• Technology innovation is widely recognised as critically important for tackling climate change and energy policy objectives, including increasing energy access and reducing air pollution. Yet tracking progress on innovation is challenging. The correlation between inputs – finances and skills – and intermediate outputs – patents and products – is sometimes unclear. Policy objectives such as cheaper technologies, industrial transformation and economic growth can be hard to measure or assign to the inputs. Despite this, a range of indicators can shed light on clean energy innovation globally, including funding and patenting. Broader sets of metrics are needed to identify and share good practices, and are being developed by some governments.
• Low-carbon energy R&D spending in IEA member countries has been broadly stable since 2012, after doubling between 2000 and 2012. It remains below the levels in the 1980s, however. Low-carbon energy technology represents around 80% of total public energy R&D spending, which in 2019 grew by 3% to USD 30 billion globally. In general, the share of GDP represented by public energy R&D spending has remained fairly constant over the last decade, and other public research objectives, such as health and defence, receive around five times more R&D funding than energy.
• Over the last decade, corporate energy R&D has seen years of growth, punctuated by slowdowns in response to economic challenges such as the 2007-08 financial crisis, the 2014 oil price crash and, now, the Covid-19 pandemic. In 2019, reported spending reached USD 90 billion, with a notable slowdown in the automobile sector, typically the highest spending sector for energy-related R&D but where revenues dipped and R&D spending was flat. While companies active in renewable energy showed an impressive 74% growth in R&D spending between 2010 and 2019, their share remains below one tenth of total corporate R&D. Meanwhile sectors that do not yet have commercially viable solutions for deep decarbonisation, such as cement and iron and steel, typically spend relatively little on R&D.
• Early-stage venture capital (VC) investment stood at USD 4 billion in 2019. Investment in growth areas, such as hydrogen and batteries, is broadening the impact of VC across sectors, and VC investment is growing in Europe, the People’s Republic of China (hereafter “China”) and the United States. However, the share of global VC deals accounted for by clean energy halved since 2012, indicating that the relative attractiveness of clean energy is not keeping pace with other technology areas, such as biotechnology and information technology. It is noteworthy in this context that, while the initial value of many energy technology start-ups lies in the patents they hold, fewer patents have been filed for low-carbon energy technologies each year since 2011.
• The Covid-19 pandemic has had a rapid and negative impact on private sector funding for clean energy innovation, and is likely to set back the speed with which clean energy technologies can be developed and improved. In the absence of policy interventions, demonstration, early adoption and learning-by-doing are expected to suffer the most in the first instance. A number of energy-related companies reported year-on-year declines in R&D budgets in the first quarter of 2020, and the number of VC deals was also down. The impacts are likely to be uneven across countries, with emerging economies finding it hardest to plug gaps in innovation systems.

This report is written in the middle of one of the largest shocks to the global economy and the energy system in history. It is too early to tell with any certainty how lockdowns, the damage to economic activity, or changed attitudes towards risk and values will impact clean energy innovation. However, some data are already available for the first half of 2020, including from an IEA survey of companies conducted for this report, and this sheds some light on early trends. Other possible effects can be predicted from the trends observed in the wake of the global financial crisis of 2007-08.

This chapter reviews the main elements of a tracking framework for clean energy innovation systems before looking at what a selection of clean energy innovation indicators tells up for the period up to 2019. It then sets out the latest information on energy innovation activity in 2020. It ends by exploring how energy innovation might be affected in the future by the Covid-19 pandemic.

A clean energy transition to net-zero emissions requires a radical change in both the direction and scale of energy innovation. Drawing from the descriptions in the previous chapter, a national innovation system that is designed to support net-zero emissions could be expected to exhibit the following characteristics, among others:

• Widely communicated and broadly supported visions of how clean energy will be supplied and used in different end-use sectors by mid-century and at intermediate milestones, backed up by published strategies and timetables, and processes for updating them.
• R&D plans that support overall mid-century energy plans and show a coherent match between the level of technological maturity, risk profiles and the type of capital support allocated.
• A rising share of R&D spending allocated by both the public and private sectors to technologies needed for sectors that currently have limited commercially available and scalable options for achieving deep emissions reductions.1
• A falling share of R&D spending by the public and private sectors on technologies that extract and convert fossil fuels to energy without carbon capture utilisation and storage (CCUS).
• A good match between spending on clean energy R&D priorities and spending on expanding and upgrading network infrastructure, including electricity grids, telecommunications, gas pipelines, CO₂ networks, and district heat and cooling.
• Rising patenting activity and rising numbers of scientific publications in key enabling technology areas required for net-zero emissions, including for technology types already commercialised.
• Active participation in multilateral and bilateral initiatives for international collaboration on energy innovation challenges that match national priorities and comparative advantages.
• An increasing flow of patient private risk capital into innovative net-zero emissions technologies, for example via VC and more patient impact investors.
• An increasing contribution from low-carbon products and components to the national balance of trade, including revenues from the licensing of intellectual property.
• Regular raising of capital by companies that are highly dependent on revenue from the early adoption phase of low-carbon technologies in sectors that currently have limited commercially available and scalable options for achieving deep emissions reductions. This indicates investor confidence in the markets created for these products.

Not all of these trends can be tracked closely using data available today, and there are further indicators of healthy innovation systems that are even less quantifiable. Despite this, a picture of the performance of clean energy innovation systems can be constructed using information that is available across the four pillars described in Chapter 1. At the more general level of the whole economy, this type of approach is followed for the Global Innovation Index, which aggregates 80 indicators (Cornell University, INSEAD and WIPO, 2018).

The IEA has developed methodologies for tracking a number of key indicators of “resource push” factors and intermediate outputs for clean energy innovation on an annual basis. While it is important to remember that this set of indicators presents only a partial view based on data available at the global level, it nevertheless offers an important insight into the level of innovation effort around the world, and there is scope for it to be expanded in the future. Better quality data on demonstration projects, technology-level corporate R&D, component-level import-export trends, public sentiment and bilateral energy innovation collaborations would be valuable additions: so would much-needed improvements to data quality for public energy R&D spending.

There are benefits for policy makers and investors in such tracking activities. In the early 1990s, few analysts attempted to assess the rate of effort dedicated to developing solar PV and Lithium‑ion (Li-ion) batteries and their technical progress: better data might have helped governments allocate resources more effectively and accelerated the development of these technologies. At a national or regional level, more granular analysis is sometimes already possible (Wilson and Kim, 2019).

Government energy R&D spending in 2019 grew by 3% to USD 30 billion globally, around 80% of which was directed to low-carbon energy technologies. While the growth rate in 2019 was below that of the previous two years, it remained above the annual average since 2014. In China, the low-carbon component of energy R&D grew by 10% in 2019, with big increases in R&D for energy efficiency and hydrogen in particular. In Europe and the United States, spending on public energy R&D rose by 7% in both economies, above the recent annual trend.

Raising public energy R&D spending and aligning it more closely with decarbonisation needs was behind the pledge made in 2015 by 24 leading countries and the European Commission to double their public investment in clean energy R&D over five years under the Mission Innovation initiative.2 Governments of major economies have been increasing energy research investments since then, with some countries, such as India, making clear links between their R&D activity and their membership of Mission Innovation.

The IEA has maintained a consistent dataset of national public budgets allocated to energy R&D since the 1970s.3 When adjusted for inflation, these data show that spending on low-carbon energy R&D in IEA member countries doubled between 2000 and 2012, but has been broadly stable since. However, it remains just below the levels observed in the early 1980s, when nuclear energy research dominated the national budget in several countries. In absolute terms, spending on fossil fuels has remained roughly constant, though its share in total energy R&D has fallen with growth in total spending.

The technology portfolio in public energy R&D is more balanced today than in previous decades, with far more money going to energy efficiency and renewables.4 Despite this, the portfolio remains strongly oriented towards supply-side technologies, rather than the types of end-use innovations needed for sectors that currently have no commercially available and scalable options for achieving deep emissions reductions. Furthermore, although energy R&D budgets are growing in the aggregate, including for developing low-carbon technologies, they are not growing as a share of GDP, and they account for a shrinking share of total government R&D spending in most cases. Energy R&D spending has been losing ground to other public research objectives in recent decades, with health and defence now receiving around five times more R&D funding than energy in OECD member countries. Modest upticks in the share going to energy in some countries since 2005 are nonetheless encouraging.

One of the world’s largest funding programmes for energy technology demonstration is China’s National Major Science and Technology Projects programme. Under this scheme, selected state-owned enterprises are given responsibility and funding for a priority engineering challenge over a multi-year period, for example USD 1 billion over five years. Challenges are designed to attract more co-funding and favourable loans from local governments and enterprises. Large oil and gas, coal bed methane, and nuclear projects were prioritised up to 2020; among the 16 projects announced for 2020-30 are turbines, coal use and smart grids. The bulk of funding from the Ministry of Science and Technology goes to “National Key R&D Projects”. Around USD 200 million of this was allocated annually to electric vehicles and smart grids in 2016 and 2017, often for basic research, and around USD 65 million was allocated to renewable energy and hydrogen in 2019. In 2016-17, clean and energy-saving coal received USD 70 million per year.

The European Commission is in the process of finalising its next multiannual R&D funding programme, Horizon Europe, which will run from 2021 to 2027. It foresees an allocation of USD 17 billion for energy, climate and mobility, which represents 16% of the total Horizon Europe budget. Much of this will go to clean energy R&D: funding for fossil fuel extraction and use has been mostly phased out. European Union-funded projects are increasingly open to participation from overseas collaborators, including emerging economies. Horizon Europe will continue the diversification of funding instruments begun under its predecessor to meet innovators’ needs, including blended finance options for large-scale demonstration projects, innovation prizes, support for small and medium-sized enterprises, and equity funding for start-ups. As part of this, an “Innovation Fund” is under development with the aim of recycling up to USD 11 billion of revenue from CO₂ trading to first-of-a-kind demonstration projects, integrating lessons learnt from its predecessor, the NER300. Renewed efforts are also being made to further harmonise European Union and member states’ research funding through initiatives similar to the “Fuel Cell and Hydrogen Joint Undertaking”, which unites public and private funds and co-ordinates expenditure of over USD 200 million per year.

In Japan, a renewed “Environment Innovation Strategy” was published in January 2020, highlighting as many as 39 priority energy technology areas with a higher level of specificity about target applications than in the plans of most other countries. This strategy retains around 25 of the priorities from the 2016 strategy and adds new priorities on nuclear and zero-carbon steel, together with more specificity on renewables, transport and CCUS. The New Energy and Industrial Technology Development Organization, which has a budget of around USD 1.5 billion, and which has funded projects for industrial-scale technology trials in Japan for 40 years, has recently extended its remit to include overseas projects. Japan has a high level of co-ordination between government and large industrial players, enabling long-term projects to be undertaken in partnership: the 2014-18 strategic programme on hydrogen energy carriers is a good example.

The United States’ 17 national laboratories, overseen by the Department of Energy, constitute one of the largest scientific research systems in the world, having added responsibilities across most energy areas to their original nuclear and fossil fuel missions from the mid-20th century. Many are run by private companies and have strong ties to local universities. The Advanced Research Projects Agency–Energy programme, established shortly before the 2007-08 financial crisis, has around USD 350 million of annual funding and aims to nurture new strategic energy technologies to achieve rapid deployment of radical technologies with high market potential, including by combining expertise across disciplines to seek spillovers.

Companies active in energy technology sectors have increased their total annual energy R&D spending by around 40% over the last decade (IEA, 2020b), and their total energy R&D spending reached around USD 90 billion in 2019. In 2019, growth was 3%, lower than the 5% annual growth observed in the two periods 2010-13 and 2015-18, which were preceded by the global financial crisis and divided by the economic impact of the oil price collapse of 2014. The oil price collapse of 2014 caused a 10% drop in the R&D spending of oil and gas companies over two years, and it took four years for spending to recover.

It is worth noting that companies active in renewable energy technologies have increased their R&D spending faster than other energy technology sector companies: they increased their expenditure on R&D by 74% between 2010 and 2019, adding over USD 2.5 billion to efforts to improve their technologies.

The automobile sector spends more on R&D than any other energy-relevant sector5. Companies have continued to increase their spending in recent years, with government policies and competitive pressures leading them to focus more on energy efficiency and electric vehicles: growth in energy-related R&D seems, however, to have flattened out between 2018 and 2019. New companies, especially those making battery and fuel cell electric vehicles, are meanwhile starting to enter the market and trying to dislodge the major manufacturers. Globally, the number of carmakers selling over 1 million vehicles per year has grown from 15 to 20 since 2005 spurring the emergence of new high-profile start-ups in electric vehicles. All the established carmakers have announced new vehicle designs, battery research coalitions and pilot testing of highly digitalised electric vehicles, and their future success may depend at least in part on their ability to direct sufficient revenue from their current portfolio of products to R&D for low-carbon alternatives. Incumbents in other sectors may face a similar balancing act.

Other sectors – notably cement, biofuels, electric utilities, and iron and steel – invest much less in R&D as a proportion of their revenue. Solar PV manufacturers, the maritime sector and the aviation sector invest rather more than these (though the aviation sector’s share has fallen in recent years), but still much less than the automotive sector. This may reflect a view that new technology-driven products are of less importance to their competitiveness than is the case for carmakers. Electric utilities and heavy industrial companies are generally consumers of technology, typically engaging in technology development via partnerships with suppliers. Nonetheless, it is striking that companies in sectors for which new technologies will be critical to achieving net-zero emissions typically invest relatively little in R&D. These sectors will need to test, modify and, in some cases, develop new processes and products for deep decarbonisation. 

Some governments have implemented systems to track private sector spending on energy technologies via surveys. While this has yet to be done in a sufficient number of countries to allow international analysis, Canada and Italy are good examples of progress so far.

Total equity investment in energy technology start-ups by all investor types stood at USD 16.5 billion in 2019. Of this, early-stage VC (seed, series A and series B), which supports innovative firms through their highest risk stages, is estimated to account for USD 4 billion. These sums are lower than those spent on energy R&D by governments and companies, but this private risk capital plays an important role in helping the most market-ready technologies to create markets and scale-up. The total value of reported deals in 2019 was 7% lower than in 2018, but the figure in both years was well above the average for the decade.

VC fulfils a valuable role by providing finance and imposing the discipline of private capital in cases where its providers see a potential near-term market opportunity and a longer term chance to capture significant market share. VC investors provide risk capital to entrepreneurs in the expectation that the winners in a portfolio of technology and business ideas will scale-up rapidly and profitably enough to pay back their investments in the whole portfolio at around 20% per year over five years. In the energy sector, VC has typically been most effective in supporting start‑ups with digital technologies or service offerings that can be quickly prototyped and are not capital intensive (Gaddy, Sivaram and O’Sullivan, 2016; IEA, 2017). Hardware areas like electricity storage, electric vehicles and hydrogen production have, however, recently attracted more VC investment. Most VC investment has taken place in the United States, where financial regulations support VC activity and VC financing is well established, but both Europe and China have recently seen growth in their share of global energy VC activity (IEA, 2020b).

Overall, trends suggest that investors see rising market potential in low-carbon technologies, driven by expectations of more stringent public policy incentives. They also suggest that, in some areas of technology – principally those involving smaller scale technologies and consumer products that are close to market readiness – private risk capital can support and reward the best innovations, and so reduce the need for public sector support. In these areas, VC investors can help technologies make it through the “valley of death” by providing funds for researchers seeking to test an initial idea or for small companies needing to move their idea beyond an initial niche market – ideas that are frequently the products of government-funded early-stage R&D (Breschi et al., 2019). However, the share of clean energy in the total value of global VC deals has fallen from around 10% to around 5% since 2012, indicating that clean energy is becoming less attractive to VC than other technology areas such as biotechnology and information technology.

To boost activity, some governments are exploring direct investment in clean energy start-ups, for example by taking so-called “anchor” equity stakes in riskier start-ups. Breakthrough Energy Ventures Europe, a USD 100 million fund established in 2019, is an example (Breakthrough Energy, 2020). The evidence on government equity stakes in such companies is, however, mixed, and governments generally have to be first to accept losses if the technologies underperform. It is notable that this policy has not been widely used in the United States, where the VC market is well established, despite the appeal of reaping some of the gains from public R&D for taxpayers.

Some countries provide targeted grant support to clean energy start-ups instead. Breakthrough Energy Solutions Canada announced the ten winners of its first round of evaluation in early 2020. In India, the Clean Energy International Incubation Centre was established in 2018 as a partnership between the public sector, which provides grants, and the private sector, which provides infrastructure and equity: it offers equity funding and guidance to start-ups with potential solutions to India’s energy challenges. Other countries, including France and Italy, provide tax credits and other benefits to young technology-intensive firms, many of which are spin-offs from academia.

Companies, too, are turning to VC as part of their energy innovation strategies. Faced with regulatory and technological uncertainty, especially in areas dominated by unfamiliar or digital products, corporations are increasingly turning to corporate VC6 and “open innovation” rather than allocating corporate R&D budgets to developing them in-house (Bennett, 2019). Investments in energy technology start-ups, including those funded by corporate VC and growth equity, reached a new high in 2019 at around USD 5 billion globally. As companies are pushed by net-zero targets to integrate new activities outside their core competences, companies may well increasingly look to corporate VC and the acquisition of start-ups as ways of managing technology uncertainty. Many of the technologies that are expected to contribute to net-zero emissions could be well suited to corporate VC funding, especially if they can be packaged as attractive consumer offerings, because they involve small-unit size technologies and could complement companies existing portfolios: digital controls for energy efficiency and energy storage are a case in point.

Following a decade of strong growth in the number of patents filed for low-carbon energy technologies, there has been a marked decline since 2011. Patents provide an insight into the research activities that are generating new knowledge with perceived commercial value: they capture some of the intermediate outputs of R&D, a proportion of which will be translated into commercial products. They do not provide a direct measure of all R&D outputs, not least because they over-represent technologies and jurisdictions for which patenting is more common: in some fast-moving fields, the patenting process can take longer than the opportunity to recoup R&D costs from marketing the technology ahead of the competition, for example, while many digital services based on software and apps are not patentable. Nonetheless, overall trends in patenting provide useful information about the extent and focus of clean energy innovation.

The decline in renewable energy patenting activity since around 2011 may in large part reflect the maturity of some technologies. The dominance of existing solar PV, bioethanol and wind technologies may deter researchers from seeking to improve them and enter the market in Europe, Japan and the United States. Patenting activity for renewable energy remains higher than at any time before around 2007 and patenting for batteries, particularly Li-ion, is a growth area (EPO and IEA, 2020). However, it is still a concern that the decline in patenting since 2011 has so far not been offset by patents in advanced biofuels, novel PV, geothermal, ocean or other renewables.

The adoption of some low-carbon technologies relies on the development of other non-energy technologies in the same value chain. However, patent trends indicate that the level of attention to different technology applications in the same value chain families is not consistent. For example, patenting for EV batteries has risen more than two times faster than patenting for metal processing, yet widespread electric mobility depends on new approaches to lightweighting vehicles.

While data are readily available on funding for innovation systems from the public and private sectors as well as for market-led financing such as early-stage VC, this gives only a partial picture. To get a fuller picture, we need also to look at the information that governments regularly provide about the ways in which energy R&D topics are prioritised, knowledge is shared, markets are created and socio-political support is built up. This section provides a brief overview of some relevant developments.

The prioritisation of research topics for clean energy funding programmes and arrangements for the evaluation of those programmes do not follow global standards. Indeed, this is an area that might benefit from some sharing of best practices between practitioners. In Japan, prioritisation and road-mapping are well-documented and provide clear guidance for R&D spending: the process benefits from a high level of co-ordination between government and large industrial players, which enables long-term projects to be undertaken in partnership. China, likewise, has a highly centralised multi-year planning framework that provides clear indications of national innovation priorities; a downside, however, can be a lack of flexibility within these budget periods. One key area that all governments need to consider is how best to exploit synergies between clean energy technology areas: this is an area where Japan and Korea stand out for their promotion of electrochemical technologies across different sectors, from batteries to fuel cells. While many countries have audit processes for programme review, evaluation against overall innovation policy objectives is rarely embedded in policy design (Pless, Hepburn and Farrell, 2020): US programmes, in particular high-level initiatives exposed to political risk, provide some particular examples of good practice.

Governments have begun paying increasing attention in recent years to knowledge sharing. The European Commission now requires recipients of funding to publish results with open access, while technology programmes co-ordinated by the US Department of Energy regularly publish their findings in detail. Certain elements of knowledge generated from European Union-funded large-scale demonstration projects have to be made public, and there is a similar requirement for CCUS projects in Alberta (Canada). In China, the creation of specific zones for the development and deployment of certain technologies, including electric vehicles and hydrogen, facilitates knowledge exchange.

Different economies have different approaches to creating markets that support early-stage commercialisation of clean energy technologies for public policy purposes. The European Union has the highest explicit carbon price and also the most deployment targets for clean energy technologies. Across major economies, targets for renewable electricity, biofuels and electric vehicles are common. Public procurement also plays a role in creating niche markets in some countries. In India, it is used to create dependable local markets for new products, such as LEDs, appliances and electric vehicles, while Norway’s approach to decarbonisation of maritime transport links R&D and public procurement (DNV-GL, 2019). China’s combination of rapid prototyping, public procurement, cheap finance for manufacturing and internal market deployment has proved effective for improving mass-produced products such as electric vehicles and LEDs at an early stage of technology readiness: its relatively high tolerance of trial-and-error is a specific advantage. In Japan, strong standards in energy efficiency and other areas drive market-led innovation, while well-designed requirements for evaluating R&D projects, programmes and planning help to improve them.

The complexity of the global clean energy system makes it hard to assess how Covid-19 will affect the speed with which clean energy technologies can be developed and improved. This is compounded by widespread uncertainty about the longer term impacts of the pandemic. However, available data and historical precedent suggest significant cause for concern, given the urgency of the need to compress innovation timelines for clean energy technologies. There are signs that the global clean energy innovation system will be hard hit by spending cutbacks, especially in the private sector, with the largest impact in the near term being a tougher environment for scale-up and commercialisation. In simple terms, there is a risk that the “valley of death” becomes deeper and wider.

Before the pandemic hit, 2020 was expected to be a critical year for several major energy innovation policy initiatives, with keen interest in the details of the European Union’s Horizon Europe and Innovation Fund, for example, and in the energy R&D elements of China’s 14th Five‑Year Plan. These policies, and many others in preparation around the world, are still top priorities, but the immediate focus has shifted to managing revenue losses and economic recovery in most countries. At the same time, many companies are facing severe pressures, and all are having to adjust to a changed and uncertain economic outlook.

While the immediate task of protecting health and livelihoods is understandably occupying all parties in the first half of 2020, measures that directly or indirectly address clean energy innovation have nevertheless already featured in the policy responses of several governments. Details are still emerging, and other governments are still considering their positions; even so, these policy signals help to give at least an initial idea about how the environment for clean energy technology might evolve between mid-2020 and 2025.

Another area of concern is the impact of Covid-19 on global supply chains and how they transmit and develop new knowledge. As described in Chapter 1, the history of performance improvement and cost reduction for solar PV and Li-ion batteries is a global one: new ideas were passed between regions by mobile companies and researchers that responded to the market and funding opportunities in different countries. Global supply chains have been weakened by recent lockdowns and restrictions in response to the Covid-19 pandemic, and it remains unclear how national policy responses will affect their future development.

The overall picture that emerges from the policy announcements and the data presented in this section is that of a seriously weakened innovation system, with demonstration, market entry and learning-by-doing suffering most in the first instance. Additionally, sectors that currently have limited commercially available and scalable low-carbon options and that were already missing concerted efforts to develop suitable zero emissions technologies, could face even longer delays to clean energy innovation. Although emerging economies have yet to publish economic stimulus plans, many of them are likely to be facing particularly significant pressure on their R&D budgets. The evidence so far suggests a systemic challenge: although the risks to basic R&D and prototyping may be lower in the near term, their impact will be diminished if the system as a whole has less capacity to make good use of them. In broad economic terms, if 20% fewer firms are established in a crisis year, which was the case during the 2007-08 financial crisis, then employment could be 0.7% lower overall three years later, and 0.5% lower 14 years later (OECD, 2020c). This issue has not been addressed so far in recovery packages.

While it is too early to determine the impact of the Covid-19 pandemic on public energy R&D, the outlook is an uncomfortable one. In many cases, the relevant budgets may be fixed for the next couple of years, and the budgetary pressures may be strongest in the period 2022-25. This seems to be what happened in the years following the 2007-08 financial crisis. In Europe, for example, R&D budgets significantly decreased in 2011-13, three years after the financial crisis, particularly in those countries with the deepest recessions (Izsak et al., 2013). It is worth noting, however, that several major countries turned to R&D policy as a way to reduce reliance on the financial sector after 2008-09 and introduced new types of innovation instruments, such as guarantees, loans and support for VC (see Chapter 5). This is consistent with policies in these countries to pursue counter-cyclical R&D policy, but it is not an option that is available to all governments (OECD, 2009; Pellens et al., 2018).

Emerging economies like Brazil and India, which have recently been raising their ambitions to develop indigenous clean energy technologies, may suffer setbacks unless they can tap into additional budget resources. These countries are identifying specific technology needs for their societies and climates that are not being addressed by companies and researchers in other countries. As emerging economies represent most of the projected growth in energy demand in the coming decades, what they decide has important implications for the clean energy transition as a whole. A prolonged downturn in any country would also carry the risk of the loss of highly skilled and highly mobile staff.

Another innovation-related area where government spending is threatened is infrastructure. Governments and regulated entities are typically the primary investors in networks such as electricity grids, district heating, gas grids and communications technologies. Enabling infrastructure that anticipates the needs of new technologies is often critical to the speed of their success. Lower revenues for regulated utilities around the world as a result of Covid-19 pose a challenge to ramping up investments in smart grids, hydrogen-ready pipelines and refuelling, and even CO₂ storage. Where third-party access is guaranteed, the costs of entry for new technology options can, however, be greatly reduced. In the United States, such guaranteed third-party access for CCUS projects as a result of government investment in CO₂ pipelines for the oil industry forms the basis for major CCUS project designs today.

Corporate R&D is highly likely to be cut or to grow much more slowly in most energy-related sectors as a result of lower revenues in 2020 and beyond. This impact is already evident in company reports for the first quarter of 2020, with companies representing a large share of global revenue in the automotive, aviation and chemicals spending less on R&D than in previous years. Reductions were seen in all reporting companies in the chemical sector, with some declines of over 10%. This matches the perceptions of respondents to our survey in May 2020, who anticipate pressure on corporate R&D budgets for key net-zero emissions technology areas for the rest of 2020 and into 2021 (Chapter 1).

The financial crisis of 2007-8 and the oil price collapse of 2014 provide some insight into the likely response of companies to the impacts of the Covid-19 pandemic. In 2009-10, the total R&D spending of major energy sectors held up well relative to revenues, with the exception of the automotive sector. However, in absolute terms, the electricity supply and renewables sectors were the only energy sectors not to experience slower growth or cuts to R&D budgets in this period. As in 2009, the outcome will be heavily influenced by government policies: for example, the tax incentives and R&D-specific loans being proposed for inclusion in some stimulus packages should be helpful. It is also worth noting that there is some evidence that recessions can create opportunities for companies to reorient to disruptive technologies (Archibugi et al., 2013).

While R&D spending is likely to suffer in the next few years, it can be expected to be much less affected than capital expenditure, as companies seek to retain R&D staff and capabilities and to complete ongoing projects. Furthermore, as underlined by our survey, major companies in several sectors have restated their commitment to a longer term decarbonisation strategy in spite of the challenges ahead. Cuts to capital investment could, however, be more damaging than cuts to R&D for large-scale demonstration of technologies, such as CCUS. Major projects could be postponed and lose vital momentum. Net-zero goals rely on several large-scale, pre‑commercial technologies such as CCUS, low-carbon steel processes, large-scale hydrogen supplies, new ships and aircraft concepts (see Chapter 4). A loss of momentum now would be especially bad timing: the past year has seen a number of path-breaking commitments by major industrial players to net-zero goals, which implicitly commit them to the scale-up of technologies in need of demonstration and first-mover investment. A salient example is the integration of low‑carbon hydrogen into refineries and gas grids to help meet the ambitious emission targets of several oil and gas companies.7 Several such projects – including H2.50, H21, HySynergy and NortH2 in Europe and Sundance Hydrogen in Canada – are currently at the design stage and represent some of the first to be driven largely by private rather than public financial incentives.

Early-stage energy VC deals were still on a par with 2018-19 levels in the first quarter of 2020, but global declines are expected in the rest of 2020 as a result of financial risks, travel, and other restrictions and policy uncertainty. If growth equity is included, a global decline in the first quarter of 2020 is already visible in the data.

It is widely recognised that many start-ups and innovative SMEs will struggle to stay afloat and will face cash flow and debt challenges, leading to lay-offs and losses of energy technology experts. Other start-ups may have to sell shares in their companies at a low price. Young companies with capital-intensive technologies, such as those needed in many sectors that currently have limited commercially available and scalable low-carbon options, may be less attractive to VC investors if market conditions reduce investors’ willingness to wait for financial returns. This could put a brake on financing for innovative entrepreneurs at a time when several major governments are seeking to rely more heavily on VC financing to bring clean energy technologies to market. It could also stimulate a policy discussion about the clean energy technology types that are best suited to VC financing and about other potential models for bringing other types of technologies to market.