Investments in innovative “blue sky” companies tell us where the bets are being placed on the energy sector’s future. Such investments leaped in 2016, mostly directed at clean energy technology. This analysis by Simon Bennett at the IEA usefully includes a long list of firms and their investments. Digital sensors, batteries, electric vehicles and smart algorithms are among the main recipients this year. Other fascinating categories include low-carbon concrete, virtual power plants, solar leasing, waste-to-biofuel, biogas digesters, and artificial intelligence. Importantly, it’s not just energy companies doing the investing. Transport, ICT, venture capital (VC) firms and others are joining in, blurring sector boundaries. And it’s not just North America getting the investments. It’s now going to China and Europe too. But VC activity – the bluest of the blue sky thinking – is still much less than government or private R&D, and capital-intensive categories are underserved. Bennett concludes we would do well to strengthen the interface between these key players.
Among the many takeaways from the UN Climate Action Summit in September was the need for capital to be reallocated to clean energy solutions around the world – The Economist talks of the Climate Capitalists who see the golden lining in the climate cloud.
These investors can play a crucial role in bridging the gap between lab and market, for example via venture capital (VC) funding that enables entrepreneurs to commercialise their first low-carbon products and hone their business models. Among the companies that have had a boost from venture funding, some are reshaping the energy landscape. Tesla has been at the vanguard of creating today’s USD 80 billion market for electric cars. BBOX and its peers have turned off-grid renewables into a highly competitive sector. Risk-taking capital like VC is an essential complement to government and corporate research dollars.
Record investment in energy technology start-ups
But how much of this investment is actually happening? World Energy Investment 2019 has already looked at companies that are allocating revenue to investments in energy technology start-ups. Now that we have added the results for the first half of 2019 to our improved and updated database of investors, we see that companies have already invested a record level in energy technology start-ups in 2019, more than in any year since the “cleantech boom” from 2005 to 2012. Some of this is Corporate Venture Capital (CVC), which is the subset of early-stage VC activity that comes directly from large companies in related sectors, and not from dedicated VC funds or financiers. Some of it is later-stage investing, such as corporate-led private equity or acquisitions.
Investors are not just energy companies
Importantly, these investments in energy technology start-ups are not just coming from energy companies. More money is flowing from corporate investors from the transport and information and communication technology (ICT) sectors in particular.
The growing presence of these firms in the development of energy technologies reflects a blurring of the boundaries between “traditional” and “non-traditional” energy companies, largely driven by the types of new technologies that are expected to shape our energy future. Digital sensors, batteries, electric vehicles and smart algorithms are among the main recipients of the more than USD 4 billion of deals in 2019. This is more than all of 2018 and nearly three times more than the average over 2012-15, before the current uptick began.
Corporate investment: low-risk knowledge acquisition
Companies inside and outside the energy sector are increasingly using corporate venture capital investments as part of a flexible and more open energy innovation strategy. As we’ve noted previously, there are several reasons large established companies provide capital to early-stage technology companies.
For example, the purpose of an investment might be to learn about a technology, acquire human capital, or build a relationship with the owner of the technology. This approach can cost less and involve less risk than developing a technology in-house, especially if the technology landscape is uncertain, as it is today in many parts of the energy system. This approach is often used with technologies that are outside the core competence of the corporate investor but that could potentially add significant value to existing businesses.
However, the most recent data reveals that the earliest, and riskiest stages of corporate venture capital represent a declining share of the total deal value. In fact, Seed, Series A and Series B funding was just 10% of total corporate spending in 2019, with the rest made up of growth equity, late-stage equity and even buy-outs.
Examples of these later stage deals include: Chevron and BHP’s investment in Carbon Engineering, an atmospheric CO2 removal firm; Johnson Controls’ investment in Carbon Lighthouse, a smart energy efficiency service; Suncor’s investment in Enerkem, a waste-to-biofuel company; VW, Siemens, Vestas and Vattenfall’s investments in Northvolt, a battery producer; Hyundai, Kia and Porsche’s investments in Rimac Automobili, an electric sports car company; Ford and Amazon’s investment in Rivian, a maker of electric vehicles; Daimler and Amperex’s investments in Sila Nanotechnologies, a battery materials company; and BP’s investment in Solidia, a low-carbon concrete developer.
In addition, there is evidence that major energy companies are building capacity in new areas not only by taking stakes in innovative firms but also, increasingly, by acquiring them. In 2019, Shell acquired virtual power plant, home battery and electric vehicle charging companies. Others, like Centrica, continue to build portfolios of consumer-facing companies with software expertise.
…but energy firms are taking early-stage investment risks
While corporate entities are investing mostly in later-stage deals overall, traditional energy companies are playing a larger role in riskier early-stage CVC deals. Roughly half of CVC activity for energy start-ups in 2019 has come from the oil and gas, utilities and electricity equipment sectors.
Examples of these earlier stage deals include: BP’s investment in Belmont Technology, an artificial intelligence provider for oil and gas exploration; Comcast’s investment in Dandelion Energy, a geothermal provider; Eni’s investment in Form Energy, a long-duration electricity storage developer; Total and Equinor’s investment in Level10 Energy, a renewables marketplace; NTT Docomo and Statkraft’s investment in Metron Labs, an energy analytics platform; APICORP and Equinor’s investment in Yellow Door energy, a solar leasing firm; Iberdrola’s investment in Wallbox, a smart electric car charger; and Tepco’s investment in Zenobe Energy, an energy storage consultant.
Rising VC activity
Corporate activity in energy venture investing is taking place against the backdrop of rising energy VC activity in general. At USD 2 billion, more money went into early-stage venture capital deals for energy technology companies in the first half of 2019 than the first six months of any previous year, except 2018.
While the growth in energy VC activity in recent years has been driven by transport deals, non-transport deals have made up more than half of the deal value in 2019 so far. This may indicate a rebalancing between sectors after a flurry of recent activity around electric vehicles in particular, but it remains too early to say. Some of the major recipients of early-stage VC funding in 2019 include: Hozon Automobile and Enovate Motors, Chinese developers of performance electric cars; Commonwealth Fusion, a lower-cost nuclear fusion system designer; CalBio, producers of new biogas digesters; and Faraday Grid, an inventor of novel power grid transformers.
Fewer but bigger investments
There are two trends behind these numbers that reveal a changing sector.
First, the growing deal value represents fewer, larger deals. The number of VC deals for energy start-ups is not rising. Yet, even excluding all outlier deals of more than USD 50 million, the average deal size in the first half of 2019 was higher than for any year since 2012.
Investments are not just in North America
Second, the geographical rebalancing of the energy VC market continues. As recently as 2013, 80% of the money went to energy start-ups in North America. Yet over the last three years, Chinese companies have represented over 50% of deal value as well as most very large deals, some of which have been as large as USD 1 billion.
In the first half of 2019, there have been fewer deals in China, but Europe is on track to claim its highest share of the market yet. If we exclude deals over USD 50 million, one-third of the 2019 deal value went to companies in Europe, also representing one third of the deals by number.
Overall, VC and corporate investment in energy technology start-ups have returned to growth, and the types of technologies they are supporting are broadly aligned with clean energy transition goals. Both types of investment serve energy innovation and bring private capital in support of pressing global challenges. The IEA will continue to monitor these trends as useful indicators of where companies and markets are placing bets on future technology value.
VC deals still much less than government or private R&D
However, VC deals still remain a small element in the context of total R&D spending. We estimate total public research and development (R&D) spending by governments to be at least three times larger than the VC market, and private sector spending on R&D may be three or more times larger again.
Furthermore, certain types of technologies are underserved by the type of capital that is mobilised by VC. These notably include capital-intensive hardware for renewables and large-scale low-carbon technologies, such as carbon capture. The risks for investors in technologies that have long lead times and uncertain markets are higher. As if to illustrate this point, Faraday Grid, a top fundraiser as recently as January 2019, entered administration in August. Boosting economic growth and transforming the energy sector through low-carbon innovation will require governments and the private sector to strengthen the interface between policy, research funding and VC investment.
Related commentaries have been published recently by the IEA that explore other key factors shaping the value chain for energy investment and finance, including changing business strategies in the oil and gas and power sectors, and capital allocation choices between different energy sectors in energy transitions.
Simon Bennett is an Energy Technology Analyst at the IEA
This article is published with permission