Paul Nelson | Data guiding hydrogen investing at Saoradh Enterprise Partners

In our 17th episode, we learn from Paul Nelson, Managing Partner at Saoradh Enterprise Partners. In his conversation with Karen Baert, we learn about their data-driven approach to investing.

Paul Nelson founded Saoradh Enterprise Partners (SEP, formerly Saoradh Energy Partners) in 2012 and now serves as Managing Partner. Paul has over 35 years of energy, advanced materials, entrepreneurial, finance, management, and research experience.

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This article is part of the series: Hydrogen Innovators Podcast

Transcript

[00:00:01.43] [Music Playing]

[00:00:02.87] Paul Nelson: So we actually see more today than we did 10 years ago. And I think that's a good sign that we're using data information insights about the technologies, as well as the markets, to make sure we're investing in the right stuff and it has good market fit and we can accelerate its adoption.

[00:00:22.16] Generally, motivation, I always look to people who really created an inflection point either in technology innovation or market creation.

[00:00:42.59] Karen Baert: Welcome back to the Hydrogen Innovators podcast. This is a series is produced by the Stanford Hydrogen Initiative, where we spotlight innovators, bold innovators in hydrogen across industry and academia. You can find the podcast series Hydrogen Innovators both from Apple podcasts and Spotify. I'm Karen Baert, entrepreneur, Stanford MBA graduate.

[00:01:06.47] And today, I'm very excited to welcome Paul Nelson, managing partner and founder of Saoradh. This is an early stage cleantech venture capital firm and research firm based in Boulder, Colorado. Paul, welcome to the podcast today. We're super excited to have you and learn from you.

[00:01:26.05] Paul Nelson: Yeah, so thanks for having me on the podcast. Looking forward to our discussion.

[00:01:30.58] Karen Baert: Paul has 35 years-- let me repeat that-- 35 years of experience in energy, advanced materials, entrepreneurship, finance and research. Before starting SCP about 10 years ago, he was a key stakeholder and participant in forming Colorado's cleantech ecosystem through development of the Colorado Energy Research Laboratory, Colorado Cleantech Industries Association, and Industry Academia Advanced Solar Research Center.

[00:02:01.39] Paul actually started his career in the energy sector back in the late 1980s, where he founded Blue Energy and technologies in 2000. He raised significant strategic and venture capital funding, acquired multiple companies, and ultimately, merged Blue Energy with ENRG fuels to create clean energy fuels. That company is now public trading on the NASDAQ exchange.

[00:02:29.35] Paul holds a bachelor's in business finance and a bachelor and masters in chemistry, all of them from CU Boulder. But today, the context in which we're talking to Paul is that his firm has been developing this leading very large hydrogen market data system. And that market database really guides their early stage venture capital investing and provides very granular market data and analysis to members of their hydrogen data consortium.

[00:03:03.16] Members of that consortium today are Schlumberger, TotalEnergies, Breakthrough Energy, SoCal Gas, RWE Global, Sumitomo, Stanford Hydrogen Initiative, and Electric Power Research Institute, and many, many more. So, Paul, can you tell us a bit more about the goal and the scope of this hydrogen database and why you formed this consortium to drive development and use this information?

[00:03:31.97] Paul Nelson: Yeah, sure. I guess to start with, at SEP, we really think about data before we get into investing. So we consider ourselves very data driven. That's why we actually have a research group in addition to our venture investing group at SEP. And so anytime we look at a space, we proactively landscape it first and then look at the investment opportunities.

[00:03:56.30] A few years ago, we were landscaping the hydrogen space specifically for North America. And we just were not able to find good comprehensive or plant-level data. And so we realized we had to build the system ourselves. Typically, we would subscribe or buy data and then analyze it. But in this case, we couldn't find it. The market was opaque.

[00:04:17.19] And so we ended up, step one, we built out a data system that identified the roughly 1,000 assets across North America that comprised the industrial scale, supply and demand market for hydrogen in North America. This is where hydrogen is produced and where hydrogen is consumed.

[00:04:35.57] But it wasn't enough. And a few years ago, we decided to create this consortium of companies and research institutes to really help us scope and then co-fund. And then we shared all the data back and continue to update it regularly of the hydrogen market, so that we added what we call connective tissue, like what are the production technologies and transport methods for each of these production sites for hydrogen? What's the underlying pricing?

[00:05:02.16] And then where are the planned locations? Where are people announcing locations? Can we track them in detail to understand are they real? Are they really happening? Or are they just announced? Where is the infrastructure? And a bunch of other details.

[00:05:16.18] And so ultimately what this did is it brought illumination to this otherwise opaque market that is the North American hydrogen market. So that's how we get to the point of creating these data systems and the consortium. And today, the data systems comprise a market model that tracks all the producers, users for current, planned, and potential supply and demand, as well as a supply chain database that's global that tracks everyone else in the hydrogen ecosystem, like equipment manufacturers for electrolyzers or vessels, as well as EPCs, investors, et cetera.

[00:05:52.65] We also built a news feed just to stay up on this. We curate probably 200 to 300 articles every day in order to understand those that really matter for announcing new tech, updates to projects, et cetera. And then our team conducts these deep dives to address questions that we still have about different aspects of the hydrogen market.

[00:06:11.35] So all of this has come together to really inform our investing, our corporate partners' investing, and the use cases that each of the members of our consortium have.

[00:06:20.28] Karen Baert: You mentioned the market is opaque, but you're absolutely right. There's still a lot of uncertainties in the market. There's a lot of hype and a lot of hope. And sometimes it's difficult to distinguish the noise from the actual facts. And that's why we're so excited about this conversation today, because mostly when we talk to different actors in the hydrogen market, we all obviously look at the world from our own perspective.

[00:06:46.60] This is such a great opportunity to actually dive into the data with you and get some insights on certain highlights, even certain market myths that your team has captured based on that great database and based on analyzing that database. So could you share some of these with us?

[00:07:07.13] Paul Nelson: Yeah, absolutely. Really, to start with, for this space, we tried to figure out how to bucket the questions and the answers, the data. So we shamelessly took a line that Brian Pivovar, who leads research at NREL uses, which is make, move, store, and use. So those are the four buckets-- make, move, store, and use hydrogen.

[00:07:30.17] And so first, we looked at use. So what did the North American hydrogen market demand use look like? And first of all, what is it today? Before we even think about new markets, what is that market today? It's a more than $30 billion market, which is about 15 million metric tons of hydrogen production and consumption every year.

[00:07:52.68] It's really split between heavy and light industry segments. Now, the heavy industry segments are by far the majority of the market. This is typical users like refineries, methanol plants, ammonia plants, other petrochemical applications. But there are light industry segments that are often unknown or just overlooked, like semiconductor fabs. Every semiconductor fab needs hydrogen, float glass manufacturers, food oil plants, pharmaceutical facilities, et cetera.

[00:08:22.43] So there are about 600 industrial end users across heavy and light industry segments. Some of those segments make their own hydrogen on site or have a mix of on site hydrogen production and then bring in supply from merchants, which I'll talk about here in a few minutes. Others just totally rely on merchant supply, particularly the light industry segments, which has a big impact on price.

[00:08:46.92] So proximity between the end user and the producer, the volume need for the end user, and the purity requirements of an end user, going back to semiconductor fabs where they need really high purity hydrogen, have big impacts on price. And while one can think that the gray or effectively dirty hydrogen market across North America today, maybe the average is $1.50 to $2 a kilogram for hydrogen.

[00:09:12.14] We see prices upwards of $8, $9, $10, or even a little bit more for delivered gray hydrogen, depending on the end use and these other factors. So that gives you a little bit of a sense of the demand market today.

[00:09:28.44] And then the second part was, OK, well, where is that going? And so we track about 50 projects across North America. So it's Canada, US, and Northern Mexico. And we track them at four stages. Are they just announced, or have they purchased land? Or is there a building permit that's been issued? Do they have signed off-takes, signed EPC? And we dig into all those details to track the projects.

[00:09:52.83] And then we also track underlying industries, like is the semiconductor industry adding more semiconductor fabs? They are. We know every fab needs hydrogen. So we track those, too. And then we ask the question, where could hydrogen go elsewhere?

[00:10:07.12] So we track another 9,000 sites. These are all the steel plants, cement plants, paper and pulp plants, aluminum plants, warehouses with forklifts, cetera. And there are about 9,000 of those that, if you add them all up for potential hydrogen demand, it's about 130 million metric tons. So it's a lot of potential. The question is, how well will technologies be developed in order to penetrate those new markets?

[00:10:34.17] Karen Baert: Very interesting. I have one quick follow up question. I really like that insight on the fact that even in the gray hydrogen market, there's such a big range on actual price. You mentioned the upper bound of in the $8, $9 a kilogram. Can you give us a quick insight on what industries or use cases we're talking about there?

[00:10:54.91] Paul Nelson: Absolutely. So along the Gulf Coast of the US, of course, a lot of hydrogen is produced and used for the petrochemical industry. It's also where we see most of the hydrogen pipelines that are directly connected between the steam methane reformer or SMR units and the end users.

[00:11:14.21] And in that application, hydrogen is cheap. It's $1, $1.50 for delivery into that market. As you start moving away from the Coast-- and let's say you're looking at a TMSC plant for semiconductor fab in Phoenix. You could easily see prices between $5 and $10 a kilogram delivered gray hydrogen.

[00:11:37.70] Same when you think about a float glass manufacturer. Every plant in North America that makes glass that goes in doors and windows has to be made with hydrogen as a process gas. And so they similarly pay fairly high prices because those plants tend not to be along the Gulf Coast. They are distributed across the US.

[00:11:56.76] So the other piece of that equation I'm kind of hinting at is the merchant supply. And surprisingly, about 40%, 45% of hydrogen consumed is actually made at merchant plants. This means a merchant plant is somebody like an Air Liquide, Air Products or Linde plant that makes the hydrogen and then moves it offsite, either by pipeline or truck.

[00:12:19.50] And the truck could be liquefied hydrogen or compressed hydrogen. And it gets moved to the end user. Sometimes it's just literally a few miles from the production site to the end user, particularly back to the case of the Gulf Coast. We have a lot of heavy industry and petrochemical production. Or it could be moved hundreds of miles or kilometers to the end use site.

[00:12:41.91] So it has a big impact-- that transport cost has a big impact on that end user, along with purity and other issues. So there are about 170 merchant plants across North America. They make about 7 million metric tons of hydrogen every year.

[00:12:56.36] Interesting fun fact is, hydrogen production today, that total of 15 million metric tons of both on-site and merchant is about 2% to 3% of the CO2 footprint of North America. So going back to job number one is transition the current market from gray to blue or green or other types of clean hydrogen.

[00:13:15.77] In terms of where that supply market is going, we're tracking about 150 projects. And most of those are blue and green. And again, just like on the demand side, we're tracking four different stages. The majority of the 150 projects are in the announced or planning stage, with only about 20% or 30% of those in FID or construction. And that includes upgrades to current supply plants.

[00:13:43.23] Karen Baert: As far as projects that are still in the announcer planning stage, what is your perspective on how many of these will actually materialize?

[00:13:51.84] Paul Nelson: Well, I think big impacts are incentives and, of course, how the incentives drive the demand. We're tracking pretty closely, as a lot of folks are, the final rulemaking we expect out of the Department of Treasury and IRS in hopefully Q2 for the 45b production tax credit, and also the enhancement to the 45Q tax credit, plus the $7 billion that will be flowing into the seven DOE awarded hydrogen hubs and the billion that has now been targeted for driving demand.

[00:14:25.00] So those incentives will have a big role. But most of the projects announced across North America are supply. And so we are paying a lot of attention to willingness to pay. And where is that demand coming from? And so with respect to that, I'll dive into that here in just a minute as I start talking about innovation trends in areas that are of interest to SEP.

[00:14:48.61] Karen Baert: Let's, indeed. This is a perfect transition to move there because besides having a great overview on where we're at today, you track a lot of different companies and innovators across research, investor statistics, different startups and innovators in this space. Looking at all these insights, what do these trends actually tell you in where we're going in the hydrogen market?

[00:15:13.42] Paul Nelson: One of the things I love looking at is, where is the money going? And particularly, where's the money going around innovation? So what problems are left to be solved in the hydrogen, the clean hydrogen space? And there's a lot still to be solved-- so good news for innovators.

[00:15:30.79] We're tracking, just in the US, we're tracking 400 startup or growth companies that are receiving venture or private market capital. And those are across the make, move, store, use buckets.

[00:15:47.08] Most of those companies are in the make or use buckets. And that is also reflected in the amount of capital that's coming in and the deal counts by year, as well. So move and store is still the minority of the companies and the deal count and the capital.

[00:16:05.77] If I just look at where are those companies going relative to say where the DOE is going to send $7 billion worth of funding to support for the hydrogen hubs, we're seeing the majority or the largest count, I should say, in the Arches hub, which is California, about 90 companies of the startup and growth companies.

[00:16:26.24] Second is the Texas and Louisiana Gulf Coast hydrogen market. For the high velocity hub, there are about 42 of the 400 companies we're tracking that are specific to that market. We also look at, as I was mentioning, where the investor money is coming in. While we're tracking 400 companies that are start up or growth just in the US, and much more than that globally, only in really starting in 2020 do we start to see large amounts of private market capital coming into the space.

[00:17:00.20] In 2020, the data from PitchBook that we access broke $1 billion a year. And again, most of that is in the make or use categories of hydrogen technologies, with a minority in store and transport. Deal counts also starting, just rocketing in 2020, 2021, 2022. We saw a bit of a dip in 2023, but that's consistent with overall dip in venture investing. So I wouldn't take that as a specific data point for hydrogen.

[00:17:36.51] But even though the transport and storage category receives less than the make or use, it still is receiving about a half a billion a year annually from the private capital markets in these companies. And it just-- the time frame, the time series, if you look at the data before 2020, pales in comparison to what has happened in 2020 and forward.

[00:17:59.94] Karen Baert: Move and stores kind of less than what we see in the other segments, but still very significant. Are you worried about a lack of funding or innovation in move and store?

[00:18:11.94] Paul Nelson: I am. I am. And it actually tells me that there's opportunity there. That's an area that's lagging a bit. I think people first think, hey, how do we make hydrogen? How do we make it efficiently? How do we drive the cost down? And that's, of course, important for the end use willingness to pay.

[00:18:28.45] But ultimately, you got to get it around. You got to move it someplace in most of the use cases. And so there has been less there. I think it's less well understood. And I think that creates an opportunity.

[00:18:43.11] I'll also mention, we also track things like patent counts, research publication counts, grant counts. Interesting fact is when we look at research paper accounts, the technologies being researched and patented are about equal looking at methane as a feedstock and water for water splitting as an input.

[00:19:07.66] You would think it would be mostly around electrolytic hydrogen pathways for water splitting, but it's fairly even between methane and water splitting in terms of additional tech dev. And then when we just look at grants, if you take just ARPA-E alone, they've put in over a quarter billion dollars in hydrogen related grants over the last 10 years.

[00:19:26.80] So you can see they've been funding this space. Now we see venture capital coming into the space. And we continue to see the research and the patent generation occurring in this space. So it's definitely a strong upward trend.

[00:19:41.02] So where does that lead us? As a venture capital firm and as we work with our corporate partners and consortium members, we ask ourselves, OK, where to deploy that capital? We've talked a little bit about make or store and move. It hasn't had as much funding. We see issues there. I think there's a lot of disruption that's going to be occurring even in trailer transport.

[00:20:04.64] A lot of trailer transport, historically for the market, has relied on fairly low pressure, very heavy steel tubes and trailers. That's going to be disrupted significantly with carbon fiber based type III, type IV vessels, much higher pressures. So you can see a significant increase in payload moving by trailer at a lower cost per unit.

[00:20:28.88] We're also paying attention to the alloys and other materials that are going in for hydrogen pipes, and particularly the components, like valves and compressor components, for moving hydrogen through pipes and compressing it at fueling facilities. I think that's really interesting to pay attention to.

[00:20:49.10] We're not ignoring methane. As I said, the research is still strong in methane. It's fairly equal to electrolytic pathways. And we're paying attention to pyrolysis and whether or not a high value carbon or solid carbon can be produced through a methane or heat decomposition or pyrolysis process.

[00:21:08.88] And we're following, I think, about 40 companies globally just in the methane pyrolysis space. We're also paying a lot of attention on electrolytic hydrogen production pathway, things like where can you get really low cost but green heat? You can get it from nuclear plants. You can get it from concentrating solar power plants.

[00:21:29.44] And even though CSP hasn't been a big deal for a number of years, it's coming back because of gains are logged across the world, really, in places like Spain, where CapEx has dropped, capacity factors have gone up. And the idea of getting heat and green electrons out of concentrating solar power is interesting.

[00:21:49.62] All these ideas are ways to drive down the energy per unit hydrogen produced. And with the energy cost being the biggest portion of the cost stack for electrolytic hydrogen, driving down the KWH per kilogram is critical.

[00:22:04.44] Karen Baert: Just to quickly clarify there, and please tell me if I'm misunderstanding, but I assume here that you're referring to, hey, if there's any type of heat available on the site, we can actually do high temperature electrolysis and significantly increase the efficiency of the electrolyzer. And interestingly enough, two episodes ago, we talked to Florence Lambert, the CEO of Genvia, who is a solid oxide electrolyzer technology developer. So that's, indeed, a great example of that.

[00:22:35.04] Paul Nelson: Absolutely. Yeah. Thanks for that clarification. But you are spot on. And then on the use side, we see interesting opportunities around mobility. I mean, some of this relates to heavy duty trucking. Everyone's forecast for this market, whether it's DOEs, low case, base case, high case, Lazard's forecast, McKinsey and others, mobility is always a big piece.

[00:22:56.11] But it's not just heavy duty trucking. We're paying a lot of attention to where we're seeing orders. And we're seeing orders for methanol powered ships. These are ocean going container ships. We have line of sight to at least 50 orders of ocean going container ships that would be operated on methanol. So that's driving some of the green and blue methanol production projects announced along the Gulf Coast.

[00:23:19.96] We're also seeing about 2,000 orders aggregate across the globe outside of China for heavy duty truck. So it's early days. There are a range of OEM truck manufacturers that have stepped up, including Daimler and others. But I think it's still early.

[00:23:39.22] Forklifts, very interesting market. Tens of thousands of forklifts operate today on hydrogen and have displaced, in many cases, electric powered forklifts for a number of reasons, including space available for fueling the forklifts and labor cost savings and other factors, and also SAF. SAF is ringing pretty true for us.

[00:24:00.74] How does green hydrogen go into a SAF product, and what does that mean in terms of the economics of the SAF? So we're paying attention to those spaces around use.

[00:24:13.81] Karen Baert: These are so many valuable insights, Paul. And indeed, ultimately you are a venture capital company. You are an investor. I love how you take that very data-driven approach to make well-informed investment decisions. And I think that's pretty unique in the investment ecosystem, as well, and very unique to Saoradh Enterprise Partners.

[00:24:40.01] Paul Nelson: Well, thank you. Yeah, it's how we're wired and very data-driven. You could call us investing nerds.

[00:24:49.07] Karen Baert: I like the sound of that. Let's talk a bit more about Saoradh Enterprise Partners, the company you started, is it 10 years ago? Why did you start that company in the first place?

[00:25:01.64] Paul Nelson: Well, my career has really been in the energy space, and it's always been, oddly, in the energy alternative space. So in the 1990s, it was about compressed natural gas, liquefied natural gas as an alternative to diesel. And that has, over the years, gained nice traction. But it was definitely an alternative play.

[00:25:21.75] And then I took this mid-career break when I was about 39 and went back. And my background had been finance. And I jumped in to get a couple of degrees in chemistry, and during that time had the great opportunity at the University of Colorado to interface with them and NREL, the National Renewable Energy Lab, and walked away with this idea that there's this thing I call the magical intersection between what is possible-- in other words, what science can solve-- what is needed, which is what the market or industry requires, what's bankable, and what matters, in other words, cleaning up the environment.

[00:25:56.76] And I took that idea and I said, what do we do with this? And I decided to move from building companies to investing in companies and helping them build with good data insights and business development resources. And so that's why I formed SEP about 10 years ago, was to take that magical intersection, put it to work, and build information, and then drive that into building companies.

[00:26:23.88] Karen Baert: Do you think there's still the same opportunity in the market or need for companies like SCP today as there was at the time started the company?

[00:26:35.88] Paul Nelson: I think even more so. We look to other companies like Flagship Ventures in Boston, who take a very early stage, hands-on, resource-driven, data-driven approach to building companies. Breakthrough Energy Ventures or Breakthrough Energy, with their fellows program, has a similar approach. So we actually see more today than we did 10 years ago.

[00:27:01.39] And I think that's a good sign that we're using data information insights about the technologies, as well as the markets, to make sure we're investing in the right stuff and it has good market fit and we can accelerate its adoption.

[00:27:15.58] Karen Baert: Absolutely. The fact that on top of that, you built that consortium, really sharing that valuable data with other actors in the ecosystem is also such a great way to enable this market and industry to move forward. Paul, I would love to end with a question that we ask every guest in our podcast.

[00:27:32.89] I have this strong belief that we all stand on the shoulders of giants who came before us. Using Isaac Newton's words, and standing on their shoulders, what makes us see further. In that context, who inspires you most and why?

[00:27:47.62] Paul Nelson: Yeah, sure. Of course, none of us do anything alone. And even if we are sitting alone, we are standing on the shoulders of other people. For me, business mentors-- I started in 1989 working for a company called Julander Energy.

[00:28:04.76] And it was really an interesting, kind of unique merchant bank in the energy space. Great mentor, Fred Julander, really got me focused on the future of energy. And then along the way, great shout outs to professors I met, like Carl Koval and Court Pierpont at the University of Colorado that really gave me insights into the science of energy and incredible scientists like Art Nozik, who was the senior research fellow at the National Renewable Energy Lab.

[00:28:39.68] So just never stop learning, always have great mentors. And then just generally, motivation, I always look to people who really created an inflection point, either in technology innovation or market creation, people-- if you reach back a couple hundred years ago to somebody like James Watt, thinking about how to produce energy from steam and Richard Feynman and his work, not only in developing new ways of math and physics, attacking physics problems, but also just very, very innovative questioning of mind.

[00:29:20.22] And, of course, people like Steve Jobs-- all action oriented, clear vision, and focus on some type of change for the better.

[00:29:30.11] Karen Baert: I love that. Never stop learning. Follow guidance of giants who create some inflection points and changing the world for the better. I can't think of a better way to end this podcast. Paul, thank you so much for taking the time, for educating us and inspiring us.

[00:29:46.05] Paul Nelson: Oh, thank you, Karen, for having me on the podcast.

[00:29:48.41] [Music Playing]