How to Scale Nascent Climate Technologies: Lessons Learned from New York’s Offshore Wind

In May, YPE NYC partnered with the Yale Center for Business and the Environment (CBEY), Stanford Startups, and a handful of other Yale and Stanford alumni groups for a thought leadership panel discussion. The panel, titled “Investing in Nascent Climate Technologies,” focused on the challenges behind advancing nascent climate technologies and included panelists from the Yale School of Management, Generate Capital, NYSERDA, US Department of Energy, DBL Partners, Prime Impact Fund, and True Ventures.

Richard Kauffman, Chairman of the Board at NYSERDA, explained the challenges with scaling and deploying innovative climate solutions at the rate needed to meet climate change mitigation targets. He also identified the role of policymakers and investors in accelerating the clean energy transition.

Investing in any new company or concept carries multiple risks. However, investing in clean energy or climate technologies has proven to be significantly more challenging, as:

• Sustainable energy solutions require large upfront sums of capital;

• Businesses often rely upon government policy;

• Markets aren’t adequately valuing externalities (e.g. absence of carbon price);

• Many markets are mature and served by entrenched competitors.

Kauffman emphasized that a more prominent and less obvious obstacle to the growth and deployment of unique cleantech solutions is the rigid nature of clean energy finance. New companies often struggle to break in, and as a result, get stuck in the “valley of death,” a reference to a parabolic cash flow curve of early-stage businesses that are struggling to become cash flow positive after spending more than they earned during infancy. The death valley curve is the stage at which most startups die, and Kauffman stressed the complex and somewhat inflexible nature of clean energy finance, where traditional investment mechanisms are not designed to finance innovative cleantechs. In order to successfully secure project capital, cleantech businesses must adapt to existing financing mechanisms, which are often ill-suited to the time scale and risks associated with deploying a CapEx-intensive clean energy solution.

Specifically, common financing mechanisms are not tailored to the nature of deploying, testing, and demonstrating nascent climate technologies because energy projects tend to have long development lead times, unique market and technological risks, all the while requiring significant initial investment. For example, the most commonly used investment mechanism in the cleantech world, venture capital (VC), is inconsistent with CapEx-intensive, long-term investments due to the relatively short life cycles of VC funds.

Cleantechs face issues with other financing pathways as well:

• Growth investors typically take market or technology risk but not both. This is a clear challenge for innovative cleantechs whose technology hasn’t been tested at scale;

• Deployment of climate technologies often requires non-recourse financing, which is a challenge to traditional project finance;

• Infrastructure funds often limit their investments in companies that have development and construction risks;

• Stock and bond markets offer the lowest cost and transparency, but are not widely available due to existing laws, size, and lack of data.

These challenges shed light into why federal and state policies must play a key role in the advancement of climate-friendly technologies. States with decarbonization standards, early-stage public financing mechanisms, and smart policies (e.g. NY, CA), see much more innovation and cleantech growth.

Economic Prize Drives Competition and Innovation

The rapid takeoff of New York State’s offshore wind industry offers a great example of smart policymaking. The state government has created the right environment to enable innovation, competition, and deployment at scale. New York State developed a multi-pronged approach to growing the state’s offshore wind industry by:

• Establishing a large end-market opportunity for offshore wind developers by setting aggressive offshore wind goals. New York’s target is the most ambitious among East Coast states, requiring 9,000 megawatts of offshore wind energy by 2035 - enough to power up to 6 million homes;

• Encouraging friendly competition with other states along the East Coast;

• Accelerating development by site identification and engagement with the federal government;

• Reducing development costs through necessary studies (e.g. environmental impact assessments) and community engagement;

• Mobilizing supply chains.

Creating scale and attracting industry investment has resulted in development costs that have been 40% lower than originally estimated by NYSERDA in 2018. It has also minimized the cost impacts on residential customers.

A similar approach can be applied to scaling CO2 capture and utilization by establishing an end-market and mandating lower carbon intensity across various sectors (e.g. clean concrete standard, clean fuel standard) through policy. 

Ultimately, the government’s role is to create an environment that will mitigate the challenges associated with building nascent climate technologies and enable the effective flow of private capital. The government can do so by:

• Conducting basic research and establishing a road map between deployment and expected costs;

• Offering early-stage grants to developers of these technologies;

• Producing risk assessments by creating and funding entities like ARPA-E;

• Aggregating demand by establishing an end-market for these technologies;

• Providing initial project debt financing through state-level Green Banks

These steps could help to shorten the “valley of death” faced by clean technology developers and allow more cutting-edge climate startups to reach commercialization. 

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