When tech investor Abe Yokell heard about the $369 billion bill to fund climate investments in the United States, he nearly fell out of his seat.
Yokell, managing partner at Congruent Ventures, was not alone. Investors and climate tech advocates have been shocked by the deal between Senators Joe Manchin and Chuck Schumer that, if passed, would be the biggest investment the United States has ever made in decarbonization.
Just a few weeks ago, pressure from Democrats to fund climate initiatives seemed dead. Now, with the support of Arizona Senator Kyrsten Sinema, the bill looks set to pass.
If it makes it to President Biden’s office, the package will energize an already strong environment for climate technology investment. US venture capital funding for climate technology has seen a tear in recent years, topping $16 billion in 2021, more than double the previous year, according to PitchBook data. And leading private equity firms, from TPG to Brookfield Asset Management, have raised billions to fund green projects.
“The Cut Inflation Act is probably more important to our current climate than it is to the climate tech community. But it’s still a really big deal for the investment community,” Yokell said.
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Investors say the bill will reduce the green premium on expensive technologies, accelerate the grid effect of electric vehicles and renewable electricity, and provide capital that will go where VCs won’t. In short, it’s Christmas for climate technology.
At a high level, the bill aims to reduce energy costs and emissions, increase energy security, and invest in environmental justice and rural communities. The breadth of the expenditure provisions reflects this broad mandate.
Together, the combination of direct investment, tax credits, and loan programs aims to reduce U.S. greenhouse gas emissions by 40% below 2005 levels by 2030.
Venture and project capital moves technology from lab to pilot plant
Humans already have most of the technologies we need to decarbonize the economy. But we don’t have everything. And some of the most ambitious and worthwhile efforts are hugely capital intensive and will take a decade or more to complete.
These qualities mean that many early-stage projects are poorly suited for VC. But it goes without saying that the climate doesn’t care about hurdle rates and holding periods.
The Inflation Reduction Act closes the funding gap in several ways. It allocates $2 billion to national energy research laboratories. There is also $10 billion for investment tax credits for building clean technology manufacturing facilities, as well as several loan guarantee programs.
Combined, these funds help research projects grow into venture-backable companies, and later-stage companies access non-equity capital to scale up production.
“The ecosystem is healthy today, but it definitely needs more venture capital,” said Dan Goldman, managing director of Clean Energy Ventures. “I think this bill has the potential to get more technologies out of labs, universities and incubators, and make them ready for private sector funding.”
Many green bounties are reduced, others are removed
The larger sums of money will accelerate the adoption of mature technologies like solar power and electric vehicles. But there are also significant incentives for technologies that are in the embryonic stages of development.
Two of the main beneficiaries of all the emerging technologies are carbon capture and low-carbon hydrogen production.
The bill increases carbon capture tax credits across the board and rewards the most difficult and valuable process, direct air capture and sequestration, up to $180 per ton. It is important to note that the rules are independent of the techniques involved.
“You need a way to jump-start these industries, and you want to do it in a way that isn’t necessarily technology-specific,” said Gabriel Kra, chief executive and co-founder of Prelude Ventures.
Hydrogen producers are eligible for production tax credits of up to $3 per kilogram based on their carbon footprint. This goes a long way to making green hydrogen more competitive against hydrogen made from natural gas, which is cheap but carbon-intensive.
According to the International Energy Agency, hydrogen derived from natural gas currently costs less than $2 per kilogram, while hydrogen made from renewable electricity and water costs between $3 and $8 per kilogram. .
With the right investment, some investors believe green hydrogen — which uses renewable electricity to extract hydrogen from water — can eventually drop below $2 per kilogram.
The network effect of clean technologies is expanded
One way to think about the bill’s impact on emerging technologies is that it creates a network effect that will have second- and third-order effects for the technologies that feed into that network, investors said.
Consider electric vehicles. Currently, they represent about 5% of new car sales in the United States. This share could increase rapidly in the coming years, both due to organic trends and the bill’s many incentives for producers and consumers.
As electric vehicles proliferate, the infrastructure to support them grows along with it. This means better economics for charging networks, the potential for vehicle-to-grid energy storage and a shorter term need for battery recycling facilities.
The same goes for renewables and the grid. As more energy resources come online, the need for technology to connect and orchestrate them increases. This is expected to benefit markets for distributed energy resources, smart electrical panels, software to orchestrate the power grid, and other emerging technologies.
“Deploying smart, connected and cheap infrastructure is going to allow the whole venture capital ecosystem to fit in,” Yokell said.
Long live the interest
Interest carried, the cockroach of tax relief, has survived another onslaught.
In a compromise aimed at winning Sinema’s support in Arizona, a provision that would have increased the holding period requirement to qualify for the lower deferred interest tax rate would have been removed from the bill.
In other words, large public corporations and their minimum tax of 15% pay for almost all of the investments that will avoid the worst effects of climate change and allow humanity to achieve economic growth without carbon dioxide. greenhouse effect.
Private fund managers keep their tax breaks but cannot claim any credit. (Save those who invest in climate solutions.)
For what it’s worth, none of the climate tech investors I spoke with expressed concern about the proposed shift in focus.
“I’m going to lose every last penny of my interest in this climate bill,” Yokell said.
Featured image by Jenna O’Malley/PitchBook News