The climate tech funding gap just got worse
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The climate tech funding gap just got worse

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Photo: Getty

Solar thermal technology could offer cheap carbon-free heat for manufacturers. But tech developers are stuck in a financing gap between venture capital and project finance that will be harder to fill after recent bank failures.

“A bright future, not without challenges.” This is how Silicon Valley Bank (SVB) described climate tech in its report on the sector last year. It had made a $5 billion commitment in loans, investments and other financing to support sustainability efforts by 2027.

The US bank was a favourite among tech startups in the region – and many of these firms were in climate technology. SVB claimed over 1,550 clients in the climate tech and sustainability sector, accounting for a large portion of its now Federal Deposit Insurance Corporation-rescued deposit base.

Many of those deposits would have been angel investor or venture capital money, given investor appetite for climate-related exposure. While 2022 saw a deceleration of VC deal flow in most sectors, appetite for carbon and emissions technologies has remained strong.

In the first few days following SVB’s collapse, VC firms were working to meet their portfolio companies’ cash-flow and payroll needs. Now they are concerned about what this means for their ability to raise funding in the future.

The crisis has come at a critical point in climate tech’s growth trajectory; the last thing that it needed was anything that hinders access to critical funding. But what it now faces is intense competition for financing that will become more expensive as the ramifications of SVB’s failure reverberate around the sector.

How does climate tech stack up against the alternatives for those rattled, early-stage investors?

The technology isn’t new and savvy anymore to attract VC funds, but the companies are too small for PE players who like to write bigger checks
Marc Deschamps, DAI Magister
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The International Energy Agency (IEA) tracks subsector progress towards their net-zero scenario annually and it has a lot to say about heat.

In 2021, heating represented half of global final energy consumption, 51% of which fed industrial processes. During that same year, the sector emitted 14.6 gigatonnes of carbon dioxide, roughly 40% of all energy-related CO₂ emissions.

Yet with only 11% of renewable energy supplementing heat, the current pace of transition is disappointing.

So far, the investment focus has been on lowering emissions in primary sectors, like the energy suppliers themselves or steel and cement production. But the emissions reduction potential of decarbonized heating goes beyond that. Investors are eager to deploy capital to technology providers with strong decarbonizing credentials that could supply carbon-free alternatives to their manufacturing clients.

There has been a steady rise in fund launches for the specific purpose of investing in decarbonization technologies since the COP26 climate conference in 2021. Big names like Temasek and BlackRock’s $600 million Decarbonization Partners venture and Bill Gates’ $2 billion Breakthrough Energy Venture funds are part of a wide ecosystem of private capital owners picking their favourite technology breakthroughs to tap into the green economy.

How it works

Decarbonizing industrial heating is all about diversifying the energy mix and improving efficiency. By adding solar thermal technology to the manufacturing process of industries such as food and beverages, textiles, and pulp and paper, corporates can reduce dependency on brown energy sources.

“The decarbonization of industrial heating starts with reducing demand for energy from existing sources, whether that energy is coming from fossil fuel sources or electricity. Co-located solar thermal or photovoltaic (PV) is an alternative technology that would reduce that demand,” explains Steven Poulter, head of principal structuring and investments at Barclays.

The heat is produced by harnessing solar power to warm water to very high temperatures. Crucially that energy source can then be stored more efficiently and there is evidence of this happening across European markets.

According to European lobby group Solar Heat Europe, it was estimated that roughly 190 gigawatt hours (GWh) of thermal energy storage coupled with solar thermal systems was stored at year end 2021. This is a much more important capacity than the electric storage capacity of solar photovoltaic (PVs) for example, which amounted to 8.3 GWh during that same year.

“Adapting heating production is hard because it’s a distributed form of consumption, but by producing solar heat on site where the energy is needed, heating for hot water and industrial processes directly reduces the consumption of gas,” says Christophe Williams, co-founder and chief executive of Naked Energy, a UK tech developer.

Naked Energy is using solar thermal technology to produce carbon-free heat by tapping into wasted surfaces in manufacturing like rooftops. Its Virtu product range, backed by 12 patents, collects solar heat to warm to up to 90°C. The heat absorber is placed inside a vacuum tube with an integrated reflector to maximize the solar energy. The company also developed a hybrid model that combines PVs and solar thermal technology to generate both electricity and heat for the same footprint.

Naked Energy announced a series-B growth investment round in July 2022, aiming for £15 million to £20 million in capital. It received investment from Barclays’ Sustainable Impact Capital (SIC) programme in May 2022, as part of a bridge funding round, to complete flagship projects in the pipeline and expand distributors globally. The funding round also included a £1 million investment from Nesta Impact Investments.

The SIC programme, whose investment mandate was increased from £175 million to £500 million in December 2022, typically provides late seed/series-A equity to companies and likes to keep some dry powder to follow up in subsequent series. The team is building a complementary portfolio of companies across a range of sectors. By investing itself, Barclays can move into a space typically dominated by other private investors.

A growing market

Naked Energy’s series B isn’t the only noteworthy transaction the market has seen targeting decarbonized industrial heating. Austrian carbon-free heat pump developer Ecop, for example, gained just under $10 million in a later stage VC raise last October from investors including Dutch energy transition investor EIT InnoEnergy and FSP ventures.

Projections for market growth are encouraging. According to a Fortune Business Insights market report, the global solar thermal market size is projected to reach 767.73 GW and $36 billion by 2026, a compound annual growth rate of 5.6% during the forecast period.

Many of our companies are balance-sheet light, and equity is the right tool to help them become cash flow or ebitda positive
Steven Poulter, Barclays

The levelized cost of energy (LCOE) of solar thermal heat technology is a strong selling point.

“The technology is already popular in European markets like Denmark, Germany, and Austria – they use solar district heating at a very large scale for a price as low as four euro cents per kilowatt hour,” says Williams.

It is also a market in which European tech companies have an advantage. The region’s solar thermal market is a net exporter, boasting a positive trade balance of €550 million, according to Solar Heat Europe.

In emerging markets, the potential for growth is equally attractive.

“Emerging markets’ manufacturing sector is set to thrive thanks to a substantial surge in demand and increases in widespread availability of energy-efficient solutions being adopted by SMEs,” says Nakul Zaveri, partner and climate co-lead at LeapFrog investments.

The sub-sector is appealing to investors because unlike many of its fellow climate tech ventures, the technology is already mature. Solar thermal industrial heating scores very highly on technology readiness levels – a method for estimating the maturity of technologies during or prior to acquisition.

“While the technology has been available for over two decades, it is only in the last five to 10 years that the ideal ecosystem of energy-as-a-service contracts, regulatory frameworks and cost optimization in technologies has emerged, accelerating the adoption of energy efficiency,” adds Zaveri.

This should lead to a more diversified access to capital from investors.

“The transition needs both innovation and investments, which is why we need finance, M&A, debt advisory expertise,” a senior banker tells Euromoney. "But it’s also a matter of equity. The amounts at stake are so huge, this cannot be only the role of the commercial bank."

Another Death Valley

And yet long-term access to financing isn’t as linear as some of these companies had hoped. Having outgrown early-stage venture appetite but not being big enough for debt financing, a lot of these ad hoc industrial product developers are caught in a financing gap. It was one that SVB was often happy to fill.

“The technology isn’t new and savvy anymore to attract VC funds, but the companies are too small for PE [private equity] players who like to write bigger checks,” says DAI Magister’s chairman for climate Marc Deschamps.

Nor are they ready for project finance from banks or infrastructure funds, who want to see a diversified client and revenue base, project sponsors and offtake agreements to feel confident about scalability.

“For project financing, sometimes it’s too early; we need industrial sponsors to support them in case of additional costs,” the senior banker adds.

The capital structure has been focused on the extremes, either large infra projects or early-stage startups
Nakul Zaveri, LeapFrog investments

Most of these tech companies will still be at growth equity stage, which makes them a target for specialized funds, with appetite coming from family offices, hedge funds and smaller PE players.

“The capital structure has been focused on the extremes, either large infra projects or early-stage startups,” says Zaveri, adding that sometimes the “boring” businesses in the middle miss out on investment opportunities.

Swedish heat pump developer Qvantum closed its series B in January at €42 million, with investment from the IMAS Foundation, the €11 billion investment manager that invests on behalf of the charitable arm of the Ikea owner, INGKA group.

Many of these smaller tech firms have been bought by industrial groups already. The industrial heat pump market is dominated by a few large players including GEA, Emerson and Bosch, which have acquired smaller tech companies in the space to tackle decarbonization.

“Market growth has been constrained by high setup costs,” adds Deschamps, which is a problem on the developers’ side.

“The biggest barrier to growth is the upfront cost, so enabling affordable capital access for developers would enable a massive acceleration of getting our technology out there” says Williams. “Those businesses could decarbonize from day one, but they need to sign up to energy-as-a-service contracts.”

For Barclays’ Sustainable Impact Capital programme, it depends on what the balance sheet looks like.

“Many of our companies are balance-sheet light, and equity is the right tool to help them become cash flow or ebitda positive, at which point there will be alternative financing routes,” says Poulter.

The early deals will always need more equity, but a lot of infrastructure investors are very open to investing in big green tech projects.

It does seem like the market is moving towards a situation where project finance is more contemplative of investing in greentech. That may be why having a banking partner from the outset is so important.

“When we invest, we look at where we can help the individual company by bringing connections and collaborations across Barclays’ broader ecosystem, including the bank’s expertise to help develop the companies financing needs all the way from early stage to, hopefully, IPO,” says Poulter.

But capital flows will have to increase quickly if solar thermal technology is to drive decarbonization across multiple sectors. The more companies reach the debt financing stage, the higher their contributions will be to reaching net zero.

“Finance will go wherever there is demand,” points out Zaveri.

The electrification option

As heat intensity differs from one sector to the next, there is a need for multiple technologies adapted to different manufacturing techniques to replace fossil fuel in both a cost- and carbon-efficient way.

“The macro view is that there will be multiple waves, with capital being deployed to several of these technologies to supplement heat processes,” says Marc Deschamps, DAI Magister's chairman for climate.

For some investors, electrification of high-temperature industrial heating is where the untapped market opportunity can be found.

Italian private equity investor Ambienta is eager to tap into the disruptions in the climate tech space and for managing partner and founder, Nino Tronchetti Provera, the electrification of industrial heating methods is a trillion-dollar investment opportunity. “The availability and scalability of the technology is there; the only issue is pricing,” says Provera.

Electricity supply is still more expensive than fossil fuels for manufacturers, especially in Europe, where high taxation is used to subsidize renewable energy.

“The net effect is that Europe is subsidizing the decarbonization of electricity supply while at the same time disincentivizing the electrification of demand, favouring the use of gas,” says Provera. "This is a clear obstacle to its overall decarbonization plan."

There are operational costs too. As global power demand increases, grid congestion will drive connection prices up, as well as network operation, in addition to the capex needed to install electric heat pumps.

“Electrification of heat means you are reliant on buying electrons from the grid, which means operational costs remain variable and subject to price volatility,” says Christophe Williams, chief executive of Naked Energy, a UK tech developer.

Not to mention that the supply of clean electricity itself is also volatile.

“The next challenge for electrification is to have a consistent, 24/7 supply of green electrons,” adds Steven Poulter, head of principal structuring and investments at Barclays.

Diversification angle

This is where the diversification angle comes in. While electrification might be a solution for high temperature heating, a third of global industrial heating processes require heat of 90°C or below, which could be provided by solar thermal.

And on the other hand, the fast development of green hydrogen is the preferred option for heating in sectors like steel or cement production. Banks will be eager to spend cash on any and all solutions that could benefit industrial clients.

What those technologies all share is the challenge of becoming a consistent and affordable option for manufacturers of all sizes looking to reduce emissions. Mass deployment of carbon-free industrial heating methods is going to need incentives to bring additional costs down and policy support to facilitate the process.

“As a British company, we are dealing with some trading challenges since Brexit,” says Williams.

To expand in Europe, Naked Energy is establishing a subsidiary on the continent, and expects its next funding round to help set up regional offices to support local partners.

Pointing to the US’s first serious attempt to tackle the climate crisis, the Inflation Reduction Act (IRA), Williams says: “It’ll be interesting to see where the EU is going with its efforts to match the IRA.”


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Sustainability and ESG senior reporter
Marianne Gros is sustainability and ESG senior reporter. She joined Euromoney in 2022, having previously covered asset allocation news in the European institutional investment space.
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