Impact Sector: Energy and Environment

New WIIP Smart Series

WIIP Smart is beginning a weekly series of long-form articles that features the work of each impact investment sector team. The sector teams are Energy & Environment, Food & Nutrition, Higher Education, Financial Inclusion, Health & Wellness, and K-12 Education. We begin this six part series with a look at the Energy & Environment team and their research. 

The Energy & Environment Team

The Energy & Environment (EE) team includes first year Investment Associates Claire, Gabe, Kening, Manvi, Peter, and Steve. The team is advised by Joe Lipscomb from Arborview Capital, an impact private equity firm with an energy and environment focus.

Industry Overview

Large-scale human use of energy and environmental resources have enabled massive increases in wealth and quality of life. However, sustaining human consumption and industrial production places a colossal burden on the environment. How do we continue providing life-changing access to energy and environmental resources to people, particularly the poorest and most vulnerable, while significantly reducing human impact on the environment? We see both a pressing need and enormous opportunity for innovative business solutions to address these energy and environmental challenges.

The business opportunities in the EE sector can be categorized into five sub-sectors: power, transportation, water, waste, and natural resources. Each sub-sector can be further disaggregated into 2-3 categories. We evaluate business opportunities within each sub-sector and its categories using the key impact goals discussed below. 

Key Impact Goals

Our investments aim to achieve four primary goals. By evaluating the sector with these goals, we are better able to gauge the level of impact of the investments sourced:

  1. Access: does the solution enable the growth of energy and environmental solutions and/or increase access to sustainable energy resources for underserved communities in the developing and developed world?
  2. Conservation: does the innovation conserve existing natural resources or reduce the use of natural resources?
  3. Productivity Increase and/or Emission Reduction: Does the company increase resource productivity and efficiency and/or reduce emissions in business and industrial processes?
  4. Remediation: Does the product/service remediate negative impacts placed on environments, ecosystems or natural resources?

The impact matrix below applies the key impact goals to each sub-sector and its categories.

 

Sub-Sector Deep Dives

We now dive into the trends and limitations of each sub-sector.

Power

Currently in the United States, our power grid is powered by 66% fossil fuels (coal and natural gas), 20% nuclear, and 13% from renewable energy (mostly wind, solar, hydroelectric).[1] Prices have fallen for onshore wind by 50% since 2009 and solar photovoltaic module costs have dropped 80% since 2008.[2] Current regulatory and cost trends have led to record deployment of clean energy like wind and solar and the development of new software solutions and behind-the-meter innovations.

In the developing world, there are currently over 1.2 billion people without access to electricity[3], and addressing this market demand with clean electricity is critical to mitigating climate change. The demand for clean energy resources will continue to grow in the developing world in the 21st century, leading to a remarkable opportunity for investors and businesses that pinpoint solutions to these challenges.

Notable trends within this sector include:

  • Rapidly declining prices for clean energy generation, storage and other products due to deployment of new innovations into the market and the economies of scale from mass production (prices for unsubsidized wind and solar are at record lows at 3-cents-per-kWh and 36-cents-per-kWh respectively).[1]
  • Innovation in business and financial models to support the deployment of clean energy technologies and assist businesses and consumers in accessing these new technologies. Overall increased investment in the sector with a record $329B invested worldwide in 2015.[1]
  • Increased demand in the developing world due to cost efficiencies resulted in clean energy investment growth in some of the world’s fastest developing countries (88% in Brazil, 32% in China, 14% in India) along with new goals to increase clean energy use (India’s goal is to increase solar capacity 33x in 7 years).[4]
  • New regulations and agreements across the globe (e.g. U.S. Clean Power Plan, U.S. CAFE Standards, Paris Climate Agreement, India Climate Change Plan) that work to incorporate the cost of climate emissions into the cost of power generation and consumption.

Limitations within this sector include:

  • Difficult competitive landscape due to historically low natural gas prices from the expansion of hydraulic fracturing (or fracking)
  • High cost of infrastructure and energy investments and a continued funding gap to support new technologies cross the “adoption chasm” between research and development and the mainstream market
  • Pushback on regulations from incumbent energy interests (i.e. coal, natural, utility industry) unsure about how to manage distributed energy resources, change business models, and prevent the utility death spiral or unable to adapt to climate regulations

Transportation

The transportation sector alone is responsible for the largest and fastest growing share of global greenhouse gas emissions; 28% of the energy consumed in the US goes towards transporting people and goods.[5] From 1990 to 2000, while CO2 emissions increased by 13%, emissions from road transport and aviation each grew by 25%.[6]

Recent regulatory efforts in the US and China increasingly require vehicle makers to adopt fuel saving technologies. Since heavy-duty vehicles such as trucks and buses comprise 50% of the energy consumed by the transport sector, increased innovation is especially important in “light-weighting” these vehicles or targeting energy efficiency solutions for commercial fleets.[7] However, efforts to increase fuel economy are obfuscated by increases in demand for number of personal vehicles and growing transit infrastructure to keep up with urbanization.

Several approaches can motivate a move toward a more sustainable transportation system. First, we can consider changes in our mobility culture, moving away from car-centric travel which accounts for 85% of daily trips by Americans to more efficient, public forms of transport or car-sharing.[8] Second, we can consider alternative, cleaner types of fuel to power vehicles, most notably electricity, hydrogen fuel cells, or bio-fuels. Lastly, we can consider incremental or marginal improvements in existing transportation technologies that conserve energy use or recycle mechanical motion as energy.

Notable trends within this sector include:

  • Increasing affordability of electric vehicles and increasing presence of electric charging infrastructure
  • The possibility for cars to operate in an autonomous or networked manner (e.g., connected vehicles), potentially replacing city taxi systems or the need for individuals to own and operate their own cars
  • Tech-enabled apps or business models that create greater efficiencies in accessing public transport (e.g., taxi hail apps, bus route apps, parking management apps)

Limitations within this sector include:

  • The possibility that private ownership of cars and preference among households to have the flexibility and security of their own car remains, implying car makers are incentivized to continue focusing on unit sales and driving up car volumes
  • Riskiness and time to commercialization of alternative fuel technologies such as hydrogen fuel cells and biofuels

Water

Water is the most vital resource for life on earth, yet, according to the United Nations (UN), a third of the world’s population (2.5 billion people) does not have access to water with adequate sanitation. Beyond human consumption, clean water is an integral component of agriculture, energy, and many more industries.[9]

So far, its scarcity and pollution have led to rationing and planning worries in developed countries, including the United States,[10] [11] and contributed to civil wars in developing countries, such as Yemen.[12] Climate change promises to exacerbate these woes; climate models forecast accelerated drought and desertification, especially in areas where water is already scarce, over the coming century.  Similarly, population growth will stress water resources.[13] 

Effluent reduction, water cleaning and reuse promise to become increasingly valuable in the global economy. Some of the most expensive environmental scandals in history have involved effluent reduction and water cleaning. For example, the BP oil spill and Exxon Valdez cost $62 billion[14] and $7 billion[15] to clean up, respectively. Improving water usage efficiency and preserving current resources are paramount for maintaining modern living standards.

Notable trends within this sector include:

  • Energy-Water Nexus: There’s increasing awareness of the link between water consumption/pollution and energy usage.[16]
  • Desalination: In recent years, zero-discharge, solar-powered desalination plants have arisen.[17] As these plants become more cost-efficient, they could revolutionize the water industry.
  • Recycling wastewater: Israel recycles 86% of its wastewater. The country with the second highest rate is Spain, at 20%. Israel’s wastewater recycling processes are replicable elsewhere, and have “huge potential,” according to The Economist.[18]

Limitations within this sector include:

  • Some technologies help the environment in one way, yet hurt it in others. For example, desalination has traditionally entailed serious environmental drawbacks, even though it’s improved water’s reusability.[19]
  • Tragedy of the commons: Rights to many waterbodies are shared internationally, meaning citizens from countries with more relaxed regulations or enforcement capabilities may contaminate global supplies.[20]

Waste

The waste management and recycling sectors are expected to grow significantly in the future years. More stringent state and local government regulations will also help boost waste reduction, recycling, and remediation practices. 

Notable trends within this sector include[21]:

  • Cities across the U.S. are continuing implementation of programs and legislation for zero waste goals, especially food and organic waste, increasing the need of efficient collection and disposal process, and new recycling programs that adopt the waste-to-energy approach;  
  • Companies are looking for advanced technology efficiencies in containers, powered by renewable energy, that can help them decrease energy use and reduce costs; 
  • The adoption of the circular economy principles by many companies will influence their product design, recycling and disposal and involve moving from recycling for recycling’s sake to closely examine the entire recycling process and minimizing its impact on the environment while increasing operational efficiency.

Limitations within this sector include:

  • A recent trend of increasing consolidation in this sector and the dominance by large companies such as Waste Management made it difficult for new entrants to establish their business.
  • Most of the waste management start-ups are based in developing markets for more substantial growing opportunities compared to the more mature U.S. market.
  • The industry is exposed to the risk of commodity price volatility which may affect consumer’s willingness to pay for the recycled versus raw materials.   
  • For some waste-to-energy technologies, impact measurement can be challenging given the energy consumption in the process of transformation.

Natural Resources

Humanity relies heavily on natural resources like water, arable land, hydrocarbons, forests, air, minerals, and, more broadly, stable ecosystems and biodiversity. By using and depleting these resources unsustainably, all life is threatened. We endeavor to invest in companies which aim to preserve natural resources and use them efficiently and sustainably. Several categories of natural resources are detailed in our prior sections; several are not. Those are captured here, and we will focus on agriculture and forestry, minerals, & biodiversity

The agricultural sector is a major environmental polluter and requires significant inputs, most notably water and fertilizer. Additionally, with the world’s population continuing to grow, productivity must increase. To address this conundrum, we are targeting companies that enable more sustainable agricultural production, that reduce inputs needed, and that reduce waste and environmental externalities.

Other vital resources that must be used more sustainably include forests, minerals, and land. Relatedly, healthy ecosystems and biodiversity are necessary for the well-being of the entire planet, including its human population. We also hope to invest in companies making improvements in these areas.

Notable trends within this sector include:

  • Predictive analytics are helping farmers make more efficient decisions that limit waste, increase productivity, and increase profitability
  • Carbon markets are enabling landowners in the Amazon and other forested areas to sell carbon credits in exchange for not cutting down trees, thereby making forests more valuable alive than dead

Limitations within this sector include:

  • Presence of large multinational players both challenges start-ups and provides a possible exit path
  • Some technologies help the environment in some ways and harm it in others - or may greatly help impoverished people while harming the environment
  • The massive dichotomy between industrial farming in the developed world (where capital and innovation are in greater supply) and smaller-scale and subsistence farming in the developing world means that it can be economically challenging to deploy new technology to where the marginal returns would be largest
  • Dependence on unpredictable regulatory processes adds risk to high potential future solutions

References

[1] Energy Information Administration, United States Department of Energy. “What is U.S. electricity generation by energy source?” https://www.eia.gov/tools/faqs/faq.cfm?id=427&t=3 Accessed November 7, 2016.

[2] Liebreich, Michael. Bloomberg New Energy Finance, BNEF Summit Keynote. New York City, April 5, 2016. https://about.bnef.com/presentations/liebreich-state-of-the-industry-keynote-bnef-summit-2016/ Accessed October 30, 2016.

[3] International Energy Agency. “Energy Access Database.” http://www.worldenergyoutlook.org/resources/energydevelopment/energyaccessdatabase/ Accessed November 8, 2016.

[4] Das, Krishna N. “Obama backs India’s solar goals, seeks support for climate talks.” Reuters, January 25, 2015. http://in.reuters.com/article/india-obama-climatechange-idINKBN0KY0QN20150125 Accessed October 30, 2016.

[5] US Energy Information Administration at: http://www.eia.gov/energyexplained/?page=us_energy_transportation

[6] EarthJustice.org “Climate forcing from the transport sectors”: http://earthjustice.org/sites/default/files/black-carbon/fuglestvedt-et-al-2008.pdf

[7] US DOT’s Energy Blueprint: https://www.transportation.gov/sites/dot.dev/files/docs/usdot_energy_blueprint_0.pdf

[8] The Atlantic’s CityLab: http://www.citylab.com/commute/2014/02/9-reasons-us-ended-so-much-more-car-dependent-europe/8226/

[9] United Nations (2013). “Facts and Figures.” Available at: http://www.unwater.org/water-cooperation-2013/water-cooperation/facts-and-figures/en/

[10] Dimick, Dennis (2015). “5 Things You Should Know About California’s Water Crisis.” National Geographic. Available at: http://news.nationalgeographic.com/2015/04/150406-california-drought-snowpack-map-water-science/

[11] Mann, Michael E. and Peter H. Gleick. “Climate change and California drought in the 21st century.” Proceedings of the National Academy of Sciences. Available at: http://www.pnas.org/content/112/13/3858.full

[12] Heffez, Adam (2013). “How Yemen Chewed Itself Dry: Farming Qat, Wasting Water.” Foreign Affairs. Available at: https://www.foreignaffairs.com/articles/yemen/2013-07-23/how-yemen-chewed-itself-dry

[13] The Economist (2016). “Water Scarcity: Liquidity Crisis.” Available at: http://www.economist.com/news/briefing/21709530-water-becomes-ever-more-scant-world-needs-conserve-it-use-it-more-efficiently-and

[14] FuelFix (2016). “BP estimates cost of 2010 Gulf oil spill at $61.6 billion.” Available at: http://fuelfix.com/blog/2016/07/14/bp-estimates-cost-of-2010-gulf-oil-spill-at-61-6-billion/

[15] Lyon, Susan and Daniel J. Weiss (2010). “Oil Spills by the Numbers.” Center for American Progress. Available at: https://www.americanprogress.org/issues/green/news/2010/04/30/7620/oil-spills-by-the-numbers/

[16] International Energy Agency (2016). “Water for Energy.” Available at: http://www.worldenergyoutlook.org/resources/water-energynexus/

[17] Griggs, Mary Beth (2015). “MIT Invention Turns Salt Water into Drinking Water Using Solar Power.” Popular Science. Available at: http://www.popsci.com/award-winning-team-cleans-water-supplies-power-sun

[18] The Economist (2016). “Water Scarcity: Liquidity Crisis.” Available at: http://www.economist.com/news/briefing/21709530-water-becomes-ever-more-scant-world-needs-conserve-it-use-it-more-efficiently-and

[19] Younos, Tamim (2005). “Environmental Issues of Desalination.” Universities Council on Water Resources. Journal of Contemporary Water Research & Education. Issue 132, Pages 11-18. Available at: http://ucowr.org/files/Achieved_Journal_Issues/v132Environmental%20Issues%20of%20Desalination.pdf

[20] Global Economic Symposium (2010). “Tackling the Tragedy of the Water Commons.” Available at: http://www.global-economic-symposium.org/knowledgebase/the-global-environment/tackling-the-tragedy-of-the-water-commons/proposals/proposed-solutions-tackling-the-tragedy-of-the-water-commons

[21] “Waste Collection Services in the US.” “Waste Treatment & Disposal Services in the US.” “Waste-to-Energy Plant Operation.” “Recycling Facilities in the US (2016).” IBISWorld Industry Report.