26: Financing energy innovation

Overview & Synopsis

Achieving net-zero emissions will require both radical and incremental technological advancements, necessitating substantial investment for clean energy innovation. However, many energy technologies are characterized by investment barriers like a high capital intensity or revenue uncertainty, that translate into market, system, and transition failures. These failures create two critical phases for energy innovation finance dubbed “valleys of death,” which mark critical conjunctions along the technology lifecycle. Targeted policy interventions are essential to overcome these valleys of death. During early stages spanning the “first valley of death,” grants and equity investments by public and private actors are essential for research, development, and demonstration activities to develop technologies and create first prototypes. To overcome the “second valley of death,” moving towards commercialization and large-scale diffusion, interventions for lowering the costs of capital, such as de-risking by state investment banks, have been proven effective to enable the necessary asset finance. In this chapter, after discussing the financing challenges faced by clean energy technologies, we explore typical financing sources and policy interventions aimed at overcoming the challenges. By aligning public and private investments, targeted policy interventions can accelerate the development and deployment of clean energy innovations, driving progress toward net-zero emissions goals.