From Pilot to Planet Scale: Bridging the Industrialisation Gap in Climate Infrastructure | Bryden Wood Podcast

The Bryden Wood podcast

The episode explores the 'industrialisation gap' or 'valley of death' that prevents climate technologies from moving from pilot stage to commer

Key takeaways

• The 'valley of death' is defined as the gap between VC-funded laboratory/pilot stages and traditional infrastructure investment.
• Ara Partners uses an engineering-led model to de-risk first-of-a-kind (FOAK) plants through rigorous stage-gate modeling.

Main topics

• Climate technology scaling
• The Valley of Death in decarbonization

Notable quotes

How can you decarbonise the planet if you can't build anything?

Conclusion

Scaling climate tech requires a fundamental shift toward integrated bu

Transcript preview

Speaker 1 (0:00) You effectively are one of the bridges across the valley of death. Speaker 2 (0:02) ARA believes that, you know, we would love 20 ARAs to exist in the decarbonisation space. Speaker 1 (0:08) Will super companies exist like this, as you might see from sort of more of a Korean model? Speaker 2 (0:13) Your whole entire mindset changes as a project manager. You shift in that you're looking for... Is it even Speaker 1 (0:19) possible? Is it even possible at the start? Speaker 2 (0:21) For a single mine to do this? Yeah, exactly. How can you decarbonise the planet if you can't build anything? Speaker 1 (0:27) Hello, my name is Martin Wood from Brighton Wood. And for today's podcast, I'm very pleased to introduce Dave Toohey, I have with me today from Aura Partners, who are the world's largest dedicated decarbonisation fund with something like seven to eight billion on the count. And Dave's small job is to convert that kind of financial muscle. into something that's going to basically advance decarbonisation of the planet by basically looking after the delivery. And that is something very close to our heart, Brian Wood, is how we create scalability in climate technologies. So we feel, and I think Aura feel as well, that there's a... There's a bit of a turning point where it's not necessarily always about finding the innovations, finding the particular climate technologies that... Speaker 1 (1:31) that we need. I mean, of course, that work goes on and should go on continually. But the question is of those technologies that are now apparent and are now available, how on earth do we take them and scale them? And how do we evolve them at a rate, an unprecedented rate, so that they reach levels of efficiency and levels of rollout efficiency that we have only traditionally seen after a technology has been mature for... half a century, a century. How do we do that in the space of a decade so that we can actually address the problem at the rate that we need to address the problem? So on the basis of that, really, I'd like to see how you're going to do it, Dave. So I'm going to ask you to send me. Well, there you go. So more specifically than that, people talking about the sort of missing middle. It's sometimes termed the valley of death. which is the sort of gap between what venture capital often fund, which is the development of the actual technology from a lab, from an idea, from an academic institution, from a laboratory. And then that's fine. But there is this bridging this gap between the point where it can be turned into actually sort of meaningful infrastructure at the scale that we need. Basically, how do you think, I mean, effectively, Aura is a... private equity fund. How is ARA going to set itself up to face challenges, that challenge of bridging the gap and hauling itself out of the valley of death? Speaker 2 (3:06) Well, thank you for having me, Martin. I would say we've already set ourselves up to bridge that valley of debt. Hence, we're founded in 2017. So we're actively living this every day. You're right. We see the scaling of technologies that supports the energy transition and the climate as being typically right side of venture capital, where you have... hopefully, a proven technology at lab scale, potentially even a pilot built. And then to the left side of traditional infrastructure, we see Death Valley or the missing, you know, that canyon in the middle between traditional venture cap and a build-out platform that is attractive to infrastructure investors as being an opportunity. And why is that? Well, if you look at... how the venture cap ecosystem looks at process technology. It is taking that pilot, which is basically a controlled environment. It is a controlled engineered environment. It is controlled non-variability of feedstock in optimal conditions that doesn't run 24-7. It doesn't have people and operators impacting it. It might not have... It might have... It would have... wouldn't have the risks that a commercial plant that needs to run all the time have. By taking and working with portfolio companies that have that infrastructure or have that technology to that point, it's the act of de-risking of how do you move from taking the learnings that's there in a controlled environment and bringing it over the other side with proper stage gate modeling. understanding the risks of how you select a concept for a plant that points space from pilot to commercial concept, looking at suboptimal conditions of a process technology to ensure that you're factoring in all of the non-pilot plant constraints that could have happened, that will happen in a commercialised plant. To us, when we cross that chasm, we see essentially plants at scale, first of a kind if it must, generating cash flow. And as we bring them plants and them concepts forward, we see even more of an opportunity to bring down the cost of them because you've built the first one. And you can see contingency in process ensuring that the first one is met. in terms of its commercial agreements. It's Speaker 1 (5:55) interesting though, because a typical way of lowering the cost of infrastructure is to drive towards higher levels of standardization, Speaker 2 (6:03) which Speaker 1 (6:04) is great. But of course, there's a bit of a contradiction about trying to standardize something which is relatively immature and emerging technology. So you sort of have to somehow find a mechanism which hasn't typically been there in the past, whereby... you look towards standardization that can drive out rollout efficiency but you allow that standardization to still not inhibit improvements in the technology between plant one and plant two and plant three and so on. Speaker 2 (6:37) It's an existential threat to any company if the first of a kind plant doesn't work. Right. You typically want to build a plant to ensure that you prove the technology at commercial scale. And when that happens, the capital starts to flood towards you if your IRRs and everything is standing up and your return is standing up. So, you know, we typically find that in first of all kind, that process contingency is OK. Right. That, you know, especially when you're looking at the engineering companies that you're using, you know. de-risking it through the proper stage gate model, being really diligent in the early stages where you can make changes with a pencil, not a sledgehammer. And once you have the first of a kind operating, you know, you're walking around the plant, you're seeing what the inefficiencies are at a process level, and you can get a little bit more bolder. But Speaker 1 (7:30) the issue there, though, is that the first of a kind plant may not, well, it almost, it could well not. produce the returns that you require, from a financial perspective. So therefore, your foresight on how many facilities, or I mean, this will depend on the size of the scale of your technology, but that you need to get before you actually realise that the return that you're looking for. So do you think overall, this is actually, overall, this problem we talked about, this sort of unique problem of having to move faster than we've ever moved before in the introduction of infrastructure, do you think is more of a a problem of out-of-date financing models and having new financing models more than it is an engineering problem? Well, Speaker 2 (8:15) no, I think it's kind of both. I think that we're moving at a pace of change with respect to the introduction of new infrastructure technology, process infrastructure technology, that the human species has never moved at. I think if you look, I do think that, you know, the financing side of it looks at how do you de-risk this platform for me enough? How do you have commercial agreements in place? How can you create standardization so returns can be higher? How can you build it cheaper, build it faster, and make sure it works? And then on the other side of it, you have the teams that are building these companies don't have an infinite amount of capital to have huge, big organizational structures to ensure that we have the right project management teams in place, the right engineering, the right engineering partners. So there's a... There can be a trade-off on both sides of it. What I have found when we look at deals and diligence companies is that the front-end definition of engineering, which obviously leads to scope, which leads to cost, which leads to potential contingency that you would need, the schedule, it's without fail. We typically look at 30 to 40 deals a year in this. It's without fail that people underestimate. the cost of what it takes to get there, the operational ramp to get the commercial offtake at a level it needs to be for who's acquiring your product, and the schedule takes longer. And also the technology, like really analyzing the technology. Front-end definition helps that. But front-end definition takes time and is the hardest capital to come by. If you have an IRR project at