With 2022 in retreatinvestors have made it no secret that they are looking for safe investments. In a challenging market with higher interest rates, that’s no surprise, but what could raise eyebrows is where investors think those quality investments lie. It is increasingly in climate technology.
The industry had an insane 2021, and while 2022 may not rise above those heights, it hasn’t had a bad year at all. To date, venture capitalists have invested $24.9 billion in climate technology startups, compared to the $31.9 billion invested in 2021, according to PitchBook data. While many observers think 2021 was an outlier, this year’s dip may be more unusual given the industry’s potential. In five years, PitchBook expects climate technology to be a $1.4 trillion market.
As much as venture capitalists like to say their investment decisions are unaffected by political and geopolitical developments, chances are that next year’s deal flow will be driven by just that.
The trends that have started this year will really bite into the market. The year started with Russia’s decision to invade Ukraine, and it took an unlikely but welcome turn this summer with the passage of the Inflation Reduction Act (IRA). Together, these two developments have done more to shape the recent climate technology landscape than any other.
So with more investors looking to dip their toes into the climate world, let’s see where they’re likely to put their money to work.
Software for deploying and managing renewable energy
The Russian invasion of Ukraine led many countries to embargo the aggressor’s oil and gas. It also sent them looking for alternatives. While renewables can’t replace that kind of demand in a few months, the self-imposed shortage caused many economies to rethink their dependence on fossil fuels. That, in turn, has spawned a wave of interest in wind and solar power and, more importantly, large batteries to ensure those intermittent sources can provide continuous, stable electricity to the grid.
The IRA further strengthened renewable energy’s strong position. The law extended tax credits – which expire at the end of the year – until 2032, giving developers breathing space to propose and implement new projects at scale. As a result, Deloitte expects the IRA to boost up to 550 gigawatts of clean, utility-scale power by the end of the decade.
As renewable projects become more sophisticated – powered in part by batteries – developers need software and platforms to manage them. I expect that in the coming year we will see growing investor interest in startups with software solutions focused on renewables and grid-scale batteries.
Direct aerial shot
In addition to renewables, the IRA is boosting carbon capture projects through enhanced tax credits. While all forms of carbon capture benefit, I suspect investors will pay most attention to direct air capture, which instead of absorbing carbon dioxide from an exhaust stream, takes it directly from the atmosphere. The IRA offers a tax credit of up to $180 per ton, a significant increase from the $50 per ton previously offered.