Unlike most areas of energy investment, and against many expectations, clean energy venture capital investments did not contract during the pandemic. Rather, momentum for annual early-stage investment was maintained at around USD 3 billion in 2020 and rose higher in 2021 as it became more evenly distributed internationally. Increasingly, investors have become convinced that energy transitions are indeed happening and that they will be underpinned in the near term by proactive government recovery policies and robust corporate demand.

The role of governments in facilitating this surge has been little discussed despite the major role of public support for the basic research from which many of the new ideas have sprung and despite the increase in targeted interventions of governments to overcome specific challenges faced by start-ups in the area of clean energy. This is a highly regulated, hardware-intensive sector that faces a fragmented and uncertain policy environment, as well as an investment community often unfamiliar with energy and sometimes poorly aligned with its funding needs. To meet the technology needs of a net zero emissions future, however, a sustained “wave” of investment in a much wider range of potentially disruptive ideas is required, supported by effective public policy.

This report focuses on government support for start-ups – young small and medium-sized enterprises or “SMEs” – striving to bring novel clean energy technologies to market. Although these companies are generally less than seven years old and have not yet commercialised any profitable products or shared dividends with investors, they could provide part of the solution to the significant societal challenges we are facing.

Countries around the world strive to become home to the next Tesla, BYD or Vestas, with good reason. Without more innovation, energy and climate goals will be out of reach. Just as importantly, nurturing start-ups to maturity can create local economic prosperity, and clean energy transitions will be a major market opportunity for all countries, all century long.

Policy plays an essential role in clean energy innovation. In the past this has taken place largely through funding R&D projects, providing tax breaks and using market regulation to incentivise improvements to product design and reductions in costs. But, with higher expectations that certain clean energy technologies can be commercialised by entrepreneurs anywhere in the world –especially true for mass-manufactured technologies like batteries, electrolysers, modular reactors, sensors, solar panels and vehicles – governments are moving to support innovative start-ups directly.

The number of government policy measures to help start-ups get new clean energy technologies to the market has risen sharply since the Paris Agreement was signed in 2015. This is extremely encouraging. Many government approaches deviate from the traditional funding models used by public institutions to fund research projects. Instead, they seek to tackle specific barriers unrelated to the quality of the underlying technology. They make use of creative policy designs, sometimes adopted from sectors like digital technology or biosciences, including concessional debt, equity funds, incubation, matchmaking and prizes.

A well-designed support policy for clean energy start-ups will never be sufficient on its own to meet innovation policy goals: the most successful regions address a wide range of innovation system needs. These needs vary widely among countries, and there is rapidly growing interest in clean energy innovation in emerging market and developing economies where resources to address them continue to be scarce compared with advanced economies. Innovation system needs also vary between technology areas. Some key, large-scale, clean energy technologies may not emerge via the start-up route.

Governments possess a range of strengths beyond their ability to provide grant-based financing to help clean energy innovators grapple with barriers. These strengths include operating world-class laboratories, trusted reputations, extensive networks, and a capacity to target technologies that are widely agreed to be important for the future but which are not yet viewed by investors as having near‑term profitability. Governments can also choose to selectively target underrepresented social groups; for instance, several countries have launched programmes in recent years to support female clean energy entrepreneurs. Among the policy initiatives surveyed by the IEA for this report, many include new ways to draw on these strengths.

A daunting challenge for policy makers is to identify which of the many gaps currently hindering early-stage clean energy start-ups they are best-placed to address. According to where the gaps reside, they include:

Governments

1. Limited consideration of the specific needs of different clean energy technologies that can make generic support measures ineffectual.

2. Low awareness of the different pathways new technologies follow from laboratory to market, including the role of start-ups, the barriers they face and their disruptive impacts.

Investors and incubators

3. Continued lack of investor attention to the innovators’ need for longer timelines to perfect new technologies as well as for ongoing policy support to address urgent developmental and environmental challenges – despite a recent upsurge of investment in some clean energy technology areas.

4. Scarce knowledge of energy technology, policy and regulation details.

Innovators

5. Perceived excessive risk on the part of high-potential inventors (especially from certain social groups underrepresented among business founders), which makes them hesitant to launch new technology businesses.

6. Insufficient non-dilutive capital to enable start-ups to experiment and learn about their early-stage technologies and business models.

7. Lack of entrepreneur awareness on how to access capital, infrastructure and business services in a timely manner at each stage of the innovation process.

8. Limited awareness of overseas market opportunities, as well as of funds and incubation services available for clean energy technologies in other countries.

Corporations

9. Lack of awareness among energy suppliers and users on the status and potential of new clean energy technologies, and on where to access such information.

10. Insufficient interaction among firms (of all sizes) in unconnected technology areas that could work together to catalyse new approaches.

For each gap, a wealth of choices are possible. For example: Should the government provide support itself or fund a third party to do so? Should start-ups be able to access support at any time or only in fixed windows, like most research programmes? Should support be available for international companies that have locally relevant technologies or only available for innovators emerging within the jurisdiction? Should support be available for business development or should it be limited to technology projects if there is a risk of distorting competition? And, finally, which level of technical maturity would benefit most from policy attention?

Policy makers seeking to develop new measures or improve those already in place can benefit greatly from a resource that showcases existing international approaches to tackling these gaps. Of course, in most cases it is too early to perceive the full impacts of these policies, but their different approaches and the ways in which their administrators have learned over time are informative.

Leadership will come not only from advanced economies. Distinctive approaches can be found, for example, in initiatives in Morocco, Singapore and India. Analysis in this report unpacks policy examples according to a framework of four primary support functions and two delivery options.

The Women in Cleantech Challenge in Canada complemented its prize design and hands-on support to female entrepreneurs with an unconditional stipend for six finalists that helped them manage critical cash flow concerns during the programme. Green Innoboost 2.0 in Morocco is a programme that allows start-ups to choose between grants or equity investment; if they choose grants, the government funder is entitled to a share of the resulting annual revenue. Innovation Norway, a state-run enterprise to help Norwegian companies allocates advisors to guide each start-up to the most appropriate funding opportunities. The Swedish Energy Agency’s grants are designed to guide innovators’ technologies to the next level of maturity, including by ensuring that they co‑operate with potential customers.

Access to infrastructure such as laboratories can be provided in different ways. The US American-Made Challenges programme is based on competitions in well-defined technology areas identified by policy experts, and successful start-ups receive vouchers for technical support to help them succeed in later stages. The IN² programme, also run by the US government, channels private capital to national laboratories so that they can support high potential clean energy start‑ups identified through scouting exercises. In India, the Clean Energy International Incubation Centre has built dedicated equipment, and blends public and private money with access to the facilities of a large electricity distribution company. Ecolabs-COI in Singapore takes a similar approach; it has developed links with a range of commercial entities that can host real-world tests of start‑ups technologies. This stands in contrast of the United Kingdom’s Energy Systems Catapult Living Labs, which provides similar opportunities but in residential households that are equipped for field trials of smart and efficient solutions.

Many policy initiatives also help start-ups with tailored services that they would find difficult to buy themselves. While Chile runs a world-renowned public programme, Start-Up Chile, the European Commission has chosen to fund a private entity to deliver the services available via EIT InnoEnergy. The Indian government also uses an indirect approach for its Technology Business Incubators, but it has designed a distinctive system with the means to channel public financing and infrastructure support to start-ups, as well as business services.

In some situations, it can be highly impactful and cost-effective to focus on enhancing connections between start-ups and potential sources of financing and support. The US Department of Energy used public funds to launch a national network of incubators to strengthen connections that had been identified as too weak; the result, Incubatenergy, is still active and privately funded. In Germany, Start Up Energy Transition is both a prize for early-stage innovators and a means of connecting them with investors, policy makers and the public imagination.