Top 10 ways governments can support clean energy start-ups
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 US$3bn 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 IEA recently published a report focusing on government support for start-ups – young SMEs – and here are the 10 ways governments can bring novel clean energy technologies to market.
In Bill Gross' widely watched TedTalks video on start-ups (above), he found timing is the number one factor differentiating between success and failure, and the idea isn't the most important factor.
Although they are intangible, networks of peers and professionals are critical resources for start-ups. While their needs change as they mature and grow into larger SMEs, they remain reliant on open flows of knowledge, access to expertise and connections with investors and customers. Investors and incubators often also have limited funds to buy services and research, which can create a system of reciprocity to help networks flourish.
09: Access to expertise and professional advice
External knowledge is a highly prized commodity for new companies, especially if their founders do not have substantial previous business experience. For small firms, gaining this knowledge through a consultant is often very costly, or is impossible without strong expert connections.
As many of them are the core competencies of incubators and accelerators, governments generally provide these start-up services through third parties rather than developing the capacity to offer them directly.
The most common form of government support is grant funding for incubators, either to carry out general activities or, in some cases, to execute defined programmes for clean energy technology start-ups.
08: Providing access to costly facilities
Access to laboratory equipment and office space are two essential costs that can be difficult for early-stage companies to finance. Laboratory access is critical for developers of hardware products at all stages, from the earliest experimentation to prototyping and, later, product development for demonstration and sale. Furthermore, in highly regulated sectors such as energy there is often a need for accredited testing to ensure compliance with industry standards, whether for appliance safety, electricity grid integration or fuel supply norms.
Young technology companies nearly always need more capital. At their launch, they often function on savings or funding from friends and family. At this stage (no more than TRL 3), fast access to government grants could help extend the company’s viability from a matter of months to a year or more. Depending on the rules associated with grants, they can allow business founders to build prototypes, recruit staff, access test equipment, undertake market research, attend conferences and buy business services – or simply pay bills.
06: Clean energy entrepreneurship emerges as economic opportunity
The lockdowns and slowdowns in economic activity accompanying the Covid-19 pandemic have hit SMEs particularly hard. Small firms have insufficient capital buffers, with start-ups often surviving by raising small amounts of financing at frequent intervals. In early 2020, a number of governments extended bridging capital to start-ups in this position to avoid losing high-potential companies and their knowledge. This action also reflects the philosophy that economic recovery can be stimulated by investing in fledgling companies that could seed local economic growth. Since mid-2020, government plans have included investments in clean energy technology areas that aim to redirect and sustain recovery over the longer term.
05: Clean energy transitions will be a major market opportunity for all countries
Achieving net zero emissions will require an unparalleled increase in clean energy investment. In fact, the IEA Net Zero Emissions Scenario indicates that annual investments in clean energy must more than triple to USD 4 trillion by 2030. Although mobilising such a considerable sum will be challenging, this investment will not only ensure clean energy transitions but also offer unprecedented market opportunities for equipment manufacturers, service providers and developers, as well as engineering, procurement and construction companies along the entire clean energy supply chain.
04: Nurturing start-ups to maturity creates local economic prosperity
Economic renewal and growth are usually core policy objectives of government support for energy innovation. Governments (including local ones) therefore aim to help the originators of new technological ideas (who have often benefited from public grants) expand their business to a critical mass of operations in the region. Before attaining this critical mass, a limited number of jobs are typically created for well-educated R&D engineers and business developers. At this stage, there is a risk of investors moving their start-ups out of the region, for example to be closer to an investor’s own ecosystems or to where innovation support is already strong.
03: Energy technology companies are underfunded by private capital
Clean energy technologies are not always well suited to the prevailing venture capital model, which emerged primarily to support information technology start-ups. There is a mismatch between the short time horizons of most venture capital funds (which promise to return capital to investors in around five years) and the longer timelines and large upfront investments needed by developers, particularly of energy hardware. Furthermore, energy technology developers must often overcome many technical, commercial and regulatory hurdles to become sustainable businesses.
02: Energy innovation is expanding thanks to start-ups
Much past energy innovation originated from large companies that benefit from considerable market power. These companies, mostly in energy supply sectors but also in industry and transport, operate sizeable research facilities and control extensive infrastructure and markets for deploying new technologies. This innovation model was attractive because it offered the economies of scale and precision engineering necessary to develop and market nuclear energy, fuel processing and combustion technologies; entrepreneurial start-up firms have therefore played a smaller role historically.
However, with regulations leading to market decentralisation and greater attention being paid to environmental performance, the scope of energy innovation has broadened. A wider range of energy sources, smaller-scale technologies and their associated energy system challenges have now become mainstream.
01: Without more innovation, energy and climate goals will be out of reach
There is wide agreement that meeting the climate challenge will depend on accelerating clean energy technology innovation, as the energy sector is the source of around three-quarters of global greenhouse gas emissions. However, rising demand for energy services is inseparable from a growing global population with aspirations for a better quality of life.
Almost half of the emissions the world needs to avoid to achieve net zero emissions by 2050 cannot be tackled with technologies on the market today. Rather, cutting these emissions will require technologies that are still at the demonstration or prototype stage, mostly in sectors such as heavy industry and long-distance transport. Even in other sectors, however, it is difficult to imagine low-carbon energy penetrating all corners of the global economy without continued performance improvements, cost reductions and adaptation to diverse local contexts.