Electrification is a key theme of Energize’s investment thesis. We invest in software and business model innovations, many of which directly contribute solutions towards decarbonization by means of electrification. This marks the capstone piece in our Electrifying Everything series, in which we’ve explored this critical transition and the technologies driving and enabling it.
You can view the full Electrifying Everything deep dive report here.
In 2020, climate technology interest and investment activity experienced a massive resurgence. The Energize team observed a familiar refrain in climate innovation: predilection for climate moonshots, breakthrough innovations, unproven technology and capital-intensive scale-ups—all in a race to attach climate technology to trillion-dollar market opportunities or “venture-scale outcomes.”
At Energize, we welcome rampant investment in disruptive climate technologies with open arms. From nuclear fusion and direct carbon dioxide air capture to million-mile battery chemistries and hydrogen sporting every color under the rainbow, disruptive climate innovations are necessary to achieve a net-zero economy and combat the worst of climate change. Fortunately, capital investment and financing innovation is scaling up to commercialize high-risk, capital-intensive novel climate technologies. Twenty-year venture fund structures, hybrid project equity and debt investment platforms, and the DOE’s renewed focus on loan guarantees are just a few examples.
At Energize, however, we are maniacally focused on how market-driven innovation and asset-light business models can transform the industrial economy into a clean, lean profitable machine over the next decade. We believe the optimal near-term strategy to decarbonize is clear: Electrify everything, and power those electrons with zero-carbon clean energy. Furthermore, we think four key drivers will have the greatest near-term impact:
Why are we so excited about electrifying everything to decarbonize? Electrifying everything can address up to 70 to 80 percent of emissions in the U.S. with technologies that are proven and economically viable today. Critically, a greenhouse gas emission avoided now is exponentially more valuable than a larger amount of emissions avoided 10 or 20 years from now because climate change is a feedback loop-based system. The financial value associated with transforming from a fossil-fuel-based economy to an electric economy is massive. We estimate more than $11 trillion in enterprise value is at stake at baseline, with further value creation from the outsized potential of a clean, affordable, local, resilient and secure electric economy. Electrifying everything to decarbonize will undoubtedly require significant capital investment into hardware and equipment. However, we think digital startups aligned with electrifying everything tailwinds are tremendously well-positioned to squash the “soft costs” that today account for 20 to 70 percent of the upfront deployment costs of that infrastructure, while consistently generating compelling investment returns.
Why do we believe investing in software that can accelerate the electrification of everything is the winning strategy?
Let’s unpack our mental model. At Energize, we think about climate technology innovation in terms of cycles that don’t exactly repeat, but often rhyme. It goes something like this:
Hardware learning curve
First, climate technology innovation exits the research lab and meets manufacturing scale to create a “learning curve” love story. Learning curve dynamics dictate that for every doubling of manufacturing capacity, we can reliably predict the percentage costs decline. For example, the cost of solar photovoltaics decreased by roughly 25 percent every time they doubled in manufacturing capacity. For lithium-ion batteries, that number is around 20 percent. Over time, cumulative reductions of hardware or process costs can range from 70 to 90 percent or more. The virtuous cycle of declining costs accelerates customer adoption as the economic value proposition improves. Technology pioneers like First Solar, SunPower and Tesla drove learning curve cost declines for solar and batteries. At this phase, dedicated vertical software vendors are still virtually non-existent.
Business model innovation
Next, innovative business models emerge to creatively wrap increasingly affordable climate technologies with holistic services. Business model innovation further catalyzes customer adoption by making it simple, easy and economically viable to embrace a new energy technology. Solar power purchase agreements (PPAs) are a great example of one such structure whereby rooftop solar was priced at or slightly below utility electricity rates. Business model innovators like Sunrun and Sunnova handle the hassle of installation, financing and maintenance, including monetizing complicated financial structures like net energy metering export and tax credits. The customer adoption calculus is clear—save money on energy, lock in a cost less than historical electricity price inflation and produce right on your own real estate, all with clean, zero-carbon solar. At this stage we often see soft costs as a percentage of the total value chain costs rise dramatically, both because hardware costs continue to decline but also because, as complexity and scale increase, sales and back-office costs begin to dominate operating budgets. At this point, dedicated vertical software is often pioneered internally by the business model innovators in an effort to bring down soft costs and streamline the process for scalability. However, these firms typically do not have software development in their DNA. And because the single customer they’re serving is themselves, they cannot amortize R&D costs across numerous customers nor benefit from production development operating leverage.
The final chapter in our love story is the phase when vertical software gets its chance. Once an industry reaches multiple billions in revenue annually within a specific geography, we think it can support a software total addressable market (TAM) of several hundred million.
The U.S. solar market generates more than $20 billion in annual revenue across the value chain—and we believe the emergence of a solar software “decacorn” is imminent. The global battery value chain is a $77 billion market today growing to an estimated $390 billion by 2025—including roughly $15 billion in software spend. The global electric vehicle (EV) charging market generates several billion in revenue today. Vertical software for solar, batteries and EV charging is a lucrative venture capital investment opportunity today.
Within our “electrifying everything via software” thesis, Energize has identified several indicators we use to qualify investment opportunities:
In building out our Electrifying Everything thesis, we identified the Top 30 Software Innovators in Electrifying Everything which represent our take on the most promising private companies serving this space. You can view our market map here.
As meaningful markets emerge for entirely new climate critical industries, we will seek to partner with the best entrepreneurs out there building the digital backbone. However, from where we stand in 2022, Energize is most excited to partner with software companies addressing solar, wind, clean firm power, battery storage, transmission, EV charging, building electrification and demand flexibility. The climate tech industry is full of possibilities as it grows and evolves, but for now, we remain focused on software as the key to electrifying everything.
View our full Electrifying Everything deep dive report here.
This article represents the views of the author and is provided for informational purposes only. It is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Readers should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Information is subject to change based on market or other conditions.