Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the B and AF podcast, and today we're talking about
Speaker 1: climate tech investment. During the third quarter of twenty twenty four,
Speaker 1: climate tech companies raised over ten billion US dollars in
Speaker 1: equity across public and private markets. So is this a
Speaker 1: lot of money? Well, it's not insignificant, but it represents
Speaker 1: a decline from the same period in twenty twenty three
Speaker 1: and is a fraction of the almost forty one billion
Speaker 1: that was raised in twenty twenty two, so zooming out.
Speaker 1: The story is different depending upon where in the world
Speaker 1: you are. In China, clean tech manufacturers had over capacity
Speaker 1: in industries like solar and energy storage, so this resulted
Speaker 1: in a collapse in funding. Meanwhile, in India there was
Speaker 1: an increase in equity funding in Q three this year,
Speaker 1: rising by one hundred and fifteen percent. But if globally
Speaker 1: it looks like there is a decline, what do clean
Speaker 1: tech investment trends tell us about the future and should
Speaker 1: we be even comparing current numbers to previous peaks like
Speaker 1: that scene in twenty twenty two. Well, today to answer
Speaker 1: those questions and more, I am joined by Mark daily
Speaker 1: Head of Technology and Innovation at BNF, and he talks
Speaker 1: about the recent report titled Investment Radar three Q twenty
Speaker 1: twenty four funding drop Again. BNF subscribers can access this
Speaker 1: report at BNF go on the Bloomberg terminal, and at
Speaker 1: BNF dot com. Now, let's talk about climate tech investment. Mark,
Speaker 1: thank you for coming on switched on today, Thanks for
Speaker 1: having me. We're going to talk about well equity funding
Speaker 1: for climate tech. So these technologies that have the potential
Speaker 1: to change the way that the energy transition is playing
Speaker 1: out and the future of decarbonization. And in twenty twenty two,
Speaker 1: our research showed that there was one hundred and twenty
Speaker 1: seven billion of US dollars in companies, but that fell
Speaker 1: in twenty twenty three to eighty four point four billion.
Speaker 1: So thus far, if we're looking at twenty twenty four,
Speaker 1: and I know we're bowling out three quarters in, but
Speaker 1: we're in that last quarter, where are things trending and
Speaker 1: where is twenty twenty four stacking up? Is it more
Speaker 1: like twenty twenty two or is it more like twenty
Speaker 1: twenty three.
Speaker 2: So it's unfortunately not really like either of them. So
Speaker 2: we've continued to see a drop off in terms of
Speaker 2: what we say corporate equity funding for climate tech, And
Speaker 2: that's important part of the word, because a lot of
Speaker 2: the equity that goes into climate tech that people would
Speaker 2: think about is project equity for solar implants. And what
Speaker 2: we're really talking about here is companies that are issuing
Speaker 2: stocks in order to finance their business operations and grow.
Speaker 2: So in terms of how much of a decline are
Speaker 2: we seeing, it's probably going to end up to be
Speaker 2: about half of what it was last year, so at
Speaker 2: a point of about eleven billion dollars per quarter this year.
Speaker 2: Why is that, you might ask, I think you probably
Speaker 2: have a lot of people in this podcast to come
Speaker 2: on and talk about growth and things, and I have
Speaker 2: to present this chart all the time, and it's always
Speaker 2: a bit counterintuitive, but the reason is basically that corporate
Speaker 2: equity funding is highly highly linked to company valuations. If
Speaker 2: your company's were more money, and the stock market sees
Speaker 2: it that way, then you're going to be able to
Speaker 2: raise bigger rounds to grow your operations more quickly. And
Speaker 2: over the past couple of years, if you look at
Speaker 2: the stock market, and Bloomberg has covered this pretty extensively
Speaker 2: from started twenty twenty two, the entire stock market dipped
Speaker 2: a little bit, the SMP, the NASDAK, and clean energy
Speaker 2: and clean transport indices. But since then the general stock
Speaker 2: market has recovered quite a lot. But if you separate
Speaker 2: out clean transport and clean energy, they really haven't. Part
Speaker 2: of the reason for this is there's been a little
Speaker 2: bit of trouble in the industry. You constantly see negative
Speaker 2: headlines about electric vehicles and the wind industry. Personally, I
Speaker 2: think that's a little bit overwrought compared to the reality
Speaker 2: of the situation, but it's definitely impacting perceptions of companies,
Speaker 2: and so that's depressed a little bit. But also interest
Speaker 2: rates have been high. High interest rates mean that companies
Speaker 2: that are growth stories, which is all climate companies, really
Speaker 2: they're going to have more of their profits out there
Speaker 2: in the future discanted at a higher rate, and so
Speaker 2: that's depressed them. Is it all bad going forward? Not necessarily.
Speaker 2: We've actually seen a little bit of recovery in company valuations.
Speaker 2: But I also say to people that this number of
Speaker 2: being big isn't good or bad. It's largely a function
Speaker 2: of like what companies need to raise money to do,
Speaker 2: and lots of the really mature climate tech sectors like
Speaker 2: solar and wind and energy storage. The companies that were
Speaker 2: raising a load of capital over the past few years
Speaker 2: actually have built a lot of the manufacturing capacity to
Speaker 2: sell and manufacture all the products they need to sell
Speaker 2: to get to net zero, and so the industries have
Speaker 2: a lot of oversupply in terms of manufacturing capacity. So
Speaker 2: additional capital being raised is actually just making all of
Speaker 2: these companies unprofitable because there's even more competition. And so
Speaker 2: that's another reason that we've seen a big drop off
Speaker 2: in funding, is because the companies that needed to raise
Speaker 2: the money to build these really capital intensive facilities just
Speaker 2: don't need to do it anymore.
Speaker 1: When you're talking about equity and valuations of existing companies
Speaker 1: and raising fur their money for new projects, this perfectly
Speaker 1: makes sense. And what I want to know though, is
Speaker 1: is this market largely focused around a few big players
Speaker 1: or are we also seeing IPOs of companies and new
Speaker 1: entrants into this listed space also tracking a lot the
Speaker 1: same lines of what you're seeing in twenty twenty two,
Speaker 1: twenty three, twenty four.
Speaker 2: So really hawk eyed listeners will I don't know, maybe
Speaker 2: have read the description and see my title at PNF
Speaker 2: is head of Technology and Innovation, and they might be
Speaker 2: wondering why I'm talking about IPOs. The reason for that
Speaker 2: is because the data set that this report is built
Speaker 2: on is a corporate equity deal tracker, and our team
Speaker 2: has ended up doing the venture deal tracking at PENF.
Speaker 2: The venture deal tracking is a lot of the work
Speaker 2: in terms of tracking this sector or this kind of
Speaker 2: group of financing because most of the deals that happen
Speaker 2: are in private markets that are pretty small or maybe
Speaker 2: like five to ten million dollars or even less than that.
Speaker 2: Most of the actual funding that we're talking about here
Speaker 2: is raised in like really really big deals, so they
Speaker 2: can be massive growth equity or they're probably going to
Speaker 2: be IPOs, And it's kind of that most I think
Speaker 2: is a Pareto rule where it's like eighty percent of
Speaker 2: the money comes from about twenty percent of the deals.
Speaker 2: So it's a really really big spectrum of So if
Speaker 2: there's like seed rounds in here, there's IPOs, there's secondary offerings.
Speaker 2: We don't really have a lot of SPACs anymore, but yeah,
Speaker 2: that's the kind of portfolio of what's in there.
Speaker 1: Why was twenty twenty two such a big year and
Speaker 1: why is this the year that we keep comparing everything too?
Speaker 1: Because you're right, Mark, Like we talk so much about
Speaker 1: charts where everything is up into the right. We're reaching
Speaker 1: record breaking investment levels in various parts of the energy transition,
Speaker 1: and here where we're looking at equity funding, we're seeing
Speaker 1: potentially the second year in a row. Like it was
Speaker 1: a peak. We're coming down off a slide. Yeah.
Speaker 2: So actually this data set starts in twenty twenty two.
Speaker 2: We tracked it before at PNAF, but we basically built
Speaker 2: this data set to have a slightly different deal source.
Speaker 2: But if we were using the old methodology, you see
Speaker 2: actually probably twenty twenty one was the peak, and it's
Speaker 2: actually nothing really to do with climate specifically. People will
Speaker 2: be very familiar with the term zero interest rate phenomenon.
Speaker 2: Virtually all private capital markets were like booming in that
Speaker 2: time period. There's just massi amounts of enture money going
Speaker 2: into everything simultaneously. There was a bit of a bump
Speaker 2: in climate at the time relative to the overall capital markets,
Speaker 2: but it really wasn't anything fundamental to climate or energy.
Speaker 1: So you think that bump that occurred when you saw
Speaker 1: a lot of different companies embracing ESG ratings that hadn't before,
Speaker 1: and you saw a lot of funds being raised to
Speaker 1: actually focus on climate or even things with a sustainability
Speaker 1: lens that didn't previously exist around twenty twenty, that didn't
Speaker 1: have as big of an impact, and you think that
Speaker 1: maybe that's here to stay.
Speaker 2: I think like funders of these things, they just have
Speaker 2: capital and they're looking for something to deploy it into.
Speaker 2: At the time, climate was one of the hottest topics
Speaker 2: in capital markets. Now we actually go into this in
Speaker 2: this quarter's report. We track what is climate as a
Speaker 2: share of total private capital markets, and I think it
Speaker 2: peaked in late twenty twenty two at about a quarter
Speaker 2: of all private market funding per quarter. Now it's down
Speaker 2: to about ten percent. And part of that is because
Speaker 2: climate has been depressed a little bit relative to the
Speaker 2: tech market, but it's really been the rise of generative AI.
Speaker 2: And if you interview climate specific venture investors, they're saying that, oh,
Speaker 2: there's actually a bit of a drop off an interest
Speaker 2: because general venture investors, who do everything, generative AI is
Speaker 2: not the thing that they want to invest in, and
Speaker 2: it's a lot more attractive to the typical venture investor
Speaker 2: because it's much more similar to mobile web than it
Speaker 2: is a climate, which everyone knows is a pretty tough
Speaker 2: industry to make the kind of VCS returns that people expect.
Speaker 1: So let's have a little bit of a discussion around
Speaker 1: the regions and things to watch around the world. So
Speaker 1: much of our time on this show is talking about
Speaker 1: China and the incredible amount of manufacturing capacity that they have,
Speaker 1: and then also the US the Inflation Reduction Act has
Speaker 1: been a big part of it. But it also makes
Speaker 1: sense that these are traditionally the largest markets for clean
Speaker 1: tech investment because they're also number two and number one
Speaker 1: in global GDP respectively. So outside of these two behemoths
Speaker 1: in the industry, what other parts of the world are
Speaker 1: emerging is really innovators and looking at clean tech investment,
Speaker 1: and are we seeing equity funding in other parts of
Speaker 1: the world, You know, what should we watch?
Speaker 2: So I would say the point I was making earlier
Speaker 2: about manufacturing over capacity, that point actually links directly into
Speaker 2: this topic, and that's because the huge boom in twenty
Speaker 2: twenty two. Actually, if you look at the regional chart
Speaker 2: breakdown of where the boom was happening, it was in
Speaker 2: inland China and that's because the entire manufacturing supply chain
Speaker 2: for things like solar and batteries and a lot of
Speaker 2: electric vehicles is based in mainland China. So these are
Speaker 2: the companies that I was talking about that don't need
Speaker 2: to build any more manufacturing capacity. And in fact, we've
Speaker 2: heard that, particularly in the solar industry, the government's really
Speaker 2: discouraging people from raising additional capital to build out more
Speaker 2: manufacturing to prevent a I don't want to say death spiral,
Speaker 2: that's a bit over the top, but like just make
Speaker 2: sure the companies are not driving each other out of
Speaker 2: business and making sure that they can generate some profits.
Speaker 2: So China's seen a huge drop off. The United States
Speaker 2: is relatively stable. The United States market is pretty different
Speaker 2: than China in the sense that it's a lot more
Speaker 2: private capital oriented. It's a lot more diverse across different
Speaker 2: areas of climate. So yes, some energy, but also things
Speaker 2: like industry decarbonization and ag tech. But yeah, in terms
Speaker 2: of there's not a huge amount of markets that are
Speaker 2: big enough in order to have trends in this data set,
Speaker 2: because there's you if one country has like one really
Speaker 2: big deal that can give it like its biggest quarter
Speaker 2: ever by ten x, so there's only some economies like
Speaker 2: maybe the major European ones. Something notable that we saw
Speaker 2: this quarter is that in India was ranked as the
Speaker 2: second biggest market for the first time. So the reason
Speaker 2: that this is a pretty interesting story is because it's
Speaker 2: kind of indicative of this broader trend of the on
Speaker 2: shoring of supply chains. People that I speak to because
Speaker 2: I'm based in Europe, often think about it in the
Speaker 2: European and the US context, but actually the same thing
Speaker 2: is happening in India, and there's content requirements around solar
Speaker 2: modules that are going to qualify for subsidies, and so
Speaker 2: the valuation of companies in India in the solar value
Speaker 2: chain has actually been They've performed really really well in
Speaker 2: stock markets since they've all gone public this year, and
Speaker 2: you can see a kind of gradual and then all
Speaker 2: big sudden increase this quarter in funding. This quarter in India,
Speaker 2: a climate tech company's raised bout two point four billion dollars.
Speaker 2: In the context of China, that would be low over
Speaker 2: the last two and a half years or three years,
Speaker 2: but just Chinese funding is now so low that it's
Speaker 2: kind of fallen down the ranking a little bit. So
Speaker 2: that's in terms of regional trends, the most interesting thing
Speaker 2: happening right now.
Speaker 1: So, if India is really becoming a much more dominant
Speaker 1: layer in this clean tech space, what parts of the
Speaker 1: industry are they known for. Is it going to be
Speaker 1: on the battery and storage and vehicles part of the
Speaker 1: supply chain? Is going to be more on the clean
Speaker 1: power traditional wind solar? You know, what are the industries
Speaker 1: and the sectors actually that they're most involved.
Speaker 2: In right now? The companies that drove a lout of
Speaker 2: the funding that we've seen over the last few months,
Speaker 2: it's definitely been solar. Solar manufacturing is a lot easier
Speaker 2: to scale in a country than battery manufacturing. European companies
Speaker 2: are struggling a lot to scale battery manufacturing. It's just
Speaker 2: a lot more complicated. If things like scrap rates get higher,
Speaker 2: the materials and more expensive, the equipment's more expensive, so
Speaker 2: there's a lot more opportunity cost to being bad at
Speaker 2: doing it. And so that's definitely the focus right now
Speaker 2: in India.
Speaker 1: So what are some of the reasons you think India
Speaker 1: is experiencing such an incredible rise compared to previous years
Speaker 1: and is really shown up on a lot of your
Speaker 1: charts more recently.
Speaker 2: So I think the biggest thing is the fact that
Speaker 2: the government is pretty acting the domestic clean energy industries.
Speaker 2: So there's tariffs unimported solar modules now a forty percent,
Speaker 2: which is pretty expensive. So even if domestic manufacturers can't
Speaker 2: compete with the Chinese companies, who are definitely the leaders
Speaker 2: in this, they can still compete in India, which is
Speaker 2: a really huge market that they can build and grow
Speaker 2: and become better at manufacturing for. I think there's kind
Speaker 2: of a broader lesson to learn here for people who
Speaker 2: are looking at the energy and climate capital markets, which
Speaker 2: is that protectionism if you believe that it's bad for
Speaker 2: the economy and it's making decarbonization more expensive, which means
Speaker 2: it's bad for trying to mitigate climate change, but it's
Speaker 2: not necessarily bad for investors' returns because protectionism creates opportunity
Speaker 2: for certain companies to make money. The thing I was
Speaker 2: mentioning earlier about manufacturing over capacity, there's globally a huge
Speaker 2: manufacturing over capacity for things like batteries and solar, and
Speaker 2: we still need some additional build out in like the
Speaker 2: next decade, but like right now it's kind of a
Speaker 2: bit oversupplied, but that's really because of China. And so
Speaker 2: if you're based in the US and all of a
Speaker 2: sudden you can't buy Chinese energy equipment for whatever reason,
Speaker 2: all of a sudden, there's now a shortage of supply,
Speaker 2: and that's actually good if you're a manufacturer. So cynically,
Speaker 2: I think there's actually an opportunity to make money if
Speaker 2: you're an investor from productionist policies.
Speaker 1: I mean, tariffs were certainly one of the topics that
Speaker 1: were at the forefront of the recent US election, So
Speaker 1: we would anticipate in the coming administration that you would
Speaker 1: see an increase in tariffs on a number of things,
Speaker 1: both in the energy transition and in other industries. So
Speaker 1: do we expect to see them these investment and these
Speaker 1: valuations that you're talking about, would you expect to see
Speaker 1: a bump from that if tariffs do indeed go up
Speaker 1: in countries like the US.
Speaker 2: Yeah, that's a really good question. I this is the
Speaker 2: indicator I'm watching the most from the election in terms
Speaker 2: of like direct change in policy. Will notice quite quickly
Speaker 2: in terms of the impact is going to have on
Speaker 2: manufacturing companies inside the US. I'm not familiar enough with
Speaker 2: the industrial base compared with the demand. Obviously there's going
Speaker 2: to be unexpected changes to the demand for these technologies
Speaker 2: in the US. Now. People think that the Inflation Production
Speaker 2: Act is relatively protected in a narrowly split Congress, but
Speaker 2: it's very up in the air at the moment.
Speaker 1: Well. And so then let's talk about the other big
Speaker 1: country in this space that we've mentioned a few times,
Speaker 1: which is China. Their government has provided a stimulus injection
Speaker 1: for stock valuations. So how has this impacted the stock
Speaker 1: market when it comes to these energy transition focused companies.
Speaker 2: Yeah, So, as I said, this whole funding market is
Speaker 2: very linked to public market valuations of companies because obviously
Speaker 2: that's what investors see is their like ultimate exit opportunity
Speaker 2: and the kind of comps that they can look at.
Speaker 2: The Transport Index in particular, notice, had a big uptick
Speaker 2: this quarter for the first time since we started charting
Speaker 2: it in twenty twenty two, and it's kind of an
Speaker 2: artifact of the fact that the Chinese government just injected
Speaker 2: huge stimulus across the entire economy, and most of the
Speaker 2: transport's supply chain in that index is based in China.
Speaker 2: So it's more of a generic bump from the economy
Speaker 2: than it has anything to do with transport related companies.
Speaker 1: So you mentioned that this is a part of what
Speaker 1: you spend your time focused on, which is the venture
Speaker 1: capital and private equity end of the market. So how
Speaker 1: is climate tech placed as a share of this? Is
Speaker 1: it growing or is there less investment in kind of
Speaker 1: some of these really early stage, more disruptive technologies.
Speaker 2: The share of it as the total venture capital and
Speaker 2: private actory markets is declining a little bit. So reached
Speaker 2: a peak of about a quarter at one point about
Speaker 2: eighteen months ago, and now it's kind of gently declined
Speaker 2: down to round ten percent. That's not low if you
Speaker 2: look at energy transition spending across the whole economy and
Speaker 2: compared to global GDP right about two percent. So obviously
Speaker 2: the venture capital and private actory market is more forward
Speaker 2: oriented than the rest of the economy. So it makes
Speaker 2: sense that it's a little bit bigger if you look
Speaker 2: at the public market size of things. It's smaller than
Speaker 2: private capital, but it's bigger than the economy more broadly,
Speaker 2: because again public market fundraising, it's four companies that are growing.
Speaker 2: They're just growing in a kind of later stage than
Speaker 2: metro capital companies. So that's at about five to seven
Speaker 2: percent of total public market raising right now, that's a
Speaker 2: bit flatter, that's not really declining or growing.
Speaker 1: So just taking kind of the temperature in the room,
Speaker 1: if you will, is your view that this is a
Speaker 1: perfectly reasonable amount of money to be going into these spaces,
Speaker 1: and we should not be expecting additional money to be
Speaker 1: flowing really dramatically into the venture capital private equity space
Speaker 1: when it comes to clean tech, because the way I'm
Speaker 1: looking at it is so often we're talking about net
Speaker 1: zero goals, and I look at how close we are
Speaker 1: to twenty thirty, so we're kind of halfway through this
Speaker 1: critical decade. And I would then anticipate that if we
Speaker 1: accept this fundamental premise that decarbonization is something that most
Speaker 1: countries in the world are interested in seeing come to
Speaker 1: fruition and are therefore writing policies that would then support it,
Speaker 1: we would see an increase in funding. Now, there's the
Speaker 1: scaling of late stage technology like renewable energy sources, and
Speaker 1: that is one end of the market, but there are
Speaker 1: still parts of the emissions pie that need technology development
Speaker 1: in order to meet them. We often refer to them
Speaker 1: as hard to abate when we talk about them, but
Speaker 1: it's those things as really complicated parts of things. Agriculture
Speaker 1: is another one of them where there is a need
Speaker 1: for technology development, And so why is this not blowing
Speaker 1: up as big as you know, maybe I would naively
Speaker 1: expect it to.
Speaker 2: Yeah, So in terms of like is this the right
Speaker 2: amount of money, or like are we going to see
Speaker 2: it grow in future? We talked about a peek in
Speaker 2: twenty twenty one. We're still much higher than we were
Speaker 2: in like twenty nineteen, say, and it's still a huge
Speaker 2: amount of money that's flowing into these companies. In terms
Speaker 2: of if I could wave my magic wand and funnel
Speaker 2: one hundred billion dollars into this sector every single quarter
Speaker 2: for these harder to abate industries, I actually don't know
Speaker 2: if that would really help us get to net zero
Speaker 2: at all. Maybe a little bit. But the problem is
Speaker 2: it's not venture capital, private equity, or people who invest
Speaker 2: in IPOs. It's not their job to develop technology. And
Speaker 2: even if they did develop the technology, if there's no
Speaker 2: demand for the ultimate product, you're never going to be
Speaker 2: able to bootstrap an industrial tech solution to like actually
Speaker 2: solve the problem in the long run if people aren't
Speaker 2: going to pay you, because there's market structures that exist
Speaker 2: to kind of incentivize the adoption of technology. There's no
Speaker 2: amount of venture money that can develop a product that's
Speaker 2: going to solve climate change. And so so yeah, it's
Speaker 2: just not the job of these financiers to do that,
Speaker 2: and you need policy to support it. So for hard
Speaker 2: to abate. We have some of that, particularly in the US.
Speaker 2: The forty five V for hydrogen, the forty five Q
Speaker 2: for carbon capture really really important and it's generating a
Speaker 2: lot of demand for those products. Doesn't exist everywhere in
Speaker 2: the world for things like agtech. My personal thing that
Speaker 2: I always talking about is like, if you believe in
Speaker 2: that we need something to decarbonize protein production like cows
Speaker 2: and chicken, there's no support for any technology that would
Speaker 2: decarbonize that value chain you think is something like lab
Speaker 2: grown proteins. Not only is there no subsidies for it,
Speaker 2: consumers don't want it, they think it's bad for their health.
Speaker 2: So like it's on a totally different field. So I
Speaker 2: we're so far away from venture investors needing to develop
Speaker 2: the technology. Obviously, there are startups out there. Maybe they
Speaker 2: will make some fundamental breakthrough that will change public perception
Speaker 2: of it, but until that happens, I don't know that
Speaker 2: there's going to be a huge uptick in funding for it.
Speaker 1: So let's talk about some of the sectors very specifically.
Speaker 1: And you had already addressed solar and the manufacturing over
Speaker 1: capacity China and how that's really risen in India. We
Speaker 1: often talk about batteries, but I actually want to pivot
Speaker 1: to the clean fuel space because we hear a lot
Speaker 1: about sustainable aviation fuels at the moment, and actually quite
Speaker 1: recently at our summit in London, there was a panel
Speaker 1: focused on this topic. So there were some things that
Speaker 1: came out of that, and I want to know from you, Mark,
Speaker 1: what is your view on well, given what you're seeing
Speaker 1: in terms of investment in these sorts of companies, how
Speaker 1: big of a deal is the clean fuel space?
Speaker 2: So relative to equipment manufacturing and clean power development, it's
Speaker 2: still small. Sound about maybe a billion dollars every half
Speaker 2: year in the sector compared to like I'd say maybe
Speaker 2: ten to twenty billion dollars for clean power specifically, So
Speaker 2: it is small, but it's growing. It's one of the
Speaker 2: areas that if you work at BNF you probably get
Speaker 2: a lot of client inquiries about it, which I always
Speaker 2: find is pretty funny. It's a nice leading indicator when
Speaker 2: you get a lot of client inquiries about something. Biofuels
Speaker 2: historically has been the biggest part of this sector, but
Speaker 2: this year specifically, we've seen a lot of interest in
Speaker 2: e fuels companies, which just to define it for maybe
Speaker 2: some of listeners who don't know, E fuels are hydrocarbon
Speaker 2: drop in fuels that have been derived from clean hydrogen
Speaker 2: and a net zero source of CO two. So I
Speaker 2: think the industry is I think it's controversial. I don't
Speaker 2: know if everyone thinks it's controversial, and BNS to publish
Speaker 2: research on this, so I encourage everyone to use the
Speaker 2: platform and read this if they're interested in hearing more.
Speaker 2: But e fuels over the long term are very, very
Speaker 2: energy intensive, and I don't think they have a huge
Speaker 2: chance of becoming cost competitive with just combusting fossil fuels
Speaker 2: offset with direct air capture. People think, oh, direct air
Speaker 2: capture is really expensive. How is that going to be competitive?
Speaker 2: If an e fuel is net zero, the carbon has
Speaker 2: to have come from something like direct air capture, and
Speaker 2: so that's actually irrelevant to the point of the cost competitiveness.
Speaker 2: We're going to be needing to capture carbon from somewhere,
Speaker 2: But creating all the hydrogen that's needed for an e
Speaker 2: fuel and then smashing it together in an electrolyizer with
Speaker 2: CO two is really really energy intense of you lose
Speaker 2: a lot of hydrogen in the process, so you need
Speaker 2: a massive amount of electricity supply to actually create the
Speaker 2: production side. So I think long term the serious competitiveness issues. Now,
Speaker 2: speaking to people who operate in the market right now,
Speaker 2: I'm sometimes a been too long term oriented. The reason
Speaker 2: that we've seen a lot of amendument in the industry
Speaker 2: is because there's a lot of strong policy that supports it.
Speaker 2: So this goes back to the point I was saying earlier.
Speaker 2: When there's policy to support demand for something, people will
Speaker 2: kind of finance whatever they can and get their hands on.
Speaker 2: Probably the strongest force in this industry right now is
Speaker 2: the European Union has created a mandate for the use
Speaker 2: of E sustainable aviation fuel in aircraft. It's not really
Speaker 2: coming into force anytime soon, but people see, oh, in
Speaker 2: ten years if I can. Airlines are starting to procure
Speaker 2: some of it now, and I've spoken to startups who said, yeah,
Speaker 2: it's like it's really expensive to make, but these mandates
Speaker 2: mean that people will pay me a lot of money
Speaker 2: to do it because there's not a lot of production
Speaker 2: capacity right now. So some people I think might just
Speaker 2: be doing it as a short term way to finance
Speaker 2: other technology development. Others maybe have more long term ambitious skills.
Speaker 2: But yeah, it's a pretty pretty exciting sector to be
Speaker 2: tracking right now.
Speaker 1: So just to be fair and balanced, Mark, as you've
Speaker 1: been very clear on your stands on hydrogen and that
Speaker 1: is a really popular topic here, do you think the
Speaker 1: rest of our team would agree with your view on
Speaker 1: e fiels?
Speaker 2: So no, not every BNEF binalists would agree with my
Speaker 2: perspective on e fuels. And I think one of the
Speaker 2: more compelling counter arguments I have heard is that, oh,
Speaker 2: it's cheap to produce fuel like the way we do
Speaker 2: right now because of the portfolio of products that are
Speaker 2: refinery creates. But if there's no longer any road fuel
Speaker 2: to create, it would actually be very expensive to produce
Speaker 2: just jet fuel, and so basically current refinery portfolios won't work.
Speaker 2: And actually that makes economics relatively competitive for ethiels, so
Speaker 2: it is still a little bit of an open question.
Speaker 2: I'm sometimes a little bit hyperbolic in terms of the
Speaker 2: way I phrase the lack of competitiveness. The reason I
Speaker 2: talk about it, though, is because it is getting a
Speaker 2: lot of policy support, and we can't just endlessly support
Speaker 2: things with policy to try to get them off the ground,
Speaker 2: because not everything. You can't just subsidize everything forever. Not
Speaker 2: a huge amount of political support for doing that. So
Speaker 2: we want to make sure we're subsizing the right things
Speaker 2: and just actually sometimes we'll subsidize stuff in it won't work,
Speaker 2: and that's fine, but we should constantly be asking ourselves
Speaker 2: that about the things that we're trying to get off
Speaker 2: the ground. And so that's why I always make this
Speaker 2: point about it, you feels, because it's a complicated question.
Speaker 1: So let's make a pivot to another technology that has
Speaker 1: a critical role to play in renewables rollout. So we
Speaker 1: often talk about the lcoees, so the levelized cost of
Speaker 1: electricity for wind and solar and how incredibly low it is.
Speaker 1: But then there's the intermittency question. It rears its head,
Speaker 1: whether it's seasonal or hourly and energy storage is sitting
Speaker 1: right there as something that we need to think about.
Speaker 1: And you see that reflected in how battery technology has
Speaker 1: been developed over the past few years. It's benefited vehicles,
Speaker 1: but it's also benefited this intermittency aspect of renewables. So
Speaker 1: energy storage is something that has been so incredibly important
Speaker 1: to the energy transition. Is it reflected then in what
Speaker 1: you're looking at.
Speaker 2: Yeah, if you look at the data since twenty twenty two,
Speaker 2: I think energy storage by itself is the biggest sector.
Speaker 2: So it's bigger than transport, it's bigger than clean power,
Speaker 2: both manufacturing and development. Most of it is for lithium batteries,
Speaker 2: which are the biggest product by a mile. There's a
Speaker 2: surprising amount for other types of batteries, so flow batteries,
Speaker 2: thermal batteries, et cetera, and a lot of stuff m
Speaker 2: battery recycling. I'd also say that most of the money
Speaker 2: that's raised is to build products that don't go into
Speaker 2: the grid, Like over ninety percent of batteries go into
Speaker 2: cars right now, and even in a net zero scenario,
Speaker 2: most of the batteries that we end up building go
Speaker 2: into cars. And I'd also say that the impact of
Speaker 2: the sector on decarbonization is lower for energy storage compared
Speaker 2: to something like solar because manufacturing is so expensive for
Speaker 2: lithium batteries, like the capital intensity of the equipment's bigger.
Speaker 2: They're more expensive to make, and so you need to
Speaker 2: raise more money to kind of get a factory off
Speaker 2: the ground. And that's why the sector has been so big.
Speaker 2: And this quarter, actually energy storage is down quite a lot.
Speaker 2: The reason for that being kind of the same as
Speaker 2: all the other equipment sectors is this is a huge
Speaker 2: oversupply in terms of manufacturing capacity. One interesting point actually
Speaker 2: is that like and this this probably applies across the
Speaker 2: entire clean clean energy manufacturing sector is people think overcapacity
Speaker 2: means you can't make money in sector. Not necessarily true.
Speaker 2: C at L is a very big company. They control
Speaker 2: a huge share of the entire battery market, and they
Speaker 2: can make money manufacturing batteries. So most companies probably struggle
Speaker 2: because it's a huge overcapacity. But the people who are
Speaker 2: really good at it, they're the ones who are driving
Speaker 2: a lot of the price trends, and so doesn't mean
Speaker 2: no one's making money in the sector just because there's
Speaker 2: over capacity.
Speaker 1: So we talked a little bit about how there was
Speaker 1: an increase in eyes, whether it's an ESG screen or
Speaker 1: in new funds that were raised to really look at
Speaker 1: some of the clean tech focused parts of the market,
Speaker 1: and that give it gave it a bit of a boost. So,
Speaker 1: if we're trying to think about what's going to happen
Speaker 1: in the future and what equity funding for climate tech
Speaker 1: is going to look like going forward, are you seeing
Speaker 1: any signs that there are funds being raised and that
Speaker 1: interest in this space is increasing or decreasing, or are flat.
Speaker 2: And so I'm often asked to produce a forecast of
Speaker 2: this number, which I always say is impossible because the
Speaker 2: numbers are so lumpy. It's like one massive deal can
Speaker 2: really change a quarter. So I can't say it's definitely
Speaker 2: going to go up or down, but I can tell
Speaker 2: you that one of the indicators that we look at
Speaker 2: as a team internally is to check how many new
Speaker 2: funds that are climate focused are closing every quarter. It's
Speaker 2: not representative of the entire pool of capital available to
Speaker 2: climate companies. There's lots of generic investors to invest, there's
Speaker 2: lots of corporate venture funds to invest, But this kind
Speaker 2: of metric of how many venture funds are closing. Climate
Speaker 2: focused per quarter over the last few years is actually
Speaker 2: reasonably flat. Some quarters it goes up by quite a
Speaker 2: lot because there's a megafund, but there's not been a
Speaker 2: huge drop off, So there's definitely still a lot of
Speaker 2: capital and a lot of investors out there who are
Speaker 2: dedicated to this vertical specifically, and so I don't see
Speaker 2: it disappearing as a theme anytime in the next couple
Speaker 2: of years.
Speaker 1: It's about matching the right technologies with the right profitability
Speaker 1: into the write investors hands. Well, Mark, thank you very
Speaker 1: much for explaining all of these different trends and for
Speaker 1: coming on the show today.
Speaker 2: Thanks for having me.
Speaker 1: Today's episode of Switched On was produced by Cam Gray
Speaker 1: with production assistance from Kamala Shelling. Bloomberg NEIF is a
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