A Peek Into Recent Conversations About Funding for Energy Innovation
By Zdenka Myslikova
Finance and the global financial architecture was front and center at COP26 in Glasgow. Some even called the summit a climate finance ministerial. In the clean energy technology community, one of the central puzzles for this COP was how to “aggressively fund climate solutions – not polluters and fossil fuel corporations” (Senator Ed Markey on Twitter). Some voices called for major changes in the global financial system, which climate advocate Kate Mackenzie suggested is structurally blocking efforts to stabilize the climate.
Some important new initiatives were announced at COP26 to support companies that are working to bring energy and climate solution innovations. Mission Innovation (MI), in its second term, an initiative of 22 governments, and the European Commission committed to develop and scale breakthrough technologies, and Bill Gates-supported Breakthrough Energy (BE) announced their intention “to accelerate critical clean energy technologies towards commercialization” via public-private sector collaboration, focusing on mid- and lower- income countries. The United States government, in collaboration with the World Economic Forum, introduced the “First Movers Coalition,” a partnership that includes 34 companies across carbon-intensive sectors that pledged to spur demand for green materials and products. The aim of the First Movers Coalition is to incentivize innovative technologies to help to decarbonize hard to abate sectors including aluminum, aviation, chemicals, cement, shipping, steel and trucking.
There is a wide range of policy instruments that governments can deploy to strengthen energy innovation. The recent report for clean energy innovation in the European Union emphasizes innovative funding sources for energy innovation and instruments for commercial-scale demonstration projects. Demonstration plays an important role in moving expensive technologies past the valley of death. But not all governments have the financial resources to dedicate to large demonstration programs such as those most common in the US, Europe, and China. Data on demonstration spending is sparse. While governments in Mission Innovation report funding for research and development (R&D), often data do not clearly delineate the level of spending in demonstration.
Deploying more funding to energy innovation
Among important financing initiatives is the European Innovation Council’s (EIC) Accelerator (Accelerator). The Accelerator supports start-ups and small and medium-sized enterprises (SMEs) in the European Union that develop high-risk high-gain innovations in their quest to find and attract patient capital from pilot stages to deployment. Companies can apply for a grant of up to USD 2.8 million for technology development and then request additional funding up to almost USD 17 million for scaling up. For the latter, scale up funds must come in the form of equity, related to a percentage of the total funds raised.
The total EIC’s budget amounts to almost USD 12 billion, though the Accelerator’s budget for 2021 amounted only USD 1.1 billion. Nevertheless, the Accelerator provides funding mainly to European companies.
In the United States, the US government's new office of Clean Energy Demonstration at the US Department of Energy will play a similar role. The office will allocate $20 billion authorized in the new US infrastructure bill for demonstrations in hydrogen, carbon capture, grid-scale storage and small modular nuclear reactors.
Mission Innovation and Breakthrough Energy in their newly announced intention focus on public-private partnerships in low- and middle-income countries. It is a significant development because many countries have not had a sufficient opportunity to develop a local clean energy technology ecosystem. Many countries lack the incentives and regulatory policies that would be needed for new firms to flourish. The recipient companies may find the regulatory framework in their home countries is not conducive to innovation. My research shows that clean tech development in Latin America is hindered by a lack of attention to the specific needs of local entrepreneurs and over-attention to attracting foreign technologies and methods. High levels of bureaucracy are another significant obstacle. For example, lengthy reporting on the use of grants from the public programs in Brazil eats up time from start-ups and SMEs with limited resources; time they would otherwise spend in laboratories inventing. The perception of being in a catching-up role and perhaps too late into the process to be successful is another roadblock that makes it complicated for the stakeholders in these ecosystems to experiment and innovate.
But the important message is that funding for energy innovation is out there, including funding for demonstration. And it is key to disseminate the information for companies to apply for the funds and use them to progress in their innovation efforts.
Venture capital for cleantech – yes or now?
Some academic studies have suggested that venture capital was not fit to purpose with the more patient capital needed to foster successful clean energy companies in the early 2000s. But this conclusion has been revisited in recent years. Shayle Kann and Ramez Naam, two climatetech enthusiasts and experts, in a conversation hosted in the Catalyst podcast ponder the VC’s role in clean tech and conclude that while many companies that focused on developing “deep” technology innovation in the 2010s wave of investment faced bankruptcies, ten years later, this doesn’t have to be the case going forward. The term ”deep” technology (deep-tech) is used to distinguish the hardware and materials form of technology from the software and digital. Earlier bankruptcies in deep-tech made the impression that software digital innovation was the only segment of clean tech that can yield sufficient returns. Nevertheless, venture capital funding is now flowing again into both hardware and software companies in cleantech, in a trend that seems to be gaining momentum. In fact, Shayle and Ramez indicate that venture-scaling a business in deep cleantech in 2021 is not a utopia anymore!
In the United States, special purpose acquisition companies (SPACs), a publicly traded entity created for the purpose of acquiring or merging with an existing company, have also become a financial vehicle of choice to capitalize early stage clean tech firms, with over three dozen SPACs acquiring firms in 2021 alone working in public electric vehicle charging, electric trucks, hydrogen, biofuels, and grid network solutions, among other clean tech areas. Now a favored way to bring new clean tech companies to markets, SPACs have had a mixed result in terms of investor return. Experts predict this form of financing deals will continue apace but with more scrutiny to structure and marketing materials from regulators and investors alike.
My humble opinion? The future is clean tech, and only clean tech across all industries and sectors no matter how many deniers, wafflers or surrenders are still out there. All venture capitalist out there, run and ride the wave!
And dear readers of this blog, I am ready for a sustainable Christmas feast, and wish you all peaceful holy days. ∎
Zdenka Myslikova is a postdoctoral scholar in the Climate Policy Lab at The Fletcher School, Tufts University.