by Jill Feblowitz
These days, companies and governments alike are making commitments to net zero emissions. While commitments are good, making progress requires investment. That means putting money on deploying existing technology in the near term, while continuing to fund innovation to deliver cost-effective approaches in the future. The current picture looks promising, but there is always a chance the momentum will lag.
Deploying Clean Technology
Despite COVID-19 and the economic downturn, clean energy investment did surprisingly well in the United States last year. U.S. companies, households and the government spent $85.3 billion on deployment of low-carbon technology in 2020, according to Bloomberg New Energy Finance (BNEF). Although there was an overall decline (-11%) from 2019, investment in electric transportation and residential heat pumps saw an uptick. Green bonds, which are primarily asset-linked, grew by 13% to a record $305 billion globally, after a slowdown in the first half of the year.
The federal government plays a significant role in the deployment of clean energy, mainly through policies like tax incentives, rebates and technical assistance. The U.S. Energy Act of 2020 (The Act) which was part of the Consolidated Appropriations Act, 2021, extended existing taxes incentives for solar and wind, a new emphasis on 45Q carbon capture incentives and a new offshore wind credit.
Even without legislation, the federal government can do a lot with clean energy related procurement. Think procurement of clean energy for federal facilities. Add to that the plans for the entire US federal fleet – over 645,00 vehicles – to be replaced with electric vehicles made in the US by 2035. Going forward, expect to see more spending on energy efficiency in federal buildings, IT for managing federal facilities energy usage and smart federal buildings.
Investing in Innovation
To reach decarbonization goals in a cost-effective manner, new technologies and approaches will be needed. That means investment in academic research and startup companies. Budding companies go through a technological valley of death proving the concept, and a commercial valley of death getting to scale. The path to maturity starts with the concept, and includes prototype/proof of concept, pilot/demonstration, and commercialization. It’s not a straight line as many founders may attest (see Figure1).
All these stages need support. Government funding has traditionally supported R&D, proof of concept and demonstration projects. What’s new with The Act is a focus on commercialization. The newly created Department of Energy Innovation will support commercialization of technologies that reduce greenhouse gas emissions. Private investment – think corporations – plays a role too in R&D as well. Venture capital and private equity support the later stages.
Figure 1. Innovation from Concept to Maturity
The Energy Act of 2020 appropriates about $30 billion over 5 years for research and development (R&D), demonstration, and commercialization. There is a caveat, though. Figure 2 shows what has been appropriated. A subsequent reconciliation process will solidify funding.
Figure 2. Estimated Funded Dedicated to Research, Development, Demonstration and Commercialization
There is a heavy commitment to carbon capture utilization and storage (CCUS); over half of the funding will be dedicated to large scale pilots and demonstration projects. ARPA-E, the energy version of DARPA, will see an increase in funding. The budget was $425 million in FY 2020. It will go from $435 million in FY2021 to $760 million by FY2025.
Transportation energy R&D is broadly defined as sustainable. The category calls out fuel cells, but not specifically electric vehicles. Electrical vehicle infrastructure is hardly mentioned. Less than $300 million is devoted to grid integration of both renewable energy resources and EVs. It’s notable that carbon removal and hard to decarbonize sectors have made their way into the Act. Expect to hear more about these in the future.
As for private investment, tech companies are jumping in big. Amazon’s $2 Climate Pledge Fund aims to invest in companies in multiple industries. To date, most dollars have gone into startups. Breakthrough Energy Ventures just announced a second round of $1 billion in funding. It is not just mission driven. Investor are seeing real returns from investment, especially in valuations of startups in the transportation space.
A relatively new mechanism, the SPAC, could boost the sector – or not. SPACs are shell companies listed on exchanges with a mission to buy private companies and convert them into public ones. There were 4 large deals in 2020. Still, the jury is out on whether SPACs will be a viable path for going public.
Sustaining the Momentum
The trend towards increased investment in clean energy is likely to continue. There is a new emphasis on accountability and climate risk. For many companies that means physical risks and transition risks. Major asset managers like Blackrock are pushing hard. Why should investors back a company with assets that might literally and figuratively be underwater in a few years? As a result, companies – Xcel Energy is one – are reporting climate-related materials risks under the framework established by the Taskforce on Climate Related Financial Disclosure (TCFD). The Commodities Futures Trading Commission (CFTC) believes that climate change poses systemic risks to financial systems. A recent report mentions a price on carbon and climate risk disclosure for multiple time horizons.
Attitudes on the need for decarbonization have changed. A study by Yale and the George Mason University found that “66 percent of US voters said that developing sources of clean energy should be a high or very high priority.” That’s quite a shift. The clear skies during COVID, rising temperatures and the increase in extreme weather and wildfires are likely part of change in attitude. Government legislation and regulations are also driving investment by providing incentives; some have set legally binding net zero targets.
Plus, companies like Amazon and Microsoft are taking note. Says Abe Yokell, managing partner and co-founder of Congruent Ventures on The Interchange, July 2020, “….[They] are really interested in skating to where the puck is going. Look out 10 to 15 years. Where is the world going? What’s the price on carbon? What should they be doing to decarbonize their entire effort? …They want to be seeking returns, but they also want to be supporting their employees and climate goals…”
Finally, cleantech is now seen as a less risky space, a space where companies are delivering solid returns. According to BNEF, the NEX, an index of companies active in renewable and low-carbon energy, was up more than 140% last year, easily besting the S&P 500 and Nasdaq.
Still, there are a lot of ways that the momentum could be halted or delayed. As for government funding, much will depend on whether clean energy investments will boost economic recovery through business and job creation. Bipartisan support will determine just what pathways to net zero are funded. The bigger question is whether funds will go to technology advancements in pathways that will meet decarbonization objectives in long term.
About the Author
Jill Feblowitz is a long-time consultant and analyst in the energy industry, focusing on innovation. As President of Feblowitz Energy Consulting, a Women’s Business Enterprise in MA, Jill’s focus is on climate risk, the energy transition and transportation. She currently serves on the advisory board for Distributech International conference and Distributech’s INITIATE!, a forum for startups and utility industry innovators. She holds a B.S. from MIT in urban studies and an electrician’s license from the Commonwealth of Massachusetts.