Innovation Fund: financial planning and determination of relevant costs

+++ Innovation Fund blog series (part 6) +++ A key component of financial planning in the Innovation Fund is determining the so-called relevant costs. The relevant costs are additional costs that arise when the new, innovative technology is used to reduce or avoid greenhouse gas emissions. These costs include capital expenditures (CAPEX), i.e. investment costs in the production plant or production site, and operating expenditures (OPEX), i.e. operating expenses that are incurred when the product is manufactured.

Tools and guidelines for the relevant costs

The EU Innovation Fund programme supports climate-friendly projects with up to 60% of the relevant costs. A single project can be financed with up to 40 million euros. This is another reason why strict cost calculation guidelines apply.

The relevant costs must be calculated in a calculation tool specified by the project organiser (Financial Information File, FIF) and must comply with the guidelines (Guidance on the Relevant Costs Methodology).

In this context, a detailed financial model must be submitted which supports the assumptions and planning data made on the basis of internal calculations and documentation. Both the calculation of the relevant costs and the detailed financial model are reviewed again by an independent auditor if the project is approved.

Calculating the relevant costs: What should you pay attention to?

There are some important points to bear in mind when calculating the relevant costs. For example, only costs that are in line with the definition of relevant costs by the project sponsor may be taken into account. These include investment costs associated with the development, construction and commissioning of the project, such as construction costs, construction of the site infrastructure, development costs for production, costs for intangible assets and planning costs for unforeseeable events.

Once business operations have commenced, operating costs from ongoing operations can also be recognised. These include costs for the operation and maintenance of the project, including personnel costs, energy costs, leasing costs and research and development costs in order to keep the innovation competitive. In this context, it is particularly important to note that research and development costs for the product itself are not included in the relevant costs.

Further specifications for a realistic cost calculation

For a realistic calculation of the subsidy amount, more information should be added: 

The revenues generated by the sale of the innovative products is also of overriding importance. These are deducted from the relevant costs in the first ten years and funding is only possible if the sales revenue does not exceed the relevant costs.

In order to prevent the funding from being inflated by low sales and high costs, the project organiser also takes into account profitability indicators such as the net present value or the internal rate of return of the project. If these ratios are too low (or too high), this can have a negative impact on the project sponsor's assessment. The calculation of the weighted average cost of capital (WACC) also regularly poses problems for applicants.

Last but not least, the funding amount in relation to the amount of CO₂ saved also plays a significant role. The so-called cost efficiency ratio indicates how many tonnes of CO₂ are saved per euro of funding. This makes it possible to compare different projects and is a key assessment criterion in the Innovation Fund.

Do you need support for your application?

In recent years, we have gained extensive experience with the EU Innovation Fund funding programme. If you would like to find out more, please contact EurA's EU funding team. We will be happy to help you!

 Text: Jan Bernlöhr