The shift to a low-carbon future is turning the economy inside out. Policy has a crucial role to play, but ultimately it is businesses that will make the energy transition happen.
In Energiewende home country Germany, many start-ups are at the forefront of transformation by bringing novel business ideas to market and by snatching market share from incumbents in sectors such as renewables, heating or mobility. In areas like storage and hydrogen, the young companies in this “Green Energy Valley” are among the world’s leaders and could be key to cleaning up polluting industries. Incumbents also bet on start-up innovation to cut emissions, and the government now nurtures the sector with a plethora of support programmes. But many start-ups continue to lament overburdening red tape, hesitant investors and a relatively small domestic market that slows expansion.
The energy transition’s spread into transport, industry and heating, as well as the rapidly rising share of renewable electricity in many countries around the globe, put a new spotlight on the importance of innovation for the projects’ success. Countless new solutions are required to decarbonise all sectors of the economy, and in many cases, it is start-ups that can offer this.
In energy transition pioneer Germany, both the government and large corporations increasingly bet on a vibrant “green” start-up scene when it comes to reconciling the shift to renewables with economic success — some call the country a “Green Energy Valley.” Thanks to their innovative capacity and an irreverent approach, start-ups are both boon and bane for established companies and sectors — they can bring new ideas into staid businesses, but also disrupt entire industries.
“We need to challenge conventional paradigms,” said Christoph Frei, secretary general and CEO of the World Energy Council (WEC). “That’s exactly what the start-ups are about. They deliver this kind of ‘out-of-the-box’ thinking and the necessary attitude. They have no fear of reinventing everything,” Frei told Clean Energy Wire.
The speed of energy transition innovations, often led by start-ups, continues to exceed expectations — witness the dramatic cost reductions in PV solar and battery storage, which have been crucial for their current rapid deployment around the globe.
According to Germany’s environment ministry, around two-thirds of all “green” basic innovations can be traced back to founder companies. “Without the relevant green start-ups, the renewable power sector wouldn’t have developed the way it did,” environment minister Svenja Schulze commented in a survey of the scene.
Start-ups play a crucial role in the success of the energy transition, and also in the economy as a whole. According to research conducted by the Borderstep Institute, “they have created far in excess of one million jobs in Germany over the last ten years.”
“Germany has a key role to play. The mere fact that the term ’Energiewende‘ has become a globalised word speaks for itself. If people want to understand what an energy transition could possibly mean, they still look to Germany for what could go wrong, and also for what could go right. Germany has examples to offer for both.” — Christoph Frei, CEO at World Energy Council
Estimates of the number of green start-ups in Germany vary wildly between around 6,000 and several tens of thousands, depending on the definitions used. Around a quarter of all start-ups classify themselves as green because they contribute to sustainability. Of these, around one in ten works in energy or electricity, and around one in 15 in mobility or cars. [See the Factsheet Germany’s green start-up scene in numbers for more details, and the dossier Germany’s Energiewende start-ups — Cutting emissions as a business model for a collection of start-up profiles and interviews.]
A total of around 4.6 billion euros were invested in German start-ups in 2018, more than ever before, according to business consultancy EY. In this respect, Germany ranks second in Europe behind the UK (7.2 billion euros). But only a fraction of that money went to German start-ups directly engaged in the energy transition: 407 million euros were invested in mobility start-ups (an increase of almost 40 percent versus 2017) and 99 million euros in energy start-ups (plus 15 percent). Much larger sums went into e-commerce (almost 1.7 billion euros), financial technology (fintech), and software (around 700 million euros each).
Germany’s role as “Green Energy Valley”
Innovation experts say that Germany’s example is still vital for the progress of the global energy transition, even if inadequate government action in recent years has meant the country has fallen back in the worldwide race towards decarbonisation.
“Germany has a key role to play,” argued Frei. “The mere fact that the term ’Energiewende‘ has become a globalised word speaks for itself […] If people want to understand what an energy transition could possibly mean, they still look to Germany for what could go wrong, and also for what could go right. Germany has examples to offer for both.”
“Owing to the political framework of the energy transition, there is continuing interest in seeing whether Germany will succeed, and how,” Borderstep’s founder and director Klaus Fichter told the Clean Energy Wire. “Additionally, Germany continues to be renowned for its engineering prowess and technical knowledge, which also generates a lot of interest in the developments in the energy sector.”
With reference to global start-up hub Silicon Valley, Fichter argued that Germany has become a “Green Energy Valley” thanks to the strong presence of start-ups focusing on making the economy more sustainable. This status is also reflected in British bank HSBC’s ranking of the countries’ potential to decarbonise, where Germany comes first, thanks in part to “a particularly large cleantech industry” creating many business opportunities related to the low-carbon transition.
Cutting edge in storage & hydrogen
The energy transition in Germany has now entered a new stage, and is seeping into parts of the economy where decarbonisation has barely begun in earnest so far, such as transport and heavy industries. At the same time, the rising share of intermittent renewable power has put the focus on the question of how to store renewable power — and many German start-ups are at the cutting edge of these endeavours.
Their activities are key to shaping the energy transition “megatrends”: decarbonisation, decentralisation and digitalisation. [See our dossiers Digitalisation ignites new phase in the energy transition, Electricity storage is next feat for Germany’s energy transition, and Battered utilities take on start-ups in innovation race for background and plenty of examples for start-up activity.]
International rankings reflect the strength of German start-ups in general, and their leading role in the above lines of business in particular.
For example, the San Francisco-based Cleantech Group compiles an annual Global Cleantech 100 list to show “which types of companies are most likely to have big commercial impact in a 5–10 year timeframe,” and which “represent the most innovative and promising ideas in cleantech and are best positioned to solve tomorrow’s clean technology challenges.”
Ten German start-ups made it onto the current Cleantech list: energy storage companies Electrochaea, Skeleton Technologies and Sonnen; fuel cell and hydrogen specialists Hydrogenious Technologies and Sunfire; energy efficiency specialists Kiwigrid, tado and Thermondo; as well as air taxi innovator Lilium. Even more start-ups on the list hailed from the US (47) and Canada (12).
Sunfire and Hydrogenious are the only start-ups on the list focusing on hydrogen, and from a total of 11 companies active in “energy storage” three are German.
A few years ago, German start-ups were also leading in PV technologies, but the sector has collapsed as production moved to Asia — a timely reminder that the ground can shift quickly in this sector, which is not only sensitive to economic trends but also highly susceptible to regulatory changes. As it turned out, Germany’s solar industry did not manage to wean itself off generous support payments [For more details, read the dossier Stricken solar sector sets out to regain leading Energiewende role.]
The fate of Germany’s PV sector is also a timely reminder that many start-ups fail before they can have any impact. According to an oft-cited study conducted by US researchers Startup Genome, around 90 percent of start-ups fail, while other studies have found that little more than half survive to their fourth year.
According to a report compiled by business consultancy KPMG on German start-ups, around half of all start-up founders had already established another company earlier. “Quite a few start-ups are the result of founders who have already experienced a failure,” the report stated. “Failure is, therefore, a central issue in entrepreneurship.”
Sören Amelang is a staff Correspondent for Clean Energy Wire. During his 15 years at the news agency Reuters, he wrote about international business, economics and politics. He was lead writer for Reuters’ German coverage of the financial crisis and the ensuing debt crisis in Europe. He holds a BA in Development Studies from Liverpool University and an MA in International Relations from the University of Sussex.