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Credibility

By Jakob Jensen — — Posted in heat series

The same sustainable solution, sold at the same price to the same customer delivering the same performance for the same purpose in the same place, produces energy at costs somewhere between 50 and 200% the price of natural gas.

At half the price of natural gas, the solution is super competitive. Companies with super competitive solutions easily attract investors. This enables them to hire the right people and roll out fast, thereby building references making it possible to move even faster while lowering costs further by buying larger quantities from their suppliers, standardizing products and procedures, and building valuable experience in their organization. A good circle.

At double the price of natural gas, solutions live at the mercy of financial incentives which in turn live at the mercy of political winds. The result is less money, slower roll-out, and ultimately a longer, more risky road towards potential success. A bad circle.

Credibility is the difference between good circles and bad circles: What risks do investors providing funding for a solution see lying ahead? The more risks they see, the higher the price for their funding and the faster they want their money back. In the end, their perception of these risks is expressed in two terms: Interest rates and depreciation time.

The longer the depreciation time and the lower the interest rate, the lower the cost of the energy. New, untested solutions may be depreciated over 10 years and new technologies from new companies may carry interest rates north of 10%. For tested solutions from seasoned suppliers interest rates may go below 1% (as for district heating investments in Denmark) and depreciation towards 25-35 years (as for solar thermal in Dubai). Combined, the effect of the two parameters easily leads to more than a 4x difference in the cost of energy.

Concerns of end-users and finance providers need to be addressed to speed up adoption. These concerns include technology-related areas such as efficiency, durability, quality, maintenance, and system integration, and business-related areas such as certainty of supply, support, cost of financing, and of course the actual price the supplier charges for the solution.

Consequently, expensive resources in the form of experienced management and employees need to be onboarded, independent experts need to test and validate the technology, solutions need to be adjusted, production capacity needs to be established, all the while both money and time fly faster and faster. Hence, addressing the concerns come at significant costs that cannot be paid by sales profits since sales may be years ahead.

Government-backed funding programs can play an important role here by supporting innovators, universities, and their collaborations with industry thereby helping speed up some of these processes. However, though intentions are good outcomes are often sub-optimal. In part because funding application procedures are inherently slow and reporting requirements often a heavy burden. But also because the industry may require unconditional exclusivity in exchange for their potential interest. As exclusivity eliminates competitive pressure industry lacks incentives to move fast. And as the unconditionality comes for free, the risk of entering into such agreements are low for the big industrial players.

The speed of climate change does not allow sub-optimal solutions. The situation calls for fundamental changes to how energy is produced and consumed with changes in infrastructure and in business models. One model to handle this at low costs and with low risks may be by supporting investments and business models financed by pension-backed infrastructure funds.

Establishing district heating for entire cities would be one such model. Building a new district heating network in an existing city is doable, it is not without risks. But since district heating piping networks can be depreciated over 50 years and since not many cities (other than Detroit) go bankrupt, extra costs can be spread over a long period of time at low risk. Add to this that the alternative cost of heat - when based on fossil fuels - is likely to become ever more expensive due to carbon emissions taxes - then there should also be room for healthy profits.

Direct benefits of such projects include significant economic activity, job creation, and increased tax income. Subsequent benefits include cleaner air, better health, and less dependence on fluctuating fuel prices. Plus - of course - a contribution to reducing future costs of mitigating consequences of climate change.

Derisking such investments with government support may come at a cost in the short run but will yield profitable returns seen in a longer perspective.

The same model can be used for large-scale desalination projects and for establishing local networks delivering high-temperature process heat to the industrial processes that today are the cause of half the world's carbon footprint.

In conclusion, the market for heat represents an opportunity as big as transportation and electricity production combined with plenty of challenges to solve, plenty of solutions to the challenges, and plenty of money to be made.

Interested in reading more? Please see the links to my other articles below. Additionally, a 'Like’ from you will also be much appreciated as this should help direct more attention at the many business and climate opportunities the market for heat production offers.

Thank you for reading,

Jakob Jensen

HEAT is a series of non-technical, easy-read 3-minutes articles looking at heat’s role in energy production, its environmental impact, technologies for sustainable large-scale heat production, and some of the business opportunities these solutions generate.

Credits

The Daily Conversation

Heliac

About me

I have spent the better part of 20 years investing in cleantech startups. During my career I have probably seen at least 3,000 business proposals, including Heliac's which I was introduced to in 2016 when I headed Climate-KIC Nordic's accelerator program. I found -and still find - Heliac's solution to be by far the best new solution I've ever come around, which is why I joined the company in early 2017.

Disclaimer: I have not double-checked all my sources and I am not an expert in all areas mentioned in the articles. I may therefore have reached conclusions that wiser men and women may know to be inaccurate. If so, I trust they will let me know, so I can become a bit wiser too.

This insight was originally posted in LinkedIn