The Energy Transformation

With Inventure’s Lauri Kokkila and Rebecka Löthman Rydå

Transforming the energy sector is exciting because it touches so many sectors of the economy: from transportation, to industry, to buildings, to agriculture, and beyond. The big shift away from fossil fuel energy is really a once-in-a-lifetime investment opportunity.

But the word “lifetime” really hangs there; there are high stakes to nailing the transformation. Energy accounts for almost 75% of all greenhouse gas emissions, highlighting the importance of transitioning our economy so we can hit net zero by 2050.

As an early-stage investor, we know that startups are uniquely positioned to bring novel high-risk innovations to the market. To develop deeper knowledge in this sector, we dug into the energy transformation with the help of our ex-intern and Survivaltech.club founder Pauliina Meskanen.

Here are the key drivers, the most important bottom-up trends and as conclusion what we are looking for in this sector:

Key drivers of the energy transition

Four main factors accelerate the ongoing energy transition.

Driver 1: Europe’s urgent need for energy independence

The Russian invasion of Ukraine revealed the cold truth about Europe’s dependence on Russian fossil energy. At the time of the invasion last February, Russia provided 40% and 25% of Europe’s gas and oil, respectively. This September, Europe got another strong signal to regain its energy independence when two intentional explosions in Nord Stream pipelines in the Baltic Sea cut the natural gas supply between Russia and Germany.

In response to the rapidly changing energy and security environment, the EU launched REPowerEU Plan in May 2022 to make Europe independent from Russian fossil fuels before 2030. The measures include “rapid roll-out of solar and wind energy projects combined with renewable hydrogen deployment”. The new REPowerEU Plan was introduced under the ambitious European Green Deal, the EU’s set of measures to make Europe climate neutral by 2050.

This clarifying focus reminds us of the boom in remote work startups when COVID hit. Similarly, we expect the energy industry to take massive leaps measured in years rather than decades. The question we ask ourselves is, what effects of the shock are here to stay?

Driver 2: Increasing government support and private funding

The EU’s climate response is just one of many governmental bodies supercharging their climate action. The U.S. Congress passed the Inflation Reduction Act (IRA) in August 2022, which allocates $370B for clean energy and climate resilience in subsidies. Some anticipate that thanks to IRA, public and private climate financing could reach $1.7T over the next ten years as federal spending catalyzes private investment.

There will be more competition coming than from just the US. China, the world’s largest emitter, saw nearly $300B in public and private investment in the energy transition just in 2021, making it the clear leader in energy transition spending. Interestingly, China also launched its emissions trading system (compliance carbon market) in 2021 and aims to expand by 70% in the coming years.

Climate startups are enjoying increasing funding opportunities from the private sector. Since January 2021, $94B of new private AUM emerged across 132 Venture Capital, Corporate Venture Capital, Growth, Infra, and Private Equity funds. There’s now around $37B of dry powder waiting to be invested in climate companies.

Looking into our own portfolio, Swappie & Material Exchange have raised investments from climate or impact focused funds. This access to unique capital is one of the top advantages to running a climate-focused startup today, as well as an ability to attract great talent and a unique subset of customers.

Driver 3: Decreasing cost of renewable energy

Renewable energy costs have dropped fast, enabling more economical deployment of energy-intense climate technologies. As one example, the cost of solar decreased by nearly 90% from over 400 $/MWh to under 50 $/MWh during 2010–2021, faster than anyone could expect. Similarly, the cost of wind energy has plummeted, with the average cost of onshore wind energy being 100 $/MWh in 2010 and only 30 $/MWh in 2021.

Low-cost renewables pave the way a whole host of new startup-driven models, such as green hydrogen and Direct Air Capture. For example, in green hydrogen production (hydrogen made from water and electricity), renewable electricity costs can make up 50–90% of the total production expenses. IRENA estimates green hydrogen will become competitive at renewable electricity costs of around $20/MWh.

Similar to the exponential growth of computing power, which has driven the tech ecosystem for the past decades, the incremental and exponential improvements in the renewable energy sector will serve as basis for innovation and opportunities.

Driver 4: Growing desire for climate action

People are increasingly concerned about the ongoing climate crisis and have a strong desire to improve their lifestyles to be more sustainable. Gen Z and people in the developing world express the strongest aspiration to take climate action.

However, people who desire for a more environmentally friendly lifestyle face barriers, especially around price. This highlights the importance of getting rid of the “green premium” — the additional cost of choosing a clean technology over one that emits more greenhouse gases.

Startups should understand that being the “greener” option is not unfortunately enough to catch the attention of mass markets. In order to compete — especially during an economic downturn — startups will need be better and cheaper while enabling the transition for greener world.

Trends and innovation areas for startups in the energy transition

We looked into eight trends in energy transformation, digging out great Nordic examples where we could.

☀️1. Renewables and clean energy

Renewables are one of the most exciting development areas, and can be one of the easiest VC cases. In 2021, 85% of the new installed power-generating capacity was renewable. Solar was the most installed power-generating technology overall, but significant geographical differences exist. Here in the Nordics, wind power dominates.

The rise of solar power has also come with rapid development of tools across the solar value chain. Many existing tools enable efficient designing, building, operating, and maintenance for solar plants (e.g., Raptor Maps, Skyfri, Glint Solar).

While similar products exist for wind power (e.g., Aerones, Vind, Shoreline), we see significant room for more innovation there. As an investor in the Nordics, where wind power is the most popular power-generating technology, we are particularly excited about innovation in the wind power value chain.

Looking more broadly, geothermal and nuclear power hold the potential to provide clean baseload for society. In geothermal, mainly US-based startups have developed solutions like new drilling and well designs and planning and sensing tools to accelerate geothermal adoptions (e.g., Quaise Energy, Fervo Energy, Zanskar).

In nuclear power, small-scale modular fission reactors (e.g., Seaborg) hold a big promise but must successfully navigate the challenging regulatory environment. In fusion power, +30 startups (e.g., Renaissance Fusion, Marvel Fusion) are taking different approaches to realize the holy grail of fusion energy, which constantly feels one step away.

🏡 2. Distributed Energy Resources (DERs)

Energy is no longer only produced in massive, centralized power plants. More consumers have solar panels installed on their roofs and heat pumps on their walls, giving rise to Distributed Energy Resources (DERs).

Getting these products into consumers’ hands is the biggest challenge. Startups have developed services for easy purchasing, installing, and purchasing of residential solar panels and heat pumps (e.g., Otovo, we do solar in solar and Lun in heat pumps).

As the number of DER installations grows, managing those with software becomes increasingly essential. Enode is one of the Nordic leaders in the space with its API for green energy assets.

Here we’re constantly on the lookout for startups with a scalable product focus: many end up looking like a feature of a larger energy system.

🔌 3. Electrification

It’s the ’20s again; electrification is sweeping across industries from transportation to heating and manufacturing.

We saw a big boom from the electrification needs of Electric Vehicles with a wide range of supportive solutions. These include EV charging services (e.g., Northe, Monta, &Charge), marketplaces specializing in used EVs (e.g., Carla), and EV chargers (e.g., Elinta Charge).

We expect to see increasing electrification of the heavy manufacturing industry in this decade. For example, several startups aim to decarbonize steelmaking via green hydrogen or directly electrifying the process (e.g., H2 Green Steel, Boston Metals). Similarly, making concrete may soon be electrified, as startups like Sublime Systems and CemVision with groundbreaking technologies work on it.

⚡4. Grid management software

The trends mentioned above — Renewables, DERs, and Electrification — are crucial for the climate but challenge the electric grid.

Increasing intermittent electricity means that energy supply and demand need to be balanced. DERs move the grid from one direction system, where electricity is produced in massive centralized power plants, into a multi-directional, decentralized energy system. Electrification leads to increasing peak loads and capacity demand.

To tackle these growing challenges, startups are developing utilities and grid operators tools, for example, electricity forecasting and grid monitoring tools (e.g., Plexigrid, rebase.energy, Eneryield).

While several startups are innovating in grid management software, a clear winner has yet to emerge. One reason for this could be the risk awareness of grid operators. Grid operators are known to be slow in implementing new technologies that might cause disturbances upon deployment. Securing an uninterrupted electricity supply to their customers is their highest priority. We hope that grid operators find faster ways to work with startups.

Integrating our following two trends: Demand Response (trend #5) and adding energy storage capacity (trend #6) are other critical measures that utilities and grid operators can take to deal with grid challenges.

🤝 5. Demand response

What’s important is not just the energy you consume but when you consume it. Decreasing energy consumption when the grid experiences high electricity demand with rewards from the utility company is called demand response.

Energy consumption in buildings offers a substantial potential for demand response (e.g., Kapacity.io, R8 Technologies, Synergi)). It matters when you warm the office, runs the heat pump, and heat the water tank. However, as high energy prices will not stay high forever, you will need to build a huge “battery” (millions of m2 or 100,000s of batteries) to create a big enough player to be relevant for demand response.

Accessing such a large pool of customers is especially difficult because you have to scale building by building, which is often slow. Alternatively, you can build channel sales through partners like existing energy providers. Neither of these two is particularly easy, although not impossible. Therefore, in this sector, the critical characteristic for us is to find solutions where scale can be rapidly increased.

🔋6. Novel and recycled energy storage

Energy storage is crucial for balancing the electricity demand and supply as more intermittent renewable power generating capacity is added to the grid.

In grid-scale energy storage, we see startups innovating bold new concepts. For example, Polar Night Energy stores heat in sand, and Enairon stores compressed air at the bottom of the ocean. As battery needs are very different depending on the use case, there are multiple opportunities that are “large enough”. Charging a bus has to be fast, but upload be can slow. Solar parks on the other hand have very different requirements.

In electrochemical batteries, prolonging battery lifetime via circularity and analytics are significant innovation areas. We see many startups repurposing used EV batteries (e.g., Cling Systems, Evyon, Cactos) and developing battery analytics for optimal use (e.g., Nortical, About:Energy).

⛽ 7. Low-carbon fuels

Synthetic fuels and advanced biofuels provide alternative low-carbon methods for storing energy.

We see a lot of activity in low carbon applications with limited volume and weight. Several startups are developing low-cost and scalable ways to produce Sustainable Aviation Fuels via synthetic fuel (e.g., Spark e-Fuels, Synhelion) and advanced biofuel (e.g., Phycobloom, XFuel) approaches.

There is considerable demand for synthetic fuels and advanced biofuels in aviation and shipping. Another benefit of synthetic fuels and advanced biofuels is that they can be drop-in solutions allowing for fast deployment.

Hydrogen is a critical feedstock in synthetic fuel production. It can also be used directly as fuel in a fuel cell or combusted. In green hydrogen, we expect to see a lot of innovation in new electrolyzer design (e.g., Supercritical) and membrane technology (e.g., Cellfion). Tackling hydrogen leakage is another important problem for startups to solve.

📈8. Carbon markets

There’s an increasing voluntary emphasis on carbon removal. In April 2022, Stripe, Alphabet, Shopify, Meta, and McKinsey launched Frontier, an advance market commitment to buy an initial $925M of permanent carbon removal, sending a strong demand signal for carbon removal developers. In the same month, Lowercarbon Capital, one of the leading climate VCs, raised a $350M fund dedicated to funding carbon removal startups.

Carbon removal startups are developing various technologies to achieve permanent low-cost carbon removal at scale. These approaches include Direct Air Capture (e.g., Climeworks), carbon mineralization (e.g., Paebbl, Carbfix), and synthetic biology (e.g., Ucaneo, CyanoCapture).

Ensuring a high quality and transparency of carbon credits are paramount for the carbon markets to actually work for the Earth’s benefit. Not-for-profit groups like Verra and Gold Standard validate and approve most carbon-offsetting projects today. But there have been concerns about their quality standards. Some nature-based startups use satellite observation to provide an extra layer of transparency and quality check (e.g., Pachama, Single.Earth). We are looking for startups to solve this critical problem in carbon markets.

What we’re looking for

The unfair aspect of researching the energy transformation is that there are so many exciting projects that just aren’t VC cases. VC math requires us to back companies that grow fast and exit within the 10 year life of the fund, while also not requiring an insane amount of follow-on capital that will dilute our shareholding. The energy transformation is, almost by definition, full of long plays that require huge amounts of capital.

But as you can see above, there are exciting startups being built in this area. Here is the quick checklist we use when reviewing startups in energy transition:

• Founders with deep operational experience building truly scalable hardware or software solutions
• Business models and solutions that are interesting post-energy crisis, and do not rely on high energy prices.
• Value propositions that do not only rely on being more sustainable. Your “green premium” needs to be below zero over time.
• Low CAPEX solutions, or a secure way to finance heavy CAPEX investments. Helping with this are a lot of capital from public and private investors.
• Large enough market opportunity. We are always thinking about what needs to happen for us to create a €1 billion+ business here. Luckily, many truly impactful energy transition startups tap into enormous global markets with a significant tail wind.
• Real IP and researched-backed solutions. “Green” is not always sustainable.

Let’s talk more:

At Inventure we recognize the importance of startups in the energy transition. Given our background from energy systems (Merus Power), refurbishing smartphones (Swappie) and deep tech connectivity (Wirepas & Haltian), we are well equipped to support the next generation of startups emerging in this field. If your startup is building a solution for the world with clean and renewable energy in Nordic or Baltics, we would love to hear from you.

A big thanks again to Pauliina Meskanen of survivaltech.club for her help with this research.

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