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

Posted by Deanna on August 31, 2021
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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.

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From Trash to Treasure ​​​

Posted by Deanna on August 3, 2021
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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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Carbon Offsets - The Good, Bad, and Ugly

Posted by Deanna on June 29, 2021
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Carbon offsets and carbon credits are interesting financial instruments intended to provide a way to quantify and monetize environmentally beneficial actions. They are similar to Renewable Energy Certificates (RECs), which are credits assigned to MWh produced of renewable electricity. Like RECs, a certain number of carbon offset credits are assigned to a project and can be bought / sold separately from the project. But while RECs are solely for promotion and facilitation of renewables development, carbon offsets can theoretically be sourced from just about anything that is emissions reducing.

This broad, broad scope has encouraged a variety of projects to be counted towards a carbon offset. Everything from installing cleaner stoves in Mozambique to reforestation to installation of biogas digesters can generate carbon offsets – and there are many more that are being qualified by the day. This diversity is both a blessing and curse. On the one hand, many projects that are too niche to receive regulatory and / or traditional financial support have a mechanism by which to access for-profit capital. On the other hand, the variation in carbon type and quality has proved a challenge for those looking to establish a unified carbon marketplace.

A part of this challenge is the multiple issuers, resellers, certifiers, registries, verifiers and auditors that each play a part in filling a part of the value chain for at least one carbon offset pathway. The market is extremely fragmented and operates across too many spheres of influence, leaving no one authority with the ability to demonstrably consolidate and reconcile every approach.

As a result, the current carbon offset market looks a bit like a dysfunctional circus – lots of interesting acts going on at the same time in different places, with little continuity or direction. The chaos is bolstered by additional issues like:

Accountability is lacking – carbon offsets require near permanence in the sequestration or use of the carbon involved, but that permanence is difficult to monitor and ensure effectively

Additionality is currently incredibly subjective – a carbon offset project needs to show “additionality” to what the status quo plan was for that piece of land or operation – or in other words, demonstrate that had that carbon offset project not been in place, an emitting action or project would have happened instead.  But proving that is difficult and a bit like trying to prevent a crime that hasn’t been committed yet…something that John Anderton taught us is a highly vulnerable model

Fourth dimension issues – carbon offset projects can generally quantify what the carbon impact would be over a lifetime but struggle in predicting what the shape of those offsets would be, especially in those outer years. Therefore a project could be issued a slew of credits for avoidance or protection actions taken in the future, but the actual real impact from that project may diverge from what was assumed at the time and generate controversy. Thus if the intention of a company is to buy credits to offset emitting actions taken at a certain point in time, a significant lag between the time of emissions and the time of actual offset might reduce the “net present value” of that offset (is there such thing as time value of impact?)

Misalignment of funding objectives – carbon offset pricing is driven by a number of factors: location, human welfare impact, employment impact, vintage, capital costs, etc. What’s been interesting to observe is how cheap an offset project can be, ranging sometimes from a fraction of a dollar / ton of CO2 to several hundred dollars. When a company has to make a decision around whether to develop an emissions reducing project or just buy certain carbon offsets, the most economic option may be just to buy some cheap carbon offsets that may be equivalent on a ton-to-ton basis but may end up discouraging the company from directly reducing its own emissions footprint

This exceptionally blurry universe of carbon offsets has created multiple opportunities for innovation: the monitoring of permanence, data collection to prove additionality, value chain tracking via blockchain, exchanges and entities that can help standardize carbon pricing, etc. Kimmeridge recently put out a paper that argued for an oil and gas-specific carbon offset exchange, one run by the industry and for the industry. Perhaps there’s an argument for multiple “vertical” exchanges that focus on industry “insets” (instead of offsets), where certain industry-specific carbon projects can only be used to counterbalance certain industry-specific actions. Perhaps we will figure out a way to create the “one true exchange.” In any case, it’s clear that the conversation around carbon credits is fast evolving – and despite all of the crime tape around the system today, there are plenty of sharp innovators on the scene to help.

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Despecialization: The Impact of Transition on Labor

Posted by Deanna on June 15, 2021
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The capital requirements of the energy transition are well-publicized. The amount of money that needs to be invested in order to install new renewables capacity, upgrade the grid, deploy new vehicle fleets, integrate new heating and cooling systems, scale up carbon capture, build up bioenergy pipelines, etc. is in the tens of trillions of dollars. Those aggregate numbers are staggering, but it’s hard for an average consumer to visualize exactly what that impact will be on our day to day. Perhaps we all have to plan on buying an EV in the next decade? Upgrade our heating systems? Choose a more efficient oven or washer/dryer? Foot a higher utility bill? Perhaps we all should expect to pay a bit more in taxes over the next few decades?

For workers in energy, that impact is a lot more apparent. Putting that much capital to work and retiring the corresponding amount of heavy infrastructure will have enormous labor implications. Most of those who touches oil and gas – from investor to CEO to engineer to field tech - are thinking about the transferability of their skills to new energy areas. Geologists and reservoir engineers are evaluating applying their ability to characterize the subsurface to areas like geothermal or carbon capture. Construction workers used to being on the oilfield are evaluating similar work constructing solar panels. Project managers are thinking about how to step into the new wave of new energy-oriented projects. The industry is now facing an unprecedented time of despecialization, that in which nearly everyone in the oil and gas ecosystem, from operator to service company to startup to investor, is being pressured to orient their roles to be less niche and more market agnostic.

And this despecialization doesn’t come without consequences. Pay is one big one. It’s well reported that the average pay for a job in renewables is more likely to be lower paying than a similar job in oil and gas, with the discrepancy ranging anywhere from 20% (construction worker to construction worker) to 40% (engineer to engineer). The gap is even wider when considering the probable scenario of a tenured worker in oil and gas taking a step-down in position in order to learn the ropes of a new trade. And that still doesn’t include the costs of training or job search. Although companies like Workrise are moving to ease this burden, the energy transition will still overall be a painful process for the average worker. With pressure continuing for renewables/new energy to lower costs, coupled with the pressure for oil and gas companies to keep offering attractive compensation packages to attract talent, this pay gap will likely continue for a long while.

What also comes with despecialization is dealing with increased competition. We see this happen with energy tech companies looking to expand outside of oil and gas as well. Although the oil and gas industry is large, the world outside of it is even larger. As more and more people look to transition with a less specialized and more commoditized skillset, they will have to contend with competing against both other workers transitioning and new workers from other industries. The mental and financial stress of dealing with this increased competition can be incredibly taxing.

All of this will change the average worker in energy. The workers that stay in energy will increasingly be the ones that can appreciate the non-pay related benefits of working in energy transition. That includes job stability, impact, and social responsibility. This is not new to the average Gen Z or millennial worker. Studies have shown that Gen Z workers prioritize purpose over pay. So as the generational turnover occurs, becoming a company that emphasizes social mission and responsibility will be key to attracting and retaining talent – and perhaps naturally resolving the pay gap.

In the meantime, for those that have not adjusted or can’t afford to adjust to this mindset, the road ahead will be a little rocky. BLS reports that 400-500k workers work in oil and gas extraction or support activities for oil and gas – and using more inclusive taxonomy, that number expands to somewhere between 1-3mm according to USEER and more than 10mm according to API. As this workforce moves to despecialize and enter into a job market driven by transition, many will be tested on their flexibility, ability to learn, drive, and passion for what they do. Many will flourish under these settings. And many will be pressured to move on from this industry. How this will settle out is still a mystery. If there’s any surety around the future though, it’s that the transition won’t be easy for our workers.

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Consumers Matter in Consumer Matters

Posted by Deanna on May 4, 2021
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It’s no secret that with the evolving energy landscape, there will be more business models in our industry oriented towards the individual consumer. The advent of new price comparison websites such as Power2Switch or PowertoChoose have made comparing retail energy plans much easier, showing in simplified terms what the average cost per kWh is for certain thresholds, highlighting whether the rate structures are fixed or variable, % renewable energy, etc. Digitalization has made the consumer more powerful in energy choice, leading to an increased focus in studying and responding to the different components of consumer preference.

This has changed the retail energy product offerings over the years, with more robust online / bill pay platforms, higher % of renewable energy, clearer billing structures, and partnerships with sophisticated energy management tools like Nest playing key roles in swaying the more capricious consumer. We increasingly see more energy companies having to take learnings from more traditionally consumer-facing businesses like retail or tech in order to stay competitive. Standard practices in retail and tech like A/B testing, consumer data gathering, and consumer-oriented marketing have been and will increasingly be transplanted into the energy sector.

But this trend is not isolated to residential electricity consumption. Current energy-centric products like EVs and some types of batteries will also find momentum in direct-to-consumer models (such as Tesla). Traditionally oil-weighted products like plastics and polyester fibers are selling into markets where consumers are increasingly having a preference for low carbon / circular economy types of materials (think recycled PET yoga pants or bottles). A Kearney study found that the percentage of consumers that would be willing to pay more for “green” products has jumped 30 points from 2013-2019.

Figure 1. Kearney exhibit on consumer premium. Sourced from Nielsen, International Renewable Agency, Oeko Institute, World Wildlife Fund.

Fuel distribution and consumption has also been impacted by this trend. There is a strong case to be made for why oil and gas and other fuel production companies should expand their retail energy presence – and indeed, we’ve seen some oil and gas companies already pursuing this strategy. Shell, in 2018, committed to investing $7-9 billion in developing a new downstream strategy, expanding its convenience store locations and revamping the product offerings and services at each location. BP formed a joint venture with ArcLight to buy convenience store chain Thorntons. Some companies have taken an even more creative approach, partnering with consumer-facing businesses like food delivery services. The benefits are multi-fold: production companies can find better outlets for their fuel products in a market of diminishing demand growth, increase margins by offering high-value products and services outside of the commodity, and drive better brand perception by direct-to-consumer marketing.

Retail energy also creates better opportunities for energy transition. As renewable fuels gain market share, product portfolios will become more differentiated and complex, which means being able to build a consumer understanding of the different fuel blends will become more important. That understanding is difficult to ramp up without a direct line of communication to consumers. Having a retail presence also creates optionality for energy companies to put in place EV charging or hydrogen depots once the demand is in place.

The point is that energy in a lot of ways has become a consumer matter. All types of energy usage - electricity production and consumption, energy and carbon usage in product manufacturing, fuel distribution and usage, etc. – now involve more consumer input. And the flexibility that a world of energy choice affords means consumer input will increase in importance going forward. Transitioning to a B2C sales model with greater understanding of consumer purchasing decisions will build more nimble and defensive businesses.

Consumers are paying attention to energy and it won’t be long before energy will have to pay attention to consumers as well. Consumers matter in consumer matters.

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Tipping Points in Energy Tech 

Posted by Deanna on April 6, 2021
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A question we always run into in energy tech is when a technology is worth investing in. How does one know whether a certain technology will persist or desist? What signals form the “green light” to say that a certain technology is for sure sticking around long enough for a good investment to be made? It’s a million, billion, and even in some cases, trillion dollar question (depending on how large of a capital investment is at stake). And it’s especially hard to answer in the world of energy tech.

The challenge with this space is answering the larger questions around adoption rate and predicting the “tipping point.” Malcolm Gladwell famously wrote a book about this entire phenomenon, illustrating the many parallels that dissemination of ideas and beliefs and behaviors have to each other. The moment a trend turns into an epidemic is a tipping point, and just like in literally viral epidemic, the adoption is driven by “superspreaders,” which are a minority of the population. Gladwell lays out the 80/20 rule, which is that 20% of the participants do 80% of the “work.” He defines the 20% to be separated into three different categories:

The Connectors – those that have wide social networks and link up disparate parts of population

The Mavens – those that are collectors and spreaders of knowledge

The Salesmen – those that are good at persuading others to change their behavior or adopt a new idea/belief

Gladwell isn’t the only one that has identified the role of “movers” in tech adoption. Scientists at the Rensselaer Polytechnic Institute found in 2011 that the tipping point threshold for when a sticky belief turns into majority opinion hovers at around 10%. In other words, the burden of accelerating adoption falls disproportionately onto the first 10% committed opinion holders of a population. It may take some time – possibly even forever – for that first 10% to accumulate. After that 10%, researchers found that the exponential switch flips and there is clear line of sight to majority adoption.

We have seen this happen in energy technology. Its tough to quantify the number of “committed opinion holders” around electrification of vehicles and how that’s progressed over time – perhaps that’s somewhat proxied in the multitude of consumer surveys that have shown a dramatic increase in the proportion of consumers intending to buy an EV in the future, a number that has shot up from ~17% to ~45% in 5 years for the US. But some minority threshold did get crossed and the power of population consensus amongst investors around the future being electrification has enabled a dramatic increase in investment into the EV ecosystem (28 SPACs…!).

When will that threshold be crossed for ecosystems less developed like hydrogen? Or carbon capture? Figuring out when the tipping point will occur can make a big difference in whether we will see the same acceleration happen in these spaces. Most reports look to 2030 for green hydrogen to make a significant dent in global hydrogen production. But a lot of that acceleration depends on costs falling at rates in-line with the drops we’ve seen in solar and wind. If there is a tipping point earlier – as we have seen can very well happen with the increasingly steep s-curves observed in the general technology space – it’s possible that something like hydrogen that is still considered speculative by many investors may be here faster than we think.

One of the most interesting aspects of the energy and industrial tech ecosystems is that they’re dominated by large, established companies –companies like the integrateds, large utilities, service companies, independent E&Ps, industrial gas players, etc This is both a blessing and a curse. It’s a curse because technology that is not validated at one of these constituencies often faces a much higher hurdle to be adopted by general industry…and we’ve talked at length about how lack of change culture and siloed roles often prematurely stilt tech uptake in some of these organizations. But at the same time, it’s a blessing because just a few “committed” corporates that can create a culture where the whole company is buying into the strategy can move a technology much closer to tipping point than if the same were to occur in other industries. For better or for worse, we are an in an industry where the large energy companies have the power to be “movers” in the new energy space.

With something like hydrogen technology, which already has a good growing set of committed stakeholders on the demand side and, to a certain extent, on the supply side too, perhaps all it takes is just a couple more of these large players to move themselves into the “committed opinion holders” camp before a tipping point occurs. For the rest of us, making sure that the decision makers at these companies realize how much is at stake in their hands is crucial.

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Lessons Learned From 2020?

Posted by Deanna on February 5, 2021
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​As we close the books on one of the most unusual years in our history and look to a better, brighter, and less catastrophic 2021, we can at least assure ourselves that 2020, at minimum, offered us some interesting lessons for the energy tech space. Here are some of ours:

  • It pays to be green and clean – 2020 accelerated interest in energy transition as the oil and gas industry experienced yet another major disruption. Businesses that were not previously marketed as emissions reducing strived to clarify their role in energy transition. |
  • SPACs are a viable option for earlier stage companies to access hungry public capital – 2020 saw the largest number of SPAC IPOs and subsequent deSPACs in financial history. As companies look for alternative methods of raising capital and going public in a dry private capital environment, SPACs will continue to be an attractive alternative. 
  • Never take capital for granted – with the private capital shortage, companies that coincidentally raised money in late 2019/early 2020 benefitted from having sufficient runway to take them through the worst of the pandemic, while companies that had planned to raise money later in the year were left with the short end of the stick. The lesson may be to raise capital when you can – and not necessarily when you absolutely need to. 
  • Who backs you matters – companies with stingier or less flexible investors suffered more when things got tough. Finding a backer with deep enough pockets and sufficient belief in the business to be able to provide emergency capital in unforeseen circumstances mattered more last year than ever.  
  • Who buys from you matters – similarly, the quality of a company’s customer base is thoroughly tested in times of distress. Quality can be measured in several dimensions: creditworthiness of the customer, resiliency of the customer’s budget, confidence in and commitment to the solution by the customer, and strength and level of advocacy within the customer’s organization. Working across lower quality customers or with less developed customer relationships was the source of a lot of the customer attrition in 2020.  
  • Ability to effectively pivot business model and end market exposure is a very useful skill to have – companies that were able to move quickly to reduce exposure to oil and gas activity and increase exposure to other markets like other industrial services (or even PP&E) had access to more capital and commercial contracts during the pandemic than those that had siloed themselves into being strictly oil and gas facing. For energy tech companies, 2020 demonstrated the value of flexibility and understanding the transferability of technology between industries. 
  • Remote working is sustainable, and in many cases, preferable - 2020 was a big experiment in the merits and challenges of remote working. For most office jobs, going remote affected productivity less than expected, though sacrifices in face-to-face interaction had an obvious impact on roles that relied on in-person sales or marketing. For heavy industry operations like working on an offshore oil rig, 2020 was the year to push for more automation and remote operations. Many companies found remote working not only acceptable but sometimes preferable in lowering operating costs and company emissions. 
  • Achieving 1.5C is really, really hard - with the pandemic, global emissions fell nearly 9% y/y, meaning we were finally on track to delivering the emissions reduction needed year to year for our 1.5C goal. But as we saw, that reduction did not come without massive disruption and economic fallout. 2020 demonstrated that getting to our green paradigm near term may only be possible alongside enormous sacrifice. 
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Oil and Tobacco

Posted by Deanna on January 19, 2021
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The oil and gas industry has a problem. Capital is leaving in droves. The industry is on the receiving end of increasingly negative social commentary and facing calls to pivot to greener energy sources. The workforce is losing talent left and right. And at the same time, there is immense pressure for companies to become profitable and start generating cash flow.   
 
One of the best examples of an industry that’s gone through a similar struggle is the tobacco industry.  The 1980s and 90s were a time of reckoning for tobacco, as the medical industry vilified cigarettes, investors faced multiple divestment campaigns, and regulatory bodies sought reparations in the form of litigation, an effort that culminated in ~$365B paid out via the Master Settlement Agreement in 1998. In response, the tobacco industry diverted its efforts to international markets, where social campaigns were considerably weaker, hiked up prices to become more profitable, cut costs, and heavily consolidated. They also made efforts to branch into growthier adjacent products like e-cigarettes and marijuana, albeit with varying success. Three decades later, the tobacco industry has transformed itself from an industry doomed to wither into oblivion into a relatively stable cash flowing machine, throwing off an average ~7% dividend to investors like Allianz desperate for yield. Total return has been stellar compared to the S&P up until 2018 (see Figure 1), when tighter FDA regulations around nicotine content and menthol cigarettes tumbled prices. Nevertheless, the tobacco industry continues to attract contingents of yield investors despite the continuing decline in smoking. It’s not quite a success story, but in the long game, it’s certainly beating expectations. 
 

Figure 1. Total Return of various tobacco stocks vs. the S&P500 and the S&P Oil and Gas E&P indices. Also shown are the percent of adults that smoke in the US over time, which has dropped by a third in the last decade. 

The analogy one can draw with the oil and gas industry is pretty clear, though not a perfect one. One lesson is that the playbook of demonstrating consistent yield is enough to draw back investor interest against relatively formidable social policy. An offshoot of this lesson is that consolidation and cost cutting are productive measures to achieve that end goal, and ones that should not be ignored as just a phase by those that have seen the industry in better times or believe that a resurgence in the commodity might change any of that. The yield paradigm is here to stay if we are look to tobacco as an example.

Of course, where the seams come loose is in the differences in capital intensity and end consumer between the O&G and tobacco industries. The oil and gas industry is highly capital intensive and produces commodities, which are not as easy to immediately increase profitability on by raising prices. The B2B model of the energy industry solves for the lowest cost product that achieves desired performance levels vs. the B2C model of the tobacco industry that can overcome this with brand favoritism and product differentiation. And while arguably both oil and gas and cigarettes are sold to a more or less captive consumer base (one from a necessity and one from a perceived necessity), the difference here is that the onus for transitioning away from a tobacco addiction is placed on the consumer, while the onus for transitioning away from an oil and gas “addiction” is placed on industry and the oil and gas companies themselves.

This nuance is important in that it demonstrates what a disconnect from consumers can do to create a heavier burden on the producing company. In not providing the necessary tools for a consumer to be able to transition easily, the oil and gas industry is continuing to set itself up for the narrative that the consumer is not to blame. So maybe the lesson here is that there needs to be greater integration between the oil and gas companies and the products that actually use the oil and gas – like vehicles or stoves. Becoming consumer facing could dramatically change the social dynamic and connect the industry with its most vocal opponents to solve the consumption problem together.

It's worth emphasizing that this comparison is NOT saying that oil and gas should be treated like a poison. Oil and gas enable and improve many vital operations around the world, while tobacco is detrimental to human health and welfare on an absolute basis. There are many existing technologies today that can turn oil and gas into a sustainable energy source, while the same can’t be true for tobacco (e-cigarettes tried). That’s exactly why the tobacco industry’s growth today is clearly a hopeful sign. The oil and gas industry has many more options than the tobacco industry to turn around its narrative.

A final lesson from the tobacco saga is that it does pay out to pursue the right growth initiatives. International markets, with a less developed social policy and greater product need, are an obvious target for both industries. And engaging in “smoke free” products with higher growth potential is possible and can be accretive for both the narrative and business itself, though this initiative certainly doesn’t come without risk, most recently demonstrated in the rise and fall of Juul. So the takeaway for oil and gas companies is to continue to seek energy transition opportunities in earnest…but with the expectation that the road will be long and rocky. Some experiments will inevitably fail, but most will certainly be worth doing. 
 

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Why We have to Pay Attention to Membranes ​​​​

Posted by Deanna on November 10, 2020
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New membrane technology may seem like an obscure part of the energy tech ecosystem, but there are surprisingly many processes across energy that depend on membranes. Anything that involves separation of product, like natural gas processing and oil refining, usually has a membrane involved to separate a fluid or gas New membrane technology may seem like an obscure part of the energy tech ecosystem, but there are surprisingly many processes across energy that depend on membranes. Anything that involves separation of product, like natural gas processing and oil refining, usually has a membrane involved to separate a fluid or gas stream into component parts. Biofuel production relies on membranes to remove by-products and yield a higher purity final product. Carbon capture systems often use membranes to separate CO2 from a gas stream in pre and post-combustion and to separate O2 from air in oxy-combustion. Many batteries use membranes as separators between the anode and cathode and similarly, hydrogen fuel cells depend on membranes to function as electrolytes for proton exchange. We recently pointed out the importance of water technology in energy transition. Membranes play a large part in enabling desalination, industrial and municipal wastewater treatment, water reclamation, and water purification. 

So it’s clear that the development of novel membranes is important to both existing energy processes and future energy processes. Compared to alternative systems that use solvents and sorbents, membranes have the advantage of lower capital and operating cost, lower decay rates in performance over time, higher reliability, and great process continuity (vs. bath processing). The right membranes can lead to mass commercialization of many energy technologies. 

But it’s no easy task to create new membranes. Membrane development is very closely tied to new materials technology, as what most membranes try to achieve cannot be achieved with natural materials. Depending on the application, membranes can target varying levels of permeation rates, physical and chemical modification properties, selectivity, resilience under physical conditions, and feed pressure. Commercializing membranes in an industrial system often means balancing cost, capacity to handle the permeating species, fouling risk, lifespan of the membrane, ease of installation and cleaning, and, increasingly, sustainability of the membrane manufacturing and disposal. Given how many different membrane materials can be used, how many structural variations there are in constructing the membrane, and how many different post-formation treatments can be applied to the membrane, membrane development is a very heavily iterative and scientific process. It’s not easy. 

And that’s why, more than ever, energy transition requires investment and support of science-based technologies. There is a short list of investors (less than 200 across all stages and geographies in the venture space, or <1% of all venture capital investors) interested in advanced materials and materials science. These technologies often times rely on the government, incubators/accelerators, family offices, and other types of non-traditional funding to move them through the development cycle…but these capital pools are much smaller than the need, especially when it comes to scale up from lab or pilot to first commercial facility. 

Membranes are just one piece of what is a larger section of the puzzle that gets overlooked. We’ve talked before about the need for funding for asset-heavy technologies. There needs to be greater financial and structural support for technologies like new membranes if we are going to be able to successfully finance energy transition.

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Water Matters: Why Water is at the Crux of Climate Change

Posted by Deanna on October 20, 2020
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There is a generous amount of discussion around the role of carbon dioxide and other GHG emissions in producing climate change. The majority of headlines surrounding climate change attribute it almost solely to GHG. Goals set by various climate authorities focus almost entirely on reducing the global carbon footprint and our CO2 equivalents. And when companies talk about sustainability, the pressure is almost entirely on reducing emissions. What seems to be egregiously overlooked is how water factors into our climate issues. As Earth’s largest natural resource, water is undoubtedly the single most important conduit by which the consequences of climate change develop, and solutions related to water are just as important, and may arguably be more important, to mitigating future changes to our planet’s environment. 

In order to understand why this is, it’s important to dive into what makes water so crucial to almost everything around us. Water is already well known as a necessity for life on Earth. There is no lifeform on Earth (that we know of) that does not depend on water for its metabolic processes. But water serves other functions as well for the Earth, including being a:
 

  1. Temperature regulator – water’s high heat capacity enable it to regulate temperature for individual organisms and ecosystems alike. The ability for large bodies of water to absorb and release heat is what keeps bodies of land, especially coastal regions, within a relatively narrow range of temperatures throughout the year. Temperature differential, which in turn produces a pressure differential, also causes weather events like high winds and rain.
  2. Universal solvent – water’s ability to be a solvent for many different compounds has its advantages, most notably in climate change discussions for its ability to absorb CO2. The ocean is one of the world’s largest carbon sinks. Water’s ability to dissolve salts and nutrients is the reason why we are able to carry out most of the chemical reactions crucial for life on earth.
  3. Transportation vehicle – outside of its ability to dissolve compounds, water can also form mixtures with various solids and liquids. This allows water to become nature’s highway for minerals, biological compounds, organisms, food, and other fluids/water. A river, for example, carries nutrient-rich sediment down to downstream ecosystems.


Perhaps most illustrative of water’s influence is what happens to the environment with disruptions in the water cycle – namely, droughts. Prolonged scarcity of water can have devastating consequences to ecosystems, agriculture, livestock, and humans. Droughts often lead to food shortages, displaced habitats, and can induce secondary natural disasters like wildfires or flooding. Droughts are responsible for about 1/5 of the damage caused by natural hazards worldwide, costing trillions of dollars a year in damages and affecting more than 55 million people.

Droughts are part of the normal climate cycle in many regions of the world and can be caused by various natural events. But human-induced global warming is expected to increase the frequency and lengthen the duration of droughts via increasing the rate of evaporation in many regions and disturbing the atmospheric pressure differentials that drive seasonal storms. As a result, droughts are at once one of the least conspicuous but most serious consequences of climate change. And their intensification is happening already. Studies have shown a linkage between global drought patterns and increase greenhouse gas emissions can be seen as far back as the early 1900s.

So it seems that if we can “solve drought,” we can mitigate some of the most serious and immediate consequences of climate change. But solving drought is no easy task. The Earth has limited freshwater and a fast-growing population, which means we’re each fighting for an ever smaller allocation of this freshwater.  As droughts proliferate to regions not previously used to drought and the “drought footprint” become more unpredictable, there will be more gaps between where freshwater is readily available and where freshwater is needed.

Luckily, technology can play a large part in closing these gaps. One set of solutions aims to increase freshwater availability and production by wastewater treatment, desalination, water transportation, and water collection/harvesting systems. The other set of solutions aims to increase the efficiency of water use, either through reducing the need for water via something like agricultural engineering or by reducing the amount of wasted water in operations via increased monitoring and enforcement of best practices. As the oil and gas industry knows very well, high demand for water combined with low water availability can dramatically stress a system. Having the foresight to implement innovative solutions to a water shortage ahead of time can prevent damaging effects to both our environment and our welfare. The key will be making these systems energy and cost efficient for mass deployment.

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