Spend some time with people in the climate tech world and you’ll soon learn that a lot of them share something in common: They’re not used to having a lot of money.
That’s because for years, climate represented a cost for many businesses, not an opportunity. Fortunately, that’s started to change recently as investors have rushed into the space, seeking opportunities in “double-digit trillion-dollar markets” that are “largely decoupled from general tech investing,” Joshua Posamentier, managing partner at Congruent, told TechCrunch+.
Investment in climate tech has been gathering pace over the past five years or so. While the sector wasn’t entirely immune to the slowdown that gripped the rest of the startup world over the past couple of years, we did see signs of a rally in the third quarter.
This continued strength is due in part to both U.S. and European commitments to climate-forward industrial policies. Between the Inflation Reduction Act (IRA) and the Bipartisan Infrastructure Law in the U.S. and the Green Deal in the EU, nearly $1 trillion in tax credits, grants, and other incentives are available for climate- and energy-related investments and purchases.
But that trillion-dollar forecast actually might be a conservative one. The IRA alone might yield more than that since many of the tax credits are uncapped; Goldman Sachs estimates the law’s climate provisions might pay out $1.2 trillion in incentives, spurring some $3 trillion in private investment.
That’s not enough to get the U.S. or the EU’s economy to net-zero carbon emissions (or to make up for historical emissions), but it’s a down payment so large it can be hard to keep track of it all.
In fact, climate tech today finds itself in the unusual position of being so awash in cash (relatively speaking) that there are a number of websites, apps and startups rushing to track it all and help companies and customers make the most of the incentives.
Making sense of it all
“Unfortunately, there’s no comprehensive database out there for all of these rebates and incentives,” said Thomas Stephens, co-founder of Upfront, a startup that’s cataloging incentives for merchants.
For companies, it’s a cost of doing business to gather and understand and integrate those incentives into their sales proposals, according to Tom Carden, head of engineering at Rewiring America, a nonprofit that advocates for the electrification of the economy.
Financial incentives for increased energy efficiency aren’t anything new. Many state and local governments have run energy efficiency programs for decades, but many of these programs evolved independently, and the lack of consistency and centralization has become burdensome for industries and consumers. One electrification startup in Colorado, Carden recalled, spent countless hours developing and maintaining an incentive-tracking spreadsheet so vast they called it “the Big Kahuna.”
When the IRA was passed in 2022, the 752-page law not only brought its own incentives, but it also brought national attention to the complex world of incentives that predated it. Rewiring America saw an opportunity to simplify things for consumers and introduced the IRA Savings Calculator. The idea behind it is to “explain the policy itself, because it’s not clear just how valuable it can be to every individual household,” Carden said.
The organization says 600,000 households have used the calculator, and Carden’s team has built an API that allows other organizations to access the data that underpins the tool. About 200 have signed up so far, Carden said.
Currently, the IRA Savings Calculator is focused only on the IRA (obviously), but Rewiring America is also working to make sense of existing electrification and efficiency incentives. Some of these offers are run by states, others by local governments, and still others by state-mandated energy efficiency programs funded by utilities, resulting in a patchwork of incentives that can be challenging for even the most informed consumers to digest.
“We’re not alone in this. There are other nonprofits and for-profit companies trying to figure out how to wrangle this data,” Carden said.
One of those companies is Upfront, which Stephens founded with Andrew Hoskins after Hoskins was venting about applying for a heat pump rebate. Stephens told Hoskins, “You just spent 5 years at Affirm. You’re an engineer. If you can’t figure this out, how is your everyday customer supposed to?”
The two started talking to merchants to gauge interest in a service that would streamline the efficiency rebate process. They received positive feedback and, after honing their pitch and starting the company, ended up joining Y Combinator’s Winter 2023 batch. The company has raised about $1 million in pre-seed funding, Stephens told TechCrunch+.
Upfront ingests a merchant’s product list and matches their inventory with data on energy efficiency, rebate availability, and so on. Depending on what the merchant wants for their site, the startup provides either a Javascript snippet or access to an API so that the merchant can display rebate availability on a product’s page.
“On the product page, a customer can just click and find that a $2,500 heat pump, after rebates and incentives, is going to be $700,” Stephens said. In the future, Upfront would like to provide financing for those purchases.
Finding nondilutive funding
While the IRA’s consumer-facing tax credits have received much of the publicity, there’s also money available for startups and established companies. Hydrogen, energy storage, solar and carbon capture are all key sectors targeted by the Act, and many of these incentives are production tax credits. While they aren’t direct sources of funding or awards, they do make the economics more favorable, which in turn helps strengthen companies’ applications for other incentives, including grants and other awards.
Though government grants and awards are a great source of nondilutive funding, they’re anything but free. “One of the most painful things that companies face when they apply for a lot of those awards is the timeline and process,” Mitko Simeonov, founder of Pioneer, told TechCrunch+. Even the application itself isn’t simple, he added. “Those take a lot of time and effort to get right.”
Simeonov estimates that climate tech companies are eligible for tens of billions of dollars of government funding. To help those companies win more awards, Pioneer maintains a database of available government funding and suggests potential matches using AI models trained on public and private data about the company.
When a client decides to start an application, Pioneer creates a dashboard to help them manage the process. Then, to write the application, the startup uses generative AI trained on the client’s prior grant applications and other information to produce drafts and supporting documents. If the AI thinks something is missing from the application but isn’t able to suggest a solution, Pioneer’s software will prompt the client with a “probing question,” Simeonov said.
Pioneer’s direct competitors are government grant consultants, who do much of the same work. But the startup is hoping that its software is sophisticated enough that expensive, labor-intensive consultancies won’t be as necessary. It already has several customers in sectors like logistics, batteries and electric vehicles, Simeonov said.
Just the beginning?
The arrival of incentive-tracking apps and startups suggests that climate tech is at a unique point in its history. After struggling for years to find footing, the sector has found purchase with not only investors, but also governments around the world.
There’s always risk in basing a business model or building a tool dependent on the stroke of a politician’s pen, but the coincidence of the IRA, the Bipartisan Infrastructure Law and the Green Deal suggests that industrial policy is undergoing a sea change that will be difficult to counter. It’s possible that the EU might face a budget crunch or that a future U.S. administration could rally congressional support to undo the landmark laws, but as the policies are more fully implemented, that’s looking less likely.
With the IRA’s climate provisions scheduled to sunset in 2032, companies like Upfront and Pioneer, as well as others like Eli and Pencil, will have nearly a decade to build their customer bases. And the market is likely to grow: To tackle climate change, McKinsey estimates that the world will need to invest an additional $3.5 trillion in energy and land use every year through 2050.
The last few years might have felt big, but the coming decades could be even bigger for climate tech. The flow of cash is unlikely to slow any time soon.