Innovation Themes

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Retrofit installers have stood out this year as being the strongest built world investment theme – both in terms of total dollars invested and early stage deal count growth. This makes sense given the spread of company maturity within this category. Investments in established installers, such as 1Komma5 and Enpal recorded some of the largest built world deals seen this year, while there continue to be countless pre-seed and seed stage companies emerging in new geographies such as France, Spain and the UK.

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Notably, more advanced markets such as Germany and the US are continuing to see significant early stage deal count as new entrants approach the retrofit challenge through the lens of new retrofit products (i.e. heat pumps) or different sales channels. Within the wider building electrification category, this year saw Europe represent 60% of deal count for the first time, with early stage deals in startups including Enter, Smalt and Lun.

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Retrofit installers see the fastest growth this year

Retrofit installers saw both the greatest investment and highest early stage deal activity, while building water efficiency received the least capital and early stage deal growth.

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Materials manufacturers saw significant funding this year, in part owing to several large green steel deals and low carbon concrete scale ups. Currently the use of green materials typically entails a 10% premium (either through the material cost or related soft costs), but regulations such as the EU Carbon Border Adjustment Mechanism (CBAM) are seeking to change this through implementing CO2 emission tariffs on imported goods including steel, cement, iron, aluminium, hydrogen, electricity, and fertiliser.

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The legislation’s initial phase came into force this quarter, requiring EU importers to report on GHG emissions embedded during the production of imports, while tariffs will come into force from 2026. Elsewhere, California announced that Scope 3 emissions reporting will now be required for all large companies through the state’s Climate Corporate Data Accountability Act, like that of the EU’s CSRD (the latter of which comes into force early 2024).

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Notably, California’s legislation is much more stringent than the SEC's proposed disclosure rule, which only affects publicly held businesses. The implications of this for the real estate and construction sectors will be significant. Scope 3 reporting will require real estate developers to report on emissions from construction materials used in new development projects, while landlords will be required to report on the energy use of tenants. The impact of upcoming regulations for built world stakeholders will be significant, incentivising the use of certified green materials and products over cheaper imported alternatives – and this is likely to be reflected in later stage funding rounds as we move into 2024.

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Declining satellite launch costs are also catalysing investment in earth observation companies such as Sat Vu and Constllr, with growing commercial interest in global thermal imagery data for infrastructure monitoring and retrofit decision making. Early stage deals grew at an impressive 39% CAGR from 2020-2023 while investment is also on the rise as companies graduate from Pre-Seed/Seed to Series A rounds. Growth in grid storage funding is driven by hardware investments in long duration batteries such as Our Next Energy’s Aries Grid and Energy Dome. Other flexibility resources are also experiencing strong investment growth. Virtual power plant solutions are starting to mature, with Series B rounds in DERMS provider SPAN, and grid flexibility software providers Leap and Piclo.

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Meanwhile, dollars invested in EV charging solutions dropped in 2023 following significant growth over the past three years. Despite the decrease in later stage funding, early stage deal volume continue to grow, with next gen solutions such Charge X and Treehouse on the horizon. As renewables penetration continues to increase, infrastructure monitoring software for grid and are also on the rise. Including solutions such as Terabase, Ampere Cloud and Birdstop, the vertical recorded an 134% investment CAGR from 2020-2023. Similarly, renewables robotics saw significant funding growth driven by a number of novel drilling technologies such as Eavor and Bedrock Energy, that unlock geothermal heating and cooling for large commercial and industrial buildings.

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Likewise, a ramp up in corporate net zero commitments and gas price spikes have seen several new providers democratise access to renewable PPAs and time stamped green energy verification. Interestingly, solar hardware tech has also experienced positive investment growth, albeit from a smaller base, with investments in combined solar heat and power tech such as Naked Energy coming to the fore. Heat pump hardware, however, stands out as being significantly underfunded, with recent years seeing only a handful of early stage rounds in technologies such as Quilt.

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Heat Pump Installers

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With soft costs representing the bulk of the total cost to the homeowner, the heat pump installation process is analogue and opaque. Until now, the high hardware cost relative to incumbent solutions has seen digitised heat pump installers attract little venture funding. As government grants and rebates improve the economics for homeowners, this is now changing. While venture financed heat pump installers received close to zero of retrofit installer financing five years ago, this year has seen capital rise to represent over a quarter (27%).

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While heat pumps offer 4x operational efficiency over gas furnaces , geography remains a key determinant of homeowner ROI, and therefore adoption. Adoption to date has been greatest in regions with generous government incentives and is reflected in the concentration of venture funding in Germany, the Netherlands, Denmark, Sweden, and the US. Market dynamics vary between Europe and the US. With the US market seeing heat pump sales exceed gas furnace installations for the first time this year, 13% of US homes across a range of income classes now use heat pumps as their primary heating source.

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Building stock and labour dynamics make the average heat pump installation cost in the US comparable to that of a gas furnace, while gas prices sit at around a quarter of electricity prices. Overall, this ensures the total running costs of a heat pump and gas furnace are now broadly equivalent. Meanwhile, the European market is roughly three quarters the size of the US. This can be explained in part the continent’s older building stock, which constrains the extent to which installs can be standardised, while the prevalence of radiators requires the use of more expensive air to water pumps.

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Gas price spikes, however, are seeing adoption surge. In the German market, sales increased by +53% over the course of 2022, while several well-funded installers (such as Woltair) recently announced their expansion into the German market. Regulation remains key, however, with the UK’s already nascent heat pump market expected to experience significant contraction in light of a government backtrack on a 2035 gas boiler ban.

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Grid Storage Software

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Venture investment in grid storage solutions has been growing rapidly. The vertical saw the second largest total deal count in 2023, with investment across hardware, installer, and software technologies. This surge is being driven by the evolving economics of battery technology (lithium-ion battery storage costs plummeting from $1,200/kWh of lithium-ion (Li-ion) battery storage in 2010 to $151 in 2022) and the increasing adoption of variable renewable energy sources have sparked a surge in interest in both standalone and hybrid storage (whereby storage is collocated with utility scale solar or wind generation).

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Developing and managing standalone or hybrid energy storage assets is complex. These systems require active strategies for charging and discharging, expanding the services offered by renewable energy facilities. Understanding the power's value at specific locations and how projects can realise their potential in wholesale markets, encompassing energy, capacity, and ancillary services, becomes essential.

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A range of software platforms such as Tyba support project developers and investors in navigating these complexities. These platforms offer modelling tools that help identify suitable project locations, optimise system design, and streamline decision-making processes. Pre-construction, platforms provide energy production models for solar, dispatch optimisation, price forecasting, and bidding algorithms for wholesale power markets.

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Post-construction, solutions like Entrix Energy optimise daily operations and wholesale market bidding for standalone or hybrid projects. This operational optimisation is vital for minimising downtime and maximising revenue, ensuring that these projects contribute efficiently to the grid while remaining economically viable.

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Retrofit Financing

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While low hardware costs and gas price spikes have seen the payback time for retrofit upgrades rapidly decline, the upfront cost to the customer remains burdensome. Infrequent yet expensive purchases, appliances are typically upgraded at the point of failure every 10-15 years, with customers seeking the cheapest viable replacement. A wave of startups are now seeking to address this friction and open up the retrofit market to a wider range of income classes.

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This is predominantly achieved through enabling the growing retrofit installer base to reduce or even remove upfront payments.In the US market, a lack of standardisation across rebate and grant programmes and between utilities, states and local authorities makes accessing Inflation Reduction act time consuming and complex. Even after identifying the relevant rebates and credits, all too often large volumes of paperwork involved can discourage homeowners from making applications. Meanwhile, for installers, keeping track of hundreds of utility, state and local programmes is close to impossible given there is no comprehensive database of rebates available.

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Solutions such as Line.Build and Upfront are enabling installers to removing cumbersome rebate application processes and long reimbursement timelines for their customers, through transforming rebates into immediate discounts at the checkout. This not only saves consumers money but also boosts retailer sales and expedites the deployment of rebates. Looking beyond government incentives, solutions such as Cloover are enabling installers to offer retrofit services as subscriptions. In removing the upfront cost to the homeowner or business, installers gain access to a much wider customer base, while simultaneously smoothing working capital.

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Other approaches address the growing requirement for corporates to report on (and reduce) Scope 3 emissions. With reporting soon to be a requirement in California and Europe, startups such as Scope Zero are enabling corporates to manage Scope 3 emissions from work-from-home and commute emissions through offering employees carbon savings accounts (CSAs). This allows both employees and employers to contribute funds towards making homes (and by extension home working) more energy efficient, with employees able to redeem funds against a range of home retrofit products.