Knowledge

How the transport sector will change

How the transport sector will (have to) change to tackle the climate crisis

And how Europe has to catch up to become a leader in sustainable mobility, transport, and logistics.

Copyright: Sono Motors

This is part of a series where I want us to have a detailed look into how each high-emitting sector can change towards a regenerative world. From an investment perspective, I will do it by looking at major problems, the technologies that could solve them, interplaying trends, and the investment opportunity size.

The sectors we focus on in the series are 1. food, agriculture & land use, 2. energy, 3. transportation (this article), 4. construction, and 5. manufacturing.

In this article, if not explicitly linked differently, all facts and figures come from Project Drawdown, the latest IPCC reports, and tracxn data. The terminology “regeneration potential” refers to a solution area’s compatibility with a vision for a regenerative world.

How can it be that Europe’s transport tech ecosystem is so underfunded?

While global GHG emissions in the transport sector continue to rise, the climate tech and venture world are working on solutions. Unfortunately, Europe lacks quite behind in capturing its chance to profit from the great transformation towards a future of sustainable mobility and transportation. More startups were founded in the EU (413) within that sector than in the US (219) in 2019/20, but there is still is a considerable funding gap with less than 25% of VC funding flowing into EU startups.

We’re late on reducing the ever-growing footprint of our transport system

The transport sector has increased 71% GHG emissions since 1990 and is the second-fastest-growing source of greenhouse gas emissions after industrial processes. Decoupling transport emissions from GDP growth, thus satisfying an increasing demand in consumption while decreasing GHG emissions, is a challenging task that we need to tackle.

Transport is responsible for 22% of energy emissions and therewith 16.2% of total GHG emissions

Today, the transport sector accounts for roughly 22% of total energy-related emissions which, depending on the source, makes up 14–16% of global emissions. There’s an urgent need for revving up investments in tech to decarbonizing transport: Achieving carbon-neutral mobility requires a 180° shift in used technology and mobility behavior to be in-line with the EU’s ambitions of decarbonizing that sector by 2050. Sustainable mobility options need to be more attractive to facilitate their adoption. We’ll need modal shifts, shared transport, and avoided journeys, in addition to improved vehicle performance tech, alternative fuels, related infrastructure, and changes in the built environment to achieve this. Indeed, quite a challenge!

In the following, you will learn about the two main pillars that we will need to work out to solve this challenge, including promising tech and investment opportunities:

  1. An all-electric intelligent road transport system
  2. Green hydrogen-powered aviation, shipping & road freight
While most road transport can and shall be electrified (or avoided), for other modes of transportation having a battery on board will not be viable.

Solution area 1: an all-electric intelligent road transport system

(A futurist) Description
Let’s go on a utopian journey to visualize our potential smart, electric and autonomous future of road mobility. Imagine it’s 2035; global warming has progressed with some of its consequences. Humankind has made incomparable technological progress in history. Renewable energy sources have become an absolute mainstream and the number one energy source. There are fewer flying and autonomous cars in place than expected in futuristic scenarios in the mid- 20th century, but still, mobility has drastically changed.

Urban areas will enjoy the sound of silence from electric vehicles, and charging your car effortlessly on inductive stations across the city will be completely normal. We will experience a bi-directional energy flow between smart grid infrastructures. By owning an EV, you are part of an intelligent energy market and multidimensional grid system. As a temporary battery storage system, your car’s energy will be returned to the power grid at times of increased energy demand.

The idea of stopping by at a gas station to fill up and burn high-emitting natural resources that were sourced from thousands of kilometers away for your transport needs will seem just ridiculous.

Instead, we will rely on renewable energy sourced from the wind or the sun. Apart from power and energy, the idea of private vehicle ownership is going to change drastically. It will seem like an unnecessary investment of personal financial resources that is simply using too much public space. Instead, shared mobility is the new normal. Higher usage of fewer cars will satisfy the needs and potentially open new possibilities to use space in cities. While future generations will just shake their heads, and some nostalgics will remember the sound and smell of fuel engines, we will look back and know that it was in the 2020s when we invested in the future of mobility, using the advanced technology described below to save the planet while receiving a high ROI.

The scenario is not even utopian. It’s on us to drive the change to this future. As road transport is the main driver for the transport sector’s emissions growth, it is time to accelerate that change!

Regeneration-, market-, and GHG reduction-potential

In a regenerative world, our need for road transport will be served by renewable energy and implemented in the highest efficiency. Efficiency needs to be ingrained in energy consumption (EV with a rechargeable battery with ~70–80% efficiency), material use and re-use, capacity utilization, and efficiency embedded in the larger energy system such as DERs. Plus, as the utopian journey demonstrated, no congestions, air pollution, or noise, the transport system should contribute to regenerating our physical and mental health, not harming us with noise or air pollution.

To build an efficient transport system, we should rely as much as possible on battery EVs, not other fuels (Source)

The GHG reduction potential is up to 80 Gt CO2e by 2050, according to Drawdown. The global electric mobility market is expected to grow at a 24.7% CAGR by 2025 to $478.9b globally.

Tech enablers
The challenge goes beyond designing new vehicles. We need to create a whole transportation system. Let’s talk about the major enablers in vehicle innovation, grid intelligence, and autonomous mobility.

According to Bloomberg, battery price parity will be reached within 2y.

Vehicle innovation
It’s vital making EVs more attractive to consumers and fitting well into our new transport system. Important enabling tech for this is fast charging and improved (financial, social, and environmental) cost of battery storage, as outlined in this article. But there are also fascinating novel approaches, such as Sono Motors that developed a direct solar-powered electric car: 248 solar cells integrated into the car’s body enable it to drive utterly self-sufficient over short distances (about 35km a day). Not only did Sono Motors manage one of the most successful crowdfunding campaigns in history with >€50m, but it also proved the acceptance of users. Since then, Hyundai and Toyota have started to develop similar cars, even Elon Musk, who wasn’t optimistic about direct-solar powered vehicles in 2017, announced optionable solar panels for the new cyber truck.

Sono Motors’ recipe in one picture: add PV to a vehicle

Grid innovation
Gas stations will become a niche for refueling, replaced by a holistic system that widens the energy loop and integrates multi-variable grid solutions as core infrastructure. Enabling technologies are referred to as V2X or V2G — vehicle-to-grid — because they allow bi-directional energy flow of a connected vehicle. This area has already seen $18b in investments in the last decade, as it lays the groundwork for an exciting democratized future for energy markets.

Therefore, to fully capture the grid opportunity of our energy system, idle EVs will be typically connected to a grid. This means parking at home, work, etc., will charge your car or supply power, decreasing the need for fast charging infrastructure that will hardly scale with our demand. Access to (inter-)grid data, mobility data, weather (or power) data, and to energy markets enables new solutions and business models. One example is GridX that provides a platform for grid management solutions with load management based on grid data. Another example is ChargeX that offers a load management solution for fleet charging based on mobility data. Such solutions could scale the current power infrastructure bandwidth to serve much more vehicles. On the other hand, charging station incumbents are still selling high-margin fast-charging stations, demonstrating that the market has not yet fully embraced the transition.

Intelligent mobility
Intelligent mobility doesn’t mean only autonomous but also public transport or iterating on that concept of sharing resources, aka Mobility-as-a-Service (MaaS). Enabling tech for the mobility services we need are primarily software, systems-, and sensor-data based.

For instance, MaaS leveraging real-time and historical mobility data can achieve much higher system performance. For example, Uber’s Gairos optimizes the efficiency of their services, which are an interacting subsystem of road transport. Further, Uber and G maps are starting to factor in carbon cost instead of just time cost in their ride planning. Lastly, intelligent mobility could accelerate the shift of not owning a car with price incentives — it can save an average American family about $5000 per year, equivalent to a wage rise of 10%.

Autonomous driving can unlock mobility’s ultimate efficiency potential (besides decreasing fatal accidents). Since the hype in 2017, all ingredients keep maturing from GPUs, ML, and sensors, to billions of driven miles data by actual users (thanks, Tesla). Pioneered by the US, there are also exciting European startups to watch: take Five AI in the UK that builds a modular, cloud-based platform for autonomous transportation systems, including a software stack for autonomous vehicles. This enables users to combine driving software, sensors, offline infrastructure, and adapting cities transport management for their developments — the goal:

70% fewer cars for 4x the trips if cars were autonomous.

Market demand & investment landscape

This analysis shows how the technologies of our future mobility system are funded. Investments in this graph total $339b as of Oct ’20, Source.

It’s been a decade now since Tesla has proven the possible co-existence of attractive and electric mobility, and many automotive competitors have followed but hardly innovated. Also large car manufacturers, such as Audi, have recently announced that they will stop developing fossil fueled cars within five years. Though consumers are increasingly acknowledging the benefits of EV, many still question the usability due to range issues, battery sustainability, and the chicken-egg problem of the charging network. The industry invests massively in charging and grid infrastructure to increase customers’ trust in the new technology. In Germany alone, the number of EV charging stations grew by 50% in 2019.

In 2019 and 2020, the EU was the fastest-growing electric cars market (44% YoY 2019). Despite serious challenges caused by COVID-19, 2020 has been a considerable success for EV sellers. With a massive increase of EVs sold in Germany (398k) in 2020, Europe has reached 1.4 million sold. This is close to half of the global market (3,2 Million in 2020). Finally, some good news for Europe: If numbers continue to rise at this speed, the EU might realize its goal to have >30 million zero-emission cars in operation by 2030.

The impact of policy materializes in global sales figures

Also, incumbents try to leverage the V2G opportunities, such as Schneider Electric and Deutsche Bahn, with their joint venture Inno2Grid. With such a flourishing startup landscape, we expect to see significant acquisitions from incumbents soon.

Within climate tech, mobility and transport lead the invested capital. To be fair, this has been also driven by a surge in e-scooter investments. (Source)

Redesigning vehicles to become electric and leverage the all-electric transportation system is highly capital intensive. Climate tech startups in transport & logistics often face high barriers to entry — that’s why startups are turning increasingly to strategic investors or corporate venture capital (CVC). In 2019, 30% of the climate tech deals in mobility and transport included a CVC firm.

Selected recent investments in Europe:

  • Ubitricity (DE, 2008), $29.4m Series C, led by Honda
  • Wallbox (ES, 2015), $30.1m Series A, led by Seaya Ventures and Iberdrola
  • Fastnet (NL, 2020), €16 million in bonds with 6% interest and five years
  • Charge Point Services (UK, 2010), acquired by Engie, valuation undisclosed
  • Einride (SE, 2016), 42 Mio € led by Norrsken VC and Ericsson Ventures
  • Oxbotica (UK, 2014), 80 Mio € led by BP ventures
  • AIAutomotive (HU, 2015), 133 Mio €, led by European Innovation Council
  • Blickfeld (DE, 2017), 10,9 Mio €, led by High-Tech Gründerfonds
  • Easymile (FR, 2014), 22,4 Mio €, led by Alstom

Solution area 2: green hydrogen (H2)

Some modes of transports will be hard to equip with batteries.

Description
Heavy long-distance transport, particularly in the air or in water, will be tricky to be equipped with batteries. An H2-powered vehicle is moved by an electric engine as well. However, the energy is not sourced from a battery but produced on board using a fuel cell. The fuel cell uses hydrogen, sourced from a hydrogen tank and oxygen from the air, and generates both power and water. The power accelerates the electric engine and gives energy to a buffer battery.

There are different ways to produce hydrogen: black, blue, and green. Every method of production requires relatively high energy input, though. The diversions via hydrogen and the fuel cell require twice to three times as much electricity to cover the same distance.

Compared with fully electric vehicles, hydrogen-powered mobility will always be less efficient.

To leverage the potential to use it for freight logistics and aviation, which have no other viable alternative today to decarbonize, means we will need to build the whole value chain.

Further, European policy has recognized this vast potential and aggressively jumpstarted the Hydrogen Economy as part of their 2020 EU action plan that aims for 22x growth by 2030 and will require $480bn of investment.

Regeneration-, market-, and GHG reduction-potential

Assuming that our regenerative world will still include heavy transport and maritime and aviation transport, hydrogen (besides switching to ground transport or video calls) seems the most realistic promise we have. It will need to be produced with 100% renewables. But it then, it seems feasible to power 99% transpacific voyages with hydrogen and fuel cells.

The reduction potential by making aviation and shipping more efficient without hydrogen is 30 Gt CO2e by 2050, according to Drawdown. Calculations with the CRANE tool (based on Drawdown) fed by this paper show that the potential would be more than 80 Gt CO2e just by aviation. And this is given that H2-powered aviation will not get significant traction within this decade — a moonshot tech we will need for full decarbonization

The worldwide hydrogen fuel cells market is projected to reach $13.8b by 2026, from $2.5b in 2020, at a CAGR of 33.1% during 2020–2026. The worldwide fuel cells market is projected to grow from $3.36b in 2021 to $28.95b in 2028 at a CAGR of 36% during the 2021–2028 period.

Other hard to decarbonize processes with high GHG intensity can also be tackled by H2.
Note that green hydrogen will be relevant not just for aviation, marine, and road freight but also for other hard-to-decarbonize processes, namely ammonia, steel, and high-grade heat, all of which total ~20% of GHG emissions.

Tech enablers
We need to solve the green H2 transition across the value chain, which includes production and storage (incl. distribution) as well as the application in heavy transport (plus heavy industry, but that’s for an upcoming article).

As for production, we will need to make green hydrogen cost-competitive and ideally modular and storage-combined. Luckily, there have been significant electrolysis breakthroughs with regards to efficiency and scalability. Consider Sunfire from Dresden that pioneers Solid-Oxide Electrolysis (SOEC) using high temperatures for increased conversion efficiency in their modular electrolyzes. Another startup pushing green H2 down the cost curve is Enapter. They bet on the more established compact Anion Exchange Membrane (AEM) electrolysis, which can use rain or tap water and is stackable.

As for storage, the key challenge is to solve low-complexity, low-temperature, low-pressure, and high-speed release storage. Solid storage media has promising tech enablers to leverage 3D printed adsorption to optimize morphology and materials. Liquid storage, on the other hand, can leverage existing fuel infrastructure. The latter has been tackled by one of the few startups in that space, Hydrogenious. They offer efficient storage for multi-megawatt energy systems in Liquid Organic Hydrogen Carriers and won investors as Hyundai and Mitsubishi.

The first-ever zero-emissions flight by ZeroAvia

For applications of H2 in aviation, maritime, or heavy road transport, we can leverage that H2 applications became relatively well understood and accessible through decades of industrial use. Bringing it to mobility, though, is still white space. Solutions will include radical vehicle redesigns and novel fuel cell technologies for powertrains. 2020 saw the first-ever hydrogen power zero-emissions flight — the result of the startup ZeroAvia.

Market demand & investment landscape

Industry leaders will transform their core businesses within a decade: Airbus committed to manufacturing electric airplanes by 2025. GE delivered the US Navy’s first full-electric battleship in June 2020. South Korea’s SK Group said it would invest $16 billion to develop the domestic hydrogen energy industry over the next five years.

This is why incumbents are heavily investing in R&D.

As the past has shown, startups will drive up the pace in bringing disruptive solutions to the market. And as a result, incumbents will again increase their venture investment and acquisition appetite to comply with the H2 process innovation that will be a pillar for their future. Today’s most active investors are SSAB, Shell, Total, E.ON, NEL, Norsk, YARA, and Airbus.

The global H2 startup and VC activity reflects the immaturity of the market. There are less than 500 companies; 95% have <$10m turnovers. Overall $1b VC dollars have been invested in 108 deals since 2015. Most of this early stage: 75% at the Seed stage and 15% at Series A.

While the immaturity was due lack of attractive market dynamics, recent policy will stimulate exactly that: the new 2020 H2 policy to align with the EU 2030 climate targets asks a whole industry to reinvent itself in a few years.

The pioneers of this transition have attracted significant capital:

  • Qairos Energies (2019, Fr), €18.8m
  • Ergosup(2012, Fr) €16.2m led by Demeter
  • UniSieve (2018, CH) €5.3m led by European Innovation Council
  • ZeroAvia (2017, UK, USA), $24.3m plus $20m UK gov prize money. Investors include British Airways, Ecosystem Integrity Fund, Breakthrough Energy Ventures, Amazon’s Climate Pledge Fund

Let’s drive this transition

As we’ve seen, this transport and mobility sector’s transition is well underway, opening the door to a trillion-dollar opportunity to invest in a new era of mobility value chains. While the past automotive and transport industry was all about gearbox systems, cylinder manufacturing, etc., the new generation will be about grid management and digital tech suppliers and building a green hydrogen economy. Let us continue to believe in utopias while making them a reality.

Founders, startups, and venture capital have to drive this transition. As the past has shown, only with the power behind venture capital can we achieve the speed needed for our economy’s transformation. The social and financial opportunities are gigantic. Let’s speed up!

Craig Douglas, World Fund

Partner

craig@worldfund.vc

Daniel Valenzuela, World Fund

Head of IR & Impact

daniel@worldfund.vc

Matthias Poerting

Former Investment Fellow

June 22, 2021

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