It’s been a long time since we’ve entered a calendar year with more uncertainty. Under the challenging circumstances, U.S. sustainability markets like clean energy, water, waste, food and transportation did a surprisingly good job of weathering the storm.
But what does 2021 hold in store? After all, we enter the year in the middle of a global pandemic, we still don’t know the shape of the economic recovery, and even under a new Administration and Congress the pathway to new climate and clean energy policies is unknown.
Here are my personal predictions for the year ahead, specifically for private markets in sustainability in North America. Remember, this isn’t investment advice, but just a sharing of ideas heading into the new year. And 2021 could be a big one for our industry:
1) COVID impacts on these markets will get worse before it gets better… but it WILL get better
COVID infections, hospitalizations and deaths are at a new high in the U.S., the winter months are expected to be the worst because of seasonal factors, and the new more infectious strain is already starting to spread. With many hospitals already at capacity, it’s going to be a rough next two months on many cities and states, and it would not be a surprise to see continued regional lockdowns that could affect businesses, including those in sustainability markets.
Certainly, business model that typically require in-person home and business visits (such as commercial solar and residential energy efficiency) will continue to be hindered to start the year. Some renewables project development work could hit delays. And certainly customer budgets, especially for municipal markets, will continue to be impacted.
But as Spring Lane Capital’s Christian Zabbal (my fellow co-founder) has written recently, “business travel will pick up in the fall, and, once again, I will probably be on a plane in October.” And things should gradually get easier even before then. The back half of the year (if not sooner) should see the removal of COVID-driven restrictions on business.
2) The Green New Deal will get most of the headlines, but real policy change in the U.S. will be via other laws and in the statehouses
With the Dems barely in control now of the U.S. Senate, Congress and the Presidency, there is hope that a Green New Deal type of comprehensive climate and clean energy law could be put in place. I certainly expect there to be multiple competing efforts around this topic, legislatively. A carbon tax will also be proposed, in all likelihood.
However, the GOP will still hold significant power in both houses of Congress, and the Green New Deal is tough for many in that party to accept. It has, in fact, become a lightning rod.
In speaking with federal policymakers, my sense is that many on the Dem side will be happy to see Green New Deal efforts, but that they will also look to more quietly include clean energy and climate policies in larger legislative efforts that aren’t specifically a Green New Deal or “climate” bill. Similar to how clean energy tax credit extensions and refrigerant phase-outs were included in the recent stimulus bill, refundability and other wonky but important improvements could be included in an Infrastructure bill or other regular omnibus legislation that would have good prospects for passage.
And of course, the states themselves continue to be major drivers of market shifts in favor of sustainability solutions. The recent Massachusetts climate change bill is yet another example of big legislation in statehouses that are moving markets. These efforts will continue in other states as well.
3) With lots of capital coming into the sustainability markets, oil & gas private equity will pivot to renewables and batteries
It’s clear that large pension plans, sovereign wealth funds and endowments are eager to put large amounts of capital at work in sustainability, and away from fossil fuels.
The same oil & gas private equity firms that put $125 billion into the shale oil boom are now unsurprisingly listening to their backers, and are looking to shift into renewables. You’re going to see a lot of new “energy transition funds” launched by these shops.
What should be interesting is that these experienced private equity investors are used to investing into a broad array of business and project models, from upstream exploration to pipelines to service providers. This should accelerate the maturation of the renewables market away from just venture capital and utility-scale project development, and encourage better capitalization and build-out of other portions of the renewables value chains as well.
4) The SPAC attack won’t slow down quickly
2020 was definitely the year of the clean energy and transportation SPAC. Once entrepreneurs and their backers — and investment bankers — saw that the SPAC pathway was available for the right stories, the floodgates opened.
It doesn’t look like it will be slowing down anytime soon.
But I do expect it to shift a bit. There are only so many pre-revenue electric vehicle OEMs available as acquisition targets, after all. I believe in 2021 we’ll see more broadening of the SPAC target sheets to include other sectors like water and waste.
5) Canada will gain more attention among sustainability investors
The U.S. has gotten all the attention over the past few months for some reason. It’s a real mystery why… But in the meantime, Canada has been making meaningful moves around sustainability.
The Canada Infrastructure Bank has been established, and along with it CAN$6 billion to put to work in areas like EV charging, renewables, and energy efficiency retrofits. We believe this is going to drive entrepreneur and project developer interest. In addition, I’m already seeing how British Columbia’s tightened low-carbon fuel standard policy is driving market activity, and I’m hearing both that the new provincial government is going to lead to even more climate-friendly policies there, and also that there are expectations of other provinces following suit.
I expect this policy momentum up north to carry over into even more investor activity in 2021.
6) 2021 will be a big year for investments in hydrogen-related platforms
I, and other long-time investors in the sustainability sector, have had a healthy skepticism around hydrogen as an investment area. While it’s been described (because of potential transportation applications) as a fuel, it’s always seemed more like expensive and specialized energy storage. More like a battery, in that you have to expend energy to produce the hydrogen, and then you hope to efficiently use the energy for electricity production (typically, via fuel cells) on the back end. I’ve long thought of it as just a liquid, awkward, more expensive battery that is years away from being relevant at scale.
But it’s clear that there are some large “niche” transportation applications where hydrogen can be a better fit than batteries, and also that there are some bridgehead market opportunities in existing industrial markets for hydrogen. What’s also been clear for a while is that the large oil & gas giants, when casting about for new green business opportunities, are going to feel affinity for hydrogen. It currently uses fossil fuels as an input, and is itself used like a fuel, so it seems like a good fit for their existing business models.
Thus, it wasn’t a surprise that in 2020 we saw a big uptick in activity by these large players around the hydrogen market, and we also saw a lot of retail investor interest in hydrogen stories. This may continue in 2021, and the year has already started out strong in that regard.
But 2021 could also mark a shift of emphasis within the hydrogen market, as many customers and policymakers begin to demand “blue” and “green” hydrogen options. This could add more demand for dedicated renewables projects. It will be a fascinating sector to watch in 2021.
7) Continued corporate focus on shorter, sustainable and more resilient supply chains could drive new investment opportunities for “on-site projects”
Between COVID-19, major storms, and regional blackouts, for many corporations 2020 was a big reminder that globalization has left many of them vulnerable to supply chain disruptions. This is just one reason why many CFOs are now looking to shorten their supply chains and get more control over them where they can.
Along with more of an emphasis on sustainability in the supply chain, this dynamic could continue to push the trend of decentralized and corporate-hosted infrastructure (think: microgrids for reliable power, on-site water recycling, and on-site chemical production like hydrogen as discussed above). For many entrepreneurs and project developers, this would mean a need to build and deploy intelligent, remotely-managed such systems. And that in turn would mean a need for third-party project capital. COVID-19 effects should start to fade over the course of 2021, but the business lessons will continue to drive investment decisions for years to come.
Later this week, I’ll provide another seven predictions on topics including clean energy venture capital trends, other sustainability asset categories within private markets, and one obvious investment opportunity that I don’t see anyone talking about yet.
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