© Fraunhofer ISI

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

© Fraunhofer ISI

Seite 2

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

© Fraunhofer ISI

Seite 3

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.

© Fraunhofer ISI

Seite 4

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.

© Fraunhofer ISI

Seite 5

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.

© Fraunhofer ISI

Seite 6

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 %

© Fraunhofer ISI

Seite 7

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

© Fraunhofer ISI

Seite 8

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.

© Fraunhofer ISI

Seite 9

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

© Fraunhofer ISI

Seite 10

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.

© Fraunhofer ISI

Seite 11

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

© Fraunhofer ISI

Seite 12

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.

© Fraunhofer ISI

Seite 13

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)

© Fraunhofer ISI

Seite 14

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

© Fraunhofer ISI

Seite 15

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)

© Fraunhofer ISI

Seite 16

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.

© Fraunhofer ISI

Seite 17

Thank you very much for your attention!

Information:Rainer.Walz@isi.fraunhofer.de