Energy prices contribute to drop in early-stage UK cleantech deals

Total investment hits £7.2 billion but seed funding collapses

The UK has retained its position as Europe’s largest cleantech investment market. Total funding reached £7.2 billion in 2025, significantly ahead of Germany at £1.7 billion and France at £1.4 billion. However, this headline figure masks a serious problem. Early-stage investment has halved in value compared to 2024, while the number of deals has fallen from 188 to just 94.

This sharp drop in seed and early-round funding threatens the pipeline of emerging technologies that will be essential for meeting net zero targets. Cleantech for UK, the organisation that produced the analysis, was established in 2023 to connect government policymakers with venture capital investors backing low-carbon innovation. Its latest report identifies three converging pressures that are starving startups of capital at precisely the stage they need it most.

First, UK industrial energy prices remain among the highest in Europe. This makes capital-intensive sectors such as battery manufacturing, hydrogen production, and carbon capture financially unviable for many early-stage companies. Second, the government closed the Net Zero Innovation Portfolio in 2024 without announcing a replacement scheme. Consequently, a crucial source of seed funding has disappeared entirely. Third, higher interest rates and increased employers’ national insurance contributions have made venture capital investors more cautious. These factors have combined to create what Cleantech for UK describes as a triple squeeze on emerging green businesses.

Moreover, broader geopolitical uncertainty has further discouraged investment in nascent cleantech ventures. The result is that early-stage deal values have fallen to their lowest point in five years, even as overall investment figures remain strong.

Energy costs remain elevated despite renewable expansion

UK businesses face energy prices that are expected to stay high until the late 2030s. Cornwall Insight forecasts that industrial electricity costs will remain elevated for at least another five years, despite planned expansions in solar and wind capacity. The government intends to triple solar generation and significantly increase wind output. Nevertheless, the price relief these additions might bring will take considerable time to materialise.

Energy-intensive industries are already feeling the impact. Sectors such as cement manufacturing and steel production are projected to see output contract by 0.6 per cent this year, primarily due to sustained high energy costs. For cleantech startups developing manufacturing processes or technologies that require significant power input, these price levels create a substantial barrier to commercial viability.

The UK requires between £700 billion and £900 billion of energy infrastructure investment over the next five years. This represents more than double the investment made in the previous equivalent period. Furthermore, annual infrastructure spending will need to reach approximately £80 billion throughout the 2030s, up from around £55 billion per year over the last decade. Meeting these targets depends on a healthy pipeline of innovative companies capable of delivering new grid technologies, battery systems, and generation capacity.

Therefore, the collapse in early-stage funding directly undermines the UK’s ability to build the infrastructure necessary for energy security and decarbonisation. Without emerging companies developing next-generation solutions, the country risks falling behind on both climate commitments and industrial competitiveness.

Government moves to separate gas and electricity pricing

In response to persistent high costs, the government has announced plans to decouple gas and electricity prices. Currently, expensive gas-fired generation sets the price for all electricity, including power from renewable sources. This mechanism means that even when wind and solar generate cheaply, consumers and businesses pay rates determined by the marginal cost of gas.

The proposed reform introduces voluntary long-term fixed-price contracts for low-carbon generators. These contracts would cover approximately one-third of electricity supply, allowing renewable producers to sell power at predetermined rates rather than fluctuating wholesale prices. According to Priya Mackintosh at Cleantech for UK, this approach could have a fairly immediate impact on shielding businesses and households from gas price volatility.

Consultations on these contracts are scheduled for later this year. The government has indicated that it will introduce the Wholesale Clean Power Fund alongside these mechanisms. However, offers will only proceed where they demonstrably deliver value for consumers. This cautious approach reflects concern about locking in long-term commitments that might later prove expensive.

Additional measures to further delink gas and electricity prices have been signalled. These proposals gained urgency after wholesale gas costs rose by 30 per cent following conflict involving Iran. The government recognises that while renewable capacity is expanding, the pricing structure continues to expose the UK economy to fossil fuel market shocks.

What the investment data reveals

Several key figures illustrate the scale of both the opportunity and the challenge facing UK cleantech:

• Total cleantech investment reached £7.2 billion in 2025, maintaining the UK’s position ahead of Germany and France combined.
• Early-stage deal numbers fell from 188 transactions in 2024 to 94 in 2025, representing a 50 per cent decline in activity.
• Early-stage deal values dropped to their lowest level in five years, effectively halving compared to the previous year.
• The UK needs between £700 billion and £900 billion of energy infrastructure investment over the next five years alone.
• Annual infrastructure spending must rise to approximately £80 billion throughout the 2030s, up from roughly £55 billion per year historically.
• Industrial output in energy-intensive sectors is forecast to shrink by 0.6 per cent this year due to sustained high electricity costs.

Why early-stage companies are particularly vulnerable

The drop in seed and early-round investment creates specific risks that differ from challenges faced by more mature businesses. Early-stage cleantech companies typically require patient capital because they are developing technologies that will take years to reach commercial scale. Battery chemistry improvements, advanced carbon capture systems, and novel grid management solutions all need extensive research, testing, and iteration before they can generate revenue.

High energy prices disproportionately affect these ventures. Unlike established manufacturers, startups cannot negotiate favourable long-term supply contracts or absorb temporary cost increases through existing cash reserves. A battery startup operating a pilot production line faces the same elevated electricity rates as a major industrial plant, but without the economies of scale or pricing power to offset them.

The closure of the Net Zero Innovation Portfolio removed an important bridge between initial research and commercial investment. This fund provided grants and loans specifically designed to help technologies progress from laboratory concepts to demonstrable prototypes. Without it, companies face a funding gap at exactly the point where they need to prove technical viability to attract private investors.

Higher interest rates have made venture capital funds more selective. Investors now demand faster returns and lower risk profiles, which disadvantages cleantech ventures with longer development timelines. Similarly, increased employers’ national insurance contributions have raised operating costs for all businesses, including startups. This reduces the runway that seed funding provides and makes each funding round more critical.

Geopolitical uncertainty compounds these pressures. Trade tensions, supply chain disruptions, and policy instability in other markets all increase the perceived risk of backing UK cleantech companies that may eventually need to scale internationally. Investors become more conservative precisely when emerging technologies need support to reach the next stage of development.

Risks of losing the innovation pipeline

The consequences of this funding drought extend well beyond the startup sector itself. A healthy cleantech ecosystem depends on a continuous flow of new companies moving from early research through to scaled deployment. When that pipeline dries up, the entire system suffers long-term damage.

Established UK leadership in cleantech investment matters because it creates networks of skilled workers, experienced investors, and specialised supply chains. Once these networks disperse, they are difficult and expensive to rebuild. Talented engineers and researchers may move to better-funded sectors or relocate to countries with more supportive ecosystems. Investors who shift focus away from cleantech may not return even when conditions improve.

Carbon leakage presents another significant risk. If UK energy costs remain high while early-stage funding stays scarce, promising technologies may develop overseas instead. Countries with lower industrial electricity prices and active government support for innovation will attract both investment and intellectual property. The UK would then face the ironic situation of having identified crucial climate solutions but lacking the domestic capacity to manufacture or deploy them.

Meeting net zero targets requires not just existing technologies but also innovations that have not yet been commercialised. Grid-scale energy storage, green hydrogen production, sustainable aviation fuels, and advanced heat pumps all need further development before they can be deployed at the scale required. Without companies working on these challenges now, the UK will face technology gaps in the 2030s that cannot be filled quickly.

The infrastructure investment figures make this clear. Spending £80 billion annually on energy systems throughout the next decade assumes that the necessary technologies exist and can be manufactured at competitive prices. If the innovation pipeline has been starved in the mid-2020s, those assumptions become unrealistic. Delays in technology development translate directly into delayed decarbonisation, higher costs, and missed economic opportunities.

Short-term fixes and longer-term structural needs

Government intervention on electricity pricing could provide some relief fairly quickly. Decoupling gas and renewable prices removes one barrier to investment by making operating costs more predictable for energy-intensive cleantech companies. Fixed-price contracts for low-carbon generators should reduce volatility and gradually bring down average industrial electricity rates.

However, pricing reform alone will not restore early-stage investment to healthy levels. Venture capital needs confidence that portfolio companies can survive and scale. This requires addressing the full range of pressures identified in the Cleantech for UK analysis. Replacing the Net Zero Innovation Portfolio with an equivalent or improved funding mechanism would fill a critical gap. Such a scheme needs to provide both grants for pre-commercial research and loans for companies approaching market readiness.

Interest rate policy sits outside government control, but fiscal measures could partially offset the impact of higher borrowing costs. Tax incentives for investors in early-stage cleantech, or enhanced capital allowances for companies deploying new low-carbon technologies, could improve investment returns and encourage longer-term thinking.

The national insurance increases announced in recent budgets have raised employment costs across the economy. While these generate revenue for public services, they also make it harder for startups to hire the technical staff they need. Targeted relief for early-stage companies, particularly those developing technologies aligned with net zero goals, could help offset this burden without creating widespread exemptions.

Critically, policy stability matters as much as individual measures. Investors make decisions based on expected conditions over five to ten years, not just current rules. Frequent changes to support schemes, unclear regulatory roadmaps, and shifting priorities all increase perceived risk. A consistent, long-term framework for cleantech support would do more to restore investor confidence than any single intervention.

Where to find detailed policy and market information

The Department for Energy Security and Net Zero publishes updates on energy policy, pricing reforms, and infrastructure investment plans. Its consultations on renewable pricing mechanisms and the Wholesale Clean Power Fund will provide detail on how decoupling measures will work in practice.

Cleantech for UK maintains analysis of investment trends and policy gaps affecting green technology ventures. Their reports track funding volumes, deal structures, and sector-specific challenges across the UK cleantech ecosystem.

Cornwall Insight offers detailed forecasting on UK energy prices, including industrial electricity costs and wholesale market dynamics. Their projections inform business planning for energy-intensive sectors and help companies assess long-term cost exposure.

For businesses working to reduce carbon emissions or improve energy efficiency, our compliance support services help navigate reporting requirements and identify practical measures that reduce both emissions and operating costs. Companies preparing for net zero commitments can access guidance through our structured net zero programme, which addresses carbon measurement, reduction planning, and verification processes that increasingly feature in tender requirements and supply chain expectations.