Europe Needs a Cleantech State Aid Overhaul — Starting with Production Incentives

The EU wants to lead the cleantech transition — for that, it needs to replace its traditional project-by-project State Aid system with automatic, bankable, output-based support. Only then will public money crowd in private investment, help scale newcomers, and lower production costs — all essential to global competitiveness.

The EU wants to lead the cleantech transition — for that it needs to replace its traditional project-by-project State Aid system with automatic, bankable, output-based support. Only then will public money crowd in private investment, help scale newcomers, and lower production costs — all essential to global competitiveness.

President von der Leyen’s flagship initiative, the Clean Industrial Deal, tasks Vice-President Ribera with modernising State Aid rules to better serve industrial policy. Cleantech is in sharp focus as EU manufacturers are squeezed by cheaper Chinese competitors and generous US subsidies under the Inflation Reduction Act (IRA). With tight public budgets, every euro must count — the priority should be to maximise private investment through smart public spending.

T&E’s report “State Aid 2.0” outlines how current frameworks like IPCEI, CEEAG, TCTF and now CISAF fall short. They mostly provide lump-sum aid for individual projects, following lengthy negotiations based on subjective criteria like the ‘funding gap’. This means companies don’t know in advance what aid they will get — making it ‘unbankable’ and unlikely to unlock private capital. A battery factory today can wade through five different instruments, each with separate rules. Crucially, lump-sum payments don’t lower marginal production costs — a key to global competitiveness.

Only large incumbents with legal teams and rich Member States with large administrative resources can navigate the system. Newcomers — startups and scale-ups — can’t and won’t. The result? The six countries that have never participated in an Important Project of Common European Interest (IPCEI – an aid category designed to support cross-border projects of strategic relevance for the EU) are all small.

Europe needs to flip the script.

If it wants to compete in clean tech, it needs smarter, not just more, money. That means enabling automatic, conditional support for production scale-up and localisation under the upcoming Clean Industrial Deal State Aid Framework (CISAF).

The case for output-based production aid

Unlike traditional subsidies, output-based aid ties support to actual production volumes. It pays for delivery, not promises, so taxpayers only reward success. It can scale with growth, sunset over time, and include “Made in EU” conditions — ensuring benefits flow to local industries, workers and consumers.

This is how the US IRA works. With simple production-based credits, it unlocked over $110 billion in private cleantech investment. Companies flocked because the support de-risked projects and offered predictability.

Ironically, the Commission already supports performance-based aid in other areas. For renewables, it mandates Contracts for Difference; for EV charging, it funds €20–30k per charger installed through CEF-AFIF. But in cleantech manufacturing — where it matters most — the Commission still plans to prohibit output-based aid and stick to the old, slow project-by-project system. This leads to delays, legal uncertainty and lost opportunities.

Fixing CISAF

As it stands, CISAF doesn’t include the one tool the EU needs most: performance-based production support tied to local manufacturing.

Done right, CISAF could become a fair and scalable industrial policy tool. It should include:

Per-unit production aid for final products (e.g. €25/kWh for battery cells) with caps per company and declining rates as companies scale and move down the learning curve.

Bonuses for local content and cohesion regions, to make aid trickle down into European supply chains and spread benefits EU-wide.

Aid contingent on European control. In recent years, the Commission has approved over €2 billion in aid for Asian battery makers, with €1.4 billion more pending for Chinese companies.

Transparent, predictable eligibility criteria, with conditions on environmental and social standards.

Invest where it matters

Production aid won’t just benefit the richest countries. Investment decisions depend on many factors — skills, permitting, infrastructure — not just subsidies. A €20/kWh battery incentive won’t overcome all structural barriers, but it can tilt the balance toward European production.

A recent Commission report shows that cleantech manufacturing capacity is already spread across Europe. With the right incentives, production aid can boost both upstream supply chains and downstream industries — especially in cohesion regions. And a well-designed system, open to all eligible firms, would finally let newcomers compete on fair terms.

To ensure geographic balance, EU-level funding must complement national programmes. The next EU budget is expected to include a new Competitiveness Fund. If aligned with reformed aid rules, this could help “Europeanise” industrial policy and avoid a fragmented subsidy race.

Time to deliver

Europe has the skills, innovation and political mandate to lead in cleantech. But unless it builds the right incentives, manufacturing of clean products will take place elsewhere.

The Commission must act. If CISAF is to be more than just another acronym, it must deliver what the current regime cannot: support scale-up of actual production, using European supply chains. Let’s make State Aid lean, clean — and European.

By Xavier Sol, Director, Sustainable Finance. Article from T&E.