With 2022 in retreat, investors have made no secret that they’re looking for safe investments. In a challenging market with higher interest rates, that’s no surprise, but what might raise eyebrows is where investors think those quality investments lie. Increasingly, it’s in climate tech.
The sector had a crazy 2021, and while 2022 may not soar past those heights, it’s not had a bad year at all. To date, venture capitalists have invested $24.9 billion in climate tech startups, compared to the $31.9 billion invested in 2021, according to PitchBook data. While many observers think 2021 was an outlier, it’s possible that this year’s dip might be more unusual given the sector’s potential. Five years from now, PitchBook expects climate tech to be a $1.4 trillion market.
As much as venture capitalists like to say their investment decisions are unswayed by political and geopolitical developments, it’s likely that next year’s deal flow will be driven by just that.
The trends that started taking hold this year will really sink their teeth into the market. The year kicked off 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, those two developments have done more to shape the recent climate tech landscape than any other.
So with more investors looking to dip their toes in the climate world, let’s take a look at where they’re likely to put their money to work.
Software to deploy and manage renewable power
Russia’s invasion of Ukraine drove many countries to embargo the aggressor’s oil and gas. It also sent them searching for alternatives. While renewables can’t replace that sort of demand in a few months, the self-imposed shortage caused many economies to reconsider their reliance on fossil fuels. That, in turn, has sparked a surge 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 reinforced renewable power’s strong position. The law extended tax credits — set to expire at the end of the year — through 2032, giving developers breathing room to propose and implement new projects on a large scale. As a result, Deloitte expects the IRA to spur up to 550 gigawatts of utility-scale clean power by the end of the decade.
As renewable projects grow more sophisticated — made possible in part thanks to batteries — developers will need software and platforms to manage them. In the coming year, I expect we’ll see growing investor interest in startups with software solutions that are focused on renewables and grid-scale batteries.
Direct air capture
In addition to renewables, the IRA gives carbon capture projects a boost through enhanced tax credits. While all forms of carbon capture benefit from this, I suspect investors will be paying the most attention to direct air capture, which, instead of absorbing carbon dioxide from an exhaust stream, draws it directly from the atmosphere. The IRA offers a tax credit of up to $180 per metric ton, a significant increase from the $50 per metric ton offered previously.
