The missing middle: the critical gap in our capital stack for energy investment

In an early South Park episode, the Underpants Gnomes unveil their business plan.

Step one: collect underpants.

Step two: ? 

Step three: profit.

It is difficult not to admire the clarity. Some parts of the energy transition can feel uncomfortably similar.

We are increasingly good at funding promising ideas. We also know that mature, proven infrastructure can attract serious institutional capital.

It is step two that gets interesting.

Somewhere between a technology that works and an asset that pension funds are happy to own sits the expensive, awkward process of proving commercial scale. The need for capital grows quickly just as investor appetite often moves in the opposite direction

That is the missing middle.

The International Energy Agency calls this the “valley of death”: the point where research funding is no longer appropriate but conventional investors are still uncomfortable with the scale and risk involved. For capital-intensive energy technologies, that can mean finding tens or even hundreds of millions to build the first serious commercial project. 

This is not merely a financing curiosity. If we cannot fund the journey from invention to scale, Britain risks falling back to its old habit: doing the clever bit and leaving the industrial prize to someone else.

Too big for venture capital, too risky for infrastructure

Different investors are built for different risks.

Venture capital can tolerate failure because a small number of successes can produce exceptional returns. Banks prefer predictable repayment. Pension and infrastructure funds can deploy huge amounts of money, but generally after technologies and revenue models have become understandable.

The difficult moment comes when a business moves between those worlds.

The British Business Bank identifies precisely this problem in UK clean technology: a shortage of later-stage Series B and subsequent capital can prevent capital-intensive companies from scaling. 

The company is too expensive to remain small and not proven enough to become comfortably big.

We have more institutions. Do we have a system?

Britain is certainly not ignoring the problem.

The National Wealth Fund has £27.8 billion to deploy and a mandate centred on mobilising private finance, including in clean energy, storage, grids, hydrogen, carbon capture, ports and manufacturing. Government explicitly describes it as a destination for projects facing a financing gap.

The British Business Bank is active in growth capital. Great British Energy adds another public investor to the clean-energy landscape.

And in Scotland, the Scottish National Investment Bank offers a useful expression of what public capital should be trying to do.

Its mission includes scaling innovation and supporting the transition to net zero. It invests commercially alongside other investors, with an explicit aim of crowding in private capital rather than displacing it. Since launching in 2020, it says it has committed more than £1.2 billion while helping to mobilise another £1.9 billion alongside that investment. Its current strategy also emphasises helping portfolio businesses scale and attract follow-on capital.

That matters because Scotland has its own missing-middle problem. The Bank’s research points to relatively healthy early-stage finance but fewer options as companies move into larger growth rounds.

The question is whether this growing collection of institutions amounts to a coherent capital stack.

Public money should make private money braver

There is an important distinction here.

Government should not try to remove commercial risk from the energy transition. Taxpayers cannot absorb every risk while private investors retain all of the upside.

The job of public capital is more specific: find the particular risk preventing an otherwise credible investment from proceeding. Then share it, reduce it or bridge it long enough for a different class of investor to enter.

The US Department of Energy’s $465 million loan to Tesla is a classic example. It helped fund commercial-scale vehicle and manufacturing capacity at a point when that leap remained difficult to finance conventionally. Tesla repaid the loan in 2013, several years early.

That’s not to say that the UK government should be on the hunt for the next Tesla. Governments are no better at selecting future superstars than most people are at choosing the fastest supermarket queue.

The lesson is about timing.

In Tesla’s case, public capital was invested during an awkward transition in risk, then became unnecessary as the business matured.

Britain has already demonstrated the same principle in a different form. Contracts for Difference helped unlock large-scale renewable investment by protecting generators from one particularly difficult risk: volatile wholesale electricity prices. Government did not remove every project risk or build every wind farm itself. It changed one part of the economics enough to support investment.

That is catalytic capital at its best.

The Britishvolt warning

Of course, not every gap deserves to be filled.

Britishvolt’s proposed battery gigafactory at Blyth appeared to embody the industrial opportunity: domestic battery manufacturing, thousands of jobs and a foothold in a strategically important supply chain. Government offered backing through the Automotive Transformation Fund partly to unlock further private investment.

The company nevertheless collapsed before delivering the factory.

The easy lessons pull in opposite directions: government should have put in more money; government should never back businesses like this.

Neither is especially helpful. Sometimes a funding gap reflects a genuine structural problem. Sometimes investors are reluctant because the proposition is not yet strong enough.

Public institutions therefore need judgment as much as capital. Their job is to share risks the private market cannot yet sensibly carry. It is not to inherit every risk a business would prefer someone else to own.

Four questions for the capital stack

For policymakers, investors and company boards, four questions matter.

1. Is there a credible next investor?

A financing strategy should explain not only who funds this stage, but who can fund the next one. Otherwise, businesses can reach milestones successfully and still hit a wall.

2. Which risk is actually stopping the money?

Technology? Construction? Revenue? Policy? Customer demand?

Until that is clear, “we need more capital” is a diagnosis roughly equivalent to telling a stranded motorist that his broken-down car needs to move.

3. Will public capital crowd private capital in?

The National Wealth Fund and Scottish National Investment Bank both explicitly put mobilisation of private money at the heart of their models. That is the right test. Success is not simply how much public money gets invested, but how much credible private investment becomes possible because it did.

4. Is this really a capital gap or is the business not yet investable?

Not every failed financing round is down to shortcomings in the capital stack and the market’s inability to fund a credible opportunity. Sometimes that is the case but, often, it’s because investors are worried about weak demand, an unproven business model, execution risk or an unclear route to profitability.

A technically brilliant company that cannot explain how it becomes commercially sustainable cannot blame investors. Public capital can help bridge genuine market gaps, but capital still follows confidence: businesses must show that the technology, management and route to market are credible.