With 2022 in retreat, investors make no secret that they are looking for safe investments. In a tough market and higher interest rates, it's not surprising, but what can make investors wonder is where they think those quality investments are to be found. Increasingly, in climate technology.
The sector had a crazy 2021, and while 2022 may not exceed those heights, it hasn't had a bad year at all. Till the date, VC investors have poured $24.900 billion into climate-tech startups, up from $31.900 billion in 2021, according to PitchBook data. While many observers believe 2021 was an outlier, this year's decline may be more unusual given the sector's potential. Within five years, PitchBook expects climate technology to be a $1,4 trillion market.
As much as VCs like to say that their investment decisions are unaffected by political and geopolitical events, next year's deal flow is likely to be boosted by precisely that.
The trends that have begun to take hold this year are going to make a deep impression on the market. The year began with Russia's decision to invade Ukraine, and took an unlikely but welcome turn this summer with the passage of the Inflation Reduction Act (IRA). Together, these two developments have done more than any other to shape the recent landscape of climate technology.
So, now that more and more investors want to dive into the world of climate, let's take a look at where they are likely to put their money to work.
Software to deploy and manage renewable energy
The Russian invasion of Ukraine led many countries to embargo the aggressor's oil and gas. It also made them look for alternatives. Although renewables can't replace that kind of demand in a few months, self-imposed shortages have caused many economies to rethink their reliance on fossil fuels. This, in turn, has led to a great deal of interest in wind and solar power and, more importantly, large batteries to ensure that those intermittent sources can supply continuous and stable electricity to the grid.
The IRA further bolstered the strong position of renewables. The law extended the tax credits - which expired at the end of the year - until 2032, giving developers a breather to propose and execute new large-scale projects. As a result, Deloitte expects the IRA to power up to 550 gigawatts of clean power on a commercial scale by the end of the decade.
As renewable projects become more sophisticated - made possible in part by batteries - developers will need software and platforms to manage them. I expect investor interest in startups with software solutions focused on grid-scale renewables and batteries to increase in the coming year.
Direct air intake
In addition to renewable energy, the IRA gives a boost to carbon sequestration projects through improved tax credits. While all forms of carbon capture benefit from this, I suspect investors will pay more attention to direct air capture, which, rather than sucking in carbon dioxide from an exhaust stream, draws it directly out of the atmosphere. The IRA offers tax relief of up to $180 per metric ton, a significant increase from the $50 per metric ton previously offered.
The DAC is still a nascent technology and there are ample possibilities to improve its efficiency and reduce costs. I've heard investors express renewed interest in this sector, and I suspect that its early phase, coupled with attractive fiscal prospects, will prompt significant investment.
Green hydrogen
Today, most hydrogen is produced by pumping steam into methane gas, and the combination of heat, steam, and pressure breaks hydrogen atoms from methane molecules and combines them into H2. This process, dubbed "grey" hydrogen, has long been the cheapest, but it releases carbon dioxide. Furthermore, its reliance on methane creates its own problems, since this fossil fuel is a potent greenhouse gas.
However, the IRA turns these economics around by offering a tax break of $3 per kilogram of "green" hydrogen, which is made by using renewable electricity to split water into hydrogen and oxygen, without carbon dioxide or methane. The credit could make green hydrogen cheaper than the methane derivative.
Green hydrogen companies have been moving forward for years, but IRA credits are likely to pick up the pace. Investors are expected to put their money to work financing startups specializing in green hydrogen, from water-splitting electrolysers to plant developers and end users.
Software for renovation contractors
It may seem strange for a climate technology article, but the IRA is about to unleash a wave of energy-efficient home renovations that will generate huge demand for renovation contractors. The law includes tax credits for windows, doors, insulation, air sealing, electric vehicle chargers and heat pumps.
There is likely to be a lot of pent-up demand for these upgrades, which people often hold off on because they don't offer the same level of satisfaction as a new kitchen or bathroom.
But, as utility energy efficiency programs have shown, people will jump at the chance to make these subtle but significant changes if the price is right. Now that these improvements will become more attractive, contractors are going to be very busy to keep up with the demand.
To help streamline the process and keep contractors working instead of bothering with office work, I'm guessing we'll see a number of SaaS startups enter the space to help with everything from customer acquisition to project management. , billing and even education.
Mining of critical minerals
Even before the IRA was debated, everyone expected it to include an extension or extension of the popular EV tax break. What people did not expect were the demands of Senator Joe Manchin: half of the credit requires batteries made in the United States with materials from that country or from friendly countries.
This provision caused car manufacturers and their suppliers to rush to build factories and sign mineral extraction agreements. Of the two things, the more difficult will be to get enough minerals. As a result, investors are likely to look to fund start-ups that find new ways to find and extract the minerals electric vehicles need, such as lithium, nickel, cobalt and rare earths.
fusion energy
It was the event that closed the year with a flourish, literally. Earlier this month, researchers at Lawrence Livermore National Laboratory declared that they had produced a controlled nuclear fusion reaction that had generated more energy than the facility's lasers had injected into it. We are still a long way from commercial fusion power plants, but this breakthrough means that net positive fusion power is no longer a hypothesis.
Investors have been betting on the merger for several years. It's the kind of high-risk, high-reward technology that defined the kind of bets that made venture capital an influential source of capital. Recently, a confluence of factors has given new impetus to this once-moribund field, and the new development is likely to unleash a flurry of startups and investors hoping their solution will be the one that brings power from the sun to Earth. .
Another hot year?
As 2022 draws to a close, the market remains unsettled. It is possible that the economy will go into recession, although there is also the possibility that it will not. One certainty, however, is climate change. Scientific evidence continues to mount that climate change is not only happening, but that the consequences could come sooner and be more dire if swift action is not taken.
In addition, governments around the world are taking an increasingly tough stance on climate change, tilting laws and policies toward action. Investors are taking notice, with some even calling climate technology "recession-proof."
It may or may not be hyperbole, but there is some truth to it. It seems that the world has realized that if it wants to minimize climate change, it will have to spend more money. Will 2023 be the tipping point that marks the start of exponential growth? I suspect that next year around this time we will know more.
