The Innovation Fund has a growing pipeline of stuck projects

The Innovation Fund is Europe’s flagship programme for bringing breakthrough cleantech to market, but a growing share of its grant portfolio is stuck before financial close. In this blog, Ciarán Humphreys looks at why, and argues that the proposed ETS revision is a chance to redesign the grants for the breakthrough projects they suit best – and transform Europe’s ambition to drive climate innovation into projects on the ground. 

Established in 2019 with its first calls launching in 2020, the Innovation Fund is Europe’s leading programme to support demonstration and scale-up of the cleantech necessary for decarbonisation. With around €40 billion for 2020-2030, it is one of the largest of its kind globally. 

Innovation in clean technologies remains crucial if Europe is to reach a both fully decarbonised and more competitive economy. But bringing those solutions to market is risky and capital-intensive. A firm proving an unprecedented technology at scale struggles to build a business case that attracts private investment. Therefore, the demonstration stage depends on the public purse. 

In the Innovation Fund, the bulk of support committed to date has been in the form of grants – the “regular grants” – rather than the more recently established fixed-premium contracts auctioned under the Hydrogen Bank and Heat Auction. 

The grant portfolio is coming under serious scrutiny in 2026. In the spring of this year, the European Court of Auditors published a report assessing the Fund’s performance, with striking headline findings. By mid-2025, the Fund had awarded €12.3 billion in grants across 228 selected projects. Of that, €331.8 million had been paid out – 2.7%. 

The headline figures don’t by themselves tell you whether this is a problem. Most of the pipeline sits before financial close, and for recent additions that’s unremarkable – reaching a final investment decision takes time.

However, there are other signs of a portfolio in distress. According to the Commission’s own evaluation, 40% of projects have reported delays against the financial close date they set themselves, and some awarded in 2020 and 2021 are now past their four-year deadline for financial close. Terminations rose from eleven at the end of 2024 to twenty-eight a year later, and twenty-four of the twenty-eight never reached financial close. Many projects in the portfolio are struggling to build a convincing business case.

Why are so many projects struggling to become bankable? In its response to the Court of Auditors, the Commission points to an “exceptional and challenging market environment since 2020” – a credible explanation, with rising interest rates and import competition jeopardising cleantech investment more broadly. 

Yet market conditions are not the whole story. The design of the grants may also play a part, in three ways :

First, the Fund is asked to back a very broad range of projects. The ETS Directive gives it a mandate covering not just innovation but also “scaling up” and “broad roll-out”, so first-of-a-kind demonstrators compete in the same calls as near-commercial projects. Assessing such different projects side by side pushes selection towards what they share, chiefly the prospect of reaching financial close through offtake, supply contracts and private capital. The result is a portfolio in which many projects face commercial risk at least as much as technology risk. 

Second, a fixed capital grant is not always well suited to commercial risk. Grants are strongest where technology risk dominates and private finance would not price the project at all. Where the main barrier is commercial, a grant sized at award only helps if the funding gap stays roughly the same size. For many projects it has not: promoters cite offtake difficulties and rising capital and operating costs as barriers to financial close. When the gap widens, a fixed grant covers less of it and does less to reassure investors. 

Third, once a project stalls, little in the grant’s design forces a decision on whether it should continue. Financial close within four years is a firm deadline, but it is a long one, and it is often extended case-by-case: a delay is usually easy to justify in a market the Commission itself calls “exceptionally challenging”. A live grant costs the promoter nothing to hold, so both sides have reason to wait. The result is a pipeline of projects clustered before financial close. The Commission expects a wave of final investment decisions in 2028, but that expectation rests on agreed financial close dates, which have already slipped across the portfolio. 

The Commission is reassessing the Fund through the proposed ETS revision. From 2031, the Innovation Fund 2.0 would shrink to 200 million allowances, compared to over 500 million currently – although only a cut of €10 billion in euro value to €30 billion, based on the Commission’s working carbon price of €150/t over the next decade. Its (non-binding) recitals point it at early-stage, high-risk technologies, with scale-up and roll-out in energy-intensive industries moving to the new Industrial Decarbonisation Bank. The legal text, however, would keep its scope broad: cleantech manufacturing remains in, and support can take any form under the Financial Regulation. Unless the calls themselves change, the mismatch described above could carry straight into the new Fund. 

Meanwhile, the Fund is already moving beyond grants for projects where commercial risk dominates. The Hydrogen Bank and Heat Auction pay fixed premia on output. In June 2026 the Commission launched the Battery Booster Facility: up to €1.5 billion in interest-free loans for the capital-intensive ramp-up of battery cell manufacturing, where debt serviced by an operating plant is a more natural fit than an upfront grant. 

These new tools are, however, sitting alongside the regular grants, which still carry most of the Fund’s money and are where the stuck pipeline sits. Here the revision opens real room for change. Article 10cb – the “Innovation Fund 2.0” provision – would remove the legal language mandating a fixed funding rate, the link between disbursement and verified emissions avoidance, and the cap on how much one project can receive, leaving a future redesign to a delegated act. 

Grants remain the right tool for first-of-a-kind projects that no investor can yet price. The task is to design them for that role. Our forthcoming paper, coming in October, sets out what a grant designed for breakthrough cleantech would look like, and what the Commission can change in how it assesses and supports projects. It will be the first in I4CE’s Cleantech Toolbox series, releasing just as the EU reimagines its cleantech financing arsenal. The task ahead is to better target tools at the projects they can truly benefit, and to build a more coherent path to scale out of today’s fragmented landscape.