Dive Brief:
- Total corporate financing for energy storage companies rose 67% year-over-year globally during Q2 2023 to $4.9 billion dollars, with $3.8 billion from venture capital, according to a report released Tuesday by Mercom Capital Group.
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The increase follows a slow first quarter, which saw decreased investor interest in energy storage amid lithium price hikes and uncertainty around the stand-alone energy storage tax credits created by the Inflation Reduction Act, said Della Xu, an investment associate with Greenbacker Capital.
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With lithium prices now stabilizing and growing comfort with the IRA tax credit, energy storage investment seems set grow alongside solar, defying an otherwise difficult financing environment, said Raj Prabhu, CEO and cofounder of Mercom Capital Group.
Dive Insight:
Investment in energy storage rebounded during the second quarter after a slow first quarter, drawing significant interest from venture capitalists in particular, who are also focusing on smart grid technology companies, solar and artificial intelligence.
Most other industries have seen financing slow down in recent months as a result of rising interest rates, but clean tech and AI continue to buck the trend, Prabhu said. Total investment in smart grid companies rose 64% globally in the second quarter, while total solar investment grew 54% year over year.
The 35% decline in funding for energy storage companies from the last quarter of 2022 to the first of 2023 was likely a result of soaring lithium prices, which peaked in November, and uncertainty around the IRA’s new standalone energy storage tax credit, Xu said. Although lithium prices began to decline toward the end of last year, narrow project margins prompted some investors to forego or delay energy storage contracts for a time, resulting in a temporary slowdown of financing in the sector, Xu said.
Investors, including Greenbacker, still aren’t as familiar with energy storage as with solar, and so prefer to stick with more straightforward storage projects even as they grow open to more creative contracts in the solar sector, Xu said.
But as investors have grown more comfortable with the guidance coming out on IRA tax credits for storage and other energy technologies, the second quarter saw increased enthusiasm from investors, she said.
“The tax credits also provided a huge value gain for everyone, and everyone wants a slice of that pie,” Xu said.
While investors have for the last several years preferred to put their money into solar developers, the IRA seems to have created a new appetite for not only energy storage, but also materials companies, metals, component manufactures and other clean tech companies, Prabhu said.
And even though the question of additional interest rate hikes remains up in the air, strong demand for energy storage, solar and other clean tech companies suggests these sectors will continue to buck the trend even if markets otherwise slow in the coming months, Prabhu said.
However, he did note that some specific areas of investment within clean tech have slowed. Mergers and acquisition activities among both solar and energy storage companies have become less common, likely as a direct result of higher interest rates.
“The easy money has dried up, at least for the moment,” Prabhu said.
