Episode 197: Funding the Clean Energy Transition with Monolith's Rob Hanson & the US Department of Energy's Jigar Shah
Episode 197: Funding the Clean Energy Transition with Monolith's Rob Hanson & the US Department of Energy's Jigar Shah
Today's guests are Rob Hanson, CEO & Co-Founder of Monolith, and Jigar Shah, Director of the Loan Programs Office, at U.S. Department of Energy. Rob provides us with an overview of Monolith, key phases of the company thus far, and the motivations for seeking public funding. Jigar explains his role at the LPO, why traditional VCs aren't built for early-stage climatetech, and how the private and public sectors can address climate change. We also discuss the government's role in the carbon-free future, how to re-align incentives for traditional funders, and advice Rob and Jigar have for entrepreneurs in the climate space. This is a great episode and a must-listen for anyone at the intersection of climate and finance.
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For starters, just to give listeners context, Rob, talk a bit about Monolith and what you do, and then Jigar, do the same with the DOE and the Loan Program Office.
Rob Hanson: So Monolith is the clean hydrogen and clean materials company, and we have this really unique process it's called methane pyrolysis. And what it does is leverages this unique feature of methane, which is if you heat methane up to really high temperatures without any oxygen around it splits into solid carbon and hydrogen. And it does two things for you. One, you've just made clean hydrogen because the carbon is coming out as a solid, not carbon dioxide. And then number two, and this is unique about our technology. If you do it right, that solid carbon comes out as this petrochemical called carbon black. And it goes and displaces what's otherwise made in a very dirty process. What's it essentially an essential product that goes into things like tires and batteries and plastics and, and inks.
Jigar Shah: On my side, the department of energy's loan programs office was conceived of in the 2005 Energy Policy Act by Senator Pete V. Domenici. And it was really funded for the first time in, at scale in 2009 during the Aero stimulus bill under President Obama. And we put about 35 billion in loans out the door during that 2009 to 2011 time period. And then it was largely dormant since then we did a follow-on loan with, for the Vogtle nuclear plant and a few other things. But at the core, the loan programs office has the ability to step in and be the first commercial banker for all of these technologies. That's what the original goal was in 2005. There's a recognition that yes, some of these technologies require people to lean in, but also that there's a lot of dynamics at commercial banks that cause people not to lean in and pay attention, right?
And largely it's due to the fact that, if you could make your numbers with standard solar and wind projects, why would you bother understanding methane pyrolysis and writing four white papers for your investment committee and doing all the hard work that it would take to do a first of a kind plant in Hallam, Nebraska. So a lot of folks just can't get the attention. I felt the same way when I was at SunEdison in 2003, you know, starting power purchase agreements for solar, which today are obvious. Everyone thought it was too risky and we ended up having to work with the speculations group at Goldman Sachs for the first financings.
And so that's the goal of the loan programs office is to provide that liquidity function to these technologies that frankly have been around for a while. Rob's technology has been around for 30 years, but in terms of actually a commercial functioning, first-of-its-kind plant, it really hasn't achieved that until the most recently Olive Creek one that Rob's scaling up and then, of course, this new, larger plant once he has it fully constructed.
Rob, if I recall from the earliest days and correct me if I'm wrong, but you essentially skipped the venture capital path. And even of the early-stage equity, you brought in these big Private Equity firms and they stayed with you through the ride and had long time horizons, deep pockets, and patience. Can you talk a bit about the key phases and stages for Monolith? Also just reflect on if you were doing the same thing today, whether those would be the same or whether they might be different given both what you learned and the current state of the market relative to when you came in, in 2012.
Rob Hanson: I know Jigar will recall, you probably do too Jason, but in 2012, particularly the Silicon Valley venture market still had a raging headache/hangover from Cleantech 1.0, so it was not a market at that time like it is today where, you know, a couple of entrepreneurs with the clever climate tech idea could go and raise a seed or a series A. There was no market. So what we were able to do is we were able to convince some big private equity, energy investors to basically go earlier and to do more venture type investing but with the promise of a lot of scale down the road and a risk profile that would kind of fit theirs in the future. So that was the first kind of chunk of capital, which let us really prove out the business model, acquire technology, prove it at pilot scale and then move into more traditional private equity investing with no longer binary risks at the table, but scale and the potential to have a lot of scale.
So it wasn't a lot of private equity groups doing it back then, but there was a couple Warburg Pincus and AZMO capital management. I think there are leaders in the space because of it, and now that you're seeing a lot more climate tech investing and especially that growth stage of climate tech investing they're really well-positioned to be able to do that. So that was kind of the first stage. And then we brought in some strategics. So recently we added NextEra SK and Mitsubishi Heavy to the capital table, as well as another private equity to group Cornell Capital, and a few others.
That was really about now tooling the company, not just purely the financial side, but also the operation side. So that wasn't just capital. It was also capital in each case with someone that's got some intelligence and kinda history in this space NextEra biggest wood and solar producer, which is our number one input in the case of SK and Mitsubishi, kind of leading companies from two of the countries that are really leaning forward on hydrogen. And, and also in the case of Mitsubishi Heavy, really strong technology development company.
Jigar Shah: For what it's worth, that's sort of how I built SunEdison and Generate Capital too, right? We never used venture capital and for good reason, right? Because venture capital generally has shorter time horizons where you're investing in 15 year exits with five year money and it causes weird, wonky board dynamics and all sorts of other issues. So there's certainly a role for venture capital to play. And I also think that venture capital has done a good job of some of the newer funds actually have longer mandates than five years now, but for infrastructure, I think it's really hard unless you're basically planning on stacking after five years and providing those venture investors and exits so that you can recycle their capital back out and bring in long term investors then it's highly risky and causes a lot more friction, I think between the founders and the capital providers.
Now, Jigar, before we talk about the work of the LPO, since you've done so many different things in and around climate over the course of your career, maybe talk a bit about what it is that motivated you to end up at the LPO in the first place and how you thought about it relative to the other path that you could have gone, including just staying at Generate?
Jigar Shah: Well, I definitely would've loved to stay at Generate. I built that company so that I could have retired there. I got certainly pulled away by the Loan Programs Office because I thought that I could have a bigger impact. I think in general when you think about my mindset in 2003, when I started SunEdison, you're talking about an academic Simon Erbach who had written extensively papers around how to use the capital asset pricing model, which had been around since the 70s around pricing energy deals, right?
And in the 90s LS power, AEs, Calpine, all these folks who were doing PURPA deals, Public Utilities Reform Policy Act, gosh, I'll probably mess that up. They were doing PPAs for coal plants, right? And their cost of capital for that plus peaker plants for natural gas and other things were always the same basically 10, 12, 13% interest and rates of return. And then you've got leverage and all these other things. And when I was going in the marketplace for solar, people were like, "Great, we have a model for that," right?
You get 20% plus returns on the equity and you get 5% interest debt and all this other stuff is going to be great. And I showed them all these white papers from the capital asset pricing model. And they said, "What are you talking about? Like you're gonna pay exactly what, you know, everybody else pays." And I was like, "But I don't have fuel price risk. Like we have very little maintenance. Like I don't know why we would be priced the same way." Right? And there was nobody to go to. I went to ex DOE folks from the Clinton administration who had set up private equity funds or whatever.
And they all said to me, "Jigar solar's too risky." This is 2003. So now when I'm sitting in 2014 setting up Generate Capital, I'm thinking like, "Where do all the people that looked like me in 2003 go, who is supposed to actually hear their pitch?" There is nobody that's supposed to hear their pitch because remember, most people want to hear, you're gonna make 'em a 100X return or a 10X return on the venture capital side, right?
And when you think about infrastructure investing, if I make you a 2X return over 10 years, that's phenomenal, phenomenal. Who are you going to pitch a 2X return over 10 years, and get them excited about it. Nobody. And then think about like, so when Generate Capital came in and was helping all these entrepreneurs make a 2X, maybe, you know, we got greedy sometimes maybes a 3X over 10 years. That we were asking for. We then turned the debt markets that Generate.
Remember we had $200 million of cash sitting in the bank going to the debt markets. So the debt markets were like, “what are you talking about Jigar, battery storage, no way are we gonna do battery storage”. This is 2013, by the way. Right And now people are doing merchant deals in Texas with ERCOT and getting like four and a half percent cost capital. Right. But when we were doing it in 2013, 2014, 2015, we had an offtake agreement through stem right at with Southern California, Edison. Like they got a deal from Macquarie. You don't get a deal from Macquarie, unless your stuff is misunderstood. Macquarie's the one you go to if like TD Bank, Crestmark Huntington, Live Oak like all those easier commercial banks won't do a deal with you. You go to Macquarie. So when I got the chance to go to Loan Programs Office and revitalize it, I jumped at it because I was like, "We're not going to solve climate change. There's no way to get to 2035 and 2050 unless you solve this part of the supply chain of capital." It clearly isn't something that's solved today.
Rob Hanson: I don't think you could have picked someone with better experience to lead LPO than Jigar. When I heard that you got nominated, I mean, we had an application in process and like I was high fiving, my CFO [laughing] being like, we got the right. And it's because one, you built a company in this space and then two, it generate you kinda fit into that, into that gap in the market. And I couldn't agree more like we're going to need to deploy hundreds of billions, maybe trillions of dollars of infrastructure each year to actually rebuild the world's kind of energy infrastructure.
And that's going to require companies to figure out how to actually pull off these asset-level financings. And I just think there are not enough people really talking about this in the climate space. And so it's, it's exciting for us to be kind of the first with kind of Jigars new leadership at the LPO, but we can't be the last right? I think the last time I was on your podcast, Jason, and saying like, "We need a hundred or a thousand modelist with over the next 10 years to be getting through these last valleys of death and, and sitting out there like the success stories from wind and solar that are knocking out multiple billion-dollar assets each year.
We got a shot at it now with Jigar and the team he's pulled together maybe we can get there. Maybe we can start doing five, 10 of these types of first-of-a-kind projects that then lead to hundreds more.
I'm just trying to get my brain around this, like is this for people whose capital is not available in other places, or is this for people that could go get it from a commercial bank but are choosing to work with the DOE and the LPO because it's a more compelling option? Do you compete with market-based capital and how do you measure success? Where does profit fit into this or is it purely mission-driven/government duty?
Jigar Shah: Yeah, it's a good set of questions. Rob probably could answer it better than I can. In general, I would suggest to you that no one in their right mind would go through our process, even as efficient as we've made it in the last six months if they could just go to commercial and get debt. So we are not competing with commercial debt. If people can go through a commercial debt process, they will always prefer to go through a commercial debt process.
Rob Hanson: I think I agree with one exception, which when we thought about debt, we thought about four components. You've got number one, the cost of the money. So that's any bank has the cost of money. Number two, they've got the cost of running the bank. So they're overhead and that rolls into the interest rate. Number three, they price the risk. And then number four, they take a profit on that.
So those are the four parts of a debt deal. Look, if you look at the DOE and compare it to commercial bank cost the money's basically the same cost to run the bank. Let's say roughly the same, maybe DOE LPO is a little bit cheaper. Price the risk. DOE set up really well to price the risk of these first ones. Like Jigar said, 10,000 engineers and scientist experts.
They're willing to do that deep technical market risk assessment to come up with what is actually the price of that risk. And sometimes that's where you bump into it, especially on these first ones. It's not that the price is too high, it's that no one will actually give you a price. They're just like, I can't do the deal. It's unpriceable so that's a differentiator I think that the DOE has.
And then the last one is the profit and that's where there is no profit. So it's not that this is this subsidy it's that the government of course is going to get paid back with interest as their cost of money was and cover all of their overhead and price in the risk of default across the portfolio. So, of course, some loans will fail. It's a portfolio, but then there's not a profit motive on top of that, which you would have in a commercial bank. So that was for us, it was the kind of nonprofit aspect of it. And also the ability to actually price the risk.
Jigar Shah: I totally agree with that, Rob, but I think it leads you to the same place, which is that the only people in the Venn diagram, which doesn't get covered by our statements or the folks who are over optimizers. So you could imagine someone saying, "I'm willing to spend the extra 12 months to get through your process Jigar, because I wanna save 42 basis points on the loan," and we have an additionality requirement there. So we would never provide them alone if we knew that they could go to a commercial bank and just get a loan and they're just trying to get 42 basis points, but we wouldn't do that.
So we can't be competing with commercial banks. For no other reason than it would take resources and both time and authority that we have away from more needy applicants, which to me is unconscionable, right? For somebody to be so selfish and greedy to take those resources away from someone who needs it more to create additionality, you know, seems like the wrong thing to be optimizing for.
I think we measure success by, as Rob suggested, we need hundreds of Monoliths to be successful, hundreds of Teslas to be successful. So I think what we're measuring as success is that we're setting these folks up for future success. I can't predict that every single loan applicant and group that we provide a conditional commitment to is gonna have that level of success. But I can say to you that without that level of risk-taking and that level of entrepreneurship, we are definitely not going to have success.
There are many, many sectors that we have mapped out of the department of energy and the international energy agency where the technologies exist. To be able to reach gigaton scale savings. Remember Rob's company didn't invent this technology, this technology was already in existence and the previous entrepreneurs had failed to bring it to market. Rob's group, of course, has brought a lot of incremental innovation to the process.
And so they are an innovative company, but the fundamental science behind what he did was really already there. And it was really his innovation, that's brought it to the point that it's at today. And I think that there is a level of recognition at the Department of Energy that without finding those people who are genuinely willing to risk it all to get to this point, that all the policy in the world and all the R & D in the world, all of which is hugely important, is just not going get to the at gigaton scale carbon reductions.
And so a lot of what LPO needs to achieve and that I'm very passionate about is making sure that DOE and the rest of the government understand how valuable those entrepreneurs are. Even though sometimes they can be a pain and sometimes they are not appreciative of what we've done. Fine, but the role that they play is hugely important and something that everyone needs to appreciate. But two, that our office needs to be accessible to them because some of them are extraordinary at raising equity because they're forward-looking people and they can sell the dream, but they are terrible at raising commercial debt because they can't be bothered to spend five minutes thinking about it and, and spending their brainpower on it, right?
It's not that they're not capable of understanding it, but they don't want to understand it. And so then they can't raise it and because they can't raise it, their weighted average cost of capital is too high and they can't get to the other side of what they wanna accomplish. And so we have to recognize that those people are coming to our office and be a little less judgey and a lot more supportive that we can get them through our office and onto, you know, the next stage of American greatness.
We know which technologies to pursue and yet a lot of the investors and entrepreneurs look at it as random. I guess I have two natural questions that come out of that. One is how do we fix it? Any tangible suggestions for what we can do to make it better and to help foster an environment where more Monoliths bloom in the areas that we need the most? And secondarily, are there examples of people, entities, companies, accelerators, or whatever who are doing it right that people like me or others could look to for inspiration?
Jigar Shah: Well, I think there's a lot of people doing it. That's why America's doing so well. The thing that I think is problematic is what we choose to focus on. In general, I'd say the vast majority of the press releases in the spaces, this person raised a C round, this person raised a D round. This person’s backed. This person is now worth a billion dollars. This person's airplane is being tracked by a Twitter account.
And instead, we need to start talking about what it means for a piece of infrastructure to last for 50 years. What does it take to actually do that? And how do you train people with vocational training to do that? What role do unions play or not play? What are the roles of local towns? I think that there are a hundred thousand people in this country who actually keep everything running.
There are senior managers who make sure your wastewater treatment plant delivers clean water to your tap. And nobody even knows their name or even cares to bother whether there's a board who manages them or how they issue bonds or how they deal with PFAs. That's the latest tour de Azure of what people are mad at them about. There's lots of stuff out there. There's lots of technology that solves that problem, et cetera.
But when you look at your podcast, for instance, which is extraordinary and reaches out to a lot of these people, there isn't a lot of content on that. Which is like, if an airport wanted to use sustainable aviation fuel, how would it do that? Who actually even makes a decision? Is it the mayor that makes a decision? Is it the governor? Oh no, it's an airport authority that's separate from all of those things. And how are they governed? What happens to the payments that come off of our ticket for the TSA precheck thing? Like where does that money even go? But those dollars are in the trillions and they are so much bigger than all of the other dollars that we hear about in these press releases every week around how much money someone raised in their A round or B round or Pre C round.
But that content doesn't show up anywhere. It doesn't show up on E&E News. It doesn't show up on Canary Media, which is probably the best of all of them. It doesn't show up on almost any of these things because people are like “well, but I wanna know how much money they all mad”e. I don't know that I actually care about the underlying dynamics of the industry and how that works, but if we're gonna solve climate change, people want to know that they can live a modern lifestyle without a lot of sacrifices through these technologies. And that story is not one that's clear to anybody.
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