A case study in the rollercoaster trajectory of clean tech

Welcome back. Last year’s record energy transition investment of more than $2tn was an important landmark. But a drill down into the details shows that, while established sectors like solar and wind energy have been surging, other more nascent ones have been sputtering.

That trend is particularly stark for the companies developing technology needed for industrial decarbonisation — a vital part of the transition puzzle that suffered a sharp fall in investment last year. Today we look at one company that illustrates some of the key problems in this space — and how they might yet be overcome.

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CLEAN TECH

A lopsided investment picture for the energy transition

If you want to understand the rollercoaster trajectory of clean tech in the past few years, the liquid fuel start-up LanzaTech provides a fine case study.

US-based LanzaTech has developed a process that uses an enzyme found in rabbit guts to turn waste gas into ethanol, which can then be converted into hydrocarbon fuel. Airlines have shown particular interest in this area, as they face new green regulations in Europe requiring that a growing share of their fuel be derived from non-fossil sources.

The last time we featured LanzaTech in this newsletter, almost exactly two years ago, it was about to go public at a valuation of $2.2bn. When I spoke with chief executive Jennifer Holmgren on Friday, its market capitalisation had fallen 94 per cent to $142mn.

What happened, and what does it tell us about the wider clean tech sector?

Part of the story is the short-lived boom in Spacs: special purpose acquisition companies listed on stock markets as investment vehicles, with the goal of finding a business to take public through a merger. Unprecedented numbers of these were floated in 2020 and 2021, before the craze subsided amid tighter regulatory scrutiny. LanzaTech’s flotation, through a merger with a Spac, came as one of the last gasps of that fad, which resulted in the listing of many — largely clean tech — companies at valuations that now look decidedly frothy.

Irrational exuberance was not the only driver of LanzaTech’s hefty valuation at its flotation, when it raised $185mn in new capital from investors including chemicals giant BASF, commodities trader Trafigura and energy companies Occidental Petroleum and Woodside Energy. At that point, sentiment towards clean tech start-ups had just received a boost from the Biden administration’s Inflation Reduction Act, which promised $369bn in fiscal support for clean energy.

Enthusiasm waned as the US government proved slower than hoped to deploy the promised funds, and as interest rates stayed stubbornly high, weighing on the growth prospects of these high-risk start-ups. It faded further as clean energy sceptic Donald Trump surged in the polls, and still more when he won re-election in November. LanzaTech’s share price has fallen 62 per cent just since election day.

Investment in the energy transition still rose in the US last year, and reached a record $2tn globally. But that investment has gone overwhelmingly towards mature, well-established industries such as wind and solar power, rather than supporting nascent technologies such as LanzaTech’s, Holmgren said. “It’s great that there’s been all this investment, but it’s a risk-averse market,” she said.

New data from analysts at BloombergNEF bears out her argument. They found that global investment in “mature” sectors such as electrified transport and renewable energy grew by 14 per cent last year. In contrast, investment in “emerging sectors”, such as alternative fuels and industrial decarbonisation, fell by nearly a quarter.

Policy uncertainty has been weighing on corporate willingness to invest in green technologies like LanzaTech’s. In particular, Holmgren is contending with a green retreat from oil and gas companies, which had shown interest in alternative fuels as a means of adapting to the energy transition. “The oil companies investing in this have all stepped back,” she said. “That’s a big deal, because they were funding a lot of the projects in the space.”

After a net loss of $110mn in the first three quarters of last year, LanzaTech has taken steps to shore up its balance sheet for what is proving a longer than expected slog for profitability.

Last month it spun out its synthetic biology operation — a core part of its business — into LanzaX, a new joint venture with New York-based venture capital firm Tharsis Capital. Over 30 employees will be moved to the spin-out, saving LanzaTech $8mn a year in annual costs.

What could drive a turnaround in its fortunes? The rise of industrial carbon pricing offers one source of hope. As the EU reduces the supply of carbon permits to heavy industry, pushing up the price, while introducing a new carbon border tariff on imports, manufacturers in Europe and beyond will have new incentives to invest in systems to capture the carbon emissions from their plants.

LanzaTech’s technology, which enables them to use these waste gases to make a marketable product, may look increasingly attractive. One of the world’s largest steelmakers, ArcelorMittal, has started shipping bargeloads of ethanol made using LanzaTech’s process from a plant in Belgium.

Aviation is still the key potential demand driver. From this year, at least 2 per cent of fuel supplied at EU airports must be “sustainable aviation fuel” — a proportion that will rise to 6 per cent by 2030 and 20 per cent by 2035. LanzaTech could benefit from a rise in SAF demand through its spin-out LanzaJet, which is building the world’s first commercial plant to turn ethanol into jet fuel. LanzaTech remains the biggest shareholder in LanzaJet, with strategic investors including aviation sector giants Airbus and British Airways.

For now, however, the latest financial figures coming from LanzaTech — and from the wider market — suggest that government policy is still insufficient to incentivise large-scale investment in the next generation of clean tech innovation. “If we’re going to compete with the 150-year-old petroleum industry, governments will have a role to play,” Holmgren said.

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