Why are investors turning to clean energy vehicle start-ups?
Written by / Liang Weiping
Editor / Wu Jing
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Source / TechCrunch; Written by Rebecca Bellan
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U.S. President Joe Biden signed the Inflation Reduction Act (IRA) in August 2022, allocating $400 billion in federal funding for clean energy projects.
A year later, in addition to established companies, start-ups began to benefit.
The study found that private investment in climate tech startups is expected to match or even exceed government funding, and the reason behind this is investor confidence in the growing market for such technologies.
According to an August 2023 report by Bank of America Global Research, more than 270 new clean energy projects were announced in the past year, totaling about $132 billion in private investment. More than half of that funding goes to electric vehicles and batteries, with the rest going to renewable energy, grid storage, carbon capture, utilization and storage, and clean fuels. Bank of America expects the investments to create more than 86,000 jobs, including 50,000 electric vehicle jobs.
Funding for the Act will go mainly to established companies, but private investment, such as venture capital, is entering startups at all stages. Investors note that many tech start-ups provide ancillary services to large industries.
Puneeth Meruva, a partner at Trucks Ventures, told TechCrunch that in the year since the Act was signed, the number of climate-related startups has increased by 10 percent from the year before, with a 65 percent increase in companies related to electric vehicle charging and a 72 percent increase in startups related to hydrogen technology.
Early stage and growth stage
"The funding of the Act is not necessarily directly beneficial to start-ups, because a lot of the money is actually more for the promotion of infrastructure and products that are either mature or commoditized from a technical point of view," Meruwa said. ”
But that doesn't mean start-ups can't use the Act to their advantage, and the incentives in the Act apply to start-up customers. Merois said startups can use it as a tool to sell to customers.
"If you're selling products related to charging, then you can say to these infrastructure developers, 'Hey, there's so much money under the Act, you can roll out chargers. Let us help you. Merua said.
Cassie Bowe, a partner at global investment firm Energy Impact Partners (EIP), said the Act increases access to debt financing during the growth phase. Part of the reason is that it includes incentives for U.S. manufacturing, which makes it more likely that companies will receive debt financing to fund production and construction. Burr said the bill also includes incentives at the project level to make it easier for companies to finance clean energy projects.
Markets tend to get carried away by hype cycles, leading to inflated valuations and misallocation of resources.
Investors interviewed by TechCrunch said the investments the bill provides and the results it produces are not overhyped. The Congressional Budget Office predicts that the bill will bring $400 billion in government spending, but the current tracking is at least three times that amount.
"The $1.2 trillion in government spending can be seen as a big number, but we consider more of a multiple of the investment of private capital managers like EIP in this area." Burr said.
Areas of start-ups benefiting
Start-up areas affected by the Inflation Reduction Act include: electric vehicle manufacturing and supply chain, electric vehicle charging, fixed and long-term energy storage, energy transmission, hydrogen, carbon capture and storage, and solar energy.
Electric vehicle manufacturing and supply chain
The U.S. EV manufacturing industry is booming thanks to the Act's EV tax credit and advanced manufacturing credit. Burr said that over the past eight years, the electric vehicle supply chain has announced investments totaling $120 billion.
With the change in the market, US battery production has been greatly promoted. According to statistics, automakers and battery manufacturers have jointly invested or committed to investing nearly $100 billion in the construction of battery and module manufacturing plants.
While the tax breaks are mostly aimed at large automakers and battery developers, battery innovators still have a lot of room for success. Companies such as 6K, Sila and Mitra Chem are producing their own battery materials. Other companies, such as Redwood Materials, Ascend Elements and Li-Cycle, are building battery recycling facilities on U.S. soil.
Section 30C of the Act provides up to 30% tax relief for newly installed chargers. However, when it comes to the impact of the Act on the EV charging industry, investors have mixed views.
Burr believes the Act is a huge catalyst, but it doesn't fundamentally change the industry compared to a year ago.
Meruwa said that in the early stages, he saw a surge in interest in EV charging companies. He also found that the number of companies related to EV charging has increased dramatically since the passage of the Act. A lot of them are focused on software.
One such startup is Stable, a portfolio company of Trucks Ventures, which develops EV charging prediction software that includes where to install hardware, how to predict performance, and pricing guidelines.
"The type of product that is in demand today is one that can always operate reliably." "Whether it's software or hardware models, we need EV chargers that work all the time and work with the grid," Burr said. That's where we've been investing. ”
Fixed and long-term energy storage
With the increasing availability of intermittent renewable energy, energy storage is essential for the operation of the grid.
Prior to the introduction of the Act, battery energy storage had to be directly connected to renewable energy generators for most of the year to be eligible for the tax credit. The Act now allows stand-alone energy systems or grid-scale battery systems to qualify, whether or not they are connected to renewable energy.
Burr says this is significant. Especially for U.S. grid-scale energy storage companies like energy storage company Form Energy and Powin, integrator and manufacturer of battery energy storage systems.
"We think one of the biggest trends across the market is the popularity of batteries across all assets." "So we're driving this trend from small mobile batteries to large grid-scale batteries," Burr said. ”
Energy transmission refers to the distribution network that transmits power generation to densely populated areas.
"Electricity demand is expected to double by 2040, a rate not seen since the invention of electricity." "To meet this demand and add all the new clean generation we need, we need to scale up transmission dramatically," Burr said. ”
The Act also provides a $5 billion loan for the construction and renovation of power generation and transmission facilities. The aim is to accelerate the development of transmission infrastructure, improve grid reliability, and enable the sharing of surplus energy across regions.
Burr said EIP will continue to invest in transmission, especially since the company's underlying strategic investors include many utility companies.
"If we don't invest enough in transmission, then we risk not realizing the up to 80 percent greenhouse gas reduction potential that could be achieved through the Act," Burr said. ”
The Act includes a range of tax breaks to support clean hydrogen, biofuels and sustainable aviation fuels. Meruwa of Trucks Ventures said this was surprising given the low level of interest in hydrogen technology in the investment community over the past decade.
Meruwa said that while many investors remain cautious about hydrogen and have not even made an investment discourse around it, Trucks Ventures is bullish on hydrogen, especially for any vehicle larger than a van.
"For large vehicles, we really can't just install batteries in the car, especially given the shortage of raw materials and battery packs." "You can't make a battery pack big enough for every truck or the aviation industry in the world because they're very sensitive to weight," Merois said. ”
Merois said it makes sense for the passenger car sector for investors to focus heavily on batteries, but for the commercial vehicle industry with uptime, it's time to start looking a different way.
"It takes too long to charge, and it's basically using the speed of lightning through the cable to achieve fast enough charging." Merois said, "In a sense, hydrogen can provide a really fast energy supply. This is almost equivalent to changing electricity, except that it is much easier because the cans are lighter. ”
Venture capital firms also noted that in the mining and construction industries, tuners are working to convert existing commercial vehicles into fuel cell vehicles.
Carbon capture and storage
The EIP's Burr said that since the passage of the Inflation Reduction Act, the valuation of startups in the carbon capture and storage (CCS) industry has soared. That's in large part because the industrial sector, which accounts for nearly one-third of U.S. emissions and is the hardest to decarbonize, is pushing hard to decarbonize.
In March 2023, the Act launched a $6 billion industrial demonstration program to provide up to 50% funding for each project. This provides a $12 billion opportunity for early-stage commercial-scale projects.
That's where startups like Carbon America win. The company is currently building two commercial CCS projects in Colorado and has secured government funding.
There are two main solar-related tax credits in the Act: the Investment Tax Credit (ITC) for solar companies and the Advanced Manufacturing Production Credit (Section 45x).
The Corporate Energy Investment Tax Credit (ITC) already exists, but the provisions in the Act extend the 30% tax credit until the end of 2032. Section 45x is a new provision that provides owners of renewable energy facilities with a tax credit of $26 per megawatt-hour per year.
Burr said portfolio companies such as Ion Solar and Arcadia are taking advantage of the extended investment tax credit incentive.
"The reason is not only because of the amount of the incentives, but also because the incentives are extended until 2032, which increases certainty." "From an investor's perspective, on the one hand, the amount of the incentive, and on the other hand, the certainty of the duration of the investment," Burr said. ”
According to the BoA, nearly $40 billion in private investment capital has been announced in renewable energy, including solar and wind, over the past year.