Is Direct Air Capture ready for VC investments?

Direct Air Capture (DAC) is a vital technology for removing CO₂ from the atmosphere to mitigate climate change, but its scalability faces two key challenges: clean energy availability and cost.

DAC requires substantial energy, making it expensive compared to other decarbonization methods, with current costs ranging from $300-$4,000 per ton of CO₂ removed. While DAC can serve carbon offset markets and sustainable aviation fuel production, cheaper alternatives like biogenic CO₂ may delay its widespread adoption until the mid-2030s.

Though long-term demand is expected to surge post-2040, near-term market growth is limited. Early VC investments could yield returns through acquisitions, but significant risks include high costs, regulatory uncertainty and potential for superior emerging technologies.

1. Introduction

In order to mitigate further climate change, humanity needs to re-establish pre-industrial levels of CO₂ in the atmosphere as soon as possible. This corresponds to removing roughly 800 billion tons of CO₂ in total. However, the global economy currently adds approximately 50 billion tons of CO₂ to the atmosphere per year. So, closing the tap of emissions, i.e. decarbonizing the economy, is a necessary step to stop things from getting worse. Key innovation and scale-up topics for industrial decarbonization are point source capture, electrification of industrial process and low carbon fuels among others. These topics are outside the scope of this discussion. Rather, in addition to stopping emissions, active removal of CO₂ is required to get back to the safe space we were some 100 years ago. This can be done by restoring and amplifying nature-based absorption mechanisms (forests, oceans, mineralization) or engineered approaches, of which Direct Air Capture is the most discussed avenue. This is the focus of this piece.

2. So, what is DAC?

The beauty of DAC is its conceptual simplicity: A vacuum cleaner for extracting CCO₂ from ambient air that can be built wherever clean energy is available at low cost and where favorable geology allows for sequestration without much transportation. DAC’s fundamental challenge is that the energy needed to capture and separate CO₂ from a gas mixture increases rapidly as its concentrations decrease. The key performance indicator of different technologies is therefore their energy need per ton of CO₂ (either as heat or electricity), which ranges between 2-18 GJ/ton (0.6-5 MWh/ton) with current technology approaches. Adding to the energy cost, the capital cost of large-scale equipment that needs to treat massive amounts of air, results in levelized costs for DAC of approximately $300-$4,000 per ton at a (hypothetical) one million ton per year (Mtpa) facility size, without sequestration. Such a size has not been built yet. The largest operational facility has a capacity that is 25x smaller than that (Climeworks Iceland, 0.04 Mtpa). The largest plant in construction is 1PointFive's U.S. facility with a nameplate capacity of 0.5 Mtpa (operational due mid-2025). The lowest levelized cost forecast for 2050 is currently with electroswing, hybrid electroswing and amine technology, all coming in at around $130-$140 per ton (in current USD, without adjustment for inflation).

There are a number of different technical approaches that are being pursued. The focus here is only on those that have reached a level of technological readiness that allows them to see industrialized applications within the next 5-10 years. The technically more mature approaches are thermochemical, using CO₂-selective solvents (calcium looping) and sorbents (amines, zeolites, metal-organic frameworks) that first capture CO₂ and in a second step release it to create a concentrated CO₂ stream. Less technically mature approaches are electrochemical, either partially (solvent/sorbent capture + electrochemical regeneration) or complete electrochemical absorption and regeneration. See the table below for a brief summary of the main technologies, their estimated cost-down potential and some of the associated startups working on them.

3. What needs to be true for DAC to scale up?

While DAC technologies will continue to be piloted at increasing scale in the coming years, there are two fundamental barriers to the massive scale-up that is required to create any meaningful climate impact. One is the availability of enough clean energy and the second is a revenue model that would make direct air capture financially attractive.

The industrial decarbonization that is required to close the tap of today’s massive CO₂ emissions requires a substantial scale-up of clean energy generation, storage and distribution. Because there is a scarcity of clean energy, there is a need for prioritization to maximize the decarbonization impact of every kWh generated. For example, with the same amount of energy needed to remove 1 ton of CO₂ from the atmosphere, one can avoid the emission of roughly 5 tons of CO₂ via point source capture or via the electrification of heat. Therefore, as long as there is not enough clean energy to decarbonize the growing economy, DAC will unlikely be able to scale beyond a few Mtpa’s, concentrated in a limited number of favored locations. This will probably be determined more by politics (incentives and taxes) than by economics (cost of energy, value of carbon). The only development on the horizon that could radically change this situation is the scale-up of nuclear fusion, potentially providing enough energy for industrial decarbonization AND for massive scale-up of DAC.

Even if the first condition of clean energy availability was met, what exactly is the economic value that DAC generates, who is willing to pay for it and why? DAC is valuable for those in the economy who have no other way to decarbonize their activities. This is foremost the aviation industry. Battery-powered or hydrogen-powered electric planes don’t work for long-distance flights. They will continue to be powered by liquid fuels that generate CO₂ when combusted. To result in a carbon-neutral flight, the production of sustainable aviation fuel (SAF) must remove that same amount of CO₂ from the air in the first place. For a certain type of SAF, CO₂ is actually a feedstock in the production. Industry commitments and government regulations in place create a market pull for CO₂ coming from the air to produce SAF. However, the CO₂ can be sourced more easily and cheaply by scrubbing flue gases of biowaste incineration plants than from DAC. The biowaste removes CO₂ from the air during its growth and releases it once incinerated. Only when biowaste capacity for sourcing CO₂ becomes insufficient will the industry scale up DAC-derived CO₂ to produce SAF.

Another approach to reach net-zero emissions is to offset via carbon credits. Emissions that cannot be avoided by decarbonization efforts are balanced out by removing the equivalent amount of CO₂ from the atmosphere, transferred between the parties as carbon credits. All major industrial players have net-zero targets in place, but will only offset when they have exhausted other options, not in the least to avoid the criticism of green-washing. However, offsetting can also be done by planting trees and other nature-based solutions that are cheaper than DAC and provide additional benefits in terms of biodiversity, nature preservation and support of Indigenous livelihoods. It is not clear how heavy the expected longer permanence (how long the CO₂ will be locked away) of DAC vs nature-based solutions will weigh in a company's decision process when selecting one or the other carbon credit type.

Finally, what will the economic incentive be for DAC to further scale up once the world has reached net-zero? Who will pay DAC operators then? The massive drawdown of historic CO₂ to get back to pre-industrial atmospheric levels might need to be executed via public sector buyers and financed by general taxation. This would likely require another Paris Agreement mid-century to reach a consensus between countries on their respective contributions to be implemented.

4. Our expectation of the resulting DAC technology providers’ market growth

After the qualitative discussion in the previous section, let’s try to quantify the market size development of DAC for core technology providers over the next 15 years with a simple model.

Volume Assumptions:

Offsets: The biggest DAC buyers that have placed purchase orders today are: Microsoft (0.8 million tons), Airbus (0.4 million tons), Amazon (0.25 million tons), Google (0.1 million tons) and Frontier (0.1 million tons). The 3 biggest providers (1PointFive, Heirloom and Climeworks) together have so far sold future rights for offsets for a volume of 1.8 million tons. Delivery dates for those volumes are not publicly available, but likely to happen over the next five to eight years. As industries reach the limits of decarbonizing their footprints around 2035, they will have to use more carbon offsets, of which DAC will be a part.

Revenue Assumptions:

• Technology providers capture 30% of plant CapEx with no maintenance revenues.
• CapEx is assumed to be $2 billion per 1 Mtpa until 2030 (in alignment with the announced 0.5 Mtpa Stratos plant by 1PointFive for $1.3 billion).
• No recurring revenues on captured volumes, plant operators recoup those.
• Between 2030 and 2040, average plant sizes grow to 1 Mtpa and cost-down efforts  achieve a CapEx of $1 billion per 1Mtpa capacity.

5. Conclusion: Why or why not to invest as a VC in DAC now?

Why to invest in DAC now:

DAC is a long-term opportunity. Investing in the right technology early allows massive value creation. First market demand is already there today, first regulations are in place that create a secure initial market size and in the long term, this demand will only increase. Looking at post-2040, with current developments in place, the demand is likely to skyrocket even if the technology remains expensive. With breakthroughs leading to cost-down, that growth is going to be pulled forward and amplified.

For a VC, there can be profitable exits even before the demand takes off, as energy majors and aviation industry players acquire technology providers to secure their future business, mainly around SAF. The proof point here is the acquisition of Carbon Engineering by Oxy.

Why to invest in DAC later:

Significant market demand will only happen in 10+ years and many DAC startups will run out of funding before they can generate sufficient revenue. With costs for the technology remaining high compared to other offsetting options and bio-based CO₂ sources, the market will only need a few facilities before 2035. Startups will get stuck between their First of a Kind (FOAK) product and when the market requires many units. The market has to be created in parallel with the technology being developed. Heavy regulation could accelerate this, but banking on the political will is a major risk.

We might expect emerging technologies to further mature and surpass current pre-industrial stage approaches in performance and cost in the next 10 years. This could create a second wave of DAC excitement in the market down the road, risking investments in current approaches and startups.

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References:
1. LUX Research - Economics of Direct Air Capture: Pathways to Cost Reduction, Dec 2023 (members only)
2. www.cdr.fyi – DAC supply and purchase leaderboards, accessed Oct 2024
3. Assessment of European biogenic CO2 balance for SAF production, Nov 2022
4. 1PointFive Stratos project
5. EU SAF quotas
6. International Energy Agency – DAC overview
7. Energy Fundamentals of Carbon Removal