Net-zero goals boost investment in tech sector

As the global energy transition gathers pace, innovation in clean energy solutions is producing a steady flow of deal opportunities

Investment in clean energy solutions is ramping up as governments and businesses race to meet ambitious decarbonization targets. To achieve net-zero emissions by 2050, the International Energy Agency (IEA) estimates that annual clean energy investment will need to more than triple by the end of this decade, to around US$4 trillion per year.

Governments across the globe are rising to the challenge, launching a host of measures to boost investment in clean energy technologies such as electric vehicles, solar power and battery solutions. In the US, the Inflation Reduction Act promises US$369 billion in subsidies to boost investment in green technologies. According to S&P Global, in the first ten months after the act came into effect, private equity firms made new renewable energy investments worth US$100 billion that would qualify for tax credits in the following six years. The European Union, Australia and Japan have since launched similar legislation to counterbalance US spending and increase funding for early-stage clean technologies.

With such incentives on offer, it is clear to see why investor interest in clean energy is growing. Global investment in clean energy reached US$1.7 trillion in 2023, according to the IEA, despite the uncertain macroeconomic climate.

Dealmakers announced a host of transactions in 2023 as PE and venture capital investors look to plug the investment gap and accelerate the growth and pace of clean energy innovation.

Transport decarbonization drives deals

PE firms have been active at the top end of the market, investing in a wide spectrum of clean energy solutions in the technology sector. In one of the largest such deals, in September 2023, US buyout giant KKR and UK investor Infracapital invested a combined US$1.1 billion in Zenobē, a UK-based EV fleet and battery storage specialist. The investment will expand the number of EVs and charging networks supported by Zenobē, with the company aiming to have 4,000 electric buses, trucks and commercial vehicles operational by 2026.

Decarbonizing the transportation sector, which accounts for a fifth of global carbon emissions, is central to achieving countries’ net-zero goals, with phasing out carbon dioxide-emitting vehicles high on the agenda. In February 2023 the European Parliament passed legislation that will require all new passenger cars and light commercial vehicles to generate zero CO2 emissions by 2035. In September the UK announced that the sale of new internal combustion engine cars and vans in the country will be banned, also as of 2035.

Momentum to decarbonize transport networks is also building in the US. In April 2023 the US Environmental Protection Agency announced its most far-reaching vehicle emissions reduction plan to date. New pollution limits set by the agency will require up to two-thirds of new vehicles sold in the US to be electric by 2032. To meet this threshold, current levels of EV sales in the US would need to increase almost ten-fold.

Dealmaking in the rare metals and EV battery space is also heating up. At the end of November 2023, US lithium refiner Stardust Power agreed a US$490 million deal to go public via a merger with special purpose acquisition company Global Partner Acquisition Corp II. Stardust intends to build a refinery in Oklahoma that could generate as much as 50,000 metric tons of battery-grade lithium annually. In late January 2024, Arizona-based Sion Power, which develops next-generation batteries for EVs, secured US$75 million in Series A funding from a group of investors led by South Korean battery manufacturer LG Energy Solution.

Beyond refining and manufacturing, several deals involving innovative lithium-battery recycling companies have also been announced in the US over the past few months. In November 2023, Princeton NuEnergy raised US$16 million from a group of investors led by Taiwanese electronics group Wistron to expand its recycling technology. This follows a US$12 million grant NuEnergy received from the US Department of Energy to commercialize its technology.

In September last year, Massachusetts-based battery recycler Ascend Elements raised US$542 million in Series D funding from various investors, including the sovereign wealth funds of Singapore and Qatar and several US and European VC groups. That funding augments the US$480 million Ascend had already received in grants from the US Department of Energy.

One of the largest energy storage deals of 2023 was announced at the end of August, when battery recycling startup Redwood Materials raised more than US$1 billion in its own Series D funding round. The company will use the investment to bolster its US-based battery supply chain as the domestic market tries to curb its dependency on Chinese materials. China processes 59 percent of the world’s lithium; the US, just 3.5 percent.

Consumer-facing renewables platforms scale up

Solar power is another clean energy subsector favored by PE players. In March 2023, US PE firm TPG invested US$150 million in clean energy platform Palmetto, which will use the funding to boost solar access for individuals and businesses across the US. A few months later, Trinity Solar, a family-run, New Jersey-based provider of residential solar, battery storage and energy services with operations in nine states along the East Coast, secured a growth investment from PE firm TSG Consumer Partners.

Increasing electricity bills have motivated US consumers to explore residential solar solutions. As demand increases, solar capacity is ramping up and is expected to grow by 84 percent over the next two years, according to the US Energy Information Administration.

Meanwhile in Europe, Prague-based climate tech startup Woltair announced a US$22 million fundraising in June 2023, led by Canadian VC firm ArcTern Ventures. The startup is looking to scale up its digital platform to facilitate the deployment of heat pumps and renewable energy solutions among European consumers. Woltair is expanding into Germany, which has experienced a surge in demand for heat pumps since 2022.

Battery storage receives a boost

Battery energy storage systems (BESS) are central to fulfilling net-zero goals. By storing power to be used at a later time, they enable increased penetration of renewables on the grid, mitigating the intermittent nature of renewable energy sources. The battery storage sector received an estimated US$37 billion in investment in 2023, nearly double the US$21 billion recorded the year prior, according to IEA figures. Meanwhile, McKinsey expects the global BESS market to exceed US$120 billion by the end of the decade.

Investors are taking note. In July 2023, Dutch infrastructure investor DIF Capital Partners announced a £200 million investment in UK BESS developer Field. Also known as Virmati Energy, Field will use the funds to develop its 4.5 gigawatt-hour pipeline of grid-scale BESS projects across the UK and Western Europe as it looks to improve the efficiency of wind and solar power.

This year, French oil and gas major TotalEnergies announced on January 23 that it had acquired German BESS company Kyon Energy in a €90 million deal. Kyon is currently developing Europe’s largest battery storage system in Germany’s Lower Saxony region. That same day, Instagrid, a German company specializing in high-performance portable battery systems, announced it had raised US$95 million in a Series C funding round led by Teachers’ Venture Growth, part of the Ontario Teachers’ Pension Plan. Instagrid’s battery systems are a sustainable alternative to conventional fossil-fuel generators, and the company intends to use this latest investment to expand into the North American market.

In the US, Tokyo Gas recently targeted Texas-based BESS company Longbow in a US$216 million deal announced in December 2023. Renewable energy production has grown rapidly in Texas, where Tokyo Gas already operates a 630MW solar farm. The Japanese company expects demand for BESS to increase quickly as well.

Software platforms amplify clean energy

Venture capital engagement in the clean energy sector has held up despite the challenging financing environment globally. According to European VC firm A/O, climate tech projects accounted for around 70 percent of total VC investment in 2023, or US$11.8 billion. Climate tech startups in Stockholm and London are leading the way globally, with the latter securing US$3.5 billion in VC investment in 2023, up considerably from US$2.2 billion the year before. This influx of capital is even more impressive given the recent global decline in VC activity, with persistently high interest rates and scarce liquidity inhibiting investment.

VCs are showing particular interest in AI startups that provide innovative solutions in the clean energy industry. For instance, San Francisco-based Verse raised US$6 million in July 2023 from a funding round led by US investment manager Coatue. Verse employs generative AI to help customers buy and manage clean power through its Aria platform, making the process simpler and more cost-effective.

Rotterdam-based AI clean energy platform Skoon Energy, meanwhile, secured US$5.6 million in funding in October 2023 through an investment led by US tech investor Blue Bear Capital. Skoon’s software platform connects users of traditional fossil fuels with clean energy solutions such as batteries, hydrogen and solar generators, affording them more choice when selecting an energy system. Besides ongoing software development, Skoon will use the investment to expand its team and enter new markets globally.

At the end of January 2024, US-based Crux Climate raised US$18.2 million in a Series A funding round led by VC giant Andreessen Horowitz. Crux facilitates the transfer of tax credits created by the Inflation Reduction Act via its sustainable finance platform. The company, which launched just one year ago, has already raised US$27 million in funding. According to a Crux report published mid-January, aggregate transfers for 2023 clean energy tax credits are estimated to reach up to US$9 billion.

Paving the way to net zero

Investment in clean energy will continue to gather at a rapid pace as the industry races to fulfil net-zero targets. Yet usage and uptake of clean energy solutions such as solar, EVs and heat pumps are spread unevenly across countries and sectors. For example, over half of the world’s EVs are in China, while demand and sales growth in Europe are expected to contract in the near term as consumers await more affordable models.

Battery storage is also not currently developing at the necessary pace. Grid-scale storage capacity is lagging behind net-zero targets in developed economies, according to the IEA, which has called for redoubled efforts in this area.

With the imperative of decarbonization and the mandates for net-zero emissions, investment in clean energy innovation should continue to enjoy favorable market and policy signals in 2024.

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