To say it’s an exciting time for climate tech is an understatement. First, with the recent passage of the Inflation Reduction Act, an unprecedented amount of government funding is about to accelerate the climate economy. The IRA’s spending is projected to reach $800 billion, which, by catalyzing private investment, could result in $1.7 trillion in total spending across the entire economy over the next decade. Second, consumer attitudes toward sustainability are shifting, and more Americans are interested in sustainable products and demanding climate action from leaders. Nationwide, 65% of Americans are worried about global warming, and 77% of Americans support funding research into renewable energy sources. And third, in large part due to this shift in consumer sentiments, more than a third of the world’s largest corporations now have public net zero targets. Together, these market dynamics are creating a ripe environment for climate innovation.

Investment in climate tech companies has also never been higher. Climate tech funding reached an all-time high of $70.1B in 2022, representing more than a quarter of every venture dollar invested. This growth isn’t slowing down: in just five years, Pitchbook estimates that the climate tech market will near $1.4 trillion, representing a compound annual growth rate of 8.8%. While there are exciting innovations happening across the climate tech space, the energy and transportation sectors, in particular, are capturing the attention of investors. This innovation is needed in order to hit emissions reduction goals: these two sectors account for 42% of global emissions.

At Impact Engine, we think about innovation in the energy sector in three categories: clean energy generation, clean energy grid technology, and electric vehicles.

Companies in the clean energy generation category are finding reliable and affordable ways to generate clean energy from renewable sources. Despite the proliferation of affordable, efficient, and increasingly competitive clean energy technologies, fossil-fuel-based energy generation is still responsible for about one-third of global greenhouse gas emissions every year. Solar and wind are the major technologies in the clean energy generation category, but there are other technologies emerging, such as waste-to-energy.
Next, clean energy grid technology is essential for reaching a clean energy grid, which will rely on transmission lines and smart grid technologies. Companies in this category are optimizing the delivery efficiency, reliability, and security of renewable power and also managing demand. This category includes battery storage, which received more investment than any other category in 2022, for a total of $18.4B.
The third category is electric vehicles. Adoption of EVs is expected to grow from 2M EVs today to 18.7M in 2030. In addition to the vehicles themselves, companies in this category are focused on expanding charging infrastructure. Mobility companies received $11.4B in investment in 2022, the second largest category.

As illustrated across these three categories, there are several potential bets to place in energy, and innovation in the energy sector is critical to meeting climate goals. As Bill Gates recently wrote, to avoid a climate disaster, we’ll need the moonshot technologies that’ll replace every emissions-intensive process that we use today; we’ll need to drive down the cost of new clean technologies to get rid of the “Green Premium”; and we’ll need to deploy new technologies quickly.

At Impact Engine, while we applaud the much-needed hardware-intensive disruptive climate technologies, we believe that software solutions are also a critical component of the transition to a clean energy future. As the grid decarbonizes, it is becoming increasingly decentralized, as energy generation and storage are happening at end nodes of the network, not just at central hubs. The grid is also digitizing: software has never been more relevant to manage the increasing complexity of baseload power, intermittent renewables, and distributed energy resources. Given these trends, software is incredibly critical to the transition to a clean energy future.

We believe software can play three major roles in the clean energy transition:

First, software can help stakeholders understand and analyze critical energy decisions. Today, most energy decisions remain offline, and software can help a range of stakeholders make better decisions about the rapidly changing grid. The first step is accessing real-time data across different applications. Universal real-time data is a key driver in unlocking a resilient and sustainable grid. But today, energy data is held by a number of different interconnected stakeholders, and the existing data-sharing infrastructure was not built for a distributed, connected grid. As the energy ecosystem becomes increasingly more interconnected, decision-makers must be able to rely on real-time data visibility and interoperability. Companies are addressing this by breaking down data silos and building holistic platforms.

Once data is available, companies can use it for decision-making across a variety of applications. For example, companies are leveraging data to understand how much clean energy is flowing across the grid, which informs more precise decision-making about how to best reduce carbon emissions. Relatedly, simply buying clean energy credits and treating every kWh of energy the same is no longer sufficient, and this does not reflect how energy is actually generated. 24/7 carbon-free energy is being seen as the new standard, and companies are leveraging software to enable corporate energy buyers, clean energy producers, and energy-trading entities to do this type of hourly clean energy accounting. This type of insight will enable higher-quality purchases of clean energy that have a meaningful impact on the grid.

Next, software can be used to improve grid efficiency and management. Multiple studies indicate that the U.S. will need hundreds of billions of dollars in transmission investment in the coming years to integrate distributed, cost-effective generation resources like solar and wind into the grid. The grid’s complexity is increasing with the introduction of renewable energy, smart meters, battery storage, and electric vehicles, but the tools to predict demand have not caught up to meet this level of complexity.

Companies are making strides in this domain by giving grid operators the tools to manage the proliferation of DERs on the grid and forecast more accurately. Similarly, virtual power plant solutions are emerging that control independently owned assets in order to manage demand, especially at peak times. Advanced solutions for managing demand also include leveraging EVs as assets on the grid; the average car is parked 95% of the time, which makes them a promising resource for decentralized energy storage without added operating costs. This is a huge opportunity for software to solve the potentially capital-intensive infrastructure problem of meeting demand. And, given the important role that battery storage plays on the grid, companies are also focusing on making batteries work more efficiently and last longer.

Third, software can help accelerate the pace of clean energy deployment. Software can be used to accelerate the deal-making that’s required to buy and sell clean energy. As more corporations set renewable energy targets and net-zero commitments become standard, the typical process for buying a Power Purchase Agreement (PPA) is proving insufficient. Today, the PPA process can take 12 months or more, and these agreements are typically only accessible to large corporations because of the high customization needed for each contract. Companies are focusing on democratizing access to renewable energy by enabling group purchases, making the process more efficient through software, and improving standardization and visibility throughout the process.

Solar development can also be accelerated through software. Companies are developing software to address the rising “soft costs” that make up 65% of the total costs in utility-scale solar, as well as operations and maintenance, which accounts for 20% of the cost of a typical solar asset. Current approaches to solar development, procurement, fulfillment, and construction are not scalable, and many asset owners still rely on manual inspection. A software solution that gives developers a holistic view of the project could shorten project timelines and increase margins. In community solar, a fast-growing segment of the solar industry, software plays a critical role in customer acquisition and customer management.

Overall, the number of firms developing innovative software solutions in the energy space is encouraging. It’s not just a smart business opportunity to capitalize on what could be a $1.7T climate tech market in five years – it’s critical in the fight to avoid a climate disaster. We can’t reduce greenhouse gas emissions from 51 billion tons per year to zero in the next three decades without new innovation in clean energy and electric vehicles. And for investors, climate tech has become a safe, smart, government-backed bet. The narrative has changed from one about risk mitigation to one about opportunity capture.

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