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Innovative Energy Start-Ups

A key vehicle for realising clean energy transitions

The creation of new enterprises (and the exit of incumbents) is central to the Schumpeterian process of creative destruction that characterises dynamic business environments and improvements in economic welfare more generally (Aghion, Antonin and Bunel, 2021). This process is likely to be particularly important in those parts of the economy in which structural transformation is central to the realisation of broader social objectives. The energy sector is a case in point, with the need for clean energy transitions increasingly paramount in the minds of policy makers.

Since new firms are often the vehicle through which disruptive technologies enter the market, a lack of business dynamism can slow this process, with significant negative consequences for the penetration of the kinds of technologies required to bring about clean energy transitions. (See Egli and Johnstone (2015) for evidence on the relationship between firm age and patenting in climate change mitigation technologies).

Unfortunately there is some evidence of a decline in innovation and entrepreneurship in the sector (Popp et al., 2021). This report, which explores these issues in detail, finds evidence for an “entrepreneurship gap” in the energy field. While some areas (e.g. energy efficiency and management; digital energy) appear to be dynamic, the scale and pace of entry is far from that which is required to bring about clean energy transitions. Policy support, in terms of both framework conditions and more targeted measures, is required, a point taken up in the concluding section.

It is worth noting that trends in the creation of energy start-ups may be very different from the amounts of funding raised by start-ups that are already at subsequent steps of their life cycle. (See World Energy Investment 2021 for the latest data on trends in early-stage financing). Various factors may result in different trends for the two indicators, such as the different cycles of financing that arise for different technology fields as policies, business strategies and macroeconomic opportunities align. Further IEA analysis will address the links between these trends, building on existing IEA analysis of the status of start-up funding.

This report draws upon data from the Crunchbase database, a commercial database on innovative companies seeking early-stage financing. The database was created in 2007, but its scope and coverage has increased significantly over the past few years. As reported by the Kauffman Foundation, the database is increasingly used by the venture capital industry as “the premier data asset on the tech/start-up world” (see Dalle, den Besten and Menon, 2017 for a discussion1).

The database uses a “tagging” system, whereby start-ups are classified according to a taxonomy of over 700 labels. Firms can have multiple tags, allowing for a rich analysis of their underlying business strategies. There are a total of 26 tags that the authors have identified as being explicitly energy-related, and it is this set of tags that are used to construct five broad subfields (energy efficiency and management; renewable energy; power grids and storage; electric vehicles; and other energy).1 These tags are also interacted with tags related to environmental (or “green”) and digital technologies to explore patterns in the development of energy entrepreneurship.

In order to ensure that we are accurately measuring new firm creation (de novo start-ups), we wean out spin-offs from more established firms by excluding cases in which the form of financing received is not that characteristic of the instruments commonly used for the early stages of firm growth (pre‑seed, seed, Series A, and Series B).

Unfortunately, in the data set there can be some lag between the foundation of a firm and its inclusion in the dataset. For this reason, start-up rates within the energy sector as a whole are “nowcast” for the most recent years using machine learning techniques, generating predictions of start-up rates through to 2020.3 However, the data on shares of different categories of start-ups are based on the actual and not the predicted values.

At the aggregate level, it is revealing that there has been a relatively stable number of energy-related start-ups globally (as represented in the database) over the last decade, but with a marked drop-off in the last couple of years. Part of this may attributable to the decline in business dynamism and new enterprise creations in general (see, for example, Calvino, Criscuolo and Verlhac, 2018.) However, the fall in energy start-ups has been even more pronounced than the overall trend with the percentage share falling from a high of almost 5% in 2007 to less than 2% in the most recent years. The Great Recession and its aftermath seems to have particularly affected business dynamism in the energy sector, a finding of considerable concern.

Energy start-up rates in levels and as a share of total start-up rates, 2000-2020

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Looking at the data at the country level, we see that the cumulative number of start-ups over the period 2016‑20 is unevenly distributed. Only Canada, Switzerland and Italy (in descending order) have shares of energy start-ups in total start-ups greater than 4%, while for other countries the figure is 3% or lower. The lowest shares are in Asia (in descending order: the People’s Republic of China [“China”], India, Indonesia, Japan, Korea). Note that there may be other countries with higher shares, but those with a very low number of start-ups overall in the sample are excluded from this analysis.

Number and share of energy start-ups by country, 2016-2020

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Looking at specialisation by subfield at the global level, there has been a marked increase in the share of energy start-ups that indicate that energy efficiency and/or energy management are a significant element of their business strategy, reaching almost a third of all start-ups in the most recent years..

Share of energy start-ups globally by field, 2005-2020

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By contrast, those in the renewables sector have been decreasing in importance, certainly reflecting in part the maturation of the sector. The share related to EVs has generally been increasing but remains small. This relatively low share may be due in part to the important role played by established incumbent firms in the automotive sector. Indeed many of those new firms which do exist in this area are likely spin-offs from existing firms, and as has been noted have been excluded in our analysis.

The case of fossil fuels is interesting with a falling-rising-falling share over the last 20 years. This is almost entirely a consequence of the trend for North American start-ups. This may be a reflection of the cycle associated with the shale gas/tight oil revolution, and further work would be required to confirm that this is the case. In the other regions there has been a continual decline over time, falling from shares of 15-20% to just over 5% more recently.

Share of fossil fuel start-ups by region, 2001-2020

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At the country level there is very considerable variation. Brazil and India have high shares of solar start-ups. Brazil, Israel and European economies (Germany, Italy and France) have high shares of start-ups that list energy efficiency and/or management. In the area of EVs (and related storage), China, India, Italy, and Korea have high shares. And finally, as noted above, Canada and the United States have relatively high shares in fossil fuels, along with Brazil and Singapore. In the area of grid and storage, Indonesia stands out. No region has a significant share of wind energy start-ups in recent years.

Share of energy start-ups by field for selected countries, 2016-2020

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In this section we review data on the share of “clean” and “digital” energy start-ups in the total population of energy-related start-ups. In both cases this has been defined by looking at cases of energy tags that are characterised as “clean” (e.g. renewables) or “digital” (e.g. smart grids) by the nature of the tag itself, and those which separately list any energy tag in addition to a “clean” tag or a “digital” tag in the description of their business strategy.

While there is a general increase in the share of clean energy start-ups relative to energy start-ups overall, it is the different paths of different broad regions that is most interesting. Europe has generally had a higher share than the other regions. The major emerging economies have shown the greatest variation over time, with the share in the most recent years no higher than 20 years ago.

Share of clean energy start-ups in total energy start-ups by region, 2000-2020

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Looking at the share by country over the period 2016‑20 we see that within the energy field Switzerland, Indonesia, Italy and Japan have the highest share of “clean” energy start-ups (as defined by our tagging) in descending order. However, it is revealing that almost all countries have a share greater than 40%, with Canada, Brazil and Israel being the exceptions. 

Share of clean energy start-ups in total energy start-ups by country, 2016 2020

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A similar analysis can be done looking at the extent to which start-ups have become more digitalised and how this varies over time. In this case the temporal trend is very notable, with the share rising by approximately 30% over the last two decades, with most of the increase in all regions occurring in the last decade.

Share of digital energy start-ups in total energy start-ups by region, 2000-2020

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Looking at the pattern across countries for the most recent years (2016‑20), it is interesting to see Israel having a high share of digital energy start-ups. Korea, Germany, Singapore and Switzerland also have high shares.

Share of digital energy start-ups in total energy start-ups by country, 2016 2020

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Dynamic entrepreneurship in the energy sector is vital in order to bring about clean energy transitions, and this report has presented new evidence on trends and patterns of energy start-ups across time, countries and energy fields. The finding that the share of energy start-ups has been declining continuously for a number of years is disconcerting. However, there are some areas that show continued sustained growth, particularly those in which their business strategy is related to energy efficiency and management. Moreover there is a notable increase in the share of energy start-ups that have a business strategy that is digital in nature.

The decline in energy entrepreneurship needs to be addressed through the usual policy levers that affect start-up rates in general (e.g. financial regulation, contract enforcement, bankruptcy legislation). However, given the urgent need for dynamism in the energy sector and the broad social benefits in the area, some more targeted policy levers should be considered. First, it is important to ensure that existing regulations that affect firms in the sector do not inadvertently and inefficiently favour incumbents, so-called regulatory incumbency. Second, some carrots can be applied such as government provision of early-stage financing to the sector both directly (through government funds) and indirectly (through government investment in private funds). And finally, academic start-ups founded by recent undergraduates and doctoral students or researchers from public universities and research institutes can also be a vehicle for entrepreneurship in the sector (see Breschi et al., 2019).


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This article has been produced with the financial assistance of the European Union (EU) as part of the Clean Energy Transitions in Emerging Economies programme. This article reflects the views of the International Energy Agency (IEA) Secretariat but does not necessarily reflect those of individual IEA member countries or the European Union. Neither the IEA not the EU make any representation or warranty, express or implied, in respect to the article's content (including its completeness or accuracy) and shall not be responsible for any use of, or reliance on, the publication.

The Clean Energy Transitions in Emerging Economies programme has received funding from the European Union's Horizon 2020 research and innovation programme under grant agreement No. 952363.

References
  1. See also https://medium.com/@andreretterath/what-s-the-best-start-up-vc-database-8237fc189830.

  2. In some cases we distinguish between wind, solar and “other” renewables, although some firms specialising in specific areas of renewable energy may not indicate as much in the tagging system. Similarly, distinguishing between energy storage for end-use purposes (principally transport) and grid-level applications can be difficult.  Further work will apply text analytics to distinguish between such cases.

  3. This is based on observed differences in the historical data in terms of the foundation day relative to the day of entry into the data set, allowing for the prediction of unrecorded firm “births” and controlling for firm characteristics.