It’s been exciting to see so much renewed investor interest in climate tech and clean energy startups. As Peter Thiel documented in detail, the last wave of late 2000s cleantech VC excitement ended in a trough of despair as many of the more well-funded companies went bust (with the notable exception of a few big winners like Tesla, SunRun, and Opower). As someone who spent the better part of the last decade building startups in the solar and energy efficiency industries, I can attest that there are indeed many challenges to building a scalable cleantech business: it’s inherently more difficult to move atoms than bits, energy markets are heavily regulated and vary greatly from geography to geography, and upfront capital costs are generally expensive and require sophisticated, patient project finance. 

Given that these challenges are still very much present, the obvious question becomes: why now? What has changed that’s made the field attractive again to VCs hoping to generate >10x returns? In my opinion, this time is indeed different and the opportunities to build venture scale outcomes are numerous. Let’s explore why. (Note: in this post, I’ll focus specifically on the energy industry. We’ll explore other climate tech in future posts). 

1) The cost of solar has fallen off a cliff 

It’s been shocking to see how few people understand what’s happened with the cost of solar energy over the last decade and the impacts it will ultimately have on society. Depending on the data source, the unsubsidized Levelized Cost of Energy (LCOE) of solar in 2010 was between 30-40 cents / kWh. For context, the all-in cost of coal or natural gas is in the range of 6-7 cents / kWh. So in 2010, the cost of solar energy was > 5x the cost of fossil fuel based electricity. Today, the cost of solar is ~2-5 cents / kWh with many bids for new utility scale projects coming in at less than 2 cents (e.g. 1.35 cents / kwh in Abu Dhabi and 1.5 cents / kwh in New Mexico). 

This is a very, very big deal. In the span of just 10 years, we’ve seen the cost of solar go from a fringe, do-gooder energy source to radically cheaper than “conventional” electricity production. So much cheaper, in fact, that mainstream financial publications are projecting that building new solar will soon be cheaper than merely operating existing coal or natural gas plants. Wow! That feels crazy to type. 

While I agree with much of Thiel’s criticism of the industry in his cleantech post mortem above, what he and so many others got wrong is the idea that there were no radical secrets or breakthroughs happening in what seemed to be an incremental energy world. The secret is that solar is an exponential technology that follows Wright’s Law. Basically, every doubling in cumulative capacity has historically led to a 30-40% drop in the cost of solar energy. I’ve seen only 3 investors/commentators consistently call this over the last several years: Ramez Naam, Tony Seba, and Cathie Wood/Ark Invest. And even they underestimated just how much the price would fall! Take a look at this solar cost chart from Ramez to see the International Energy Agency’s projections vs. his own vs. what actually happened.

His forecast was the most aggressive to date – and even he overestimated the 2020 cost by >2x. 

2) Storage and EVs are falling down similar cost curves 

Now you’re probably thinking: great – solar is ridiculously cheap, but it still doesn’t solve our societal energy needs for one major reason: intermittency. The sun only shines during the day. And on some cloudy days, not even then. And the demand on the grid is notoriously prone to spikes where the cost of energy can jump an order of magnitude for 1-2 hours when everyone is cranking up their A/C together. That’s where natural gas peaker plants make their living. Sure they’re more expensive and much dirtier than solar, but they’re reliable and can be turned on/off exactly when needed. Solar simply can’t compete with that kind of reliability. 

That’s all true. But this is where things get really exciting. Solar cannot solve the intermittency problem by itself. But a complementary technology is almost ready to do the job: batteries. Storage has always been the holy grail of the energy industry. Once you can cheaply store electricity then you are free to overproduce during the sunny parts of the day to safely use a fraction of the excess at night or during peak hours. 

Lithium-ion batteries are following along a very similar cost curve to solar. The slope is not quite as steep – every doubling in cumulative capacity produced yields around 20-30% cost reductions – and it’s a few doublings behind solar. But I believe that within the next few years, the cost of solar + storage will beat the cost of natural gas peaker plants. Research from Ark Invest suggests we’re already there for peaker plants used only 10% of the time (the average usage amount for such a peaker). And we should be there in < 5 years (maybe much sooner) for plants used < 25% of the time. Unlike these antiquated plants, the price of solar and storage will only continue to drop from there via a virtuous cost reduction/deployment cycle. 

And this is just to speak of conventional Li batteries. Other alternative storage technologies like flow state or compressed air storage batteries are themselves showing promise (though they’re much earlier in the pipeline). Other “virtual batteries” which offload excess energy for productive purposes like running data centers or mining bitcoin are also extremely effective here. I’ll explore the concept of Bitcoin Virtual Batteries more in my next post. 

BTW, given that the cost of batteries is the primary driver for Electric Vehicle cost  (20-30%), it should come as no surprise that EVs are following along a similar cost curve.

One last note: virtual and real batteries will solve most of society’s daily intermittency problems, but there’s still the issues of seasonal intermittency and some mission critical energy needs for which even a < 1% chance of downtime is unacceptable (e.g. hospitals). For these cases, larger, more interconnected grids and some base load supply from hydro, nat gas, or possibly next gen nuclear will almost certainly play a role. But that’s a conversation for another article. 

3) Innovation in Financial Engineering 

Even with the radical collapse in price of solar and storage, the upfront cost for these assets is still in the thousands of dollars for homeowners and 10s to 100s of millions of dollars for utility scale installations. These are still very expensive projects for anyone to undertake on their own balance sheet. Fortunately, we’ve seen a tremendous amount of innovation around financial engineering and deployment models. The biggest breakthroughs were the Power Purchase Agreements from SunEdison and solar leases from SunRun, which pioneered $0 solar for businesses and homeowners respectively. The ability to have a third party finance a solar project and guarantee a fixed energy cost or amount of savings was a major development that helped bring about current market conditions.

We used a very similar model at my last startup, Bright, which is now the leading residential solar company in Mexico. Other companies like Mosaic helped to pioneer solar loans. Jigar Shah, the former CEO of SunEdison, is bringing this innovative financial model again to other climate tech like batteries, EV charging infrastructure, energy efficiency, etc. at billion dollar scale through his new fund, Generate Capital. Companies like kWh Analytics built insurance products that helped large pools of capital become comfortable investing in the space. 

4) Smart grids and smart homes 

The other major breakthrough in this industry is data accessibility. Most grids around the world are remarkably complex and impressive machines (check out this great read for context), but were ultimately opaque to the end user. Until now. The U.S. is on pace to deploy >100 million smart meters by the end of the year. The rest of the world is doing the same. Much of this data is publicly available via open standards. Meanwhile, the falling cost of sensors and rapid deployment of smart thermostats and Alexas leads me to believe that the promise of the smart home is finally coming to fruition. Smart devices and buildings that can turn/off only when they’re actually needed can go along towards improving energy efficiency, which while not as sexy as renewable energy/storage, is a huge piece of the ultimate energy puzzle. By some estimates, the U.S. wastes >60% of the energy we create. And, anecdotally, my experience is that this is much worse in emerging markets. 

Where to Invest?

So given all of the above reasons to be excited, the next question is: where should investors participate in the clean energy revolution? For institutions (and increasingly individuals), I think there’s a lot of good reason to focus on deployment capital: i.e. unsexy project finance with long-term reliable returns. As a venture investor, though, I still believe that there is a ton of greenfield opportunity left. Here are some of the areas that I’m excited about: 

• The EnergyOS: As every home and building becomes an intelligent “prosumer” (i.e. producer and consumer of electricity), we’ll need software solutions that allow these new agents to decide what to do with each electron produced or received at the edge of the grid. In simple terms, what should I do with the electrons I’m producing right now? Use them, sell them, store them, mine bitcoin, etc. Software with real time electricity market data should help me make that decision. A few exciting startups I’ve seen pushing in that direction: Enpowered, Camus Energy, and David Energy. One thing I really love about Camus is that it’s built on open source standards. I hope that all energy markets in the future are built on OSS with private companies providing competing interfaces. 

• SaaS tools to help the long tail of solar/storage installers succeed. Although a few full-service distributed energy installation companies have enjoyed success (e.g. SunRun), I’m ultimately most bullish on the long tail of solar installers and entrepreneurs. Just as there is no dominant HVAC installation/repair company, I think that the future of solar/storage/other distributed cleantech installation will reside with the long tail of installers. We need software to empower those entrepreneurs to find customers, design systems, secure financing, monitor performance, and provide customer service. A few solutions I’ve seen to date include Aurora Solar and Sunwise. Investor Jake Saper wrote an excellent article detailing the playbook for such a startup back in 2016.

• Financial engineering applied to new sectors. Just as financial engineering helped solar go mainstream, I think we now need the same sort of financing options for dozens of other clean energy and climate tech solutions. Some initial examples include financing for: microgrids, EV charging infrastructure, heat pumps, LED lighting, smart thermostats, biogas plants, etc. These new models should focus on data collection that help bring further transparency, facilitate creation of insurance products, and bring more capital to market. 

• Community ownership of energy assets like solar farms or batteries. Over 80% of Americans are unable to install solar on their roofs (they live in an apartment, have trees blocking their roof, etc). This is even more of a problem in more dense, urban areas of the world. Sites like Solstice and Sundaygrids offer opportunities for everyone to own fractional shares of community solar projects instead.
• Clean energy crowdfunding platforms: I believe there’s huge latent demand for retail investors to invest in projects that provide reliable returns and support clean infrastructure. Especially in 0 or negative interest environments. A new wave of startups like Citizenergy is showing strong initial traction here. My old friend, Sherwin Yu, and I started our first startup in this space > 8 years ago while still in college. I’m hopeful that this idea is finally having its day 🙂
• Platforms that facilitate real-time p2p energy markets. This one is tricky because of regulations, but there are some interesting techniques to do this – e.g. crypto-based solutions for trading tokenized kWh as well as using physical microgids in emerging markets ready to leapfrog traditional grids. 
• Data products that help bring down the cost of financing for clean energy projects even further, especially in the developing world. Some cool projects I’ve seen here include: kWh analytics, Energetic, Banyan, and Raptor Maps. I would also love to see secondary markets arise for trading fractions of solar projects in real time. I think that this could unlock some creative new financing structures like $0 down solar with no contract or lease. 
• Tools to turn Bitcoin miners into virtual batteries. Some interesting companies I’ve seen here: Layer1, Satoshi Energy, and Rosseau. Much more to come on this concept in the next few weeks!
• Novel ways to create network effects for owners of Distributed Energy Resources (DERs). I’ve always wondered if it would be possible to build a “solar social network” where neighbors could ask one another about their experience getting solar, storage, efficiency retrofits, EVs, etc. and get referral / sales bonuses for helping to close the deal. 
• Platforms to retrain the masses to work as clean energy entrepreneurs and installers. We need a newly trained workforce of 10s of millions of local solar, battery, EV charging installing entrepreneurs around the world. Someone will build the platform to help train this force for good paying, meaningful jobs. We had to build something somewhat similar internally at Bright to get enough installers to meet our residential demand in Mexico alone. Imagine the opportunity to launch that sort of a workforce in emerging markets around the world!

As you can see, the field of possibilities for the future of venture backable clean energy startups is enormous! The rapidly declining costs for solar + storage, innovations in financial engineering, and proliferation of smart devices/data collection brings us to what feels like should be the steepest portion of the clean energy adoption S curve. If you’re building one of the companies I mention, or even better, one that I haven’t considered yet – please reach out 🙂

Thanks to Alvaro Migoya, Jason Laster, Nat Bullard, Tommy Leep, Alex Pruden, David Gabeau, Pablo Castellanos, Arturo Duhart, and Ali Chehrehsaz for the conversations and feedback.