Decarbonization: First Principles and Market Landscape
This article will introduce decarbonization and some emerging green markets. Subsequent work will take deeper dives into the decarbonization of the energy generation, industrial, and residential sectors.Fundamentals of decarbonization:
To understand decarbonization, it is helpful to consider the first principles of carbon emissions including why we are hooked on hydrocarbon energy, and what the specific sources of carbon emissions are. On a chemical level, we can use combustion to release the chemical energy stored in hydrocarbons in the form of heat energy. In addition to this useful heat energy, the reaction of hydrocarbon combustion also forms CO₂ at a rate of almost 6 billion metric tons per year in the United States. This CO₂ remains in the atmosphere for 300–1,000 years due to carbon dioxide’s stable intrinsic energy level.
We capture the released energy as heat or gas expansion (think: internal combustion) to perform physical work. Except for heating applications, the energy is usually not used directly and relies on a translational mechanism. For example, when converting hydrocarbon chemical energy into electrical energy, we start by burning gas or coal to boil water. The resulting steam spins a turbine which generates electricity. Below are some specific (in)efficiencies:
So why do we use hydrocarbon fuels for these indirect, inefficient applications? In essence, fossil fuels are just too convenient to shake. Their physical nature is key. Once removed from the ground, we can transport this fuel anywhere and use it instantly, regardless of the weather, sunlight, or external factors. We can’t capture wind or sunlight in a barrel to ship across the ocean (would be nice, though). Hydrocarbon fuel is also relatively easy to transport due to its high energy density with respect to weight. For reference, batteries provide 0.1 to 0.27 kWh per kilogram vs. gasoline’s 13 kWh/kg.
Furthermore, the infrastructure for fossil fuels is firmly in place–electricity is produced in real time corresponding to the demand of utility customers. This is a huge advantage over naturally produced renewables. When electricity usage is high, more hydrocarbons can be burned to meet demand, likewise when energy demand is low, less electricity can be produced. An optimally renewable society would require huge improvements in energy storage. The current system is not built for enabling consistent, demand-driven power delivery from intermittent forms of generation such as solar or wind.
Even with proper energy storage infrastructure in place, or with the implementation of consistent renewables such as nuclear, proper green energy adoption may require a grid overhaul due to the less controllable nature of renewables and higher overall electricity demand. This grid overhaul would likely have to double electrical capacity and enable bidirectional energy transfer amongst distributed energy production nodes (bidirectional meaning power delivery to and from the grid). Fortunately, there will be benchmarks along the path to this new grid that present near-term decarbonization investment opportunities that will have significant impact on reducing carbon emissions.
Segmenting carbon emissions:
Below is the segmented CO₂ GHG emission landscape:
A brief synopsis of opportunities in the market:
Electric power generation (24.9%):
It is almost certain that renewable forms of electricity generation are just in their nascency. It would be prudent for any investor to have some capital allocated to this sector. From solar electricity to small modular nuclear reactors, the dated electrical production systems will face growing competition as the price per watt of green electricity falls. Tangential opportunities will arise in energy storage, grid retrofitting, and many other spaces.Industrials (23.9%):
(1) Hydrocarbon dependent industrial systems: There are numerous industrial applications that rely on hydrocarbon gas as reactants for the process or as fuel to reach temperatures that current electric devices cannot meet. For example, in ammonia production, hydrogen molecules are supplied by using natural gas as a reactant. Opportunities for alternative fuels, byproduct recycling, fuel cell technology, and new electric heating technology will arise.(2) Byproducts from industrial production: There are other applications such as the ‘flaring’ of natural gas, where hydrocarbon byproducts must be disposed of. In many cases, these byproducts are still useful, and new technologies will make their use economically feasible. Recycling chemicals and carbon capture processes will play a big part in mitigating the GHG emissions from these processes.Residential (6.1%):
Many experts anticipate a future of residential electricity delivery consisting of microgrids where local neighborhoods become their own energy market. Energy production may become ‘distributed’ or generated near where it is used. Opportunities will arise in storage, generation, grid retrofits, and more. Even without the microgrid revolution, residential energy consumption will shift as more centrally produced green energy becomes available.
Market landscape:
PitchBook analysts expect the decarbonization market to top out at $908B in 2022 and grow to $1,300B by 2027. Last year, the VC/PE space invested $54B in companies classified as climate tech.
Investment criteria:
Key qualities of the technology/product:
(1) Scalability for a real impact with the potential to reduce CO₂ emissions by thousands to millions of metric tons annually.
(2) Technical differentiation in the form of energy production, implementation, long-term storage, customer acquisition, grid-enabled network effect.
Business model:
Green energy is the future, and natural market forces will help us get there. Target companies should provide long-term value, not cost, for customers. Therefore, sales should not rely on government subsidies, although subsidies are a plus for early adoption of new tech.
Team:
The team should have demonstrated work in energy sector from oil companies to renewables. It is important that founders understand this highly competitive market.
Partnerships:
Bidirectional energy production relies on permitting and compliance with incumbent utility grid companies. A demonstrated partnership or LOI with utility providers or municipalities is almost essential for building confidence in residential and commercial energy startups.Specific investment opportunities to be analyzed in future work:
- Decarbonization of electrical energy generation
- Decarbonization of industrials
- Decarbonization of residential energy consumption
Sources:
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[6] Pinner, Dickon. Decarbonizing industry will take time and money — but here’s how to get a head start. McKinsey & Company. Retrieved September 12, 2022, from https://www.mckinsey.com/business-functions/sustainability/our-insights/sustainability-blog/decarbonizing-industry-will-take-time-and-money-but-heres-how-to-get-a-head-start
[7] ReportLinker. (2022, July 12). The global microgrid market size is estimated to be USD 26.9 billion in 2022 and is projected to reach USD 63.2 billion by 2027, at a CAGR of 18.6%. GlobeNewswire News Room. Retrieved September 12, 2022, from https://www.globenewswire.com/news-release/2022/07/12/2478322/0/en/The-global-microgrid-market-size-is-estimated-to-be-USD-26-9-billion-in-2022-and-is-projected-to-reach-USD-63-2-billion-by-2027-at-a-CAGR-of-18-6.html
[8] Solar PV Panels Market Size & Growth Report, 2030. (n.d.). Retrieved September 12, 2022, from https://www.grandviewresearch.com/industry-analysis/solar-panels-market
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