IRA and the new capital cost of climate #114

Happy Monday!

If we seem a bit IRA-happy, it’s largely due to the unique glee that making sense of wonky policy through clustered bar charts can bring – in this week’s issue, we evaluate EVs, hydrogen, carbon capture and more through the lens of the tax credits they’ll receive from the newly signed IRA.

While carbon capture mileage may vary, an average 40% decrease in costs can trend towards ‘changing everything’ by giving more deep technologies the opportunity to scale and prove themselves in the market.

In this week’s deals, $750m more for nuclear to Terrapower, ~$150m for a Chinese green energy provider and a new ~$900m German EV SPAC. In the news, a nuclear plant may get a new lease in CA, the World Bank dips its toes in blockchain carbon, and Mexico sends it for fossil fuels while building a new massive refinery.

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DesIRAble tax credits

The IRA has officially gotten Biden’s sign-off, and with that a bevy of new incentives are on their way to supercharge climate tech deployment.

As we witnessed with solar and wind, well-structured tax credits are powerful levers to drive down the green premium for nascent clean technologies. These incentives move the levelized cost “line in the sand” of climate tech closer to that of their fossil incumbents - driving faster deployment and market adoption to scale down the cost curve.

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Cleantech Tax Credits 101

Tax Credit: Value of the credit is monetized as an offset to the taxpayer’s tax liability

Tax equity financing: If developers don’t have enough revenue to take full advantage of the tax credits, they can partner with a third-party investor (banks, large companies) who provide initial capital and claim the tax credit on their tax liability (more here)

Direct Pay: Instead of requiring credits to be subtracted from a tax balance, allows credits to be treated as as a “payment of tax” to receive a cash refund from the Treasury

PTC: Per-kWh tax credit based on amount of electricity generated and sold. Received over a period of time (used for wind).

ITC: Allows taxpayers to deduce a % of the cost from tax liability. Provides a one-time credit (used for solar).

Along with the notable extension of wind (ITC) and solar (PTC) credits, the IRA contains a bevy of shiny new incentives, decreasing climate technology costs by 40% on average.

*Source: costs from* *Rhodium Group* *(Hydrogen, SAFs),* *BloombergNEF* *(Batteries),* *Modernize* *(Heat Pump),* *WRI* *(DAC),* *IEA* *(CCS),* *InsideEVs* *(EV). Assumes SAF prices estimated in 2027 and hydrogen prices estimated in 2030.*

💨 Carbon Capture (30-70% cost decrease for DAC; 70+% cost decrease for CCS)

Increases credits. Increases 45Q to $85/ MT for industrial CCUS and $180 for DAC for non-EOR use cases. This is a major bump for bringing down DAC costs (~70% impact on the low-end of DAC costs).

Lower capture thresholds. Lowers the annual threshold for electric generation facilities to 18,750MT and DAC projects to 1,000MTs - allowing smaller-scale demonstration projects to capture the 45Q credit and scale down the cost curve faster (as Carbon180 notes, the largest operating DAC facility today stands at 4,000MT).

Direct pay. Allows for upfront direct pay for 45Q credits generated in the first five years of operation instead of delayed and complex tax rebates which require complicated tax equity structures to harvest the benefit. Ideally, this direct pay model of high willing-to-pay early customers ($600/ton!) and the additional credit brings in enough early investable revenue that hardware-intensive DAC businesses are able to rapidly scale down the cost curve to break a profit from the much lower future mass market prices ($50/ton?).

✈️ SAF (26-46% cost decrease)

SAF tax credit up to $1.75/ gallon for aviation fuel that achieves a minimum 50% carbon intensity reduction from the petroleum baseline. The IRA also provides $244M in grants to fund SAF.

⚡ Hydrogen (61-88% cost decrease)

Base tax credit set at $0.60/ kg increasing to $3/ kg depending on carbon intensity. Also includes a direct pay option similar to carbon capture for a limited period of time. Assuming Rhodium Group’s 2030 costs for green hydrogen, the $3 45V credit represents ~60-90% of the total per kg cost.

This fundamentally changes the economics of green hydrogen, making it possible to get to cost parity with gray hydrogen at ~$1-2/ kg.

🔋 Battery manufacturing (~30% cost decrease)

Provides tax credits of up to $35/ kWh for battery cells and $10/ kWh for battery modules. Also includes 10% PTC for production of critical minerals and other battery components.

🏡 Built Environment (25-52% cost decrease for Heat Pumps)

Consumers can claim a tax credit for 30% up to $1,200 of the cost of certain home energy efficiency projects including $150 ($412 avg.) for a home energy audit, $600 ($800 avg. per window) for new energy-efficient exterior windows, $500 ($550-$640 avg. per door) for exterior doors, and $600 ($5,723 avg.) for highly efficient central air conditioners, electric panel upgrades, and water heaters.

Energy-efficient electric or gas-powered heat pumps for space heating and cooling or a heat pump water heater qualify for 30% tax credits up to $2,000.

🚗 EVs (14-27% cost decrease)

$7,500 tax credit for new EVs and $4,000 for used EVs with many, many caveats (e.g., MSRP, income, critical mineral and battery component requirements). Reference this cheat sheet here.

We’ve updated our Master IRA tracker below to include tax credits.

Deals of the Week (8/15-8/21)

⚡ TerraPower, a Bellevue, Wa-based nuclear energy company, raised $750m in funding from Bill Gates and SK Group.

⚡ Atom Power, a Huntersville, NC-based provider of EV charging solutions, raised $100m in funding from SK Inc. and SK Energy.

🥩 Eat Just, a San Francisco, CA-based company developing egg and meat alternatives, raised $25m from C2 Capital Partners.

🌾 Groundwork BioAg, a Israel-based company developing crop-enhancing mycorrhizal inoculants raised $18m in Series B funding from Climate Innovation Capital, MoreVC, Middleland Capital, Ibex Investors, HSBC Asset Management, Edaphon, and BASF Venture Capital.

💨 Carbonstop, a China-based carbon emissions management software and consulting solutions provider, raised $14.8m in Series B funding from Sequoia China, GL Ventures, and Matrix Partners.

🌱 Eat the Change, a Bethesda, MD-based platform making environmentally friendly, nutrient-dense snacks, raised $14.5m in funding from Collaborative Fund and S2G Ventures.

⚡ Exponent Energy, a India-based company developing fast charging technology, raised $13m in Series A funding from YourNest Venture Capital, Lightspeed India Partners, AdvantEdge Founders, and 3one4 Capital.

🚗 Zap-Map, a UK-based electric vehicle point mapping service, raised $9m in Series A funding from Good Energy and Fleetcor Technologies.

⚡ goEgoNetwork, an India-based EV charging infrastructure solution provider raised $8m in Series A funding from Aisha Ventures.

⛵ Bearing, a Palo Alto, CA-based AI maritime shipping AI company, raised $7m in Post-Seed funding from Mitsui and AI Fund.

♻️ CleanRobotics, a Longmont, CO-based AI recycling sorting company, raised $4.5m in Series A funding from Undivided VC, SOSV, Melco INternational Development, and Longmont Evergreen Opportunity Fund.

🦐 Atarraya, a Mexico-based company developing sustainable shrimp farming technology, raised $3.9m in Series A funding from Jeff Horing of Insight Partners and other angel investors.

🚗 Zeti, a UK-based EV fleet financing company, raised $2.5m in Seed funding from Powerhouse Ventures.

⚡ EExion, an Israel-based company using carbon electrodes to develop EV batteries, raised $2m in Seed Funding from Capital Nature, 4WARD VC, Climate Capital Collective and Environmental Sustainability Innovation Lab.

❄️ Koolbooks, a France-based company scaling solar refrigeration across Africa, raised $2.5m in Seed funding from Aruwa Capital, GSMA Ecosystem Accelerator, Blue Earth Capital, All On, and Acumen.

☀️ Quantified Energy Labs, a Singapore-based developer of aerial monitoring solutions for PV inspection, raised $1.5m funding from angel investor Liu Xiaosong, co-founder of Tencent.

Submit deals here

Exits & New Funds:

Contrarian Ventures, launched their second seed-stage fund targeting $100m to invest in climate-tech founders across Europe.

Edge Autonomy, a San Luis Obispo, CA-based autonomous technology developer acquired Adaptive Energy, an Ann Arbor, MI-based manufacturer of solid oxide fuel cells for low-carbon backup power applications.

Future Energy Ventures is establishing a new independent venture fund focused on Series A and B investments in digital energy companies with E.ON as the anchor investor.

In the News

It’s finally official 🎉! Biden signed the Inflation Reduction Act, ripe with $370B of fresh funds for climate tech expected to get the US within ~0.5B tons of its 2030 climate target. We would’ve preferred “on target”, but it’s as close to the bullseye we’ve seen yet. For the breakdown, click-through to our IRA tracker.

The world may be turning back to nuclear. In California, Governor Newsom is considering extending the Diablo Canyon nuclear plant by 5 years in light of recent heat waves, droughts, and wildfires decreasing grid reliability. Meanwhile, facing similar challenges across the Atlantic, Germany is also reversing its plans to wind down three major nuclear plants and the UK is planning 8 new nuclear plants.

Boston is going all-electric. Mayor Michelle Wu announced that Boston is seeking to ban fossil fuels from new building projects and renovations, following behind other major cities NYC, Seattle and Washington D.C.

Move over KlimaDAO, IFC is launching the Carbon Opportunities Fund, a blockchain-enabled platform to trade carbon offsets. With $10m for the proof of concept, IFC is joined by Cultivo (biodiversity project originator and investor), Aspiration (sustainable finance), and Chia Network (blockchain tech firm). The announcement ties with a World Bank (an IFC sibling) article highlighting digital MRV in the carbon markets.

China’s heatwave has reached an all-time 64 day record, causing droughts and power-shortages putting the plant operations of EV battery giant CATL to halt.

“He’s an oil man.” In a complete 180 from the rest of the world, Mexico president Andrés Manuel López Obrador is investing its energy future in fossil fuels, not renewables - starting with the opening of the country’s largest oil refinery in July.

Pop-up

The era of passive, hands-off government is over. If you read one article this week, make it this banger from Robinson Myers who weaves together many of the diplomacy vs policy, national security, and re-industrialization themes we’ve been exploring in this Post-IRA World.

Opportunities & Events:

🗓️ Women & Climate NYC Networking Dinner: Register for dinner on August 23 and discuss climate with other female identifying individuals – no professional climate experience necessary.

💡 Third Derivative: Apply for Third Derivative’s cext cohort by August 25 to be considered for their virtual, 18-month-long accelerator program.

🗓️ Care for Our World: Register for this in-person and virtual panel discussion on September 1 with public health academics about innovation’s role at the health x climate intersection.

🗓️ Queers in Climate: Register for this casual meetup in NYC on September 20 (during Climate Week) for LGBTQ+ folks working in climate.