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Weekend Analysis

Nuclear fusion need not apply: Planet-saving tech is ready to scale

Venture investors say the primary challenge for climate-tech startups is no longer deep-tech breakthroughs. It’s time to build.

Earlier this month, scientists shot a cluster of lasers at hydrogen isotopes and—for the briefest of moments—got an inkling of what it would be like to control a star.

The experiment at the Lawrence Livermore National Laboratory in California marked the first time that a fusion reaction spun off more energy than was used to create it. It’s an important milestone, but commercial fusion is likely still decades off, even if things go well.

The task at hand is upending the global energy system, so more moonshots are certainly merrier. But the climate is not waiting, and dozens of other clean energy technologies are ready for prime time. Moreover, politicians finally seem ready to spend money to accelerate their deployment.

Venture investors say the primary challenge for climate-tech startups is no longer deep-tech breakthroughs. It’s time to scale. But how do they do it? New business models, big-name partnerships and gigatons of software.

Relative to the rest of the VC landscape, clean-energy and carbon-tech investment have been strong this year, and are close to matching 2021 records. Valuations have been particularly robust.

Some of the notable areas of investment include hydrogen and solar. On the hydrogen side, one of the year’s largest VC deals was Monolith‘s more than $300 million round in July led by Decarbonization Partners and TPG. Within solar, Palmetto‘s roughly $375 million raise led by Social Capital was a standout.

The ongoing energy crisis and the passage of the Inflation Reduction Act have provided significant tailwinds for the sector and helped offset the negative effect of inflation, particularly on raw materials. Rising energy costs have helped to reduce the payback period for energy investment and given governments an incentive to secure domestic energy sources.

With the rapid build-out of renewables set to continue apace, the opportunities for companies that can meet that demand have never been better.

“All roads to deep decarbonization drive through cheap clean renewable energy,” said Shayle Kann, a partner at Energy Impact Partners, which recently closed a $485 million fund.

Software for scale

Fundamentally, the effect of federal spending and the energy crisis is that renewable energy and electrification are expected to grow much faster in the US than previously thought.

What’s needed to support that rollout is software and services that make everything from financing and consulting to installation and maintenance much more scalable, said John MacDonagh, a PitchBook analyst covering climate technologies.

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Examples include design software for installing infrastructure like home solar or battery storage, said Kevin Stevens, a partner at Energize Ventures. In that vein, Energize recently led a $66 million equity investment into Sitetracker, which makes software to manage infrastructure projects in clean-energy and telecom applications.

New energy assets tend to be smaller and more distributed than legacy infrastructure, which gives software players a important role to fulfill.

“The high growth ahead in distributed assets will make coordination increasingly important,” Stevens said.

Energy is eating the world

The rise of distributed assets also presents an opportunity to create new business models. Much in the way that the rise of “embedded finance” allowed startups across industries to act like banks, renewable energy and battery storage are enabling more companies to think like energy providers.

Take real estate operators, who are now in a position to supply power to electric vehicles as transportation refueling moves from the gas pump to the garage. And the combination of onsite solar and storage means that property owners can act as independent power suppliers.

“This is a massive opportunity for the built environment to become an energy player,” said Greg Smithies, a partner at VC firm Fifth Wall. “I think we’ll see real estate companies setting up energy divisions and going after this opportunity aggressively.”

Smithies co-leads Fifth Wall’s climate fund, which invests in real estate tech companies and closed a $500 million fund in July.

Earlier this year, MGM Resorts opened a 100-megawatt solar project in Nevada that supplies 90% of its daytime power across 13 properties. This project and others like it show that property managers are willing to invest in energy projects that reduce costs and provide a reliable energy source, Smithies said.

Proving through partnerships

For climate technologies that are less mature—such as hydrogen, carbon capture and next-generation batteries—the immediate task is to strike partnerships and build out projects that prove the technology and its economics.

Recent federal spending comes with several strings attached that aim to bring manufacturing to US soil. That’s a benefit to, for example, US battery startups that want to partner with major battery makers or scale their own production. They may no longer have to sell into foreign markets to do so.

In the case of emissions-free hydrogen, suppliers need to find appropriate use cases and partner with heavy users of the gas, MacDonagh said. Because hydrogen is difficult and costly to transport, certain applications and locales will be far more competitive than others.

Carbon capture is another area where locality and partnership matter. This week, Chevron led a $318 million investment into point-source carbon capture startup Svante, which the latter will use to build a factory that makes carbon dioxide filters for hundreds of projects globally.

For all of these developing technologies, both the Inflation Reduction Act and the Bipartisan Infrastructure Law provide generous tax credits that make many new US projects economically viable.

“A lot of what will happen next year is waking up to the opportunities and challenges of this legislation,” said Energy Impact Partners’ Kann.


Correction: This article has been corrected to reflect that the recent fusion experiment involves directing laser energy at hydrogen isotopes, not helium isotopes. (Dec. 19, 2022)

Featured image by Joey Schaffer/PitchBook News

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