Around this time last year, I shared some reflections from At One’s 2023 AGM. We had the privilege of attending this year once again at the incredible California Academy of Sciences and once again it was a powerful event. At One, and Tom Chi in particular, has a unique ability in the climate tech space to be raw and honest and vulnerable around the emotional pain associated with environmental devastation without coming off as trite. Tom’s annual State of the Planet keynote was, once again, simultaneously moving and original and thought provoking. At this year’s event, I also had the immense pleasure - and terrific fun - of doing a panel discussion with Pulakesh Mukherjee of Imperative Ventures and moderated by At One’s Laurie Menoud. We covered a lot of ground and touched on some of the most important topics on the climate tech market today, so I thought it would be worth summarising some of the main points of conversation.
Who’s having fun?
HOTor NOT: Discussion on hype trends / areas that have received a lot of attention / investment - which do we believe in, which seem doomed:
Sustainable aviation fuel / efuels - NOT - Fundamentally the costs will not be competitive in a commodity market where there is precious little willingness to pay above the odds. Not to say the willingness to pay up is absolutely zero, but not at meaningful percentages of overall fuel use, not without regulation with real teeth. SAF from biofeedstock is also highly restricted by supply and e-fuels (using green hydrogen from electrolysis and synthesising with carbon captured from somewhere) has stacked inefficiencies and is a wildly profligate use of low-carbon electricity.
Hydrogen - full thoughts on this set out in this recent post - but the answer on this is…it depends.
Green hydrogen through electrolysis - NOT - we have so many things that we can use low carbon electricity for, including decarbonising things we already use electricity, that using low-carbon electrons to create hydrogen and squander exergy (useful work potential) is really wasteful and generally therefore also uneconomical. There may be edge cases where there is abundant and complimentary wind and solar resources (Chile, Australia, Saudi, Morocco) and no major sources of local demand or ability to connect to the grid where these green hydrogen projects might make sense. However, even then, China has already stolen the lead on electrolyser production, coming in at about a third of western manufactured electrolysers, so I am bearish on the prospects for those companies, which have received the majority of VC funding in this space to date.
Geological hydrogen - HOT - I love geological hydrogen for two reasons. Firstly, it has incredible intrinsic potential as a (again, potential) massive new source of primary energy, to the tune of many billions of tonnes of low-carbon hydrogen at a cost point that would allow it to be used even for the less high-leverage applications. As a source of primary energy, the energy return on energy invested has the potential to be really high, in the region of 30:1, compared to the 0.7:1 or less for green H2. Secondly, I love geological hydrogen for what it represents for future solutions more generally. Here we have the prospect of a major addition to the energy system balance sheet, and it wasn’t on anyone’s radar two years ago. Still today a lot of people aren’t familiar with it. Just think of all the future solutions that we have no idea are coming! [Disclosure, we’re also indirect investors in Koloma via Evok Innovations.]
Geoengineering - This doesn’t quite qualify as hype, since virtually no money has gone into it, but we touched on it as an “frontier” area that is gathering some interest. My view is that the squeamishness around solar radiation management or other types of geoengineering from some quarters, while no doubt coming from a place of genuine concern, is wholly misplaced. Humans have been changing our environment since we’ve evolved on this planet and radically, increasingly so over the last century. We have been incidental and wanton terraformers up to now, and we have already tipped the planet onto a path of serious change. We should absolutely be responsibly be pursuing the knowledge of how we can intervene to mitigate those effects. I’d actually go further and say that it is inevitable that geoengineering will be implemented as part the toolbox of managing climate change since we are clearly behind where we need to be on decarbonisation. To be clear, I am not saying I am in favour of any particular form of geoengineering, just that we can’t prematurely remove things from our toolbox and it is important to build our understanding of potential risks and benefits and the edges of what is quantifiable.
Market trends: Trends in the climate tech funds market:
The universe of climate tech venture funds exploded between the years of 2019 and 2023 up to around 350 today. We’re now still seeing new funds coming to market, but the pace has slowed markedly and overall we’d expect the number of funds to plateau or maybe decline over the next couple of years as a lot of managers that raised money during at the top of the venture market won’t be able to raise follow on funds. This is healthy. We’re still seeing a lot of managers that have pivoted from pure software backgrounds into climate, often with a focus that includes deep tech sectors that are perilous for tourists / debutants. Most of these won’t survive. One thing we’re excited to watch over the coming years is where we can start to see some more technical talent come into the investing side, particularly with operating experience in some of the more industrial or hardware businesses that have successfully scaled.
Risks: What are the things that could derail the current climate tech wave?
The biggest, most underappreciated risk by founders and investors is what incremental innovation and scaling can do for incumbent technologies. If you have a technology which represents some decent improvement vs the incumbent, but it is going to take you a decade plus to scale, you aren’t competing against the incumbent today, but against the incumbent after 10 years of improvement. That is why it is necessary for would-be disruptors to offer radical, not incremental, improvements on the incumbent economics. (Also, perhaps not incidentally, it was At One’s laser focus on radically improved cost structure offered by their portfolio companies that was one of the big reasons we invested.)
This dynamic is present across many industries in climate, but energy storage is one that springs to mind. Lithium ion has clearly won for 4-8 hour storage. The space is somewhat open for longer duration storage, but probably not for long. CATL, the world’s biggest battery maker, has an annual R&D budget of $2.5bn! That is why it is so critical for founders to deploy, deploy, deploy.
Subsequent to the panel, Pulakesh kindly shared some slides for the course he is teaching on scaling climate tech at Stanford. This one encapsulates this idea:
Pulakesh Mukherjee / Stanford School of Sustainability
Energy Transition investment: The prompt - It is estimated by BNEF that spending on energy transition needs to increase from $1.7 trillion today to more than $4trn by 2030 and $7.6 trillion by 2040.
I was perhaps more optimistic around these numbers than the others on stage. Whilst the climate tech venture funding has been somewhat volatile, coming off a massive bubble in 2021, the overall spending on energy transition including infrastructure and household capital expenditure on electric vehicles has been consistently and rapidly increasing. In fact, if the world were just to continue at the compounded growth rates over the last few years, we will exceed the $4trn annually by 2030. That said, the growth hasn’t been even across sectors, with electrified transport ahead of pace and renewables and power grids behind. I covered this in a previous post, but reattaching the relevant slide here from that BNEF report:
BNEF
Exits: What are the areas that have the best exit prospects?
What you are looking for is where there could be multiple cash-rich potential buyers. These can vary over time, but the two groups that spring to mind are 1) oil and gas companies and 2) big tech. In the first group, you are really talking about things that play to their strengths, so anything subsurface - geological hydrogen, geothermal - or things having to do with moving and processing molecules - CCS. For the big tech play, it would be - obviously - anything having to do with efficiency of compute, energy efficiency of data centres, etc. Linking back to the title of this panel - can climate tech finally succeed - a few landmark exits in this space over the next couple of years are critical for signalling to the broader financial markets that this is a trend that is here to stay.
It is obvious that alternate energy is very challenged. Natural Gas our cleanest burning fuel needs to be a dominant form of energy. Flaring natural gas needs to be greatly diminished. Hi-speed rail needs to replace overland flights. Farming needs to follow the Dutch model: climate-controlled and pesticide-free. We need to make a massive switch to mass transport and downsize vehicles. Our forestry practices need to be drastically changed. Mining for batteries needs to be done environmentally neutral.
Given that our energy system was decarbonizing per unit of energy long before the adoption of Green energy policy, do you believe that we should be spending $5-7 trillion per year on more clean energy?
Why not just let the energy system continue on the same trend as it was in the late 20th Century? We will eventually get to the same place anyway..
It is obvious that alternate energy is very challenged. Natural Gas our cleanest burning fuel needs to be a dominant form of energy. Flaring natural gas needs to be greatly diminished. Hi-speed rail needs to replace overland flights. Farming needs to follow the Dutch model: climate-controlled and pesticide-free. We need to make a massive switch to mass transport and downsize vehicles. Our forestry practices need to be drastically changed. Mining for batteries needs to be done environmentally neutral.
Given that our energy system was decarbonizing per unit of energy long before the adoption of Green energy policy, do you believe that we should be spending $5-7 trillion per year on more clean energy?
Why not just let the energy system continue on the same trend as it was in the late 20th Century? We will eventually get to the same place anyway..