Scaling the Innovation in the Energy sector

This article is just a personal opinion based on my own experiences along more than 20 years working in several top class technological companies, and now from Zonda having the chance to look at the big picture including also the venture capital and startups world. So let’s start from the beginning. It's worth clarifying that I will talk about Open Innovation specifically for the energy sector, that is what I know and what I did for at least more than two decades of my life.

Putting the Energy in context

The development of technology for the energy sector, it was and will be tightly linked to the energy needs of humanity and the available resources. One clear example is the steam machine introduced by Thomas Newcomen in 1712 and further developed by James Watt, was early adopted to drain mines up to the wider adoption in the steam locomotive industry, and this technology was pushed forward by the high power density trapped in the coal, one of the first fossil fuels adopted. In that line, Rudolf Diesel developed together with MAN in Germany the first diesel engine using palm oil around 1893, maybe the first application of biofuels in history. Many years later, the emergence of natural gas opened the door for the wider utilization of more efficient thermal machines like the gas turbine (that took hundreds of years of development) with major application in air transportation and power generation. All these technologies were developed mainly with their operational and economic characteristics in mind, and it was not until later ‘90s that the efficiency and recently the emissions, raised the bar for the new technologies.

"With a better understanding about the Climate Change, the results of the IPCC researches in the early 90’s, the multilateral agreements like Kyoto (1992) and Paris (2015) and many other actions that brought to light the problem we are facing with the greenhouse gasses (GHGs) and the impact in the atmosphere of CO2, Methane and N2O, the topic of the decarbonization and the need to curve them to avoid the annual average temperature increase above 1,5-2oC, started the so-called Energy Transition. This is, the transition from a heavy based fossil fuels energy matrix to a more sustainable and carbon neutral one, with the hope we don’t destroy the planet in the process".

On the other hand, the Renewable Energy is not new, but recently its adoption started to become wider and not only because of some subsidies, but also because of its intrinsic advantages versus other technologies that years before were the kings of the scene. However, the current situation, the risk of a climate crisis, the cost of certain fuels and goods, as well as how the geopolitical scene is changing with the emergence of new players like the Hydrogen or the Nuclear Fusion, is making the current scenario the most complex situation of all times.?

Do we need new Technology?

Yes, some can argue that all the solutions are available and we just need to apply them, and that is partially true. I mean partially, because yes, we have technology available today to create green hydrogen, synthetic fuels, capture CO2 emissions and more, but most of the solutions available today are extremely expensive and quite inefficient, so yes we can apply them but will have a high cost (aka green premium). In the short term, I agree we need to apply what we have on hand, and Governments are making a big effort to level the field and facilitate this path, like the EU’s mandates and Green Deal, or USA’s Inflation Reduction Act (IRA).

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These new technology will came in the form of better and more efficient ways to create, transport and use energy, new technology that allows some solutions like Hydrogen or Energy Storage to have a bigger role. We also need more technology because the scenario is complex, and there are certain industries that produce raw materials and goods we use every day (and we will use for the next 100 years at least) that are carbon intensive, and cannot be change easily, at least in the short-medium term. For such industries like Cement, Steel, Petrochemical and others, the so-called “difficult to abate”, we need Carbon Management technologies that allow them to keep producing materials and goods at reasonable prices without GHGs emissions, and today that is not easy.

In many years working in the Energy Transition and Decarbonization, and for sure the last three years at Baker Hughes, I saw several companies trying to make all fit together, the production, the prices, the cost, the emissions, the regulations, the profit and certainty the pressure in caliper that shareholders do asking for carbon neutrality while increasing the profit. I helped many companies and corporations to evaluate different technologies, to run several scenarios, and to engineer complex financing structures trying to make this happen. Is not easy, and one of the reasons why it is so hard to walk the talk at the Energy Transition and Decarbonization is the lack of technology, the absence of multiple solutions to facilitate this carbon neutral future.

So, How do we create new Technology then?

With this high level situation, now we can talk about Innovation. Innovation can come in different flavors and from different backgrounds, nevertheless when we talk about energy most of the time these innovations come from the science and deep technology sectors, where the next frontier of solutions is crafted. Many decades ago, in a similar way that happened with the microchip Corporations like Texas Instrument or IBM and the surge of Silicon Valley Startups, the technology for the energy sector was almost entirely developed inside big corporations like General Electric, Westinghouse, Siemens, Shell, Chevron and many others. These internal R&D departments used to have hundreds of engineers and scientists around the world, looking after the next big tech stuff that can deliver energy to the world. I cannot identify any specific breaking point, maybe the globalization and digitalization era opened a door for these new group of engineers, scientists and entrepreneurs coming from top universities like MIT, CalTech or ETH that were no longer portending a job on those R&D departments, but creating a deep tech startup that leaves a mark in the world while making them very wealthy.

The energy Corporations, in some cases copying the strategic applied in the microchip and software sector, started to implement the concept of the Open Innovation, that basically means opening the doors of the internal R&D center to the world, collaborating with different players in order to foster, accelerate and support the creation of new technology, now not only with their own teams but also with many other players spread around the world. The idea sounds great in any way you look at it, but is complex to implement and execute. First of all, the Corporations tend to be slow and biased when taking decisions and making moves, and this collides head on with the flexibility and speed of the Startup world.

Developing a top Energy and Climate Open Innovation Framework

After some setbacks and stumbles, some Corporations understood that the way to make this happen is including the Startups in a more soft and subtle way, using a Corporate Venturing arm, that is basically a Venture Capital type of structure but tailored for coexists within a Corporation, and this also brings some biases and limitations. Long story short, the most successful energy Corporations in the world have now, four very defined fronts of actions in terms of Open Innovation:

1. A smaller, more efficient and highly targeted R&D department, strongly linked to their Engineering, Sales and Marketing areas working mostly in the incremental innovation of existing technologies (incremental innovation is when you increase small steps of something that already exists, in contracts with disruptive innovation that is when you create something totally different from scratch. Think about LEGO, the maximum king of incremental innovation).
2. A good link and bidirectional relationship with top Universities and research centers that provide mostly technology transfer on specific topics, solve specific problems, or provide applied science that will be used later on in new technology. This is a quite virtuous cycle because not only provides technology to the Corporations, but also helps these Corporations to identify and attract young talent in a very practical and efficient way.?
3. A Corporate Venture Capital (CVC) in charge of appointing very precise and targeted investments in Startups that make sense for the Corporation not only in terms of new technology but also in terms of some specific and well defined strategic targets. Strategic targets could be for example, having visibility over a segment of customers that the Corporation has no access to, or understanding some technological trends happening in different corners of the globe (this was critical for the Digitalization for example) or testing a new technology or business model in a faster way. Some more experienced CVCs can also take advantage of specific structures and strategies such as Venture Customer, Venture Debt or Fund of Funds.
4. Last but not least, different channels to feed and foster new ideas in the form of Startups, that later on, the Corporations can invest on, make commercial agreements or eventually if make sense for everyone, acquire them. This portion happens in different ways, some Corporations like ENEL have their own Incubators or accelerators, others like Shell are quite active with Hackathons and others just promote prizes or Startup Competitions in certain Universities. All of those are very valuable to ensure the ideas move forward.

Upgrading the Open Innovation Framework for 2023 and beyond

The path we designed with my partner Mariano to upgrade the Open Innovation Frameworks is exactly the main reason we founded Zonda, our deep tech VC and Corporate partner firm. The way I see the Corporations can close the gap and fully develop an Open Innovation framework is adding a fifth element to the strategy we described above, and this is a well designed and controlled collaboration with highly technical and vertically oriented Venture Capital firms, that can complete the picture in order to expand the frontiers of development beyond the business as usual. One important point to highlight is that Corporations in the past decades, had a bad time putting several millions of dollars into Venture Capital firms that brought little to nothing value to them. This has an explanation, as at the time when Corporations dropped that capital into typical VC firms, used what they had available that were mostly what is called Agnostic VCs.

“For soft tech an agnostic VC could still make sense (like eCommerce, EdTech or PropTech) but when we talk about deep technology like BioTech, ClimateTech or HealthTech, agnostic VCs cannot perform as well as vertically oriented and specific ones can, simply because you must understand deeply what are you doing as well as having the right background and network to make the Startups thrive and growth, otherwise is just wasted money”

Of course, when pioneer Corporations tried these leaps of faith into the VC world a few decades ago, there was almost no vertically oriented and experienced VC firm in the world working in the energy sector. Now this situation has changed, and there are several very good actors and serious players in the global VC ecosystem that can actually find the right Startups, support them and help them to develop in the right way working seamlessly and frictionlessly with the CVCs and Corporations.

Of course, all these processes entail lessons, falls and rises, very good developments and some frustrating experiences. These days the Energy and Climate sector is living its best moment, and the time is just right for the Corporations that truly embrace the Open Innovation, to move one step further and expand the frontiers of their Innovation including the right Venture Capital partners in any region, that can help bringing the most innovative ideas and solutions, partnering and collaborating with the other four legs of the framework while keeping the Corporations with levels of control and visibility that make them comfortable. What is sure, is that we need more technology and more solutions to ensure the access of sustainable and more affordable energy, we need more Climate Tech solutions to ensure we can decarbonize our world, and that context is just perfect to make it happen. It is not a question of doing it or not, it is when it will happen, and the sooner the better!

About Zonda: Zonda Capital is the first of its kind, deep technology Venture Capital and Corporate Partner for the Energy and Climate sectors in Latin America. More at www.zonda.capital ?