Climate change is perhaps the single greatest challenge facing society today. Successfully addressing it will require a profound shift in how we power our lives.
In order to mitigate the worst impacts of climate change, science shows that we must limit global warming to the range of 1.5° and 2°C. To achieve that goal, researchers estimate that the world's cumulative future CO2 emissions must not exceed 1,000 gigatons (GT), and recognize the possibility that the upper limit may be less than 750GT. In a world currently emitting about 50GT of CO2 per year and growing, there is no time to waste.
Minimizing the scale of global warming emissions to meet the world’s remaining carbon budget will require fundamental changes in how we generate our electricity, fuel our mobility and industry, and power and condition our built environments.
Of course, change is already afoot. For at least the past two decades, an energy transition has been unfolding. The first phase of the transition, Cleantech 1.0, focused on technologies that were on the margin in terms of cost. Although a lot of technical gains were made, commercial success was relatively limited by the challenges of capital intensity and cost-effectiveness.
The second phase of the energy transition, and the one we are now approaching the tail end of, has seen renewables grow to play a meaningful role, particularly in the power sector. In the United States and around the world, wind, solar and, more recently, storage now account for the majority of annual new generation capacity deployments. Falling costs and strong deployment-support mechanisms over the past six to seven years have aided this dynamic. However, this growth has been almost entirely limited to the power sector.
Economy-wide Adoption Is Needed
Unfortunately, having wind and solar playing a meaningful role in power generation, even if that role continues to grow at rates similar to the past few years, will not be sufficient to meet the world’s decarbonization needs. What is required is a step-change in the overall adoption of clean energy across the broader economy, and this must occur within a decade. This next phase of the energy transition – the Mainstreaming of Clean Energy – must see a massive expansion in clean megawatt-hours (MWhs) production. This expansion will offset fossil fuel-fired generation in the power sector, but critically, these clean MWhs will also have to drive the decarbonization of mobility, industrial processes and our built environment.
What will set the mainstreaming of clean energy apart from the previous phases of the energy transition is: 1) the growth in the multi-sectoral dependency of clean energy solutions, and 2) the need to deliver clean MWhs in a smarter and more dynamic fashion than has been the case to date. This need for smarter MWhs is driven by a greater dependency on intermittent generation resources across the power system and meeting this need will require significant volumes of new energy storage of all durations, along with more dynamic demand management capabilities.
Much of the need for storage and greater demand management capability will come from outside of the power sector itself. The large-scale electrification of mobility will offer the potential for significant demand shifting along with energy storage. In addition, power-to-X technologies, particularly green H2 production, will link electricity and molecule production in a way and at a scale not previously seen, and this will unlock further potential for energy storage and demand shifting.
The scale and complexity involved in the mainstreaming of clean energy over the next decade will present many challenges. Fortunately, the world has a wealth of innovators already hard at work developing the technical solutions we require. Indeed, many of the solutions are already available, and their performance and economic competitiveness continue to improve. Core clean energy technologies like wind and solar PV are already the most cost-effective options for power generation in many settings, with or without consideration of their emissions. Advanced energy storage solutions are also now at the point where electrification of mobility and their large-scale deployment in power systems makes sense. Though still less mature, key technologies to support the decarbonization of industrial processes, notably green H2 are also gaining vital momentum. Over the next three to five years, we will see these technologies begin to deploy at the scales needed to allow for the mainstreaming of clean energy.
A Different Approach to Clean Capital
When we consider how S2G Ventures can leverage our investing activities to help accelerate the mainstreaming of clean energy, we see an opportunity to address structural features in today’s capital markets that presently add friction to the transition. To begin, it is important to recognize that today’s clean energy market is not lacking investor interest or capital. However, a salient feature of the market is that much of this capital is siloed, with individual funds tending to focus on either early-stage, growth, or real assets to the exclusion of other categories. This lack of capital flexibility across the market can create barriers to value realization and impact, particularly for entities transitioning from early-stage to growth or for growth equities that need to deploy project-type assets.
Given that the energy system relies on technologies that are largely “asset” or “project” type in nature, it is crucial that early-stage and growth-stage innovators of new clean energy solutions have the means to effectively deploy these into the market. The pathways that do exist today can be a very slow process, hindered by the need to engage with multiple capital providers who have divergent investing mandates in terms of check sizes, return expectations, and timing to liquidity.
At S2G, we take a different approach than most funds in today’s clean energy market.
Though largely focused on the growth equity stage, we realize and embrace the catalytic impact that flexible capital solutions can have for our partners, particularly those looking to develop and then deploy innovative clean energy assets. By being able to offer more flexible capital solutions, S2G can bridge the traditional capital silos that dominate today’s clean energy investing landscape and in doing so we can provide our partners with a distinct competitive advantage.
The debate about our energy future and the climate challenge often focuses on singular technology solutions, their relative maturity, performance and the scale of their deployment. This is understandable and important. However, it is also far from the complete picture. The reality is that for an energy system whose speed of transition matters, the reduction of barriers between the technical innovation, early deployment and scaling phases of a solution’s lifecycle is critical. By demonstrating the power of our flexible investment model that can bridge the entire cycle, we are excited to partner with innovative companies and play our part in the mainstreaming of clean energy.