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Size matters: The struggle between scale, manufacturing, and technology
Learning from the past and delivering on the promises of cleantech 2.0
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A recurring theme in my Climate Musings is my pragmatically optimistic perspective of the world. While this lens is influenced by a multitude of factors, it is fair to say that the optimism is majority-dependent on the promise of future technologies.
While advances in solar, wind, and lithium-ion batteries have been inspiring and served as a beachhead for the globe’s decarbonization journey, these technologies can only address a portion of the globe’s footprint (e.g., power sector, road transport).
This leaves me wondering how we address the remaining emissions and even go net-negative. Enter, wave 2 clean technologies – or the ~30-50% of decarbonization technologies still in R&D or pilot stages with their sights set on commercialization.
What do I mean by “Wave 2”
When I say “wave 2”, I’m generally referencing the technologies needed to decarbonize heavy industry, liquid-fuel dependent transportation (e.g., aviation, marine), and the sectors that are inherently hard-to-decarbonize (e.g., cement). This includes hydrogen, carbon capture, long duration storage, bio-based plastics / fuels, and more.
All of these techs have different technical, market, and regulatory challenges… the common thread in each is a need to deliver cost reductions as large as 5-10x from today.
This may sound daunting. Fortunately, the wave 1 technologies of solar, wind, and LiB conquered this challenge over the past decade or so. By leveraging scale, manufacturing, and technology advances, wave 1 technologies were able to deliver the cost reductions needed to be relevant.
Wave 2 technologies face these same difficult, but surmountable, challenges. However, the role the of each cost reduction lever is not straightforward. The best technology doesn’t always win… and size does indeed matter.
Cost drivers and reduction levers, explained.
Before going deeper, let’s make a quick pit stop to set the foundation for understanding both cost drivers and cost reduction levers, applied to clean tech.
Cost drivers: Each clean tech is balancing the following cost drivers…
CAPEX: Capital expenses, or the physical infrastructure required to get a process or technology started (think: solar panels, wind towers, and turbines). CAPEX is a one-time cost, so generally the bigger you go, the smaller share it takes of the overall process costs. This is why chemical plants, refineries, nuclear plants, etc. are billion-dollar projects vs. million-dollar investments.
OPEX: Operational expenses, or recurring costs. In this bucket you’ve got things like electricity, steam, labor, maintenance, and more. OPEX can see some benefits of scale and process improvements, but it generally has more “variable” components that don’t scale as well as one-time CAPEX might.
Feedstock: the inputs or raw materials needed for any process to function (think: natural gas, corn, lithium, or for renewables… free air and sun!) The rule of thumb is that an existing process can never get cheaper than the cost of its feedstock, so the only lever here is technology advances.
Cost reduction levers: Now that we have cost drivers, let’s see how we reduce cost…
Scale: when we discuss cost, what matters in the end is a “per-unit” cost. So not the total investment, but what that means for e.g., the cost of gasoline on a $/gallon basis. Here, size matters. Specifically, the larger you build, the lower the impact of one-time / upfront costs like CAPEX. This is why bigger is better, as long as you don’t get “too big” and result in construction cost overruns and additional project complexity.
Manufacturing: manufacturing scale or “learning” is similar to project-specific scale, but earlier in the value chain. Technologies that are able to design their core hardware as modular, bite-sized chunks (e.g., solar panels) instead of relying on large-scale, bespoke construction for each individual project are able to access the benefits of scale in manufacturing which then compound as they roll into the total project CAPEX. Typically, doubling the manufacturing base results in a "learned" 20% unit cost reduction.
Technology: Perhaps the most straightforward cost reduction lever to grasp: fundamentally better technology drives down costs. This often comes in the form of efficiency — for example, solar panels that convert 20% of the sun’s energy vs. 10% — but can also come through simpler or lower cost process requirements. (e.g., battery chemistry)
Bring together the cost drivers and cost reduction levers and you get a riveting, multi-dimensional puzzle for the future of clean tech and wave 2 technologies. Let’s go!
So… what can Wave 1 teach us?
As an engineer at-heart, I always thought that technology, and technology alone, won the day. So when I heard that silicone solar cells were only ~10% efficient, and there was this exciting new technology called perovskites that was >30% efficient, I thought for sure we’d be living in a perovskite future. Same goes for batteries.
Only when I entered the business world did I appreciate the importance of scale, manufacturing, and commercial readiness and operability. Allow me to explain…
Solar has seen a >10x cost decline in the last decade or so. Have the panels gotten 10x more efficient? Certainly not. Maybe ~50% more efficient, but the majority of that cost decline has come from massive manufacturing scale in China and Southeast Asia. In turn, these cost declines enabled larger and larger projects, which delivered additional benefits of economies of scale. A comprehensive study of cost declines in the solar industry proved this exact point — once the technology was ready, >50% of all cost declines came from economies of scale and learning.
The same story applies for LiB, which already have or will soon reach cost levels that make EVs cheaper than gas vehicles. Here, the car or overall battery pack (“scale”) is fundamentally limited by the size of the car. Instead, the unit battery packs have gotten a lot cheaper – again through manufacturing learning. Technology has and will come into play (e.g., lower cobalt cells, new chemistries) opening up more abundant raw materials and deliver higher energy densities… but the initial unlock was learning and scale in manufacturing rather than technology.
So… what’s the lesson? The best tech doesn’t always win. Commercial readiness, simplicity, repeatability, predictability, and availability matter… A LOT.
Enter, Wave 2
So how does this all matter for wave 2? The answer varies, so let’s go case-by-case:
Most forecasters believe that “green” hydrogen, or renewable H2 electrolysis will win the day. While there are several other exciting H2 approaches (e.g., methane pyrolysis, photocatalysts), the hydrogen industry has been focusing heavily on both scale and learning by developing Gigawatt-scale projects that are reliant on mass manufacturing of electrolyzers and fuel cells. There remain some open technology questions (e.g., which type of electrolyzer) but this wave 2 tech is starting to hit an inflection point.
Bio-based fuels & materials
For low-carbon liquid fuels and low-carbon materials like biofuels and bioplastics, the future is all a game of scale. Why? These technologies are essentially a feedstock-evolution of the existing oil and chemicals industries, using wood or agriculture residues rather than oil as an input. This means delivering a comparable project scale to the incumbent industries today is what matters for delivering cost-competitive goods… and that’s exactly what the major players are focusing on. (SPACs!)
Long duration storage
Longer-duration storage technologies (e.g., flow batteries, unconventional pumped storage) all promise low-marginal costs of adding more and more “hours” of storage1. The interesting question here is if these technologies can enter the commercial-scale regime before lithium-ion batteries get even cheaper than they already are. I, for one, hope they do – but as we’ve learned, the best or “right” tech doesn’t always win.
The story here is really yet to be written, but over the next few years I expect a battle of technologies (e.g., solid sorbents, liquid solvents, electrochemical approaches), each vying to reach an “MVP” that can quickly leverage scale and learning to build an enduring competitive advantage.
Takeaways for innovators and investors
Now… I know I hit you with a lot this week, so let’s simplify and summarize some “tips & tricks” for the innovators and technology investors among the group.
Technology readiness: If you are a wave 2 clean technology looking to make your mark, remember to learn from the past. You can’t rest on your laurels as “the best tech” or the “right answer”. If you can’t reach commercial readiness and benefit from scale, you will struggle – full stop.
Manufacturing & learning: Now, even better, if you can get to a small-repeatable unit that can be massively scaled through the manufacturing supply chain – that’s the holy grail. Solar and lithium-ion have shown the way, so think about how you can break your system down into modular components and manufacture them through a repeatable, scalable process.
Accessing scale: Not everyone can break there unit down into modules, so if you can’t, find a way to go big in an efficient manner. Going big isn’t easy and requires large amounts of financing, so don’t forget that part and think about how to access low-cost debt (e.g., 3%) or an “as a service” model that won’t burden your customers who are seeking to deploy.
Like reading a juicy murder-mystery novel, I’ll be on the edge of my seat to see how the story gets written for each of the Wave 2 technologies. In the meantime, I’ll be crossing my fingers and saying my prayers that the story will get written as quickly and efficiently as possible – society badly needs it.
Thanks for reading as always. Until next time…
Long duration storage becomes more and more important for a grid with increasing levels of intermittent renewables — calling for storage durations around 8-12 hours (rather than more typical 1-2 hour duration projects today)