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O p p o r t u n i t i e s a n d s p e c i f i c c h a l l e n g e s f o r e c o - i n n o v a t i o n s
D r. R a i n e r Wa l z
H e a d o f C o m p e t e n c e C e n t e r “ S u s t a i n a b i l i t y a n d I n f r a s t r u c t u r e ”
F r a u n h o f e r I n s t i t u t e S y s t e m s a n d I n n o v a t i o n R e s e a r c h I S I
U N - E C E C O N F E R E N C E O N P R O M O T I N G E C O -I N N O VAT I O N : P O L I C I E S A N D O P P O RT U N I T I E S
S E S S I O N 3 : F I N A N C I N G E C O - I N N O VAT I O N
T E L AV I V, J U LY 1 1 - 1 3 , 2 0 1 1
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Content
BackgroundOpportunities
Typology of challenges for financing
Challenges for financing due to specificities of eco-innovations Capital and time requirements
Risk perceptions and specific risk categories
Conclusions
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Market opportuni t ies for eco- innovat ions
Source: DIW/ISI/Berger 2007; Berger 2008; ECORYS et al. 2009
Annual demand for environ-mental innovations in the world.
High annual growth rates.
Markets in NICs gain importance.
0
100
200
300
400
500
600
700
800
900
1000
green energy supply
energy efficiency
material efficiency
green mobility water waste
market volume 2008 forecast 2020
8 %/a
5 %/a
6 %/a
3 %/a
5 %/a
7 %/a
billion €/a
Financing strategies must reflect market opportunities.
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Val ley of death
Valley of death depends on
perceived risk,
capital intensity of innovation and
length of time needed for commercialization and scaling up.
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F inanc ing port fo l io and problems
Lower-risk projects are financed within the context of project/ asset financing.Venture capital specialises on high-risk projects.VC typically concentrates on smaller projects which are not too capital intensive and rather below 10 years until exit of VC fund. Source: Ghosh/Nanda 2010
Taxonomy of problem areas for financing :Not enough venture capital available.Characteristics make projects hard to finance (high risk, capital intensive).Risk perception of projects.
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Need for informat ion to eva luate r i sks
Asymmetric information between capital seeking company and investor can lead to adverse selection
Need for evaluations to reduce information asymmetry.
Effects on financingEvaluations more difficult for innovative projects => higher costs.Fixed-cost character of evaluations disadvantage small projects (small ticket problem).Venture capital often cluster around industry branches to pool branch know-how.Risk premium for investments outside regional proximity.
Literature: Especially small high-tech companies face financing gap.Many of the suppliers of environmental technology are SME.
Annual turnover German environmental technology suppliers
< 10 million € 74 %
10 – 50 million € 14 %
> 50 million € 12 %
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F inanc ing for c lean technology
Many OECD governments see a funding gap for innovations.Empirical data for financing of clean tech (mainly energy):
Rising opportunities can also been seen in increase in financial investment.Regional imbalances in availability; investment outside regions leads to risk premium.
Source: Knight 2010
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Overv iew of spec i f i c i t ies of eco- innovat ions
Complexity of innovation:New business models needed. Leadership for systems innovations along value chain.
Dependence on governmental policiesSpecificities related to capital requirements:
Large scale.Life-span.
Market characteristics: Location of markets.High innovation pattern and changes in technological leadership.
Uncertainty of impacts along value chain:Uncertainty of (environmental impacts).Uncertainty of social impacts.Availability of resources.
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Eco-innovations very often require new business models, changes along complete value chain and different functioning of sectors.
Character i s t i cs of Eco- innovat ions
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Time and capi ta l requi rementsof eco- innovat ions
New business models need testing and experimentation in niche markets.
Coordination of complete values chain isrequired to achieve systems innovations.
Transformation of sectors requires adaptation of organizations and institutions.
Investments in infrastructure sectors take a lot of time and scaling up for commercial viability is very costly.
Time untilsignificant
revenues can begenerated is very
long
Eco-innovationprojects oftenrequire large
sums of capital toprove commercial
viability
Eco-innovations face a severe valley of death.
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Dependence on gover nmenta l po l i cy
Triple regulatory challenge for eco‐innovations:R&D policy (not exclusive for eco-innovations).
Environmental Policy (prerequisite for market formation).
Regulation of infrastructure sectors (many eco-innovations address sectors such as energy, water, transport).
Reasons for governmental changes:Government changes.
Change in policy approach of existing government.
Success of projects make costs of environmental policy an issue.
Governmental policies depend on rational that policies are good for the society. Assessment of economic, environmental or social side effects becomes crucial.
Dependence on governmental policy and risk of policy changes make eco-innovations less attractive for
investors.
Example Spain:
Change in incentives and cap on increase
drastically undermined market development of PV
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Shi f ts in locat ion of markets and compet i tors
Markets in emerging economies will become more important.
New competitors are emerging and building competences.
Shifts happening very quickly:
Eco-innovation show high dynamics.
Strong know-ledge increase in emerging economies.
Quick changes and shifting to new markets make risk assessment more difficult.
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Risk due to effects a long the va lue cha in
Effects occur over the complete value chain
Environmental effect might be less favorable, due to environmental effects up- or downstream.
Eco-innovation causes problematic effects on other environmental dimensions.
Eco-innovation causes problematic effects on other dimensions of sustainability.
Need for Life-Cycle-Sustainability Assessment increases uncertainty and assessment costs.
The case of first generation biofuels:Effect on greenhouse gases depends on feedstock and landuse pattern.
First generation biodiesel
makes use of advanced filters in diesel engines more difficult,
can contribute to loss of biodiversity and increased pesticide use.
Fuel versus food debate
How does such a debate affect willingness to finance biofuels? “Rush to Use Crops as Fuel Raises Food Prices and Hunger Fears” (New York Times, April 6, 2011)
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Structura l change assoc iatedwith eco- innovat ion
Eco‐innovations require structural adjustment
Strong structural change, with many newcomers in the market.
Potential risks of drastic adjustment make changes look unattractive to incumbents, which make them an unlikely source of capital.
Structural changes increase government related risks and increase difficulties to assess potential risks furthermore.
-200.000
-100.000
0
100.000
200.000
300.000
plastic recycling
paper rec. and subst.
car life span extension
car sharing biobased products
job turnovers
job gains
job losses
Employment effects of 5 case studies for eco‐innovation
Data: Walz 2010
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Cr i t i ca l resources
Availability of critical resources add another risk for eco-innovations.
Eco-innovations will drive up demand for critical resources
– Electromobility => neodymium– Hydrogen economy => platinum (PGM)–Wind energy => dysprosium– PV => gallium, indium
Data: based on Fraunhofer ISI (2009)EU Ad hoc Working Group (2010)
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Summary and Conc lus ions
Eco-innovations face some specific financing difficulties:Regional availability of venture capital does not match location of markets.Eco-innovations face severe valley of death.Specific risk categories and complex risk perceptions. Feedback loops of specific risks with dependence of eco-innovations on government policies.
Challenges for financing community and policy making:Increase of typical size of financing funds.Improve risk perception by supplying strategic intelligence.Increase Private-Public Partnerships.Predictability and long-term orientation of policy.