Mind the gap – a lack of risk capital means the UK may lose its lead in climate technology
Whilst the UK Government has gone ‘all in’ with £22 billion to fund two carbon capture and storage schemes – there is still a significant funding gap for many other green energy technologies which could accelerate Britain’s journey to net zero, writes Martin Wright, Chair of the Association for Renewable Energy & Clean Technology.
The recent news of £22 billion in new funding to support two carbon capture and storage (CCS) projects in the north of England is to be welcomed. It has certainly captured the headlines.
However, there is a danger that CCS is being promoted as the magic bullet which will make CO2 conveniently disappear beneath the seabed, whilst there are many – including Greenpeace and others – who have significant concerns about its efficacy and life cycle benefit. Moreover, and crucially, the underlying technologies have been in use for decades. They are not new.
It is important that we don’t place all our eggs in one basket as government needs to support a range of technologies to reach net zero – for example through accelerating the development and commercialisation of other new climate technologies in which Great Britain already has an early mover advantage.
For decades we have been world leaders in a number of sectors – wind energy, tidal energy, heat storage and heat pumps to name but a few – with early technologies showing great promise, but no clear route to developing a commercial product.
Arguably, it would surely, be better value for money for the British taxpayer to use a fraction of that CCS capital to provide the £100s of millions (not billions) to support some of these sunrise technologies through to commercialisation.
It is a long-standing theme in Britain’s industrial landscape – we are very good at inventing things, but we are very poor at supporting new technologies through to commercialisation. The prevailing ethos is that ‘we can only invest when it is fully developed’, unless of course the project is massive. HS2 comes to mind.
In particular, I am referring to First of a Kind (FOAK) funding to allow leading UK businesses to develop and demonstrate new technologies at scale and bridge the investment ‘valley of death’ towards a commercially successful product.
As a number of commentators have noted, ‘cleantech’ is not like ‘fintech’, and whereas software companies may be able to ‘cross the valley’ without a substantial step-up in investment, asset-heavy climate tech solutions are different.
In many cases, these technologies are substantial engineering projects, and they need patient capital to deliver multiple models at scale, drive down costs and meet a market which may be immature or still emerging, yet they are utterly vital to transforming the energy system.
Here the ‘valley’ is deep – often needing £30-100 million funding to bridge it – and it is wide, with an average time horizon of five to seven years according to global consultants McKinsey, creating the so-called First of a Kind financing gap.
Gravitricity – the company I lead – is a case in point. We are pioneering two new forms of underground energy storage – and although we have deployed a small-scale demonstrator (during Spring 2021, in Leith) which generated international attention, and have globally recognised partners, including National Gas, Huisman, Baker Hughes and ABB – we lack the significant risk capital we require to unlock investment and build demonstrator schemes.
Whilst the UK Infrastructure Bank (now rebranded the National Wealth Fund) alongside the Scottish National Investment Bank are important national institutions, as currently constituted they are unable to provide the significant early-stage funding that UK clean energy startups require, only supporting projects at Technology Readiness Level (TRL) 7 and above – which means prototypes which have already been demonstrated in an operational environment. In other words, they can only fund projects alongside normal commercial risk funding.
This represents a major gap in the UK funding landscape.
The UK has no shortage of high-profile, hugely innovative firms that have exciting climate technologies, but are struggling to step up due to a lack of available ‘growth equity’ in domestic markets. They may be able to pull together the funding to develop their first proof of concept, sub-scale, prototype, but then spend years trying to fund their second.
Meanwhile, the world marches on, and although FOAK funding is becoming more common in Europe and particularly the US, this type of support is not a feature of the current UK landscape. However, it is fundamental if the UK wishes to capitalise on our early lead in numerous new climate technologies.
The reality therefore is that many early-stage companies like Gravitricity, with their innovative technology and solutions aimed directly at addressing global problems, are unlikely to flourish and develop and sadly will ultimately follow many other ideas and either come to a halt or end up going abroad and being developed to the benefit of others.
Of course, not every technology will succeed, but if the UK is to find climate tech ‘unicorns’ it needs to nurture them. It needs to fund prototypes and demonstrators, and the next iterations after that – with a clear pathway of patient, long-term, stable capital. It is not rocket science!
With only £1 billion (less than 5% of the CCS support), Britain could provide £50 million support to 20 companies, one or more of which could become global leaders. So, whilst CCS and other existing technologies such as battery storage and pumped hydro have their place – and have been granted funding or support mechanisms – other home-grown technologies which could be leading the world are left fighting over scraps.
GB Energy is the one new institution which could shift the dial. Its establishment offers a unique opportunity for the UK to address this clear gap in the domestic funding landscape, stepping in where private sector finance is not yet ready to – and level the playing field.
You can never win a race if you always intend to come second. Moreover, no one ever remembers the runner up. It is high time the UK played to win and supported those that might just win big in the race to net zero.
Martin Wright is Chair of the REA, and Executive Chairman of Gravitricity