Energy innovation investment remained resilient to shocks in a turbulent 2022

Government and corporate spending on energy research and development hit record highs last year, as did venture capital bets on clean energy technologies. However, risks lie ahead, and the availability of capital varies between regions and types of innovation. Fortunately, the G7 and G20 are starting to address the barriers to energy R&D investment and the disparities between countries.

The World Energy Investment 2023 report is a barometer on the world’s progress achieving clean energy transitions, given that financial commitments and spending are the ultimate tests of whether policies and pledges translate into action. The report shows that investment in clean energy technologies is significantly outpacing spending on fossil fuels, as affordability and security concerns triggered by the global energy crisis strengthen the momentum behind more sustainable options.

A similar test can also be applied for technology innovation and ideas. Investment reflects the market’s confidence in future clean energy technologies. It also shows the extent to which governments and companies are serious about plugging the most challenging technology gaps to deliver a net zero emissions trajectory. Chapter 5 of the World Energy Investment report offers the most comprehensive collection of new data on these trends, and this article shares its headline findings.

Public spending on energy R&D grew by 10% in 2022, to nearly USD 44 billion according to our estimates, with 80% devoted to clean energy. For listed companies in energy-related sectors, preliminary data show a similar rise in R&D budgets in 2022, while early-stage venture capital investment into clean energy start-ups reached a new high of USD 6.7 billion. These solid outcomes came despite higher costs of capital and pervading economic uncertainty.

Growth in direct public R&D spending is being supplemented by a jump in industrial support that will indirectly catalyse innovation

While this counter-cyclical pick up in investment is good news, the market and policy context for energy innovation is also changing. On the one hand, macroeconomic conditions are getting tougher, with rising interest rates and other headwinds leading to the 2023 collapse of Silicon Valley Bank, a United States-based provider of finance to start-ups, bringing a nervous atmosphere to a previously buoyant part of the innovation system. On the other hand, policy support for innovation in many countries is intensifying as governments respond to the energy crisis and seek more resilient and diversified clean energy supply chains. The United States Inflation Reduction Act, for example, provides a huge boost to the drivers of clean energy innovation.

New industrial strategies and the priority attached to de-risking clean energy supply chains will reinforce policy support in key countries, but they risk creating ring-fenced national or regional markets. Unless some restrictive measures are averted, any continued growth in public R&D spending could be partly wasted due to reduced international cooperation, curtailed information sharing and lack of free movement of talent.

Global public energy RD&D budget, 2015-2022


The competitive pressures of energy transitions are driving companies to fund more R&D as higher revenues offer further opportunities to support clean innovation

According to preliminary data, listed companies in energy-related sectors increased their R&D outlays by 10% in 2022 despite economic uncertainty and higher capital costs. While trends and competitive pressures vary across sectors, in aggregate this growth can be interpreted as companies responding to the threats and opportunities of the energy transition. As the technological basis of these sectors shifts, R&D is essential for growing, or simply maintaining, market share. Automotive R&D is driving the increase as electrification accelerates.

Bumper 2022 revenues at energy sector companies offer a further chance to increase spending in coming years. Research budgets are typically set in advance and high energy prices were unanticipated, so the effect was not felt in 2022. However, energy companies have a major opportunity to increase clean energy R&D budgets in 2023 and beyond, even if just to maintain the average ratio of R&D to revenue. There is also a good strategic case to take advantage of public support in areas like clean energy manufacturing: pairing internal R&D with new public funding can make capital more productive in an environment of greater capital discipline.

Early-stage equity funding for energy start-ups is booming, led by clean mobility and renewables, but later-stage funding is flagging

Early-stage equity funding for energy start-ups had its biggest year ever in 2022, with increases in most clean energy technology areas. Funding for start-ups in CO2 capture, energy efficiency, nuclear and renewables nearly doubled or more than doubled from 2021, which was already much higher than the average of the preceding decade. This type of funding supports technology testing and design and plays a critical role in honing good ideas and adapting them to market opportunities.

Growth-stage funding, which requires more capital but funds less risky innovation, rose by only 1% in 2022 and was very weak in Q1 2023, indicating that the value of growth-stage deals for energy start-ups could fall by nearly 60% in 2023. Prevailing macroeconomic conditions have dented the amount of capital available and raised the cost of scaling up nascent businesses.

With banks restraining their lending, investment is not expected to bounce back quickly. Limited partnerships, the primary backers of VC funds, will continue to rebalance their portfolios to reduce risk exposure, resulting in more intense competition between start-ups for early-stage funding. In addition, banking services and loans are likely to become more costly for small, innovative firms. It is expected that start-ups will have to survive longer between funding rounds or before an “exit” (becoming a public listed company or being acquired by a larger firm), with less access to bridging capital.

Start-ups that develop hardware face difficulties paying for research staff and for prototyping and testing, despite the importance to energy transitions of developing improved clean energy hardware solutions. Growth in early-stage funding for energy start-ups developing such equipment is flat, while VC growth-stage investment fell in 2022.

Growth-stage start-up global venture capital investment by sector, 2010-2023


Early-stage start-up global venture capital investment by sector, 2010-2023


Early-stage clean energy continues to outperform other segments, demonstrating investor interest in energy transitions

Deals in Q1 2023, if maintained, indicate that early-stage VC funding for clean energy could continue to grow strongly in 2023, far outperforming non-energy segments for which VC investment has fallen dramatically since 2021.

To delve deeper into the VC investment trends in each energy technology area, download the extra charts that accompany this article at the end of the commentary.

Venture capital investment in energy start-ups, by technology area, for growth-stage deals, 2004-2023


Venture capital investment in energy start-ups, by technology area, for early-stage deals, 2004-2023


Did the world spend enough on clean energy innovation when money was cheap?

Overall, the latest investment data for energy R&D and innovation are broadly positive, reflecting some of the themes running through World Energy Investment 2023. The impacts from Russia’s invasion of Ukraine are yet to become fully apparent and, separately, government support for clean energy is helping it to so far buck weaker macroeconomic conditions. There is little evidence from 2022 that corporate spending on clean energy innovation will rise along with higher revenues, but there is a strong case, in particular, for oil and gas companies to increase R&D in coming years.

In addition, industrial policies to favour national clean energy value chains may steer significant new capital to selected technology challenges, spurring eligible innovators to compete with each other to secure contracts and win market share.

Government support for clean energy innovation comes at a time when the finances for innovative small companies are under severe pressure from inflation and when co‑operation on technology between some major economies is increasingly shaped by geopolitics. Concerns that investors will retreat from riskier bets on new technologies are legitimate, and the world may regret not having spent more on clean energy R&D and early-stage innovators during the past 15 years of cheap capital.

Regional differences are set to widen, not converge, but recent attention from the G7 and G20 is welcome

The IEA Net Zero Emissions by 2050 Scenario requires over half of clean energy investment to be in emerging market and developing economies, yet higher inflation and rising risk perception are hitting EMDEs the hardest. China, Europe and North America, plus Japan and Korea, dominate R&D spending and play an outsized role in energy innovation compared with their future energy investment needs. In 2022 EMDEs (excluding China) accounted for just 5% of public energy R&D, 3% of corporate energy R&D (by country of headquarters) and 5% of energy VC (by country of start-up).

Higher financing costs in EMDEs could entrench this difference at a time when there are other growing obstacles to innovation co‑operation between regions. Accordingly, the Sixth Assessment Report of the Intergovernmental Panel on Climate Change concluded that clean energy innovation systems in EMDEs need strengthening.

On 20 May 2023, G7 leaders issued a Clean Energy Economy Action Plan committing to maintain support for research, development, and deployment of clean technologies as a critical enabler of an accelerated clean energy transition in low- and middle-income countries. At the request of these leaders, the IEA will convene an international forum with relevant parties from the public, finance and corporate sectors, as well as research entities and start-ups.

India’s presidency of the G20 is already expanding the scope of discussions within the G20 Sustainable Finance Working Group, which will meet on 19 June 2023 in Mahabalipuram to exchange ideas for scaling up capital for early-stage climate technologies.

These initiatives should be encouraging to anyone advocating energy transitions around the world. Innovation in and for EMDEs can better target their specific social, economic and climatic contexts. It can help to position them in clean energy technology value chains, thereby boosting economic growth and accelerating global efforts towards achieving climate goals. The presence of local capabilities and domestic technology leaders is a driver of more ambitious clean energy policies in all countries.

Advanced economies and multilateral development banks also have a role to play in ensuring that investment opportunities for energy innovators are as global as possible, even as competition intensifies in areas from batteries to energy management software, hydrogen, heavy industry, heat pumps and air conditioning.