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How the Inflation Reduction Act will supercharge climate tech startups

‘The bill is just a monumental accelerator for a whole host of technologies that serve to decarbonize one sector or another.’

How the Inflation Reduction Act will supercharge climate tech startups
[Image: StudioM1/iStock/Getty Images Plus]

Out of the more than 80 million single-family homes in the U.S., roughly 1,000 have geothermal heat pumps from Dandelion Energy, a startup that spun out of Google. (Another 1,200 have the heat pumps on order.) But it’s likely that number will grow quickly—and that the company will expand out of the Northeast, the only region where it operates so far—thanks to the support for climate tech in the Inflation Reduction Act.

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It’s one of hundreds of companies working on climate solutions that will be boosted by the massive new climate bill, which includes $369 billion in funding for everything from solar power and electric buses to grants to help retrofit homes.

“The bill is just a monumental accelerator for a whole host of technologies that serve to decarbonize one sector or another,” says Shayle Kann, a partner at the venture capital firm Energy Impact Partners. “It basically does that by making clean options cheaper pretty much across the board. So if you’re in the business of building or installing or selling some zero-carbon product, in most cases it just suddenly became a whole lot cheaper for your customers to adopt.”

Dandelion’s heat-pump technology, for example, which works by tapping into geothermal heat underground, will benefit from bigger government incentives for its customers; under the Inflation Reduction Act, households can get a tax credit of up to 30% of the price of a home improvement to increase energy efficiency, such as installing a heat pump. Perhaps even more important, the incentives will last for a decade, which can give investors the certainty to pour more capital into startups like Dandelion to help them grow.

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In the past, as short-term government incentives for renewable energy repeatedly faced expiration and then were saved at the last minute, companies struggled with the unpredictability. “If you’ve been in solar, people often refer to the solar companies as a ‘solar coaster,’ because you’ve got these tax incentives going up and down,” says Michael Sachse, Dandelion’s CEO. “It’s like, ‘Oh, we’re killing it.’ ‘Oh, we’re about to die.’ What this does is give 10 years [of a 30% tax credit]. It just means you can run your business and plan. And venture capitalists are going to invest. Everything can get better with that kind of certainty behind it.”

Sean O’Sullivan, founder of SOSV, a venture capital firm that focuses on climate tech, agrees: “Ten years is long enough to change the landscape. The job of a VC is to take the stuff that’s in a biology lab or chemistry or physics lab, and make it so affordable that in five or ten years’ time, everybody has changed their way of interacting with the environment.”

Previous tax credits for wind and solar helped costs drop dramatically: The cost of utility-scale solar fell by around 90% between 2009 and 2020, and is now the cheapest form of electricity in history. (Earlier this year one paper estimated that the U.S. could save $5.6 billion annually if its remaining coal plants were replaced by solar power.) The new funding could help other technology follow a similar path.

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“I do think you can expect to see similar things in areas such as energy storage, and heat pumps, and electrification technologies in clean hydrogen, in carbon capture, in nuclear, and geothermal,” Kann says. “I’m naming a few of many that will be impacted.”

The bill includes support for zero-emissions technology at ports, for example, which will help boost new shipping technology and startups making equipment like hydrogen or electric forklifts. As large car companies get new support to build electric vehicles, a variety of startups making related tech—from vehicle charging infrastructure to smart home electric panels—will also grow.

Additional funding will help reduce emissions at factories making steel, cement, and chemicals, which can benefit startups like Brimstone, a company that developed a new process to decarbonize cement, or Solugen, which makes chemicals from sugar instead of fossil fuels.

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For many emerging technologies, the new policy could help bring down costs enough that they begin to see mass adoption. “The number-one issue with deploying many of these technologies is they’re kind of right on the cusp, right now, of being economically viable,” says Greg Smithies, partner and coleader of climate at the venture firm Fifth Wall. “They’re sort of right at that tipping point.”

Other incentives in the bill support companies working on tech to reduce emissions from agriculture, prevent wildfires, or restore ecosystems. DroneSeed, a startup that recently worked with the Forest Service in Mount Hood National Forest to test the use of drones to replant trees in an area burned by wildfires, is one of several companies in the reforestation space that expects to grow more quickly because of this new federal support.

An expanded tax credit for carbon capture can help companies working on solutions for direct air capture and carbon storage, such as Heirloom, a startup that uses crushed minerals to suck up CO2 from the air. The Inflation Reduction Act is “massive,” says Heirloom CEO Shashank Samala. “This will speed up our deployment by several years.”

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The company recently raised $53 million, and counts Microsoft among its early customers—but the bill will do more. The legislation increases the tax credit that companies like Heirloom can get for capturing carbon, and makes the credit “stackable,” meaning that it can be paid for the service both by customers and through the tax credit. It could help put the company on the path to achieve its incredibly ambitious goal: to remove a billion tons of CO2 from the atmosphere annually by 2035.

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About the author

Adele Peters is a staff writer at Fast Company who focuses on solutions to some of the world's largest problems, from climate change to homelessness. Previously, she worked with GOOD, BioLite, and the Sustainable Products and Solutions program at UC Berkeley

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