Financing the "Missing Middle": Investment Gap and Solutions for Scaling Emerging Energy Technologies

Background: The "Missing Middle" of Energy Innovation

Energy systems face multiple challenges of security, reliability, affordability, and sustainability. Although innovative technologies promise to address these issues, there exists a significant funding gap between proof of concept and commercial scale-up. According to investors O'Sullivan and Raghavan, between 2017 and 2022, the US and Europe raised $270 billion for the low-carbon energy transition, including approximately $120 billion in early-stage venture capital and about $100 billion in infrastructure investment, but only $55 billion for late-stage venture capital and growth funds. This gap (the "missing middle") is estimated at $100–200 billion.

Causes of the Funding Gap

The "missing middle" stems from rational investors' risk-return trade-offs. Emerging energy technologies (such as long-duration energy storage, solid-state batteries, green steel, carbon management, sustainable aviation fuels, etc.) face both technological uncertainty and capital expenditures in the billions during demonstration and scaling phases, exceeding the capacity of traditional venture capital. Meanwhile, infrastructure funds demand predictable returns and are unwilling to assume new technology risks.

Policy Attempts and Volatility

The U.S. federal government has tried to bridge the gap through policy measures. The Energy Act of 2020, the Infrastructure Investment and Jobs Act (IIJA) of 2021, and the Inflation Reduction Act (IRA) of 2022 provided substantial funding, including the establishment of the Office of Clean Energy Demonstrations (OCED) within the Department of Energy and the strengthening of the Loan Programs Office (LPO). However, implementation has been slow: as of early 2025, only 47% of new appropriations had been committed, and 5% actually disbursed. After Republicans returned to power in 2025, OCED was abolished, and many grants and loans were cut, severely challenging policy stability.

The Role and Innovation of Private Capital

Beyond public policy, the private sector is also exploring solutions. New insurance products, risk transfer tools, and private customer demand guarantees (such as corporate consortiums jointly procuring emerging technologies) are reducing investment risks. Philanthropic and catalytic capital also takes on risks that traditional investors avoid. For example, private investment in sustainable aviation fuel grew from nearly zero in 2021 to $2 billion in 2024; carbon management investment exceeded $1.8 billion over the same period.

Impact of the Macro Environment

The high-interest-rate environment in the post-pandemic era has increased financing difficulties. The AI investment boom has further diverted capital, but it has also created energy demand signals that may partially substitute for support after government withdrawal. New AI applications in the energy and industrial sectors could improve efficiency and reduce environmental impact.

Diverse Paths to Solutions

No single solution can address all issues. The report recommends: Federal and state governments can provide demand guarantees (such as government procurement and cooperation with private customers) and increase grants and financial assistance; regional stakeholders can coordinate to implement economic development strategies. Private, public, and collaborative actions must work together to narrow the "missing middle."

Capital Signals: Long-Term TrendsDespite policy fluctuations, global demand for emerging technologies in the energy transition is still rising. The intersection of AI and energy may become a new magnet for capital. The investment prospects of technologies such as sustainable aviation fuels, carbon management, advanced nuclear energy, and geothermal energy depend on innovation in risk-sharing mechanisms and policy stability.

Does this event indicate that global capital is reassessing the investment value of energy innovation? — In the United States, political swings and high interest rates have indeed dampened the confidence of some investors, but demand signals from private markets for emerging technologies (such as AI-driven energy demand) and policy resilience (partial support retained) still provide anchors for long-term capital. It foreshadows that in the next decade, capital flows will place greater emphasis on innovation in risk-sharing structures, and the reliability of public policies will become a key competitive factor.