Last year the US intensified its plans to become a cleantech superpower with the Inflation Reduction Act, a powerful piece of legislation that will see billions of dollars invested in renewable energies and technology such as wind power, electric vehicles, and carbon capture and storage. As the nation strives to bypass China and produce green components on its own turf, Jenny Messenger looks at how American banks are responding, whether they are seeing a jump in requests to finance cleantech projects and what they are prioritising as the green energy transition takes shape.
Cleantech has come a long way since the term first entered the lexicon of venture capitalists at the turn of the 21st century. Burgeoning technologies like solar power systems, electric vehicles and batteries for energy storage have matured into full-fledged industries, while emerging options like green hydrogen are developing fast.
Growth is set to be exponential for cleantech as countries attempt to limit global warming to 1.5°C above pre-industrial levels by reaching net-zero carbon emissions by 2050.
According to the International Energy Agency (IEA), mass-manufactured clean energy technologies will triple in value by 2030, reaching approximately US$650bn a year, if governments worldwide implement their climate and energy pledges.
Lavinia Bauerochse, Deutsche Bank’s global head of ESG corporate bank, flags up the shift in human capital too, with many tech graduates now opting for cleantech rather than big tech. “That will also be a catalyst for innovation, for acceleration,” she says.
Though there is no single, agreed-upon definition of cleantech, the term tends to be broadly interchangeable with green technology. It covers a wide range of products, technologies and processes that claim environmental benefits, including solar, wind and hydroelectric power, electric vehicles, recycling, and carbon capture, utilisation and storage (CCUS).
Manufacturing cleantech on the requisite scale to support the green energy transition, though, presents challenges, and the situation has been complicated further by Russia’s invasion of Ukraine, the subsequent threat to supply chains, and the trend towards friendshoring and nearshoring in a bid to circumvent geopolitical disruption.
Amid the scramble for market share, the US has staked a claim to becoming the world’s leading cleantech superpower, hoping to overtake China, which is currently on course to become the top cleantech manufacturer.
China’s investment in research and development
in recent years and its ‘Made in China 2025’ initiative, designed to make it a leader in high-tech industries, has bolstered its position.
In a May 2023 briefing, The State of Clean Technology Manufacturing, the IEA notes that “China appears well positioned to capture US$500bn, or around 65% of the projected output from global clean technology manufacturing capacity in 2030, including both existing and announced projects”.
The US is aiming to be a serious competitor, however, with the Inflation Reduction Act (IRA), signed into law in August last year by US President Joe Biden.
The IRA implements industrial policy on a gigantic scale through federal spending and tax breaks, and promises to regenerate the US’ manufacturing industry base, with the tagline “Make it in America”.
It represents a huge step forward in scaling up production capacities for all manner of green technologies and preparing the market for the energy transition.
So far, the IEA says that the IRA is already having an impact on domestic manufacturing capacity, particularly in the case of batteries, with the total installed capacity for battery manufacturing rising 85% in 2022 to 105 gigawatt hours (GWh) per year.
If the projects that have been announced are carried out, this could mean an extra 925GWh of annual production capacity by 2030.
Similar moves to bolster the supply of critical materials and slash emissions have been made in Europe as it too tries to “lead the cleantech revolution”, as president of the European Commission Ursula von der Leyen put it when she unveiled the EU’s green deal industrial plan earlier this year.
The EU aims to reduce net greenhouse gas emissions by at least 55% by 2030, simplify regulation and provide faster access to investment and financing for cleantech production.
This includes the Net-Zero Industry Act – which has targeted an increase in manufacturing capacity of net-zero technologies to 40% of the EU’s annual needs by 2030 – and the Critical Raw Materials Act (CRMA), which seeks to lower the EU’s dependency on imports of vital raw metals and minerals from single country suppliers.
Benchmarks for the CRMA include at least 10% of the EU’s annual consumption to be mined locally, at least 40% of the bloc’s annual consumption of refining and processing to take place in the EU, and the recycling of at least 15% of its annual consumption by 2030.
Financing challenges
Well-established renewable energies, such as wind and solar power, have had ample time over the last few years to develop into attractive options for US financiers.
The last decade has seen “the financing of utility-scale renewable projects such as solar and wind with top-tier sponsors and developers” mature significantly to become “a highly competitive financing market”, says Steven Cranwell, chief executive and regional head, client coverage, for the Americas at Standard Chartered.
Cranwell tells GTR that Standard Chartered is seeing an uptick in requests involving cleantech projects from both an advisory and financing perspective.
These projects, he explains, include solar, wind and offshore wind infrastructure, cleantech manufacturing (largely solar and battery manufacturing), distributed generation, green and blue hydrogen, CCUS and biofuel production, including natural and landfill gas.
Of this plethora of options, Cranwell says that client interest is highest for “the emerging sectors of clean hydrogen, cleantech manufacturing (solar, wind, batteries), offshore wind, distributed generation, energy storage, biofuels and CCUS”.
When weighing lending decisions, Deutsche Bank assesses technologies as a whole as well as individual projects, Bauerochse says, but she notes that there is a widespread lack of understanding about certain new forms of technology, such as green hydrogen, which impacts the financing these projects can attract.
“We always have a chicken-and-egg problem when it comes to investment security. Certain technological investments will become easier if you know what the lifetime is attached to it, or what the regulatory framework for it is,” she says.
“We will continue to work in a very fluctuant regulatory framework for years to come. We will definitely need harmonisation of standards and level playing fields because everybody’s working in a global environment. We need to have coherence between regimes and frameworks. Everybody must stay adaptive,” she adds.
Because of these uncertainties, fresh solutions may not make economic sense right now, though they may well do later on.
“When it comes to large-scale storage solutions, for example, or scaling up hydrogen, these are new areas where you need to identify pilot structures and create an understanding of the risks, how to mitigate them and how to create bankability,” Bauerochse says. “It’s more about developing an understanding of associated risks, which everybody is doing at the moment, and so are we.”
Given the influx of new technologies, some will inevitably fall by the wayside. Successfully betting on those that will turn into viable long-term solutions is the challenge.
Bauerochse explains that there is still some debate over which technologies will win out, but responsiveness and adaptability among banks and corporates is key.
She adds that there needs to be “openness” to assess the merits of various technologies, whether for the transition period or the long term.
There are issues of largescale production capacity to be ironed out, too.
“The best example is the infrastructure challenge for hydrogen,” Bauerochse says. “There is an understanding that there will be adaptation possibilities, but you have to identify the right derivative to transport and you want to have some investment security before you take the decision.”
This means that a number of other colours in the so-called hydrogen rainbow may be required before the most sought-after option, green hydrogen, can be rolled out.
“For the transition period, there may also be an openness to pink or blue hydrogen needed, in order to create security of supply, and therefore investments in infrastructure, which later after a transition period can utilise green alternatives,” Bauerochse explains.
Currently the majority of hydrogen is grey, which is produced when natural gas is processed by steam reforming – but this generates carbon dioxide as well as hydrogen.
Blue hydrogen follows the same process as grey but uses carbon capture technology to negate the carbon emissions, while green hydrogen is produced when water is electrolysed using renewable electricity, splitting it into hydrogen and oxygen.
Pink hydrogen is produced through electrolysis powered by nuclear energy, while both black and brown variants use coal.
Cranwell at Standard Chartered also points out that “the impact of renewables intermittency on the overall grid system and their reliability costs” should not be overlooked, and that as long as energy storage and hydrogen remain in early stages of development, they can’t provide the baseload power modern societies demand.
“In such instances, lower carbon-intensity fuels, can play a direct role in supporting the transition,” he says.
Upscaling production
The US’ IRA is intended to help surmount some of the problems of market indecision by shepherding federal spending towards domestic manufacturing and the commercialisation of cleantech.
It will inject around US$370bn – via tax incentives, grants and loan guarantees – into energy, manufacturing and transportation to reduce carbon emissions and shore up domestic manufacturing capacity.
Along with the 2021 Bipartisan Infrastructure Law and last year’s Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, these pieces of legislation underscore the US’ drive to boost its competitiveness and innovation.
The US$27bn greenhouse gas reduction fund within the IRA, for example, offers grants to mobilise financing and leverage private capital for clean energy and climate projects intended to reduce greenhouse gas emissions, with an emphasis on projects that benefit disadvantaged communities.
“The IRA is a potential game changer for emerging cleantech manufacturing,” Cranwell says, adding that tax credit incentives will hasten the adoption of technologies such as hydrogen, CCUS, energy storage and the reshoring of US cleantech manufacturing.
“Through the IRA, the US is expected to advance its position as the premier global destination for international cleantech investment,” he says.
Through the energy infrastructure reinvestment programme, the US Department of Energy will be able to offer up to US$250bn in low-interest loans to upgrade, repurpose or replace energy infrastructure, with a cut-off date of 2026.
The Innovative Clean Energy loan guarantee programme gives the energy department an extra US$40bn in authority to arrange loans for projects involving critical minerals processing, manufacturing and recycling, for example.
One of the biggest boons for banks and businesses is the raft of tax credits the IRA provides. Facilities eligible for the advanced manufacturing production tax credits include investments related to industrial or manufacturing facilities and equipment, or the domestic production of critical minerals like cobalt and nickel.
These provisions give “strong revenue visibility and credit support for banks and financial institutions”, Cranwell says.
The IRA’s tax credit transferability could simplify project capital structures too, he adds, because eligible projects “can bypass certain complicated tax equity structures”, which has led to increased deal flow and client engagement.
Looking ahead, Cranwell anticipates an increase in solar and wind projects, and he is also “extremely hopeful that the first large-scale green and blue hydrogen projects will be operational within the next five years”.
Bauerochse also stresses the importance of collaboration across the market in the US and globally. “I wouldn’t recommend searching for a silver bullet. We will need a mix of solutions and technologies, and we will need to look into the individual use cases,” she says.
And in the race to become the frontrunner in cleantech, the outlook remains open.
Alongside the US, the EU and China, Bauerochse suggests that countries in emerging markets and particularly the Global South are also strong contenders, with the ability to leverage their attributes and become key energy exporters.
“There will be a lot of competition for becoming a green superpower,” she says.
“I wouldn’t take a bet yet, because what we need is a scale-up everywhere. I want to see everybody being very ambitious and developing capabilities and production,” Bauerochse concludes.
