Why ESG is not the same as (and can be harmful to) sustainability

Posted by Deanna on May 26, 2022

ESG is often brought up in the same context as sustainability (and climate and energy transition). In many cases, it’s use interchangeably with sustainability to refer to an organization's desire to “go green.” Take for example these recent articles about ESG:

Which almost all exclusively refer to the climate movement. These aren’t necessarily wrong. Many aspects of ESG do overlap with transition or sustainability strategy. It’s often said that ESG is really “big E, little S and G,” which is to say that, out of the three letters of ESG, “E,” or environmental, is often seen and received as the most important.

Using ESG almost synonymously with energy transition or sustainability does one of two things though. 1) It does a disservice to the other aspects of ESG that are not climate-focused and 2) It can actually be hurtful to growth-oriented sustainability initiatives.

#1 is a little more obvious than #2. When the emphasis for ESG is placed so heavily on climate, and in particular emissions, the company can under-recognize efforts that have gone into other initiatives. Things like DEI, responsible labor practices, and business ethics that can get “underfunded” internally with a warped definition of ESG, which can potentially minimize the influence of the company on human relationships and social systems at times where it can be immediately impactful. ESG has to be recognized as a broad umbrella.

(SASB does this well. They’ve identified 26 areas that fall under ESG, of which 15 have no direct relation to the “E” in ESG.)

#2 is what I’ve come to realize over time – and it’s something that I don’t think is immediately obvious.

ESG’s intended purpose is to identify and address the environmental, social, governance issues that matter to a company. The keyword here is matter. In practice today, matter means what gets investors to put more money forward. Matter is what’s relevant to financial performance. Matter is “what does the company do that is different from other companies and raises its equity valuation.”

In other words, ESG is fundamentally a benchmarking framework. It’s used in practice to identify companies that stand out relative to other companies. And it’s used in this way by investors in particular. Which is why the questions that get asked over and over again in ESG circles are “why does ESG matter to financial performance?” “How is this going to make me more money?”

(To put SASB in the spotlight again, this is exactly why they have materiality calculators to determine which of the 26 areas of ESG actually matter for enterprise value across different industries.)

This can undermine true sustainability in leading a company to always look at their neighbor for guidance on what to do and to only focus on things that their investors consider linked to financial return, a mindset that tends to lead companies to take the most conservative path towards sustainability.

A good analogy is in school. The goal of school is to learn (or learn how to learn), but when a student focuses too much on getting good grades (“ESG score”) to get a good job or go to a good college (“financial return”) vs. actually learning (“being sustainable”), the incentive might be for the student to take easier classes or to just do enough to outcompete her fellow students. A parent (the “investor”) might say “why in the world are you taking that class? How is that going to get you a job?” Which is exactly the kind of advice that, while practical, gets in the way of true scholarship. And leads to kids not taking enough academic risks for learning’s sake. (And leads those same kids to take investment banking jobs down the line 😊)

Another way of putting it is that thinking that ESG is the same as sustainability disincentivizes companies to be creative, aggressive, and risk-taking in putting forward new sustainability growth initiatives. If all you care about is the measurement, you’re more likely to stick to what’s being measured.

Don’t get me wrong…ESG is still very important. It (in theory) establishes a fair and objective baseline across companies and industries. It allows the laggards to recognize that they are laggards and take the first step to catching up. It’s a requirement for being a good company. And establishing ESG standards and practices is critically important for catalyzing industry-wide movements forward in sustainability and governance.

But I think it’s wrong to mistake a company’s ESG strategy for sustainability strategy. Every company needs both. ESG can measure a company’s position vs. peers and allow a company to calibrate itself to accept industry best practices. Sustainability strategy will probably overlap in many ways but should always take things a step forward in ways that ESG cannot as a benchmarking tool. Every company has the opportunity to create differentiated, creative sustainability strategy in areas that are not captured by ESG.

In short, get good grades, but don’t forget to learn as well.

An example of what I mean using a fictional lemonade company:

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Future hydrogen uses and demand

Posted by Deanna on May 19, 2022

Now having discussed hydrogen production and logistics, the last piece of the puzzle is….hydrogen uses and demand!

Right now the hydrogen use chart is dominated heavily by industrial offtake – out of the combined ~75 Mt of pure hydrogen in the market in 2020, 37Mt was used for refining, 33 Mt for ammonia production, and the remaining 5 Mt for reducing iron for steel production. Including hydrogen in syngas adds another 15-20 Mt to the total, most of which is used in methanol production.

The future of the market is much more diversified…and much harder to predict. 2050 forecasts swing wildly depending on assumptions (e.g. BNEF’s Gray scenario predicts 190 Mt of hydrogen vs. 1,130 Mt in their Green scenario), but most seem to assume more than 500 Mt of hydrogen demand is necessary for a successful transition.

For simplicity purposes, I’ve averaged three sources (BNEF Green, IEA Net Zero by 2050, and Hydrogen Council’s 2050 forecast), which results in ~793 Mt of hydrogen demand. 75% of this demand comes from new uses: Power (30%), Transport (23%), and Heavy Industry (21%). The remaining quarter is made up of hydrogen offtake that largely exist in some form today (ammonia: 6%, chemicals: 9%, refining: 4%) in addition to building heat demand (7%).

(Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen use methods from various companies):

  • Power is probably the most controversial use of hydrogen because of traditional, higher efficiency storage options like batteries or hydropower. Roundtrip efficiency of storing electricity in the form of hydrogen ranges from 18-46%, compared to 60-90% of most other forms of storage. Nonetheless, intermittency remains a key issue in the deployment of renewables and in some cases (when factoring in supply chain constraints, unfavorable geography, weight limitations, charge and discharge time required, need for off grid fuel, and scalability), it may make more financial and practical sense to go with a hydrogen fuel cell system.
    • Most of the innovation in this area is centered around developing and commercializing better fuel cells. Like in the electrolyzer space, there are different chemistries for fuel cells, with most companies specializing in one or two types (with some of the same companies working on both electrolyzers and fuel cells of the same type). Some of the more popular ones include solid oxide fuel cells (Elcogen) and PEM fuel cells (Loop), which are generally more commercialized at scale than their electrolysis counterparts. Lux research gives a great overview of stationary fuel cells here.
    • Some hydrogen storage options don’t use fuel cells. EnerVenue, for example, is deploying nickel-hydrogen batteries for utility scale storage.
  • Transport is the second largest future use of hydrogen and one that seems to have the greatest number of startups working on new solutions. Larger auto (and forklift) makers like Toyota are also eyeing hydrogen as a clean transport solution. Due to its low gravimetric energy density, hydrogen is seen as a more favorable solution for heavier vehicles – trucks and buses – and transport that is weight sensitive – shipping, aviation, and freight. Some examples of new hydrogen transport include:
    • Riversimple’s Rasa, a two seater hydrogen FCEV offered on a subscription basis
    • Quantron’s  Q-Trucks or Q-Buses, FCEV light-duty trucks and city buses
    • Hydra’s vehicle retrofits of heavy-duty trucks
  • Heavy industry is the third largest source of future hydrogen demand and possibly the most impactful when considering potential for near-term emissions reduction. Concrete, steel, and aluminum contribute over 7 Gt, ~44% of which are direct heating-related. Replacing these heating sources with hydrogen fuel or a mix of hydrogen fuel with other low carbon fuels can be a way to reduce a lot of emissions in one fell swoop. An additional 32% of emissions comes from electricity for things like electric arc furnaces (steel) or smelting (aluminum), which can also be decarbonized through hydrogen-fueled stationary power. The remaining quarter of emissions are process-related. Hydrogen has the most potential to replace natural gas as a reducing agent in the steel process. So in practice:
    • CEMEX has been injecting hydrogen into its fuel mix for its kilns since 2019
    • H2Green Steel is combining large scale electrolyzers to produce hydrogen, hydrogen as a reducing agent for producing direct reduced iron (DRI) from iron ore, and electric arc furnaces (instead of blast furnaces) to produce green steel
    • Rio Tinto along with the Australian Renewable Energy Agency (ARENA) is testing using green hydrogen to replace natural gas as a source of heat for the calcination of bauxite to alumina
  • Buildings is another target for clean heating. Gas companies like SoCalGas are already testing up to 20% blend of hydrogen into the gas distribution grid (as most appliances have been designed to accommodate that amount of hydrogen already). Other companies like Modern Electron are developing new hydrogen-based heating and electric systems for buildings
  • Legacy hydrogen-consuming sectors like ammonia, refining, and chemicals will also move to using green hydrogen as both a feedstock and heating source.
    • Companies like Hydrofuel are commercializing green ammonia production from green hydrogen
    • Refineries have long used hydrogen in desulfurizing oil and gas products, cracking large products into smaller ones, and hydrogenating new products. Shell announced that they would collocate a green hydrogen project next to their refinery in Germany in an effort to lower the CI of the fuels produced nearby
    • Chemicals is probably one of the trickier sectors to decarbonize with hydrogen due to many reactions’ sensitivities to increased hydrogen blending and/or any temperature changes that occur when using a new heating source. Methanol is perhaps lower hanging fruit because of its use of existing syngas. Companies like Carbon Recycling International are replacing this syngas with recycled CO2 and green hydrogen. Other companies like Ineratec (synthetic liquid fuels) and Krajete (green methane) are producing new sustainable fuels and need green hydrogen as a feedstock.

To summarize, the future of hydrogen is massively EXCITING! It’s hard not to believe in a robust hydrogen market when faced with the different products under development today that will depend on cleaner sources of hydrogen in the future.


Hydrogen logistics Pt 2: future methods, costs, and a guess at the amount stored tomorrow

Posted by Deanna on May 12, 2022

Last week I explored the current costs and methods used for hydrogen logistics today. This week will be about the future of this part of the value chain: what new methods are in the process of being developed and commercialized?

Innovation in storage seems to be bifurcated between 1) improvements to current physical methods and 2) developing new materials or molecules to capture and/or transform the hydrogen.  Most startups and research labs seem to be working on #2, which is perhaps a symptom of the fact that there are an incredible number of materials to explore for this application. In fact, the DOE hosts a great database that lists out 250+ hydrogen-storing materials that researchers have discovered.

I won’t come even close to going into all of those methods, but hopefully the below gives a high level overview of what methods are actually being worked on by startups in the ecosystem.

(Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen storage methods from various startups):

  • Improving current physical methods
    • Pressure vessels for gaseous storage of hydrogen still have room to advance. For example, Steelhead Composites creates type IV vessels, which are lined carbon-fiber wrapped vessels that are lighter, more durable, and can withstand greater pressures than traditional steel containers. Other vessels can be combined with a metal hydride to lower the needs of compression while increasing capacity (Harnyss)
    • Not exactly a storage method, but upgraded compression technology like electrochemical compression developed by HyET can help increase availability and reduce the implementation cost of high-pressure storage
    • Liquid hydrogen storage is also improving. IC Technologies in Norway has been working on new membrane tanks for large volume cryogenic liquid storage of hydrogen
    • Improving onboard storage systems for hydrogen FCEVs is also another target of innovation. Verne’s system claims to offer cheaper, denser, safer, and more reliable tanks for trucking and shipping through cryo-compression and upgraded control systems
  • Developing new materials-based methods
    • New liquid carriers that allow transportation of hydrogen as a liquid fuel but without the expense of liquefication and/or cryogenic cooling. Liquid carriers most commonly mean ammonia (Hydrofuel / Kontak) and liquid organic hydrogen carriers (Hydrogenious), though there are novel inorganic liquid carriers like the silicon-based liquid carrier that HySiLabs is working on
    • Metal and chemical hydrides like with sodium borohydride (H2Fuel Systems), aluminum hydride (FuelX), and magnesium hydride (H2Store / Hydrexia) have been pointed to as some of the most promising materials-based storage methods due to the high availability and low expense of the metals used. The limiting factor has been the energy needed and slow kinetics of the dehydrogenation reactions (“unpacking”), which has prevented rapid scale up
    • Metal organic frameworks (MOFs) like those produced by Immaterial Labs can be used to adsorb hydrogen into the lattice at very high rates. MOFs do very well in terms of capacity and adsorption rates compared to competing methods but unfortunately usually have to operate in cryogenic temperatures, which drives up costs
    • Similar to MOFs, porous solids can be used to absorb hydrogen. It was difficult to find any companies working on carbon nanotubes or activated carbon, which have long been discussed in research. In a related vein, a company called Green Fortress Engineering is developing hydrogen storage via porous silicon

Distributed hydrogen production does somewhat belong in this section too. Having onsite production at demand points like fueling stations eliminates the need for any hydrogen transport. Companies like IVYS Energy are working on building these all-in-one fueling stations.

It’s also worth mentioning the prospect of shipping hydrogen. Maritime transport of hydrogen is still in its infancy. It will be interesting to see whether or not international shipping of hydrogen will be necessary given the widespread availability of hydrogen-bearing sources. There are also some efforts in recent years to test out actually producing (then shipping) hydrogen on ships.

In terms of costs, there aren’t great sources for the potential costs of transport in the future based on all of the methods described above. According to one study examining Germany by 2050, transport + logistics could get down to $0.30 - $1.60 / kg  vs. the ~$1.50 - $6.00 / kg range we determined last time for current methods. This study only looked at gas, liquid, and LOHC methods though.

Finally, I’ll just end on the size of the future market. Luckily, this was actually a bit easier to find than the size of the current market, thanks to the smart people at IEA. According to their Net Zero scenario, they believe storage needs could amount to ~50 Mt by 2050, which is just under 10% of the 500+ Mt of hydrogen that they believe will be needed for Net Zero. That is a lot of hydrogen to store, considering the current total hydrogen produced right now is ~70 Mt. But considering the number of new methods that are under development, I'm optimistic that we'll have plenty of economic storage by that point.


Hydrogen logistics Pt 1: current costs and (guessing) market size

Posted by Deanna on May 5, 2022

Last time we talked about hydrogen production. I thought it might make sense this week to do a dive into hydrogen transport, storage, and other logistics.

Since there’s a lot that’s not well covered on this subject, I'm dividing this into two parts. In part 1 today, I’m going to explore the current status of this market. Part 2 will lay out new technologies and developments.

The nice thing about the hydrogen logistics industry is that it very much exists today. There is already a functioning model of moving product around safely and at a certain scale.

Most hydrogen today is stored and transported via physical methods, either a) in gaseous form via pipeline and high-pressure vessels or b) in liquid form via cryogenic tanks. Materials-based methods like hydrides or liquid organic carriers also exist, but these are still being commercialized.

I had a hard time finding a breakdown of each storage/transport method (so if anyone has one, would love to see it), but from what I can gather, hydrogen is currently most frequently transported in gas form on tube trailers. Liquid hydrogen transport is limited to large volume, long haul applications where the expense of liquefaction and insulation + the boil off loss of the hydrogen can be covered by the scale and immediacy of the demand (markets usually 150+ km away where a few tons per haul can be used in a short time…space programs are often cited as an example). Pipelines exist but only cover a few hubs (e.g. US Gulf Coast and Northern Europe) and require consistently large amounts of product transported through the same route in order to justify the upfront capex.

Costs vary by technology, distance and amount of hydrogen carried, but typically for distances 500km or less:

  • Transport ranges between $0.50 / kg and $2.50 / kg (distance increases this rate and economics of scale decreases it)
  • Conversion (compressing or liquefying hydrogen for transport) adds $1.00 - $3.50 / kg (liquefaction is more expensive than compression)
  • Storage can also vary quite widely. Cavern storage is not widely available but can cost $0.20 / kg whereas storage in tanks can vary anywhere from $0.50 – $2.00 / kg depending on pressure rating, material used, size of vessel, and loss/boil off rate
  • Combined, transport, conversion, and storage can add on average $1.50 - $6.00 / kg

Note that the above still doesn’t include the cost of refueling stations if you are looking at the logistics cost for a distributed fueling network. Adding in that cost, which is ~$7/kg, is not exactly straight forward since hydrogen can also be produced on-site at these stations, which eliminates many of the previous logistical costs.   

It might also be helpful to think about how these costs break down by method. The below shows what I estimated for total transport, conversion, and storage costs in $/kg for each of gas trucking, liquid trucking, and gas pipeline:

Generally, for deliveries <500T annually, tube trailers are the most economic option. For bigger deliveries, pipe wins out. However, since there aren't enough pipelines to be able to service all of the areas in which large scale hydrogen is needed, liquid hydrogen trucking is often the next most economic option.

These numbers are imprecise and don't take into account situational differences like the availability and accessibility of equipment, lower contract pricing, regional variations in power costs, consumer preference, etc. My understanding is that right now, gas, liquid, and pipe are all used across the matrix despite the price differences shown here.

I also tried to figure out exactly how much hydrogen is stored and transported today.

This is very difficult to find, unlike the widely reported 70 MT number that represents hydrogen produced. I guess the reason why this estimate is so obscure (other than the fact that maybe people don’t care enough about the logistics of hydrogen as much as the production of it) is that most of the hydrogen today is transported and stored by largely same the few giants that are producing the hydrogen. Since the hydrogen is moving around a few internal company ecosystems, perhaps there hasn’t been good data (that’s not proprietary) gathered around this. I’m hoping once there are more third parties in the logistics ecosystem, that will change.

Anyway, the best estimate I could come up with is 4 - 5 Mt. That’s dubiously anchored on several reports that seem to estimate that the hydrogen storage market at ~$14B right now and an assumed cost (loosely based on the above averages) of $3 - 3.75 / kg. That implies that less than 7% of current hydrogen production is stored.

Next time I’ll look into the future of this market. Thanks to the below for offering data points on cost:


17 ways to produce hydrogen sustainably

Posted by Deanna on April 28, 2022

Hi everyone – I’m sorry for falling off the map after that last post. I have been a bit busy taking care of some things, including physically moving to Denver. The move was a little unplanned but thoroughly welcomed. One of my goals this year was to explore new networks and Denver will be a great hub to do that from. I’ve been incredibly impressed with the Denver tech community + the many exciting things happening around energy transition and climatetech in this city. The easy flights to Houston are also a big plus!

You might have also seen that I was made an advisor to Boundless Capital Partners, a Denver-based investment bank focused on energy infrastructure and technology. I’ll continue to “do my own thing” but this gives me chance to support a stellar team taking a differentiated approach to investment banking while also staying adjacent to some relevant dealflow. Give me a shout if you’d like to learn more or to generally catch up.

Today let’s talk hydrogen production.

A lot of you might know that the reason why I am long hydrogen, despite the logistical shortcomings of the current network, is the many ways that hydrogen is able to be produced from a variety of sources. Hydrogen is the simplest molecule in the universe, which lends itself to be a product or by-product of a variety of different pathways.

See below for some of the different ways I know of to produce low-emissions hydrogen (Note that these are not vetted or sorted. This is just a list I compiled of advertised hydrogen production methods from various companies, mostly startups.):

  1. Biomass gasification + heat + water-gas shift + CCUS | Mote
  2. Biomass -> biofuel steam reforming + heat + water-gas shift + CCUS | GTI
  3. Biomass / waste + renewable electricity + microbial electrolyzer | Electro-Active Technologies
  4. Coal gasification + heat + water-gas shift + CCUS | GE
  5. Modular steam methane reformation + heat + water-gas shift + CCUS and/or RNG | Bayotech
  6. Conventional SMR, partial oxidation or autothermal reforming of methane + heat + water-gas shift + CCUS and/or RNG | Air Liquide
  7. Methane pyrolysis + renewable electricity + possibly RNG | Monolith Materials
  8. In situ partial oxidation of hydrocarbons + water-gas shift + CCUS | Proton Energy
  9. In situ oil + fermentation by microbes + CCUS | Cemvita
  10. Water + renewable electricity + PEM electrolyzer | Hystar
  11. Water + renewable electricity + AEM electrolyzer | Versogen
  12. Water + renewable electricity + alkaline electrolyzer | Battolyser
  13. Water + advanced SMR + high temperature electrolyzer | NuScale
  14. Water + renewable heat + solid oxide electrolyzer | Utility Global
  15. Water + photons + photoelectrochemical reactor | Syzygy
  16. Water + renewable electricity + mine tailings + electrolyzer + CCUS | Planetary Hydrogen
  17. Water + quasar wave reactor | Q Hydrogen

*Note: The list could be made even more precise through differentiating between SMR, electrolysis, and pyrolysis by type of catalyst used. For example, there is a sub-category of plasma-based catalysts that are used in pyrolysis.

For a more in-depth explanation of some of these, the DOE is a great resource.

A few observations on the list:

  1. Most new methods rely on water as a primary feedstock. Not many companies that I could find are working on new implementation of gasification or reformation from hydrocarbon sources.

  2. Electrolysis as a broad category is filled with players ranging from large public companies to small startups. The larger companies are focused more on the more mature technologies, which, for electrolysis is alkaline and, to a lesser extent, PEM. Startups tend to be working more on a mix of PEM, AEM, and solid oxide.

  3. There is a lot of competition in electrolysis technology. Electrolytic methods tend to be evaluated based on:
    • Cost and availability of secondary inputs (heat or electricity or both, catalysts, membrane, electrolyte)
    • Ability to output pressurized hydrogen
    • Current density (which, to my understanding, is proportional to power density and thus hydrogen generation rate, so generally speaking, higher current density = larger hydrogen generation in the same amount of area)
    • Partial load range (which is wider for PEM and solid oxide than for alkaline and AEM)
    • Long term stability and durability of the system (alkaline tends to be better tested in this arena)
    • Ability to scale (modularity and absolute size able to be achieved)
    • Overall efficiency (electrolysis usually lands at ~60-80%)

      It’s my understanding that no one electrolytic method wins in all or even the majority of these variables, which makes “choosing a winner” in this arena a complex optimization problem. With more complexity in choice comes more competition for the same business. The higher competition is somewhat compensated by the larger number of players interested in electrolytic production of hydrogen vs. other methods.

  4. An emerging category of hydrogen production is biohydrogen – or the production of hydrogen via biological methods. This can range from producing hydrogen with algae or using a microbial-based reactor (like microbial electrolysis). I had a difficult time finding startups that were working on commercializing this technology. It seems that most of the development in this area is being done by universities. With the amount of capital going into microbiology, and especially microbiology in energy transition (currently focused on developing synthetic oils and chemicals), we should see biotech startups emerging focused on producing hydrogen as well.

Hope you enjoyed today’s roundup. Would love any feedback or comments!


100+ questions across energy transition

Posted by Deanna on February 18, 2022

As many of you know, this year is the year of learning for me…and I had to think: what better way to start off this journey than posing some questions I’d like answered?

Deciding Scope
I struggled a bit before writing this post to decide what part of this broader climatetech ecosystem I’d like to cover. I have an energy tech background – which means I looked at technologies that influence what we now consider the energy industry. However, that set of technologies is rapidly changing. Technologies like soil-based sequestration, chemicals manufacturing, waste recycling and WTE, hydrogen jets, HVAC, insulation, etc. have moved into the “don’t care” to “care” bucket very rapidly for traditional energy players (meaning utilities + oil and gas companies). And that’s because carbon is carbon is carbon. What happens downchain or upchain matters…and is increasingly the responsibility of the parties across the whole chain. Selling product into market or buying product from a vendor is no longer a transaction void of responsibility. The energy industry should care where its molecules and electrons are going and how it can help get those molecules and electrons into better places, in addition to producing better molecules and electrons in the first place.

Visualizing FEST
I think Bill Gates does a great job in How to Avoid a Climate Disaster breaking down what we do from an energy usage / emissions perspective. He separates it into making things, plugging in, growing things, getting around, and keeping warm and cool, or in other words:

  • Food and ag (19%)
  • Electricity & heating / cooling (34%)
  • Stuff (31%)
  • Travel and Transport (16%)

I call this the FEST framework. Like a FESTival but for seven billion people. One that needs food, beds, ways to get around, sanitation, a clean up crew, and for everyone to be happy and healthy. But one that also only has a limited amount of time, a rapidly growing number of “attendees,” and a planning committee with zero experience doing this well. Sound familiar?

Which leads to the reason why I like this framework so much. What it does so well is allow us to break down how our everyday activities are affected by what technologies we buy, support, develop, invest in, etc. Other breakdowns separate by energy, industry, agriculture, and other abstract categories that don’t mean much to me immediately…I get especially confused with “Industry.” What the heck does that cover? But I know exactly why I care about access to food, electricity, stuff, and travel. With FEST, the impact of tech on living is clear.

There are of course limitations to breaking things down in this way. The most apparent is that the supply chains are still not clear. For example:

The categories get especially muddling when products with complex supply chains like cars or semiconductors are considered. But overall, FEST is a manageable way to understand and chart emissions impact from various sectors. And sets itself up nicely for a FESTivus-themed conference later this year (if anyone has any desire to fund such a conference, please let me know. I have lots of ideas but no money).

Onto the thoughts and questions...

Food and Ag (19% emissions, 9.7 Gt)

This is admittedly the category I’m least versed in. I’m a huge foodie and consider eating one of my hobbies. But what I’ve come to appreciate only recently is the power of industrialism that has led to the ability to mass-produce almost anything edible, even things as niche as pumpkin spice cookie butter and pickle-flavored popcorn. In the land of excess, we enjoy only spending 6% of our income on food, a fraction of what other (even developed) nations spend. The hidden cost of course is that our emissions footprint is a lot higher as well.

It seems that the key levers to reducing emissions in this category are:

1. Improving meat production efficiency (shortening distance & # of steps between production and the consumer, replacing livestock with meat alternatives, cleaning up excess waste in meat production)

  • How efficient are current anaerobic digesters (what benchmarks are used)?
  • What technological improvements are in the works for improving digester efficiency?
  • What are the current leakage rates of NO2, biogas, methane and other emissions from farm equipment and systems?
  • How do we incentivize smaller farms to implement good waste management systems?
  • How much of emissions from meat production is from distance to consumer?
  • How is veganism / vegetarianism around the world and how do the adoption trends correspond to livestock emissions?
  • How is veganism / vegetarianism distributed across age groups?
  • How does consumer labeling of emissions impact affect consumer behavior around food purchases?

2. Improving fertilizers and their usage (using less excess fertilizer via smart fertilizer systems & soil sensing, creating and using new fertilizers that can actually fix nitrogen or release nitrogen gradually, creating plants / “climate crops” that can capture excess fertilizer and/or excess emissions)

  • What kinds of “climate crops” exist today? What prevents them from scaling in the market?
  • What kinds of smart fertilizer systems are in use today and how prevalent are they? How much more expensive do they make the end crops?
  • How scalable are “climate crops” and will there be consumer appetite to pay for more carbon negative crops?
  • Are there naturally more carbon negative food products we can encourage consumer consumption of?
  • What is the average time to adoption of a new fertilizer? What testing and certification processes does a new fertilizer have to go through?
  • How are advances in microbiology influencing fertilizer production?
  • What is the rate of nitrogen fixation by new fertilizers and how much of an ultimate emissions impact would they be able to make at scale?
  • How much interest is there by fertilizer producers in sourcing clean ammonia and how much of a premium would they be willing to pay?

3. Reducing land usage (vertical farming / hydroponics, regen farming, reforestation to build land back up)

  • How much potential do nature-based carbon solution projects have to offset the land usage from our agricultural systems?
  • How much of a time lag is there between release and offset if both projects are started at the same time?
  • How much of farming will move towards urban environments with vertical farming?
  • How distributed will vertical farming be (households, neighborhoods, districts, etc.) and how will food purchasing behavior change with this shift?
  • What are the different flavors of soil restoration / regeneration and their relative impact?
  • How will climate change and unpredictable weather patterns affect fixed-site farming? Will there be a push towards more mobile farming practices?
  • How can the world better insure farmers against crop devastation due to climate change?
  • What mechanisms exist to incentivize regen farming practices?
  • How much of the market are regen farming offsets and how are they priced relative to other offsets?
Electricity & Heating/Cooling (34% emissions, 17.3 Gt)

Electricity and indoor climate control forms the backbone of much of the energy transition discussion. The trend towards mass electrification is a huge benefit for transition because it concentrates the points of potential emissions reduction to the supply side, which is much more controllable than the demand/consumer side. Imagine if we had little generators that powered our phones instead of plugging them into the wall…and imagine how much of a pain it would be to switch out each consumer’s generator for a more efficient generator every few years.

Instead, we have the electrical grid, which, outside of transmission and distribution losses, is a virtually emissions-less form of power delivery. This standardization of energy consumption has allowed us to focus our efforts on generation improvements and make huge improvements to the overall power footprint without massive consumer disruption (well, outside of the occasional power outage…).

It seems that the key levers to reducing emissions in this category are:

1. Improving power generation (making existing clean power sources like onshore solar or wind more efficient, lowering the cost curve for not yet commercial clean power sources like geothermal, offshore wind, nat gas + CCUS, etc.)

  • What new wind turbine technologies not yet at scale (HTS turbines, VAWT, counter-rotating blades, etc.) and how much land / resources can we save by accelerating scale up of these technologies?
  • What retrofit opportunities are available for both solar and wind farms for new technologies?
  • What recycling opportunities currently exist for solar and wind parts and at what cost?  
  • How much value can be captured by the secondary market for solar and wind parts?
  • What is the practical limit for deploying EGS at scale (e.g. how many wells can be drilled across what timeline, step up from supercritical fluid, etc.) and how does that compare to the current development timeline for solar and wind?
  • What retrofit opportunities exist for current oil and gas wells to transition to geothermal wells (e.g. transforming into closed loop)? And how quickly can this be deployed?
  • What are the current technological limitations for deploying ocean / wave energy at scale? How do costs at the theoretical level compare to offshore wind at the theoretical level?
  • How do the different forms of marine power generation (offshore wind, offshore solar, wave energy) compare in suitability for certain water regions and impact (measured by emissions + biodiversity impact)?
  • How much can CCUS turn existing thermal power generation clean?
  • What ongoing resources are needed to keep CCUS on thermal power gen (coal and nat gas) net negative or neutral carbon? How will the lifetime cost (both financial and environmental) of these resources compare to retirement and replacement by renewable energy sources (and both of their lifetime costs)?

2. Building grid dynamism and resiliency (optimizing the grid for more distributed, intermittent power sources + changing weather patterns, improving utility scale and long duration storage, upgrading transmission and distribution networks)

  • Where are the tightest bottlenecks created by lack of sufficient transmission / distribution for new power generation projects?
  • What upgrades are possible to accomplish with current transmission / distribution infrastructure and RoW?
  • How much new land is needed for new transmission / distribution assuming rapid deployment of conventional renewable energy?
  • What current hardware limitations are there for deploying grid optimization software?
  • How much of grid optimization will be done behind the meter vs. in front of the meter?
  • How do load forecasting models interact with weather forecasting models?
  • How do new development needs currently get forecasted and what types of models are industry standard?
  • How does storage need to upgrade with a continuously upgrading set of renewables assets?
  • How does the cost of deploying non-battery storage (like thermal, gravity, compressed air, and pumped hydro) compare when scalability is given time value (i.e. scaling faster is worth more from a “net zero by x” standpoint)?
  • How does the cost of new non-battery storage compare to non-battery storage retrofits compared to the forecasted cost of batteries?
  • How important will modularity be in deploying storage, especially in the face of a continuously changing energy generation picture?

3. Decentralizing energy to improve resiliency and access (developing and deploying microgrids, transforming building-level access to power, improving building energy efficiency via new cooling/heating and smart devices)

  • How will the value of real estate fluctuate with microgrid potential?
  • What new financial mechanisms can be used to incentivize the adoption of energy efficiency devices and improvements?
  • What new financial mechanisms can be used to incentivize connections between private microgrids and/or private clean energy assets?
  • How will the ownership of clean energy evolve between leaseholder and landlord as the differences in energy savings becomes more significant, especially in older properties?
  • How will consumer-to-consumer energy trading evolve and what is preventing mass deployment?
Stuff (31% emissions, 15.8 Gt)

“Stuff” is by far the most complicated category, as it encompasses manufacturing, construction, and production of everything we use in our day-to-day lives. This includes household goods, packaging, fuels, chemicals, clothes, furniture, vehicles, machines, electronics, houses, offices, bridges, roads, etc.

In terms of accounting for emissions, this category has three distinct sources of emissions: electricity* (22% of industrial energy use, ~34% of emissions or 5.2 Gt CO2e), heating (66% of industrial energy use, ~34% of emissions or 5.3 Gt CO2e), and feedstock (remaining 12% of industrial energy use, ~32% of emissions or 4.9 Gt CO2e). If you break that down by sector instead, iron & steel, cement, chemicals and fuels (including oil and gas), and mining make up ~65-72% of emissions. For those top “heavier” industries, heating makes up even more of the equation, 42% of emissions by some estimates.

Because of this concentration of emissions around electricity and heating, industrial decarbonization has been closely linked to new ways of producing electricity and heating in the “E” sector. We see this prominently in the emergent use of renewables in hydrogen production and “lighter” industries like paper and pulp.

There continue to be challenges in using intermittent renewables for heavier industries though. Industries like steel and cement require high amounts of continuous heat and need it reliably available in order to maintain process efficiency and reduce downtime. Because of this, the practical alternative energy sources for industry are more so dependent on the development of alternative fuels, hydrogen, and biomass.

The final third of emissions comes from feedstock and process – the emissions from using fossil fuels in an “imperfect” reaction (like how steam methane reforming produces a mixture of waste products that aren’t well managed) or from leakage in the system. Attaching CCS onto a flue gas stream with a dependable concentration and pressure of CO2 and implementing some good leakage detection/prevention practices can clean up existing systems. Replacing feedstock with something else is a tougher challenge, but one that may be the easier route for industries where CCS is not cost effective.

Which brings us to the final twist in the “stuff” category: the potential to be able to actually store or sequester carbon in things, creating useful objects from a harmful waste product + replacing an existing emissions positive manufacturing process with a neutral or negative one – two birds with one stone. CO2 is already being stored in the form of carbonates in cement, chemicals like ethanol, carbon black, and plastics.  Although elegant, the time and resources needed to scale up completely new manufacturing processes will mean that these solutions will face a harder pathway to capturing market than comparable retrofit solutions, unless there is a distinct financial advantage.

It seems that the key levers to reducing emissions in this category are:

1. Developing dense and reliable alternative sources of energy to provide industrial electricity and heating (co-locating renewable energy with industrial centers where it can be practically used, commercializing biomass, hydrogen, nuclear SMRs, and biofuel solutions for industrial energy)

  • How will energy startups and industrial companies partner to finance the colocation of technologies likes CCUS, hydrogen, etc. onto existing industrial sites?
  • Can industrial waste be used for on-site heating and how prevalent is this practice?
  • How much lead time is necessary to change out a blast furnace?
  • How much biomass is available to provide industrial heating and will the dependence on biomass or other non-traditional heating sources move industrial sites closer to these locations?
  • How do biomass, hydrogen, SMRs, and biofuel solutions for industrial heating compare from a cost, modularity, interchangeability, environmental impact, and scalability perspective?
  • What’s the proximity of industrial sites to grid energy and what bottlenecks exist to use electricity for industrial heating (or in high heat processes, is it the efficiency of electricity to heat itself)?
  • How much electricity is purchased vs. produced on-site for industrial operations and how much does this vary by product produced?
  • What is the frequency of plant downtime due to lack of electricity or heating and how much does this cost the operator?

2. Making process adjustments to reduce energy usage or capture emissions (replacing energy-intensive parts of the process like separations with lower energy versions, pursuing energy efficiency initiatives, implementing CCUS and good waste management / product handling practices to reduce unwanted leakage)

  • What incentives do industrial companies have to continuously improve energy usage?
  • How much can energy efficiency reduce the need for electricity in industry?
  • What possible alternative processes for products that require heavy heat (like iron / steel) can reduce the need for heating and energy altogether?
  • How much emissions reduction can we achieve by locating industrial production closer to demand centers?
  • Does it make more sense to move industrial production closer to energy sources?
  • What public and private financial mechanisms can give credit for lower-CI pathways to produce industrial products (like LCFS for fuels)?
  • How much of emissions is due to poor waste management across different industrial sectors?
  • How much of emissions is due to product / fuel leakage across different industrial sectors?
  • What is the definitive environmental impact of mining for additional clean energy components and what new extraction technologies can help alleviate some of this impact?
  • What is the potential emissions reduction associated with relocating more manufacturing and industrial production to first world countries?

3. Aggressively pursuing the use of “clean” feedstocks like CO2 or H2 in creating products and materials

  • How much can developing CO2 to value pathways drive up the value of carbon?
  • Are there enough products (now and under development) that utilize carbon black to drive CO2 pricing?
  • What breakevens do these future products require in order to scale?
  • What industrial processes could benefit from clean hydrogen (either liquid and gaseous)?
  • What chemicals depend on ethanol and methanol as feedstocks and how do certain products change in price with a green premium?
  • How much of a premium does the use of clean ethylene and other petchem feedstocks add to critical-to-life plastics?
  • What kinds of marketplaces can help facilitate more transparent feedstock selection and enable CI-aware pricing?

*It’s not clear to me how much of electricity here overlaps with the E in FEST and if we are double accounting by including it here as well. From what I can tell from Bill Gates’ numbers, it includes the electricity used in industry even though, at least in the US, the vast majority of manufacturing electricity is purchased. Please let me know if anyone has a definitive breakdown of this…

Travel & Transport (16% emissions, 8.2 Gt)

Travel and transport, as the most dependent category on oil and the most ostensibly emitting consumer-facing portion of the pie, has been at the crux of the energy transition debate since cleantech 1.0. Electric vehicles have come a long way from being an eccentric consumer choice to actually being the sexier transport option for most of the younger generation. And of course, with Tesla paving the way for mass production, the consensus is that transport disruption is almost inevitable. It’s not a matter of “if” but “when” and even the most stringent of forecasts have EVs taking more than 1/3 of EV sales by 2050.

Travel emissions can be divided into four main categories: passengers on the road (45-53% of emissions), freight on the road (25-29%), aviation (9-12%), and maritime (11%). EVs remain the dominant solution for passengers on the road, while a mixture of EVs and hydrogen FCEVs can cover road freight. Aviation and maritime each have a spectrum of solutions between electric, hydrogen / ammonia, and sustainable fuels.

I’m not a car geek…and I suspect I will never be a car geek. I drive a 14-year old Acura with a stuck passenger side window and side mirrors that refuse to adjust properly. But even I was excited to test drive a Tesla earlier last year. The constraining factor to purchasing one was (and still is) lack of charging infrastructure in my apartment. Which brings us to the root of the issue with road travel disruption: the infrastructure bottleneck.

Because of current charging times (a few hours to 20 minutes depending on charger type), charging infrastructure must go where consumers spend a significant portion of their time, which means more deployment to homes, offices, and grocery stores. Charging infra will be way more distributed than our current fueling network, with deployment dependent on individual building and business owners and their policies. There’s also just going to be a lot more of them. There’s an estimated 20 million chargers needed in the US by 2030 vs. est 640,000 today vs. est. 1.2 million gas pump connections. That’s a lot of installation, maintenance, and potential points of failure that I suspect will be a growing annoyance for EV owners. As anyone who has spent time with chargers knows, there’s wide variability between charger quality. It’s not uncommon to drive up to a supercharger to find that a few of the ports are non-functioning. We’ll solve that problem with quality control and better maintenance networks, but it’ll take time and experimentation.

Outside of EVs, hydrogen and sustainable fuels drive a large part of the technology conversation in this category.  Finding dense (either on a volumetric or gravimetric basis or both) sources of energy that can be easily stored and transported is especially critical for ships and planes. I’m very long hydrogen for two main reasons: 1) as the simplest molecule in the universe, hydrogen lends itself to being produced in dozens of ways from many different inputs and it’s only a matter of (short) time before clean hydrogen production becomes cost-effective and widespread 2) fixing the volumetric density issue will not take an unforeseeable technological breakthrough – many companies are already lowering the cost of liquefaction, new metal hydrides, and on-site production.

It seems that the key levers to reducing emissions in this category are:

1. Deploying charging infrastructure safely and effectively (developing new fast chargers, building better maintenance and monitoring systems around chargers, creating new incentive structures for building owners, optimizing load and charging schedules for charging networks and EV fleets)

  • How will decentralized charging affect consumer travel behavior?
  • What incentives will real estate and commercial business owners have to install charging stations?
  • How will charging stations get retrofit (or will they) with new charging technology?
  • How will the installation of charging stations affect the need and sizing of microgrids in the area?
  • Will chargers continue to be owned by building owners or will they get consolidated in the future?
  • What business models for charging infrastructure companies will be prominent 5 years from now (e.g. direct sales, charger financing, owner-operator)?
  • How can state and local codes get standardized to better implement charging infrastructure?
  • How will electricity trading between buildings affect the deployment of charging stations?
  • How will the need for charging stations require upgrades to electrical infrastructure within buildings?
  • How will fleet charging systems work in conjunction with charger networks to dynamically distribute electricity load?
  • How will service networks develop to effectively maintain charging infrastructure and how much of it will be handled and paid for by the building owner, charging network, or customers?

2. Creating energy dense alternatives for heavy freight, maritime, and aviation (producing cheap and clean hydrogen with logistics considered, developing neutral or negative sustainable aviation fuels)

  • What retrofit opportunities are there for older ships and planes?
  • What recycling opportunities are there for older ships and planes in first world countries?
  • How will the need for drop in fuels compete with the need for emissions-free fuel use (e.g. replacing engines with fuel cells)?
  • How will hydrogen production be optimally located to serve the needs of maritime, aviation, and heavy trucking?
  • How will the ability to move certain operations into smaller, electric vehicles (moving from vessels to AUVs or jets to drones) affect the need for bulk transport (and thus the need for fuels)?
  • How will the hydrogen/ammonia pricing for marine fuel compete with the pricing for land freight, chemical feedstock, and industrial heating?
  • How will airlines and shipping companies be incentivized to pay for lower CI fuel?
  • How much differentiation will there be between SAFs and how much will the market tolerate in terms of differentiated pricing?

3. Transitioning vehicles that don’t burn cleanly to EVs or clean-burning setups (retrofitting cars and trucks with fuel cells or electric drivetrains / powertrains, incentivizing early retirement of older, dirtier forms of transport with clear plan for recycling parts)

  • What’s the emissions reduction associated with preventing mass retirement of older vehicles?
  • What recycling opportunities are there for older cars and trucks in first world countries?
  • How much will retrofit be part of the transportation decarbonization picture and who will be performing the retrofits (OEMs, third party specialists, local maintenance shops)?
  • What is the lifespan of an electric vehicle excluding battery replacements?
  • How many consumers will eschew a car altogether in the future in favor of bikes / scooters (and how much of a dent will that make on emissions from this category)?
  • How will desired consumer features like autonomy be affected by choice of fuel / fuel consumption setup?
Bonus thoughts and questions

Several questions that affect all four of these areas:

  • How will the relationship between startups and strategics continue to develop?
    1. Will strategics need to invest earlier and how much of the portfolio should be dedicated to venture vs. traditional corp dev?
    1. Will there be more standardization of partnerships between strategics and startups?
  • What kinds of creative capital are available for startups in this area?
  • How will our definition of “energy” change?
  • How will companies recategorize in the face of a more interdisciplinary universe?
  • How much of recycling should be localized to maximize reductions benefit and prevent carbon leakage?
  • How will companies manage Scope 3 emissions and how much will that management influence supply chain choices?
  • How will offset trading manifest and how many marketplaces or exchanges will the market need? How will they differentiate themselves?
  • How will the time value of the offset be used to price the offset?
  • How will carbon pricing develop to reward consumer behavior as well as corporate behavior?
  • How will the implementation of smart contracts drive supply chain transparency and vice versa?
  • At what scale and using what scenario analysis in offset qualification does additionality become immaterial?
  • Will we have complete standardization of carbon accounting up to a certain point and what will differentiate certain carbon accounting software packages?
  • What will be the impact on energy consumption of technologies like metaverse, quantum computing, autonomy, etc.?

Would love any thoughts / comments / answers / more questions to add to the list 😊

To see a larger version of the FEST map, please click here.


Project Development for Energy Transition: Pt 2

Posted by Deanna on October 19, 2021

Last time we wrote about the different components that make up project motivation for energy transition infra, BEPTC. How well a project can address each of these components and establish project motivation is often times the driving force behind an equity investor’s initial interest in the project.

But after interest is established, the real diligence begins to determine level and type of development risk, which informs an investor’s view of fit with their investment mandate and the ultimate investment structure (% equity or debt, assetco vs opco vs holdco, etc). Once again, we cite NREL’s framework for the second phase, SROPTCC, or Site, Resources, Offtake, Permits, Technology, Team, Capital:

  • SiteWhere is the project located? What agreements does it have that ties it to this location? What operating constraints or risks might this site pose?
    • Site is often times a huge limiting factor for energy transition infra. A site has to have access to appropriate infrastructure to connect feedstock, offtake, supplies, and equipment. It has to be evaluated for environmental impacts. It has to be surveyed and permitted (which will likely come from multiple regulatory and/or private bodies). It has to balance transferability to other locations (to help the holdco scale) with having a unique advantage over other locations. In energy transition infra, it helps to 1) co-locate multiple projects on a single site to share the risks around a chosen site or 2) partner with a larger stakeholder that already has the appropriate rights and permits to a site. In many cases, an investor will expect to be taken through the process of site selection, so having a documented, systematic method of selecting a site can be very useful.
  • Resources What resources will this project need? Where are those resources? Are those resources secured by contract yet? .
    • Resources in energy transition infra can include availability of wind / sunlight, used cooking oil for renewable diesel, or water for hydrogen production…where is the resource that will be turned into product? Who will deliver it and through what logistics? Is this all in writing and/or is there clear visibility into the contract structure? If the feedstock will be purchased from someone else, how much can volume and/or pricing be locked in and for what period of time (vs. life of project?). How much variability might there be in feedstock quality and how will that affect the process? Electricity, gas, catalyst, and all other resources needed for this project outside of the primary ‘feedstock’ are also important to have contracts and/or visibility around.
  • Offtake Who will purchase the product and what terms will they be able to offer for the product?
    • This is an incredibly important part of the project. How much demand is there for what is being made – biofuel, renewable electricity, green ethanol, etc.? How much differentiation is there in the product being produced and is that recognized by the market (i.e. can it attract premium pricing)? Similar to Resources, is there clear visibility into contract structure and how much of the volume/pricing/tenure can be locked in? What customer optionality is there and are there existing relationships if not agreements? Outside of the primary product, are there by-products produced and are there offtakers for those products? What sorts of certifications or specifications will the product need to qualify for and how much variability will the process be able to handle?

These first three are crucial to securing the base project economics. Often times, projects come to us when these three are still in flux, which makes modeling the project more challenging and why some more conservative investors prefer agreements to be more or less in place before they engage. At the same time, project developers often find that initiating conversations with investors when agreements are not finalized can provide larger corridor for investors with different risk profiles to come in and help negotiate those agreements to their liking. Balancing the timing of these conversations is an art much more than a science. Sometimes we advise clients to execute LOIs with the appropriate parties, which can formalize a series of conversations into a document that can be shown to an investor but also leave room for further negotiation. This formalization and documentation is important for projects that are “first of a kind” or championing a new set of relationships.  

The last four components are ones that every project should also have clear visibility around before talking to investors (and probably do based on work done during the project motivation stage) BUT are not crucial to the economics of the project. Instead, they more so dictate timing and execution risk around a project. Thus, these components can change a little throughout the financing process without major effect. At the same time, much of this work will inform the first three, so it’s unlikely that these components will change drastically anyway.

  • PermitsWhat kind of permits are required for construction and operation? What is the timeline for these permits?
  • TechnologyWhat kind of technology is being used? What engineering work is needed to scale the technology up? Has an engineering study been done by a third party?
  • TeamWho will be operating the plant? Who will be managing the overall company? Who will be negotiating the contracts? What kinds of agreements will dictate labor allocation between different entities?
  • CapitalWhat kind of capital will be needed at what stages (development, construction, operation)? What investors have funded the holdco or development stage and what role will they play going forward?

Hopefully that provides a clear framework around how projects in the energy transition space are evaluated by investors. For project developers, the broad takeaway is that there are many questions that will get asked around the development / financing process, many of which there won’t be clear answers to from the get-go. The important thing is to have answers at ready and be ready to document and validate those answers at each step.  


Project Development for Energy Transition: Pt 1 

Posted by Deanna on September 21, 2021

An interesting dilemma for capital providers in energy transition these days is being able to underwrite the unique risk profile for infra development in the space. Traditional project development relies on visibility, predictability, and repeatability, all aspects that get blurred by the uncertainty, dynamism and constant “newness” that runs across energy transition. That’s why infra has traditionally focused on projects that have low to no technology risk, rich precedence, and contracted cash flows – things like roads, buildings, pipelines, etc.

Renewables has come a long way in its road to being the perfect project finance candidate. Technology development has progressed to the point where solar panels and wind turbines are proven at scale and, on the lower end, virtually commoditized. Backstopped by typically 15-20 year PPAs, renewable assets have become prime targets for energy transition infra deployment.

But there’s a whole host of other new energy infrastructure that relies and will rely predominantly on emerging energy technologies. That includes storage, CCUS, hydrogen, biofuels, water recycling and filtration, waste-to-energy, etc. For so many of the companies in these areas, the capital ramp is quick – going from Series A/B to the next phase of capital can mean a jump from $5-15mm to $50-500mm+. The step-change nature of the development cycle for hard tech means that the incremental de-risking that is achieved is often disproportionate to the incremental capital ask. Most of the time, the change in capital is much larger than the perceived change in risk.

NREL breaks down the different components of project motivation, which is what they define as what drives the project forward and gathers the necessary stakeholders. They break it down into BEPTC – Baseline, Economics, Policy, Technology, and Consensus. How this framework plays out in energy transition infra:

  • Baseline – project should have an overarching reason why it’s needed. NREL calls it a “statement of purpose.”
    • The biggest disconnect we get in energy transition infra here is that baselines are often “this will be the first…” or “this is proof that…” vs. establishing a true need from the market forces at work
  • Economics – project should have favorable economics – ideally economics so favorable that there is margin for those economics to fall and still make money. NREL recommends a 20-30% rule of thumb margin
    • This is a challenge for energy transition infra. The project may not be at true economics of scale because the vendor or offtake market is not mature or the technology still has to undergo some engineering work at scale. It may not be feasible to work at a 20-30% rule of thumb or it may be hard to pinpoint what the margin for error is exactly
  • Policy – project should be aware of and have strategies around policy
    • Most projects we come across have a good handle on existing policies. The problem with this component is that policy is not very well defined and rarely has precedents in this space. It sometimes takes coordination with the policy makers to have a view on future policy clarifications or decisions, access that some project developers may not have
  • Technology – project should assess technologies available and choose ones that are “bankable” and NOT unrealistically early stage. NREL calls this the most straight forward component of project motivation, assuming there is plenty of commercial technologies to choose from that achieve the same end. But in the absence of choice around technology, we see this component as the most challenging to navigate
    • Energy transition infra projects that are “first of its kind” need to have robust understanding and explanation of the technology. The earlier stage and unique it is, the more of a challenge this is. What has worked in the past is pointing to rough analogs of each technological component to build some element of precedence. For example, if the process is new but the reactor design, cooling towers, heating elements and all components in the process are old, that can be a form of precedence. Having a good initial list of expected engineering problems to be solved can also serve as a bridge to an investor getting comfortable with the technology
  • Consensus – project should build consensus around stakeholders on motivation and development process. This component is the most difficult to gauge when bringing in a new investor or third party. In our minds, having initial consensus is great, but the perception of future consensus can be a real dealbreaker. In other words, the investor should feel like the project will have an easy path to getting anyone involved in the project now or in the future on the same page. A confusing story or eclectic market may feel daunting to buy into if the investor feels that they are alone in those efforts
    • Energy transition infra ecosystem is constantly shifting, so predicting future consensus (what it will need and who it will come from) is a great challenge. Marketing the story and making sure there is broad public buy-in around the market need is a way to establish this (as is being done around batteries and EV infra) but takes time. The other way is to make sure that the stakeholders involved in the project are both committed long-term and have the necessary resources to commit long-term. Having contractual relationships with large creditworthy strategics can help establish this

How this relates to raising capital is that it’s these very core elements that come to form the “gut feel” of whether a project is worth pursuing. When presented with an opportunity, investors have to make quick decisions on whether to spend time on that opportunity – and what we’ve observed is that it’s this general framework that investors use to make those quick decisions.

Once a project gets the green light for deeper due diligence, the next steps are understanding the timing / stage of a project and refining an investor’s understanding around risk to see whether that matches up with an investor’s investment mandate. A good way to look at this phase is both quality of decision around and progress on decision around: site, resource, offtake, permits, technology, and team.


Distributed Industrial Networks: How the climate crisis is overturning economies of scale ​​​

Posted by Deanna on August 31, 2021

The concept of economies of scale has been long ingrained into our paradigm of an efficient economy. Reducing costs by increasing efficiencies in larger scale, more centralized production units makes sense to us intuitively. We’re taught to buy supplies in bulk and get a discount, spread fixed overhead over larger production volumes, use size to gain market leverage over customers and suppliers, and access larger and cheaper tranches of capital via larger capital projects.

The twist with economies of scale in the context of climate change is that the classic industrial optimization problem becomes bifurcated. Efficiency as a goal has to compete with climate friendliness. That changes the economies of scale equation a bit.

In a traditional economies of scale model, industrial centers produce vast, cheap quantities of product and that product is delivered to other industrial centers for further processing or large distribution warehouses for delivery to the end user. The result is the ecosystem as we have it today: industrial clusters where similar products are developed in tandem, networks of pipe/rail/trucking routes where product can be delivered to another industrial cluster where synergies can gain be realized.

But in an economy where climate impact is prioritized, these centers of industry are focused on delivering the smallest footprint, and that may not line up exactly with our traditional model of economies of scale.

A prime example is the distribution of solar resources. Residential solar comes in at ~$0.15 - $0.22 / kWh vs. community solar at ~$0.07 - $0.17 / kWh vs. utility scale solar at ~$0.03 - $0.04 / kWh, costs that indicate a fair bias towards “bigger is better.” But when taking into account factors that affect the environmental impact of each project like land usage, transmission losses and time to deployment, residential solar starts to level the playing field.

This effect is even more prominent when considering energy resources that don’t have as efficient of a network to deliver to the customer. Within the industrial ecosystem, goods get hauled between industrial sites everyday. For processes that are aimed at lowering the carbon intensity, the effect of this haulage, which includes road fuel and any preparation work to get the product ready for transport, on the carbon footprint makes a sizeable dent on the overall score. Decarbonizing a heavy industry facility will require making sure the incremental footprint made by logistics at that site is netted out against the footprint reduction of the process itself.

A salient example of this is in CCUS, where the financial and environmental cost of transporting CO2 means that sources have to stay close to capture sites which have to stay close to end uses / points of consumption. The end result is a much more distributed network vs. incumbent industrial networks like this in oil and gas or steel production.

Several other areas of climate tech will follow suit in becoming more distributed over time, including hydrogen, green chemicals, and agriculture. The closer one’s customer base is to the individual consumer, the closer the industrial site might have to be a population center, spreading these networks much more similarly to population. The environmental benefits are not just limited to logistics either – finding more sustainable ways to produce something will fragment our industrial products such that regionalism / customization to the local consumer will have an increasingly dominant effect (e.g. consuming produce that’s local or using energy produced by a local landfill). This will often run counter to the traditional inclination to build towards economies of scale and centralization.

A final thought: perhaps the end result of all of this is that population growth and migration will evolve to take advantage of areas where economies of scale won’t have to be sacrificed for the sake of decarbonization. Urbanization is often pointed to as a key risk factor for climate change, mostly due to the current limitations of urban infrastructure. However, urbanization does have the nice benefit of creating economies of scale in having points of consumption all gathered into one place. Cities were once built around proximity to coasts and rivers to take advantage of trade and water available for agriculture/drinking. Now that we’ve identified novel, cleaner ways to utilize the resources around us, perhaps cities will evolve to be gathered around those industrial resources instead.


From Trash to Treasure ​​​

Posted by Deanna on August 3, 2021

Energy transition and circular economy go hand-in-hand, both optimizing for an ultimate vision of sustainability. Where they overlap is around the industrial processes that generate energy, adjacent to energy production, or use energy in a significant way. Creating a circular economy means that products are able to be used for longer or for more purposes, waste products are turned into feedstock for creation of new products, and that there are industrial pathways in place for recycling, repurposing, and recovering within the product’s lifecycle. We see the circular economy divided into two main areas:

Waste to energy, or creating electricity, heat, or fuels out of trash or organic waste. Landfill to biogas, dairy manure to RNG, municipal solid waste to syngas are all thriving examples of these pathways. Most of these technologies have existed for decades in order to reduce the operating costs and amount of land occupied by waste management facilities, but we’ve seen a recent “renaissance” of activity and development. The unusual tenure of the technology (derisking it in many people’s eyes) combined a macro focus on decarbonization and expanding regulatory programs like LCFS have led to WTE projects skyrocketing in number. ​​​​

The production of goods from waste resources or industrial by-products. The utilization of CO2, normally a by-product or waste product, in producing chemicals, carbonates, or synthetic graphite has been a big topic. Plastics recycling has been and continues to be a dominant focus in this space. Creating chemical precursors like methanol or ethanol or hydrogen from excess syngas streams or waste biomass can be the industrial bridge to creating more sustainably produced plastics.

Creating these pathways is no easy task – and being able to sustain them over a long period of time will be even harder. A big challenge with circular economy pathways is maintaining the balance between supply and demand. An instable waste stream can cause a feedstock shortage, disrupting commercial agreements and leading to price volatility. Because the components of a circular economy are so interdependent on other processes, a circular economy is vulnerable to the domino effect. One sequence of disruptions can completely eliminate the viability or need of a pathway.

This brings us to the ultimate challenge: commercializing circular economy pathways for the long term. Like other industrial-scale projects that we have seen in the energy transition space, circular economy projects will require a combination of technology development and project development, two different sets of expertise and ecosystems. Moreover, the traditional infrastructure development mindset relies on having high visibility of offtake and feedstock. Both of those are hard to secure long term in a circular economy, where inputs and outputs are always shifting according to market dynamics.

The name of the game for circular economy is flexibility. Having optionality around feedstocks and offtakes will generate an advantage for projects, especially those that deal with intermediary products. Most of the projects we look at don’t future test their pathways, only basing their narrative on one particular macro outcome. Circular economies are not static, especially as we deal with the behavioral science surrounding waste vendors. A big question is what happens when a waste turns into a valuable product, one that merits a premium vs a discount? We saw that happen with flared gas to bitcoin mining. It’s for that reason that for companies looking to commercialize circular economy projects, we recommend extensive scenario planning.

In any case, the circular economy is an exciting vision that is flourishing now. WTE, which was once the dirty cousin of wind and solar in the renewable energy industry has turned into a fast-growing behemoth. Recycling is not so consumer driven anymore and scaling up to replace industrial processes. We’re excited to see this space grow and what comes out of it.

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