Review of the 2023 summit, exploring ways to build and scale green business ventures and new technologies.

Last week, I had the pleasure of speaking at the 2023 McKinsey Green Business Building Global Summit and used the opportunity to discuss the importance of technology agnostic policy in the energy transition. Forthcoming McKinsey research shows that while 90% of emissions reductions required for net zero are possible with existing technologies, only 20% of that abatement is from technologies that are commercially mature. Clearly a huge amount of technology innovation is going to be needed to deliver an energy system that is secure, affordable and decarbonised. The conference was filled with examples, not least our work at Enoda, that demonstrate this innovation happening.

As such, government policy must be developed not just to incentivise the solutions of today, but to develop the solutions of tomorrow. To do this, it must be technology agnostic and create a level playing field for all possible solutions. Policymakers and regulators should focus on identifying and defining problems, not picking winners or supporting specific technologies. Incentives and subsidies should focus on outcomes, not specific technologies, and technologies that deliver the same outcomes should face the same regulation and incentives.

A number of valuable wider themes emerged in the conference that warrant reflection:

Systems thinking is needed: The energy transition has always been about transitioning from one stable system equilibrium to a new stable equilibrium for the energy system as a whole. However, much of the first wave of the energy transition focused on bringing decarbonised assets into the existing system, without deep attention to the system as a whole. That approach was viable when the energy transition was too small to affect the operation of the system as a whole, but it is clearly now changing, with many stakeholders realising that a successful energy transition requires rethinking the whole system in an integrated manner. Nevertheless, utilities, regulators, policymakers and legacy incumbents are overwhelmed by immediate challenges and may lack the time and ability to focus on solving long-term problems. New fora and institutions could support this approach to systems thinking.

Dichotomy in the green business space: Despite the moniker of “Green Business”, there was a clear distinction among the green businesses present: those that are scaling existing technology and those that are developing the technology of the future. As the discussions progressed, it became increasingly clear that while both of these are needed to deliver the energy transition, they face very different challenges and have very different needs. For example, there were fascinating discussions about how to catalyse bankable demand to support project finance for businesses that are scaling existing innovations, or for private equity firms starting new businesses to apply and scale existing technologies. Early-stage innovators were focused on how to bridge the gap between seed funding and commercial deployment, and more mature technology innovators focused on where to deepen their asset ownership to deliver against their opportunity set, for example by constructing their own factories. Project developers focused on how to optimise the range of subsidies and incentives available globally, while my message on the importance of technology agnostic policy resonated with many other technology innovators. Throughout, we saw the paradox that private equity and growth investors are struggling to find enough green opportunities to invest hundreds of millions because the technologies that will underpin these companies are still scaling.

What future for lithium-ion batteries: Nowhere was the dichotomy between the developers and innovators starker than in attitudes to Li-ion batteries. Developers are focused on all manner of projects to build stationary Li-ion, both at grid scale in front of the metre and behind the metre in home energy management. Meanwhile, innovators are focused on alternatives to stationary Li-ion, where through new battery chemistries, like iron air; alternative storage mechanism, like heat; next generation approaches to electric vehicle power management that make vehicle-to-grid more effective and less damaging to the vehicle; or alternatives to using batteries for frequency regulation, as we do at Enoda. While batteries have been an important element of the transition to date, we need the Li-ion to go into vehicles. Even among developers, some are shortening their expected payback windows for batteries, conscious of the potential for returns on battery projects to fall, or working to reduce their capital cost and improve their economics by, for example, using second-use batteries.

Platforms are needed to support specific innovation: The complexity of the energy system is a barrier to many innovators, and there is a clear need for a platform for energy that allows new innovators to easily integrate their hardware or software into ancillary services markets and energy ecosystems more broadly across many geographies. Innovation in the energy transition is still analogous to that of Web 1.0, when every web company needed to build the full stack. The explosion of the internet was facilitated by platforms that enabled innovators to easily access core technology and services and reach customers globally. Analogous platforms will be needed for the energy transition. For example, there is a huge proliferation of hardware and software in the EV and home energy management ecosystem. The entrepreneurs behind these companies understand that their innovations could contribute to balancing the energy system, but they also lack the expertise and scale to access these markets. They need globally applicable platforms in which to integrate.

Asset-light is being replaced by asset-heavy: In many areas, asset-light businesses are realising that they need to become capital intensive and integrate vertically to scale to meet demand. The capital intensity transition takes many different forms, including investing in plant, developing in-house EPC capability, investing to secure dedicated feedstock and in-sourcing the teams that install and maintain their products. In some cases, subscription-style business models provide the cashflow stability to support this investment.

Subsidies do not catalyse demand, contracts do: While major new subsidies, like those of the US’s Inflation Reduction Act, have been met with great enthusiasm, both investors and corporates were careful to emphasise that these subsidies do not directly catalyse demand, and that a bankable contract can be far more valuable to underpin scaling than a large subsidy. Many green businesses have adapted their business model to secure bankable contracts, for example by going directly to their customer’s customers to access a point in the value chain with greater willingness to pay a green premium.

A step change in maturity: What tied all of these themes together was the sense that the space is undergoing a step change in maturity, akin to the transition from Web 1.0 to Web 2.0. The reality of the scale and limitations of the transition is clear, and entrepreneurs are adapting their business models accordingly. New technology is necessary to deliver the transition, and necessary conversations about how to adapt the system today while building a system that can support the needs of tomorrow are giving a stronger foundation for the transition. In my view, this maturity of the dialogue is the greatest cause for optimism.