The Case Against FOAK: Why you should stop calling your project a first-of-a-kind

By Ben Cader-Beutel

At New Energy Risk, we advise, evaluate, and insure projects being developed by climate tech innovators. And as the sector approaches a pivotal moment, with enhanced geothermal, third-generation biofuels and electrolytic hydrogen nearing project readiness, climate tech appears to be close to putting its awkward teenage years in the rear-view mirror.

There is a well weathered acronym that has taken on a new lease of life of late and is fast becoming lexicalized in innovation circles: “FOAK” (for “first-of-a-kind”). In vogue though it is, I believe the term is standing in its own way. Rather than fostering the deployment of novel technology into much needed infrastructure projects, FOAK has become the proverbial caution tape to project investors and lenders.

The Adoption of FOAK

We’ve seen a recent surge in sophisticated and well-funded climate hard-tech companies emerging from the low-interest rate COVID period. These firms are now transitioning from scrappy startups to fully-fledged developers, licensors, and equipment manufacturers (or a combination of all three). They are entering their deployment phase and encountering an underdeveloped ecosystem in comparison to their R&D and demonstration phases, which were supported by accelerators, a vast VC network, and government grant programs.

A key issue is the finance world’s inability to keep up with technology innovation, especially at the intersection of development and project finance. Early project returns do not match the significant capital outlay and perceived risk – at least in the eyes of conventional growth capital. And the industry has learned, through Clean Tech 1.0 that venture capital and SPACs are not good at building successful hardware companies alone.

“FOAK” is used by innovators and early-stage VCs to describe the project that takes the technology across the ‘valley of death’, through the ‘missing middle’. Much like catching the golden snitch, financing for such a project is unpredictable and elusive. While building the first commercial project is an important milestone in a hard tech startup’s journey and the beginning of sustainable returns for shareholders, it seems to me that the FOAK label has become more of a red flag to project investors than it is a signal for imminent growth.

FOAK’s Dilemma

I recently participated in an industry roundtable for a group of “FOAK EPCs”, “FOAK investors”, and “FOAK insurers”. The first agenda item was to define the term. Is it based on a bill of materials? The sponsor’s balance sheet? Feedstock source? As expected, everyone in the room had a different answer. This lack of consensus complicates the conversation; we can’t even agree on the pronunciation, for FOAK’s sake.

By my personal definition, a FOAK meets two criteria:

1. The project includes any new technology or new integration of technology (even if the unit operations are all TRL-9 individually).
2. The project generates enough cash to offer a positive return on investment.

But others in the ecosystem choose to include new geography, a new tax incentive, or a new offtake structure. Once you get broad enough, every project becomes a FOAK.

Reality is much more nuanced than any definition could capture. Projects are evaluated by investors and lenders individually and according to a robust set of criteria. Highlighting an aspect of project’s novelty limits its ability to attract such funding, even if it has proper mitigations in place for each of its risks.

FOAK is a large bucket, which tends to obfuscate important differences in technology and associated risk, calling out the ‘hair’ rather than the value. For example, flow batteries and cellulosic ethanol are fundamentally different projects, yet both are categorized similarly when seeking project capital. This alienates investors who may specialize in specific technologies or market segments and may in fact be able to understand the risk.

Beyond FOAK

Today’s terminology around project deployment calls out shiny novelty rather than value. The entire innovation ecosystem – startups, capital, and government – has a role to play in deploying new technologies, and the future of climate tech (and our planet) depends on making projects appeal to investors motivated by reliable returns.

So, what’s the solution? Shifting away from the FOAK terminology towards a more nuanced presentation of the spectrum of risk and respective mitigations could position projects to access broader pools of capital. With the proper tools in place, such as hybrid equity enabling investors to tap into future upside (see Twelve and Infinium’s recent raises), or project-centered risk mitigation tools such as NER’s performance insurance solutions, projects can abandon today’s unhelpful platitudes in favor of a carefully constructed scaleup strategy.

by Brian Mahy

How Often Do Batteries Catch Fire?

By Shawn Lee

How often do batteries catch fire? There is a lot to this seemingly simple question. Battery systems can cost 100s of millions of dollars. Between 2017 and 2019, South Korea had 23 battery fires across multiple battery providers. LG Chem, one of the world’s premier battery manufacturers, lost $124M on its energy storage business in the first quarter of 2019 after seven consecutive quarters of profits. An Energy Ministry inquiry suspended five of the country’s 1,490 energy storage facilities during its audit, blaming poor installation quality, incomplete electrical shock protection, and a lack of overall controls for integrated systems. [1]

Lithium-ion batteries, the most common type, store energy by moving lithium ions between an anode comprising a high energy state material (generally some sort of neutral graphite) and a cathode comprising a low energy holding material (some kind of oxide). These two materials are kept electrically separated, which forces the electrons to flow in an outside circuit, where these electrons ultimately power anything from a lightbulb to a full electric car.

If for, whatever reason, the battery forms an internal electrical connection between the anode and the cathode, the battery will discharge all its energy through this short circuit in an uncontrolled fashion. This internal short circuit can be created by degradation due to the Battery Management System repeatedly discharging the battery too quickly or operating it out of its temperature range, or due to some sort of manufacturing fault. Either way, once the battery creates an internal short, it discharges a bunch of energy very quickly, and generates enough heat to boil liquid hydrocarbon electrolyte that separates the two materials (which incidentally is normally carcinogenic).

In most properly designed battery cells, the cell will vent the hydrocarbon vapor through pressure relief points. If the cell isn’t properly designed, the battery cell could burst in an unexpected way. In both cases, there’s now a hot hydrocarbon vapor mixing with atmospheric oxygen, which is perfectly capable of conflagrating and overheating the nearest intact battery cell and causing it to burn as well.

Very quickly, the effect can be a runaway fire burning from unit to unit. Developers can mitigate this by installing the batteries outdoors, using active fire suppression systems, separating clusters of battery units in space, and actively monitoring key parts of the battery and proactively taking parts offline and replacing them before they cause a fire.

When a battery fire happens, it’s a very high-profile event. The fire is typically very hot, can burn for longer than other kinds of fires, and the event can erode public support for new battery systems because they’re perceived as less well understood. Of course, no power technology is immune from fire.

The good news, however, is that as an industry, we are no longer really in the wild west of battery fires. The frequency of large battery fires is easy to find, since they almost always make their way into the news. Fire data reported by the Electric Power Research Institute [2] combined with data on installed batteries in the United States from the Energy Information Administration, gives us a true sense of the yearly rate of failures. Large changes to the failure rate year on year are indicative of an immature industry still working out its kinks.

The battery industry reflected an immature industry before 2014. However, since then, US BESS failure rates have been relatively consistent, showing that even though we’ve yet to settle on a consensus on fire codes, internationally or within the United States, the battery industry overall has settled into a consistent fire rate. Of course, when they do happen, fires can be catastrophic and design practices play a part in limiting both the occurrence of fires, and their consequences.

At NER, we use an understanding of battery failure rates, and a technical understanding of individual root causes and mitigations, to support battery projects with warranty backstops and Battery Dispatch Insurance products which can supplement standard property covers and help batteries deploy at scale.

Sources:

[1] https://www.spglobal.com/marketintelligence/en/news-insights/trending/bVy2KGU3Opsle5Vv8QG0-Q2

[2] https://www.pv-magazine-australia.com/2021/09/28/australias-biggest-battery-cleared-for-testing-following-fire-fallout/

by Brian Mahy

Interview: Sue Coates, Trident Public Risk Solutions

by Brian Mahy

The US Treasury Releases Guidance on SAF Emissions Rates, but How Many Questions Does it Answer?

By Krista Sutton – Principal Process Engineer

Last week, the Treasury released their long-anticipated guidance [1] on emissions rate calculations for the 40B sustainable aviation fuel (SAF) tax credit established by the Inflation Reduction Act (IRA), which is likely to serve as a model for the 45Z clean fuel tax credits with regards to SAF (although such guidance has not been issued, or equivalency explicitly indicated). Let’s dive in…

What is at stake?

Under Section 40B, the IRA established a tax credit value of $1.25 per gallon of SAF, meaning aviation fuel with an emissions rate at least 50% lower than fossil jet fuel. The act includes an adder of 1¢ per additional percentage-point reduction beyond 50%, up to a maximum of $1.75 per gallon. Section 40B makes tax credits available through the end of 2024.

Under Section 45Z, also newly created by the IRA and which makes tax credit available from 2025 through 2027, credit value is calculated as an emissions factor multiplied by an applicable amount, which for SAF is $1.75 per gallon. The emissions factor is calculated as follows, meaning that tax credit value accrues from a baseline emissions rate of 50 kg_CO2e per MMBTU.

The SAF emissions are calculated through a lifecycle analysis (LCA) methodology – a topic of much debate. At the heart of the issue is whether corn-based ethanol-to-jet production and soybean oil-to-jet production will qualify for the tax credit. The guidance around LCA methodology will ultimately determine how competitive 13.8 billion gallons a year of US ethanol production [2] would be with respect to other feedstocks for the production of SAF.

Why is there an argument?

A debate has been raging since the passage of the IRA over which lifecycle analysis modeling methodologies should be accepted to estimate SAF emissions. Sections 40B and 45Z specifically call out the International Civil Aviation Organization (ICAO) Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) methodology:

“the most recent Carbon Offsetting and Reduction Scheme for International Aviation which has been adopted by the International Civil Aviation Organization with the agreement of the United States, or…”

 but leaves room for debate in the following paragraph:

“any similar methodology which satisfies the criteria under section 211(o)(1)(H) of the Clean Air Act (42 U.S.C. 7545(o)(1)(H)), as in effect on the date of enactment of this section.”

On one side of the debate, the biofuels industry and airlines have argued for the inclusion of the ANL-GREET  (Argonne National Labs (ANL) Greenhouse Gas, Regulated Emissions, and Energy Use in Transportation) model which is used as the basis for lifecycle analysis for all the other low carbon fuels eligible for the 45Z tax credits. These stakeholders cite its more frequent update cycle and more recent datasets containing the most up-to-date advances in the industry. [3]

On the other side, environmental groups have argued that the GREET model is not as stringent in accounting for emissions resulting from indirect land use change (ILUC) as the ICAO CORSIA methodology, and that the use of the ANL-GREET model would grossly undercount emissions from a land use transition to grow crops for SAF production. [4]

What is the difference between the models?

Estimates for direct emissions from these models are actually quite similar, as a version of GREET was used to derive the default LCA factors by the ICAO. However, there are key differences related to the modeling of input assumptions for indirect emissions between the ANL-GREET and ICAO CORSIA methods; specifically:

• How the two models develop the ILUC factors;
• The allowed land-use basis;
• The data referenced for each type of land use conversion; and,
• Whether they give credit for sustainable farming practices via soil organic carbon (SOC) modeling.

These assumptions can make a large difference in the final emissions numbers according to the International Council of Clean Transportation:

“ILUC modeling cited in some configurations of the default GREET model estimates land-use emissions for corn ethanol and soy that are only 25% – 33% of the total emissions estimated through public regulatory assessments by the U.S. Environmental Protection Agency and the California Air Resources Board” [5]

So, what did the guidance say?

A likely less contentious part of the guidance establishes a safe harbor for fuels that qualify for D4, D5, D3, or D7 Renewable Identification Numbers (RINs) under the incumbent renewable fuels standard (RFS) administered by the EPA. Fuels meeting D4 or D5 certification will be automatically considered to have a 50% emissions reduction and fuels meeting D3 or D7 certification will be considered to have a 60% emission reduction for the purposes of 40B credits.

On the modeling side, the guidance, at least on the surface, has handed a win to the airlines and biofuels industries, and particularly ethanol producers that are transitioning to SAF production, by authorizing a GREET-based model as an acceptable alternative for determining the life cycle GHG emissions of SAF.  In reality, they have kicked the can down the road as the guidance references a new GREET model being developed to meet the criteria of 40B that is planned to be released on March 1^st, 2024. The updated model could incorporate more stringent indirect land-use change factors. This would effectively authorize the use of the GREET model (what the industry wants) and implement stricter ILUC factors (what environmental groups want). For now, it leaves the door open for a wider pool of crop-based SAF to qualify for 40B credits so we can be sure that the debate will continue, and we will see which way the pendulum swings on March 1^st, 2024.

Sources:

[1] https://home.treasury.gov/news/press-releases/jy1998

[2] https://www.ers.usda.gov/data-products/u-s-bioenergy-statistics/#:~:text=In%202022%2C%20U.S.%20ethanol%20production,totaled%20about%203.1%20billion%20gallons.

[3] https://advancedbiofuelsusa.info/saf-modeling-debate-isn-t-really-about-greet-vs-icao-it-s-about-current-data-vs-old-data

[4] https://theicct.org/wp-content/uploads/2023/09/ID-16-Briefing-letter-v3.pdf

[5] https://theicct.org/long-shadow-model-inputs-could-dilute-ambition-of-saf-grand-challenge-nov23/

by Brian Mahy