The role of State Investment Banks in enabling low-carbon technological change

Ms Anna  Geddes, ETH, Switzerland

Prof Tobias Schmidt, ETH, Switzerland

Keywords: state investment banks, innovation, public finance, technological change, renewable energy, project finance

Renewable energy technologies (RETs) are considered essential to help mankind achieve its climate change goals [1]. But there is a significant ‘financing gap’ for the projects required and many are concerned that investments for the large-scale diffusion of RETs will not materialise [2-4]. Public support and utilities’ balance sheets are constrained and, given the necessary scale of investment, private finance is required [5-8]. Meanwhile, to become competitive in the long term, further innovation is needed [1].  In recognition of this issue, some governments have appointed State Investment Banks (SIBs) to accelerate the diffusion (and innovation) of RETs. For example the UK’s GIB was founded to foster a greener and more innovative economy by mobilising private finance into low carbon projects. Studies exist on why SIBs are being created and their role in the economy [9-11], but not regarding their impact on technological change. With this work we aim to answer the following questions: How and to what extent do State Investment Banks contribute to (or stall) technological change in the field of renewable energies?

In innovation systems, financial actors can be said to perform a ‘selection’ function i.e. when investors finance a RET project, they select which technologies/designs, and consequently which innovations, are deployed into the system [12, 13]. But investors still often perceive RETs as risky and more innovative projects are not financed, i.e. innovative technologies remain unselected. Given the important role of learning feedbacks (learning-by-doing and -using) for complex technologies such as RETs [14, 15], the selection function of financial actors can result in lower rates of innovation and the lockout of (presently) more risky technologies. Changing the selection function of financial actors in the innovation system is therefore key to addressing climate change.

Our analysis is based on an evolutionary perspective of innovation, where knowledge feedbacks within innovation systems are assumed to be essential for the improvement of technologies [16-18]. In evolutionary innovation, studies mostly assume the selection function is performed by product/service markets. However, financial markets also perform a selection function [12] and for technologies requiring project finance, financial actors take that role. This is mostly overlooked in evolutionary studies on technological change, where only recently have studies begun to analyse the role of finance [9-11, 19]. We aim to address this research gap, improving the theoretical understanding of the role of project finance in technological change.

We focus on 3 countries with SIBs: UK, Australia and Germany. We perform interviews with RET project developers (to reduce bias we include those who have and haven’t engaged with SIBs), equity investors, bankers and industry experts. We define innovation to include technical and organisational aspects. If something is considered new to a country’s actors, then it is considered innovative. Data was gathered from literature and 22 (at the time of submission) semi-structured interviews held from 2015 to 2016.

Findings show that SIBs can impact upon technological change over various dimensions e.g. debt, equity, deal structure, etc. For instance, by arranging structurally complex deals, SIBs may enable greater diffusion (and innovation) of energy efficiency projects. However, they can also introduce bias, by providing debt-only instruments, which may constrain the deployment of smaller scale technologies that require equity assistance. Overall our current findings lead to the conclusion that SIBs can help address the selection bias of private sector financiers. However, this is only if a clear mandate for innovation is implemented by the SIB or if innovative deal structures are adopted by the private sector. Results from our UK and German interviews will be finalised May 2016.