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- How climate finance innovation unlocks trillion dollar TAMs - VoLo Earth Newsletter
How climate finance innovation unlocks trillion dollar TAMs - VoLo Earth Newsletter
VoLo Earth Community,
Last week, the DOE awarded seven companies across the nation with the Climate Finance Innovation Award. Of these seven, only two were startups. And of these two, both are VoLo Earth portfolio companies: BlocPower and Skyven Technologies. VoLo Earth led BlocPower’s Series B in 2023 and Skyven’s Seed round in 2022.
Our experience as operators teaches us that business model and finance innovation complements technology innovation to create wide moats (or to accelerate scaling beyond what technical innovation can do alone).The recent DOE award sobered us with a realization that we have perhaps been taking this element of our strategy for granted. So, we will take this vote of confidence as an occasion to pause and share what climate finance innovation means to VoLo Earth and our portfolio.
While specific theses vary by submarket, three overarching principles underscore VoLo Earth’s decision-making: 1) indisputable and defensible technology differentiation with powerful unit economics that can unlock innovative business models, 2) ability to dominate market share in trillion-dollar TAMs with step change value propositions that can sell into mature supply chains on known metrics, and 3) quantifiable and scalable carbon impact that can decarbonize core sectors of the global economy.
We believe that the energy transition must be led by best-in-class economics (economic merit), and the only way to achieve that is by continuing to innovate on business and finance models that are unlocked alongside new technology. The energy transition does not entail a linear, one-for-one replacement of energy sources but rather an opportunity for exponential structural improvements as technologies usher a reshaping of the surrounding economic incentives and flows of capital.
VoLo Earth portfolio companies BlocPower and Skyven illuminate this strategy; both are adapting traditional energy finance to serve decarbonization in large, but historically difficult to access, decarbonization markets (heating, cooling, and energy efficiency in urban and peri-urban buildings, and medium-temperature industrial process heat, respectively). And in the case of BlocPower, this means addressing the demographics most commonly left behind in the ‘progress’ of techno-economic advancement.
BlocPower
The Problem: 27% of annual global CO2 emissions are generated from building operations alone (some reports put this figure at upwards of 40% in the US). Commercial and multi-tenant residential buildings in high-density urban areas have traditionally been one of the hardest sectors to electrify and decarbonize. This gap is amplified in low-to-moderate income communities.
The Innovation
BlocPower is a platform for multi-faceted building upgrades for heating, cooling, energy, and efficiency but has a central focus on heat pumps.
BlocPower focuses on deploying solutions at the city and state level, enabling building owners to upgrade with little or no upfront cost by stretching payments over the lifetime of the installed systems.
At its core, BlocPower's innovation lies in developing complex financial vehicles and an intricate corporate structure involving numerous sub-entities for various financing mechanisms, a non-profit arm for workforce training, and multi-layered contracts with municipalities. This model establishes new operating markets based on local factors such as environmental conditions, energy prices, incentives, and cost of capital to ensure favorable project economics for all stakeholders.
By leveraging innovative financing tools like green bonds, in-house workforce training, on-bill financing, and strategic partnerships, BlocPower has unlocked a new asset class for climate-focused investments while delivering affordable clean energy solutions and transferable job opportunities to underserved communities. Their model demonstrates how climate finance innovation can drive equitable sustainable development and pave the way for replication globally.
Skyven Technologies
The Problem: Industrial process heat produces 7.5 GT of GHG emissions per year, which is equal to the transportation industry. A whopping 29% of global energy consumption derives from industrial process heat, and most of the industrial heat used today, worldwide, is produced from coal (45%) and natural gas (23%). Industrial heat similarly proves to be one of the hardest to decarbonize en masse.
The Innovation
Skyven’s core product, Arcturus, is an industrial steam-generating heat pump that captures low-temperature heat rejected from industrial processes, increases the temperature of that heat, and uses it to generate steam at the same temperature, pressure, and quality of existing boilers.
Skyven provides industrial heat-as-a-service contracts to industrial customers. This contract, called a Thermal Energy Services Agreement (TESA), solidifies a 3-way agreement between Skyven, the client, and a 3rd-party financier to fund the CapEx of the system. In more familiar terms, one can think of it as a PPA for BTUs.
These TESA contracts allow manufacturers to upgrade facilities without incurring capex burden. Skyven measures energy savings using sensors and proprietary software and bills for saved BTU at a lower rating than the plant would otherwise pay for fuel, allowing for savings on day one after installation.
Skyven has taken an extremely challenging to decarbonize sector (industrial process heat) and has now enabled mass scale and adoption via a FOAK finance model for process heat (the TESA). plant managers have historically been unable to decarbonize because of the barriers in place from a technology and finance perspective, which are now broken down with Arcturus and the TESA.
In both cases, the level of difficulty of the hard-to-abate sectors occasioned breaking the barriers of traditional models. So, climate finance innovation can be a response to the challenges of decarbonizing these deeply entrenched, globally scaled practices which define Buildings and Industry. Further, the coupling of business and finance innovation with differentiated tech will likely be the accelerant needed to make the energy transition mainstream and provide the investment community with the necessary returns to create a capital flywheel.
One more portfolio company with a parallel role in the ecosystem is Blue Frontier. VoLo Earth led Blue Frontier’s Seed round in 2021, followed by a Series A led by Bill Gates founded Breakthrough Energy in 2022 and a strategic funding round of $16.9M from a large corporation (as highlighted in the February newsletter - we will let you know details when we can!)
Blue Frontier is building the world's next generation cooling technology. Coming out of NREL, the Company is commercializing a liquid desiccant-based HVAC and cooling technology with an initial product focus on DOAS (dedicated outdoor air systems).
They have an integrated desiccant regeneration core, which acts as a proprietary battery, allowing them to load shift nearly all of their electrical demand by 4-6 hours or more.
This is a highly-differentiated trio of step-change values for the HVAC sector: 1) hyper-efficient cooling, 2) grid demand-response capability during peak cooling load, and 3) significant reduction in commercial facility demand charges.
Together, these define a game changing cooling technology that has enabled an novel financing model which the team will begin to deploy soon.
However, climate finance innovation expands beyond the perspective offered by these three portfolio companies. Each rely on 3rd-party financing for project capital, and to make these innovations deliver superior economics in practice, we must reduce financial complexity, automate the delivery and regulatory process, and thus ultimately lower the WACC (weighted-average cost of capital). To tie this letter together, it’s important for us to highlight Banyan Infrastructure in our portfolio, working to make this latter piece a reality.
Banyan's mission is to address the friction in the project financing process, particularly for smaller scale projects. Large banks often avoid these projects due to the high cost and time-consuming process of evaluating, managing, and maintaining them. However, Banyan's purpose-built project finance software is becoming a game-changer in this space.
Banyan works with large banks like SMBC to streamline and automate the investment process. By cutting investment time and reducing transaction fees, they're making it possible for these banks to fund smaller, but profitable projects that they would have otherwise overlooked. This not only expands the banks' market share but also accelerates the flow of capital to sustainable infrastructure projects.
Notably, Banyan played an instrumental role in the Greenhouse Gas Reduction Fund, working alongside green banks and community development financial institutions. Their software helped cut down the time taken to write out small loans, ensuring the funds reached the intended communities faster. This was crucial in developing the model for GGRF’s capital roll-out, and Banyan is poised to be the commercial leader in the actual deployment of these funds.
Together, these four portfolio companies highlight that it takes a systems-level approach to actually scale climate tech. And in each case, the technology is the enabler, vs. the answer. Innovative business and financial models unlock the utilization of differentiated decarbonization technology to highly defensible businesses surrounding technical moats. This systems-level approach is the only way to unlock a true avalanche of capital (creating a flywheel) into the energy transition, and the only way we will have a chance at hitting climate warming reduction targets.
Climate Finance Innovation is a moving kaleidoscope, perpetually defined by new and shifting layers. When marrying financial returns with carbon abatement goals, the hardest-to-abate sectors are often the most opportune. We believe these will continue requiring innovative financial mechanisms.
IN THE NEWS
 Streamlining Sustainable Infrastructure | Banyan Infrastructure is pioneering a framework to power the Greenhouse Gas Reduction Fund, outlined in a White Paper which breaks down GGRF funding, the critical challenges facing recipients and sub-recipients, the role of green banks, CDFIs, and other local lenders, as well as reporting requirements and best practices around a digital strategy for lenders and investors to create standardization and efficiency in the market. |
 Sustainable Metal Refining | Nth Cycle, critical metal refining company, was awarded a $7.2M 48C Tax Credit Allocation to pioneer the large-scale production of Mixed Hydroxide Precipitate (MHP). This will allow the company to produce unprecedented purity of nickel and cobalt hydroxide at significant reductions in GHG emissions. Nth Cycle’s facility will further advance domestic clean energy manufacturing and energy transition job opportunities. |
 Next Gen Software for Electric Utilities | Renewable Energy World outlines how Pearl Street is on a mission to undo the queue. The article addresses Pearl Street’s origin story as an evaluation of grid analysis from an academic perspective, seeking to answer “Could we build a simulator for the electric power grid that internally looks a lot like the simulation tools used for every other circuit on the planet?” Read to learn how the company evolved into the portfolio company we know and love today! |
READING
VoLo Earth: Of the nearly 7,000 pages of grant applications reviewed, the Rocky Mountain Institute found that nearly every single US state, including many who haven’t historically been leaders on climate, submitted Priority Climate Action Plans to the EPA in the past several month. The states and territories examined “collectively account for about 90% of the country’s population and carbon pollution,” and that for almost half of the states, these Climate Plans represent “the first meaningful climate action planning effort since at least 2018.” The report found that transportation, buildings, electricity, and waste were the most commonly addressed sectors, with many aimed to create jobs and support local communities.
Importantly, 42 states indicated plans to leverage additional federal funding. We have continuously reiterated the urgency for climate change and the energy transition to become entirely apolitical - this report is a hope-filled signal that we are heading in this direction.
And of course, a quick shoutout to The Rocky Mountain Institute for this effort. RMI is a long-held VoLo Earth thought partner, and while Joe and Kareem knew each other for years before, they really cut their teeth as colleagues working side-by-side at RMI for years. RMI Founder Amory Lovins is a deeply valued advisor to VoLo Earth’s fund.
VoLo Earth: “The pace of electricity load growth could nearly double or even triple over the next five years,” according to the Energy Futures Initiative (EFI) Foundation’s recently released report. Current load growth follows years of relatively flat power demand and industry’s built around these assumptions. Accelerating demand yields “paradigm-shifting implications for the power sector, affecting system-wide reliability in the near term and changing the course of deep decarbonization in the mid-term.” The dynamics embedded in these shifts are top of mind when evaluating companies through our second core principle, the ability to dominate market share with step change value propositions that can sell into mature supply chains on known metrics.
VoLo Earth: This summer, New Yorkers will begin to receive the first federal Inflation Reduction Act rebates for heat pumps, heat pump water heaters, heat pump clothes dryers, induction stoves and electrical upgrades. This includes up to $14,000 in rebates for low-to-moderate income homes.
If you’ve ever spent time in New York, you will surely appreciate the need for effective home temperature management. But, the distribution is also a landmark for IRA implementation as well as a meaningful propulsion forward for two VoLo Earth portfolio companies, Zero Homes and BlocPower. Zero Homes, Fund I portco, is a platform for residential electrification which automates and optimizes the sale and design of home xrelectrification, while BlocPower, (you know all the details now) has deep roots in New York State and a focus on LMI communities.
VoLo Earth: The New York Times article highlights a new EPA policy requiring USA coal plants to reduce 90% of their emissions by 2039. The new policy imposes stricter limits on emissions of mercury, seepage of toxic ash into water supplies and limits the discharge of wastewater from coal plants. VoLo Earth Ventures agrees that there is a lack of economic viability associated with developing point-source carbon capture solutions for coal plants because of the cost of energy from wind and solar. We believe the answer to the USA’s surging demand in electricity is not “clean coal” but rather, increasing the speed that renewable projects are approved and developed.
Public discourse about climate change has resulted in the erroneous idea that it's all about cost, burden and sacrifice. If the math was correct, everyone would see it's about profit, jobs and competitive advantage.