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Investing in clean tech – a valley of death or plenty?
Why clean tech investing is difficult and some ideas to make it better
What other way to start this week’s blog post then to wish a BIG, hearty Happy Mother’s Day to my mom, Brenda Ross. Yes, yes… that lady who has been commenting on almost all of my blogs is indeed my mom (gasp!)
I’m also pleased to be writing this week with a co-author, Sam Morton. Sam is a Strategist at Google X, fellow technologist, and a friend who I regularly Muse with in the early stages of blog formation. Hopefully this is the first of many!
Now for this week’s Musing…
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Bridging the valley of death
Sheesh – “bridging the valley of death” — sounds intimidating! This phrase, well known among the clean technology community, is meant to refer to the journey of taking an idea or technology from lab to commercial operation. Originally coined by ARPA-E, the US government’s ‘in-house’ clean technology incubator, the valley of death has proven difficult to traverse for years and years and has rightly earned its name.
But why so intimidating? How come Uber can go from idea to billion dollar unicorn with a few coders and some marketing and your favorite clean technology can’t?
Let’s dive in and hit the following:
Why should you care about early-stage clean technology?
Why is this critical technology so hard to finance & scale?
What are some ideas for making the task less daunting?
Why should you care about early-stage clean technology?
This one may seem self-evident for those that are sustainability minded – but I think most folks might wonder why early-stage, seemingly new technologies are needed when the likes of solar, wind, and batteries have come so far? Allow me to explain.
Yes – “wave 1” of clean tech has officially made its mark
Solar, wind, and lithium-ion batteries have collectively experienced costs declines of 15-25% annually over the last 20 years or so. This has driven an equally rapid growth rate, and as recently as last week, allowed renewables to supply 95% of energy to the grid in California.
However – the net zero challenge remains daunting
As I’ve written before, to prevent the world from warming more than 1.5 degrees Celsius and avoid serious physical climate consequences, we need to reduce our global greenhouse gas footprint by half in the next 10 years, and to net-zero by 2050.
That means we must reduce at a rate of ~6% per year through 2030 to achieve this goal To put that 6% number into perspective... all it took to reduce global CO2 production by 6% was a pandemic that shut down travel for the majority of 2020.
9 more pandemics worth of carbon reduction? Sounds tough…
And — we’ve only just started addressing the problem
The chart below shows global greenhouse gas emissions by sector and sub-sector. While this chart is worth an article of its own, what you can see is that the emissions footprint is quite diverse. This means that a ‘silver bullet’ for decarbonization doesn’t really exist.
So yes, solar, wind, and batteries are great. However, current at-scale clean technologies only address about 50-70% of carbon emissions. This means that even if we fully rolled out solar, wind, batteries, the like… the remaining 30-50% of emissions reduction relies on technologies that are still in early R&D or demonstration stages.
Meaning… we need new clean technologies!
Carbon capture, low carbon liquid fuels, clean dispatchable baseload power, hydrogen, low carbon cement and steel, and new agricultural technologies… we need it all!
This is exactly why you should care. We’ve got a longgggg way to go, and if we’re going to come anywhere near a 1.5 degree Celsius pathway… we will need a lot of new tech.
So… why is this critical technology so hard to scale?
Let’s get it straight — investing in any early technology or idea is risky.
Often pioneered by out-of-the-box thinkers or technologists… these ideas can either be BIG successes or BIG flops. Even Uber could have amounted to no more than a creepier version of an already creepy taxi service – but look where we are!1
So how does one go from idea to institution? Here, a risk retirement framing is most applicable. Any new idea or tech needs to prove, or ‘retire’, two key buckets of risk:
Market risk: will people actually like your idea? Can it serve as a viable business? Will someone else make a better version of your idea?
Technology risk: will your product or technology actually work? If it works, can it work at scale operationally?
Venture capitalists will rightly tell you that retiring both of these risks is highly dependent on the team involved – betting on people is often more effective than betting on an idea.
However, both of these risks also happen to cost an investor widely different quanta of money to ‘retire’ – especially when it comes to clean technology. Let’s examine this point a bit closer by comparing a consumer app with a new type of battery technology.
Software apps 📱
Once you have an idea, the ‘technology risk’ of a software product is rather straight forward to retire. Take five guys & gals, give them a few computers, a few million dollars, and some server space – and I promise you they will be able to make a functioning app. Now… whether or not that app or idea will take off is a whole separate question, and frankly carries a lot of risk – but that risk is more of a binary (1/0) vs. an expensive endeavor to test.
New battery technology 🔋
Now… let’s take a new battery technology, say the recent ESS long duration storage flow battery that announced a SPAC on Friday (more on SPACs here). The market risk here is relatively confined – there is a clear need for battery storage in a low carbon grid, and while other competitors could come in and steal market share, you should have a pretty clear idea of the overall opportunity and how you stack up to your peers. The technology risk is where it gets EXPENSIVE. Scaling a new ‘hard-tech’ or physical technology can often take >$100Mn, easy. Moreover, first-of-a-kind facilities that compete with incumbent technologies can easily approach $1Bn.
That’s a big check size for any investor to stomach. This means it is often much easier to write check-after-check to new software start-ups and leave the clean technology investment to governments and more impact-oriented capital sources. A sad fact for technologies that are so badly needed in today’s day and age.
So… what can help fix this ecosystem?
There must be some better solution right? If there is so much appetite for sustainable investing of late, why can’t we solve some of these hurdles?
As I often say, I promise I don’t have all the answers — but here are three ideas to get the ball rolling:
📈 Securitization of clean tech investing
One of the challenges of investing in clean technologies as mentioned above is the capital required to prove the technical risk. This means unless you have endless funds, you are likely investing in one or two technologies that might work — as opposed to investing in the entire bucket of “long duration storage” technologies that should work.
One concept floated recently is the securitization or financial bucketing of similar clean tech start-ups. Essentially, this means instead of betting on just one horse, I could bet on a bucket of 10 horses going after the same trophy, that would inherently lower my risk.
Now any system like this would need to be well thought out — how do you bucket similar technologies that are at different development stages, in different geographies, and potentially have different technical approaches2… all without hampering competitive advantages!
To start, a regulatory development framework could help here…
🏛️ Consolidated regulatory development framework
Building on the above… the question emerges of how we bucket clean tech start-ups? How do we take 100s if not 1000s of different technologies at different stages and provide enough structure, transparency, and accountability for an investor to be interested?
To answer this question, let’s look to the pharmaceutical market:
While businesses often cringe at regulation, you could argue that the regulation provided by the FDA in phase 1/2/3 drug trials has been critical in enabling the development of life saving medicines. Without a structured regulatory approval process, consumers would struggle to trust the efficacy and safety of medications offered while investors would struggle to invest in progressively larger and riskier patient trials3.
A similar approach for clean technologies could be tied to technology readiness levels (TRL). If a system of independent technology and operational vetting could be managed effectively by say, the Department of Energy (DOE), this additional regulatory intervention could work to increase interest in clean technology investing rather than detract from market development.
This is no small administrative and technical ask… but a boy can dream right?
🗹 Recognizing the value of carbon removal
Last but not least — valuing carbon reduction like it deserves!
One of the key developments that enabled solar and wind to become cost competitive was the 20-year power purchase agreement (PPA). Why? Because cleantech investments can often be CAPEX heavy — this means that low-cost debt financing for the upfront investment is critical. The PPA construct gave loan providers enough security to write 2-3% interest debt vs. 7-9% interest debt — driving a ~30% cost decline on the levelized cost of energy.
This exact financing mechanism is badly needed for carbon removal — lets call it a Carbon Removal Agreement (CRA). The catch? Unlike the electrons from a solar farm, the absence of carbon does not provide immediate economic value like electricity does. This is where government intervention needs to meet the private markets and acknowledge the long-term costs, and thus value, of carbon removal.
If we’re able to cobble together some semblance of the above, alongside existing early-stage cleantech investors, government grants & incentives, and corporate commitments… we might just get there!
But don’t be fooled — this is still a serious uphill battle. Pragmatic optimism at its finest! Until next time…
Yes, yes I know. Uber is not wildly profitable (yet), but it is a great example of a somewhat crazy idea that turned into a seemingly ubiquitous business model.
Not to belabor the point, but this regulatory framework is seriously critical for investors. You take one long, expensive, opaque, daunting process… and break it up into digestible, transparent pieces that have multiple known entry and exit points for investors. HUGE!