If you’re listening to this podcast, you have probably heard of Shayle Kann. Shayle has been at the frontier of climatetech research, media, and investing for over 15 years. Now a partner with the venture capital firm Energy Impact Partners (EIP), Shayle leads EIP’s Frontier Fund, which invests in revolutionary technologies to enable deep decarbonization. Of course, he’s also the host of the popular climate tech podcast from Canary Media, Catalyst with Shayle Kann. In this episode, Chad Reed and Gil Jenkins walk through Shayle’s diverse and impactful career path and dive deep into several of the Frontier Fund’s portfolio companies along with other emerging issues, including rebuilding trust in carbon markets; climatetech vs. cleantech 1.0; and the promise of the Inflation Reduction Act.
If you’re listening to this podcast, you have probably heard of Shayle Kann. Shayle has been at the frontier of climatetech research, media, and investing for over 15 years. Now a partner with the venture capital firm Energy Impact Partners (EIP), Shayle leads EIP’s Frontier Fund, which invests in revolutionary technologies to enable deep decarbonization. Of course, he’s also the host of the popular climate tech podcast from Canary Media, Catalyst with Shayle Kann.
In this episode, Chad Reed and Gil Jenkins walk through Shayle’s diverse and impactful career path and dive deep into several of the Frontier Fund’s portfolio companies along with other emerging issues, including rebuilding trust in carbon markets; climatetech vs. cleantech 1.0; and the promise of the Inflation Reduction Act.
Links:
Energy Impact Partners Website
Energy Impact Partners Frontier Fund
Episode recorded: September 29, 2022
Email your feedback to Chad, Gil, and Hilary at climatepositive@hannonarmstrong.com or tweet them to @ClimatePosiPod.
Chad Reed: This is Climate Positive – a show featuring candid conversations with the leaders, innovators, and changemakers driving our climate positive future. I’m Chad Reed
Hilary Langer: I’m Hilary Langer.
Gil Jenkins: And I’m Gil Jenkins.
Shayle Kann: The mandate for our Frontier Fund is actually fairly simple. The first part is revolutionary technology. This is where we take big swings at big technology problems.
The second component is deep decarbonization. We are looking for technologies that are going to be fundamental to a net-zero future. I get to think about this macro like, "What is it going to take to get us from the 50 gigatons that we're at today of annual emissions to 0, and what are the fundamental building blocks of that transition? How can we invest in those?
Chad: If you’re listening to this podcast, you have probably heard of Shayle Kann. Shayle has been at the frontier of climatetech research, media, and investing for over 15 years. Now a partner with the venture capital firm Energy Impact Partners, Shayle leads EIP’s Frontier Fund, which is dedicated to investing in revolutionary technologies to enable deep decarbonization.
In this episode, we walk through Shayle’s diverse and impactful career path and dive deep into several of the Frontier Fund’s portfolio companies along with other emerging issues, including: rebuilding trust in carbon markets; climatetech vs. cleantech 1.0; and the promise of the Inflation Reduction Act.
Note that we experienced some technical difficulties associated with Shayle’s audio in this episode, but we still hope you enjoy it.
Hilary: Climate Positive is produced by Hannon Armstrong, a leading investor in climate solutions for over 30 years. To learn more about our climate positive journey, please visit HannonArmstrong.com.
Chad: Shayle, we're honored to have you today. I know many investors and podcasters think very highly of your long and successful career in the climate space. First, we'd love to walk through your career path. At what point in your early life or career did you decide to devote your career to climate?
Shayle: Thanks for having me. I discovered climate, I guess, it was originally energy, specifically, the times it started to broaden my horizons to other climate stuff over the years, but I originally discovered energy in college. Actually, I was in college in Southern California. I was a psychology major so nothing to do with energy, and partway through college, I took a couple of courses by coincidence, one was called strategic natural resources, which was basically about the geopolitics and history of energy where we read Dan Yergin's book, and I learned all about oil and stuff like that, and found that super interesting.
Then the next semester I just happened to take this other course for some reason that was on public utility regulation. It was taught by a former Southern California Edison government affairs exec who had retired and decided to become a college professor. It was like an evening seminar, where he would come into class and take an O'Doul's, it's a non-alcoholic beer, chug in, slam it down, and then talk about public utility regulation for three hours. I think I was the only person in the classroom who loved it.
[unintelligible 00:01:14] things I was like, "There's something here for me," so without being super deliberate about it, decided that I wanted to try energy stuff in my career. I ended up tailoring my major to be a little more focused on that, and then went to work at the California Public Utilities Commission immediately after college. That kinda set me off on this journey to where I am today.
Chad: Public utilities regulation is not many folks' natural entry point [chuckles] successfully into energy and climate. Then you began originating and trading carbon credits in around 2007. That market has changed a lot over the last couple of decades. Could you tell us about that experience and what you learned from it?
Shayle: Folks who were around those days will remember that around 2006, 2007, there was this burgeoning market for both voluntary and compliance carbon credits. There were a couple of compliance markets in Europe, and there was, I think what was called RGGI in the Northeast. There was a lot of excitement around voluntary carbon offsets. Companies were starting to procure them to offset their own emissions. This is going to sound familiar because it's been happening again today, but it was true then too. With that said, it never really took off.
If you look at the trajectory of that market, it was growing. It was small but growing. It was like hundreds of millions of dollars of annual traded volume, up through, I think, when the financial crisis hit around 2008, is when it really started to fall away, and the market basically went dormant. Not that it disappeared entirely, but it went pretty dormant from 2012 until, probably, three years ago. Now there's this new wave of excitement around it that, obviously, surpasses anything that we saw, in terms of the amount of activity and innovation in it.
I did take a bunch of lessons at that time around why that market never quite took off. Obviously, this macro financial environment was a big one of them, and that is worth always thinking about because we're talking about voluntary procurement. What budget line item from a corporate disappears when there's hard times if it's a really bad financial crisis? Stuff like voluntary carbon credit procurement goes away.
In addition to that, I think the market never got over the hump of building trust and transparency around what the credits actually were, what they're worth, and how to differentiate amongst them. This is a problem, I think, we also have not solved today. It has not gotten better. It has gotten more complicated. We've introduced an entirely new asset class or series of asset classes around carbon removal, which didn't exist back then. For all the right reasons, it's a better version of a credit than avoidance credit, but it carries its own entire set of questions around trust and transparency, and measurability and verifiability, all this kind of stuff. I'm watching us play out a similar story right now, in that regard, so that gives me a lot of pause.
Chad: Right. There is an organization now called the Integrity Council for Voluntary Carbon Markets, that is an independent NGO that is attempting to set and enforce, what they call, core carbon principles, which they hope will serve as these global standards to ensure that these credits have the trust and transparency necessary for buyers to be confident enough to buy them. Are you familiar with his organization, its efforts, and how are you thinking about, how do we rebuild that trust in the marketplace today?
Shayle: I am familiar with them. I will say that, first of all, they're not the only ones, and this is part of the problem. There's a bunch of different organizations all saying, "I will be the one, maybe I'll build a consensus amongst a bunch of parties, but one way or another, I will be the one to help tell you what is real and quality and what is not." There's a bunch of them, including some that existed way back in the day, like the gold standard, for example, which was a number of them back then still exists today.
There's Verra, you've got ratings firms. There's privately venture-backed startups who are trying to do their own version of sort of credit ratings, basically trying to be the S&P or Moody's or whatever, for carbon credits. It's all super complicated. It's all super confusing, right? People disagree on what's quality. In addition to that, the other thing that makes it particularly complex is the fact that new solutions are arriving constantly. If you just look at carbon removal world, we can come up with a bunch of criteria.
For example, we can say, one factor that matters a lot in quality for carbon removal credit is durability. Does this thing going to remove carbon for 10 years, 100 years, 1,000 years, or forever? Who knows for a lot of these things, right? We don't have great data yet on durability. There's fairly wide ranges for something like Biochar, for example. It could be 100-year durability, it could be 1,000-year durability. We need to decide whether that matters in the first place between those two ranges, and second, we need to decide how are we going to adjudicate it.
I think it's great that there are these independent organizations trying to create the standard. What I saw happened last time is that that happened too but there is no consensus on which of these places everybody would end up trusting, and the more of them that show up, the harder it is to get to that consensus. I don't know how we get out of that hole.
Chad: Yes, we probably agree with you, we think that the cheapest and most efficient way to remove carbon is actually to avoid putting in the atmosphere in the first place. That's what our investment thesis is focused on.
Gil: Let's come back to your bio, Shayle. You could probably regale us with stories of your time as a Fulbright scholar in Australia. I personally became aware of you, first, through your long and successful stint at GTM Research. May it rest in peace. Give us a sense of, I think this was around 2008, what was like building an energy market intelligence arm, a pretty big team, 30 people tracking and forecasting? Then give us a peek inside to what energy market intelligence work is like?
Shayle: Sure. Backstory there, briefly, was, as you mentioned, I went to Australia, into an academic research for a year. I came back, it was early 2009. I moved back to Boston. It's where my wife was in grad school at the time. I thought I wanted to be a clean tech venture capitalist, actually, because that was back when clean tech venture capital was exciting.
Gil: Well, you're that now, Shayle, of course, you see, finally.
Shayle: It turns out I am right now but it took a while.
Gil: Yes. [chuckles]
Shayle: I thought I wanted to do that then. I was talking to some of the Boston-based funds at that time. One of them said, "Well, we're not hiring but you should talk to this company. We just invested in the seed round called GTM, Greentech Media." I went and met Scott, who was the co-founder and CEO. Scott and Rick, the co-founders of GTM, they had had a previous venture success in optical networking world in a company called Light Reading. They built this business that had this unique business model that was sort of two things housed under one roof.
One thing it's a B2B, digital media business, basically, news, journalism, all the normal B2B media stuff, really laser-focused on depth in this one core sector. Then alongside that, they had a research and market intelligence firm that would deliver much more in-depth, much more unique data-driven insight. All of that would sit behind a big paywall, and you sell subscriptions and data and all that kind of stuff. The idea was that those two pieces would feed off of each other and catalyze each other.
They saw that work in the optical networking group, and they decided, "Okay, maybe we can take this business model to a new sector, one that has a lot of growth and a lot going on, a lot of complexity, but yet have sort of the home that you want to go to to figure out what's really happening." That was the genesis for GTM. I turned in a year after that. They knew the business model really well. They didn't know the market yet. They're coming in fresh on energy. I ended up leading the market intelligence side, as far as GTM Research.
I think we just maybe got lucky with timing in the market. There was a lot going on and it was pretty opaque. Taking a specific example. At the time, 2009, 2010, solar market in the US was really just starting to take off. We're seeing the first big utility scale solar projects get built, residential solar. This is when like Sunrun, and SolarCity, and Sungevity were just really starting to ramp up. There was just a complete lack of good data and intelligence on what was happening. How much was getting installed, who was doing it, for what price, who the suppliers were, what the economics look like?
All of these fundamental questions just wasn't good information out there and so we built this whole platform around trying to basically, just illuminate what's happening in the market for all these players who were like flooding in to try to take part in that.
Chad: I will say I was at Sungevity at the time for a couple of years during business school and relied very heavily on your research as we developed some strategic finance products.
Gil: Was it also like cellulosic ethanol back then, and LEDs? What were the verticals?
Shayle: Solar was the first big one for us. We discovered a real market need there and went super, super deep. One of our competitive dynamics for us was that we were up against much larger, more established research and data firms like IHS, and then Bloomberg, when they bought Duke Finance and so the way that we differentiated, we said, "We're not going to go super broad and cover everything. We're going to go really, really deep in the places that were deep." We started with solar, we added smart grid, which was, you may remember very big at that time as well.
Gil: SilverSpring, yes, very big in '09, '10, '11. Yes.
Shayle: That's right. That became our second big vertical and we added energy storage early there. I think we were starting to get really good at identifying like, what's the next big wave coming? Cellulosic ethanol was basically over by the time we showed up. LEDs were not over. They were successful, but boring by that point. We were looking for what's the next thing that like the universe is going to descend upon as the next big market, but where there's a ton of opacity in what's actually happening.
Gil: As a consumer now of yourself, do you think the data's gotten better as we've matured as an industry too in the forecast, or you still have your knits since you were so close to it?
Shayle: I think it's worse if anything based on the position right now. Let's take an example of a market that's in this situation. Lots of growth, lots of excitement, a lot of opacity. You could pick carbon removal and carbon capture. You could pick electrolysis, green hydrogen. Answering all those basic questions that I just played out about solar in 2009 is really hard to do for those markets in 2022, still. There are market intelligence firms out there. I don't think that they are doing a great job of really crystallizing the core of what's happening in these markets. The ones that are out there, they're big now. Bloomberg being a good example, they're probably the best, but they're so broad.
I haven't seen anybody come along yet and say, "We're going to do what GTM did in this new climate tech universe, go extremely deep, but present information in a way that's really easily digestible. I'm frustrated because I'm getting super on that, but I haven't seen it.
Gil: Maybe EIP should fund the next thing, right?
Shayle: I thought about at some point in my future if I ever want to incubate something, or whatever, spin it out.
Chad: I would argue that the space has declined a bit because you're not there anymore but you joined EIP in 2018 where you're now a partner, Energy Impact Partners. Tell us about EIP's early history, how it all came together, and what differentiates you all from others in climate tech VC.
Shayle: Sure. The DNA of EIP, our founder managing partner, Hans Kobler, he was part of the original founding of GE Ventures. GE was a pioneer in corporate venture capital, but GE's also sort of unique in that, at least at that time, before they started selling everything off for pieces now, they had multiple, very distinct business units that had very different needs – aviation, power, finance, et cetera.
When they founded GE Ventures, they basically built an internal venture capital arm that would work with each of the business units individually, figure out what they saw coming in the future, where the needs were, where the white space was, use that proprietary intelligence that they would get from talking to them and then make themselves better investors and then delivering value to the companies that they're interested in by helping them work with the parent.
At this point, that's like a tried and true corporate venture capital thing and the founding idea of EIP was to do something somewhat similar except for create a separate organization. We are not corporate venture capital, that we are financial investors, and our fund is structured just like any other financial investor, but still deliver all the value, having multiple corporates in your cap table simultaneously.
EIP was founded with initially a group of utilities who all provided capital for our first fund and we invested in a bunch of companies. We had differentiated insight into what might work and what might not work. Then for some of those companies, we could deliver really outsized value by helping them connect with a bunch of strategics. Since then, we've expanded the platform substantially.
We have a little under $3 billion under management now across a few different funds with different focuses and a much broader LP coalition, which still includes a lot of utilities, but also includes other folks in the energy industry, buildings, real estate, transportation, mobility, other large industrial categories, big tech companies but the idea remains the same, which is we are differentiated because we now have, I think close to 60 strategic LPs that we can draw upon for our own insight to make us smarter investors that we can work with and build a relationships with, and who can deliver value to our portfolio of companies through, but where we ourselves carry the credibility and the reputation that comes with a true financial investor.
Chad: Can you give us a specific example of how a strategic LP has helped generate value for a portfolio company?
Shayle: One example of a company we exited is a company called Greenlots, which was one of the pioneers in EV charging, I don't know, 5, 10 years ago. We were early investors of Greenlots. We were the largest shareholder there. We invested in them in part because we did, at that time, this actually predates me at EIP, but we did a big scan of all the really, really nascent EV charging companies at that time and with our LPs, who at that time, they were the utilities who are going to interconnect the stuff and wanted to roll out infrastructure themselves because they wanted to galvanize the electric vehicle market. That's the early days.
Collaboratively, with them, we found Greenlots to be the most attractive opportunity, invested in the company, and then proceeded to work with Greenlots to figure out where they can help roll out within our LP territories including- so one of their earliest deployments was through Avista, which is a utility in Spokane, Washington, one of our LPs. They were rolling out a pretty pioneering EV charging program for utilities where they would own and operate a bunch of EV chargers from residential, all the way through DC fast chargers in their territory. They used Greenlots for it. Taking up Greenlots into the market, it helped come down the cost curve and build up their experience, and expand, getting real revenue but did a lot for Avista as well. It's a win-win on both sides.
Greenlots then had rinse and repeat a bunch of versions of that in addition to them building out the broader platform outside the utilities and it was sold to Shell in, I want to say, 2019. That's one example amongst a whole bunch.
Gil: Well, I think we want to ask you about the Frontier Fund. Tell us about that and Chad and I want to ask you about a few specific companies.
Shayle: Sure. The Frontier Fund is where I focus now, and it's kind of my baby, and I love it dearly. The mandate for our Frontier Fund is actually fairly simple, and it's two parts. The first part is revolutionary technology. This is where we take big swings at big technology problems. These are deep tech companies. They tend to be hardware companies. We're investing before the technology is fully proven and commercial. We're taking some tech risks for engineering or scale-up risk, but they're really big swings.
The second component is deep decarbonization. We are looking for technologies that are going to be fundamental to a net-zero future. We're investing in-- Think of this as our big bets on big climate solutions platform, which given how I spent my whole career is a really exciting space to be in for me because I get to think about this macro like, "What is it going to take to get us from the 50 gigatons that we're at today of annual emissions to 0 at least on net, and what are the fundamental building blocks of that transition? How can we invest in those?
Chad: I do want to talk about the broader climate tech VC space while we're here. Many people call this era climate tech or clean tech 2.0, which they say began in the mid-teens. This is differentiated from clean tech 1.0, which really kicked off in the mid-aughts. That's when a lot of VCs brought a lot of money into a lot of hard tech companies, rather than software-focused companies at that point, but they lost a lot of money. Some say that's in part due to the failure of the Waxman-Markey climate bill in the first few years of the Obama administration. In your view, what are the primary factors why climate tech 2.0, or whatever we're calling it, will be more successful than clean tech 1.0 was?
Shayle: So many things that are different now than they were a decade ago. There's very little to me that is similar but just to list off some of the things that are different. One is the capital landscape is dramatically different. One of the things that caused a lot of those companies to fail in the first wave is that there wasn't a great fall on capital. There wasn't sufficient money out there for them to continue to finance, particularly, for these hard tech solutions that are capital intensive. Now, there is lots and lots of capital that has been raised and is dedicated to climate. There's more coming even now despite the general pullback in venture and activity. One thing is capital availability.
Second thing is that the market has changed. What happened in that first wave was that actually, some of the technologies everybody was trying to invest in succeeded dramatically. Solar, wind, lithium-ion batteries, they just weren't great venture outcomes for most of the investors, but the technologies succeeded nonetheless. Now we're in a world wherein we actually do have cheap, abundant renewables and are getting there on lithium-ion batteries and starting to get there on EVs. There's a next wave that comes behind that that can either ride on the coattails of those markets or help enable them to go further. It's a different set of categories. It's a broader mandate.
Now, I don't think we're in clean tech 2.0. We are in climate tech 1.0. The reason with that distinction in terminology matters is that it is a different focus. It includes some of the same areas, but it is broader. There's a laser focus on tons of CO2 equivalent, and that carries you across energy, transportation, industry, food, and agriculture, carbon, and buildings. Those are the five-and-a-half big categories of emissions. That's a broader mandate we've learned from last time. We know what didn't work, we know why it didn't work, and hopefully, we're not going to repeat those mistakes again, and then finally the world has changed.
I think climate change has continued apace. We collectively have gotten more concerned about it as a human population everywhere and so that has bled into more money flowing into climate-linked capital, more corporates who are willing to take meaningful strides and real action not just make announcements. Then it's a policy. Obviously, the policy environment is different. You said the Waxman-Markey bill didn't pass. Well, the Inflation Reduction Act did, and it's the biggest thing we've seen in this sector ever, in my opinion.
Chad: Yes, and we'll get to that a little bit later. I do want to touch on you mentioned all the capital that's flowed into climate tech funds more broadly. I think over $40 billion over the last year or so. The sector still feels very hot. Do you ever worry about valuation bubbles? That you're investing now at multiples that may not be sustained, much less grow when you need to exit the investments?
Shayle: Yes. This is not unique to climate tech. They're in broader tech VC. There was a run-up evaluations that lasted 12 years as the overall macro environment remain strong. In the past, I don't know whatever it is, six months or something like that, there's been a pullback in valuations. That is true in climate tech as well. In general, especially for what I'm focused on in this Frontier Fund, we're taking long-term bets here. We're betting on companies for which we believe the technology is successful will be a fundamental part of what becomes a net zero future. That means that we think these things will have staying power into really big markets over decades.
I don't worry so much about perturbations in the markets over the course of a year or two or three or even a single economic cycle. Certainly, companies need to be able to raise enough capital to continue developing the technology and coming to market but we're trying to maintain our eyes in the long-term prize here because we think that prize is big enough that it will warrant what we are paying today.
Gil: One of the companies in the Frontier Fund that I've been really impressed with a lot of buzz on them and I met them recently at a dinner for ACP is Form Energy. They're attacking this holy grail multi-day energy storage. I think they were iron- is it iron flow?
Shayle: Iron-air.
Gil: Iron-air. For the uninitiated, tell us what's so exciting about Form. I think clearly they've got some momentum and a fascinating team, but why did you make them one of the companies in this fund?
Shayle: Fundamental premise here, things we have to believe, perform to be exciting, that I believe we are going to build a truly ridiculous amount of renewable energy, wind and solar, basically everywhere in the world over the next decade or two. It is the cheapest, single, cheapest source of kilowatt hours, either wind or solar, depending on where you are that you'll be able to get, and we're going to continue to scale it up. Now, as everybody knows the sort of if there's a flaw--
Gil: Don't say the sun doesn't always shine. You were going to do that, weren't you, Shayle?
Shayle: Well, I was going to say, everybody knows that part. Everybody knows that-
Gil: I did it then. Sorry.
Shayle: -the sun sets every night and the wind doesn’t blow all day. I think most of what people understand that challenge to be does get solved mostly by lithium-ion batteries and some amount of demand response and stuff like that. That is the diurnal problem. Over the course of a day, can you meet load with supply if you're in a grid that is increasingly driven by wind? Now we are starting to see the stresses on that already. It's not like it's easy. You can look at-- We are narrowly avoiding blackouts about once a year now in California maybe a little bit more often. We're super solar heavy grid, tuning peak hits, the sun sets, we have peak demand.
We're starting to scratch the edges of that being a challenge. You see this happen in other places, but let's just say we solve all that. You still face the problem when you're going to get to a higher penetration renewables grid that is longer duration. This is why people care about long-duration batteries, but they're thinking about it the wrong way mostly. You start to face these 12 to 24-hour challenges. I think even there you can solve it mostly with lithium-ion batteries and other technologies. Where you really face a problem, that is a true reliability challenge for the grid that shows up fairly quickly if you are trying to maintain high reliability for customers, is multi-day events.
They're not that uncommon. They're becoming more common as time goes on. You could see it in Texas with weather in February. You could see this in the midwest with like a cold snap and where there's no wind that shows up in a cloudy week in a solar heavy grid. Those types of situations, you have to plan for if you are a grid operator and they become increasingly challenging to plan for. Now, you can use lithium-ion batteries to solve that problem but it's extremely expensive to do so.
Form's core innovation was what would it take to build a battery for which you can economically operate it as a multi-day storage asset, so three, four days of storage at a time instead of the four to eight hours you typically get out of lithium-ion battery. The only way you can do that is if the capital cost to the battery is extremely low because you are not going to be cycling it as much, you're not going to get as much out of that arbitrage but otherwise. Form is building a battery that's about a 10th of the cost of a lithium-ion battery, and it's well suited to this multi-day storage solution. We think that this is going to be a fundamental component of a zero-carbon grid, again, to my earlier point of what are the things we will need to reach the promised land.
The absence of a battery like Form's, you need to rely on a bunch of other things that have their own challenges, be they nuclear, geothermal, or carbon capture on gas plants, or something like that.
Chad: Continuing on that theme of other solutions, Zap, another company in your portfolio, Zap manufactures compact and scalable nuclear fusion reactors that, of course, generates zero-carbon electricity. We recently interviewed TAE Technologies, which raised about 250 million and its latest round for the next generation of hydrogen boron fusion reactors. Tell us what is Zap's differentiating technology and approach, and why you believe they will be successful where so many others have failed in commercializing fusion reactors?
Shayle: Obviously, this is our one investment so far in a nuclear fusion company. Obviously, we go in with clear eyes. We know the risks associated with commercializing fusion--
Chad: That's revolutionary, man. Truly, that's deep.
Shayle: Yes, it's deep. It's the deepest in deep tech. What I will say is that folks who have spent a lot of time recently looking at the world of nuclear fusion generally come out of it thinking, "Oh, my God, somebody is going to--" There's maybe a few folks who are going to reach what has always been considered the promised land, which is Q equals one, energy break even. You get more energy out than in. Nobody's ever done it. I think it's coming pretty soon. There's a few players who have the chance to do it within three years or so. Our thesis has always been, we're deep in energy world and electricity world, getting to Q equals one is like a monumental achievement, but it does absolutely nothing for making fusion an economic resource on the grid.
For us it has always been, we're looking for the combination of technology that has the promise to get to that point, but then also we think as the fundamental properties to, ultimately, deliver economic power on the grid. It's just because you have fusion doesn't mean it's cheap power. It's similar problem with fission. You have really, really cheap input, but you have extremely high CapEx. If you have extremely high CapEx and you're amortizing down over the lifetime of the system, it may just be too expensive. We don't want that to happen with fusion.
Zap was the first company that we came across that basically had that same view. Their eye is not on Q equals one. Their eye is on Q equals 20 and when Q equals 10 or 20 or whatever the number is, building a system for which the CapEx is sufficiently low, that you can build an attractive levelized cost of energy. No promises, obviously, but we think Zap has the right mindset and a technology that has a real pathway to get there. If it works, it's a huge deal, but we're very much of the mindset that as it pertains to deep decarbonization, a zero-carbon grid is a must-have. There's a lot of things that are nice to have. You can't get there at all without a zero-carbon grid. We had to take a bunch of shots on goal to get there.
Chad: Yes. It's not just the grid that we need to decarbonize. Of course, we have to decarbonize heavy industry. Another company in your Frontier Fund portfolio was Rondo Energy, which provides various renewable products and services intended to enable industrial decarbonization at scale. Just tell us a little about Rondo's technology approach and business model.
Shayle: What Rondo has is, what they call, a heat battery. It is a thermal energy storage product that takes in electricity, stores it as heat, stores it in the form of heat, and then delivers it as heat. There's some thermal energy storage companies you may have heard of that are trying to do long durations for the grid. That's not what Rondo's doing. They're delivering high-temperature industrial heat. High-temperature industrial heat is a huge deal. It is why we have so much emissions from many of these categories like steel and cement and petrochemicals and all these other categories.
Mostly the reason that they are such heavy-emitting industries is that they need this really high-temperature heat that we currently combust fossil fuels to get. What if you didn't have to do that? The way that the thesis behind Rondo is similar to what I said before with Form, just in a different context, which is if you believe we're going to get increasingly available, increasingly cheap renewables but if you don't necessarily believe that grid electricity, if you were trying to operate 24/7, is going to be cheaper and cheaper and cheaper because we're going to have to do all of this balancing and because transmission distribution costs have continued to go up, then what your conclusion ends up being is we should be trying to figure out a way to operate intermittently to meet the cheap electricity. The problem is these big industrial facilities, they don't operate intermittently. They need 24/7 heat or steam.
That's where Rondo comes in. Rondo can pull and store for how many hours a day, you've got it. It's cheap and clean. Six, it could be eight, whatever the number is, location and size of that, such that when they store as heat and delivered out the other side 24/7. From the industrial facility standpoint, they're decarbonized, they can take advantage of the cheapest power that's available, but they don't have to change their operations. They continue to operate 24/7. That's the idea behind the heat battery.
Chad: Excellent. We talked earlier a little bit about carbon removal. I just want to jump to that because I just read this morning actually, that the last quarter was the highest-ever VC investment in carbon capture startups. $900 million almost across 11 deals. Carbon removal has to be a part of the solution if we're ever to achieve the temperature trajectory that we need to, to avoid the worst impacts of climate change. Can you rank for us the carbon removal technology solution that you think will have achieved the most scale in, say, 2035, whether that's natural carbon capture solutions or tech-enabled point source or direct air capture or other hybrid solutions that are out there as well?
Shayle: That's a really interesting question. The things that are most readily available and scaling today, though they're not necessarily in all cases the best, are nature-based solutions, particularly avoiding deforestation, afforestation, maybe some of the soil carbon stuff. You can do that most easily and scale it most fast and it is cheapest today, so it probably has an inside track to the most scale for the near term. Behind that, you could say something somewhat similar for point source carbon capture, which now looks even more attractive in light of the IRA in the US. There's a lot of momentum.
Those two probably have the most legs in the sense of being just like they're in the market already today, basically, and they can continue to scale. Behind that, there's a million other solutions for carbon removal and moreshowing up by the day.
In terms of true scale and scalability, direct air capture is appealing in that context. Now, it carries a cost question more than anything else, but direct air capture may end up being fundamental to a bunch of other emerging sectors. If you want to use CO2 to produce something, so take e-fuels for example, you want to make jet fuel that is truly zero carbon, you're going to want to produce a bunch of hydrogen, a bunch of direct air capture, combine them through a variety of mechanisms and create jet fuel, basically. That's going to require a lot of direct air caputre.
I guess if you're asking me today to bet on largest scale of engineered carbon removal solutions by 2035, which is long enough to get there, I think I would say direct air capture.
Gil: Alright, Shayle, we've been dancing around. We got to talk IRA. Okay, so you did a really great pod with Jesse Jenkins, no relation, I think like a week after it passed. If anyone hasn't listened to it, we'll put it in the show notes. It still holds up your enthusiasm. Both of you guys really came through and I was listening to you guys. I was feeling the same thing of like, "Oh, my God, what about this and that?" I also suspect that you're still digging in. It was August 17, it was signed, but in July we got the breakthrough.
What do you think is underlooked now? Have you wrapped your head around it anymore or have you already shifted into like, what about all these questions and treasury guidance, and that will inform what I think are the biggest winners. My sense is, obviously, hydrogen. Hydrogen, robust, big winner, energy storage, big winner, and some other technologies but after you've had another month of reflection, give us your IRA hot takes.
Shayle: I continue to think that the world generally, maybe outside of climate tech circles, but even inside to a degree, is not quite reckoned with how big a deal it is. It is truly transformative to multiple super-important sectors, like who are the winners? Almost everybody in climate clean energy world at least. Renewables are the biggest winner, just the extension of the ITC and the PTC making it tech neutral. That's going to be the biggest thing of any of it. Then all these domestic content benefits. You look at- like First Solar is going to be sold out as long as they can-- Everything they can make for a decade plus, right? Wind and solar are huge winners. Stationary energy storage is a huge winner. It gets standalone ITC for the first time and a bunch of domestic manufacturing stuff. Hydrogen, as you said, gets this super lucrative tax credit, carbon capture gets this super lucrative tax credit. Battery manufacturing and materials and minerals, anything that's a domestic supply chain there gets a huge benefit, and methane reduction, there's a ton in there.
I think to your point, there is kind of a waiting game now because in some of these places it does matter what the treasury guidance ends up being to dictate what impact exactly it has on the market and who benefits most. Just taking a step back, we haven't yet digested how big a deal this is, I think.
Gil: I think you're right, particularly this combination of the manufacturing and the production tax credits. I don't think people realize, even in batteries, I'm sure you do, and maybe you don't want to get into too much detail, but how much cost is covered potentially by a smart battery manufacturer and developer instances or the interaction with hydrogen and carbon capture. This is true industrial policy on a scale we've never seen, and it's going to be a very exciting decade. Boy, we are digging into the details as I'm sure you are as well, in terms of what does this mean for market near, mid, and long term?
Shayle: Yes. We just don't know yet. It creates a massive rising tide for clean stuff, but boats will, this metaphor is going to fall apart immediately, but the rising tide will not affect all boats equally.
Chad: [chuckles] Sticking on policy for a second. The SEC has proposed mandatory climate disclosures. The most important of which I would argue,all companies have to report scope 1 and 2 emissions, and many have to report scope 3 emissions as well. What are your thoughts on this proposal? Then subsequently, do we really need to reform the greenhouse gas protocol? It hasn't been updated in about 10 years, especially for scope 2 and maybe 3 emissions as well.
Shayle: I would say I'm not the expert on this. I'm not deep enough on it to know how much the GHG protocol needs to be reformed or anything like that. I think high-level corporate action on climate stuff is a really, really big deal in galvanizing some of these more nascent markets. I think anything that holds corporate feet to the fire to take real action, to set meaningful targets to be measured against those targets is good in accelerating adoption of new technologies. How exactly it gets implemented is outside my area that I'll pretend to be expert in.
Chad: Then final question before we get to the hot seat, the 10-year treasury is hovering around 4% right now. In addition, we may be looking at a recession here in the US as the Fed continues to tighten to bring down inflation. Climate tech companies' projects, in general, are often more capital-intensive than other fossil alternatives. What are your thoughts on rising interest rates and the looming recession, and how will they impact the climate tech space, or is our industry really recession-proof going forward?
Shayle: I don't think it's right to say that this industry is recession-proof. It's not. It's part of the economy, and parts of this market are particularly sensitive to things like interest rates. The nature around renewables projects make them especially sensitive as you guys know better than I do. What I would say is that I think that there are counterbalancing forces going on right now. There is one which is the macroeconomy, which is a challenge. There is the other, which is the climate supercycle, which is, if you believe that there is going to be a meaningful push for decarbonization, that's going to have to last until mid-century, certainly, the momentum behind that right now pushes against the impact of the economy. I don't think that it's recession-proof, but I do think that it gets buffered a little bit by the fact that--
The IRA is another example of this, right? Simultaneously, with the macro environment deteriorating, you have this bill getting passed that just totally transforms the economics of a bunch of these things and creates all sorts of new momentum for new investment. I think the impact will be real relative to an alternative scenario where in the economy were still booming but I do think that there is a degree to which a lot of the areas of climate tech are well insulated.
Chad: That's a good sentiment to end on before we get to the hot seat. We asked for your immediate quick thoughts on the following statements. The hardest decision I've ever made is?
Shayle: Getting braces when I was 16. My orthodontist said that I was going to need braces for sure at some point in my life. When I was 16, I was given the option to get them right away or wait until some point in my adult life when I was going to have to get them. It was such a difficult decision, but that was like the most mature decision that I ever made. I got the braces then because I was like, "I'd rather have braces now in high school than when I'm an adult, so I'm just going to do it."
Chad: From this podcast your teeth look great on the Zoom screen-
Shayle: Thank you.
Chad: -on the big screen here. One thing I've changed my mind on is?
Shayle: Direct air capture, actually. I was fairly skeptical for a very long time. I remain maybe not the greatest enthusiast of direct air capture, but I've come around to there being a real market for it.
Chad: The person I've learned the most from is?
Shayle: My father. Certainly, he was sort of-- There's a long backstory, but he had a weird career. He was a children's entertainer, storyteller, juggler, magician for kids. As I've grown older I've come to appreciate not only just that, that was like a cool thing that he did, but also like what a hustle he had to pursue to make that a career for himself in Madison, Wisconsin for 30 years. I learned a lot from him just in terms of hustle and independent thinking and not doing stuff just because that's what the society told you to do.
Gil: Now being a leading climate tech VC, you're a leading energy and climate podcast host yourself and it's fun. How many of our colleagues are pass around your episodes. You should know that, and you've done an amazing job, I think, in our niche, within a niche, going back to the Interchange and now with Catalyst, with Canary. Why did you decide to start podcasting and then you took a break and why you come back and maybe one tip to small podcasters out there on something you've learned?
Shayle: Well, I started podcasting back in the GTM days. It was actually a business decision for GTM. It was part of our digital media platform, and it was a way to use, we use that platform to promote our research, which I was running at the time. We did it for a business reason. It turned out to be a good business reason for us to do it but then I discovered that I really liked doing it. I find a lot of value in it, and it's a useful exercise for me actually. I tend to try to focus on things that I think are super important, but I don't fully understand, and it's an opportunity for me to really like, digest that stuff live. That seems to work for what people want to-- They're learning along with me a lot of the time.
As far as podcasts go, I think depth over breadth is usually the thing- you want to figure out like what, you said niche within a niche, find your niche within a niche and then really lean into it because there's so much content out there now, if you try to build something that's really broad, you're going to get lost in the mix, but if you build a really, really devoted audience who really cares about the things that you care about, you can build from there.
Chad: Yes. Well, you come out with a podcast every week and you're a climate tech VC so the key ingredient to my productivity is?
Shayle: Coffee, certainly.
Gil: What kind, espresso or--
Shayle: I'm like a little bit of a coffee snob, so I'm making pour over coffee.
Gil: Of course, you are. You're out in Berkeley--
Shayle: It's very in kind with my circumstances but, yes, I mostly drink Philz. I also drink this one particular Philz blend called Philtered Soul. Yes, I have my process. It gets heated to the exact perfect temperature and poured out of the right spout and into a nice cup.
Chad: The most insightful book or article I've read recently is?
Shayle: I have not been reading books as much lately as I should have been, to be honest. We do have a seven-month-old son, which is a convenient excuse to say that I haven't been reading that much but I'm going to give you a piece of content that I've been consuming, really enjoying, which I think I'm behind on. Everybody else is already ahead of me here, but my wife and I have fallen in love with Alone, the show where they drop people alone in the wilderness. The person who survives longest wins, just the ingenuity, people on the show, and the perseverance is very inspirational to me.
Chad: Then finally, to me, climate positive means?
Shayle: Carbon-negative?
Chad: True, true. Yes.
Gil: Direct.
Chad: Thank you for joining us, Shayle. It's been a great conversation. Really great to chat with you and appreciate your time.
Gil: Yes, Shayle, thanks for all you're doing, man. You're a great ambassador and voice for our burgeoning industry and it's really fun to have you on.
Shayle: Appreciate it. Thanks for having me, guys.
Chad: If you enjoyed this week’s podcast, please leave us a leave a rating and review on Apple and Spotify. This really helps us reach more listeners.
You can also let us know what you thought via Twitter @ClimatePosiPod or email us at climatepositive@hannonarmstrong.com.
I'm Chad Reed.
And this is Climate Positive.