Innovation in Sweden: Cleantech

Innovation in Sweden: Cleantech

In 2016, Mundus began this series on Sweden’s innovation track record by looking at the latest EU Innovation Scorecard, which ranked Sweden as the leading innovative economy in the EU. Despite Sweden maintaining its top ranking, the Innovation Scorecard posed the question as to whether Sweden was getting a good result from its national investments in innovation, especially from universities. Subsequently, Mundus performed deep dives into the tech world, where the consensus of those we interviewed was that helpful government had been at best a marginal factor in the IT industries success. Our next story on digital health found practitioners repeating similar claims – they were succeeding on their own, not with the helping hand of government. In this final article on the cleantech industry we return to this theme. According to Sweden’s entrepreneurs, they attribute little value to government direct assistance. Fortunately, Mundus is happy to provide some balance to this view, by noting that we can draw on some good government publications to support our analysis.

Monthly Policy Review

What is cleantech?

Cleantech is a term that came from finance two decades ago. The Cleantech Group says “Originally thought of as a venture capital investment niche theme, cleantech is growing up – and now permeates all realms of the economy impacting industries as diverse as ICT, Healthcare, Food, Electronics, Chemicals and Retail. The term has been used interchangeably with ‘resource innovation’, ‘industrial efficiency’, ‘sustainable technology’ but all essentially have the same meaning – doing more with less while making money doing so. For a time it seemed like cleantech was associated almost exclusively with the energy realm (“renewable energy, energy efficiency”), but its true and wider meaning is now proliferating, increasingly linked to solving ever more prominent world challenges – such as clean water availability sustainable food sourcing land and air pollution and low carbon transportation.” Cleantech therefore seems to be a catch-all term for innovation across many fields. The EU’s Horizon 2020 growth and jobs strategy identified 6 societal challenges as being important.

  1. Health, demographic change and wellbeing;
  2. Challenges for European bioeconomy: Food security, sustainable agriculture, marine and maritime research;
  3. Secure, clean and efficient energy;
  4. Smart, green and integrated transport;
  5. Climate action, resource efficiency and raw materials.
  6. Secure societies: Protecting freedom and security of Europe and its citizens.

Bullets 2, 3, 4 & 5 would all fall under cleantech.

Cleantech 2.0

Sweden’s Innovation Strategy (introduced by the Reinfeldt government) cited these societal challenges and used them as support for its raison d’être; Sweden needed innovation in order to a) Meet global societal challenges b) Increase competitiveness and create jobs in a knowledge economy, and c) Deliver public services with increased efficiency. The strategic rationale for clean innovation is compelling, and would be accepted generally by most countries. What typically causes issues is how to incentivise this, given that much of the value goes to society, rather than business. But as this excellent 5 minute film shows, (https://youtu.be/TrF8yP4pQ7Y) Sweden’s cleantech success started over 50 years ago, with the realisation that Sweden had environmental problems, leading to the establishment of the world’s first Environmental Protection Agency (EPA, Naturvårdsverket). The government made companies responsible for their environmental impact, but also invested in research and provided incentives. According to the Swedish Agency for Economic and Regional Growth (Tillväxtverket), powers given to cities and regions created a governance model that encouraged innovative solutions, including district heating and a phenomenal 99% recycling rate of household waste. In the 1990s, carbon and energy taxes were introduced, encouraging the development of a biofuels industry, which is now Sweden’s largest energy source. Sweden has demonstrated that GDP growth can be pursued while simultaneously driving down greenhouse gas emissions. Business Sweden presents the current state of the industry as Cleantech 2.0, which implies that there was an earlier version.  Having invented the term, finance quickly tired of Cleantech 1.0, after losing billions. According to the Financial Times, globally VCs invested $40 billion in the sector over a decade, and possibly they will lose half of this capital. 

The Silicon Valley model of developing an idea and then flipping it to a buyer, or IPO, has failed. Cleantech does not yet produce the mega returns of health or app companies – at least it has not yet. Therefore, the industry needed to regroup, retool and await new funding sources. The result has been lower industry growth rates than expected a decade ago. However, this may finally be changing as Sweden and the world begin to ramp up focus on sustainability. Business Sweden says that there are between 300 – 900 new cleantech companies founded in Sweden every year, and the sector now comprises thousands of companies with annual turnover of SEK 220 billion.

The traditional Swedish action to support innovation is to invest in research. Business Sweden points to Sweden’s high investment in R&D per capita, particularly in the cleantech areas of materials science, power systems research (smart grids) and biofuels. The government has given resources to promote cleantech, e.g. a search function to identify which cleantech company is the best fit. The government is also making generous use of grants. There are a very wide range of programs supported by Vinnova, the government’s innovation agency, and the Swedish Energy Agency, which also supports innovation in energy. Increasingly, the budget process is being used to dedicate grants for innovation to reduce climate impacts, in an area, which the government identifies as strategic for both political and national interest reasons. A further indication of the priority, is the formation of the National Innovation Council, chaired by the Prime Minister, and comprised of four other ministers and ten members from the business- and research sectors. Recently, the CEO of Volvo and the President of KTH were appointed to the Council, which suggests that the government believes in the linkage between innovation, climate impact and industrial strategy, with the future of the automotive industry at stake. In fact, there is a great deal of evidence that demonstrates that the government sees cleantech as a ‘Category 1’ issue that goes beyond making political statements and a goal of being ‘the first fossil-fuel free welfare state’.  It is now an instrument of foreign policy, with recent agreements being announced with both China and Germany. Cleantech has also become a central part of the government’s budgetary process. In a press conference that went almost unnoticed by journalists and the public alike, Finance Minister Magdalena Andersson and Climate Minister Isabella Lövin announced a new mechanism to drive the uptake of biofuels. The consequence of this ‘fuel change’, as the government calls it, will be significantly lower taxation revenue from transport fuels. It was followed by further announcements with other measures that the government sees as tools that will drive down Sweden’s transport GHG emissions by 70 per cent by 2030.

How then does one reconcile the different viewpoints of many international observers and the Swedish government, which credit Sweden with major achievements in cleantech, with those of Swedish businesses, which feel that the government could be doing more to support them? This question is answered by the Cleantech Group, a news and analysis organisation, which presents a biannual report in collaboration with WWF and Tillväxtverket, ranking countries on their cleantech performance. In its latest (2014) report, Sweden came 4th, scoring well and topping the list for general innovation drivers. Sweden has “especially strong innovation inputs, entrepreneurial attitudes, above-average public R&D, and a relatively large number of cleantech organisations, resulting in high general and cleantech specific innovation drivers’ scores. The country has much evidence of emerging cleantech innovation, being home to a large proportion of high-impact cleantech start-ups. In commercialised cleantech, Sweden has high scores for renewable energy consumption, high cleantech revenues and a good density of publicly traded cleantech companies. Sweden demonstrates one of the largest gaps between ‘evidence of emerging cleantech innovation’ and ‘evidence of commercialised cleantech innovation,’ and so has improvement potential in scaling up efficiently. Sweden scores above the rest of Europe apart from Finland.” As the underlined section identifies, Sweden’s firms are lagging its policy settings. This may be because policy is evolving quicker than industry can follow, but it might equally represent problems with the policy formulation – for instance, is Sweden’s market too small to justify development?  Is the government investing in the wrong place and it needs to do more to assist firms? Petra Wadström, the entrepreneur behind Solvatten (information only available in the subscriber version the article), has a clear view. In her opinion, the government spends too much on research, which has a poor delivery of inventions that actually make it to market. This view is substantiated by analysis undertaken by think-tank Reforminstitutet. In its review of 100 of Sweden’s leading innovations, the institute found that only 20 per cent of these were derived from academic research. Half of Sweden’s inventions came from companies, and one third from private entrepreneurs, leading the instutute to conclude that “if Sweden is to remain an innovative economy, policy should focus on improving conditions for companies and individual inventors who want to recover their innovation. The potential is greater in industry than in academia and policies that put universities at the heart of the innovation process probably do not give the same result. A more general conclusion is that the Swedish innovation policy needs to be more evidence-based and less controlled by political rhetoric”.

Comment

Mundus believes that Swedes have successfully highlighted the issues that need to be reconciled. There is a balance between investing in basic research, and innovation driven by entrepreneurs who can understand market needs. We suspect that the government sympathises with this view, and is emphasising the need to create the conditions for businesses to thrive, such as links to big export markets in China and Germany, and the Innovation Council. We are aware of significant initiatives that are being attempted in Swedish cleantech, and believe that further successes can emerge. But they may not. That is the risk that the government is taking.

Note: This is a shortened version of the original. Footnotes and graphs are only available in the subscriber version of this article.

 

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Sean is responsible for Mundus’ strategy and commercial activities. He began his career in the oil industry Australia. After working internationally in commercial roles with BP in South Africa, the UK and Singapore he moved to Sweden with his family in 2009. He worked in business development and then as the Strategy and Growth Director for NASDAQ Commodities from 2009 to 2015. Sean holds an engineering degree from Adelaide University and an MBA from the Darden Business School at the University of Virginia. He blogs about energy and innovation at www.renovamus.com