Heavy funding for heavier industry

KEEPING COOL WITH

Hi there,

Big news out of the DOE and OECD on the industrial decarbonization front this week. This email serves to break a lot of it down. Two other quick announcements:

1) Nick is joining Climate Capital as a Venture Partner focused on the firm's new seed fund. Having spent 3+ years writing about, researching, and analyzing stellar climate tech businesses, now it's time to get busy investing in them, too. Re: early-stage climate & energy tech deals, whether it's your team, one you know well, or simply one that's been on your radar that you think should be on Nick's also, feel free to get in touch (respond to any of our emails).

2) For the New York-based peeps or anyone visiting this weekend, we’re hosting a run + coffee meet-up in Brooklyn on Saturday morn. Come enjoy fresh air, endorphins, caffeine, new friends, and climate and energy conversations. Deets here.

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IN THE NEWS

I am quite pleased the Biden Administration unveiled significant grant funding for a bevy of industrial decarbonization projects to kick off this week. For one, it was very timely, considering I spent last Thursday’s newsletter underscoring how the U.S. is and needs to continue to be the leader of the energy transition and other climate efforts, not just for its own purposes, but as a role model for the world. 

Secondly, industrial and manufacturing decarbonization is something I singled out this year as a key area of focus for these pages, and we have a lot of content coming down the pike next month on these topics. Thirdly, well, I think a lot of what got funded by the DOE this week is super important work!

Here’s the topline story: The DOE and its Office of Clean Energy Demonstrations (OCED) granted up to $6B for 33 projects across areas like cement, steel, aluminum, chemical manufacturing, and more. Some of the projects that got funded are really cool, at least, you know, if you geek out on this stuff in the way I do. The projects include what could become the country’s first new aluminum facility since the late 70s, a greenfield steel plant in Mississippi, several chemicals, refining, cement, and concrete projects, and more. This marks the most significant investment of its kind in decarbonization in the U.S. in general, and once company commitments get factored in, the total investment scope balloons to $20B+.

Stepping back, incentivizing decarbonization in industry and manufacturing isn’t just necessary because many products produced via industrial processes or manufacturing are high emission.

They’re also: 

• Products we rarely think about but always need 

• Traditionally, they compete almost purely on price and quality 

• They’re often very trade-exposed

The second and third bullets in the previous sentence make it very hard to decarbonize your operations if you’re a manufacturer or industrial company operating without incentives or some regulatory framework that protects your work domestically. Over the past thirty years, in the U.S., for instance, whether or not these companies are trying to make their products more sustainable, they’ve constantly been at risk of getting out-competed on price by China (also a big reason the U.S. has lost ~6 million manufacturing jobs since 2000). Hence, incentivizing emissions reduction work in the areas the OECD funded has twin goals: Reshore and restabilize domestic manufacturing and give it enough breathing room to innovate beyond price.

It’s also worth noting that investments in clean industry have lagged investments in clean energy and transportation in general — hopefully the DOE’s efforts catalyze change on that front.

Let’s take a closer look at the projects and why some aren’t stoked about all of em’.

The good

Most of the projects I’m most excited about target global, high-emission industries and are among the first of their kind, both in the U.S. and globally. 

For instance, there’s an entirely new green steel plant that will be built in Mississippi. The plant developer, Swedish SSAB, received $500M in funding to create one of the world’s first iron-making facilities to use 100% green hydrogen to produce direct reduced iron. SSAB will leverage technology from Hy Stor Energy and send iron to electric arc furnaces, which the company also operates in Iowa, to make very low-carbon steel. Global steelmaking represents some ~8% of global carbon dioxide emissions. While there are several first-of-a-kind (FOAK) green steel facilities being built globally, they’re all in Europe and few to none are rolling out green steel at any considerable scale yet.

Cleveland-Cliffs, a major steel manufacturer that has already made some strides in decarbonizing its operations, also received funding to replace one of seven of its coal-fired blast furnaces and to transition to direct reduction iron instead. This is another component of the steel story that’s great when decarbonization gets underway; new steel-making techniques are critical to phase out coal, the worst fossil fuel by many measures.

Aluminum, the manufacturing of which represents some ~2% of global carbon emissions, also got a nod from the DOE. Aluminum is used in countless things, including cars, solar panels, construction, power transmission, and more. The Green Aluminum Smelter project, which Century Aluminum Company will lead, received $500M to build the first new U.S. aluminum smelter in many of our lifetimes (45 years). Century Aluminum Company estimates the decarbonized smelter can reduce emissions by 75% by leveraging energy-efficient design and low-carbon energy sources. 

Other FOAK projects tapped by the DOE include commercialization efforts for startups like Brimstone, which aims to produce low-carbon cement. Brimstone received a $189M award (subject to negotiation) to build its first commercial-scale plant. Making cement the ‘usual’ way produces carbon dioxide as a direct byproduct of chemical reactions, in addition to requiring a lot of often carbon-intensive energy. Brimstone’s process doesn’t use limestone, which is the culprit behind more than half of the typical carbon dioxide released in cement making.

The ‘meh’

There are other projects that, while still exemplary of important decarbonization work, don’t strike me as cutting-edge per se. I don’t think all the companies’ projects selected should, in an ideal world, have soaked up precious non-dilutive government funding. For instance, recipients like Kraft Heinz, the famous American condiment and food maker, received $170.9M to upgrade and electrify food production at ten of its facilities across the country. These upgrades include things like installing heat pumps and electric heaters to cut use of natural gas or other fossil fuels for heating and drying. 

While the emissions reductions these projects could achieve are real, and while I am excited about lower-carbon mac & cheese, the proposed upgrades aren’t as risky as, say, taking a chance on novel cement or steel manufacturing techniques. Hence why it’s a bit ‘meh’ for me. The highest and best use of the grant funding is to meaningfully shift risk and ROI calculations, not to pay for things companies should really be doing anyway.

Another example of something I’m a bit less excited about is a $500M grant to Heidelberg Cement to use carbon capture and storage to reduce emissions from cement production. I’d be the last person to poo-poo carbon capture; considering how much momentum direct air capture has for removing carbon dioxide from an environment in which it’s quite diffuse (the atmosphere is about 0.04% CO2), it makes sense to also apply capture technology in environments where CO2 concentrations are 8% or higher. Still, compared to projects like Brimstone’s, where fundamentally novel, lower-carbon cement production techniques are being tested, CCS strikes me as something that cement manufacturers should have funded ten years ago and should, in 2024, fund on their own.

The ugly

Some projects that received funding are coming under even more scrutiny, at least in my circles. The reason being that some see the companies behind them as businesses least deserving of federal funding, ones that have contributed most to global warming and moved slowest in the past to make any changes. Take, for instance, ExxonMobil, an oil major. The company will receive up to ~$332M to use hydrogen instead of natural gas in ethylene production. One wonders if that $332M might not have been better used accelerating a dozen startups' chemical decarbonization efforts, especially considering how flush with cash Exxon has been of late ($36B profit in 2023).

Similarly, multi-billion dollar companies like BASF also received substantial funding. Exxon Mobil is almost a half trillion dollar company by market capitalization. BASF has been around since the 1940s.

It's fair to ask whether their projects are the highest and best use of government funds. Some see these as examples of regulatory and funding capture. Others might say, well, these companies have the size, know-how, and balance sheet capital to commercialize successful decarbonization projects if the first demonstrations and first-of-a-kind projects work.

Exxon’s project aims to demonstrate hydrogen burners at the "largest ethylene plant in the USA.” If your contention is oil majors shouldn’t get this money, as above, it’s also fair to ask who else is really in a position to work on these skills. TBH, I’m not sure where I land here yet. Let me know where you do.

The net-net

Across the $6B in funding from the DOE, you’ll get everything from genuine excitement and groundbreaking work to accusations of regulatory capture and misallocation of funding. On the whole, I see it as a watershed moment for industrial decarbonization globally, not just domestically. The U.S. isn’t the only country incenting industrial decarbonization; other countries, like Germany, are rolling out supportive funding mechanisms, too. Still, many global companies will be watching the work happening in the U.S. to inform whether and when they invest in similar projects.

The DOE estimates that the projects could help avoid 14M metric tons of carbon dioxide emissions each year. I note that to remind you of my stance on why these projects matter most. The incremental emissions reductions really don’t matter that much. It’s what the world will learn from these projects – what’s possible, what works, and what doesn’t – that matters.

KEEP COOL PODCAST

In our most recent episode of the Keep Cool Podcast, myself & John Skrinar, Partner at Cresta Fund Management, explored the world of "boring capital" as it increasingly enters climate tech & energy. Contrary to the moniker, boring capital (i.e., large private equity and infrastructure investors) entering the market is a very positive signal for the energy industry; specifically, it signals the maturation of core technologies for decarbonization. This capital doesn’t come to the table unless there are stable, commercial-scale projects to invest in. For reference, tech and projects we touched on included:

• Carbon capture

• Hydrogen

• Renewable natural gas

• Thermal energy storage

• ... and many others

John & I also cast an eye to the political landscape and underscored the importance of stable policy to accelerate commercialization and to bring more 'boring capital' to the table.

If any of that piques your interest, tune in here.

Ciao,

– Nick