The Republican National Convention has come to a close, officially naming Donald Trump the party’s nominee once again. Democrats continue to grapple with whether and how to replace President Joe Biden as their candidate — a debate many expect will come to a head this weekend. Everywhere, political uncertainty looms.
One impact of the left’s turmoil in the wake of Biden’s disappointing performance in late-June presidential debate: climate-focused funding is already being sidelined. This includes both funding from climate and clean energy donors for the Democratic party itself, and private capital for climate companies that are building projects.
Dan Reicher led the Department of Energy’s efficiency and renewables efforts during the Clinton administration, and is now a Stanford researcher and sits on the board of Clean Energy for America (formerly known as Clean Energy for Biden). He thinks the more urgent concern is whether enough money will be invested fast enough to scale essential emerging technologies, rather than the potential lack of political donations from the sector.
Those dollars, or lack thereof, will ultimately “make or break” what is needed for the energy transition, Reicher said.
“That money is taking a second hard look at this whole category of investment, as it gets harder and harder to site and develop clean energy projects, as returns get pushed down, as early-stage companies get into trouble,” he said.
That’s the largest concern at the moment, he added: “whether [private capital is] going to be raised at the massive levels they need to be raised at to really fix the problem.”
Growing concerns
One of the central concerns for investors and companies alike is the fate of the Inflation Reduction Act’s myriad tax credits under a second Trump presidency.
Those concerns are steepest for later-stage investors, worried about the potential loss of significant federal funding for infrastructure and first-of-a-kind projects. (This is an anxiety reflected in recent funding data — it’s taking nearly twice as long for climate tech companies to raise a Series B as it did just a few years ago.)
“The IRA created a boom of interest in the space and really a support system where [Office of Clean Energy Demonstration] grants are covering 50% of these first projects,” Lara Burmeister, associate director at VC firm Wollemi Capital, told the audience at a clean energy event at Stanford University this week. Wollemi focuses on growth-stage investments.
Federal funding has played a massive role in de-risking certain projects through their capital structure, she added. In the face of uncertainty over the future of that funding, investors have broadly pulled back in the last few quarters. And if the IRA were to be repealed, wiping out that source of support, that reticence would only continue.
Burmeister said investors are likely to have a harder time getting comfortable with “emerging infrastructure” investments. Companies with capex-intensive tech should therefore consider other markets.
Those are concerns voiced by early-stage climate investors as well, though in general there is less anxiety around investments in companies that are already expected to take more than a presidential term to mature.
“Our single biggest bit of feedback for [companies] has been ‘don’t count on the U.S. market unless it’s an already existing, mature sector,’” one early-stage investor told Latitude Media. That said, some industries likely to see their tax credits or regulations on the chopping block — like electric vehicle tax credits and hourly matching for green hydrogen — are well-established enough in the domestic market to survive, if not thrive, the investor added.
But for the likes of carbon capture, green steel, or green cement, the regulatory risk investors have to weigh has been greatly heightened by the present uncertainty.
“Go find a regulatory regime, like Europe, that’s already pre-baked and more conducive,” he said. “These are global problems. You may as well not make your life harder, beating your head against the wall in the U.S.”
Early-stage business as usual
There is anecdotal evidence across the sector that all types of investment are experiencing a lull. The same early-stage investor said he has already heard from one potential LP that was waiting to make a decision on investing until after the election in November.
“There’s a little bit of a pause in commitment as people try to figure out how it’s all going to shake out, and what it means to invest in the sector right now,” he said.
But in general, early-stage VCs are likelier than their later-stage counterparts to say it’s primarily business as usual for their investment strategy. Seed-stage investors generally express optimism about the fate of the IRA, though, as well as about their prospects under a Republican administration.
“The train has left the station on electrification,” said Clay Dumas, a founding partner at Lowercarbon Capital. “It’s happening, and that’s true whether or not we have the IRA — but I don’t think the IRA is going anywhere.”
These are global problems. You may as well not make your life harder, beating your head against the wall in the U.S.
Dumas, who worked for the Obama administration, pointed to Lowercarbon portfolio company Heirloom, which is in the process of building a direct air capture facility in Louisiana, funded in part by a grant from the Department of Energy. In Lowercarbon’s view, politicians in that state aren’t likely to be taking stabs at the IRA, despite its rightward political lean.
“They’re excited about [the DAC hub,] not because they’ve suddenly come to Jesus on climate, but because they realize this could be more than 1% of jobs for the whole city,” Dumas added.
Many of Lowercarbon’s portfolio companies got their start during the first Trump administration, and received funding from the federal energy research and development agency ARPA-E. The fund itself was founded in 2018, in light of the realization that the industry wouldn’t benefit from a policy boost in the Trump years — and would therefore need to rely more heavily on private capital.
“Past experience doesn’t suggest we’re going to see some dramatic rollback,” Dumas said. “But what we aren’t going to get is a doubling down on all of these policies.”
If a Democratic candidate wins in November, he added, the country “will see an epic boom in climate tech investing.” That’s in large part because a second Democratic term — be it led by President Biden or by some other candidate — avoids a lot of the uncertainty that comes with an administration change. Without that uncertainty, “a lot of dollars at the infrastructure level that may be locked up today will be unleashed,” Dumas said.
In Dumas’ view, the best way to increase the odds of a Democrat in the White House and the potential resulting green investment boom is for Joe Biden to step aside as the party’s candidate.
“It’s beyond obvious to anyone who’s got their eyes open that he should be stepping aside,” he said. “I think it’s going to happen. And if it does, all the worry about Donald Trump will be appropriate, but I don’t think he’s getting re-elected.”
Of course, not all investors are aligned on whether replacing Biden will boost investments. The early-stage investor, who agreed to speak to Latitude Media on background, said Biden’s stepping aside as nominee would cause even more uncertainty.
“I don’t think we’re looking at any particularly good outcomes; there’s trouble everywhere,” he said.
In the case of a Trump win
If Donald Trump were to be elected in November, though, Dumas said it would introduce another kind of uncertainty for climate investors.
“We don’t know which version of Donald Trump we’re gonna get,” he said: “The person who talks to CEOs and puts them at ease…or the Donald Trump who wants to dismantle the Federal Reserve.”
There’s a lot of potential for disruption across all sectors if it’s the latter version, Dumas said. But his overall optimism about climate investments doesn’t budge even under that scenario.
The cast of tech and venture figures who “bent the knee to Donald Trump” this week (including, reportedly, Andreesen Horowitz) are “actively investing in climate tech by another name,” he said. “To the extent [that] there is actually a lot of unity from the class of people in this country that are building new companies, that are innovating, that are inventing. And it doesn’t matter where on the political spectrum they fall — they’re all attracted to this problem set.”
Burmeister, whose portfolio is significantly later-stage than Dumas’, agrees that all is not lost in the case of a Trump win.
“I do have some comfort in thinking about what we have seen historically that’s taken place when the federal government does not support clean energy,” she said. “We see a lot of state-level programming that steps up, and I anticipate that we’ll see that even further.”
But November — and the certainty that a win for either party will bring the industry — remains months away. In the interim, there’s no doubt that private investments are cooling, but Aaron Dunn, a managing director at Morgan Stanley, said it can’t all be attributed to political uncertainty.
“People want an easy explanation, that it’s Washington, and they’re worried about a different administration changing IRA rules,” he said. “I think it’s just as much that the project financing got a lot more expensive, so the economics of building massive renewable footprints got a lot more expensive for everybody.”
That’s primarily because interest rates have remained so high, Dunn added, pointing to renewable energy equities, which he said have been “demolished” by the cost of funding construction projects.
Tim Chiang, an investor at Myriad Ventures, added that he doesn’t think the election’s results will change the day-to-day reality of trying to develop frontier technologies.
“A lot of these [technologies] face the same challenges that they would before the IRA…the challenges with scale up and the capital intensity of a lot of those things still exist,” he said, pointing to long-duration energy storage or hydrogen as examples.
While an administration change would provide a “meaningful increase” in risk when it comes to scaling those companies, Chiang said, “it’s not necessarily a death blow.”
