Investing in Cleaner Technology: Lesser-Known Areas of Innovation to Watch

Investing in climate tech remains strong; according to PwC, climate-tech startups made up over 25% of total VC investments during the first three quarters of 2022. That said, January has seen two powerful news events that may have slipped under your radar, but that have the potential to have enormous impact on the efforts towards cleaner energy. Here, we are going to look at cleaner energy investment opportunities that can help bridge the gap between where the science and our needs are today versus where we want to be in the future.

Renewable Energy Investments Accelerate

Investments in renewable energy are accelerating into 2023 despite geopolitical and market headwinds.

According to the International Energy Agency (IEA), Russia’s invasion of Ukraine caused the first truly global energy crisis, which in turn generated an unprecedented momentum for renewables.

“Renewable capacity expansion in the next five years will be much faster than what was expected just a year ago. Over 2022-2027, renewables are seen growing by almost 2,400 GW in our main forecast, equal to the entire installed power capacity of China today. That is an 85% acceleration from the previous five years, and almost 30% higher than what was forecast in last year’s report, making it our largest ever upward revision.” - IEA

With a war in Europe, inflation, and a painful correction in capital markets over the past year, it would be reasonable to see investor confidence weaken, as it did in the aftermath of the 2006-2011 Clean Tech 1.0 Boom. Instead, 80% of investors surveyed by PwC plan to increase their investment in environmental, social, and governance (ESG) products over the next twenty-four months. This comes at a time when more than a quarter of venture capital investments went to climate tech over the twelve months ending October 31, 2022 – a higher portion than in 12 of the prior 16 quarters.

Last year the U.S. invested more in Climate Tech VC funds than during the entire Clean Tech 1.0 Boom. Europe’s VC funding in Climate Tech more than doubled from 2021 to 2022, out-investing China for the first time. If we include the huge increase in investments by India, worldwide Climate Tech investing rose 89% between 2021 and 2022.

Investor confidence has no doubt been aided by government policies that are more supportive of green-tech innovation than ever before. For example, President Joe Biden’s Inflation Reduction Act included a $370 billion investment in climate change and clean energy. We are also seeing corporations like Microsoft (MSFT) and Apple (AAPL) working towards being carbon neutral or negative. This means that we have the three components of an economy – households, businesses, and government – all moving in the same direction towards cleaner energy.

That’s good news for the climate, but it also means there is a lot of investor money bidding up prices in renewable energy tech.

Renewable Energy Investments Realities

Renewables in general face challenges with their variability, something I wrote about here a few months ago. For example, in the winter when many regions closer to the poles have the greatest need for power for heating and light, solar generation is at its lowest level for the year. Conversely, summer droughts around the world are reducing hydroelectric power generation capacity. When it comes to renewables, their innate variability requires supplementation in the form of stored energy and/or more stable energy sources.

Change takes time and there is a lot of fossil fuel energy generation to replace. In the 1960s, oil overtook coal as the world biggest source of energy, yet today the annual consumption of coal is around 300% of what it was back then. Global consumption of coal hit a record high in 2022 and coal is still the world’s largest source of electricity generation (at 37%), accounting for nearly as much as the next two largest sources (natural gas at 22% and hydro at 15%) combined.

Last year energy security quickly became a top national priority for many countries with the start of Russia’s war in Ukraine. We use around 100 million barrels of oil a day, and it is going to take time to replace such enormous use of fossil fuels. Around 60% of global power generation today comes from coal and natural gas-fired plants, which collectively emit around 14 billion metric tons of CO₂ per year, or about 37% of total annual global emissions. Replacing that production quickly is no minor task, so perhaps the best way forward involves not just a green energy revolution but also an evolution. In addition to investing in renewables, many are thinking of ways to use what we already have in different ways to reduce emissions.

A Game-Changing Way to Address Emissions

One such technology involves carbon capture, but not in the way you probably think. When you see the phrase “carbon capture,” most people think Direct Air Capture (DAC), which is a large-scale industrial process that requires huge amounts of energy (which means creating even more emissions), to extract carbon dioxide from the atmosphere. Earlier this month, the Swiss company Climeworks announced the world’s first certified CO₂ removal and storage on behalf of paying clients, which include Microsoft and the payments company Stripe. But while Climeworks’ Iceland facility will be the world’s largest direct air capture plant, it will only be able to extract about 36,000 metric tons, which is equivalent to around 30 seconds of current global emissions; this tech still has a long way to go.

What you might not have read about is NET Power’s carbon capture technology, which does something very different and has recently been in the news because it is combining with the SPAC Rice Acquisition Corp (RONI) and should soon be publicly listed as NET Power (NPWR), as the deal is expected to close in Q2 of 2023.

NET Power has developed a patented process that inherently captures over 97% of CO₂ emissions from natural gas power production but, unlike other carbon capture attempts which add a step to capture after the traditional electrical generation process, this process involves burning fossil fuel with oxygen instead of air, removing all NOx emissions while releasing only “clean” and easy-to-capture CO2. The technology is based on the Allam-Fetvedt Cycle, or the Allam Cycle for short. Using this process, any CO2 that is generated can be readily used in enhanced oil recovery and industrial processes, or sequestered underground. Power plants using this technology also have a materially smaller footprint, which means they can be located in more areas than were possible with traditional plants.

In 2016 Net Power began construction on a 50 MW power plant in La Porte, Texas, to demonstrate that its technology could work. By 2018, the plant was up and running and in 2021 it was synchronized to the power grid, proving its technology works. Next up will be the company’s first utility-scale project that will be located near Odessa, Texas, targeting 300 MW of near zero-emission power production. The project will be located on an Occidental (OXY) site; Occidental is also NET Power’s largest shareholder. Other major NET Power shareholders include Baker Hughes (BKR) and Constellation (CEG), major players themselves. From an investor perspective, the company is particularly interesting in that its business model is an asset-light technology licensor. Each license is expected to generate approximately $65 million of net present value (PV10) to NET Power.

Nuclear Gets an Upgrade

The focus on renewables for the future of energy generation requires ways to provide energy stability given the inherent variability of renewable generation. The most stable form of energy generation ever developed continues to be nuclear, which looks to be getting a second life. Earlier this month on January 20, the U.S. Nuclear Regulatory Commission approved the design of the first module nuclear reactor for use in the U.S. by an Oregon-based company called NuScale (SMR). This will be just the seventh reactor design that has been given clearance for use in the United States and the first of an entirely new generation of reactors that can make nuclear energy more widely available. This is such an important breakthrough because it addresses many needs:

• Renewable energy sources tend to be highly variable, thus need to be supplemented with something that is more stable. Nuclear energy is exactly that – you don’t crank up or slow down a nuclear plant easily.
• Traditional nuclear reactors are expensive, take years to build, and have a branding problem following Fukushima Daiichi and Chernobyl, despite the low number of actual deaths or injuries related to nuclear power plants.
• Small module reactors, also called SMRs (now you understand NuScale’s ticker), can be built much more quickly, have a materially smaller footprint, and are deemed by experts to be far safer with fewer points of failure than exist in a traditional reactor.

The bottom line is that while harnessing the power of renewable energy is an important goal, it will take time, considerable investment, and innately requires augmented energy supply and storage to ensure that power is available when it is needed versus when it is most easily generated. The path to a cleaner future will need to include improvements over existing technologies, which means opportunity for investors in areas that get less attention today, but that could become some of the most impactful solutions in the future.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Sustainability Renewable Energy ESG Venture Capital