Dive Brief:

• While investors increasingly seek solar company stocks for reliable returns, energy storage is the new rising star of energy venture capital, according to Raj Prabhu, CEO of the Mercom Capital Group.
• After a steady recovery in the third and fourth quarters of 2020, total corporate funding for the solar sector rose 21%, from $6.7 billion in Q4 2020 to $8.1 billion in Q1 2021, according to a recent report by Mercom. A second report found that venture capital investment in battery storage, smart grid and energy efficiency companies is up 410% year-over-year.
• Solar, an increasingly mature industry, is now largely seen as a reliably profitable investment, attracting fewer but larger deals, Prabhu said. Storage still brings in far less investment but is drawing in venture capitalists looking for the next big energy technology.

Dive Insight:

COVID isn't entirely in the past, but investors are already looking toward the future and betting that future will be green, according to new reports from Mercom Capital.

Solar took only a brief financing hit during the first months of COVID, Prabhu said. In August, investors acquired 15 GW of solar projects, suggesting investor interest in solar has already returned to pre-COVID levels. But they're not just looking at solar. Investors seem to be feeling quite optimistic about the future of renewable energy, and a second wave of green energy technologies — battery storage, smart grid and energy efficiency — are drawing noticeably more investment. Companies within those three sectors raised a combined $1.3 billion in Q1 2021 compared to $252 million in the first quarter of 2021.

Solar and battery storage are, however, drawing different kinds of investors, Prabhu said. Solar is now seen as a low risk asset capable of steady returns, and after its performance during the pandemic, investors increasingly see solar as a “safe haven.”

“Once you buy these projects, you are basically collecting checks every month,” he said. “For those investors, solar and renewables are working.”

Solar's reliable performance, Prabhu said, has pushed the price of individual deals upward, but there are fewer deals to go around now that the industry has largely identified the dominant technologies. That has venture capitalists turning to other green technologies in their search for the next potentially disruptive innovation.

Battery storage in particular is drawing attention, with 13 deals bringing in $994 million in 2021's first quarter. But smart grid technology, energy efficiency, electric vehicles and even hydrogen have spurred investor excitement in recent months.

“In the last 18 months or so, the dealmaking on [hydrogen] is phenomenal in terms of the size and speed and how fast that has taken off,” Prabhu said, though he was unable to give specific numbers because Marcom does not yet track the hydrogen sector individually. “Even though everyone agrees it will take a long time for hydrogen to be practical, it's still taking off.”

Investor sentiment, Prabhu said, seems to be driven in part by overall optimism about economic recovery after COVID, and also indications from the Biden administration that renewable energy will enjoy greater government support in the years to come. But there's also a sense, he said, that investors interested in energy are moving away from fossil fuels and toward renewable energy on a belief that this sector is where future earnings will occur.

“Nobody thinks this is going to turn around. They all know that fossil fuels are history, and renewables are the future,” Prabhu said. “Everyone knows renewables is it. It's just a matter of how do we get from here to that point.”