoline blendstocks (known as "Reformate"), which can be used to enhance the energy content of gasoline, diesel, and jet fuel.

In September 2014, the Guardian newspaper, UK, highlighted an increasing trend for pension funds to invest in 'Clean Tech' companies. See also OECD report from August 2012 The Role of Instiutional Investors in Financing Clean Energy.

An Ernst and Young study shows that investors are not being driven by purely moral and philanthropic principles but by the better long-term returns offered by sustainable technologies and renewable energy sources [Source: Pension and insurance fund attitudes toward investment in renewable energy infrastructure, November 2013].

The largest investments have been in wind and solar energy. However, there is also bioenergy investment by pension funds. For example the PensionDanmak investment of £160m in a new biomass power plant, Brigg Renewable Energy Plant, which is to be built in Lincolnshire, in the east of England.