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“The past year has been a game changer for energy policy with the US, China and the European Union committing to net carbon zero. With $70 trillion of investment required to reach net zero by 2050, the opportunities in clean energy will be significant.” —Hydrogen Highway, 2021 Bernstein Private Wealth Management
It was the hot thing.
In 2006, a ton of money flowed into clean tech as venture capital firms, historically focused on software and hardware, jumped into these new business models. After all, we were becoming increasingly aware of the ramifications of climate change—and what could be more important than saving the earth?
After the VCs dove in, the federal government began providing cheap loans and subsidies.
Harvard Business Review sets the scene:
“Oil prices had increased by approximately 400 percent since 1998, and Goldman Sachs was calling for a steady state oil price of $200 per barrel. Al Gore had just released An Inconvenient Truth and George Bush had recently passed the Energy Policy Act of 2005, giving billions of dollars to renewable energy companies. Headlines read Green is Good and The Smart Money is Going on ‘Clean’ Technologies. Clearly it was the dawn of a new energy era, and investors were chomping at the bit to be the first movers in this sector, where government subsidies and cash infusions were sure to keep companies growing.”
Unfortunately, no one really understood how these technologies—or these businesses—worked. And a lot of money was lost.
“Clean tech was clobbered,” says Roy Stein, operating partner at Orchid Black, who has worked in clean tech for over a decade. “The government spent billions on promoting and subsidizing clean tech, which generated a lot of institutional capital. Unfortunately, innovation was not ready for mass rollout. It was too early. Clean tech companies folded one after another; investors lost billions of dollars.”
Bloomberg noted when solar manufacturer Solyndra spectacularly failed, it caused “an immense political backlash….that was only the most prominent failure; overall, investors lost about $25 billion when the sector crashed. Money dried up fast.”
For the next ten years, clean tech became a very dirty word. “By 2016,” notes the Harvard Business Review, “90 percent of clean tech investments were considered abject failures … dozens upon dozens of clean tech companies were over-capitalized, over-extended, and ultimately bankrupted. Of the 150 clean tech companies founded in Silicon Valley over [those] 10 years, almost all of them floundered and failed.”
Today, it’s all changed. Bill Gates leads breakthrough energy ventures, a new green venture fund, and Form Energy, which is developing an aqueous air battery that could deliver continuous power for 150 hours. Electric vehicle innovation across all major automakers is staggering and battery technology, solar, and wind energy are all getting capitalized as sector rotation to clean tech is back in favor.
Why now? Three reasons.
Today, the cost of solar power is plummeting and is now cost competitive with traditional fossil fuels, explains Singularity University’s Pascal Finette: “In 1977 a kilowatt per hour was $76. By 2016, it was three cents.”
“Swanson’s Law says that with every doubling of solar panels, the price drops by 20 percent,” he continues, “So solar is actually getting close to zero. In fact, soon you will not pay for energy.”
Now that solar has become cheaper than fossil fuel, it’s become a viable energy source. The Energy Information Administration notes that solar, wind and other renewable energies climbed to 21 percent of total energy consumption last year.
Battery performance and cost has also come down dramatically over the last 15 years, explains Philip Eliot, an Orchid Black operating partner who worked as a VC investor specializing in clean energy says, “Electric cars are happening because we finally have batteries that provide a decent mileage range. And lower costs mean the ROI has improved. Today, once you get to 30,000 miles, you’re saving money.”
Bloomberg’s Noah Smith agrees the cost drops have had a profound impact: “In 2009, the levelized cost of solar photovoltaic (PV) electricity was $359 per megawatt-hour—more than four times as expensive as electricity from a natural gas plant. By 2019, solar PV had fallen in price to $40 per megawatt-hour, 28 percent cheaper than gas. That’s an 89 percent decline in 10 years, with more cost drops yet to come. Meanwhile, lithium-ion batteries have experienced a similar drop in prices. That order-of-magnitude drop in costs makes all the difference. Most of all, it means that solar and wind aren’t risky new technologies.”
Lazard’s Latest Annual Levelized Cost of Energy Analysis proves this out: As the cost of renewable energy continues to decline, certain technologies (e.g., onshore wind and utility-scale solar), have become cost-competitive with conventional generation technologies.
Secondly, there has been a significant shift in governmental policy, starting with the Obama administration, of subsidies or tax breaks that have also helped propel the industry forward. Most recently, the Biden administration has planned to extend investment tax credit programs for solar and energy storage by ten years and implement an ITC for new transmission lines as part of a new $2 trillion infrastructure package.
These policies created effective incentives for mass adoption. States with tax breaks for hybrid electric cars, for instance, have helped drive the market for those technologies.
The last ten years has seen a dramatic shift in from failed enterprises to companies with tangible solutions and workable business models.
Eliot states: “In the dot-com era, we saw business models that just didn't make sense and flamed out. Fast forward 15 years and now some of those business models have come back in more mature ways. The first phase was mostly throwing stuff against the wall, but the better ideas percolated for 10 or 15 years, and suddenly they made sense.”
In 2000, it was a joke to count ‘eyeballs,’” he continues, “but today, Google and Facebook make their money off of, well, eyeballs. A similar thing happened in clean tech, where in 2006, many companies didn’t have the experience or even the right teams. But now 15 years later, it's a much more mature ecosystem.”
This mature ecosystem is being noticed. According to the IEA, over the next 30 years, $70 trillion will be invested in clean energy, a fourfold increase from current levels. They foresee that in 2050, “renewables will account for nearly 90 percent of global electricity generation, with solar photovoltaics (PVs) and wind contributing almost 70 percent.”
If we accomplish this, we hit net-zero emissions, reports Forbes: “This net-zero target is considered essential for limiting warming to 1.5 degrees Celsius above pre-industrial levels, the scientifically supported climate goal.”
Part of the allure is that today, clean tech spans a huge range of technologies including recycling, renewable energy, transportation, electric motors, information technology and many others. Roy Stein defines clean tech as “any technological solution that enables a cleaner environment.” That includes rickshaws, he says: “In APAC (Asia-Pacific), there are 50 million rickshaws and they are by far the most polluting vehicles in the world. Right now there’s a company that’s retrofitting the rickshaw market.”
That company is Power Global. CEO and Founder Porter Harris has developed batteries for SpaceX and Faraday Future. He sees huge opportunities to do something impactful in emerging markets: “The majority of the world is riding around on two or three wheels. Rickshaws, motorcycles, light duty cargo trucks. We’ve developed a retrofit kit that fits 90 percent of auto rickshaws. It will be powered by a battery swapping, energy-as-a-service network.”
“Look at the Boeing 787 Dreamliner,” says Stein, “Nippon, United, Japan and American Airlines all use it. It’s larger than the 747, has only two engines, not four, it can fly 50-80 people more, and it generates 25 percent of the emissions. Would you consider that clean tech? I would.”
Investors are in—and the government is following. The Energy Department just announced plans to back efforts to “drive down the cost of long-duration storage 90 percent below the cost of today’s lithium-ion batteries by 2030.”
So are we heading into another bubble?
The consensus is no. Gartner notes that sustainability and renewability are increasingly on the mind of all investors: “Eighty-five percent of investors considered environmental, social, and governance (ESG) factors in their investments in 2020.” In addition, extreme consolidation in clean tech has led to smart, well-run businesses.
“The tech has changed significantly over the last decade,” points out Harris. “With solar and battery prices coming down dramatically, this is not a bubble. Clean electrification is here to stay. Whether you’re talking about solar, wind, hydro, nuclear, it's all about electricity. And when you can pair solar with new stationary storage, offering 20-year life of a battery system at $150 per kilowatt-hour, renewables become the best storage solution.”
“Energy storage has made all of the difference,” notes Ed Wise, CEO of Positive Energy, which focuses on energy storage and EV infrastructure, “The capacity has increased significantly. If you get quality cells—the building blocks of storage—and assemble them correctly, they improve your energy throughput—aggressively.”
“At the same time as the technology was improving,” he continues, “the electrification of cars and trucks became globally accepted and that volume drove costs down. The difference is staggering: Today we’re talking about building 15 and 20 year batteries because of the tech advancements.”
Noah Smith of Bloomberg agrees that it's different this time: “The clean-tech bust, like the dot-com bust in 2000, was a case of investor enthusiasm for a new technology outstripping the technology itself. However, just as few today would question the value of companies like Google and Facebook that came into their own during a trough in investor enthusiasm, eventually the value of clean technology won’t be in question.”
Orchid Black’s Conclusion
This is not a phase or a bubble, it’s the natural evolution to the next juncture. Just as steam and coal-powered engines gave way to gasoline, these technologies are now also giving way to electric. Clean tech’s consistent, dramatic technology advances paired with steadily decreasing costs is creating a stable, mature ecosystem—and a long term energy solution.
Orchid Black is a boutique advisory of former CEOs, CROs, CMOs, strategy execs, and board members. We are accomplished operators with an investor mindset and deep M&A experience.
Like an orchid, a company’s maximum value emerges from cultivating growth. Orchid Black’s unique business model not only accelerates value, but aligns our compensation with our partners' success. We invest together, betting on a collective vision, using shared skills and expertise.
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