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India launches support for innovative clean energy start-ups as global investments begin recovery from 2020

Yet another casualty of the pandemic, early-stage 1 venture capital (VC) investment to support innovative energy technology firms through their highest-risk stages fell to an estimated USD 3.1 billion globally in 2020 – a 30% drop from 2019. This private risk capital, which complements the much larger sums governments and companies spend on energy R&D, is vital to develop critical new clean energy technologies because it enables market creation and helps the production of market-ready innovations to scale up.

Before the pandemic hit in early 2020, strong momentum in the sector was widely expected to raise investments to above the previous high point of 2011. Instead, the growth trend was blunted as deals were postponed, scaled back or cancelled in the face of market uncertainty and tougher financing conditions.

Global early-stage venture capital investment in energy technology companies in India, 2010-2020

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Despite the 2020 investment dip, there are signs that much-needed financing for clean energy innovators could get back on track. While the impacts of the Covid‑19 pandemic on VC energy investment vary by sector and region, a general resurgence in late 2020 helped counterbalance the setbacks of the first six months. When the IEA released World Energy Investment 2020 in May of last year, however, there was no guarantee this rebound would occur. In fact, it was wholly plausible that innovators of potentially revolutionary clean energy solutions would fail to attract follow-on funding and face bankruptcy or have to lay off energy technology experts.

Our provisional 2020 totals certainly demonstrate that start-ups and investors adjusted successfully to new ways of working in the second half of 2020. But they also reflect two larger trends: tech stocks are now viewed as a haven for capital due to the turmoil in more traditional sectors; and investors are increasingly convinced that an energy transition is happening and will be underpinned in the near term by proactive government policies. The latter trend has, however, had the most impact on investment in more mature energy companies with products already on the market. For these later-stage growth equity deals, 2020 actually represented a new high point, led by companies offering incremental improvements to clean technologies in areas like grid management and electric vehicle charging. In contrast with ten years ago, cleantech 2 financing is less radical and more focused on optimising the transitions already underway – a healthy development.

Nevertheless, the late-2020 rebound does not compensate for the loss of expected growth in riskier, early-stage investing. The year’s totals are buoyed by two very significant deals in TELD electric‑vehicle charging and Redaptive efficiency retrofits, which were already approaching the deployment stage. Aside from these major transactions, the average disclosed deal value for early-stage start-ups was around USD 7 million, which is 12% less than in 2019. Although the number of deals remained constant at just over 400, investors allocated less capital to each one. In some cases, investors may have been less willing to put capital at risk in these straightened times while, in others, they may have taken the opportunity to offer a lower price for equity. For energy storage and hydrogen start-ups, the average value of disclosed deals dropped by 40%, with less capital spread across more companies.

Average deal value of global early-stage venture capital investments in energy technology companies in India, 2010-2020

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Some sectors fared much better than others in 2020. Early-stage deals for transport technologies (e.g. electric mobility and alternative drivetrains and engines) reached their highest-ever level at USD 750 million (excluding outliers), with an additional USD 10 billion invested in later-stage deals, such as those involving growth equity for more mature companies. For these technologies, the average reported deal value was stable.

That investor faith in growth prospects for electric vehicles was undiminished by low oil prices indicates consensus that technology readiness is high and consumer appetite and policy support are strong. This could be a valuable lesson for governments seeking to emulate this situation for other technology areas. Energy efficiency technologies also did well in 2020, with early-stage investments rising to USD 730 million (including Redaptive), the highest level since 2011. While the average disclosed transaction value also increased, this resulted from a sharp decline in the number of deals.

By contrast, early-stage financing for renewables-based start-ups fell a sharp 55% to USD 330 million, with over 60% of investments involving solar energy. Hydrogen and energy storage technologies attracted USD 500 million, 30% less than in 2019. These drops suggest that confidence in these energy technologies is still not as strong as for others, even though renewables, hydrogen and storage are expected to play an important long-term role in the clean energy transition.

Much of the VC activity in renewables, energy storage and hydrogen involved later-stage deals propelling larger companies towards substantial commercial scale-up. In hydrogen in particular, a significant share of the capital went to corporate buy-outs, which will boost the chances of scale-up in that sector, but could constrain some of the technological variety through consolidation. 

Selected deals for clean energy start-ups in 2020 by technology area

Technology area

Start-up

Headquarters

Value of deal(s)

Public sector involvement

Transport

Ather Energy (electric scooters/motorcycles)

India

USD 46 million (two rounds)

 

Transport

Star Charge (EV charging and digital solutions)

China

USD 125 million

 

Transport

Sono Motors (solar-powered vehicles)

Germany

USD 110 million (two rounds)

 

Energy efficiency

Aledia (micro-LED chips)

France

USD 98 million

Support from BPI France

Energy efficiency

Tibber (smart home energy management)

Sweden

USD 65 million

 

Energy efficiency

Menlo Micro (electromechanical switch)

United States

USD 44 million

 

Energy efficiency

Redaptive (retrofit services)

United States

USD 156 million

 

Renewables

(biofuels)

Forge Hydrocarbons

Canada

USD 23 million

Support from Sustainable Development Technology Canada

Renewables

(solar)

SunCulture (solar-powered irrigation systems)

Kenya

USD 14 million

 

Renewables

(solar)

Aurora Solar (digital services for solar engineering and operation)

United States

USD 50 million

Support from US DoE Sunshot incubator in 2014

Renewables

(geothermal)

Dandelion Energy (home heating and cooling)

United States

USD 12 million

Support from New York State Energy R&D Authority in 2019

Hydrogen

H2-Greenforce (hydrogen from electrolysis and storage)

United States

USD 12 million

 

Hydrogen

ZeroAvia (hydrogen-based powertrains for aviation)

United States

USD 21 million

Support from UK Department for Business, Energy and Industrial Strategy in 2019 and 2020

Hydrogen

Ohmium (hydrogen from electrolysis)

United States, India

USD 16 million

 

Energy storage

Demand Power (behind-the-meter energy storage)

Canada

USD 35 million

 

Energy storage

EnerVenue (metal-hydrogen battery stationary storage)

United States

USD 12 million

 

Energy storage

Lilac Solutions (efficient lithium extraction services)

United States

USD 20 million

 

The ability of entrepreneurs to raise consecutive rounds of financing to fund experimentation, prototyping and business development is a critical component of successful energy innovation. This financing route is not suitable for all clean energy technologies, however, and used alone it is unlikely to bring major industrial or CCUS projects to market. Nevertheless, it is a proven means for sharing scale-up risks with the private sector and for learning about potentially disruptive ideas for consumer products, digital technologies, modular solutions and other concepts. In recent years, innovation by young firms has been a major contributor to productivity and these enterprises are playing a larger role in job creation. This year could be pivotal for getting back on track and ensuring that the clean energy momentum and expertise in the innovation value chain are not lost.

Governments help innovators bring their new ideas to market in three main ways. They often fund the riskiest R&D to ensure a constant flow of new technologies, and they use incentives and regulations to create early markets for products that still need to be refined and made more affordable (e.g. low-emissions innovations). Meanwhile, during the innovation process, governments can also improve the funding environment for start-ups that are just getting established by adding its own investments to those of the private sector, providing grants or helping innovators access services and tools such as intellectual property consultancy and lab space.

In 2020, governments relied on these policy options to help small and medium-sized enterprises avoid the most severe impacts of the pandemic. Covid-19 support schemes – such as bridge financing without discrimination as to sector or quality – illustrate governments’ defensive efforts to ensure start-up survival. While France earmarked up to EUR 4 billion for start-ups and innovative small and medium-sized enterprises, including through a French Tech Bridge targeting companies between financing rounds, Germany made up to EUR 2 billion available under its Corona Support Package for Start-ups and SMEs and Norway provided grants to start-up networks such as incubators and accelerators to maintain services for entrepreneurs. In India, the government provided targeted support to start-ups actively fighting Covid-19 and wants to incentivise private investment post-Covid. Meanwhile, China’s Ministry of Science and Technology established support for high-tech zones and innovative enterprises, though it did not focus on start-ups specifically.

European government actions may have contributed to the 17% rise in early-stage financing for clean energy in the region in 2020. Although VC energy investments in Europe have been expanding in recent years, their strong rise in 2020 was an exception globally. Conversely, investment in North America fell 14% and the drop in the Asia Pacific region was even greater, with the average deal value falling by over 40% from what it was in 2019. In China, not only were high-value deals absent in 2020 even though they have been recorded consistently since 2016 (especially in electric mobility), there was also very little activity in general in the first half of the year.

In 2021, governments have the chance to shift from defensive and non-selective measures to actively supporting innovation in target technology areas. This opportunity arises from the commitments of several major economies to work towards net-zero emissions by mid-century, and governments can be encouraged by the way vaccine development programmes have proven the effectiveness of state agencies in guiding and accelerating innovation. In addition, private investor enthusiasm to acquire clean energy start-ups with high growth potential continues to rise, with large sums raised recently for more patient funds and a proliferation of clean energy companies going public through special-purpose acquisition companies (SPACs), which may offset a reduction in corporate VC availability.

Many countries have programmes in place (e.g. ARPA-E in the United States and InnoEnergy in Europe) that provide clean energy start-ups the greatest chance of success by offering them grants, loans and incubation services, and these schemes are likely to become even more important as the world weathers recessions and other economic uncertainties. With energy innovators increasingly accessing early-stage capital through accelerators and incubators, there is much global experience that can be shared, including between emerging and advanced economies. For example, India and Brazil recently agreed to work together on a Start-up Bridge initiative.

Global early-stage venture capital investment in energy technology companies in India, 2010-2020

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The number of early-stage financing rounds reported for start-ups dropped approximately 30% across all sectors of India’s economy in 2020, according to the latest available data. With the energy sector reporting half the deals of 2019, it fared worse than other sectors such as consumer goods, finance, and information and communications technology. In other words, the portion of energy deals shrank more than the shares of other sectors. However, as described in our new India Energy Outlook, released last week, greater innovation could address India’s pressing energy and environmental challenges.

As start-ups have become a key instrument for innovation in India, which has a lively financial sector but few technology-driven large corporates, the share of deals involving energy must expand to well above 3%. Stronger incentives can be created for entrepreneurs with local knowledge to scale up their solutions, and growth expectations for clean energy market investments, including for overseas investors, could be improved. 

Sectoral distribution of early-stage start-ups that raised funds in India in 2019 or 2020

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On 15 February 2021, Social Alpha – a not-for-profit network of technology and business incubators that manages India’s Clean Energy International Incubator Centre (CEIIC) under the auspices of Mission Innovation – announced a new initiative to seek out promising innovators engaged in addressing critical but undervalued energy innovation gaps. It is the third such challenge undertaken. Since CEIIC was established in 2018 by the Government of India and Tata Trusts, it has incubated 25 start-ups with support from the Department of Biotechnology, BIRAC and Tata Power. Like the previous two initiatives, the aim is to find and support innovators and entrepreneurs who have transformative technologies that could effectuate deep and lasting social and environmental impacts.

However, this latest quest also focuses specifically on some of the difficulties wrought by the Covid-19 crisis, as it also seeks technologies that can simultaneously improve livelihoods and address climate change. Successful applicants from around the world will receive development and scale-up support, potentially including: facilities, mentorship and support for rapid prototyping, product design and development, testing and market validation, pilot, market access, and investment. Along with the Research Institute of Sweden, the IEA is making its knowledge and information available to this initiative.

If you are an innovator with a technology idea or are a young company interested in the Techtonic challenge, visit https://www.socialalpha.org/techtonic-innovations-in-clean-energy/ to apply before 31 March 2021. While the challenge is open to all clean energy technologies, the focus this year will be on solutions targeting livelihoods, smart energy systems, energy storage and thermal comfort.


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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. Seed, series A and series B deals.

  2. “Cleantech” refers to an investment philosophy held by investors seeking to profit from companies with technology products designed to reduce environmental harms such as climate change. It is broader in scope than clean energy, and generally includes both early-stage and later-stage investments in fast-growing private companies.