Premiums, Incentives, Mandates Spur Decarbonization

BloombergNEF’s Claire Curry Says Pre-Commercial Startups Ripe for VC

While the United States has made it easier for climate-focused businesses to qualify for and receive tax incentives through the Inflation Reduction Act (IRA), Europe tends to approach decarbonization through mandates. Cindi Bough, Managing Director at Climate Investment, kicked off Day 2 of her Energy Week 2023 fireside chat with BloombergNEF’s (BNEF) Claire Curry by exploring the strategies employed on both sides of the Atlantic. Curry, who is BNEF’s head of Technology, Industry and Innovation, agreed.

“The European Union has said they have more money available for scaling the transition than the US has put on the table,” Curry said. “The challenge is that IRA is super easy to understand as a tax credit. Everyone who applies for it gets that. European money includes complex funds. People ‘in the know’ can get access, and that’s why the European Union has funded steel mills — owned by large companies — for €4.5 billion this year just in Germany. And yet, startups struggle to get the money they need.”

She applauded the UK’s plan to give billions of pounds to hubs to reduce CO2 emissions, though she thinks startups, rather than big oil and gas and Indian steel facilities, should get the lion’s share. Still, the hub program could provide much-needed solutions to demand-side challenges. That’s something she said the US is missing.

She advocated Europe’s approach to mandating offtakes for green technologies. Earlier this year, the European Union adopted the Renewables Energy Directive, requiring annual increases in green-hydrogen’s share of industrial use to 42% by 2030.

“That means oil refiners, fertilizer companies, methanol producers have to shift,” she said. “A target that’s six years down the line drives institutional investment, because these big companies have to change.”

She conceded that startups may not benefit directly from the mandate, but Bough noted possible indirect effects and opportunities for venture capitalists.

“From a VC perspective, large companies may be getting subsidies and know how to deliver the mandates, but they often have innovators’ dilemma and need to move faster,” Bough explained. “So, they potentially would be partnering with new innovations and technologies from startups.

Curry doesn’t see the lack of cost competitiveness as a detriment to green-energy adoption in many industries.

“I think the green premium is here to stay for lots of materials,” she said. “Look at the number of people queuing up to buy green steel. They’re paying €150 to €200 per ton premium. That’s significant. Cement will be similar; it’s even harder to decarbonize. The premium for recycled plastics is very significant.”

While the price per ton may induce sticker shock, the actual cost to consumers is more digestible, she noted. For illustration, she showed that steel represents only about 2% of the retail price of a high-end German-engineered automobile. With a green premium of 20%, using green steel only would add about 0.4% to the car’s price.

“We are seeing German car companies in particular, and Italian car-part manufacturers, queuing up to buy steel from (green facilities),” she said. “For their customers, it doesn’t really change the price of the car, so they can pass the cost on to the buyer.”

She noted that this isn’t the case in all steel applications, such as office buildings.

“Steel and concrete in buildings have a very long supply chain so it is hard for makers of green materials to find an off taker willing to pay a premium if they are half a dozen steps removed from the end customer with the net-zero emissions goal.”

But since 25% of the world’s steel is bought by governments, there is hope that public infrastructure can provide a large portion of the required offtakes. Inflation and other global economic conditions make taxes even less popular. But while the price per ton of green steel out of the mill can get scary, the price citizens pay for using it in public buildings is negligible. It shouldn’t stop projects being funded. “We cannot wait to start funding first-of-a-kind (projects),” Curry said.

But to be viable, she added, ‘first-of-a-kind’ has to be bankable, which entails two parts: reducing technology risks is essential and proving you can get an internal rate of return that people are willing to invest in or give debt to.

She said startups have learned that raising project financing is important. Getting debt to fund the business, as a startup, is basically impossible, but there is project debt to be had, especially if the government is willing to provide some type of guarantee, which Europe and the US are now willing to do.

The second hurdle, provable returns, requires signed offtakes for the product and for any inputs needed to make it. Curry cited H2 Green Steel as a model for others to emulate.

“It has a long-term offtake signed for renewable energy, which means the hydrogen price is guaranteed,” she noted. “That’s a huge input cost. It also has offtake agreements for over half the iron and steel it’s going to produce, representing a fixed price at the premium they’ve set. They have designed that price premium to meet the returns they need to guarantee the funding they’re getting.”

Curry also noted that Europe’s new green-methanol startups are rejecting numerous offers from shipping companies that want to invest equity using a VC model. Instead, the startups are primarily self-funding to avoid the possibility of losing control of their mission to “the Maersks of the world,” she said.

Instead of taking VC/PE money into the startup, they want to raise equity at the first-of-a-kind project level.

Most potential customers for industrial products are uncomfortable signing long-term offtake agreements.

“In traditional shipping, aviation, steel, and ammonia,” Curry said, “offtakes are one or two-year deals and not at a fixed price. They tie the price to the price of oil or (some other commodity). So, signing a seven-year fixed-price offtake is insane. (To get it done,) you need companies who care, either about carbon emissions or about energy security. That’s the (liquid natural gas) model. The LNG industry got going because Japan needed a stable energy source, and the Japanese government and trading houses were willing to invest in massive LNG terminals and sign fixed-price offtakes.”

Again, H2 Green Steel offers a game plan with investors accounting for much product offtake. Ideal customers are those committed to Scope 1, 2, and 3 net-zero goals.

“Europe has loads of those,” Curry said. “We have a database of about 1,000 companies with net-zero goals. We’re tracking their targets and whether they are hitting them through SBTI targets or other means. That opens some exciting investment opportunities in niches where VC can play — proper VC startups that are pre-commercial.”

Attractive industries include industrial heat, “because for companies in Europe, that is the only part of their Scope 1 they can’t squeeze out,” Curry explained. “So, they’re buying biomass at crazy prices; they’re very willing to pay premiums if we can serve them better solutions like electrification.”

Startups that service the circular economy are also ripe for VC investment she said.

“We’re just beginning to see Europe turn the screw on waste plastics,” she said. “There is so much money to be made in AI and robotics for sorting and spotting waste, because the premium people pay now on waste plastics is very significant. Other forms of waste will become more important too, such as construction and demolition waste. We have increased the amount of waste cement and concrete by 300% every year over the last 30 years — with most ending up in construction and demolition waste. The CDW is a target for many cement makers to try to reprocess.”

She is particularly excited about prefabricated and modular building companies working to reduce waste at the structural level.

“That is going to be so important, because we are seeing US, Canadian, and European cities begin to mandate lifecycle emissions reduction in buildings. They are going to get really strict in the next decade.”

TDK Ventures and Climate Investment hosted Energy Week 2023 at London’s Goldsmiths’ Center to highlight the efforts of industry entrepreneurs, investors, and the scientific community in solving the world’s energy challenges and finding sustainable paths to decarbonization.

Energy Week 2023 featured industry leaders, experts, and visionaries, who are shaping the future of the energy landscape to help explore the latest advancements, challenges, and opportunities in sustainable energy solutions.

TDK Ventures Inc. invests in startups to bolster innovation in materials science, energy/power and related areas typically underrepresented in venture capital portfolios. Established in 2019 as a wholly owned subsidiary of TDK Corporation, the corporate venture company’s vision is to propel the digital and energy transformations of segments such as health and wellness, next-generation transportation, robotics and industrial, mixed reality and the wider IoT/IIoT markets.

Climate Investment is an independent organization founded by members of the Oil and Gas Climate Initiative, specializing in accelerating capital-efficient decarbonization in high-emission sectors. Since 2017, they have curated a portfolio of over 35 innovative technologies and business models, resulting in a cumulative reduction of 57 MT CO2e in greenhouse gas emissions from 2019 to 2022. Visit www.climateinvestment.com [climateinvestment.com].