(More) Iterating on our Marketplace

Making Hard Decisions

Startups are full of contradictions. One of the wonderful (and by wonderful I mean incredibly challenging and often frustrating) experiences you get to have when you start a company is seeing these contradictions revealed to you in real time, and then having to make difficult choices.

Last week we came to terms with one of these contradictions and let our marketplace partners know that we were re-re-pivoting the way the OpenEAC Exchange would work. Their patience with us has been a godsend and I will forever be in their debt for it. I’m going to take you through this decision in the hopes that it helps us all think a bit more clearly about how to build a truly impactful environmental commodities market around building decarbonization.

Some Background

First, let me back up and talk a little bit about this contradiction that we have been wrestling with for three years. Today, most net-zero buying of carbon offsets and RECs happens in arrears. That is, a company will tally up its annual carbon footprint and then go buy RECs or offsets that (optimistically) were generated within the same timeframe as when the emissions occurred. This is only sometimes true, as “green-e” RECs and most carbon offsets don’t have this sort of time matching requirement, but the basic way in which companies buy is fairly consistent insofar as they look for tradable certificates that already exist.

At the same time, more and more emphasis is now being placed on “additionality” claims. The idea is that if a buyer is purchasing an EAC, in order to claim impact the monetization of the EAC has to have played a part in getting the project across the finish line in the first place. If a project is up and running of its own accord, an after-the-fact EAC is pretty hard to justify from an impact standpoint.

So, if most buyers want to buy EACs that already exist, but the EAC needs to come with an “additionality” claim, how do you structure a marketplace? This is the contradiction that we have been wrestling with for three years.

Three Possible Solutions

One solution is to ignore additionality. Think of this more like market-transformation. The California Public Utilities Commission runs a program like this, where the goal is not to support individual projects, but categories of technologies that need scale in order to become price competitive (think LED lighting in the early days). This would be fine, but it’s not really the core problem facing distributed clean energy.

Another solution would be to create a speculative EAC market that would funnel capital into decarbonization projects hoping for massive returns. This approach would be reminiscent of cryptocurrency schemes from a few years ago, where an “initial coin offering” would fuel dreams of riches to be had once the market caught on. EACs could be the next Bitcoin! While it might be fun to get really rich speculating on EACs, this is probably the worst way to solve the problem.

A third solution would be to limit EAC purchases to only those projects with proven additionality. The implication would be that, by and large, the only way to procure EACs from distributed clean energy projects would be to directly invest into projects at the outset. The disadvantage of this model is that it flies in the face of the way that most RECs and carbon credits are currently purchased and requires buyers to reconstruct their entire approach to net-zero.

What we Decided

For the first few iterations of the OpenEAC exchange, we’ve waffled between the first and third solution. Frankly, I’ve been a little terrified of taking the harder-line stance of forcing buyers into a new structure where they only get the EACs in the future as the projects generate savings. If there’s one rule of startups it’s that you’re supposed to make your customers lives easier, not more difficult. How crazy is it to stipulate that you have to pay upfront, for EACs that will only be recognized little by little, for as long as a 15 year period, for projects where we don’t actually know how much carbon will be saved?

But over the past year, as we’ve seen our nascent market play out first-hand, it’s become obvious that “additionality” isn’t just some dumb concept foisted upon us by NGOs and academics. It is really true that there are countless clean energy projects that are shovel-ready today, but missing the last 10-30% of the money that they need to get funded. Sometimes that money is missing because of the cost of capital. Other times because the ROI is too shallow. Sometimes it has to do with procurement rules. But 100% of the time it means that we continue to resort to fossil fuel systems at a time when we need to absolutely stop.

So we’ve decided to take the route less traveled. I know that this will disappoint those hoping for a Bitcoin-like bonanza and probably turn off some buyers who just want a commodity that checks the box for them. But for those who stick around, they get to be part of something actually impactful and we feel better about spending our days and nights and weekends working on actually solving the problem of decarbonization in the world.

How a Procurement-first Market Works

As we’ve been meeting with impact-oriented buyers, one theme has emerged over all the rest: the desire to be able to select specific projects in specific locations that tell an interesting story. The price of the EAC is often secondary to the impact that it delivers.

Over the past few months we have been experimenting with running RFPs on behalf of our buyers, allowing them to set the terms of what they want to be able to invest in. We’ve learned quite a bit along the way (that’s code for “failed spectacularly at times”), but have gotten to a point where this feels like a repeatable process.

Today, we are excited to announce the first four public procurements for “additionality” EACs on behalf of corporate buyers. In the spirit of doing things that don’t scale, we’re releasing these on a Notion website and taking responses via email to our support account. Please don’t judge!

We are keeping the buyer identities confidential for now, but the transactions will ultimately end up on the WEATS public registry (which now lives on our website). The sellers will be required to demonstrate how the purchase of these EACs closes a critical funding gap in the project, and of course WattCarbon will perform all of the measurement and verification needed to mint an EAC for each gram of CO2 saved or each watt-hour of clean energy produced.

If you are interested in checking out the listed procurement requests, please send us an email to support@wattcarbon.com to get on our distribution list. The turnaround time for this one is pretty short (December 2nd deadline).

Bigger picture, we know that we’ll have to accelerate energy decarbonization ten-fold over the next two decades to keep global warming within a reasonable range. The only way this will happen is if we can unlock capital to invest directly into decarbonization projects. If we can make that part of a net-zero strategy, where instead of expecting a financial return on investment the buyer earns “additionality” EACs towards its net-zero goal, we will have indeed turned a corner on this massive problem.