Bill Gates' climate fund mobilizes $1.5 billion to make climate tech less expensive

Today, many companies working on climate tech face a catch-22: They can’t attract enough customers to sustainable products because they cost more than environmentally damaging options. But these products—like direct air capture and sustainable aviation fuel—won’t become less expensive unless more people opt to pay the higher price right now.

Bill Gates calls that additional cost the “green premium.” In July, his climate investment group, Breakthrough Energy, created a private-public program aimed at bridging the affordability gap by combining philanthropic donations, traditional investors, and product offtake agreements—a type of long-term contract for large product purchases.

The program, named Breakthrough Energy Catalyst, has now raised $1.5 billion to fund companies in four areas of emerging climate tech—direct air capture, green hydrogen, long-duration storage, and sustainable aviation fuel.

“There are alternatives for every one of those products that are incredibly cheap, easy to finance, and there's a market for them,” Breakthrough Energy's managing director Jonah Goldman told Emerging Tech Brew. “What we need right now is the phase of commercialization where you have to basically take a capital risk, because you’re building something new.”

He hopes that Catalyst’s funds will make up about 10% of the total financing for these ambitious and expensive projects, accounting for the last-mile investment while the rest is financed traditionally.

Based on this estimate, he says the Catalyst dollars could help mitigate the risk for other investors and mobilize up to $15 billion of total capital when combined with funding from sources like private investors and government grants.

“All of our money is concessional capital,” he said, referring to investments that generate below-market financial returns. “We think that there has to be that level of concession in order to effectively mobilize the rest of that [financing].”

Catalyst aims to raise an additional $1.5 billion by the middle of 2023.

Catalyzing climate tech

Catalyst plans to take a portfolio approach, investing in multiple projects working on each of the four areas of emerging climate tech it has identified, and then determing the best way to get long-term funding for the project. (For example: Getting airlines to commit to long term contracts for sustainable aviation fuel.)

Goldman said Catalyst will focus on two metrics when deciding how to invest: How much the project will reduce the green premium and how much it will expand the market for products that permanently cut emissions, which Catalyst calls catalyzed emissions reduction.

The fund says it will only take on projects with the potential to scale at half a gigaton (which is the equivalent of about 1% of yearly greenhouse gas emissions), he said.

“Some [projects] are going to win because they’re more likely to lead to rapid cost declines, and others are going to win because they’re more likely to lead to rapid emissions declines,” Goldman said.

Catalyst put out a request for proposals for US projects in December, and one for projects in the UK and Europe in January. The fund will work alongside the US Department of Energy to deploy up to $1.5 billion in capital over the next three years, as the government allocates money from the federal infrastructure bill.

The European Commission is working with Catalyst and the European Investment Bank in a public-private partnership aimed at driving $1 billion into these climate technologies between 2022 and 2026. Over the next 10 years, Catalyst investors and partners will match the £200 million already committed by the government to clean tech projects in the UK.

From the private sector, Catalyst is partnering with corporate giants including American Airlines, Bank of America, GM, Shell, steel manufacturer ArcelorMittal, Microsoft, and State Farm. These companies have all contributed to the Catalyst fund and could eventually become customers for the climate tech products that the program backs.

“Part of the risk is that it hasn’t been done before, and that hasn’t-been-done-before risk is priced into the cost of capital,” Goldman said. “If we’re able to include [traditional investors] in these projects, then it’s going to be easier for them to evaluate the real risks in the next project and the project after that. But we just need to start building these projects.”

Microsoft-backed Energy Impact Partners is also taking a swing at the problem with its Deep Decarbonization Frontier Fund, which has raised $200 million and aims to pair utilities and oil and gas companies with clean-tech startups once their products are ready for commercialization. So far, Frontier Fund investments include battery company Form Energy, nuclear fusion startup Zap Energy Inc. It’s also reportedly working with others focused on clean hydrogen and zero-carbon cement and fertilizer.

For these new financing models to work, there will need to be government support as well, Goldman said.

“Ultimately, the biggest driver of market success, especially for something like this, is going to be policy. There’s no scenario where this gets done without deliberate policy development. And there’s some of that going on, to be sure. But we need a lot more,” he said. “The capital will be there if policy is there for it.”

Although the infrastructure bill passed in November included $7.5 billion for EV charging, and $3.5 billion for direct air-capture plants, the Biden Administration's main climate change and social policy bill—Build Back Better—has been stalled in the Senate due to objections from West Virginia Sen. Joe Manchin. Some Democrats are calling for Congress to move forward with the $555 billion for clean energy and climate provisions in the legislation, which Manchin has expressed support for in the past.

Big picture: But given that the government is unlikely to fund or facilitate every single climate solution at the pace needed, Catalyst is ultimately trying to step in and bridge the gap between the forces of capitalism and the urgency of the climate crisis.

“Clean cement doesn't build a building better than dirty cement,” Goldman said. “Capitalism normally only transitions when things are either better or cheaper. And right now, in some things, we’re actually trying to transition to things that are less effective and more expensive. And there’s just no natural mechanism to do that in a capitalist environment.”

Correction: We updated this piece Feb. 7, 2022 to clarify that Breakthrough Energy Catalyst was founded in July 2021, not January 2022. We've also updated language throughout to more accurately describe Breakthrough Energy Catalyst.