Climate tech investments reached $32 billion in 2023, marking a 30% decrease from the previous year, yet still outperforming the broader venture market, which saw a 39% decline. In climate tech, deal count fell 3% in 2023, meaning that most of the funding decrease was caused by earlier stage rounds and lower valuations.
Despite the downturn, the multi-year trend for climate tech is still positive, with a CAGR of 23% since 2020. In other words, climate tech is still attracting strong investments, but valuations have come down in 2023.
So as we look forward to 2024, it's clear that both challenges and opportunities await private climate tech investors. Let's dive into them!
1) Turning down the heat with thermal storage
The industry sector represents 25% of annual global GHG emissions and producing industrial heat accounts for about 20% of all global energy demand, according to the IEA.* One of the main reasons why industrial emissions and energy usage are so high is that industrial processes, such as cement and steel making, need to reach temperatures of over 1000°C.
One way of decarbonizing high-temperature industrial processes is by using thermal energy storage technologies, also known as thermal batteries. In simple terms, they work by using cheap renewable energy sources to heat up materials like bricks to extremely high temperatures, >1000°C. The energy is then stored within these materials as heat. This stored heat can be retained for several hours or even days at a very high level of efficiency.
On the policy side, the IRA introduced the Investment Tax Credit for standalone energy storage projects, which includes thermal energy storage. This credit will reduce the cost of an energy storage project by 30% if it meets labor standards, with an additional 10% if it hits a threshold for domestically produced materials, and yet another 10% if it is located in a community that historically produced energy.
On the tech side, companies are set to start producing and delivering thermal batteries in 2024. Antora Energy’s new factory is set to start producing their modular thermal batteries this year, which will be delivered to industrial manufacturing sites in the US. Rondo Energy, another heat battery company (part of our Portfolio Fund I), announced an expansion of its manufacturing facility to 90 GWh per year, larger than any current battery manufacturing facility worldwide.
We expect more investment in this sector in 2024 and more production facilities coming online.
2) Striking gold with white hydrogen
The promise of white hydrogen, a breakthrough in sustainable energy, has captured the attention of the energy industry. Unlike green hydrogen, which relies on renewable electricity, white hydrogen can be extracted from wells that naturally replenish themselves. This method of hydrogen production offers a potentially lower-cost alternative and introduces a new dimension to the field of hydrogen production.
Found in the ground along tectonic plates on every continent, this geologic hydrogen has the potential to revolutionize hydrogen production. With as much as a trillion kilograms in the ground, white hydrogen could become a significant complement to other clean hydrogen sources or even emerge as the world's primary energy resource.
The coming-out year for geologic hydrogen in 2023 sets the stage for further developments in 2024. Exploration and drilling for geologic hydrogen are expected to gain momentum, although significant infrastructural investments will be required for cost-competitive production. Companies like Koloma (part of Portfolio Fund I), which emerged from stealth mode with substantial funding and numerous patents, are poised to lead in this space. Another exciting company in this space is Helis Aragon.
The year ahead is likely to see more companies and investments focused on exploration, drilling techniques and transport for geologic hydrogen.
Note: As we learned from oil and gas, any new mining site must take into consideration the ecological and social consequences.
3) Advancements in storing and transmitting renewable energy
Global annual renewable capacity increased by almost 50% in 2023, the fastest growth rate in the past two decades.* As our energy landscape is increasingly shifting towards renewable energy sources, the challenge of intermittency becomes more pronounced. The solution lies in storage systems and transmission lines.
Effective battery storage systems are capable of storing excess energy during peak production times and then redistributing it during periods of low renewable energy generation. Two exciting companies in this space, using different technologies to enable long-duration (+100h) energy storage, are Form Energy and Noon Energy (both part of our Climate Tech Portfolio Fund I).
Alongside storage, the transmission of energy is a critical aspect of the renewable energy equation.
Grid capacity, which refers to the maximum amount of electricity a grid can handle at any given time, is often a bottleneck in the efficient distribution of energy. While this is primarily a policy challenge, technological advancements can play a pivotal role in enhancing grid capacity. Innovations to keep an eye on in this space are Infravision (drone-enabled power line upgrades), AIDash (grid resiliency, part of our Portfolio Fund I) and Continuum Industries (grid expansion).
We expect to see a continued investment and policy focus on storing and transmitting renewable energy in 2024.
4) Rebuilding a voluntary carbon market with elevated standards
2023 was not a good year for the carbon offset market. It started with a publication from the Guardian, which claimed that “more than 90% of rainforest carbon offsets by biggest certifier are worthless”.* More press coverage addressed concerns at specific projects which, next to the validity of the carbon savings, questioned claims on the broader environmental, economic and social impacts.
This negative press, particularly around nature-based solutions and avoided deforestation projects, had a mixed impact on the market.
The market's response to these developments was a noticeable shift towards higher-quality carbon credits, such as those offered by the Frontier program. This "flight to quality" meant the prices for higher-quality carbon removal credits increased, while the prices of lower-quality credits decreased.
In response to these challenges, 2024 is expected to see growth in the market for Monitoring, Reporting, and Verification (MRV) solutions. Over 30 startups are currently active in this space, offering innovative approaches to MRV. Two cool companies working in this space are Isometric and Yard Stick (part of our Climate Tech Portfolio Fund II. These solutions focus on ensuring the high quality and impact of nature-based carbon offset projects, such as soil carbon.
Additionally, transnational institutions are stepping in to further regulate the market, with initiatives like the World Bank's High-Integrity Forest Carbon Credits initiative playing a crucial role. While significant policy integration in the US and EU may not happen in 2024, we expect preparatory work to get underway this year.
5) The resilience of wind and solar
Over the past 15 years, wind and solar power have transitioned from being marginal players to dominant sources of new generation capacity in many regions. This rapid growth has been driven by dramatic cost declines, positioning renewables as a major force in the energy transition.
However, recent challenges, such as rising costs and project realization difficulties, have emerged, raising questions about the future trajectory of renewable power. Despite these growing pains, the resilience of renewable power is evident.
In 2023, global annual renewable capacity additions saw their fastest growth rate in two decades, a testament to the robustness of this sector.* Moreover, global commitments, such as the agreement at COP28 to triple renewable power installation rates by 2030, indicate strong continued support for renewables.* And while costs may currently be on the rise, they are expected to decrease over time, with further declines anticipated beyond 2025.*
We expect the combination of supportive policies and global commitments to ensure that wind and solar power remains a critical component of our efforts to combat climate change.
6) Mission methane reduction
In 2024, methane emission reduction is poised to become a key focus. Methane is a potent greenhouse gas with significant warming effects (25x more potent than CO2)*, and its reduction is critical to global warming mitigation efforts.
On the policy side, we have started to see some movement. The Global Methane Pledge, signed by over 150 countries at COP28, aims to cut methane emissions by 30% from 2020 levels by the decade's end. Notably, the EU's proposed methane emissions limit on gas imports from 2030 could significantly influence EU fossil fuel suppliers to reduce methane leaks. In the US, the Environmental Protection Agency's new regulations, effective in 2024, are set to significantly reduce methane pollution in the oil and gas industry.
Corporate engagement is also ramping up. For example, fifty companies representing 40% of global oil production pledged to eliminate methane emissions by 2050.*
However, addressing methane emissions from the agricultural sector remains a challenge. Luckily we are seeing serious innovation happening here, highlighted by companies like Rumin8 (seaweed feed additives for cows), Kayross (satellite data to spot leaks) and ReGrow (soil management tool).
We anticipate 2024 to bring increased cooperation and industry commitments, with an emerging emphasis on the agricultural sector.
7) More capital catalyzing emerging markets
Worldwide, current investments in climate tech are not evenly distributed. From 2010 to 2022, countries other than the US, China, EU and India accounted for only 8% of total climate venture activity.* This disparity is largely attributed to the early stage of the climate tech ecosystem (i.e. funds, regulations and markets) in many other parts of the world.
Considering that emerging and developing economies are projected to contribute significantly to emissions growth in the coming decades*, investments in these countries need to increase rapidly. Fortunately, a slow but positive shift is occurring and we expect to continue in 2024.
New funds, such as LeapFrog, which recently launched a new climate strategy, are being established with a focus on mitigating climate change in emerging markets. Another notable commitment is a $30 billion investment in a newly launched catalytic climate vehicle called ALTERRA. This initiative aims to support international efforts in creating a more equitable climate finance system, particularly by improving access to funding for the Global South.
We expect these commitments to further stimulate investments in the energy transition of emerging markets in 2024.
8) The end of the runway
For the companies who raised funding rounds at the climate tech peak of 2021-2022, this will be a year of readjustment.* There are two main drivers of this:
Companies who have pushed off major fundraises by raising bridge/extension rounds, or who pushed off fundraising at all in 2023, will go out to market in 2024
Funds that raised their climate fund in ‘21/’22 are sitting on a large pool of dry powder as they slowed down their investment pace in 2023, so they will have increasing pressure to deploy capital
This means we likely won’t see a further decline in invested capital in climate tech in 2024 relative to 2023, but we won’t see a full rebound either. That is due to a couple of reasons:
The climate tech investment landscape in 2024 is expected to be characterized by more flat, down or structured funding rounds, as companies adjust to post-peak valuations and seek capital under these new conditions. On the fund side, funds will be keen to deploy their powder but also cautious to do this at the right terms.
Private market valuations are a lagging indicator of (public) equity valuations. This is why we do not expect a full rebound, as the public markets are only starting to recover. This also means that potentially some climate tech companies will go under in 2024, and investors will focus on quality companies with strong fundamentals and unit economics.
While this may mean the end of the runway for certain companies, it also means that the ones with strong unit economics and superior products will rise to the top.
The Outlook for Climate Tech in 2024
The climate tech landscape in 2024 is set to witness a diverse array of developments across various sectors. From innovations in energy storage and transmission to breakthroughs in hydrogen production, the trends for the year reflect a dynamic and evolving field.
Did we miss out on any of the trends you are paying most attention to in 2024? Let us know in the chatbot or connect with Liza, our Co-Founder and Head of Impact, on LinkedIn!
Important notice: This content is for informational purposes only. Carbon Equity does not provide investment advice. You should not construe any information or other material provided as legal, tax, investment, financial, or other advice. If you are unsure about anything, you should seek financial advice from an authorized advisor. Past performance is not a reliable guide to future returns. Your capital is at risk.
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