The EU Innovation Fund (Fund) has proven to be a successful model to push European climate innovation forward. It is the largest funding tool of the EU for carbon capture and utilization (CCU), carbon capture and storage (CCS), innovative renewable energy generation technologies and energy storage technologies. The next general grant call for funding proposals is currently being prepared (IF25), with an expected call letter in the end of 2025. A pilot auction for the industrial heat sector and the third round of the Hydrogen Auction are also targeted for the end of 2025.[1] This article aims to explain how the Fund works and how foreign investors can benefit from the EU's drive for climate neutrality by 2050.
The Fund was launched in 2020 and is executed by the European Climate, Infrastructure and Environment Agency (CINEA). It is fully financed by the EU Emissions Trading System (ETS). From 2020 to 2030 revenue procured from the auctioning of 530 million ETS allowances have been allocated towards the Fund, resulting in an estimated total funding pool of 40 billion EUR (based on current carbon price of 75 EUR/tCO2). 12 billion EUR have already been granted to 214 projects (another 4.6 billion EUR are earmarked within running award procedures), still leaving future projects with a substantial funding capacity of 23.4 billion EUR until 2030. Funding per project averages 57 million EUR.[2] While Fund projects are locally bound to EEA state territory, project participation is open to non-EU entities. Currently only 10 out 472 participants are located outside of the EEA: five from the US, two from South Africa, two from Australia and one from Canada.
The majority of project selections are structured around a yearly application process, initiated by multiple grant calls for proposals. Nine calls have been completed since 2020. The calls cover a generalized topic field in accordance with current EU policy directions. For the latest calls in 2024 these were "Net Zero Technologies" offering 2.4 billion EUR in grants and "EEV Batteries" covering 1 billion EUR. The "Net Zero Technologies" call was broken down into 5 subcategories: Three general decarbonization topics differentiated by project size: large-scale (CAPEX above €100 million), medium-scale (CAPEX between €20 million and €100 million) and small-scale (CAPEX between €2.5 million and €20 million), a clean-tech manufacturing topic (manufacturing equipment and components for renewable energy, energy storage, heat pumps and hydrogen production) and pilot project topic for highly innovative technologies.
Applicants first undergo a general financial and operational capacity check. Specific projects are then selected through a scoring system by an independent group of outside experts based on the following award criteria: degree of innovation, greenhouse gas-avoidance potential, project maturity (technical, financial, operational), cost-efficiency and replicability.[3]
Recently the calls have emphasized “supply-chain resilience and strategic autonomy” as a goal for funding projects, especially in regard to critical raw materials.[4] As of 2024 "Contribution to Europe's industrial leadership and competitiveness" was introduced as an explicit assessment factor, making up 7 % of awarded points in the general decarbonization topic and 9 % within the clean-tech-manufacturing topic. [5]
Resilience related requirements can also be found in the new competitive bidding mechanism of the Fund. This funding format was introduced in 2023 and has been focused on the production of renewable hydrogen. The 2024 Hydrogen Auction and the current draft of Terms and Conditions for the 2025 Hydrogen Auction for example both include explicit caps on the amount of project electrolysers originating from China.[6]
A Grant Agreement (GA)[7] sets the framework for the funding and its terms and conditions, in particular concerning deliverables, reporting and payments. The funding awarded through the grant calls is provided through a fixed lump sum grant. Up to 60 % of calculated project costs can be reimbursed. Interim payments for contributions to the project can only be requested upon completion of predetermined work stages or triggering of milestones set out in the GA. The eligibility of costs and contributions is based purely upon the achievements of results and therefore no cost reporting is necessary. Parties to the GA may keep any grant surplus, but bear the risks of overrunning costs, since the lump sum is not increased.
Up to 40 % of the maximum grant amount can be paid out until financial close, while the remaining amount of at least 60 % is reserved for the reporting periods after financial close; at least 10 % is reserved for a three-year period after entry into operation. Financial close represents the moment in the project cycle where all the financing agreements and permits have been signed and all the required conditions met. The maximum grant amount will only be paid out, if over the entire project course duration, the project reaches at least 75% of its greenhouse gas emissions reduction target.
The most relevant options for project participation are the roles of beneficiary, affiliated entity and subcontractor. The participation forms correspond to the level of project involvement and legal liability towards the granting authority.
Beneficiary
Beneficiaries are the only participants who sign the GA. They are jointly liable for the technical implementation of the project and individually financially liable for their own costs, as for the tasks performed by their subcontractors and affiliated entities. A single beneficiary acts as contact point with the CINEA, so called Coordinator. They submit the deliverables and reports triggering payments in the system. It is mandatory for multiple beneficiaries to a grant to conclude a consortium agreement. Payments are made only to the coordinators bank account and it is an internal matter of the consortium how the payments are then distributed to each beneficiary.
Affiliated Entities
Affiliated Entities do not become party to the GA but are in many ways treated like beneficiaries. Affiliated Entities must have a permanent legal or capital link to the beneficiary, which is neither limited to the action nor established for the sole purpose of its implementation (see Art. 190 (1) (b) Financial Regulation 2024/2509)[8].
Affiliated entities must fulfil the same conditions for participation and funding as the beneficiaries. They can charge lump sum contributions to the project under same conditions and must implement certain project tasks attributed to them in the GA. The work for these tasks is carried out under their full and direct control, but the beneficiary remains responsible toward the granting authority for the work carried out by them and must ensure that all their obligations under the GA also apply to the affiliated entity. The granting authority may require joint and several liability of an affiliated entity, if the financial capacity of a beneficiary is weak and the beneficiary mainly coordinates the work of its affiliated entity.
Subcontractors
Subcontractors also do not become party to the GA. They preform project tasks attributed to them in the GA similarly to affiliated entities but do not charge costs to the grant. The GA must specify which actions tasks will be subcontracted and the estimated subcontracting amounts but does not require naming of a specific subcontractor. The subcontractor is paid by the beneficiary in exchange for its work and the beneficiary remains fully responsible towards the granting authority for tasks performed by its subcontractors and must ensure that their contractual obligations also apply to the subcontractor. The beneficiary must award the subcontracts based on best value for money and absence of conflict of interest. The eligible cost covered by the grant is the price of the subcontractor charged to the beneficiary, containing a profit margin directly for the subcontractor.
The legal body surrounding the Fund applies to all project participants, including non-EU participants. The regulatory framework for the Fund can be found in the EU Financial Regulation (FR) 2024/2509, which sets out common rules for budget implementation through award procedure under the direct management of a commission agency like the CINEA. Foreign entities within the award procedure must make standard declarations regarding a common list of exclusion criteria found in the Financial Regulations.
When participating in projects supported by the Fund, foreign investors must take into consideration the Foreign Subsidies Regulation 2022/2560 (FSR)[9]. Whereas the legal body governing the Fund does not foresee the application of the FSR in the award procedure, Art 143 (1) (e) Financial Regulation states that the addressee of a decision under the FSR rules, prohibiting the award of a contract for having received foreign subsidies distorting the internal market shall be rejected from an award procedure.
Art. 1 FSR clarifies that distortions created by foreign subsides can arise with respect to any economic activity, thus including the realization of grant projects in the EU. To date, there is no precedent indicating that the Commission would generally treat a foreign investor participating in a Fund award procedure and having received foreign subsidies in the same way as a subsidized foreign undertaking in a tender (Art. 5 (1) (e) FSR) within a procurement procedure.
However, for the newer Fund programs that use auction and bidding formats, more closely resembling a procurement process, bidders must provide information on foreign subsidies beforehand, and, in case extraordinarily low bids are received, an investigation under the FSR can be initiated ex officio by the Commission.[10]
Dr. Christian von Wistinghausen
Johannes Supp
[1] Calls for proposals - European Commission
[2] Innovation Fund Project Portfolio - Innovation Fund - Portfolio of signed projects | Arbeitsblatt - Qlik Sense
[3] Example of award criteria point system for the 2024 Large scale project call, Page 19; Call document for the call "Innovation Fund call 2024 Net Zero Technologies"
[4] call-fiche_innovfund-2023-nzt_en.pdf, Page 9, 11.
[5] Call document for the call "Innovation Fund call 2024 Net Zero Technologies" Page 25.
[6] IF25 Hydrogen Auction, Draft Terms and Conditions; ee3b468a-ee39-4748-b3be-5ce8f0fd4652_en 2.1 General Auction design elements, 1.14.
[7] Model Grant Agreement for all Innovation Fund Projects till 2027, non-negotiable and applies as is;ls-mga_innovfund_v1.1-01102023_en.pdf
[8] EU Financial Regulation, Regulation - EU, Euratom - 2024/2509 - EN - EUR-Lex
[9] Foreign Subsidies Regulation EU 2022/2560, EUR-Lex - 02022R2560-20221223 - EN - EUR-Lex
[10] Questions and Answers, Innovation Fund 2024 Auction, Question 16, Page 6,7fc59da6-15a1-46a1-a015-fa9645789601_en
