Key takeaways

• Funding
  • Long-duration batteries and hydrogen push funding to a two-year high: Next-gen climate and energy startups raised USD 3.2 billion in Q4 2023 (+18.1% QoQ and +51.2% YoY), up for the third consecutive quarter and reaching a two-year high, suggesting a full recovery from a relatively quiet start in 2023. Around 70% of funding stemmed from battery energy storage companies. Plus Power’s USD 1.8 billion debt financing round was the largest, as climate and energy startups turned to alternative funding sources, with VC funds drying up. Hydrogen startups (USD 524.4 million +31.4% QoQ and +534.9% YoY) continued to gather investor interest, while CCUS funding slumped (-59.7% QoQ and -89.3% YoY). CMS, CRA, and Conservation Tech also hit three-year lows.

• Product updates
  • CMS and CCUS led a moderate increase in new product launches: We observed 39 product updates in Q4 (vs. 30 in Q3). CMS startups ramped up new climate disclosure products ahead of proposed SEC regulations. CCUS disruptors continued their commercialization efforts. Notable world firsts included Carbfix's attempt at permanent CO2 mineralization using seawater as a solvent and BeZero Carbon's launch of the industry's first ex-ante carbon credit rating.

• Partnerships
  • Collaborations intensified with a focus on carbon offsetting and third-gen renewables: We observed a significant increase in climate and energy partnerships in Q4 (105 vs. 66 in Q3). More than half of the partnerships were from industries related to carbon offsetting (CCUS and CMS). CCUS disruptors focused on commercialization and global expansions, while personal carbon offsetting and B2B platform integrations were the main focus of CMS collaborations.
  • In Alternative Energy, General Fusion and LanzaTech saw multiple collaborations to advance fusion energy and sustainable aviation fuel (SAF), respectively. Tidal and geothermal energy startups also fostered partnerships with government bodies and incumbents. Hydrogen mobility partnerships focusing on advancing fuel cell technologies and hydrogen-powered aviation were also notable.

• M&A
  • There were six M&A deals in Q4 (vs. five in Q3). bp’s agreement to gain full ownership of Lightsource bp was the most notable. bp intends to leverage Lightsource’s renewable energy portfolio to support its growth into areas such as hydrogen, EV charging, biofuels, and power trading.

• Regulation
  • The EU raises renewable energy targets; the US pushes for renewable hydrogen: The EU Renewable Energy Directive mandated that 42%-45% of all energy produced by 2030 must come from renewable sources (previously 32%). Meanwhile, the US Government unveiled proposed regulations for clean hydrogen production and plans to invest USD 7 billion to develop a national clean hydrogen network. Interest in fusion also intensified with the US and UK Governments forming a strategic partnership to accelerate the demonstration and commercialization of fusion energy.

• Outlook
  • Carbon management and offsetting expected to hold strong: Both the CMS and CCUS industries have continued to lead in collaboration and product innovation, even during periods of low investor activity. We expect the industries to maintain this momentum ahead of the expected announcement of proposed SEC regulations in early 2024 that would require public companies to disclose their carbon footprints.
  • Long-duration energy is key in renewable energy adoption: There is a need for adequate battery storage to support energy grids and manage the intermittency of renewables, as the push for sustainable energy generation intensifies. This has led to battery manufacturers attracting consistently high levels of VC and government funding, including USD 2.2 billion in Q4 alone, which is now being invested in large-scale battery capacity expansion and battery technology innovation. We expect energy storage to remain a key hotspot in the Alternative Energy space.
  • Investor and government interest in hydrogen on the rise: Following a rather slow start to 2023, with subdued funding and activity, VC and government interest in hydrogen rose in the second half of the year. Furthermore, following the European Commission’s adoption of two delegated acts in June 2023, which set out rules for the EU's definition of renewable hydrogen, the US is now catching up with its proposed regulations to determine which projects will be eligible for the 45V subsidy. Such a clear regulatory outline coupled with government and VC funding, signals a positive outlook for the industry.

Funding: Long-duration batteries and hydrogen push funding to a two-year high

Analyst Take: Next-gen climate and energy funding was up for the third consecutive quarter, reaching a two-year high. Nearly 70% of this was raised by battery manufacturers, most notably a landmark USD 1.8 billion debt financing for Plus Power. Hydrogen, which saw renewed interest in Q3, remained a funding hotspot following favorable regulations for clean hydrogen production in the US and Europe in the second half of 2023. Alternatively, CCUS’ funding uptick in Q3 was short-lived, while funding for CMS, CRA, and Conservation Tech hit three-year lows.

• Next-gen climate and energy funding rose to a two-year high in Q4, raising USD 3.2 billion across 53 rounds, up 18.1% QoQ and 51.2% YoY in dollar terms. The average funding round size (USD 60.6 million) also reached a two-year high, indicating a full recovery from the dip in funding earlier in the year.

• Climate and energy startups continued to turn to alternative funding sources, with VC funds drying up. Similar to Q2 and Q3, funds raised through grants, convertible notes, and debt financing (collectively categorized as “Other”) continued to be the largest in dollar terms, accounting for ~72% of total funding. Early-stage funding (Series A and B rounds) was broadly flat from the last quarter, accounting for ~26% of all rounds. Seed funding fell for the fourth consecutive quarter and was at its lowest for the past three years (~1% of total funding). Growth-stage venture funding improved in dollar terms (~12% of total funding), but in terms of the number of rounds, it dropped further to a three-year low (~2% of all rounds). 

• There were four mega deals (rounds raising more than USD 100 million) in Q4 2023 compared with an average of five per quarter over the past three years. These included USD 1.8 billion raised from debt financing by Plus Power (~56% of total funding), a USD 380 million Series C funding round by Electric Hydrogen (~12%), CAD 200 million (~USD 150 million; ~5%) raised from convertible notes by Northvolt, and a USD 131.9 million Series B funding round by Eavor.

• Alternative Energy once again dominated funding, primarily led by investments in long-duration battery storage. The Alternative Energy industry raised USD 2.4 billion in Q4 (~75% of total industry funding), up 33.1% QoQ and 182.6% YoY. Similar to Q3, the majority of this (USD 2.2 billion, ~68% of total industry funding) was raised by battery producers across 13 funding rounds. Geothermal and bioenergy companies were also strong contributors, with Eavor and Quaise collectively raising USD 144.9 million and Anaergia and Dimensional Energy collectively raising USD 51.0 million, respectively.

• Hydrogen Economy funding continued to strengthen following recovery in Q3, raising USD 524.4 million (+31.4% QoQ and +534.9% YoY) across eight funding rounds (~16% of total funding). The most notable among these was Electric Hydrogen’s USD 380.0 million Series C funding round. Other notable contributors included Elcogen (USD 47.8 million), Lhyfe (USD 30.2 million), Nikola Motor Company (USD 30.0 million), Ionomr (USD 20.0 million), and SWITCH Maritime (USD 10.0 million).

• CCUS funding tumbled following a resurgence in Q3, raising only USD 96.7 million across nine funding rounds in Q4 2023 (-59.7% QoQ and -89.3% YoY). Although there were several notable contributors in Q4, such as Deep Sky’s (USD 41.1 million) and Carbo Culture’s (USD 18 million) Series A funding rounds, overall funding raised by CCUS companies in 2023 was lackluster. The industry raised only USD 414.5 million over the year compared with the USD 2.3 billion raised in 2022 (-82.4% YoY).

• CMS, CRA, and Conservation Tech had their weakest funding performances in three years. The CMS industry raised USD 44.2 million across six rounds (-73.7% QoQ and -46.6% YoY), continuing a downward trend seen over 2023. Annual funding for the industry in 2023 (USD 804.0 million) was half of what was raised in 2022 (USD 1.5 billion). In a similar vein, Conservation Tech raised USD 19.2 million across three rounds (-72.3% QoQ and -54.0% YoY), a low following an uptick seen in Q3 (USD 69.4 million). Lastly, CRA funding for the quarter dropped to USD 4.4 million, raised from two rounds (-40.5% QoQ and -17.1% YoY), a notable low for the industry. Please refer to Appendix I for the full list of funding rounds. 

Product updates: New CMS products ahead of regulations; CCUS focuses on commercialization

Analyst Take: CMS startups ramped up new climate disclosure products ahead of proposed SEC regulations (expected to be announced in early 2024) that would require publicly traded companies to disclose their carbon footprints. Moreover, despite the slowdown in funding, CCUS disruptors continued their commercialization efforts, with several launching new pilots and executing world firsts, including Avnos' first commercial pilot project for hybrid direct air capture (HDAC) and Carbfix's attempt at permanent CO2 mineralization using seawater as a solvent. In addition, EOMS companies are capitalizing on the strong interest in battery energy storage and are expanding their grid and energy asset optimization tools to support renewable energy deployment.

• We observed 39 new product updates in Q4, compared with the 30 in Q3. The updates spanned across the CMS (13), CCUS (9), EOMS (5), Alternative Energy (4), Hydrogen Economy (4), CRA (2), and Conservation Tech (2) industries. 

• Launch of climate disclosure tools: CMS companies such as Normative, Cedara, and Iconic Air launched new platforms, while others such as BeZero, Rubicon, and Nori introduced new tools and carbon offset credits.

• CMS companies launch new rating systems and protocols: Several companies, including BeZero and Greenly, launched rating systems, which assess and grade carbon-offsetting projects and carbon footprint reduction progress of companies to help improve transparency in the carbon removal industry. Meanwhile, Isometric launched protocols to standardize carbon removal credits as well as DAC and bio-oil geological carbon storage processes.

• CCUS trials technology advancements and receives product validations: Avnos, C-Capture, and Solidia launched pilots of their technologies, while other companies successfully carried out advancements in CCUS technologies, including Carbfix injecting dissolved CO2 in seawater underground and Carbyon’s fast-swing process capturing CO2 using less than 2,500 kWh/ton. Meanwhile, CarbiCrete advanced CO2-based building solutions by receiving validation for its cement-free, carbon-negative concrete process from Enviro-access and meeting ASTM C90 performance requirements for concrete masonry units (CMUs).

• New asset optimization platform launches: With the push for renewable energy and battery energy storage continuing, EOMS companies that develop optimization tools for grids and energy assets are focusing on expanding their offerings. As such, disruptors such as Piclo, Peaxy, and Fluence introduced new solutions to strengthen the operations of grids and optimize battery performance to maximize storage.

• Other product launches by energy storage, hydrogen, and conservation tech startups: 24M Technologies and Northvolt launched new battery systems, while Hyzon deployed its first hydrogen-powered waste collection truck. Additionally, NatureMetrics launched the world's first nature intelligence platform powered by eDNA.

Partnerships: Carbon-offsetting collaborations dominate; third-gen renewables in the spotlight

Analyst Take: More than half of the partnerships formed in Q4 came from industries related to carbon offsetting (CCUS and CMS). CCUS disruptors are taking the lead in forming multiple collaborations to drive commercialization and scale operations globally, while personal carbon offsetting and B2B platform integrations were the main focus of CMS collaborations.

In Alternative Energy, fusion companies collaborated to improve their devices, while SAF producers focused on operational expansion. Tidal and geothermal technologies were of particular interest to incumbents and governments, with Google now using the latter to power its data centers in Nevada. Hydrogen mobility partnerships focused on advancing fuel cell technologies and hydrogen-powered aviation, as the US prepares to set the requirements for the 45V Hydrogen Production Tax Credit in Q1 2024.

• We observed 105 partnerships in Q4 2023 (vs. 66 in Q3 2023). The CCUS, CMS, Hydrogen Economy, and Alternative Energy hubs saw the most number of partnerships. Service collaborations (42) and product/tech development partnerships (39) were the most common, followed by customer collaborations (24).

• CCUS partnerships focused on operational expansion, collaborative technological advancements, and establishing CDR offset agreements: The CCUS industry carried the most number of partnerships in Q4 (32% of total partnerships). Notable CCUS disruptors such as Svante, Storegga, Climeworks, Deep Sky, LanzaTech, and 1PointFive created partnerships to expand their global CCUS operations, while others, including Heirloom, CarbonCure, and CarbiCrete, focused on kickstarting their commercial operations through collaborations. The industry also inked over 100,000 tons worth of new carbon dioxide removal (CDR) offset agreements during the quarter.

• Personal carbon offsetting and B2B platform integrations were the main focus of CMS partnerships: Disruptors such as CHOOOSE, Squake, Greenworlder, and Cedara collaborated to provide carbon offset solutions for consumers to manage their personal and travel carbon footprints. Companies also partnered to integrate carbon data, analytics, and project ratings into insurance, consulting, accounting, and travel industry platforms, enhancing the ability to provide customized solutions, transparent emissions tracking, and risk-adjusted portfolios to support decarbonization efforts.

• Fusion and biofuel collaborations continued, while other third-gen renewables garnered government and incumbent interest: Interest in climate tech hotspots fusion and SAF continued in Q4, with notable disruptors such as General Fusion and LanzaTech fostering multiple collaborations to pursue commercialization and operational expansions. Other third-gen renewables, such as tidal and geothermal, also fostered partnerships with government bodies and incumbents. This included Fervo Energy supplying electricity to Google through geothermal energy and Orbital Marine working with the European Commission on commercializing tidal energy. Alternatively, while long-duration energy storage raised significant funding, there were no critical collaborations that took place this quarter. 

• Notable partnerships to advance hydrogen mobility: Disruptors in the hydrogen industry such as Elcogen, Bramble Energy, and Quantron focused on collaborations to advance their fuel cell technologies, while ZeroAvia dominated aircraft advancement, with multiple collaborations to support hydrogen-based flight. 

Acquisitions: bp takes full ownership of Lighthouse bp

• We observed six M&A deals in Q4 2023 (compared with five in the previous quarter). EOMS accounted for two of the six deals, while the CMS, Conservation Tech, and Hydrogen industries carried one transaction each.

• The most notable of these was bp’s agreement to gain full ownership of Lightsource bp, a company that develops and operates utility-scale solar and battery storage assets, by purchasing the remaining 50.03% stake of the company for GBP 254 million (~USD 321 million). bp aims to further scale up Lightsource bp operations and use the company as a source of low carbon power for its own operations and support its growth into areas such as hydrogen, EV charging, biofuels, and power trading. The transaction is expected to close mid-2024.

Regulations: The EU ups renewable energy targets; the US pushes for renewable hydrogen

Analyst Take: Both the US and Europe are pushing to advance renewable energy technologies and their wide-scale adoption, with the EU now mandating that nearly half of all energy produced must come from renewable sources by 2030. Furthermore, following the European Commission’s adoption of two delegated acts in June 2023, which set out rules for the EU's definition of renewable hydrogen, the US is now catching up with its proposed regulations to determine which projects will be eligible for the 45V subsidy. Such a clear regulatory outline coupled with significant government funding would not only strengthen the push toward sustainable hydrogen production but also bolster the uptick in VC funding seen in the second half of 2023. A similar level of US government interest is being shown in the commercialization of fusion energy, with the Nuclear Regulatory Commission easing restrictions in both Q3 and Q2, several government grants being made available, and now a landmark international partnership underway.

• The EU Renewable Energy Directive ups 2030 renewable energy target to 45%: In November 2023, the Renewable Energy Directive, which is the legal framework for the development of clean energy in the EU, was revised to raise the overall renewable energy target from 32% (EU/2018/2001) to a binding minimum of 42.5% and an aim of 45% (EU/2023/2413). The increased intensity aims to achieve the EU's 55% greenhouse gas emissions reduction target for 2030 and also deliver on the European Green Deal and the REPowerEU objectives. Following the revision, the directive's rules will be turned into national law within 18 months, and specific provisions related to permitting renewables are to be implemented by July 2024.

• The US publishes proposed regulations for clean hydrogen production: In December 2023, the US Department of the Treasury and Internal Revenue Service released the proposed regulations for the 45V Hydrogen Production Tax Credit introduced in the Inflation Reduction Act, following delays of the announcement in Q3 2023. As such, the Treasury Department’s Notice of Proposed Rulemaking (NPRM) has published the proposed rules in the statute, including lifecycle greenhouse gas emissions, qualified clean hydrogen, and qualified clean hydrogen production facility. This is to be open for public comment for 60 days on the Federal Register prior to finalization. The offered credit will vary (ranging from USD 0.60 to USD 3 per kilogram of hydrogen) based on the emissions rate of the production process and will be available for 10 years, starting on the date that a hydrogen production facility is placed into service (for projects beginning construction before 2033).

• The US invests USD 7 billion to launch seven regional clean hydrogen hubs: In October 2023, the US DOE announced that the Bipartisan Infrastructure Law will invest USD 7 billion to create seven Regional Clean Hydrogen Hubs (H2Hubs) nationwide, as part of President Joe Biden's Investing in America agenda. The H2Hubs aim to form a national clean hydrogen network, promoting its production, storage, and delivery and will collectively produce 3 million metric tons of hydrogen annually, reaching nearly one-third of the US 2030 production target. 

• The UK and US form landmark fusion energy partnership: In November 2023, the UK Department for Energy Security and Net Zero (DESNZ) and the US Department of Energy (DOE) reported the formation of a strategic partnership to accelerate the demonstration and commercialization of fusion energy. The two countries will focus on advancing the UK’s fusion strategy and the US’ Bold Decadal Vision for Commercial Fusion Energy. This will involve the joint development of resources and facilities in academia, industry, and government for the commercialization of fusion. In particular, the partnership aims to address technical challenges, develop national research facilities, support the harmonization of regulatory frameworks and standards, develop resilient supply chains, and invest in community engagement and relevant skill development.

Value chain: Carbon offsetting a key focus in support activities; inbound activities and manufacturing centered around hydrogen

Appendix

Appendix I: Funding

Appendix II: Partnerships

Appendix III: Value chain summary Q3 2023