IRAs are starting to pay off for climate change technology startups

Image credits: TechCrunch/Bryce Durbin

The Inflation Control Act, signed into law by President Joe Biden in August 2022, will invest $4,000 in clean energy projects as the U.S. aims to cut economy-wide greenhouse gas emissions by up to 40% by 2030. Appropriated a federal budget of $1 billion. Even startups are starting to benefit.

Private investment in climate technology startups is on track to match or outpace government funding, especially as investors. You can have peace of mind in this growing market for technology.

According to one study, more than 270 new clean energy projects were announced in the past year, totaling about $132 billion in private investment. Bank of America Global Research August Report. More than half of these funds went to EVs and batteries, with the rest going to renewable energy, grid storage, carbon capture, utilization and storage, and clean fuels. BoA expects these investments to create more than 86,000 jobs, including 50,000 in EVs.

Funds from IRAs will primarily go to established companies, but venture capital and other private investments are flowing into startups at all stages. Many startups are emerging to provide ancillary services to large industries, and investors are taking notice.

Puneeth Meruva, a partner at Trucks Venture Capital, told TechCrunch that in the year since the IRA was signed, the number of climate startups has increased by 10% compared to the previous year. VC recorded a 65% increase in companies related to EV charging and a staggering 72% increase in startups working on hydrogen technology.

Initial and growth stages

“Funding from an IRA does not necessarily directly benefit start-ups. In fact, many funds are well-established from a technology perspective or are used to deploy commoditized infrastructure and products. ,” Melba said.

That doesn’t mean startups can’t use IRAs to their advantage. The bill’s incentives apply more directly to start-up customers. Melba says startups can use this as a tool to sell to customers.

“If you sell products related to charging, you can go to these infrastructure developers and say, ‘We have all the IRA funding to deploy chargers.’ We can help you do that. “Sho,” Melba said.

During the growth phase, IRAs have increased access to debt financing, said Kathy Bowe, a partner at Energy Impact Partners. Part of the reason is that IRAs include incentives for domestic manufacturing, making it more likely that companies will have access to debt to fund manufacturing increases.

The IRA also includes project-level incentives that make it easier for companies to finance clean energy projects, Bowe said.

Start-up sectors affected by IRAs

Sun

The two main tax credits for IRAs are related to solar power. They are the Solar Investment Tax Credit (ITC) and the Advanced Manufacturing Production Credit (Section 45x). The ITC already existed, but the IRA provisions extended the 30% tax credit until the end of 2032. Section 45X is new and gives owners of renewable energy facilities an annual tax credit of $26 per megawatt-hour of electricity generation.

Bowe said portfolio companies such as Aeon Solar and Arcadia are taking advantage of the extended ITC incentives.

“It’s important not only the amount of the incentive, but also the increased certainty because the incentive has been extended until 2032,” Bowe said. “From an investor perspective, part of it is the amount of the incentive, but the other part is just having certainty over the investment period.”

According to the BoA, nearly $40 billion in private investment in renewable energy (including solar and wind) has been announced over the past year.

Stationary and long-term energy storage

Energy storage is essential to operating power grids with increasing amounts of intermittent renewable energy.

Prior to the enactment of the IRA, battery energy storage devices had to be directly connected to a renewable generator for the majority of the year to qualify for the tax credit. Currently, the IRA allows standalone energy systems or grid-scale battery systems to qualify, regardless of whether they are connected to renewable energy.

This is huge, says Bowe. This is especially true for grid-scale storage companies like Form Energy and Powin.

“If you think about one of the biggest trends we’re seeing across the market, it’s the proliferation of batteries across all assets,” Bowe said. “So we’re embracing this trend in a big way across everything from small mobile batteries to large grid-scale ones.”

energy transfer

EIP is also making significant investments in energy transmission, which feeds generated power into the grid in densely populated areas.

“Electricity demand is expected to double by 2040, a rate of growth essentially unseen since electricity was invented,” Bowe said. “To meet that demand and add all the new clean generation we need, we will need to significantly expand transmission.”

The IRA also provides $5 billion in financing for the construction and renovation of power generation and transmission facilities. The goal is to accelerate the development of electricity transmission infrastructure, improve grid reliability and allow regions to share surplus energy.

Bowe said EIP will continue to invest in its power transmission business, especially since the company’s strategic investor base includes many utility companies.

“Without adequate investment in transmission, up to 80% of the potential greenhouse gas emissions reductions that can be achieved through the IRA may not be realized,” Bowe said.

hydrogen

The IRA includes a variety of tax credits to support clean hydrogen fuels, biofuels, and sustainable aviation fuels. Melba said this was surprising given the investment community’s lackluster response to hydrogen technology over the past decade.

While many investors are still wary of hydrogen and don’t even have an investment thesis for the fuel, Melba said truck VCs are bullish on hydrogen, especially vehicles larger than vans.

“For large vehicles, you can’t just put a battery on it, especially given the short supply of all materials and packs,” says Melba. “Given that weight is so important, it’s impossible to build a pack large enough for every truck or aviation service in the world.”

Meruba said that while a focus on batteries makes sense for the passenger sector, it’s time for commercial industries where uptime is critical to start looking elsewhere.

“It takes too long to charge. It’s like you have to run a lightning bolt through the cable to do it fast enough,” Melba says. “Hydrogen allows for very rapid charging in some ways. It’s almost the same as replacing a battery, but much easier because the canister is lighter.”

The VC also pointed out that retrofitters are working to convert existing commercial vehicles into fuel cell vehicles, particularly in the mining and construction sectors.

carbon capture and sequestration

Carbon capture and sequestration (CCS) is an industry where startup valuations have skyrocketed since the passing of the IRA, Bowe said. The main reason for this is a big push to decarbonize the industrial sector, which accounts for nearly a third of total US emissions and is the most difficult to decarbonize.

In March 2023, the IRA launched a $6 billion industrial demonstration program that will fund up to 50% of the cost of each project. This represents a $12 billion opportunity for early stage commercial scale projects.

That’s where startups like Carbon America can win. The developer is currently building two commercial CCS projects in Colorado that it plans to own and operate and has already received government funding.

Domestic EV manufacturing and supply chain

Domestic EV manufacturing is booming thanks to the IRA EV tax credit and advanced manufacturing credit. Bowe said there has been $120 billion in investments announced in the EV supply chain over the past eight years, half of which was made after the IRA was passed.

Domestic battery production has increased significantly The United States is trying to end its dependence on China. According to our calculations, automakers and battery manufacturers have pledged to invest and invest nearly $100 billion in domestic cell and module manufacturing.

TechCrunch is tracking that number. EV battery manufacturing equipment It exists and it is promised. The tax credits available for these are primarily reserved for large automakers and battery developers, but there is plenty of room for battery innovators to succeed.companies like 6K, Shira and Mithrachem We produce domestically produced battery materials.Others, e.g. redwood wood, Ascend Elements and Li-Cycle are building battery recycling facilities in the continental United States.

EV charging

Section 30C of the IRA provides up to a 30% tax credit for each new charger installed. However, investors’ insights differ on how the IRA has affected the EV charging industry. Bowe said while IRAs are a big catalyst, the field hasn’t fundamentally changed from a year ago.

Meanwhile, Melba says there is a lot of interest in EV charging companies in the early stages. He also noticed that the number of EV charging companies has increased significantly since the IRA was passed. And a lot of it focuses on software.

One such startup is Stable, a Truck VC portfolio company that has developed predictive software for EV charging that covers hardware installation locations, performance prediction methods, and pricing guides.

“The kind of products the market needs right now are products that work reliably every time,” Bowe said. “Whether it’s a software model or a hardware model, we need an EV charger that works all the time and works with the power grid. That’s what we’ve been investing in.”

Opportunity for new business fields

Investors who spoke to TechCrunch said they’re seeing more companies spring up to help other companies access new credit.

Melba said he has seen startups act like tax advisors, helping businesses understand complex tax laws.

Some companies have created a market for transferable tax credits, Bowe said.

IRAs include transferable methods of monetization for commercial and utility-scale energy projects. This allows project owners to sell tax credits to other taxpayers, providing cash flow and project funding.

Previously, tax credits were intended to benefit energy project developers, but this left behind small developers who did not pay enough taxes to realize the tax credits. Ta. Previously, that trust would have simply been wasted. This debt can now be transferred to a tax-capable company in exchange for financial compensation.

IRAs are not overhyped

Markets are often driven by hype cycles, which can lead to overvaluation and misallocation of resources. Investors we spoke with said that the investments brought in by and as a result of IRAs are not examples of overhype.

The Congressional Budget Office previously projected that the IRA would bring government spending to the tune of $400 billion, but now expects it to be at least three times that amount.

“While $1.2 trillion in government spending may be seen as a big number, we often think about the amount of money that private capital management companies like EIP, which are operating in this space, will invest in. It’s a multiple,” Bowe said.