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New IEA report shows growth in clean energy R&D spending by governments, but also warning signs on the horizon

By Simon Bennett (Technology Analyst, International Energy Agency)

According to the latest World Energy Investment report from the International Energy Agency, government energy R&D spending in 2019 grew by 3% to USD 30 billion in 2019, and was mostly directed to low-carbon energy technologies. While the growth rate in 2019 was below that of the previous two years, it remained above the annual average since 2014. The data for IEA countries is freely available on the IEA website and data for the rest of the world has been gathered in close collaboration with Mission Innovation and national governments.

However, the report warns that significant headwinds face continued momentum for clean energy innovation as a result of the Covid-19 pandemic. In the near-term, governments – especially those that are members of Mission Innovation – face critical decisions about how to manage reductions in private capital allocated to energy R&D and venture capital (VC) in 2020 and 2021, and rising pressures on public budgets in emerging economies in particular.

The report says that “major governments are increasing energy research investments, as they pledged to do in 2015 under the Mission Innovation initiative”. In 2019, around 80% of all public energy R&D spending was on low-carbon technologies[1]. With 6% growth, spending on low-carbon technologies rose faster than total public energy R&D spending, reaching USD 25 billion in 2019. In China, the low-carbon component of energy R&D grew by 10% in 2019, with big increases in R&D for energy efficiency and hydrogen in particular, driving up the global total.

While it is too early to determine the impact of the Covid-19 pandemic on public energy R&D, the risks are clear. The IEA report looked at corporate R&D in particular and found that 3% growth in 2019 was already slower than in previous years, with cuts to R&D budgets expected in several sectors in the next year or more. The financial crisis of 2008 and the oil price collapse of 2014 provide some insight into the likely response of companies to the impacts of the Covid-19 pandemic. In 2009-10 the total R&D spending of major sectors suffered slower growth or cuts, with the exception of the electricity supply and renewables sectors. After 2014, oil and gas company R&D took four years to return to growth and remains below the 2013 level. In the automotive sector, anticipated cuts to R&D spending in 2020-21 could be a setback to much-needed fuel economy improvements and electrification. But, while corporate R&D spending is likely to suffer, it can be expected to be much less affected than capital expenditures, which are critically important for the large-scale demonstration of technologies, such as CCUS or new industrial processes.

VC deals for clean energy technologies have been enjoying record highs in the last few years, suggesting that a more sustainable inflow of capital is rewarding government efforts to set long-term climate ambitions and fund new ideas. Total equity investment in energy technology start-ups, including growth equity, by all investor types, stood at USD 16.5 billion in 2019. Of this, early-stage VC, which supports innovative firms through their highest risk stages, is estimated to have been USD 4 billion. This private risk capital plays an important role by enabling market creation and scale-up of the most market-ready technologies. And it is increasingly an area in which companies from outside the energy sector are investing in the hope of profiting from disruptive transformation of the energy sector, including its power networks, fuel supplies and buildings efficiency. Understandably, overall deal value fell in the first half of 2020 amid a difficult business environment and higher investment risks.

The challenge for governments is to address emerging weaknesses across all these funding sources to keep clean energy innovation on track.

The IEA is preparing an Energy Technology Perspectives Special Report on energy innovation that will be published in early July 2020. It will look at the potential impacts of Covid-19 in more detail and make recommendations for action.


 

[1] Based on IEA methodology to assess low-carbon R&D spending. More info on methodology here: https://www.iea.org/reports/world-energy-investment-2020/methodology#abstract

 

-Simon Bennett (simon.bennett@iea.org) is a Technology Analyst with the International Energy Agency (IEA)

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