As leading scientists warn of a “rapidly closing window of opportunity” to address the climate crisis, venture capital firms have rushed to join the effort to save the planet. Large firms have stepped up climate tech investments from their generalist funds, and more dedicated climate funds are springing up. Since the start of last year, at least 22 climate-focused funds have closed on a combined $5.5 billion, including nine that pulled in $1.6 billion this year, according to research from affiliate title Venture Capital Journal.
Global venture capital investment in climate tech reached $70.1 billion across 3,325 venture deals in 2022, up from $1.6 billion in 2010, according to impact research firm HolonIQ. The money that poured into climate tech last year was up 89 percent from 2021. It fell sharply, however, to $11.2 billion across 400-plus deals in the first quarter of 2023, and HolonIQ projects it will total about $36 billion for all of 2023 based on first quarter volume and the broader economy.
The surge of investment comes as the United Nations’ Intergovernmental Panel on Climate Change (IPCC) warned in March that “there is a rapidly closing window of opportunity to secure a livable and sustainable future for all.” The IPCC issued its first climate report in 2018, making note of the “unprecedented scale of the challenge required to keep warming to 1.5C.” Five years later, the organisation’s sixth report observed that the challenge “has become even greater due to a continued increase in greenhouse gas emissions.”
Venture investors believe a significant part of the response to climate change must focus on energy grid resiliency. The grid is not prepared at this time for increasing electrification of transportation, heating, water electrolysis to produce green hydrogen (seen as a leading storage option for transporting renewable energy long distances) and other kinds of commercial and consumer demand, amid intermittent supply from renewable power. Nor is it ready for the rising frequency of extreme weather events. VCs are actively looking to fund companies building software and hardware to make the grid more resilient to serve the needs of everyday life.
Sameer Reddy, managing partner of venture at Energy Impact Partners, says energy grid resiliency will be “one of the biggest beneficiaries” of the $738 billion Inflation Reduction Act (IRA), US legislation passed in 2022 that promises billions of dollars to accelerate the country’s transition to clean energy.
“There are a lot of business models that will enable small and medium enterprises to open up their [EV] charging infrastructure”
Future Energy Ventures
“It’s one of the least well-compensated things in the IRA, but it helps beneficiaries from a second- or third-order effect perspective,” says Reddy, who leads EIP’s distributed energy and cybersecurity teams.
While microgrids and more resilient transmission and distribution (T&D) infrastructure are among the “less sexy ways to play some of the macro tailwinds coming out of the IRA, [they are part of] a category that we’re going to care about for decades to come,” Reddy tells VCJ. “Managing [grid] resiliency from a climate-adaptation perspective is only going to get more challenging as the infrastructure continues to age, as the workforce that serves that infrastructure continues to age, as we see more extreme weather, and then on top of all of that is a grid that continues to destabilise. That is one sector specifically that we’re spending a lot of time around.”
To increase resiliency, the grid will need to rely heavily on a variety of software platforms that can do everything from aggregate distributed energy resources (DER) – such as rooftop solar installations and battery storage – to be sold into the grid, to how, when and where to dispatch maintenance workers to repair malfunctioning EV charging stations. This will help avoid blackouts and brownouts as the grid comes under mounting stress from expanding electrification.
Within what can be a sprawling category, software platforms designed to make renewable energy generation and the overall grid more intelligent have grown in importance. The biggest IPO so far this year in any sector is Nextracker, which has developed a tracking system for utility-scale solar (defined as 100 megawatts of power or more). Nextracker raised $638.4 million with its IPO in February.
Initially, all solar panels were fixed tilt, facing south. Nextracker introduced innovative technology to track the sun east to west, and later added software. “It makes the solar power plant more intelligent, provides more power and makes it more dispatchable,” says Dave Kirkpatrick, co-founder and managing partner of SJF Ventures and one of the earliest climate tech investors.
Whereas investment in some of the basic smart grid technology has already been made, Kirkpatrick estimates that the start of mainstream adoption of more interactive “intelligent grid” technology – where the associated risks are reduced and the benefit of the technology is broadly accepted – is two to five years away.
Technology platforms designed to bolster grid resiliency represent roughly a quarter of the companies that Energy Impact Partners invests in, says Reddy. The $485 million Deep Decarbonization Frontier Fund I that EIP closed on last year has put capital into 15 start-ups so far and will back another 15-20 over the next four years.
Extreme weather events are putting more stress on “an inherently destabilising grid” caused by additional renewables on the supply side and rising electrification of demand such as in transportation. Microgrids are one of the varied ways to bolster grid resiliency, Reddy notes.
Enchanted Rock, which EIP began backing in 2017 with $16.4 million in development capital, is a market leader in what the Houston-based company calls microgrids-as-a-service. At the center of its business model is a goal to replace the incumbent technology, diesel power, a $15 billion-a-year industry that “has no reason to exist anymore,” given cleaner alternatives that are equally reliable, says Reddy.
Microgrids-as-a-service provides energy reliability to a local host customer, which can be a data centre, hospital or utility that has built a large source of distributed power generation off-meter to avoid outages during extreme weather events or blackouts and brownouts.
“For the 1 percent of the time when the grid is down, Enchanted Rock’s systems provide unprecedented reliability,” says Reddy. “But for the other 99 percent of the time, they provide reliability in a different way, which is by dispatching that electricity back to the grid.”
That benefits the grid by smoothing out intermittency from unpredictable renewables and providing local reliability to different parts of the grid based on certain needs at those times.
Enchanted Rock’s systems, concentrated in Texas, helped to keep all H-E-B grocery stores running during Hurricane Harvey in 2017 while the supermarket chain’s peers were unable to continue operating.
Microgrids get compensated based on volatility for the power they export to the grid when it is needed most. With grid volatility rising exponentially, “microgrids can make a considerable amount of money as well during times when the grid experiences scarcity events” and needs short-term access to dispatchable assets, says Reddy. Every major independent system operator (ISO) around the US operates “on razor-thin reserve margins, so they need this flexible capacity [whenever they] have underestimated load requirements or the temperatures are more extreme than they anticipated.”
While microgrids have been around for some time, the concept of energy services within commercial and industrial is becoming a focal point for many investors, says Mile Milisavljevic, a partner at EY-Parthenon who advises PE and other investors on clean energy transactions.
“[Digitised energy services for the C&I space are] actually a fairly complex value chain [starting] with energy audits, building envelope scans, things along those lines, so you know where your energy is going”
“It’s actually a fairly complex value chain [starting] with energy audits, building envelope scans, things along those lines, so you know where your energy is going,” says Milisavljevic. “It can involve anything from putting solar and battery storage onsite to support energy needs all the way to retrofitting motors and increasing efficiency of insulation. Then on the back end, there is a lot about tracking, measuring and interfacing with the grid and carbon trading… so there’s quite a bit of software and technology that goes into that.”
For Activate Capital Partners, which closed its second climate fund on $500 million last October, “the zoom-out question we think about all the time for our sector, but also just investments, is around the ‘Why now?’” says Anup Jacob, co-founder and managing partner of the San Francisco-based firm. “We have an investment thesis that we are experiencing this generational transformation to a world that’s not only digital but also decarbonised. We think about sustainability and resiliency as two sides of the same coin, really transforming how we power, produce and move everything.”
Jacob – who in 2013 ended his six-year tenure as co-founder and partner at Virgin Green Fund, the sustainable investment vehicle for Richard Branson’s Virgin Group – points to a 75 percent drop in solar prices and an 81 percent cut in battery costs over the past decade as key inputs creating an inflection point for the climate tech industry.
“Solar [is] now cost-equivalent to traditional energy without subsidies,” says Jacob. “You can see that in the marketplace, where 90 percent of all new electricity generation now is either solar or wind.”
That development has not only opened a market for renewable power that Jacob estimates is worth $250 billion, but it has “also unlocked the market around modernization of the electric grid where you’re seeing grid storage coming in place.”
When base prices of renewables drop substantially, “you move essentially from a push to a pull economy,” he says. Where the US government was once pushing for renewable fuel and portfolio standards, “now it is consumers and enterprises and industrials that are pulling because it makes economic sense.”
A second set of drivers for the surge in climate tech investment is advances in cloud computing and networking, AI, 5G proliferation and smart phone penetration, which are changing the industrial environment.
For the past century, physical assets such as buildings, utilities and roads have been solid investments. Covid has changed that, showing that an exogenous event can suddenly cause toll roads to not make money for anybody when people are not traveling, Jacob says. “Real assets investors are saying, ‘What next?’ That break in the logistics space created an interesting avenue for us to look at logistics as part of this smart real assets thesis.”
One of Activate’s investments is in Voltus, whose technology platform aggregates clean energy generated by distributed energy resources, bids into the market and shares the resulting revenue among the DERs.
“The grid wins, the consumer wins and enterprise wins because the grid becomes more resilient,” Jacob says. “Prices come down as availability goes up.”
As DERs proliferate, “you need a software layer, which is what [Voltus does], to integrate into the grid.” In 2021, Activate led Voltus’s $31 million Series C round. Last August, the company canceled an acquisition that would have allowed it to list publicly via a reverse merger.
FERC opens a path
Historically, only utilities were allowed to bid into the wholesale electricity market. Two years ago, the US Federal Energy Regulatory Commission (FERC) passed Order No 2222, which enables an aggregation of DERs to participate in the capacity, energy and ancillary service markets operated by ISOs and regional transmission organisations (RTOs). More important than the types of DER technologies comprising an aggregated bid is the total number of megawatts it can provide dependably when an RTO calls for it.
“Issues of grid resiliency, interconnection, permitting and other themes that allow for higher levels of renewable penetration and EV adoption are key investment themes for the next decade”
The goal is to create virtual power plants through such aggregation, and the only way to achieve that is through software integration, says Jacob.
At the end of 2022, there were 39.5 gigawatts of distributed photovoltaic power in the commercial, industrial and residential sectors – nearly 36 percent of total US solar capacity of 110.1 GW, according to the International Energy Agency. The IEA reported an additional 1.5 GW of distributed storage, 250 MW of distributed wind, 400 MW of distributed hydroelectric power and a few hundred MW of other energy sources. (The Energy Storage Association puts distributed storage at 2.4 GW.)
Activate is also investing in a theme that Jacob calls vehicle-to-grid. It lets EVs serve as a source of energy to the grid, charging when prices are low, dispatching during the day when people are driving, and sending power back to the grid when they are stationary. One of Activate’s portfolio companies, WeaveGrid, provides an “intelligence layer” of software that enables EV manufacturers to talk to the grid. This will become more critical as EV market penetration in the US rises from 6 percent currently to what Jacob predicts will be 20 percent over the next decade.
“Our idea is that fleet electrification and grid intelligence are coming together very quickly,” he says.
“When Ford sells an EV, all they care about is selling that car to their dealership network. They’re not thinking that they’re selling an energy storage device.”
WeaveGrid’s software tells a utility when it has been attached to EVs in a certain location, letting the utility know how much charging it will need to provide and making it aware of a new power source that can be tapped when the grid shows signs of strain.
One of the pure software companies in the UK that Oil & Gas Initiative’s (OGCI) Climate Investments has invested in focuses on managing the reduction of energy consumption. France-based Metron has an industrial SaaS platform that plugs into facility management systems at a company’s headquarters to set a baseline for energy consumption in its facilities. It then uses AI and machine learning to recommend set points for energy reduction. Those might be how to sequence a chiller, lower the temperature of a boiler or schedule cooling stations to work at certain times. Climate Investments led Metron’s €18 million Series B round in 2021.
“The benefits to customers are immediate because they from day one have an overview of what their facilities are consuming,” says Hannah-Mei Andrews, a principal on CI’s investment team. “The energy savings can be as much as 15-20 percent after the first year.”
Other software platforms are enabling commercial and industrial companies to decarbonise their operations, along with ways to monetise their investments in renewable assets. Veckta, in San Diego, has developed an onsite energy marketplace platform that gives C&I customers access to vetted capital, construction and equipment suppliers all in one place.
Veckta’s platform automates multi-site assessment and design optimisation for a client, then channels real projects into the marketplace, allowing developers, equipment vendors, financiers and companies that combine engineering, procurement and construction functions (EPC) to bid on projects and ultimately contract and install them, says Kareem Dabbagh, managing partner at VoLo Earth Ventures. VoLo Earth led Veckta’s $3.3 million seed round last June.
“There are so many clients who want to decarbonise their portfolio of assets and manage a sustainability strategy across sites that simply don’t know how, and Veckta provides the solution through a tech-enabled marketplace from A to Z,” Dabbagh says. Veckta is “accelerating the adoption of green energy and shoring up the grid through its advancement of distribution-scale C&I systems that build resilience capabilities for specific sites.”
Although fairly new, Veckta is already commercial, generating revenue through SaaS utilisation of its assessment and data platform, as well as through transactional revenue from marketplace projects, notes Dabbagh.
Yet another way to make the grid more resilient to rising electrification needs is by helping companies and real estate owners/operators that want to electrify and decarbonise to optimise the energy that their buildings consume. BlocPower, also in VoLo Earth’s portfolio, has a technology platform called BlocMaps, which can provide a digital twin of any building or area of buildings, such as a city, in the US. BlocMaps optimises the building’s electrification model for HVAC and heat pumps, solar, storage and EV charging.
Hard CO2 targets
Future Energy Ventures in Berlin sets a target for each new company it invests in to achieve 5 megatons of CO2 avoidance or mitigation within the first five years of FEV’s investment. The firm is currently raising its second fund, its first as an independent venture firm no longer under the auspices of E.ON, a multinational electric utility based in Germany that provided all the capital for FEV’s €250 million debut fund in 2016.
FEV is eyeing a first close for Fund II on €100 million by this summer, with E.ON as an anchor investor committing up to 16 percent, or €40 million of the projected final fund size. Fund II expects to support about 30 companies at Series A and B stages, with initial tickets between €1 million and €5 million for Series A and up to €7 million for Series B, reserving some dry powder to double down on winners.
FEV has already funded one company out of Fund II, UK-based Piclo, co-leading its £8.3 million ($10.4 million) Series B round in March. Piclo’s energy management platform wants to make electricity grids efficient, reliable and sustainable. Its software sits between the distributed system operator and various decentralised energy generation providers, giving the DSO the flexibility to access power from traditional carbon-based generation as well as renewables. “[By] granting this access, the impact that we’re looking at is peak shaping of the electricity demand,” says Moritz Jungmann, an investment partner at FEV.
Creating more incentives around the kind of market flexibility that Piclo makes possible will be one of the key ways to increase grid resiliency, says Reddy at EIP. That includes “the way we compensate flexible, behind-the-meter (BTM) resources during times of grid stress, [which] needs to change drastically,” he says.
Another focus for FEV is to increase the number of charge points needed to scale alongside broader EV adoption. To overcome the central problem of a fragmented value chain, “there are a lot of business models that will enable small and medium enterprises to open up their charging infrastructure,” Jungmann says.
Wider EV adoption requires “a shift to on-premises charge point management and deployment,” he adds. The two questions that need to be addressed are how to manage that for internal fleet users and how to open up the infrastructure for external EV drivers who just want to charge their vehicles but aren’t related to the SMEs providing the charging infrastructure.
“That is quite a complex management process that wasn’t there before,” Jungmann says. “But that will open up a lot of opportunity for the enterprise as it can generate some revenues on it, but it also has a high amortisation of the capex deployed. This will also enable these service providers to aggregate power sources to trade back to DSOs, he adds.
Smart storage software platforms are also popular with investors. NYSE-listed Stem, a former Activate portfolio company, became the first smart energy storage company to go public, via a special-purpose acquisition company merger in 2021. Stem provides BTM storage, with an AI-powered analytics platform that lets C&I customers and partners optimise energy at reduced cost by automatically switching between battery power, onsite generation and power from the grid.
Milisavljevic at EY-Parthenon cites a change in focus for EV charging slightly away from the charging equipment itself toward software and maintenance management of installed charging equipment. It is still early days for deployment of charger networks, and some charging stations are down as much as half of the time. That has sparked the development of software-based service solutions, he says.
Intelligent software platforms are starting to be used to remotely diagnose a charging malfunction quickly, telling a charging OEM the kind of technician to dispatch to fix whatever has failed on a charging station, which can be either a mechanical part of the device or a feature in the software. Still another issue that can be addressed through software is how to align incentives across the equipment, service and operator chain, including the basis on which a repair technician is paid, so that reliability improves in a systematic manner, Milisavljevic says.
Growing interest in reliability as a service is creating a service contract structure that he expects will organically get woven into all software, equipment and service solutions with the aim of making the charging ecosystem more robust. Milisavljevic saw a lot of seed-stage investments made in these solutions in the first quarter of this year, suggesting the space is still nascent with more innovation still to emerge. There have also been a few large, late-stage investments in the past year or so, he notes.
On both the supply and demand sides of the equation, “you have two fundamentally destabilising forces [for the grid] and from our perspective resiliency really plugs the gap,” Reddy says. Improved resiliency can mean adding more distributed resources like microgrids, energy storage or demand-side flexibility like demand response. “We need to do all of that stuff at a significantly larger scale.”
Kirkpatrick at SJF believes “issues of grid resiliency, interconnection, permitting and other themes that allow for higher levels of renewable penetration and EV adoption are key investment themes for the next decade.”
The Inflation Reduction Act provides robust incentives for solar, wind, EV, carbon capture and green hydrogen, but “those power plants or assets can only be deployed if they can be sited, permitted and connected cost-effectively and in a timely way to the grid,” he says.
Expanding a clean energy ecosystem will also require upgrades for much of the existing transmission and distribution infrastructure, as well as policy and regulatory upgrades, for the deployment and carbon reduction goals of the IRA to be achieved.