Green investments stuck between rising risk and government backing

Higher rates cut funding for climate startups but stimulus might cause a rebound

There is a financial tug of war in the clean-energy sector, with a fear of rising rates and slowing economy competing with lucrative government funding designed to reduce greenhouse-gas emissions.

The winner could determine whether the country meets the Biden administration’s ambitious climate goals.

Cash poured into companies focused on renewable energy, batteries, electric vehicles and hydrogen producers when interest rates were low. Many were unproven and unprofitable, making them less attractive when rates went up. This year, the funding gusher slowed. 

The failures of Silicon Valley Bank, a financier for a large number of clean-energy startups, and First Republic Bank, have sparked concerns that a source of financing for the sector is drying up.

“Every venture industry has been affected, and climate is no exception,” said Amy Francetic, co-founder of Buoyant Ventures, a Chicago investment firm focused on clean energy that banked with First Republic. 

At the same time, a wave of impending government funds, including tax credits, subsidies and low-interest loans for clean-energy companies is providing hope that the sector can successfully power through the doldrums. 

The iShares Global Clean Energy exchange-traded fund is down about 5% this year, compared with a 9% gain by the S&P 500. Startup electric-vehicle makers such as Lucid Group, Fisker and Rivian Automotive have seen some of the sector’s sharpest declines, their shares tumbling this year as the companies scramble for market share in an increasingly competitive market.  

Peter Davidson, chief executive of climate investment firm Aligned Climate Capital, said his firm struggled to get other investors to put cash into BoxPower, a California solar microgrid startup. A $5 million investment by Aligned accounted for more than half of a recent financing round for the company. “There’s never as much capital as you think,” he said. 

Davidson, who ran an Energy Department program that provides loans to clean-energy companies during former President Barack Obama’s second term, said he remains optimistic about the sector. One reason, he said, is that consumers are increasingly making decisions based on climate change. 

Another reason for optimism is the climate-focused Inflation Reduction Act, as well as state and federal regulations pushing industries and utilities to decarbonize. The Biden administration’s recent proposal of new rules to reduce greenhouse gases from coal- and gas-fired power plants could help boost investments in renewable power sources such as wind and solar.  

“Capital is very much still flowing into quality companies,” said Shayle Kann, a partner at Energy Impact Partners, a $3 billion venture-capital firm that invests in clean-energy companies.

The IRA is expected to provide some $1 trillion worth of incentives for clean technologies, driving trillions more in investments. Another slug of cash was channeled to clean energy from the 2021 bipartisan infrastructure package, with funds dedicated to building charging networks, nuclear and clean hydrogen, among other things.

A growing boom in EVs and the lithium-ion batteries that power them is unlikely to slow soon. Global EV sales are expected to grow 35% in 2023 from the previous year, according to the International Energy Agency. 

Some 47 major new EV projects in the U.S. adding up to an estimated $49 billion in capital investment have been announced since the IRA was passed in August 2022, according to Jay Turner, an environmental policy professor at Wellesley College who tracks the battery supply chain. 

EV charging companies are trying to keep up. Public charging ports are expected to increase 60% this year from 2022, according to J.P. Morgan research. EVgo, a charging company, recently reported a 283% year-over-year increase in revenue in the fourth quarter. 

Mining companies are spending billions of dollars and raising budgets for new projects to provide materials required for the energy transition, including the minerals that make up lithium-ion batteries. Automakers and the makers of lithium-ion batteries have announced dozens of plans to build factories in the U.S. to build out a domestic fleet of EVs. 

Jeff Lipson, chief executive of HASI, a $10 billion Annapolis, Md., investment firm that focuses on clean energy, said that while the failure of Silicon Valley Bank created uncertainty, incentives of the IRA are already pushing more funding into the sector.

“The certainty the IRA provides on tax credits allows for these companies to make longer-term investments,” he said.