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Blog | Feb 10

VC take on spotting the opportunities in energy space

Josefiina and Petra WRITTEN BY Josefiina Kotilainen and Petra Koivuvaara

Who will lead the race to net zero in the energy space?

Reading time 7 min

Getting to net zero will be difficult – and we cannot rely only on the energy solutions at hand to get there. Here’s Maki’s Josefiina Kotilainen and Petra Koivuvaara analyzing what trends are driving the energy space forward and where do the opportunities lie.

The International Energy Agency (IEA) estimates that nearly half the technologies we need to reach net zero by 2050 might not even be on the market, yet. On the other hand, from the existing innovations on this front, only a handful have the potential to reach true scale. There's an urgent need to move towards a green energy system—a shift driven from multiple fronts by consumers, businesses, governments and larger entities like the European Union. What is driving the energy space today and where do the future opportunities lie—here’s what we found:

Trends driving change in the energy space

Our world’s energy use will climb up—and that’s inevitable. But by keeping an eye out on the main culprits who dictate how we produce and use energy, we can strive for the best means to meet these demands. Currently, there are two phenomena within the energy space driving change.

1. The volatility of energy markets

Over the past few years in Europe, we have seen a sharp increase in the price of electricity and energy in general. This spike is driven by multiple factors, such as the unexpected post-pandemic rebounce of the global economies, the Liquefied Natural Gas (LNG) price hike fueled by China’s power demand, and poor conditions to produce renewables. In the long run, the overall increase in demand will continue to drive up the energy prices, while an influx of green energy will also inflate the costs (before reaching true scale) as well as the volatility of the market. Essentially, there will be a necessity for tools to both reduce energy usage and to manage the volatility of the energy supply, not forgetting making the electricity grid endure green energy better, as well.

Consider for instance, the many areas in the world still with minimal electricity usage and what would happen as they start to plug-in. Energy solutions implemented in regions such as China, India and Africa, to cater to these burgeoning demands, will have an enormous impact on the CO2 emissions of the future. This will require innovations—designed differently to those in the Western world—which might require skipping certain development steps and leaping straight to utilizing green energy.

2. Regulation and political landscape

Like most things, energy is also political - and the recent energy crisis revealed the vulnerability of the European energy system, that is dependent on for example. imported natural gas. This also means we are likely to see new regulations in the energy space.

Political decisions can hinder moving to renewable energy sources. For example, Germany’s decision to move away from nuclear power forced the nation to keep using more fossil fuels to meet the energy demand - all while using nuclear, they could have shifted away from coal and found a better solution to pair with increase in renewables. Some countries, on the other hand, see nuclear power as an important piece of the puzzle to get to net zero. Of course, policies can also drive positive change as in the U.K., where gas boilers are being banned, and oil boilers might face the same fate, too. The British government is further planning on requiring new homes to be equipped with electric vehicle (EV) charging points starting already in 2022.

Public funding can also work with renewables, and Finland and wind power is a good example of that. Wind power in Finland received a lot of subsidies back in the day, when the market was still emerging. Nowadays, the industry functions under general market terms, and wind power producers are lining up to build more wind parks across the country. Similarly, public funding from European Union Green Deal, Biden administration's Green New Deal in the United States, as well as other individual countries’ stimulation packages will fund a bulk of the energy innovations in the upcoming years. As we see it, all types of funding are essential for getting more and more green solutions to the point where the green premium is low enough or simply cheaper than the non-green alternatives. Meanwhile, on the other side of the coin, all types of incentives for green solutions can also drive the change.

In the energy sector, regulation can create new markets or clear out space for innovative solutions. Regulation can also help to accelerate growth, when a company’s timing is right, for instance a country deciding to require EV chargers in each house just as an EV charger company is at the ideal stage to deliver. Since the need for new solutions can surface quite quickly, success might come down to being in the right place at the right time rather than having the best technology.

Spotting energy opportunities

There are many groundbreaking companies and ideas in the energy sector, but not all of them fit into the VC model. When scouting for new investments, we need to get a strong conviction on the ability of the technology and the team to scale quickly. Often this means that the solution needs to be a software, or a function with minimum hardware. However, this is only the VC model, and thankfully there are other funding sources for companies that do not fit this criteria.

1. Storage

To add more green energy to the grid and truly globalize the energy market, we need solutions, far more effective than the existing options, for energy storage and transfer. We’ve been recently following the battery and hydrogen spaces closely, however we are also keen to explore other innovative alternatives.

Coming back to battery tech, this area has received a lot of funding in recent years, and seen more sustainable solutions coming out of the space. But sourcing some of the materials, such as rare earth elements (REEs), used to build batteries have significant environmental impacts. Battery recycling is currently costly and inefficient, but transitioning to a circular value chain might be the key to making battery usage more sustainable—which will soon be a priority since the demand for batteries will increase significantly in the coming years, as it’s considered a top runner in the race towards net zero, e.g. in transportation.

Hydrogen, on the other hand, could provide as much as 24% of the total energy demand in the European Union by 2050. Even though many policymakers see hydrogen as one of the major solutions of getting to net zero, it will require massive investment in the energy space. Currently, most of the hydrogen is produced from natural gas and coal, and one major roadblock in resorting to a greener production process is the lack of sufficient green electricity (that could be used to produce green hydrogen) . From a VC perspective, the challenge is that no one knows what the timeline is for hydrogen usage to actually ramp up. And the timing is important because most VCs have a fund lifecycle of a decade, so it might not make sense to invest in an idea that is just too early.

Energy storage graph

2. Energy transfer

There are few areas where somewhat efficient electricity transfer occurs today, like Nordics and Baltics balancing each other’s electricity supply through a joint power exchange, Nord Pool. Recently, a newly built direct power cable NordLink, connecting Norway and Germany, has started supplying green energy between the two countries. A similar cable also opened between Norway and the U.K., connecting the Nordic energy market to its counterpart in continental Europe. However, we see plenty of opportunities to make energy transfers more efficient, especially when it comes to minimizing the energy lost in the process of balancing another country’s energy market. While building power cables between nations is not VC fundable, we’re adamant that there is space for innovations—that can be scaled quickly.

3. Virtual power plants

To counteract the volatility created by adding more renewables to the energy market, we need solutions that bring the ability to react quickly to balance the grid. Not only can a virtual power plant (VPP) do all that, but also optimize, monitor and forecast the power use. Typically a VPP controls a network of units that they can ramp up or down depending on what is needed to stabilize power grids.

A VPP can tap into the reserve market, play with electricity pricing or be paid by customers to optimize power use. Demand response is currently a lucrative opportunity in markets with high green energy and high energy prices, that VPP’s can take on. More importantly, they are also an essential part of building smart grids.

Virtual powerplants

4. Consumer energy saving solutions

We’re also actively looking for companies with solutions that help consumers to use, produce, sell and buy electricity in a more flexible way. Few companies like e.g. Tibber have started to make headway in building consumer facing energy saving solutions, but we think there’s still room for more. This includes solutions from apps for controlling when to charge your electric vehicle to products that allow you to set the electricity makeup for your house. Imagine a future where you know the electricity consumption of every single device in your home and the energy choices used to power them.

We see that the consumer-facing solutions are tapping into the sustainability trend—where consumers want to feel like they’re doing something tangible and have a positive impact towards solving the climate crisis. Consequently, they might also want to understand their electricity usage better. The difficulties in this space might lie in customer acquisition and the fluctuating energy prices.

Consumer energy saving solutions

We’d love to hear from founders who are trying to tackle the challenges within the energy space with innovative solutions. If this is you reach out to us at lets@maki.vc!

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