The Fusion Play

It’s safe to say the VC-backed fusion energy scene is heating up. In the past ten years, what was once a field relegated to the world of government labs and megaprojects is now blossoming into a burgeoning industry with over $1B in venture capital backing. We can see this trend unfolding through Pitchbook’s data below.


Source: Pitchbook 2019

The lionshare of investments have gone to TAE Technologies, the California startup with an eclectic group of backers including Paul Allen, Goldman Sachs, and the Russian government. Also jockeying for a piece of the pie are Tokamak EnergyGeneral FusionHelion Energy, and Commonwealth Energy Systems.

For the uninitiated, nuclear fusion is where two or more atomic nuclei merge to form one heavier nuclei, and in turn give off large amounts of energy. First theorized in 1920 by English physicist Arthur Eddington, it is the same process occurring in the center of the Sun. We’ve been able to produce fusion reactions in labs for over 60 years now, and while the push to commercialize has always existed, venture-backed fusion startups are a relatively new phenomenon, with most being launched in the past decade.

The premise of abundant, clean, safe energy is certainly a strong sell, but with many of the aforementioned companies entering their series E and F funding rounds with no commercializations in sight, questions over the reasoning behind these investments inevitably rise.

The Break Eeven Challenge

After the US-based Los Alamos National Laboratory first achieved man-made fusion in 1958, it was at this point that the race to break even began.

When it comes to commercializing fusion energy, there is only one number that matters – the fusion energy gain factor. Typically expressed with the symbol Q, it is the ratio between the energy being put into a fusion reactor and the energy coming out. Once a reactor exceeds Q=1, it is said to have scientifically broken even. Early fusion reactors had Q values far lower than 0.1. The current record was achieved in 1997 by the internationally funded Joint European Torus (JET) reactor with a Q value of 0.67.

Generally recognized as existing between the Q values of 4 and 6, the engineering break even point (also known as the ignition point), is where the energy output of a reactor is enough to equal the energy input and power the reactor hardware itself. It is at this point that the fusion reaction becomes self sustaining. Large amounts of fusion by-products end up escaping reactors and have to be constantly replaced and confined by energy-hungry machinery.

Building upon the successes of the JET reactor, the upcoming ITER reactor being built in France by an expanded consortium of governments is set to achieve a Q value of 10. Construction began in 2013 and it is expected to be complete by 2025.

Once a fusion reactor is able to generate enough excess energy to power and pay for itself, it is said to have broken even economically. While the needed Q value varies based based on the current energy market, it is generally estimated to be that of 20+.

Building upon the advancements of the coming ITER reactor, the followup government-funded DEMO and DEMO2 reactors in Europe are expected to economically break even in the 2060s.

With such far out timelines and incremental advancements, the premise of most every fusion startup is easy to see – diverge from the status quo and develop a reactor that can shortcut its way into the Q=20+ range. It’s a gamble, but one that VCs have been willing to take. The potential upside of dominating the $1.4 trillion dollar advanced energy market far outweighs the potential risks of investing in reactor startups that fail to leapfrog ahead of the pack.

But with all this being said, it doesn’t explain why fusion investments are just now picking up steam. Both fusion reactors and the push for renewable energy have been around for decades. If it were truly as simple as investing in fusion startups until one broke even economically, it should have happened by now.

The Great Internalization Shift

The issue is that breaking even economically is not enough to enter the market. The fatal flaw of fusion energy is that it is (ironically) too clean for its own good. Every other form of energy production is able to subsidize its cost of production by shifting costs to the environment rather than direct buyers. This can be seen from the chart below.


Source: Czech Academy of Sciences, 2017

The total cost of energy sources like coal and natural gas are far higher than their cheap prices convey. Over the long run, the global economy pays a much higher price through the economic impacts of climate change, soil acidification, ozone depletion, etc. When the market fails to internalize the external costs of energy production, even a supposedly economically viable fusion reactor now becomes uncompetitive. This can be seen in the chart below.


Source: Czech Academy of Sciences, 2017

If we were to however somehow pressure energy producers to internalize their external costs and level the playing field, the story changes drastically.


Source: Czech Academy of Sciences, 2017

In a world where external energy costs are internalized, a Q=20+ fusion reactor is only beat out by nuclear reactors – and even this will change as fusion reactors advance into further generations.


The primary method of pressuring energy producers into internalizing costs is by having governments enact laws that do just that. This is what has changed in the past decade and forged a path for fusion investments. When we take the previous VC investment data and overlay it on top of Carbon Brief’s recent climate law report, a clear picture emerges.It wasn’t enough for investors to pursue potentially leapfrogging fusion technology. They had to know that if their investment succeeded, it would be able to adequately compete with existing incumbents. Increased climate laws have ensured just that.

Sources: Carbon Brief and Pitchbook

We reached out to a number of fusion startups to see what they had to say about our findings. UK-based Tokamak Energy got back to us with a quote from Legal & General, the investment firm that led their most recent capital raise:

“It is part of our mission and purpose to make investments that have a positive social and economic impact.  Climate change is an important issue for everyone and we have a small window of opportunity to reverse this trend and find an alternative source of energy that is clean, green and cheap for consumers.

Through our investment in Tokamak Energy, we are investing in a UK-based company developing revolutionary technology with global potential. Its bold and ambitious plans have ground-breaking implications for our environment.”


– Nigel Wilson, CEO of Legal & General

Nigel’s reinforcement of the climate change narrative further confirms our theory that private capital flowing into fusion is largely powered by the recent explosion of climate laws around the world. Only time will tell if this pays off for investors.

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