Designing Grants for First-of-a-Kind Cleantech
The EU’s Cleantech Toolbox #1: The Innovation Fund
The Innovation Fund is the EU’s main programme for helping new clean technologies reach their first full-scale plant, and one of the largest of its kind in the world. The proposed revision to the ETS1 Directive, published in July 2026 and currently under debate, sets out how the Fund could change in the 2030s: a smaller fund, with grants focused on early-stage, high-risk technologies, and auctions and other financial instruments for scale-up and manufacturing. It also gives the Commission almost complete freedom to redesign how the Fund awards and manages its grants.
This paper examines how the Commission should use that freedom to design better grants for breakthrough cleantech projects.
The Innovation Fund 2.0
Bringing new clean technologies to market is risky and capital-intensive. A firm proving a new technology in a market it would disrupt may struggle to build a business case that attracts private investment, which is why the demonstration stage depends on public money.
From 2031, the Innovation Fund 2.0 would have around €30 billion over ten years and would be directed at early-stage, high-risk technologies. Scale-up and roll-out in energy-intensive industries would move to the new Industrial Decarbonisation Bank. The revision removes most of the constraints that have shaped the Fund’s grant calls to date, leaving their design largely up to the Commission.
What a demonstration instrument needs
The literature and experience from other countries point to two lessons for funding first-of-a-kind plants.
First, public funders should back projects mainly for their potential to advance the technology, with commercial prospects as a secondary consideration. A study of 511 demonstration projects since the 1940s found that over a third were cancelled. A programme can still succeed if its portfolio as a whole moves the technology forward.
Second, funds should be paid out in stages, with each stage used to decide whether support continues. The US Office of Clean Energy Demonstrations built go/no-go decisions into its awards, and Japan’s Green Innovation Fund holds an annual expert review of each project. The EU has started to trial this approach in Horizon Europe.
Where the current design falls short
The Innovation Fund falls short on both counts.
It screens out the riskiest, most innovative projects. Applicants are assessed against each criterion in turn and are eliminated as soon as they fail one. Projects that cannot yet show a credible path to private investment fail at the project maturity stage, and the most novel technologies are rarely able to show one. The Commission’s own evaluation finds this is the most common reason applications fail. Close-to-market projects, on the other hand, can still score well on innovation. A breakthrough project that would score highly overall may never reach the final ranking.
Once a grant is signed, the Commission has few ways to act if a project stalls. The Fund already pays grants in instalments, but these work as a payment schedule, with no decision on whether support should continue. Missed financial close deadlines are usually extended, and of the 20 projects terminated by mid-2025, only three were terminated on CINEA’s (the EU agency which manages the Fund) initiative. Projects with little prospect of progress can hold onto their funding for years, when the money could be used to back new, more promising applicants.
What should change
This paper proposes two changes.
Change how projects are assessed and selected. Breakthrough technologies should not be ruled out because investors are not yet on board. Incremental, business model and system-integration innovation should be scored lower on innovation than genuine breakthroughs. The Commission should state clearly that a high-risk mandate means some projects will fail, and judge success by progress in each technology across the portfolio.
Build clear milestones into every grant, and give the Commission the power to act on them early. Two should be mandatory: an early check on whether the technology is working, and a check on whether the project can still secure investment. At each, the Commission should be able to continue funding, help the project find other EU support, or end the grant and reuse the money. When a project is terminated, the knowledge it generated should be shared, so that the learning the grant paid for is kept.
Conclusion
Neither change needs new primary legislation or a bigger fund, though CINEA will need more capacity. The Commission can make both through the rules for its next calls and its standard grant contract, as long as the co-legislators keep the flexibility the ETS revision proposal would give the Innovation Fund.
With a smaller budget and a high-risk mandate, the Innovation Fund 2.0 cannot afford to fund projects that would have found private investors anyway, or to leave stalled projects holding money for years. These changes would let it back more ambitious technologies, with potentially large benefits for Europe’s decarbonisation and competitiveness, and act quickly when they do not work out.
