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Opportunities for financing industrial clusters

October 12, 2022 5-MINUTE READ

RESEARCH REPORT

In brief

  • Accenture outlines financing considerations and opportunities for U.S. industrial clusters to accelerate the path to industrial decarbonization.
  • Industrial emissions account for almost a quarter of emissions in the United States and are some of the most difficult to abate.
  • The creation of industrial clusters, or hubs, is one approach gaining traction around to world to abate industrial emissions.
  • Three key steps can help determine which creative financing mechanisms for industrial clusters could have the greatest impact.

All eyes on industrial decarbonization

Industrial emissions account for almost a quarter of emissions in the United States. This makes them the third-largest contributor to the country’s greenhouse gas (GHG) emissions behind the transportation and electric power sectors. They also represent some of the most difficult emissions to abate.

One approach gaining traction around the world is the creation of industrial clusters or hubs—where industries that share a nearby location collaborate to meet decarbonization goals. A report by Accenture, in collaboration with the World Economic Forum, identified four key enablers to support industrial clusters’ transition toward net zero. Those enablers are policy, partnership, technology and financing. The fourth, financing, will be critical to scaling success.

In the United States, the Bipartisan Infrastructure Law (BIL) and the Inflation Reduction Act (IRA) provide an opportunity to apply federal dollars to stimulate industrial decarbonization. However, while historic levels of funding are being made available, more will be needed to tackle the scale of the challenge. As a result, these government funds would need to be strategically leveraged to de-risk the market and unlock additional private sector capital required to bridge the gap.

This report outlines key financing considerations and opportunities for industrial clusters as public and private sectors in the United States collaborate to accelerate the path to industrial decarbonization.

Globally, more than US$100 trillion will be required to decarbonize society by 2050. In the United States, an estimated $2.5 trillion will be needed by 2030 to be on trend for net zero by 2050.

Financing industrial clusters: Three key steps

While public clean energy financing structures have often followed a 50:50 cost-share through grant programs, creative financing mechanisms across the value chain should be considered to make the most of available federal dollars.

$164B

Potential investment for industrial clusters from the Infrastructure Investment & Jobs Act (IIJA).

$500M

Funds available from The Energy Act 2020 to decarbonize hard-to-abate industries.

$40B

Infrastructure loans available from the U.S. Department of Energy Loans Program.

$369B

Funding targeted to climate change and energy security in the Inflation Reduction Act 2022.

We see three key steps to consider in determining which creative financing mechanisms will have the greatest impact in accelerating industrial decarbonization:

1. Take a whole systems approach

Take a whole systems approach to understand the unique challenges and needs across the value chain.

2. Explore a range of financing mechanisms

This action acts to target specific challenges, de-risk the market and unlock additional capital.

3. Stack creative mechanisms (existing and new)

Stack mechanisms (existing and new) to enable decarbonization of not just one project, but industry at large.

Lessons learned from UK offshore wind

The development of the offshore wind industry in Europe offers an interesting example, especially in the United Kingdom. Public investment in 2010 made up about 70% of funding for the UK’s offshore wind fleet. Currently, it is at about 25% and trending toward 0%.

Renewable Obligation Certifications (ROCs) and, later, auction-based Contracts for Difference (CfD) were the foundation of this development, although their characteristics have changed meaningfully over time as technology scaled and private investors engaged. To catalyze this market, it was critical that public financiers identified the target transition point to private investment from the start and deployed suitable financing mechanisms at the appropriate time.

Summary of key lessons learned from the evolution of the UK offshore wind market:

  1. Plan funding to attract the most relevant market players and incentivize the appropriate improvement behavior.
  2. Plan to draw down public investment needs by inciting competition.
  3. Work on variations for retaining investor appetite and innovation while incentivizing investments in the appropriate place, from a geographical and value chain perspective.

Partnering for the path forward

The BIL and IRA provide an opportunity to catalyze the US journey, but the ability to tap into creative financing mechanisms will be a critical determinant to how it plays out.

Ongoing partnership between government and industry is needed to truly define the business models and market enablers required for continued development and scale. Open channels of communication are critical, for government to understand current and future challenges and put forward supportive policies, and for industry to communicate their ongoing needs.

As various clusters or hubs form, they should jointly define an optimal financing plan to support their vision which taps into public funds and existing financing mechanisms, but also identifies net-new mechanisms that would strengthen the business models they are shaping.

The partnership between the UK government and industry is one prime example. UK policy has been centered on creating an industrial decarbonization strategy as a whole—not just enabling project after project. This has required continued collaboration with industry to put in place a roadmap of emissions reduction and related government support programs to get clusters off the ground.

And they have continued this support by actively partnering with the private sector to get input on the business and financial models to support the scale-up of emerging technologies critical to industrial decarbonization, including hydrogen and carbon capture and storage. It is this partnership between industry and government that has created the appropriate conditions for increased market confidence and appetite for investment—making the most of the limited public funding available to create net-new markets.

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