Beyond Mega investments: which type of funding is needed to drive cleantech adoption in Germany?

According to Wood Mackenzie in September, global investment of $2.7 trillion a year is needed to achieve net zero emissions by 2050. Last week, #Brookfield announced a $3bn commitment into two of their #energytransition / #cleantech funds, their new Global Transition Fund II will have a $20bn size goal.

💰💰💰 With mega transactions becoming more frequent and institutional funds sitting on billions, the question is: what will this capital be invested in? 

With these amounts, #efficient #capital #deployment becomes an issue. #Institutional investors need big transactions so that they can put huge amounts of capital to work efficiently. 

The return requirement of the last Brookfield Transition Fund of 10% #IRR net, 13% IRR gross, may sound high to the German ears, but on the scale of global cleantech it is relatively normal return requirement for low risk capital.

❓ So where are those projects in Germany, big in size (>100 M€), with a track record and pipeline, that can provide +13% equity return – with limited risk exposure to the equity? Well – hard to find.

👆 So, like for the energy system itself, could decentralization be part of the answer? 

💡 What we see as trends in the German cleantech space are

➡ new technologies evolving, like new battery technology, 

➡ new business models developing, like heatpump-as-a-service for retail clients or grid-scale stand-alone storage systems, co-located generation and storage assets of all sizes,

➡ new developers entering the market with limited track record, 

➡ the development of C&I as the next huge growth segment for solar PV, which brings new hashtag#off-taker risk compared to #FIT based business models,

➡ new behind-the meter and baseload PPA’s, taking over from “as produced” PPA structures,

➡ new cross-technology service solutions like solar PV + battery or power + heat – preferably in as-a-service-models.

😤 You will notice that the list includes the word “new” many times. This marks one of the key challenges for those new #assets being developed. The #trackrecord is non-existent (meaning higher perceived risk). Also the first assets are likely in the “few million Euro range” – which is too small for the mentioned billion $ funds.

😡 That means: funding is very complicated for the “new kids on the block”. Welcome to the “First of a Kind” or #FOAK world. 

💫 Bottom-line: the huge institutional funding will help on the net zero path, but it will likely be deployed in more established parts of cleantech infrastructure. To truly expand the reach and increase deployment speed, a new type of funding approach is needed – one that enables the creation of new asset classes. 

👉 In the coming months, we will discuss more how to bring more #FOAK funding to the cleantech space in #Germany.

The state of the German Retail Solar industry: Part 2 - the current financial landscape in #solar for #startup's and #growth companies. 🌞

🔍 Downrounds on the Horizon

Global #vc funding has been down 42% so far in 2023 - however, #cleantech sector funding has slowed down less than other industries. At the same time, on the back of weak demand, many solar scale-ups struggle to reach the planned break-even and are quickly using up any reserves. In such a phase, securing additional funds becomes a daunting task, especially as valuations, sky-high still last year, have come down significantly. In the current environment, companies are likely facing significant down rounds (first example #Otovo). Pulling through requires mental adaptation, acceptance and a mindset different from the one most players have been on. It is time to expand the narrative beyond the pure growth gospel, add more strategic substance and include a convincing plan to reach profitability!

💸 Growth rounds run dry

Scale-ups on their way to break-even still need sizeable funding and often funding rounds are pegged to milestones in company development. As solar demand slows, achieving milestones has become harder and fund release is not guaranteed. Investors need to rely more on conviction rather than positive growth metrics. Many investors have “picked their horses” in 2021/2022, with seemingly sizeable rounds for #EnPal, #1komma5, #zolar at high valuations (but, watch out: corporate funding is not the same as asset finance). Investors hope to avoid being asked to drive a down round which impacts portfolio value. New scale funding is scarce.

📉 Demand slowdown impact

Falling prices reduce turnover and margins, while costs seem to only know one direction during scaling-up (despite falling hardware costs). Higher customer acquisition cost do their bit. Year-end pressures are more pronounced this year: ability to turn inventory into cash becomes life saving and inventory bears the risk of depreciation with falling hardware prices. All of a sudden, inventory turn, operational efficiency and costs structure are key, investments delayed. Be wary: key people may jump ship as stories change and share options become worthless. A new situation for many founders and leaders.

🧐 #investor patience and bright spot in #seedfunding

These days, resilience of investors is being tested. It helps in those challenging times to know where difficult decisions may be needed: understanding who loses most if all goes South - the way out of a potential crisis likely leads through that door!

On the positive side: Selected early stage start-ups still see good venture investment traction. Seems like investors are getting ready to pick who will emerge from the cold in 1-2 years.

Let's discuss! What are your thoughts on the current financial challenges in the German retail solar industry?

See also our prior posts for further perspectives 😊

Authors: (Christian Langen and Tobias Schütt)

Our perspective on the current state of the German Retail Solar industry: Part 1 - demand side

1️⃣ >> Falling electricity prices <<... weaken demand for solar PV as best alternative. Retail electricity price levels have come down from their peaks and with less price volatility than in 2022. However, winter hasn’t really started yet. Power prices will likely go through more volatile cycles in the coming months and and subject to temperatures, electricity prices may go up again in the short-term

2️⃣ >> Falling PV system prices <<... incentivizing the ”lets wait and see” attitude of customers > something that the industry has seen numerous times over the last 20 years. This time is no different. Manufacturers (not only Chinese ones) try to turn finished goods in stock into cash before year’s end. This may go into Q1/24, when Chinese demand tends to be lower and factories continue to roll. The question is, how long until customers think that the bottom is reached and demand will pick-up again – which it will. Often times in the past, demand has picked up in Spring, when the Sun shows its force!

3️⃣ >> Recession risk / high interest rate environment <<... overall reduced investment activity around housing, even for things that are must-haves (vs. solar PV as ”nice-to-have” for most). Key reasons are: 🔹 the higher interest rate environment leads to additional monthly financial burdens (if financed) and better investment alternatives 🔹 in an environment with a potential recession, individuals will invest and finance carefully 🔹 Insecurity about future interest development. How long will the current interest rates stay? Does it pay off to push out investments? ▶️ Result: reduced demand for residential solar PV for now... but: 2022 was an exceptional year in terms of demand. Now we come back to a longer term, sustainable growth path. These phases are difficult to manage, especially in industries built on a relentless growth narrative.

❓What does it take now: Good management teams and calm investorsManagement teams need to step up: dealing with growth and at the same time supply chain imbalances that impact profitability. Managing growth-hungry teams.Investors should stay calm - hey, you got into solar because growth and returns can both be high, but volatility is higher, too. Accept the learning curve, and stay the course.

❗Final takeWe believe in healthy demand for many local and national solar PV companies – with vast growth potential (> 8M suitable roofs left in Germany alone) for those making it through the rough weather – a real management challenge.Stay tuned for part 2 – the investor / financial side.What do you think?

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