Where do you see the most opportunity in the IRA?
It has become clear that in addition to being a climate-focused bill, the IRA is also a domestic manufacturing bill. And the push for US manufacturing seems to be the least appreciated part of the legislation. We’re in the middle of a years-long trade dispute with China that has impacted climate tech sectors like solar, and China now dominates many of the key manufacturing sectors necessary for decarbonization – solar, wind, energy storage and EVs. So fundamentally, this bill is about building a US supply chain.
The goals of domestic manufacturing and carbon reduction are somewhat at odds. Both goals are important, but it’s going to take a long time to build a strong base of domestic manufacturing in these sectors. We do not want to be 100% beholden to potentially unfriendly actors for the key minerals and products needed for the energy transition.
Another area of opportunity we are excited about are the clean hydrogen credits, which have the potential to fundamentally shift the economics of those projects. The subsidy is meaningful — up to $3/kg. The general view is that “dirty” or grey hydrogen costs around $1-2/kg, and clean hydrogen has been more like $8-10/kg, so even with the subsidy it’s still more expensive, but it’s getting there. We believe that green hydrogen will be competitive with grey hydrogen much sooner than most are predicting. The green hydrogen credits in the legislation will accelerate that.
How will the Act change your investment strategy?
Of course I’m very happy about the IRA, and I think it will help greatly in terms of accelerating the energy transition. But as an investor I don’t think it will change our general approach to the market. We launched this fund at a time when legislation like the IRA seemed unlikely. We are very focused on companies that have technologies and value propositions that are sustainable without subsidies – where the fundamental economics are just better than the alternatives. I’m bullish on all the sectors we’re investing in regardless of any additional government support.
Having said that, if there’s one thing that might change in our investment strategy as a result of the IRA, I would look more closely at companies trying to compete with China with US assembly and manufacturing. In the past, a differentiated technology often wasn’t enough to compete with the brute force cost reduction and scale employed by China. With the IRA, I think it’s going to increase the chances for success for some US startups.
There’s been some criticism of the IRA for its emphasis on US manufacturing because it could slow down the price reductions that have enabled the adoption of solar. Do you think there could be unintentional negative effects on solar or will this push solar (and storage) to the tipping point?
I believe establishing a US supply chain for solar, wind and energy storage is vitally important, and worth the potential of a slowdown in cost reductions, or even some cost increases in these critical technologies. I do think this will put pressure on China and other countries to behave better in order to keep market share in the US, which is the largest market in the world for these technologies (outside of China itself). It gives the US leverage in trade negotiations.
My biggest fears about the impact of additional subsidies on these industries is that they will delay the necessary cost reductions and efficiency increases that we need. Solar is a great example – consumers in the US pay 2-3x more for residential solar than they do in other major markets, like Europe and Australia. We are horribly inefficient at the “soft costs” – sales, marketing, permitting, installation. We really need to figure out how to lower these costs, and not use these incentives as an excuse to sit back and make more money. Solar shouldn’t be $3-4/watt for consumers, it should be $1-2/watt, so we need to figure out how to do that.
Let’s talk about the EV incentives. How do you think they will change the market for EVs?
The EV credits are interesting – because in order to get the full credits, you need a substantial amount of domestic content. Again, this is a way to incentivize US manufacturing. But how this plays out may not necessarily be favorable to EV adoption. I’m in the market for a new EV, and the day the bill was passed the Hyundai Ioniq 5 I was thinking about buying suddenly became ineligible for a credit. But, shortly after the bill was signed, Hyundai announced that it is moving up their plans for a US assembly plant. So the bill’s strategy to incentivize a US supply chain is already working.
It’s important to note that the IRA does not include EV charging infrastructure but the previously passed Infrastructure Law does include incentives for a buildout of EV charging networks.
The Act sets the stage for significant investment in the production and use of clean hydrogen in the United States. Could you talk about your investments in green hydrogen?
One of the companies we’re invested in is Ohmium, which designs and manufactures electrolyzers for green hydrogen. We believe this company can be competitive with fossil-fuels based-hydrogen without subsidies, within the next three to five years, based on their technology and manufacturing roadmap, and the availability of low-cost, renewable electricity.
Ohmium is a California-based company with manufacturing in India. And they weren’t really focused on the US as an end market initially, because other regions, like Europe, the Middle East and India, have been more aggressively pursuing green hydrogen. But, momentum has been growing in the US, and it will be interesting to see whether the IRA increases that. I suspect it will.
What are some of your other portfolio companies we should know about?
One of our portfolio companies is Resilient Power, which is building extremely compact, solid-state, high-power EV charging hardware for fleet electrification at lower cost than traditional solutions. We’re very excited about the investment in Resilient by Amazon, who has plans to be net zero by 2040, with 100,000 EVs in their fleet by 2040. Resilient Power is the type of solution that Amazon needs to accomplish that.. This is a technology that could re-write the distribution grid, as well as unblock the major supply chain constraints that we are dealing with on the grid.
Another company we’re excited about is DroneBase, which enables the low-cost inspection of critical infrastructure, including over 60GW of solar and wind projects worldwide, as well as utility infrastructure. The technology and services they supply are key to keeping the energy transition infrastructure operating efficiently.
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