Equal's 2022 Climate Wish List
Last year, we discussed the fact that climate funding was more material in 2020 than it had ever been before. Little did we know what 2021 had in store for us. PWC recently found that $56.6B of climate funding was raised in the US between the second half of 2020 and first half of 2021. While 2021 was the biggest year for climate tech from a funding perspective, it also saw renewed focus on the policy side, with Joe Biden’s plan for climate change.
While 2021 was clearly a blockbuster year in climate tech, we think 2022 brings even greater promise. The combination of talent and capital approaching the space is simply unlike anything we’ve seen before. We’re also seeing digital and material innovation come together in ways we’ve never seen before. Political, corporate and social expectations are elevating beyond our expectations. 2022 seems like the kink in the curve for digital transformation in climate.
We’re eager to meet the most talented, hard-working, mission-driven founders dedicated to that transformation, but wanted to share a few themes we’re particularly interested in for 2022 below.
EMPOWERING THE GREEN WORKFORCE
The DER market is growing increasingly fragmented and as new DER types emerge, developers will need alternative forms of underwriting and project design to capture this value. Curbing soft costs, which can amount to ⅔ of total project costs, will be critical. We believe there’s an opportunity for software solutions to streamline developer workflows as they expand outside of solar and deeper into residential electrification. These software solutions will touch multiple aspects of developer operations, enabling them to overcome key challenges around labor turnover and project installations. You can read more about our thesis in the space in this ClimateTech VC article.
BUILDINGS AS DIGITAL POWER PLANTS
At the beginning of 2021, we talked about how batteries and EVs were exploding in adoption and helping bridge the gap between supply and demand by turning buildings into power plants. To us, batteries and EVs serve a completely different function in clean energy than traditional renewables do. Where traditional renewables require economies of scale to bring costs down, batteries and EVs are all about network effects that can be leveraged to flexibly manage the balance between supply and demand. As we think of the “hierarchy of flywheels”, we feel strongly that network effects trounce economies of scale. Batteries and EVs serve as a way to enforce network economics and encourage interoperability in ways that previous closed-end solutions didn’t. Software is the orchestration layer required to manage and optimize these assets, enabling new business models like virtual power plants (VPPs). VPPs represent a way to harness distributed supply and demand nodes for real-time interoperability that can be used for demand response, grid services, and more. We’re fortunate investors in David Energy, a company that establishes itself as the virtual power (and grid services) company across a network of customers, and see exciting opportunity for them in 2022. To unleash models like David’s, we need to see the continued roll-out of building electrification infrastructure and we’re excited to invest into that roll-out.
ENERGY GETS CONNECTED
Once all of these new DERs, including batteries and EVs, are installed behind-the-meter (BTM), we need to address the complexity of a progressively growing base of distributed supply and demand nodes communicating with each other to effectively operate. Unfortunately, data connectivity across devices, networks and operators is sparse, inhibiting the ability to achieve the full potential of these assets. To do so, we require data connectivity services to create new electricity rails that share supply/demand data, real-time pricing information and rules to orchestrate behavior. This is incredibly complex given the “walled gardens” of the energy industry — every device, stakeholder and power provider has different standards, protocols and formats for sharing data. We’ve seen the success of universal API infrastructure in other ecosystems that shift from economies of scale to network effects (Plaid in fintech and Project44 in logistics). We believe there’s an opportunity to build similar data connectivity in energy to drive network effects by circumventing those walled gardens. You can read more about our thesis in this blog post.
EVERYTHING GOES CIRCULAR
Last year, we talked about the rise of the circular retail economy driven by billions of dollars in excess inventory and returns. This year, we expect to see even more focus on circularity across other verticals like food, packaging, and materials. In 2018, 91.3% of all plastic waste generated in the US was not recycled, with containers and packaging making up the largest portion of waste. Large marketplaces like Amazon are increasingly seeking out partnerships with liquidators and returns management companies to curb waste for sellers on their platforms. Since existing supply chains haven’t been built to handle circularity, or reverse logistics in general, we expect to see a proliferation of new software solutions that plug into business operations and enable some form of circularity. This can be through traceability, logistics optimization, inventory management, packaging, or more. We think these circular infrastructure solutions could also mitigate the widespread supply chain crunches that have continually worsened over the last two years, resulting in inventory crunches, delayed fulfillment, and decreasing access to goods and services for the average consumer. We believe there’s an opportunity to enable businesses across multiple verticals to find ways to efficiently use and reuse goods like packaging that they have today, rather than having to seek out new inventory to prepare for tomorrow.
PROJECT FINANCE 2.0
We see two critical and interrelated transactions involved in clean energy projects: financing and power procurement. Innovation in both fintech and decentralized finance (defi) is at an all-time high and more and more clean energy projects will be moving through developer pipelines as well. New investments into renewable energy projects and companies came out to $174B in the first half of 2021 globally, and ESG investments are expected to become a $1T category by 2030. Despite this, there is tremendous friction in the long-tail of the clean energy market. How can we better streamline the power procurement process for all types of customers? How can we leverage existing transactive technologies? What new business models will defi unearth when it comes to project finance? These are all key questions we’re interested in learning more about this upcoming year.
MONTGOMERY BURNS PRINCIPLE NO MORE?
One of our guiding principles in energy is what we call the “Montgomery Burns Principle” (referencing Montgomery Burns from the Simpsons), which states that opportunities in climate must make economic sense before they make sense from a sustainability perspective. The Montgomery Burns Principle has been core to our work at Equal since we began looking at climate. However, for the first time ever, we’re starting to change our stance. We’re starting to see corporate enterprises voluntarily engaging with offsets and corporate adoption of emerging energy interventions far exceed the realms of economic rationality. We’re also starting to see private fleets take aggressive and costly moves to reduce emissions. According to McKinsey, 1 in 5 of the world’s 2,000 largest publicly listed companies have committed to a net-zero target as of October 2021. This is not Malkiel’s version of shareholder stewardship, this is true corporate leadership. Given these catalysts, we’re rethinking the Montgomery Burns Principle for the first time.
2022 is sure to be a banner year for climate tech and we’re excited to invest into these trends in the years to come. If you are a founder working across any of these opportunities, we would love to chat! You can find us at simran@equal.vc or zullo@equal.vc
Special thanks to Liz Hart for her feedback
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