Public guarantees are key to affordable industrial de-carbonisation transition, analysis reveals

(10 Mar 2020) Across much of Europe, natural gas is the dominant heat supply for industrial process heating. A recent analysis by partners in the EU-funded TrustEE project reveals that renewable energy to supply heating can become financially attractive versus natural gas with the right policy mix. Public guarantees are a key ingredient, especially for SMEs, because they simultaneously improve access to bank loans and lower the financing cost.

Low to medium temperature industrial heating (up to 200°C) is a crucial resource for many European industries, including pulp and paper, food and beverage, and transport equipment. Proven renewable technologies, such as solar thermal, biomass, and biogas systems, are poised to address the growing need for de-carbonized process heat sources. 

However, in many European countries natural gas remains the dominant fuel alternative versus most renewable systems today. This situation begs the question: How do we expedite the transition to de-carbonised industrial heating in a manner that is financeable by companies and affordable for European taxpayers? A recent analysis by partners in the EU-funded TrustEE project ( reveals that renewable energy to supply heating can become financially attractive versus natural gas with the right policy mix.

Higher fuel costs versus lower financing costs  

To date, the emphasis of policy discussion in the EU has focused on measures to increase fossil fuel costs (e.g., through CO2 taxes/price levels). Alternatively, many countries offer subsidies or incentives to reduce the high upfront investment cost (CAPEX) of installing renewable heating assets (see list of country-by-country incentives).

However, raising CO2 taxes to a level where renewable energy sources become competitive comes at a cost for private and business consumption. Further, building political consensus for higher CO2 tax or pricing regimes becomes more difficult the higher the envisaged levels of the tax/regime. Providing public incentives or subsidies to lower CAPEX requirements for renewable assets is another way to encourage early market adoption of renewable technologies. However, this approach becomes prohibitively expensive from a public funding perspective when considering a full transition. Catalysing private investment is therefore critical for a deep de-carbonisation scenario.  

What about addressing the other component of financial viability?

Access to finance and financing costs are a critical part of the equation. Today, small and medium size enterprises (SMEs) pay significantly higher financing costs than large firms due to high risk premiums and face difficulties obtaining bank financing. Since SMEs comprise the majority of industrial firms in Europe, relieving these financing problems would address a huge part of the market.

Why do SMEs face higher financing costs?

A risk premium is applied to SMEs due to a higher real or perceived credit risk over the lifetime of the project. Investment in renewable energy production facilities is capital intensive with a long-term investment horizon. Therefore, financing costs are a major component of the total cash flow profile. Solar thermal production capacities are most affected, because OPEX are nearly negligible, and biogas investments are also dominated by CAPEX (in biomass projects OPEX is more important because of the feedstock).

Under current financial market conditions with low or even zero interest rates, financing costs are primarily influenced by risk premiums reflecting the credit risk of the debtor. Therefore, the higher risk premiums applied to SMEs drive up the cost of financing and dampen financial attractiveness.

Long-term guarantees can accelerate an affordable transition

How can we eliminate this SME credit risk premium and provide access to bank loans or other types of private financing? What policy levers are needed and available?  

Credit insurance is only available for up to three years to help mitigate credit risk at the outset of a project. However, insurance does not address the longer-term credit risk over the lifetime of the projects, which can be up to 20-25 years as proven for solar thermal, biomass and biogas systems. Therefore, other instruments are required to mitigate the long-term credit risk.

Based on an analysis of incentive scenarios, REENAG GmbH (a partner in the TrustEE project) found that lowering financing costs in combination with a modest CO2 tax would make solar thermal and biogas investments financially viable in many countries in Europe. And critically, these measures would reduce the need for CAPEX subsidies for biogas and solar thermal, even to zero in some EU countries.

REENAG also analysed the effect of a long-term guarantee on financial viability versus a higher CO2 price scenario for solar thermal and biogas. Implementing a guarantee scheme makes investments in these technologies financially viable much faster – in some cases immediately – versus implementing a higher carbon tax. Long-term guarantees therefore can substantially reduce the required CO2 taxes and subsidy levels required to achieve 100% renewable technology adoption.

Even more importantly: public guarantees for SMEs provides access to bank loans and other private financing. Addressing this impediment is critical to transition to carbon-free industrial production.

“Our initial analysis shows that long-term guarantees are a very effective option to address access to finance for SMEs,” concludes Dr. Winfried Braumann of REENAG. “In the scenarios we ran, implementing long-term guarantees helps make solar thermal and biogas investments financially attractive almost immediately in several countries. These instruments also reduce the level of subsidies required by tens of billions (€). Calculated as abatement cost per ton of CO2, they are by far the most cost-efficient climate policy instrument.”

Next step: Proposing a methodology for long-term climate guarantees

Europe’s vision is to achieve net-zero greenhouse gas emissions by 2050 through a socially fair and cost-efficient transition. In the industrial sector this transition requires billions of € in investments by private companies. Therefore, there is a need for long-term financing where the inherent long-term credit risk has to be assumed by some party (because the credit risk rating of SMEs may be too weak).

As a next step, REENAG and TrustEE partners will publish the analysis and a proposal for climate guarantees, linking the well-known concept of public guarantees for investment loans to the task of greenhouse gas reduction. The authors will present this paper at the eceee Industrial De-carbonisation Conference, which takes place on 16-18 June in Gothenburg, Sweden.

TrustEE partners look forward to discussing the findings with policy makers to accelerate a cost-effective transition to de-carbonized heating. Interested policymakers or other stakeholders should contact TrustEE partners at: