McKinsey: Supply Chains can Boost Climate-Tech Ventures

McKinsey Paper on Challenges of Climate Tech Investment Says New Firms Enjoy Supply Chain Opportunities That Help With Scaing-up

New businesses that are built on asset-heavy climate technology face unique opportunities around supply chain, says McKinsey.

In a paper called The unique challenges of climate tech, McKinsey focuses on organisations that specialise in areas such as green steel, the removal of carbon from the atmosphere and new ways to produce and store renewable energy.

It says that, although such sustainable businesses face severe demands around managing capital-intensive initiatives, because so many are new businesses they are also in a strong position to harness the power of supply chains to help them achieve their goals.  

McKinsey says that “bringing sustainable tech projects to life starts with securing a supply chain”.

“New businesses need to line up suppliers of raw materials and other key components early and creatively,” it says. 

McKinsey reveals it has worked with such companies, and that they were able to “establish partnerships with key suppliers to secure a stable future supply chain, and share the risk”. 

It gives as an example “an early-stage green-ammonia project developer who negotiated a long-term purchase price allocation from a renewable power source”. It adds that the agreement “included guarantees of origin for each project site”. 

Offtake agreements 'useful supply chain tool'

Such deals are known as ‘offtake agreements’. This is a contract under which a third party (the ‘offtaker’) agrees to buy a certain amount of a product – usually an energy product – at an agreed price. 

McKinsey says offtake agreements are important for de-risking operations that require heavy investment in climate tech.

It points out new companies can strike offtake agreements before a technology is even market-tested, and gives as an example “a green-materials company that struck offtake agreements with leading automotive CEOs early in its business planning phase”. 

McKinsey explains that the company’s management was able to show that, by 2030, 30% of automotive OEMs would need that particular product for their decarbonisation efforts.

“It was less expensive and involved lower technology risks than alternative solutions,” it says. “Plus the company clearly laid out demand-and-supply growth on a competitor-by-competitor level, an exercise that highlighted the risk of a shortage between 2025-35.” 

McKinsey adds that companies who are effective in deploying capital-intensive climate tech “also secure relationships with equipment providers as soon as possible”. This, it says, includes “suppliers of materials and components”, as well as firms specialising in engineering, procurement and construction. 

It cites “an automotive player that is collaborating with Eastern European companies to ensure a supply of low-carbon metal parts”. 

It adds: “Understandably, investors and partners want to see demonstrable progress on timelines and recoil from delays and cost overruns. 

“Because the stakes are high, even a bit of slippage could result in financial distress, given the size of the required plans.”

McKinsey: Ørsted a climate-tech disruptor

Boldness is essential, McKinsey urges, adding that true disruptors “lay out a clear ambition to build an industry-leading platform with multiple plants, products, and scaling”.

One notable disruptor, says McKinsey, is renewable energy solutions specialist Ørsted, which in 2010 tasked itself with shifting its portfolio from 85% fossil fuels and 15% renewable energy to 99% renewable sources by 2025. 

“Its comprehensive plan was to shift from being an integrated energy provider to a world leader in wind energy, and it worked,” McKinsey says. “The company’s net income has flipped from negative to positive, ranging from approximately $1bn to $3bn from 2016 to 2022, even in the face of recent supply chain strains and rising interest rates.”

It adds that Ørsted’s emissions also decreased by approximately 90% in this time.

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