Energy innovation showing slowed momentum at pivotal moment warns IEA

Although the range of new energy technologies under development globally is broader and appears more promising than ever, the global energy innovation landscape is at a pivotal moment amid signs of slowing momentum in financing and shifting priorities, according to the latest IEA report.

The IEA, in their report The State of Energy Innovation, finds that as countries’ industrial strategies place increased emphasis on economic competitiveness, security and resilience, making progress on innovation is becoming more important than ever.

The report says that recent years have shown a steady increase in innovation activity. Namely, public and corporate energy R&D spending has grown at an average annual rate of 6%, though initial estimates for 2024 indicate that growth may be slowing in some advanced economies.

Corporate energy R&D has outpaced economic growth, particularly in the automotive and renewable energy sectors. However, R&D spending as a share of revenues in the cement and steel sectors remains 20% to 70% below that of the automotive and renewables sectors, respectively, while the aviation and shipping sectors have reduced the share of their revenue spent on R&D over the past decade.

Venture capital (VC) funding for energy technologies surged more than sixfold from 2015 to 2022, reaching levels equivalent to all public energy R&D combined. This influx of private capital has supported around 1,800 energy start-ups.

Even if only a fraction of these firms succeed, they could have a significant impact on global energy systems by the 2030s, says the IEA. However, this investment trend reversed in 2023 and 2024, with VC funding declining by more than 20% amid tighter financial conditions. The only sector to see growth in VC funding during this period was AI, which offers potential to accelerate energy innovation but may also draw capital away from the energy sector.

Public and private financing earmarked for large-scale energy technology demonstration projects this decade has reached around $60 billion, the Agency adds. These projects are critical for commercialising emerging technologies but face delays due to inflation and policy uncertainty.

Most projects have still not reached final investment decision and 95% of demonstration funding is concentrated in North America, Europe and China. Sectors with urgent innovation needs to validate low-emissions options – such as heavy industry and long-distance transport – account for just 17% of the total. At a time of shifting government priorities, coordinated action can ensure that a global portfolio of projects bridge the “valley of death” for key technologies to meet climate goals.

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The report stresses the importance of maintaining momentum and addressing structural gaps in the global innovation system. Public energy R&D investment today stands at just over 0.04% of GDP in IEA member countries – less than half the level seen in the early 1980s despite new energy security and climate challenges.

Commenting in a release was IEA executive director Fatih Birol: “Innovation is the lifeblood of the energy sector, particularly in today’s fast-moving times with the global energy mix shifting and major trends such as electrification having far-reaching effects.

“A wide range of technologies now appears to be coming close to market, offering hope for improvements in energy security, affordability and sustainability over the long term. But we require investment, both public and private, to scale up innovative solutions. The payback may not always be quick, but it will be lasting.”

In the spotlight

Within the IEA’s report, battery minerals, innovating with AI and carbon dioxide removal are placed in the spotlight for international cooperation.

According to the Agency, the diversity and resilience of battery mineral supplies can be improved with innovation in mining, recycling and battery chemistries.

Cathodes with higher iron content and less nickel and cobalt, both of which have faced supply chain volatility, have rapidly taken a nearly 50% share of the global EV market. Continued support for solid-state and lithium-sulphur battery research is needed, alongside creation of markets for new sources of lithium and clarity on recycling standards.

When it comes to AI, the report highlights how applying AI to accelerate energy innovation can reduce search times for new energy materials, including for cathodes, electrodes, CO2 capture, bioenergy and synthetic fuels.

However, most successes are currently concentrated at the earliest innovation stages. To fulfil AI’s potential to reduce costs and democratise energy innovation, open access databases, reduced barriers to ‘self-driving labs’, and attention to scale-up are needed.

Finally, innovation in CO2 removal is being spurred on by private capital mobilised by carbon credits.

By 2024, says the report, a total of 140 start-ups had been launched to pursue 13 different ways of removing CO2 from the atmosphere and preventing its re-emission. However, most of the $4.8 billion spent to date has been on just two approaches – direct air capture and bioenergy with CO2 capture and storage.

To bring others to the market, more effort is needed on monitoring long-term performance and procurement of high-quality credits.

During an IEA press conference to launch the report, Timur Gül, chief energy technology officer for the IEA, commented on how energy innovation can be fostered.

Said Gül: “We acknowledge that each technology has its own unique challenges, there is no simple or single recipe to success. In fact, we do recognise that innovation requires time and patience just as much as it needs genius and finance.

“It is vitally important that decision-makers remain tolerant of projects that do not turn out as expected but nonetheless provide those important learnings that may facilitate the next step in the innovation journey.”

Policy recommendations

According to the IEA, based on consultations undertaken for the report, the following areas require more policy attention:

• Raise public energy R&D and demonstration spending to attract private sector co-funding, boosting competitiveness and growth.

• Ensure that the overall level of public and private support remains stable in priority areas through economic cycles, maintaining access to operating capital.

• Cooperate to bring a global portfolio of large-scale energy demonstration projects to fruition, especially for near-zero emissions steel and cement, aviation (including fuel production) and CO2 removal.

• Ensure that publicly funded research supports accessible training datasets so that energy innovators can grasp the full potential of AI-driven R&D.

• Support access to testing facilities and ‘living labs’, which can significantly shorten times to market for building energy management, geothermal, long-duration energy storage, heat networks and others.

• Work to reduce bureaucracy and align processes with innovators needs. Experiences with creative solutions – including permanently open calls, shared evaluations and multi-stage prizes – should be shared among governments.

• Tailor support to each technology’s innovation needs. In sectors such as building energy efficiency, the critical bottlenecks are largely non-technical.

• Strengthen energy innovation systems in emerging and developing economies. There is untapped potential for more effort within these countries, among countries facing similar challenges, and via international partnerships.

• Maximise innovation impacts from public investments in first-of-a-kind projects by sharing findings and policy experiences during project implementation.

• Foster markets that give confidence in robust future demand for the products of the most successful innovators. Government support can spur demand, competition and competitiveness.

Originally published on Enlit World.