750 billion Euro, or 750,000,000,000 Euro – it’s an exciting and unprecedented amount of money that the EU’s recovery funds aim to provide over the coming years to accelerate recovery from the COVID-19 pandemic while supporting the EU's long-term priorities, including the target to become the first carbon neutral continent by 2050. Companies will likely have opportunities stemming from this investment, but the picture gets quite complex when it comes to the details on where, when, how and for whom this money will be available. To help you navigate this opportunity for your organization, one of our European market experts reviews 10 key points of the plan to unpack its complexities and shares some tips on how your organization can potentially benefit.
Fabien works as a Sustainability & Energy Efficiency Director in the EMEA region focusing on decarbonization journeys, integrated into our clients' sustainability & climate programs to help companies achieve their climate goals and spearhead the green transition.
NextGenerationEU is a €750 billion temporary recovery instrument that aims to repair the immediate economic and social damage in the EU brought about by the coronavirus pandemic. Its objective is to catalyze a sustainable transition to make Europe greener, more digital, more resilient and better fit for the current and forthcoming challenges. The recovery plan will be split into three pillars:
- Pillar 1 supports the immediate recovery of Member States
- Pillar 2 is designed to kick-start the economy and facilitate private investment
- Pillar 3 will address the lessons of the crisis with support for innovation in health and sustainability
The sum of €750 billion is mainly fueled by a new Recovery and Resilience Facility, with its financial centerpiece of €672.5 billion in loans and grants available to support reforms and investments by EU countries. To finance this facility, for the first time in history, the EU will borrow on the markets at more favorable rates than many Member States and redistribute the amounts. Additional existing funds for regional development and transition will fill out the budget to the €750 bn mark.
The European Commission unveiled its first proposal for the NextGenerationEU recovery plan in May 2020. This emergency package aims to jump-start Europe's recovery over the period between 2021-2024, particularly in the countries heavily hit by the COVID pandemic. Negotiations between the member took until February 12th, 2021, when the regulation finally came into force. The next steps are shown below. Submission of National Recovery & Resiliency Plans (NRRPs) will be the main intermediate step to channel money into the member states – their administrations are deep into the drafting process and a number of plans have already been submitted, with some final plans expected well before the April 30th deadline. Once these plans are approved, the money can be paid out to the member states, with ideally 70% of the funds available in 2021 and 2022, and 30% in 2023. However, given the situation to date, as European countries still struggling with 2nd or 3rd waves of COVID-crisis management, a slightly slower release is likely to happen.
Source: Business Europe, 2021
It’s worth noticing that for our clients, this timeline does not show the full picture, as the EU funds are sometimes allocated to fuel existing national programs, such as the France Relance program or the new German Federal Incentives for Efficient Buildings (BEG). Consequently, there is a good chance that there are already projects eligible for incentives today.
While the funds are split between all 27 member states, the proportion differs according to the damage countries inflicted by the pandemic. Spain and Italy have been the most severely hit and will therefore receive the largest shares of the funding with Spain close to €140 bn and Italy up to €180 bn in grants and loans, which represents a major share of their Gross Domestic Products (GDP). Some smaller countries like Greece, Romania, Hungary and Bulgaria will also have grants available representing more than 10% of their GDP and additional loans. Poland is another country with transition potential, with €24 bn grants available. For the largest economies, namely France and Germany, there are still significant grants of €39bn and €25bn accessible respectively. These large countries are not expected to take up the full available funding with additional loans, but rather to combine EU funds with their national recovery programs from existing budgets.
Per assessment of the EU, any national plan eligible for the funds must prioritize these overall objectives:
- Power up – frontload future-proofed clean technologies and accelerate the development and use of renewables
- Renovate – improve energy efficiency of public and private buildings; contribute to the doubling of the renovation rate and foster deep renovation by 2025
- Recharge and Refuel – Promote and accelerate the use of sustainable, accessible and smart transport systems, charging and refueling stations and extension of public transport
- Connect – Rapid rollout of broadband services to all regions and households, including fiber and 5G networks.
- Modernize – Digitize public administration and services, including judicial and healthcare systems
- Scale-up – Increase European industrial data cloud capacities and develop the most powerful, cutting-edge and sustainable processors
- Reskill and upskill – Adapt education systems to support digital skills and educational and vocational training for all ages
In addition to prioritized project types, the investment guidelines set minimum thresholds for green investments: 37% of national recovery plans is to be spent on climate change and 20% is to be spent on the digital transition. A “do no harm” principle that applies to all spending should prevent any funding from going to projects that would harm the environment (e.g. coal-fired power plants). In practice, there are still no real safeguards to ensure that recovery funds do not go to inefficient and polluting industries and many important decisions are left to member states. However, the EU insists on very clear targets, milestones and transparency to ensure the money is spent efficiently and in line with priorities.
Per design, the NextGenerationEU program is technology-agnostic and only a few technologies are explicitly mentioned, namely EV with large funding across national programs or 5G broadband technology. Others that are not called out by name are natural candidates to benefit from the funds. This applies to all technologies for clean energy production, such as PV, wind turbines, biogas, and the respective infrastructure to scale their use. Another innovative technology in focus is hydrogen. For example, the German NRRP plans to allocate 11% of the total budget to flagship projects, research and funding programs for industry use of renewable hydrogen and (as the major component) joined hydrogen projects within the framework of IPCEIs (‘Important Project of Common European Interest’) in collaboration with France. Last but not least, all technology to deliver decarbonization of buildings should benefit from large funds allocated to building renovation with the ‘Renovation Wave’.
As most NRRPs are still under development and the final landscape of incentive programs are still taking shape, there are some uncertainties especially when it comes to the participation of commercial and industrial (C&I) organizations. Business Europe, a European businesses association, estimated that around 30% of the total funds should in some form benefit C&I; either directly within incentives schemes or indirectly with the wide range of measures to kick-start the economy. Supporting well-functioning markets with strong small and medium-sized enterprises is another overarching priority of the EU, but recovery programs will not be limited to these organizations. On the contrary, countries like Spain are addressing large companies as beneficiaries of the funds, assuming they would have the resources to rapidly develop and execute projects within the very challenging timeframes. The need to spend fast is also the reason why some countries like France have started with funding of public building and infrastructure projects, relying on the existing framework and administration to handle the processing, while leveraging funds for C&I in the 2nd step. In any case, companies in Europe will need to assess programs on a country level to understand if and how your organization’s specific projects could benefit.
NextGenerationEU is part of the larger EU Green Deal, which is aiming to make Europe the first carbon neutral continent by 2050. The EU Green Deal package includes an almost complete overhaul of the related EU regulations including, among others, the Renewable Energy Directive, the Energy Efficiency Directive, the Emissions Trading Directive, the Effort Sharing Regulation, and the land use (LULUCF) directive. A new Climate Law is also on the path to legislation, including the legally binding target of net zero greenhouse gas emissions by 2050 and a strengthened intermediate target for 2030 to reduce greenhouse gas emissions by at least 55% compared to levels in 1990. Companies are likely to be faced with the strong pressure and need for speed to adopt the future regulation: there will simply be no time for long transition periods.
Prior to the pandemic and following economic turndown, many companies were already embarking on a path toward sustainable business transformation. Now, with the NextGenerationEU program, there are opportunities emerging for your company to use the crisis as a catalyst to accelerate your climate and sustainability programs.
To maximize the impact of stimulus funding and government incentives, it’s important to feed this activity into your goal-setting and benchmarking processes. Climate change—and the increasing need for resilience—will not be fixed by a one-time funding opportunity. A strategic approach to embedding potential stimulus funding into your carbon-reduction programs can enable access to solutions to tackle the climate crisis, speed progress toward your goals and build business resilience.