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Investment in energy R&D

Spending on energy R&D by national governments and the European Union, 2014-2019

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Government energy R&D spending in 2019 grew by 3% to USD 30 billion in 2019, and was mostly directed to low-carbon energy technologies. While the growth rate in 2019 was below that of the previous two years, it remained above the annual average since 2014. It also reflects the multi‑annual nature of many government R&D budgets, which follow cyclical trends within budget periods. For example, a main reason for the weaker growth in 2019 was the stabilisation of China’s public energy R&D spending, yet this is closely tied to the Five-Year Plan (FYP) framework in China. Certain research programmes, especially those related to coal technologies, have passed their peak spending under the 13th FYP and are now analysing results and planning for the next funding period, from 2021 to 2025. There are indications that low-carbon technologies, including hydrogen, could receive a boost in the next period.

Growth was robust in Europe and the United States; spending on public energy R&D rose by 7% in both economies, above the recent annual trend. Looking ahead, increasing energy R&D has been a central feature of policy discussions in the European Union as part of the European Green Deal and the expanded R&D programme Horizon Europe. In the United States, Congress will decide the level of funding for 2021 by October and this will be influenced by considerations relating to economic heath and economic stimulus. Several proposals to increase energy R&D are currently circulating in Washington, including a bipartisan American Energy Innovation Act with provisions to establish new R&D programmes. At 0.06%, Japan has one of the highest ratios of public energy R&D spending to GDP, alongside China, and spending there was constant with respect to GDP in 2019.

In 2019, around 80% of all public energy R&D spending was on low-carbon technologies – energy efficiency, CCUS, renewables, nuclear, hydrogen, energy storage and cross-cutting issues such as smart grids. With 6% growth, spending on low-carbon technologies rose faster than total public energy R&D spending, reaching USD 25 billion in 2019. In China, the low-carbon component of energy R&D grew by 10% in 2019, with big increases in R&D for energy efficiency and hydrogen in particular, driving up the global total. However, to some extent this year-on-year growth in 2019 reflects a slower start to 13th FYP spending compared with fossil fuel technologies, not an unfolding trend. Major governments are increasing energy research investments, as they pledged to do in 2015 under the Mission Innovation initiative.

While it is too early to determine the impact of the Covid-19 pandemic on public energy R&D, the risks are clear. R&D practitioners may find it difficult to execute funded projects in 2020, and public budgets will be under pressure. Experience from the 2008 financial crisis indicates that budgets are likely to be fixed in 2020, most likely seeing reductions in 2022‑23. In wealthier countries, cuts may be modest or nonexistent as governments pursue countercyclical R&D policy through stimulus measures. In 2009‑11, the American Recovery and Reinvestment Act raised annual energy R&D spending by 75% compared with 2006‑08, before it fell back in 2012‑14. If global public R&D were raised by 75% in coming years, it would add USD 18 billion of funding. In emerging markets, on the other hand, R&D budgets and value chains are less resilient and the public sector is more dominant. This poses a risk to the development of appropriate clean energy technologies for countries expected to grow their energy sectors most in coming decades.

Growth rates for revenue and R&D for selected sectors and the European Union, 2007-2012

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Global reported corporate energy R&D spending in selected sectors, 2010-2019

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Companies active in energy technology sectors over the last decade have increased their total annual energy R&D spending by around 40% since 2010, based on our analysis of the latest available data from annual reports. The total energy R&D spending of this sample reached around USD 90 billion in 2019, 3% higher than in 2018. The multi‑year trend traces two periods averaging growth of over 5% (2010‑13 and 2015‑18), preceded by the global financial crisis and divided by the economic impact of the oil price collapse of 2014, which caused a 10% drop in the R&D spending of oil and gas companies over two years. In each case, the periods of higher growth could therefore have been responses to disruptions. While it is hard to draw conclusions from a single year, the apparent slowdown in 2019 could have reflected a return to the longer-term trend. That issue will not be answered in 2020, however, as the impacts of the Covid-19 pandemic will almost certainly lead to a reduction in corporate energy R&D in 2020‑21.

Across the period, companies active in renewable energy technologies represent a particularly bright and resilient story. These companies spent 74% more on R&D between 2010 and 2019, adding over USD 2.5 billion to efforts to improve their technologies, complementing over USD 4 billion spent on renewables R&D by governments.

Automakers – who typically have much higher R&D budgets than energy companies in absolute terms and as a share of revenue – continue to increase their spending as government policies and competitive pressures drive increased focus on energy efficiency and electric vehicles. However, the data suggest they may be facing a balancing act between a weaker outlook for car sales revenue and the need to invest in new vehicles and manufacturing supply chains.

Despite securing a higher share of sales from more profitable cars such as SUVs, the lower margins on EVs – an area of expected strong future growth – means that investments in new production lines are expected to stretch balance sheets. Energy-related automotive R&D is estimated to have stabilised between 2018 and 2019 after several years of growth, and this sector is a key factor in the overall stagnation. This reflects wider cuts to R&D in the automotive supply chain in 2019 that offset growth from the major carmakers. VW Group, for example, increased overall R&D to USD 16 billion, or 7% of revenue. Anticipated cuts to R&D spending in 2020‑21 could be a setback to fuel economy improvements that are needed to accompany the shift to larger vehicles (see Energy End Use and Efficiency section) and electrification.

The financial crisis of 2008 and the oil price collapse of 2014 provide some insight into the likely response of companies to the impacts of the Covid-19 pandemic. In 2009‑10 the total R&D spending of major sectors held up well relative to revenues, with the exception of the automotive sector. However, the electricity supply and renewables sectors were the only ones not to experience slower growth or cuts to R&D budgets in this period. After 2014, oil and gas company R&D took four years to return to growth and remains below the 2013 level.

While R&D spending is likely to suffer, it can be expected to be much less affected than capital expenditures, as companies seek to retain R&D staff and capabilities, and complete ongoing projects. As in 2009, the outcome will be policy-dependent, with tax incentives and R&D-specific loans being proposed for inclusion in stimulus packages. Still, for the large-scale demonstration of technologies, such as CCUS, cuts to investment could be more damaging than those to R&D.

Global early-stage venture capital investment in energy technology companies, 2010-2019

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Total equity investment in energy technology start-ups, including growth equity, by all investor types, stood at USD 16.5 billion in 2019. Of this, early-stage venture capital (VC) (seed, series A and series B), which supports innovative firms through their highest risk stages, is estimated to have been USD 4 billion. These sums are lower than those spent on energy R&D by governments and companies, but this private risk capital plays an important role by enabling market creation and scale-up of the most market-ready technologies. The total reported deal value in 2019 was 7% below that of 2018, but the last two years are well above the decadal average.

Other indicators also show the market is maturing. Compared with recent years, 2019 early-stage VC was spread across more technology areas. While low-carbon transport (mostly EVs and charging) was 35% of this, its share was much lower than in recent years. Time will tell whether this represents consolidation at the end of a period of exuberance marking the start of EV deployment. Other sectors grew significantly, notably energy storage, hydrogen and fuel cells, but also bioenergy and solar. Combined, they largely offset the USD 1.5 billion decline in transport. Higher levels of growth equity, despite lower follow-on deals, provide another indication that investors see storage and hydrogen as having high growth potential. Notable start-ups completing funding rounds included energy storage company Energy Vault (USD 110 million), biomethane producer Bioenergy DevCo (USD 106 million), Jiangsu Guofu Hydrogen (USD 60 million) and battery pack maker Romeo Power (USD 88 million). Among the deals for hydrogen technologies, most were for firms with novel hydrogen production devices, such as pressurised or photocatalytic electrolysers.

Start-ups receiving funding also diversified geographically. At 19%, Europe had its highest share of reported deal value in four years, while China, at 22%, had its lowest share since 2016. The US share declined to 41% in 2019 compared with 45% in 2018. By contrast, India increased its share to 12% in 2019, from an average of 3% over the previous decade. Notable Indian energy start-ups completing funding rounds included Ola Electric Mobility (USD 250 million), Hero Future Energies (USD 150 million) and Ecozen Solutions (USD 6 million).

The average disclosed deal value for energy tech start-ups was 10% lower in 2019 than 2018, but at USD 12 million, it remains higher than at any point over the previous decade. Deal size is particularly high in China, with start-ups there sometimes raising hundreds of millions of dollars in a single funding round, such as Hozon Automobile (USD 450 million) and Enovate Motors (USD 300 million). However, European and US early-stage VC deal sizes are also at all-time highs. This indicates investor confidence in new energy technologies to play a disruptive and profitable role in the energy sector in the next decade.

While diversification of sectors and geography, plus rising deal value, were good-news stories for 2019, the near-term outlook is very different. Early-stage energy VC deals were still on a par with 2018‑19 levels in Q1 2020, but lower activity was evident in China and global declines are expected in Q2-4 due to financial risks, working restrictions and policy uncertainty. When including later-stage deals such as growth equity, which tend to be larger, Q1 2020 activity was 50% lower than in recent years. Some countries have already included support for start-ups in stimulus announcements, including France and the United Kingdom.

Share of domestic investors in countries' VC activity, 2010-2019

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Corporate venture capital and growth equity by sector of investor, 2010-2019

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Corporate investments in energy technology start-ups, including corporate venture capital, reached a new high in 2019, at around USD 5 billion. The strong annual increase was driven by a small number of very large growth-equity rounds, notably in low-carbon transport. Large corporations continue to see a strategic case for direct investment in innovative, nimble technology players. Companies inside and outside the energy sector are using corporate VC as part of a flexible and open energy innovation strategy.

Traditional energy actors (i.e. fossil fuels, utilities, IPPs, energy equipment and services) account for a decreasing share of investments; about 23% in 2016‑19 compared with 49% over 2012 to 2015. The notable spending by electrical equipment manufacturers in electricity storage and EVs, which drove the trend in 2018, was absent. Oil and gas companies accounted for roughly 50% of investments by traditional energy actors but at USD 290 million, their spending was less than in 2017 and 2018. Deals involved start-ups in bioenergy (e.g. Shell investing in Punjab Renewable Energy Systems), CCUS (Chevron in Carbon Engineering), energy storage (Eni in Form Energy), hydrogen (Total in Sunfire) and solar (Equinor in Yellow Door Energy and Oxford PV).

Conversely, the share of non‑traditional actors in corporate investments for energy start-ups rose again. The strong investment presence of the ICT and electronics sectors since the mid-2010s was maintained with nearly USD 2 billion in 2019, mostly in low-carbon transport, energy storage and efficiency, including for data centres.

Of the nearly USD 5.9 billion of VC and other equity invested in low-carbon transport start-ups in 2019 in total, USD 3 billion was from corporate investors, of which USD 1 billion came from the transport sector and USD 1.8 billion from the ICT sector. Electric pickup truck producer Rivian raised over USD 3 billion in 2019 from investors including Ford Motor Company and Amazon. Electric vehicle manufacturer Weltmeister Motor secured USD 450 million in a growth-equity deal led by ICT company Baidu.

A country’s VC landscape is defined by its investors as well as its start-ups. For example, four-fifths of the investment in US-based start-ups comes from US investors. This share has declined slightly in recent years, but not as steeply as the share of investment received by Europe-based start-ups from Europe-based investors. That share is now closer to 70%, similar to that of China, which has dipped from over 90% since the middle of the last decade.

While most governments seek to keep the domestic gains from innovation, there are also benefits to attracting overseas finance to local start-ups. World-class start-ups attract investment from all over the world and many VC funds scour the globe for talent. Corporate VC, particularly from multinationals, tends to have a global scope because it seeks opportunities with the best business fit, and often with local market knowledge. The rising share of inward VC in China, Europe and the United States may indicate a more globalised and efficient environment for energy technology entrepreneur finance. Investment in start-ups from Australia, India and Israel comes largely from overseas, reflecting the ability of their entrepreneurs to compete for capital given their relatively smaller domestic VC sectors.

Capacity of electrolysers for hydrogen production by commissioning year by regions, 2010-2020

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Capacity of electrolysers for hydrogen production by commissioning year and intended use of hydrogen, 2010-2020

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In recent years, capacity additions of water electrolysers to produce hydrogen have expanded rapidly, from 2 MWe in 2010 to 25 MWe in 2019. This activity reflects surging interest in hydrogen as an alternative to fossil fuels in a diverse range of uses, from powering vehicles to storing electricity, refining oil, heating homes, and producing synthetic fuels such as methane or ammonia.

Electrolysers use electricity to split water into oxygen and hydrogen, which generates no CO2 emissions at the point of use. The powering of electrolysers by low-carbon electricity or applying CCUS to hydrogen production from fossil fuels can support low-carbon hydrogen at the point of production. No new CCUS-equipped hydrogen production – each plant equivalent to 100 MWe to 600 MWe of electrolysers – has been added since 2016 but several are planned, mostly in Europe.

Investment has surged in the past two years. Electrolysers installed in 2019 represent capital expenditure of around USD 40 million, while those in construction may be worth over ten times more. Electrolysers have grown in scale, from below 0.5 MWe on average in 2010 to 6 MWe, and quoted costs for newer designs have halved. A 10 MWe facility began operation in Japan in March, and a 20 MWe plant is in construction in Canada, both for vehicles, and potentially industrial uses too. Several hundred MWe of announced projects seek financial close this year or next; over 600 MWe could be commissioned through 2021, nearly three times the total additions since 2010. Two electrolyser factories, 1 GWe and 360 MWe, are in construction in the United Kingdom and Norway, with others under development in China.

However, many of these investments could face delays related to Covid-19 restrictions, revised capital expenditure plans and weaker hydrogen demand. The automotive, oil and gas, and steel industries, among others, may all review the economics of electrolysis hydrogen applications in light of weaker revenues and lower coal and gas prices.

To date, much demand for electrolysis hydrogen – some two to five times more expensive than that from fossil fuels today – has been supported by one-off government initiatives. Project developers expect more predictable demand ahead, arising from industrial emissions reduction commitments (e.g. by oil refiners), and policy incentives that promote clean hydrogen. These factors depend on the evolution of the current downturn, as well as government efforts to include in stimulus measures policies that support demand and supply of hydrogen. In this light, the vehicles sector has been the most dynamic route for hydrogen uptake, based often on hydrogen from natural gas or coal without CCUS. At the end of 2019, 23 350 fuel-cell electric vehicles (FCEVs) were on the road, nearly half registered in 2019 alone, while hydrogen refuelling stations increased by 20% to 460. Most activity has come in Japan and the United States. While blending hydrogen into the gas grid, to deliver low-carbon heat for buildings, is also mentioned in policy debates (see Energy End Use and Efficiency section), just 0.6 MWe was added for this dedicated purpose in 2019 and 2020.

China represents a major new factor in the development of hydrogen. From minimal levels in 2018, China is aiming for around 150 MWe in operation by 2021, mostly for mobility, with increased signs of public support. In April 2020, Hebei province approved USD 1.2 billion of projects for hydrogen equipment manufacturing, filling stations, fuel cells and hydrogen production, including electrolysis (Xu and Singh, 2020). Sales of FCEVs climbed from a few units in 2017 to almost 4 400 in 2019; China now leads hydrogen bus and truck deployment.

The landscape of hydrogen technologies and companies is in flux. Industrial uses and the gas grid are becoming more important target markets, China is playing a larger role in technology development, and there is not yet a dominant technology design.

Several countries seek to become technology leaders in hydrogen and are developing policies and financial measures to support strategic investment. This is reflected in the diversity of countries from which the hydrogen start-ups attracting most early-stage VC come.

In addition to a push in China, the Netherlands published a Climate Act in 2019 with specific hydrogen targets and, in May 2020, the Australian government announced up to USD 200 million for a new hydrogen fund (CEFC, 2020). A number of countries, including Portugal, have indicated possible support for hydrogen as part of economic recovery measures, while Germany’s national strategy was delayed to accommodate the new economic context.

In 2019, there were more early-stage VC deals for hydrogen start-ups than in any previous year, with over USD 110 million invested in 25 deals. The largest deals were for hydrogen production systems, especially novel technologies, including pressurised electrolysers, saltwater splitting, anion electrolyte membranes and photocatalytic reactors. Few of these firms are proposing the current market-leading technology of alkaline electrolysers, or the more expensive, more flexible challenger polymer electrolyte membrane electrolysers, which are popular for new demonstration projects. This shows that competition between electrolyser technologies is not yet settled.

Among growth equity deals, which tend to involve less technology innovation risk, mobility was a key target market in 2019.

Largest early-stage VC deals in hydrogen start-ups in 2019

Company

Offering

USD million

Country

Jiangsu Guofu Hydrogen Technology

Electrolyser, storage, vehicle refuelling

60

China

Ergosup

Electrolyser

12.5

France

Joi Scientific

Hydrogen production

9.8

United States

Szygygy Plasmonics

Hydrogen production from natural gas or ammonia

9.74

United States (2 deals)

Enapter

Electrolyser

4.65

Germany

Log 9 Materials

Vehicle fuel cell

3.5

India

 

Largest growth equity deals in hydrogen firms in 2019

Company

Offering

USD million

Country

Nikola Motors

Vehicle

250

United States

Sunfire

Electrolyser, stationary fuel cell

28.7

Germany

FirstElement Fuel

Vehicle refuelling network

24

United States

Hydrogenious LOHC

Hydrogen storage

18.8

Germany

 

Total capacities of 15 announced US CO2 capture projects targeting final investment decision by the end of 2023

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Capital spending on CCUS projects remained modest in 2019, at under USD 1 billion, mostly on projects that have been under development for several years. The first two CCUS trains of the Gorgon LNG project in Australia began operation, following delays since construction began in 2009. It is now the world’s largest dedicated geological CO2 storage facility (i.e. the CO2 is not used for enhanced oil recovery [EOR]). It will be able to store 4 Mt of CO2 per year when the third train starts, which is due in 2020, and if the LNG plant runs at full capacity. Four other CCUS projects are in construction, two in Canada and two in China. While no FIDs have been taken since 2017, in 2020 three oil and gas firms stated a willingness to invest USD 700 million to develop CO2 storage in Norway by 2024, pending public funding (Equinor, 2020).

Investment signals for CCUS in the United States improved following the extension and reform of the 45Q tax credit in 2017. Companies have since been waiting for regulatory clarification before committing to building, and some of this – on construction criteria – was published in early 2020. Fifteen projects are now reportedly targeting 45Q support, pushing the global number of large-scale projects in development over 30, the highest since 2014. Depending on the size and sector, each project could invest USD 100 million to USD 1 000 million if successful.

Section 45Q of the US tax code provides up to USD 50 (inflation adjusted) per tonne of CO2 sent to geological storage, or up to USD 35 per tonne used for EOR, for up to 12 years, if the effectiveness of storage is monitored and construction begins by 1 January 2024. Like other production-based incentives, 45Q incentivises investors to identify cost-effective projects developed by any promoter, though the credit is best monetised by bigger players with larger tax burdens.

Alongside 45Q, California’s Low Carbon Fuel Standard (LCFS) has emerged as a key complementary policy for projects linked to biofuels production, DAC or EOR. Globally, 45Q and LCFS are trailblazers for DAC support. The 2019 CCUS protocol clarifies how projects can benefit from LCFS credits – which traded at around USD 180 per tonne of CO2 in 2019 – and requires monitoring of stored CO2 for 100 years.

Among projects targeting 45Q support, some of the closest to investment decision and operation are those that aim to capture high-purity CO2 that is currently vented from bioethanol production or natural gas processing. These are among the lowest-cost options for capturing CO2 and the projects plan to pair this with EOR, which can be the CO2 storage option that is quickest to bring into operation. It often requires only a connecting pipeline to an existing EOR operation.

However, the current oil price downturn and sharp cuts to upstream investment programmes suggest EOR operators may be reluctant to sign new contracts (see Fuel Supply section). Project sponsors such as ExxonMobil and Occidental Petroleum have cut capital budgets by over 30% in 2020. While some discussion of an extension of the 45Q deadline (beyond 2024) and increasing the value of credits emerged before the crisis, no decisions have been made to adjust the policy.

The largest US announcements are associated with coal and natural gas-fired power plants, with CO2 capture capacities of 1 Mt to 6 Mt per year. Several of these projects are looking to sell the CO2 for EOR. Given the likely challenges to securing CO2 off-take contracts over the coming two and a half years, dedicated geological CO2 storage options may become more attractive than before.