Alexander Starchenko
In recent years, there has been a growing consensus about the urgent need to accelerate the energy transition. While the primary focus has been on reducing CO2 emissions to combat global warming, another crucial objective has emerged: securing Europe's energy independence. This new goal demands a shift away from reliance on imported energy resources, and the renewable energy sources of solar and wind power offer a unique opportunity. Despite considerable progress in transitioning electricity production from coal and natural gas to solar and wind, there remains a significant challenge lingering in the background: a (hot) elephant in the room, namely, heating and cooling.
Heating and cooling account for a substantial portion of energy consumption in the EU, representing approximately half of the total energy used. This includes both residential and industrial heating and cooling needs. Shockingly, this sector is responsible for nearly 40% of CO2 emissions in the EU, and its decarbonization progress lags behind that of the electricity sector. A staggering 80% of heating and cooling in the EU still heavily relies on fossil fuels.
However, researchers, investors, and startup founders have allocated less attention to the heating and cooling sector compared to more popular and trendy sectors. While the first quarter of 2023 saw the release of numerous comprehensive public research reports on hydrogen in Europe and North America, heating and cooling received limited coverage, if any, with only a handful of reports available. Moreover, there is a notable scarcity of mature technologies to effectively decarbonize heat, resulting in limited technological innovation in this area.
At First Imagine, we have conducted an analysis of Pitchbook data on European Seed investment deals within the Energy transition from 2022 to the first quarter of 2023. Surprisingly, only approximately 5% of these investment deals were directly linked to the heating sector.
“Heating and cooling account for a substantial portion of energy consumption in the EU, representing approximately half of the total energy used.”
The limited popularity surrounding the heating and cooling sector can be attributed to objective reasons. Unlike electricity, heat or cold cannot be efficiently transported over long distances, leading to the absence of a unified market or exchange for this sector. Each consumer's heating or cooling needs are unique and often tailored to specific industrial processes within individual plants. The diversity of heating requirements becomes even more pronounced when considering residential and commercial needs, where a single city can encompass various building types with differing ages, sizes, and levels of energy efficiency. On a larger scale, the complexity expands to millions of buildings across old cities and new villages throughout southern and northern countries within the EU, each with distinct energy consumption patterns.
Addressing the complexity and scale of the heating and cooling challenge requires a range of diverse and sophisticated solutions. However, the available options are currently limited. In the low-temperature heat segment, the most viable carbon-neutral technology is the electrification of the heating and cooling (H&C) sector through the widespread installation of heat pumps. The EU's energy policy has recognized the potential of heat pumps and has set a target of doubling annual heat pump deployment to reach 40 million units by 2030. Additionally, improving building energy efficiency is a key focus. To truly transform the heating and cooling landscape, there is a need for new technologies that can be easily mass-scaled and tailored to specific requirements. Furthermore, the development of innovative business models that accelerate the adoption of these technologies and reduce the financial burden associated with the transition would be highly welcomed.
In the high-temperature heat segment, the availability of technologies is even more limited. High-temperature heat pumps, which are crucial for decarbonizing industrial heat, are currently at a relatively low technological readiness level. The utilization of hydrogen as a replacement for natural gas in high-temperature heat applications is still in the early stages of development. Furthermore, high-temperature heat storage, an essential component for efficient heat management, remains a nascent technology. Given the urgency to decarbonize industrial heat, there is a pressing need for significant technological innovations in this field.
Despite the challenges posed by the limited availability of technologies, unclear regulations, insufficient subsidies, and business models, the decarbonization of the heating and cooling sector is an urgent imperative. Thankfully, numerous policies supporting the decarbonization of heating and cooling, particularly in Europe, have been implemented. Now, it is the responsibility of innovators to step forward and develop new technologies and business models that can drive the decarbonization efforts in this sector. As venture investors, we are fully prepared to support these innovators in their endeavors.
