Climate Tech Hits a Bit of Turbulence
A slew of sector-specific issues — including, surprisingly, the methodical rollout of the Inflation Reduction Act — have recently made for a bumpy ride.
A speed bump?
Whatever you want to call it when investors become harder to reach, suppliers drive a harder bargain, and new hires get delayed, the climate-tech and renewables industries seem to be experiencing it.
Since the year began, the pace of new investment in climate-tech and renewables companies has slowed. High interest rates are starting to make some projects unattractive. And a slew of sector-specific issues — including Silicon Valley Bank’s collapse and, surprisingly, the methodical rollout of the Inflation Reduction Act — are causing leaders across climate-related companies to tap the brakes.
“I do think it’s a softening of the market,” Tim Latimer, the CEO of Fervo Energy, a Houston-based geothermal startup, told me. “Without a doubt, it’s more difficult and it takes longer to close funding rounds today than it did 12 or 24 months ago.”
“There’s definitely been a little bit of a slowdown,” Jorge Vargas, the cofounder and CEO of Aspen Power Partners, a renewables developer, said.
Last quarter, venture-capital investment in climate-tech startups dropped to its lowest level since the spring of 2020, according to Pitchbook data. The total value of deals fell 36% since the previous quarter and is down 51% since 2021’s all-time high.
In raw totals, there were only 279 climate-tech deals completed in the first three months of the year — the lowest level since 2019, according to Pitchbook.
“People made a variety of bets over the past 36 months as capital — which was long overdue — came into climate tech,” Latimer said. “Now people are being a little bit more discerning about which companies and teams are hitting their milestones.”
“It’s nowhere near as pronounced as what we’ve seen in the tech space,” he added.
The industry clearly isn’t in crisis yet. New climate-focused venture funds are still opening. By any measure, climate-tech startups are having an easier time fundraising now than they did in the late 2010s, when less than $2 billion flowed into the space in some quarters, Pitchbook data shows.
Still, the pullback has caused some of the very youngest companies to delay hiring or reduce their headcount, Latimer said. At least one climate-tech unicorn has made a similar move. Last week, Arcadia, a climate-data and software provider last valued at $1.5 billion in December, laid off about 9% of its employees. The company had “almost 700” employees late last year.
“This painful but necessary decision was reached after carefully weighing Arcadia’s market-leading position against the uncertain outlook for the economy,” Gabriel Madway, the company’s vice president of communications, told me in a statement.
But Arcadia is an unusual climate-tech firm in some respects: Founded in 2014, it is nearing its 10th birthday, a de facto make-or-break moment for venture-funded companies. Most climate-tech startups are younger and have spent less of their investment. And the market for climate-curious engineers, programmers, and project managers is still brisk, by all reports. Climate-tech job boards such as Climatebase still show hundreds of open positions.
“Valuations were good enough in ‘21 and ‘22 that people raised fairly sizable [investment] rounds, and people have positioned their company so they have 18 months of runway,” Latimer, the Fervo CEO, said.
If leaders see a slowdown, that “means you would’ve grown 10x and now you’re growing 3x,” he told me. “If you zoom out on a five-year time horizon, it’s nothing. It’s at most a blip.”
Clay Dumas, a partner at the climate-focused fund Lower Carbon Capital, doubted that climate tech was in a serious moment of crisis. “While investors are catching their breath post-[Silicon Valley Bank], the tailwinds for climate tech are only gathering strength,” he told me in an email.
Whatever you want to call it — a blip? a breather? a gurgle? — most executives agreed that companies are dealing with two sector-specific sources of uncertainty beyond the broader, economy-wide fears of a recession. The largest might surprise environmental advocates: It’s President Joe Biden’s flagship climate law, the Inflation Reduction Act.
How the Inflation Reduction Act is leaving companies in limbo — for now
On paper, the Inflation Reduction Act, or IRA, should be good for anyone in the climate business. Since the act — initially forecast to spend $374 billion on climate — was passed last year, banks have fallen over themselves to publish new and engorged estimates of its impact. The law will pay out more than $800 billion, Credit Suisse analysts insisted in October. No, it will spend $1.2 trillion, and unleash another $3 trillion in private investment, a Goldman Sachs team replied last month.
No matter the topline number, just about everyone agrees the law will ultimately transform companies that work on climate change.
But for now, companies find themselves in a limbo where the law has been passed, and their suppliers and customers know the climate economy is about to boom — but the money hasn’t started to flow.
Although the Department of the Treasury and the IRS have set up programs for electric vehicles, they have yet to publish guidelines for some of the law’s most important tax credits, including those meant to boost the clean hydrogen industry or support renewables projects in low-income areas. The Department of Energy and the Environmental Protection Agency, which oversee some of the law’s largest targeted programs, are still setting up those opportunities or inviting organizations to apply for them.
That is making it hard for companies that will benefit from those programs to prepare for the future. “Not knowing when the incentives will hit the market makes it hard to do planning,” Andy Frank, the CEO of the home-weatherization company Sealed, told me. This could leave startups and companies less well staffed and less ready to take advantage of the IRA’s programs when they actually launch.
“If the whole goal of the IRA is to unlock private capital, the longer there is uncertainty as to what things will look like, then the longer private capital will sit on the sidelines,” Frank said. “On the other hand, if they announce rules tomorrow that are really crappy … then private capital will also sit on the side lines.”
The outlook was slightly different in renewables world, Vargas, the CEO of the renewable developer Aspen Power, said.
“We speak about a windfall, and everyone is excited, but it hasn’t trickled into the economics of projects. This stuff is barely scraping by,” Vargas, who used to lead Morgan Stanley’s solar financing office, said.
“The cost of building projects has increased because of [the] IRA,” he said. “After all the adders were announced — all the vendors, all the construction, they raised their prices. It’s just a passthrough.”
Latimer, the Fervo CEO, was more upbeat.
“We know that the IRA will be a generationally defining investment opportunity for anyone working in the clean energy sector,” he said. “But for specific technologies, for how fast and how quickly and how much capital they’ll need to scale up, we don’t know yet. The whole industry is waiting for more guidance on the law interpretation.”
Why Silicon Valley Bank caused a solar speed bump
At the same time, parts of the broader climate industry are just getting over a Silicon Valley Bank-shaped speed bump.
Silicon Valley Bank, or SVB, collapsed in March after suffering a run fueled by panicky investors. The bank was “an integral part of the early-stage climate tech community,” Gabriel Kra, a climate-focused venture capitalist, told me at the time. But the bank was particularly important for financing community solar projects, a type of large-scale solar farm that collectively benefits a pool of individuals, companies, or nonprofits. The bank said that it had financed 62% of all community-solar projects nationwide.
“Three to five years ago, SVB was one of the only shops in town,” Jeff Cramer, the president and chief executive of the Coalition for Community Solar, told me. “Now there are more banks that are comfortable with community solar.”
Still, the bank’s collapse problem set back Vargas’s company, Aspen Power. In early March, Aspen Power was in the final stages of closing a new lending arrangement with SVB. It also kept one of its cash accounts there.
Then SVB fell apart. “We thought, ‘Oh my God, we’re so screwed,’” Vargas told me, although he added that the firm had cash at another bank and was never in serious danger of missing payroll. Within days, the federal government stepped in to guarantee SVB’s depositors, and Aspen Power eventually opened a new lending facility with another bank.
The entire episode “slowed us down about three weeks,” he said.
“If you add in the SVB collapse and you add in uncertainty around [the IRA’s] business credits … there’s a bit of a hold” across the community solar industry, Cramer said. “It doesn’t mean that there’s uncertainty in those projects generally. It’s simply a matter of timeline that when it makes sense for those projects to energize.”
“If you go out three, four, years, I don’t think it will change the amount of [solar] capacity or number of customers overall,” he said.
A bit of a hold — a three-week delay — these things might seem like a hiccup, but they can be more destabilizing for companies that depend on a steady flow of new renewable projects coming online. The question for climate-tech and renewables companies — and the American economy — is whether the past month’s wobbles are the start of something more serious, or whether they’ll be forgotten by the summer. Dumas, the climate-focused venture capitalist, was optimistic.
“Profit motive, national security, cultural and corporate attitudes, plus more than a trillion dollars in government spending and AI-boosted discovery are all accelerating adoption of new products and technologies that [will] win,” he told me. “They’re better, faster, closer, [and] cheaper, on top of being lower carbon.”
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