Green Cement and its Adoption Cycle
The cement industry is currently responsible for ~8% of total global emissions (source). And although major industry players have committed to the need for change (source), the cement industry is significantly off track to reducing its emissions in line with The Paris Agreement (source).
Why is the cement industry off-track from its emissions reduction targets?
The long answer: check out the piece I wrote about the cement industry and the context behind why it is such a bit climate issue (here)!
The shorter answer: as a start, we can focus on the industry dynamics inherent in the cement industry. The legacy industry’s commoditized and traditional nature, combined with its complex stakeholder ecosystem make it challenging for low-carbon cement companies to get customers who will take large volumes of product for long periods of time. And without customers, it is difficult for low-carbon cement companies to raise financing to build factories. This means that unit economics can not be scaled and therefore that cost parity to traditional cement products can not be achieved.
I’ve illustrated the low-carbon cement adoption conundrum in a cycle diagram:
To break the cycle and increase adoption of low-carbon cement, there are methods to influence and change the dynamics of each of the five steps in the cycle. The focus for this piece is understanding why cement market dynamics are detrimental to the adoption of low-carbon cement (step #1) and then focuses on creative approaches to enabling offtake agreements for low-carbon cement products (step #2).
Offtake Agreements: A Tool to Reduce Commercial Risk
A climate techie’s favourite two-word phrase: offtake agreements. Offtake agreements are a tool which can be used (and have successfully been used: see the Rondo Case Study) to reduce commercial risk for climate technologies. An offtake agreement is a guaranteed revenue stream in the form of a customer who is willing to purchase the product at a set price. This tool reduces commercial risk by guaranteeing revenue following project completion. Offtake agreements come in many forms with various levels of risk on the side of either the buyer or the seller.
The structure which offtake agreements take can vary, with some examples illustrated below:
Graphic: Tessa Peerless
As illustrated in the cement adoption cycle above, a guaranteed revenue stream (often expected in the form of an offtake agreement) is often required for a hard tech company to gain financing from a bank (or to “become bankable”). And it isn’t hard to understand why. When the technology company has a guaranteed revenue stream, they also have a much higher probability of having funds to pay back their loan. So offtake agreements = financing potential.
In the most-bankable scenario, a provider would obtain multiple agreements from a diversified set of customers. To sweeten the deal even further, the ideal customers would be ‘blue-chip’: extremely reliable and valuable industry players who have a long history of financial stability. Together, these variety of blue-chip “offtakers” would ideally represent an offtake of the majority of the supply which will be produced by a particular project. I’m sure you can see how this scenario would lower a project’s commercial risk: it would essentially guarantee the project revenue and subsequent interest payments or equity returns.
But the cement market has some inherent challenges which make it challenging for them to obtain offtake agreements.