Equal’s Top Climate Themes for 2021
By: Rick Zullo and Simran Suri
2021 is poised to be a blockbuster year in climate tech, thanks to the intersection of three key catalysts. First, the economics of new energy are starting to make sense. The cost of clean energy is coming down, as the number of system installations rises and tech becomes more sophisticated. Second, funding is more material now than ever before. We’ve seen more and more investors look towards climate and the announcements of several new climate-focused funds. $29B was deployed into green businesses across the North American venture landscape in 2020. And third, policy is being put in place to bolster the deployment of climate tech across energy generation and efficiency, mobility, carbon offsetting, and more.
For the first time post-Clean Tech Bubble (something that we had personal experience with), the stars are aligning and the opportunity to build and fund green businesses is full of promise. At Equal, we’re excited to participate in the re-emergence of cleantech (now known as climate tech) and are particularly excited about a few key areas in the industry. We’ve warned that investors are making some of the same mistakes they made in the prior cycle (with the astronomical rise of climate oriented SPACs showing as a potential warning sign) which is why we think it’s more important than ever to bring a “Prepared Mind” to the table when seeking to partner with the best founders. Amazing founders continue to expand our point of view on the future of this industry, but below are a few of the themes we are particularly excited about for 2021. If you’re a founder working in the climate tech space, please reach out to us!
BUILDINGS AS POWER PLANTS
Buildings represent 40% of commercial energy consumption, yet remain one of our greatest sources of inefficiency. A decade ago, the American Recovery and Reinvestment Act (ARRA) made weatherization an incredible focus — over 340,000 low-income homes were weatherized through the $2B investment, creating energy savings of $1.1B, supporting 28,000 jobs and reducing almost 7.4M metric tons of carbon. This decade, however, we believe policy initiatives will move beyond efficiency to focus on building electrification and automation.
Undoubtedly, a huge component of this will be batteries and energy storage. Energy storage is needed to efficiently manage load shifting, particularly as grids see more and more demand from products like EVs, and as they move towards clean energy sources with inconsistent generation patterns, like solar or wind.
Energy storage solutions within buildings serve as one of the primary means for modulating energy volatility and making the most out of our existing grid resources. Historically, these solutions have been prohibitively expensive but, much like in solar, component costs have come down enabling new economic outcomes. This enables building owners to view themselves not only as consumers of energy, but ultimately responsive participants in the grid. The use and proliferation of distributed energy resources (DERs) now enables buildings to leverage assets like batteries and rooftop solar to generate revenue. As occupancy levels potentially retreat from previous levels as a consequence of COVID, it will become more important than ever for buildings to identify new sources of income and this method provides a pathway to do so. RigUp co-founder Sandeep Jain (who is an active angel in climate tech) says “Buildings are the new oil wells. They’re dormant sources of energy and wealth, waiting for the right entrepreneurs to tap into it.”
Enabling asset holders to more easily tap into this revenue stream has remained a tremendous challenge and provides one of the most promising opportunities we see in the climate space
Pete Scarpelli of Global Sustainable Future (a climate-oriented PE fund) says “Advancement in energy storage technology is a key driver to the rate of renewable energy adoption. The industry has many players looking to sell their widgets. Those with business models that make it easy for end users to adopt the technology will be the ones to watch.” We’re particularly interested in players who can simplify and standardize the value chain, making it easier for end consumers to unlock the full potential of energy generation, management and storage technologies within buildings.
Projected global cumulative storage deployment by country 2018–2030
DIGITIZATION OF EV INFRASTRUCTURE
While Tesla’s stock price has certainly brought mainstream attention to the electric vehicle (EV) market, the narrative on EVs has been building for years. While tax credits for EVs are likely to expire, that is a bigger signal of their mainstream adoption than a headwind. Policymakers like incoming Transportation Secretary Buttegieg have signalled plans for mass roll-outs of EV infrastructure, as the Biden administration plans to build 500,000 new public charging stations by 2030. While EV manufacturers should benefit (and public players have amazing multiples right now), the hardware infrastructure is increasingly commoditized. Determining how to unify these systems to unlock the customer value proposition, however, remains a challenge. Running charging stations and their networks can incur high costs (up to 30% of the charger cost) and smaller networks may struggle to coordinate activity, thus placing additional stress on the grid and limiting opportunities for demand response (a potential revenue driver of EV infrastructure models). Tesla and ChargePoint have developed high quality customer experiences that provide a fair degree of transparency, but as EVs flood the market, Tesla’s market share is likely to wane and we’ll see increased competition from traditional hardware OEMs like ABB and Siemens. With that, software will play an incredibly important role in unifying customer experiences and demand constraints across disparate EV infrastructure to ensure policy makers and infrastructure owners alike can make the most of their investments.
DEMOCRATIZATION OF RENEWABLES
While clean(er) forms of energy are more available than ever before, there are still ample bottlenecks preventing adoption. 80% of Americans don’t have access to solar energy — their roof may be blocked by trees, they may not meet the FICO (650+) or income level standards required by developers, or they may not be able to afford up-front payments (required in 73% of new projects in 2015). While residential solar developers have traditionally favored longer, more stable contracts, we expect the new administration to push for more accessible clean energy in underserved markets via regulatory mandates that heighten both the requirements and incentives for developers to reach low-income audiences. We believe community solar represents a path towards doing so. These projects present a potential opportunity to save customers 5–10% on electricity bills by aggregating demand across a given “community” to achieve sufficient demand for a localized, commercial-scale solar project. With much of the low-hanging fruit taken for larger scale commercial rooftop projects and residential players facing an increasingly commoditized customer acquisition race, community solar represents one of the few opportunities for developers to find new untapped sources for projects. Setting up these projects, however, presents its challenges especially in attracting and coordinating activity amongst local residents who may struggle to meet traditional underwriting requirements. We see an opportunity for new methods to acquire, underwrite and serve customers to attack the soft-costs of these projects and produce better outcomes for developers and residents alike.
CIRCULAR FASHION
Retail had a tough year in 2020. Brands saw supply and demand disruptions like they never had before and now must attempt to unify competing mandates of 1) economic profitability, 2) customer convenience and 3) sustainability. Consumer consciousness on this third lens (sustainability) continues to grow, especially in younger demographics. These populations also tend to be those most oriented to e-commerce, which has resulted in dramatic increases in logistical burden. As a result, the average US citizen sends 81 lbs of clothing to the landfill each year, generating harmful amounts of methane and depositing toxic chemicals and dyes into the ground during their 200+ year decomposition process. While the cost and environmental impacts of e-commerce logistics are immense, understated are the environmental impacts driven by clothing being returned. Brands are expected to see $70.5B in returns this holiday season, a record 73% increase from 5 years ago. Brands are unequipped to handle reverse logistics, forcing them to throw away “new” or “slightly used” clothing at unprecedented rates. With the fashion industry already serving as one of the largest emissions contributors in the world, it must identify ways to align its core values of price, convenience and sustainability. We believe the circular economy presents an unprecedented opportunity to do so, aligning customer and corporate values. This process, if properly implemented, has the potential to increase utilization of more durable, long-lasting apparel, rather than orienting the industry toward fast-fashion concepts. We see new brands developing their own circular offerings, but recognize the immense challenges of standing up a completely new supply chain to serve these needs. Circular supply chains simply operate differently than those of the past, so brands and enablers alike must find ways to collaborate and identify pathways for efficient circular distribution.
BIDEN’S GREEN WORKFORCE
Joe Biden has a history of supporting job creation with strong union ties, dating back to his days as VP of the Obama administration, post-Financial Crisis. Today looks no different, as Biden plans to create 10M new clean energy jobs. While much rhetoric has been tossed around about a “Green New Deal”, the reality is that green jobs are a high growth industry regardless of government support. The Bureau of Labor Statistics found that wind and solar installation technicians will be the first and third fastest growing occupations between 2019 and 2026, at 61% and 51% respectively. With the Democrats in control, we believe that workforce development programs will further accelerate this growth, leading to a new generation of technicians, contractors and entrepreneurs targeting green industries. Much like in other labor categories we’ve worked with, we believe that new digital solutions and business models can be used to unleash unprecedented levels of productivity amongst this flood of workers. These workers will require new forms of training, project management / scheduling and financial management to run their businesses more effectively, creating a whole landscape of labor marketplace and vertical software opportunities.