1 / 72

Clean Energy Deep Dive

Clean Energy Deep Dive Gazay

Clementine1
Download Presentation

Clean Energy Deep Dive

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Post "Cleantech" Bubble: Opportunities for VC Investment in Clean Energy Clementine Gazay in collaboration with Northzone Winter 2023

  2. CONTENTS 01 Context 02 VC Investment Verticals - Deep Dive 03 Market Analysis 04 Initial Market Map & Case Studies 2

  3. Executive Summary 01 - Context ● As Earth continues to warm, global emissions reductions pledges remain insufficient to meet scientific targets ● Clean Energy is one of the major “Cleantech” levers to reducing these emissions. It’s also a vertical ripe for innovation and investment in 2023 as in addition to being a potential avenue for emissions reduction: ○ Energy access is of geopolitical and nationally strategic importance; ○ There are major, global regulatory tailwinds from public investment in clean energy markets; ○ Costs of key energy infrastructure components are down and technology is inching closer to widespread adoption. 02 - VC Investment Opportunities ● The mid-2000s experienced an influx of VC investment in Cleantech that was met with a sharp decline in returns, known as the “Cleantech 1.0” bubble. The worst losers of this investment cycle were materials & hardware startups ● Looking forward, VC investment in clean energy will require looking across the energy supply chain for startups enabling the clean energy transition. As a generalist fund, balancing investments based on return profiles and using benchmarks unique to the clean energy space is a must. These benchmarks & consideration frameworks are detailed in section 2 This deep dive identifies 4 themes for investment in the clean energy space that are particularly attractive for VC-type players: ● Q2 03 - Market Analysis Pre-2023 VC investment metrics reveal a mismatch between VC dollars invested and potential impact on GHG emissions: investments are unjustifiably skewed towards backing mobility and EV startups while other sectors like energy are responsible for greater emission amounts ● The market for clean energy a trillion-dollar one: investments in energy must be >$2 trillion from now-2030 to achieve net-zero emissions by 2050 ○ Within clean energy, renewable energy production is the biggest market opportunity with nearly $1 trillion in investment needed over the next 7 years to meet GHG emissions targets ● Pre-2023 Climate Tech exits reveal the clean energy VC market is in its early phases: there are less than 50 VC-backed exits per year in the across the clean energy supply chain. Most of these are M&A plays by energy pure-players, with SPAC deals inflating exit rounds in 2020 and 2021 ● 04 - Sourcing Case Studies & Fund Implications ● A market map in section 4 identifies high-growth startups of interest/potential benchmarks for larger-size tech funds looking to invest post-seed rounds ● VC funds approach energy investing differently: generalists either have a dedicated fund or pool with other investment. Bottom line: it is difficult to pool energy investments with common generalist funds due to differing return horizons, business models, and level of expertise required 3

  4. 01 Context 4 4

  5. The earth is warming. Countries have pledged to reduce greenhouse gas emissions but efforts remain insufficient to limit rise of global temperatures by 1.5 degrees by 2100. (Source: UN) 5 5 PROPRIETARY & CONFIDENTIAL © 2020

  6. “ClimateTech” incorporates the broad array of technologies and innovations that address GHG emissions Reducing harm Environmental, Social, and Corporate Governance (ESG) Doing good Impact Doing environmental good Climate Tech Source: Cavalry VC, 2022 6

  7. Roughly, four market verticals make up the ClimateTech universe. This thesis focuses on energy transition & solutions ClimateTech Innovation Segments Industry, the circular economy & recycling Agriculture & alternative foods Energy transition & solutions Transportation & mobility Focus of this thesis 7

  8. Global Levelized Cost of Energy Cost in $USD per MWh 800 700 The cost of energy has drastically reduced over the last five years, especially utility scale batteries… - 77% 600 500 Utility Scale Battery cost decline from 2015 to 2020 400 300 Utility Scale Battery 200 Offshore Wind Fixed Axis Solar Tracking Solar Onshore Wind 100 0 2008 2010 2012 2014 2016 2018 2020 Source: Silicon Valley Bank, Future of Climate Tech Report 8

  9. …but this cost reduction isn’t enough & the trend may be changing. Energy investing is important now for four main reasons: 9 9

  10. For one, geopolitically & economically speaking, energy independence is strategically more important than ever before In 2022, Russia’s invasion of Ukraine interrupted supplies to Western leading to supply shortages and drastic price increases. Food and energy prices contributors to global inflation. energy Europe, are the main 10

  11. Global government clean energy investment support enacted since the start of the Covid-19, by sector (in $B) Governments around the world are rolling out huge & long- lasting subsidy packages to support clean energy infrastructure Low-carbon electricty 290 Mass and alternative transit Energy-efficient buildings and industry Fuels and tech innovation Low-carbon vehicles 260 255 175 110 Electricity networks People-centered transitions Energy access 60 20 10 Including: ● ● ● USA: ~$370bn projected subsidies by 2032 from the Inflation Reduction Act (IRA) EU: ~€250bn projected subsidies from the expanded “Green New Deal” Japan: ~ JPY 20tn (~€140bn) in “Green Transition” bonds Source: IEA, 2022 11

  12. Volume-weighted average battery pack and cell split In real 2021$/ KWh 684 606 Pack 215 194 New technologies coupled with declining costs are pushing clean energy projects along the innovation curve 393 303 130 82 226 Cell 469 186 412 67 160 140 132 52 48 263 36 31 221 159 134 112 104 101 2013 2014 2015 2016 2017 2018 2019 2020 2021 Many core unit costs declining exponentially as newer technologies reach maturity and economies of scale are achieved, such as: ● Solar PV panels: ~80% cost reduction, from $3.50 p.w. in 2010 to $0.20 p.w. in 2020 (IRENA) ● Wind: ~50-70% reduction in LCOE for offshore & onshore wind since 2010 ● Lithium-ion batteries: ~85% cost reduction (EIA) 12 Source: Bloomberg, 2021

  13. Clean energy sources and access to clean energy And, lastly, as natural disasters linked to warming temperatures increase, energy availability will continue to be a life- changing resource Increased Greenhouse Gas (GHG) emissions Opportunity to exit the cycle! Warming earth temperatures Investment non-renewable energy infrastructure Increased strength & frequency of natural disasters Need for electricity, the essential resource during crisis 13

  14. Putting it all together - 2023 has the potential to be the year of energy investing because: (1) Energy access is of geopolitical and nationally strategic importance; (2) There are major, global regulatory tailwinds from public investment in clean energy markets; (3) Costs of key clean energy infrastructure components are down and technology is inching closer to widespread adoption; (4) Access to clean energy sources is a major lever to decarbonization, tackling humanity’s biggest current risk cycle: global warming. So, where do the investment opportunities lie? 14

  15. 02 VC Investment Verticals Deep Dive 15 15

  16. VC investment in early stage cleantech companies around 2008 # of companies $ billions 150 6.0 A-Round Financing A-Round Deals Total Financing 5.5 5.0 The mid-2000s experienced an influx of VC investment in Clean Tech that was met with a sharp decline in returns, known as the “Cleantech 1.0” bubble 4.5 100 4.0 3.5 3.0 2.5 50 2.0 1.5 1.0 0.5 0 2004 0.0 2006 2008 2010 2012 2014 “From 2005 to 2008, the share of VC funding going to clean energy technologies more than tripled. However, clean energy start-ups proved to be an unprofitable experiment. Less than half of the over $25 billion provided to cleantech start-ups from 2006 to 2011 was returned to investors. As a result, the cleantech boom went bust as VC funding dried up.” CEPR Think Tank, 2022 Source: CEPR Think Tank, 2022; MIT, 2016 16

  17. Materials and hardware were the worst losers in the bubble’s aftermath… Capital returned to A-round investors in cleantech, financing from 2006-2011 and exits through the end of 2014 ($USD Billions) $764 -84% Material/Chemical/Process $123 $586 Hardware Integration -95% $30 Software/Software Appliance $542 $202 Deployment/Finance $52 $328 Capital invested Capital returned Other Cleantech $69 Source: MIT, 2016 17

  18. … leading today’s Cleantech venture investors to three paradigms: Paradigm #1: Developing most clean energy technologies is capital intensive and scales slowly and payback is too long to see real investment returns Paradigm #2: Clean energy startups compete in tough markets with thin margins & difficult to differentiate products, compared to FinTech, Enterprise SaaS… Paradigm #3: Energy investing is riskier than other sectors due to volatile international commodity markets and exposure to regulation Source: CEPR Think Tank, 2022 18

  19. So it’s not a surprise clean energy VC investment pre-2023 is dominated by deals in: EU Deal & Inflation Reduction Act (IRA) related technologies: Solar/PV installation & financing to take advantage of government subsidy consumer rebate program Climate Enterprise SaaS: Mobility-Oriented Energy Storage: Emissions reporting and ESG software Li-ion batteries and energy storage (mostly specific to electric vehicles) 19

  20. But the global energy supply chains encompass much more… Natural resources End consumers End of Life & Waste Management Extraction & Mining Manufacturing Delivery and Conversion Processed materials (plastic, oil, Mineral mining (lithium, cobalt, Fuel production (gasoline, hydro Carbon capture and storage iron ore, copper) gas, steel, glass…) fuels, biofuels, gas) Electrical subcomponents Hydrocarbon extraction (oil, gas, Energy production (hydrocarbon, Materials reuse and recycling (semiconductors, wafers, cathodes..) coal) nuclear, solar) Energy delivery (grids, pipelines, Restoration and Industrial mineral quarrying Components and end products charging stations) decommissioning Value Chain | Time 20

  21. Looking forward to 2023: investing in opportunities across the energy supply chain could be the answer End of Life & Waste Management Extraction & Mining Manufacturing Delivery and Conversion Mineral mining (lithium, cobalt, Processed materials (plastic, oil, Fuel production (gasoline, hydro Carbon capture and storage iron ore, copper) gas, steel, glass…) fuels, biofuels, gas) Electrical subcomponents Hydrocarbon extraction (oil, gas, Energy production (hydrocarbon, Materials reuse and recycling (semiconductors, wafers, cathodes..) coal) nuclear, solar) Energy delivery (grids, pipelines, Restoration and Industrial mineral quarrying Components and end products charging stations) decommissioning Vertical SaaS across the value chain Key Potential Growth Avenues Likely not VC investable Remains “Hot” 21

  22. This analysis materializes a four-pronged investment strategy… 22

  23. 4 areas for clean energy investments in 2023, all along the energy supply chain: Renewable Energy Energy Consumption & Energy Storage & Delivery Carbon Capture, Offset & Production Efficiency Trading Tech ● Energy storage: Li-Ion batteries & charging stations ● Energy delivery: Virtual Power Plants (VPPs) ● Pick & Shovel opportunities in PV/Solar, wind-farming and nascent renewables ● Modular components ● Emissions analytics ● ESG reporting ● Energy efficiency analytics ● Carbon capture ● Carbon accounting ● Carbon trading platforms across the production supply chain 23

  24. Renewable energy production 24

  25. Area #1: Renewable Energy Production Trends Renewable Energy: Solar & Wind are set to shine among renewable energy sources Around 65% of the coal used globally in 2021 and 40% of the natural gas were for power generation. This balance is shifting. Solar Photovoltaic (PV) and wind (onshore and offshore) will account for almost 90% of all new renewable energy installations until 2027. ● New public policies in major markets will propel further adoption of clean energy sources at an expected rise of 50% from 2020 levels. In the U.S., impact of the Inflation Reduction Act (IRA) will grow annual solar and wind capacity additions to energy in the United States by two and a half times, through access to tax credits stimulating growth. U.S. has large untapped offshore wind potential that may be exploited, as The Bureau of Ocean Energy Management designated two new Wind Energy Areas in the Gulf of Mexico and announcing a 4.5GW California lease sale set for December 2022. In Europe, the EU Commission’s Repower EU plan aims to boost renewables energy by 69% by 2027. Investment in natural gas is drastically reducing (even more significantly than coal). ● ● ○ ○ ○ ● 25 Source: International Energy Agency, 2022; International Energy Agency, 2022

  26. Area #1: Renewable Energy Production Trends Minerals are required for energy transition ● Demand for critical minerals necessary to produce clean energy from renewable sources will soar by 2030, especially copper, nickel, and graphite. Reaching the goals of the Paris climate agreement would quadruple mineral demand by 2040, according to the International Energy Agency (IEA)'s latest report. Hydrogen remains a longer-term game ● More renewable energy sources means more investment in flexible energy storage and transmission, which will put a premium on hydropower, bioenergy, and thermal. ● Hydrogen and other renewable sources could be complementary. According to the World Economic Forum, “hydrogen could help decarbonize hard-to-electrify heavy mobility sectors like shipping railways and buses.” ● Today, Green Hydrogen (emissions-free hydrogen) makes up only about 0.1% of overall hydrogen production. According to the World Economic Forum, this will increase as the cost of renewable energy technology continues to fall. ● It’s a tougher business than other renewables. This sector is plagued by uncertain demand, inconsistent regulation and severely lacking infrastructure. According to the IEA, “just 4% of new projects are under construction or have made it to a final investment decision.” Hydrogen demand from G7 members from 2020 to 2050 Source: International Energy Agency, 2022; World Economic Forum, 2023 26

  27. Area #1: Renewable Energy Production Key VC Investment Opportunities Risks to Investments High interest in solar photovoltaics drove record VC investment in 2022. This may have led to inflated company valuations in the solar space. Congested interconnection queues face renewable projects with extended project timelines that create risks to further capacity development. Highly technical, high CAPEX ventures remain doubtful VC investments. Supply chain issues as most solar hardware is manufactured in China. China provides low cost infrastructure which the U.S. has tried to control with tariffs. Managing electrical output. As renewable energy installations increase, electrical intermittency needs to be managed to avoid stress to the power grid. The efficiency of wind turbines is correlated with their size. Finding the infrastructure to build, transport, and install huge infrastructure may be difficult. Dependence on minerals required for the energy transition may be a bottleneck to long-term growth. ● PV/Solar: Solar panels are viable at a small scale and decreasing in cost, making them good candidates for residential installation. Pick & shovel opportunities include: (1) small, modular hardware, (2) installment & design software, (3) scalability accelerators (financing platforms, marketplaces), (4) efficiency maximizers. 1 ● ● Wind farming: Offshore wind installations can be less costly than scarce land and easier to approve from an urban planning perspective but they are among the hardest to maintain. Startups focusing on breakage, monitoring & maintenance, and asset performance may be key to enabling wind farming technologies. 2 ● ● Innovative & Nascent Renewable Technologies: Very nascent tech like green hydrogen investments seem to be too early in the innovation curve for non-DeepTech VC investment. More accessible tech could be geothermal energy (heat pumps, hydrothermal). 3 ● Source: Fitch Solutions, 2023; Pitchbook, 2022 27

  28. Area #1: Renewable Energy Production Venture Evaluation Framework Specific to This Space Ventures must have the R&D & technical talent but also the network to scale businesses in regulated environments ● Does a sufficient talent pool exist to hire & scale this business or is this tech too early/nascent? ● Is there an operational workforce to implement/install? ● Have founders/core team worked closely with government or local authorities before? Do they have a knowledge of/strategy concerning the political landscape? ● Is there a solid R&D plan to innovate? To win, companies will need a great understanding of where they fit on the energy pipeline ● Does the venture have an understanding of where they fit in the energy pipeline and will there be barriers to integration along this pipeline (grid, transmission, etc.)? ● Is the timeline to integration in energy supply chain realistic for VC returns? ● What are the transportation/access to natural resource (sun, wind factors)/installation requirements that this venture depends on? ● Geographical proximity to energy markets it will be selling to? ● Supply chain matters: where are they sourcing necessary materials and is this supply scalable (i.e. dependence on China)? Every penny counts: energy production is highly cost sensitive. Companies must stay lean, avoid encroaching on profit margins, and avoid differentiating at a higher cost ● Selling energy is an extremely cost-sensitive operation. How will this venture lower the price of energy/ensure they aren’t adding unnecessary markups along the energy delivery value chain? ● If this venture is serving a differentiating factor: is the market they are operating in sensitive to differentiation at all? ● How will this venture maximize profit margins? How do profit margins stack up to alternatives along the energy supply chain? ● Has hiring, training, and deploying installation and maintenance teams been factored into the financial model accurately? Be weary of political and regulatory dependent ventures ● What is the realistic political risk for this venture? ● Is this venture operating in a volatile regulatory geography/environment? ● Does this business model depend on uncertain economic factors like uncertain tax credits? ● What is the ease of obtaining permits? ● Who are the utility regulators of target geographies and will they be adopters of this technology? Sources: McKinsey, 2022; International Economic Development Council, 2016 28

  29. Energy Consumption & Efficiency 29

  30. Area #2: Energy Consumption & Efficiency Trends Regulatory tailwinds in the U.S. and in Europe favor a boost in ESG reporting requirements, with a focus on energy & carbon emissions General ESG Reporting, and in particular, reporting on carbon emissions in industrial sectors will continue developing in 2023. More and more companies are announcing net zero targets, as sustainability is a priority for consumers, shareholders, and employees. In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules to enhance and standardize climate-related disclosures for investors, emphasizing the importance of ESG reporting for publicly traded companies. A major SEC focus is working through requiring all public companies to disclose Scope 1 and 2 emissions data in annual filings. The EU has also formalized regulation on ESG reporting: the Corporate Sustainability Reporting Directive (CSRD) entered into force on Jan. 5th, 2023 and rules will be phased in starting Jan, 2024, requiring EU companies and certain non-EU companies to provide detailed reporting on their sustainability practices. ● ● ● Source: Reuters, 2022; Columbia University, 2020; 30

  31. Area #2: Energy Consumption & Efficiency Trends Energy efficiency & consumption has historically been a VC-investable area Energy efficiency is “the use of less energy to perform the same task or produce the same result.1” Buildings are responsible for more than 40% of power consumption demand and GHG emissions around the world.2 You can’t regulate or change what you don’t know - building & energy analytics software developed in recent years provides visibility that allows for action to reduce this consumption. This is one of the easiest ways to get insights that save companies money and improve their carbon footprint. In 2020, around 20% of early-stage VC funding in energy technology was allocated to energy efficiency startups.3 Supply chain complexity means persisting difficulty getting “real” energy efficiency data on Scope 3 emissions Scope 3 emissions are indirect GHG emissions produced through supplier/third party interactions. 90% of a product’s emissions occur throughout the supply chain rather than own company operations. Visibility around the carbon emissions and energy consumption within the supply chain is important for compliance but also to enable the success of carbon markets products.4 Source: (1) Energy,gov, 2023; (2) Columbia University, 2020; (3) IEA, 2022; (4) Harvard Business Review, 2022 ● The EPA’s overview of GHG Protocol scopes and emissions across the value chain: Scope 3 emissions remain the hardest to quantify and track ● ● ● ● ● 31

  32. Area #2: Energy Consumption & Efficiency Key VC Investment Opportunities Risks to Investments ESG Reporting Software with a Focus on Carbon and Scope 3/Supply Chain Emissions Sources: Companies with the technology to unlock and analyze deep insights on emissions will be key to ESG reporting. Opportunities lay on (1) verticalized industry-specific analytical SaaS and highly automated solutions (the difficulty is uniformity in data collection, ingestion and analytics) and (2) specifically carbon emissions tracking to be used in carbon credits trading schemes. Regulatory pressure in the U.S. is still pending and is 1 year away from entering into force in the EU. Lack of a reporting standard: there is no one gold standard for ESG reporting. The risk that a company reports ESG metrics in a limited way exposes their product to accusations of greenwashing and obsolete value from a regulatory standpoint. Information is not readily available (though this is a risk & opportunity). The structural lack of information exchange and transparency from all the different actors in the supply chain makes it very, very difficult for large organizations with thousands of suppliers to measure their impact. Data quality and collection may still be in its nascent phase. Often, data collection is still manual and many companies do not publicly disclose the level of information detail needed for impact calculations. ● 1 ● ● Energy Efficiency Software: Energy efficiency is a low-hanging fruit to more responsible energy consumption. Looking forward, the use of advanced AI can drive efficiency gains at a wider scale by analyzing data on the way energy is used and consumed within an enterprise and identifying, then exploiting opportunities to reduce energy consumption. 2 ● Source: AI For Climate Mapping, 2022 32

  33. Area #2: Energy Consumption & Efficiency Venture Evaluation Framework Specific to This Space The financial profile of Climate SaaS will be different 1 ● The TAM for climate markets evolves with regulation & tech. developments. Leave room for loose interpretations of TAM and don’t let a $500M-$1B market size eliminate a startup. ● Sales cycles may be >12mo. because they (1) often involve public buyers and (2) require a heavier education component. ● Slightly lower topline growth may be the result of slower sales cycles. ~70% in revenue growth at the Series B isn’t an anomaly BUT is expected to accelerate faster than traditional SaaS. ● Slightly higher gross margins (60-80%) are the norm. Higher customer success headcounts and cloud hosting fees mean a higher COGS, but solutions are expected to be stickier. ● Dollar retention may be higher as solutions are bought cross-business units. ● The most important metric may be capital efficiency. Given longer sales cycles, cash burn should be as low as possible (between .5-3x burn multiple). Remember regulatory compliance is the central market driver ● EU regulation in reporting is planned to phase-in January 2024 and the SEC hasn’t made moves to approve emissions reporting mandates yet - we are still relatively early on the adoption curve from a legislative standpoint. Ensure startup cash burns line up with these cycles & are aware of regulatory risk. ● Compare revenue projections with potential fines/value at risk. A company will not pay for an ESG emissions software if OPEX is higher than potential fines. Understand the regulatory environment and diligence pricing models accordingly. GTM strategy differentiates. Best practice is to begin with one vertical & expand ● Supply chains are complex; understanding them to accurately monitor will resource intensive. Does the startup have a clear plan with which industry vertical to begin with and is this industry vertical big enough as a first starting block to scale? ● Does the startup have a true understanding of Scope 1,2,3 emissions and what is their “unfair advantage” to evaluating notoriously difficult Scope 3 emissions? Will they be able to replicate Scope 3 emissions analysis past their first vertical? Automation & proprietary analytics will differentiate ● Companies that can develop proprietary AI to drive reporting & emissions analytics will be the winners in this space. Diligence their analytics platforms like other technically advanced algorithm products. Sources: (1) Energize Ventures, 2022 33

  34. Energy Storage & Delivery 34

  35. Area #3: Energy Storage & Delivery Trends The energy delivery supply chain: FTM vs. BTM assets Structurally, energy delivery assets are typically known to be Front of the Meter (FTM) or Behind the Meter (BTM): Utilities companies have historically made profits through the installation of BTM assets at end-user locations. ● But utilities’ monopoly on FTM assets may shift as energy delivery becomes more expensive. ● “Despite increased spending on FTM power delivery assets like transmission and distribution, power produced by and transported through utility-owned infrastructure is becoming increasingly expensive and unreliable.”1 These innovations would allow for decentralized energy delivery, which may also be the key for transition to distributing energy stored from renewable sources. Rises in energy costs are mostly due to power delivery ● Source: (1) CTVC, 2022 35

  36. Area #3: Energy Storage & Delivery Trends The huge rise in the share of solar PV and wind in total generation in all scenarios fundamentally reshapes the power system and significantly increases the demand for power system flexibility to maintain electricity security. Grid power has historically flowed in one direction (from BTM to FTM assets). As people and businesses are installing renewable energy assets, power now flows in multiple directions, challenging the grid. Traditional energy transmission isn’t enough to support renewable sources of energy because they require immediate production of energy. Energy storage systems allow electricity to be stored—and discharged—at the most strategic times. Estimates state the US will need 70 times as many batteries as today (180GW of 6 hour batteries) for a grid dominated by renewable energy.2 In the U.S., it’s not just about renewables: the current state of power transmission is a major area of concern. Average annual U.S. power outages affecting more than 50,000 people increased 45.0% from 2012/16 to 2017/21.The Infrastructure Investment and Jobs Act includes $15 billion dedicated funding for the grid.3 Today, most of energy is stored through Pumped-Storage Hydropower (PSH). PSH facilities store and generate electricity by moving water between two reservoirs at different elevations. PSH represents 95% of all utility-scale energy storage capacity in the United States and will continue to grow, but grid-scale batteries are catching up as an alternative, innovative way to store energy.1 Lithium-ion (Li-Ion) battery cell cost declined by roughly 90 percent over the past 10 years. Li-Ion is positioning itself to be the most cost-efficient way of storing energy across the value chain today. ● Other alternatives to energy storage include flywheel, solar-plus storage, other lead-acid batteries but none are nearly as advanced as PSH and as cost efficient as Li- Ion for use across the energy value chain. Flexible energy storage from solar/PV sources would end total reliance on power from the centralized grid (utilities-controlled FTM assets) by saving solar energy produced during non-peak, daylight hours to use during peak, non-daylight hours. ● ● ● ● Source: (1) IEA, 2022 (2) Princeton, 2020; (3) ECO Capital Partners, 2022 36

  37. Area #3: Energy Storage & Delivery Trends Rising energy distribution costs + proliferation of Distributed Energy Resources (DERs) + a need for a more modern, flexible energy grid to enable renewable energy sources to thrive = 5 opportunities in energy storage & delivery.1 ● 1- Battery storage systems, in particular, Li-Ion batteries at scale; ● 2- Electric vehicles as mobile battery systems; ● 3- Electric water storage and space heaters; ● 4- Grid-interactive efficient buildings combining electricity production and consumption (known as ‘prosumption’); ● 5- Virtual Power Plants (VPPs): A VPP is a consolidation of business or household energy assets (DERs) that can be flexibly charged, discharged, or managed to meet energy grid needs. At the consumer scale, these are known as “Micro-Grids.”1 VPPs & Micro Grids may be the capital-light, tech-enabled, energy-potential unlocking technology VCs are looking for: ● The Federal Energy Regulatory Commission helped clear the way for VPPs in September 2020. Order 2222 enables VPP operators to be compensated for the services they provide to the grid.3 ● A VPP system is not subject to the liabilities associated with land use, waste management and stranded asset risks of traditional power plants. ● VPPs can incorporate advanced software & ML/AI to process meta-data such as weather forecasts, real-time electricity prices and real-time grid status to optimize the operation of DERs. VPPs: the energy delivery supply chain of tomorrow?2 Source: EIA Source: (1) RMI, 2023 (2) IEA, 2022; (3) Axios, 2023 37

  38. Area #3: Energy Storage & Delivery Key VC Investment Opportunities Energy storage tech enabling flexibility (in particular, Li-Ion battery tech)1: ● On both the B2B and B2C sides, technology unlocking data analysis to bring insights on battery health and cycle; ● Preventative maintenance or remote upkeep preventing battery degradation - drone monitoring, for example, is an innovative way to monitor expanses of grid infra; ● Financial platforms providing real-time economic analyses that balance revenue versus costs for batteries actively participating in energy markets. VPPs & DER management: ● Large-scale grid management software. These platforms determine a device’s battery level and if batteries should feed electricity to the grid, charge from a source or discharge power into the household; ● D2C grid software: products allowing individual households to feed energy back into the grid or connect to larger VPP networks; ● Smart energy retailing: products and marketplaces enabling resale of energy back into the grid; ● Cloud APIs for VPPs. These solutions would allow VPP operators to enroll large groups of DER assets easily into their VPP in a single batch;2 ● Edge computing devices: hardware allowing for connectivity between DERs and VPP networks. 1 2 Microgrids: ● Vehicle-to-everything technology. Hardware and enablers allowing small energy stations charging EVs to store energy and re-use it when needed or feed it back into the grid. 3 Source: (1) Axios, 2023; (2) SwitchedIn, 2022; (3) Wall Street Journal, 2023 38

  39. Area #3: Energy Storage & Delivery Risks to Investments Costs of battery components. Although batteries have gone down in price significantly over the last few years, costs are still too high in some cases for business plan viability and profitability. Battery costs in some places may also benefit from national regulations and prices (i.e.. German subsidies on battery costs), but this may not hold across different countries of one same region. Materials shortages. Around half of Lithium is mined in Australia and shipped to China for processing. Estimates point to potential mining shortages and supply chain bottlenecks as barriers to Li-Ion adoption, and European regulations around minerals mining & processing may make it harder for these companies to thrive in Europe.3 VPPs are still early on the adoption curve: “There are just 21 VPPs in the U.S. larger than 30 MW, per Wood Mackenzie. Only seven are bigger than 100 MW.”1 This scope, for now, positions them as too “low threshold” for VPPs to be widely adopted as utility-scale energy management solutions. Interoperability: decentralized grids are a recent topic, and there has yet to be a common grid-to-DER communication standard. One may be required in the future and may pose issue to non-operable solutions. Resiliency will be an issue. In the wake of natural disasters like fires, hurricanes, and storms, will VPP technologies stand the test of “resilient” power management? ● ● ● ● ● Source: (1) Axios, 2023; (2) SwitchedIn, 2022; (3) Wall Street Journal, 2023 39

  40. Area #3: Energy Storage & Delivery Venture Evaluation Framework Specific to This Space A strong understanding of the ICP isn’t optional ● Business models for VPPs or battery energy storage solutions will differ highly whether a startup is selling to individuals for their homes, communities, utilities companies, and others. Defining ICP, the stakeholders the customer is currently dependent on and a plan to integrate with these is key. ● For D2C models, the sales journey will require huge CAC costs (related to education) and will be driven by visible energy cost reductions rather than efficiency. It will also require interfacing and partnering with legacy utilities companies. Highly localized “thresholds” define where a venture sits ● Generally speaking, there are 3 energy consumption levels: local/individual, distribution-level, and grid-level consumption. The number of Kilowatts at play determines in which level a solution is operating in (and thus, how it can operate). Different places have different “trigger-points” to categorize energy usage. ● Key questions: which level of consumption does a startup work with? What are the regulatory/practical implications of operating at this level? Is this scalable or will this product/solution be categorized differently in other target geographies? Are they physically able to manage the KW required for their model? In this market, “network effects will trump economies of scale every time” 1 ● The quality of a VPP depends on the number of DER assets connected to it and how rich DER data is. This will enable the VPP’s ability to accurately predict spikes in energy usage and corresponding efficient consumption. ● “As the grid evolves to look like the internet, business models (like VPPs) that revolve around data and networks have the potential for superior economic and environmental performance.”1 Revenue models in this space are highly subjective ● The revenue models of energy storage & delivery solutions often depend on the actual amount of GW being delivered/redirected. Unlike in the traditional utilities space where consumption is contractually negotiated & bought, flexible energy solutions depend on actual usage. ● Key questions: What is the revenue structure of the solution and how variable is it based on consumption fluctuation? How were the assumptions on consumption derived and what is level of confidence around these assumptions? Source: (1) CTVC, 2022 40

  41. Carbon Capture, Offset & Trading Tech 41

  42. Area #4: Carbon Capture, Offset & Trading Tech Why talk about Carbon Capture & Offset here? Let’s zoom out. To reduce our current carbon footprint of 40Gt of carbon per year, several options are available: How? Covered in thesis parts 1 & 2 ● Set ESG emissions targets ● Consume more efficiently, using efficiency tools & analytics Consume less Reduce footprint Consume the same, but from carbon-neutral sources ● Replace polluting sources by net-zero energy sources like solar & wind Instantly capture the carbon emissions produced & store them somewhere where they can’t pollute ● Carbon capture technologies Remove another corresponding amount of carbon in the atmosphere in anticipation of emissions ● Biological carbon sequestration such as reforestation, algae Continue emitting carbon Offset emissions by buying carbon credits from someone avoided emissions / removed carbon ● Carbon accounting & trading platforms 42 An alternative option

  43. Area #4: Carbon Capture, Offset & Trading Tech Trends 5 main carbon reduction technologies aim to reduce carbon emissions that have already occurred 1: Carbon Capture Technology Description & Risks Bio-Energy with Carbon Capture and Storage (BECCS) Capture carbon with trees, burn trees, capture carbon at smokestack, and bury carbon underground. Current major issue with these technologies is land use. ● ● Taking CO2 directly from the air and pumping it into a plant that transforms it into a valuable resource (can be fuel, building materials & components…). Current major issue is price of capturing carbon (currently at $94/ton of CO2). ● Direct Air Capture (DAC) ● Burning organic waste in oxygen-free chambers and then burying it or using it for agriculture. Current major issue is scalability. For Biochar to have a meaningful impact, you would need to burn a massive amount (some estimates say ~10% of bio-waste on the earth). ● ● Biochar A small group of companies is looking to enhance the CO2 that is absorbed by the ocean (a naturally-occurring phenomenon). Main challenge is doing this at a scale that wouldn’t increase the acidity of the ocean water & damage sea ecosystems. ● Ocean Carbon Capture ● Essentially reflecting sunlight back into space. From a VC lens, this is way too nascent and controversial. ● ● Solar Radiation Management (SRM): Source: (1) Y Combinator, 2022 43

  44. Area #4: Carbon Capture, Offset & Trading Tech Trends Carbon capture tech has been around for +40 years. Why are we still in “early” phases?1 Lacking standard in carbon pricing: pricing highly depends on the geographies with only 30% of emissions taxed today2 ➔ In the U.S., there is no unified carbon pricing. CO2 emissions are not restricted or priced at the national level. There is no clear commercial impetus to reduce emissions. 1) ➔ In Europe, carbon pricing is managed by the EU Emissions Trading System (ETS). The price of carbon varies by geography and over time, depending on energy supply and demand. The price of carbon directly correlates with the unit economics of carbon capture technologies. Top climate scientists said last year in a UN report that climate mitigation solutions costing $100 per ton of carbon or less “could reduce global greenhouse gas emissions by at least half the 2019 level by 2030.”3 Industry-inherent “value chain complexity” is a barrier to investment. CCS technologies have 4 main components (capture, transport, deep underground injection, and ongoing monitoring), and each of these links are industries in themselves with little official coordination. Finding the right technology that has an understanding and the ability to tackle all these links has been very difficult. 1) Source: (1) Energy Futures Initiative, 2023; (2) IMF, 2023; (3) Financial Times. 2023 44

  45. Area #4: Carbon Capture, Offset & Trading Tech Trends The voluntary vs. mandatory carbon market1 Carbon accounting & trading ● Launched in 2005, the EU’s Emissions Trading System (EU ETS) was a pioneering program & first attempt to introduce a compulsory carbon market to reduce emissions in high- intensity carbon-emitting industries.1 Now, there are many more global certificates for carbon trading: 3 in Europe, 2 in the U.S. 1 in S. Korea and New Zealand, respectively. ● In parallel to regulatory initiatives, a Voluntary Carbon Market (VCM) has been developed. This market drives investment in projects that deliver independently verified carbon reductions through the sale of carbon credits. Although VCMs are significantly smaller than the regulated compliance markets, their use is growing. In 2019 the VCM market was valued at US$320m, compared to US$249bn for EU ETS. ● To carry out carbon accounting & trading, a player must be able to measure their carbon footprint accurately and must have access to the platforms enabling credits trading. 3 main principles guide carbon offset projects: ○ 1- Permanence: understanding & accounting for expiry dates on carbon credits (i.e. forestry carbon expiring); ○ 2- Leakage: not causing more emissions by nature of operationalizing a project meant to net reduce emissions; ○ 3- Additionality: emissions reductions must be additional to any that would occur without the project. ● Source: (1) Sustainalize 45

  46. Area #4: Carbon Capture, Offset & Trading Tech Key VC Investment Opportunities Carbon capture tech: ● Direct Air Capture and Ocean Carbon Capture may still be too nascent for generalist VC funds by nature of return horizons and riskiness. ● Accessible tech from a VC perspective are nature-based solutions (i.e. seaweed farms, tree planting) ● Revenue models interesting here are those in licensing of technology or direct resale of carbon credits. 1 Carbon accounting platforms: ● Carbon accounting software is a specific type of emissions software discussed in investment area #2; it is more complex than typical emissions SaaS as it truly resembles the accounting discipline (balance sheets, compliance, audit capabilities, etc.) 2 Opportunities along the involuntary (regulatory) & Voluntary Carbon Market (VCM) value chain: ● FinTech for direct procurement of carbon credits ● Marketplace-model platforms for tracking, verifying & trading carbon credits ● Trading platforms for carbon credits within ETS framework (regulation-driven) ● Ratings providers for carbon credits ● Verification & quality control carbon credits ● Potential innovation: tech leveraging blockchain to verify & trade energy credits via smart contracts 3 46

  47. Area #4: Carbon Capture, Offset & Trading Tech Risks to Investments The cost of carbon emissions is still too uncertain and too low for the unit economics of carbon capture tech to be rewarding. Investing in carbon capture tech is a long-term game speculating on the rising cost of carbon. For involuntary carbon markets driven by regulation, compliance systems ultimately control to the number of carbon credits in circulation. For carbon removal companies, the return horizons may not make sense to VC investors. The length of POCs in carbon capture tech can last up to 15 years and sales cycles (where customers are builders of new plants or waste management facilities) can take years as well. The accuracy of carbon accounting platforms is still in testing phases. Fraud, lack of transparency, and general mistrust still plague the Voluntary Carbon Markets (VCM) industry. “Phantom” carbon credits are an industry-wide problem. Some major incumbents (such as Verra) have been accused of overstating and shaping their carbon credit calculations by following own frameworks. ● ● ● ● ● 47

  48. Area #4: Carbon Capture, Offset & Trading Tech Venture Evaluation Framework Specific to This Space Vertical integration along the carbon chain will drive growth & resiliency of a venture ● Startups that can build vertically along the carbon chain (from originating carbon credits to trading & certifying them) will have a competitive advantage. ● Look for ventures that have found a niche to vertically build out their model, as they will be able to circumvent missed revenue from intermediates along the supply chain.3 Carbon Capture tech is VERY nascent. VC-investable opportunities in technology will have proven initial success with POCs and will be backed by industry insiders & research institutes ● Today, only a handful of players have developed proven carbon capture technology and the price of carbon is still too low for these ventures to have a functioning business model ● Carbon Capture ventures are dependent on POCs before developing commercial product: norms are ~15 years of POCs (5-10 POCs) with later-stage projects involving massive corporations with large plants ● Multiple government-funded, grant, subsidized POCs are the norm with some complementary private funding; ● The best way to measure traction of these ventures is: ○ (1) understanding their competitive edge in terms of rendering a currently grossly unprofitable business model to a potentially scalable one - today, revenue models are either selling infrastructure or licensing technology ○ (2) evaluating how close ventures are to be seen as potentially groundbreaking by researchers in the space. The IEA and Global CCS institute are key “stamps of approval” to this type of technology ● Pilot rounds of funding vary but larger players are ~$20M1 Transparency, legitimacy, and friction-reducing platforms may dominate in the winner-takes-most VCM space ● Carbon credit trading platforms will only be as good as the trust around them. How a company is able to prove their value add but also their reliance and trustworthiness will define their success with enterprise buyers who drive this market. ● The market may be a winner-takes-most one: as buyers care more about trust and verifiability than other dimensions, a “brand name” who can establish itself as the trusted broker in carbon credits transactions may prevail Source: (1) Expert Conversation, Feb, 2023; (2) Energy Futures Initiative, 2023; (3) CTVC, 2022 48

  49. 03 Market Analysis 49 49

  50. Since 2018, more than US$260 billion have been invested by VCs in general Climate Tech startups. Most of this investment is concentrated in mobility & transport ventures 1 Source: (1) PwC, 2022 50

More Related