The climate tech industry stands at the forefront in the race against time to mitigate global warming. Yet, this industry faces unique challenges due to its capital-intensive nature and the scale required to meet global sustainability demands.
Businesses focused on climate technology require substantial capital to scale. While solar and wind energy farms are relatively easy to get up and running, research by McKinsey & Company shows that asset-heavy climate tech requires substantial capital during its startup phases. An example of this is removing carbon from the atmosphere.
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Capital-intensive climate tech
Why are climate tech companies more complex than traditional tech startups?
McKinsey says: “The challenges that climate tech businesses face are different – and frankly, harder – than the ones faced by high-tech companies over decades past. It all starts with capital intensity.”
Climate tech’s initial investment amounts are about five to six times larger compared to other sectors – such as financial technology (fintech) or quantum computing.
These capital-intensive technologies – which require a considerable amount of money upfront before they even start producing anything – include:
- Sustainable fuels.
- Hydrogen production.
- Green power.
- Recycling or circular economy.
Other climate tech sectors – such as carbon capture, switching to electric vehicles (EVs), and building EV infrastructure – could exceed $25 million. This is due to the astronomical costs of scaling up these technologies, which are crucial for reducing greenhouse gas emissions.
Creative financing solutions
It’s not all doom and gloom, though. McKinsey says certain financing models could propel the industry forward. Despite the significant capital required at startup, these high-risk projects offer attractive returns.
In most instances, McKinsey says investors seek opportunities where the potential rewards justify the risk.
Another benefit is the government’s role in supporting climate tech ventures since substantial incentives can reduce the risks associated with these projects. More than $2 trillion has been made available in the European Union to support the European Green Deal.
In the US, more than $500 billion will be invested in climate technologies via the 2022 US Inflation Reduction Act (IRA).
Scale up faster
Time is running out. Unfortunately, scaling up capital-intensive projects already takes time.
However, McKinsey says: “Even marathons can be run quickly, and being fast comes with clear advantages.”
These advantages include:
- Becoming ‘industry standard’: Suppliers who provide working solutions could provide essential services across other spheres of the industry.
- Cost reduction: Rapid scaling can significantly reduce overall costs. For example, the cost of lithium-ion batteries has decreased by over 85% over the last decade.
- Standardization: Standardizing hydrogen plants and similar components enables easy expansion and deployment.
- Skipping pilot stages: Effective climate tech businesses may bypass pilot stages and go straight to commercial scale.
The study says the rise of climate tech is “reminiscent of the spectacular rise of high tech over the past three decades,” despite the key challenges to finance these projects being “vastly different.”
The report concludes: “Getting enough capital and enough time to build scale will be particularly hard. But these challenges are solvable. In another decade, some companies will be capital-intensive climate tech leaders. Why not yours?”
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About the author
Cheryl has contributed to various international publications, with a fervor for data and technology. She explores the intersection of emerging tech trends with logistics, focusing on how digital innovations are reshaping industries on a global scale. When she's not dissecting the latest developments in AI-driven innovation and digital solutions, Cheryl can be found gaming, kickboxing, or navigating the novel niches of consumer gadgetry.
