The carrot or the stick? — the competitive battle to fund green energy transition projects on both sides of the pond

 In EU Green Deal / IRA, Green Credit, Green Deal, Green economy, Green energy, Green Finance, Lithium ore mining, Lithium power, News

The enthusiasm in the European Union (EU) and the US to launch strategic industrial programs has significantly increased in the post-Covid era.
One of these, and perhaps the most ambitious and far-reaching, is The European Green Deal. This is a comprehensive set of measures launched by the EU in June 2021 to transform the EU into a modern, resource-efficient and competitive low-carbon economy.
On the other side of the pond, in the summer of 2022, the US enacted the Inflation Reduction Act (IRA) with a similar broad focus to that of the EU’s Green Deal. The IRA is addressing inflation by reducing the national debt, healthcare costs and energy costs over the next ten years.

Text: Chris Graeme. Photos: Renata Schiavon (AmCham)

The EU Green Deal operates mainly with non-tax incentives. However, through the OECD GloBE rules, qualified refundable tax credits (QRTCs) are available, which might be claimed for projects which fit the EU Green Deal program.

The IRA, on the other hand, explicitly focuses on tax incentives in the form of transferable tax credits (TTCs) through the extension and expansion of numerous energy-related federal income tax credits.

For corporates with plans for innovation, industrialisation and/or decarbonisation, this means that they have the choice between applying for grants and loans in the EU or for tax credits in the US, depending on their own global growth strategies. The problem, however, is that the US has so much more money available, and if the EU is unable to mach it, Europe may lose out on many opportunities as companies relocate them to the US.

This issue and others were discussed at a lively and reflective debate organised by the American Chamber of Commerce in Portugal (AmCham) for its event ‘How can US and EU policymakers and companies play to amplify each other’s energy transition efforts’ – Opportunities and Risks for Portuguese Companies and Portugal’ which was held at Lisbon’s Pestana Carlton Hotel on January 18.

After opening remarks by the AmCham president, António Martins da Costa, the event was kicked off by expert Miguel Sossa, Vice President – America’s Sustainability GTM at Gapgemini who flew in specially for the event, and António Vicente, Deputy Head of Representation, European Commission, whose presentations were stimulating and enlightening, but will be featured in a separate article at a later date.

The US Inflation Reduction Act (IRA) has caused significant transatlantic tensions since its signing by President Joe Biden in August 2022. The White House aims to break with the country’s high levels of fossil fuel consumption and switch to clean energy — a change that Europeans have long called for. To do so, it offers massive tax credits over ten years and introduces measures that go against World Trade Organization (WTO) rules.

Europe sees this as a protectionist attempt to attract the booming green industry to its territory, at the expense of its trading partners. Visits to Washington by France’s President Emmanuel Macron and Minister of the Economy and Finance Bruno Le Maire, his German counterpart Robert Habeck, and European Commissioner Thierry Breton have so far not changed the situation.

To respond to the IRA, European Commission President Ursula von der Leyen announced a major “Green Deal Industrial Plan” in early February 2023 to boost the competitiveness of Europe’s cleantech industry. This new plan is built upon past climate initiatives, such as “Fit for 55”. Overall, the European strategy has little in common with the US IRA: no massive tax credits but instead higher carbon taxes; no protectionism but instead a strong preference for free trade. The two strategies are radically different. Transatlantic misunderstandings and diplomatic tensions are therefore likely to persist.

The panel discussion, moderated by former AmCham president and ex-Galp director, Sofia Tenreiro (currently a partner at Deloitte Portugal) included Jorge Casillas, Head of Planning and Markets at EDP, Manuel Sousa Martins, CEO, Aurora Lithium, Georgios Papadimitriou, Executive Director and board member at Galp, and João Noronha Leal, board member at aicep Portugal Global (Investment).

Two different approaches

Discussing the differences between the two approaches, Jorge Casillas (EDP), speaking from the point of view of the investor, said the US model made it clearer and easier to understand what incentives companies would get, do the numbers crunch, and then decide to advance or not.

In the case of the EU, Casillas said that because the emphasis was not on taxes, “They can’t give tax breaks”. Instead, they “set up targets and make countries strictly comply with those targets”. In other words, the EU uses the stick approach and the US uses the carrot approach.

“What they do is force and incentivise governments to adopt these policies, and governments have some freedom in the way they implement them, but at the end of the day they have to meet the targets,” he explained.

Casillas said that the US case was very “direct” on what companies can do, whereas in the EU, there is longer to wait to see what governments will do, although it does allow more “comprehensiveness” on policies.

As for EDP, the company he represented, it has a far-reaching green energy plan on a worldwide scale using wind, hydro and solar power in its objectives to be totally green by 2030 through accelerating decarbonisation. EDP is investing €24Bn in energy transition, doubling its capacity in solar and wind power, and investing in green hydrogen.

In the case of targets, the EU has them for local manufacturing and production and construction, mobility and transport, aviation, shipping, industry, energy production, building renovation, and many other areas.

“In the US such targets don’t exist because policymakers focus on tax incentives, which are only granted in compliance with US production rules and current trading agreements”.

Another example is that 65% of products manufactured may not originate from a single country in the case of the EU. In the case of the US they must come from the US and its trading agreement counterparts to get the tax sweeteners.

Damaging competitiveness?

Georgios Papadimitriou (Galp) on how this would impact Europe’s competitiveness, admitted the IRA had “set the bar high”. “We’re not talking about any country; this is the United States, which has the economic size and capacity to launch this type of investment support scheme. It is the global leader, with a stable system that is made for business and lives for business.”

To give an example, the IRA includes a US$369Bn in incentives for energy and climate, mainly as corporate tax credits valued at US$270Bn. The act aims to cajole private capital towards clean energy, transportation and industry, and many of these tax credits can be transferred or refunded through a direct pay mechanism, which allows companies to monetise the benefits regardless of their lack of federal tax liability.

“When the US launches a package like this, it of course generates a lot of news, and has an impact in the EU as it generates a momentum for investors to act and look towards making their investments in the US,” he said, adding “there is a lot of capital out there and in our companies we fight for capital allocation and if there is a destination like the US, offering such incentives, it’s very difficult to ignore it,” he said.

Galp – an early mover in lithium refining

Galp has a venture capital arm (Galp Ventures) one in the battery space and the other in the hydrogen space with both of those companies depending on investment and will grow because of the IRA.

Galp is also investing in the lithium space with a partnership with Aurora Lithium (See article on Essential Business’s website “Aurora Lithium Looks to Brussels Funds”). “We want to invest here in Portugal and what is happening out there is very important”, he said.

For example, In 2022, Galp intensified its Corporate Venture Capital activities and made its first direct investment of US$ 5 million in 6K, a company developing disruptive cathode materials manufacturing technology.

The company 6K is championing the innovative process of advanced microwave plasma technology to produce metal powders for specialised applications, including cathode materials.

6K focuses on producing low-cost, environmentally friendly battery materials to lower the environmental impact of global battery material production and to do so cost-effectively and sustainably. Investing in 6K fits well strategically with Galp’s ambitions to position itself in the battery value chain.

In the lithium example, Galp has taken a significant first step in becoming an early mover in the lithium processing segment of the battery value chain. The 50/50 JV between Galp and Northvolt (“Aurora JV”) was legally completed in 2022, and significant progress was made in the project to build and operate a lithium processing facility in Portugal, with a capacity to annually produce up to 35 Kton of lithium hydroxide, sufficient for 50 GWh of battery production per year (approximately 700 k electric vehicles per year).

With the start of production expected in 2026, the project will use a proven conversion process, leveraging recent process improvements and technologies to increase its sustainability and efficiency. Additionally, the Aurora JV is seeking to enable the use of green energy to power the conversion process, thereby minimising reliance on the conventional natural-gas-powered approach.

“What is happening with the IRA does have an impact on how we see the world from the European Union. For example, we are green hydrogen investors in Portugal to produce clean fuels, but in the US green hydrogen is subsidised in two ways: the IRA which subsidises green power making it cheaper, and offering green hydrogen subsidies a second time per kilo”, said Georgios Papadimitriou (Galp).

Papadimitriou added that the fact that the US had this IRA scheme providing conditions were met meant companies knew what they could count on, and don’t actually have to apply for it. “It’s up for grabs” whereas in Europe you do.

On the plus side, Europe had been first in leading the way in green investments with the Green Deal in 2020 whereas the US was lagging behind.

“Europe’s green movement and incentives made China’s renewables investments what they are today”,he said in terms of competition and bringing down the price of renewable energy from a high of €500 MW/h through incentives and this price now down by many times.”

However, Europe still had a way to go in terms of matching the US in terms of business orientation and speed of action despite taking steps in the right direction.

“Business plans are made year-on-year and we cannot afford, in a rapidly changing world, to wait two of three years for the regulations and approvals on big investments when you are trying to conquer new space. That is not a viable way forward,” said Georgios Papadimitriou (Galp).

Time for action!

Manuel Sousa Martins, CEO of Aurora Lithium, was asked if Europe had enough mechanisms in place to drive the industryand said there was definitely space to “tap into funding”, but called for caution because the IRA was the way the US, driven by US workers, was trying to maintain the lead on global green energy technology manufacturing and innovation.

“First there is a space in Europe to tap into funding which is positive, and Europe is very good at regulatory frame-working and taking the lead on green energy initiatives but it is now time for action,” he said.

The entrepreneur referred to the Innovation Fund but emphasised that it was hard to navigate the funding mechanisms in Europe.

“We at Aurora are trying as a joint venture with Northvolt (a Swedish company currently developing high-quality ‘green’ lithium battery cells) and Galp to do the first of three lithium converter plants. Nobody has done this before. We aim to be the largest and most sustainable lithium production facility in Europe by 2027”, said Manuel Sousa Martins.

And added: “This is a challenge, it requires talent and funding and represents an €800 million investment. It will reduce our carbon and water footprint and will be circular by design.”

“There are programmes and we are competing (for funds) but when you compare with the US (he gave the example of a lithium refinery project in the US with an investment of US$ 500 million receiving incentives of US$ 150 million), they offer 40-50% upfront incentives which have been pouring into these companies”, explained the Aurora Lithium boss.

And concluded that European companies needed to compete on the same level playing field with other countries otherwise companies like Aurora and even scaleups “might just want to go elsewhere”.

“We need access to funding and European companies like ours trying to build something that has never been done before in Portugal, and which is actually contributing towards energy transition. We like they also need to get access to this kind of (US) funding.”

Limited Portuguese resources

João Noronha Leal (aicep Portugal Global) discussed the important role of regulations and taxes regarding technology and artificial intelligence, which could either block it or prevent it playing is role in guaranteeing net competitiveness.

“Regarding grants, as a public entity we are limited in resources from the Portuguese government and have to manage incentive schemes carefully in terms of the different companies that approach us.”

“AI is currently one of the major priorities. Many steps have been taken by Europe in this area, but still Europe is straggling behind the US in AI as in other areas like lithium, not so much as regulation is concerned, but in terms of implementation, and a clear road map as the way to implement the level of incentive schemes that exist,” he explained.

João Noronha Leal added that when companies tried to access such incentives it wasn’t clear for either the companies or consultants which have difficulty knowing what they can suggest to their clients.

“This is a surprise as we would not expect large consulting companies to request information, some of which can be found on the internet, but their managers are not aware of this. What we have to do — and we don’t need further regulation right now — is we need companies to absorb the regulations that exist, and ensure that aicep and companies know what is available and work alongside public institutions to access what they need,” he added.

Many of the schemes depend on national funds, and the Portuguese State does not have the same access to funds like Germany. Sometimes those funds are not always present because funding is needed elsewhere such as schools, health or security. “It is not always clear that a national project should be a priority. Often we have to notify the European Union for fund applications and that can take two years and companies simply cannot wait two years for a decision”, he lamented.

João Noronha Leal concluded that a decision in the US could be made in as little as two weeks as this was the fundamental difference and challenge hampering projects in Portugal. “They (Europe) need to be faster in taking decisions with people who can take responsibility and make things happen quickly.