Resources

• The topic of energy transition underpins David Crane’s story. This Deloitte piece – written years after Crane’s experience trying to transition his own company – outlines how it sees the oil and gas industry can prepare for a low carbon future.
• For a better understanding of Crane’s own views of the situation, his own piece If I Was Right, Why Was I Fired? expands on the story told in this podcast, as does this GreenBiz piece called Inside the Rise and Fall of NRG’s Green Strategy.
• Here’s a SPAC primer, and a Forbes article that explores the risks and opportunities of the proliferation of climate-tech SPACS in 2020 and 2021.
• Crane’s SPAC is described further on the Climate Real Impact Solutions website.

Guests

Host: Rebekah Emanuel, Head of Social Entrepreneurship, Harvard Innovation Labs

Guest: David Crane, Climate Real Impact Solutions (SPAC)

Transcript

David Crane:
As a climate activist, I think it's great to show these big incumbent companies that there is a way to get value for their green innovative businesses. What the SPAC allows is that big companies that have been doing cool green things are going to start to sort of carve them out and SPAC them so that they can get purpose-built shareholder base.

Rebekah Emanuel:
What allows big companies to transition from brown to green? David Crane has lived that transition and thinks there are new financial vehicles that make this more possible and more lucrative than ever before. I'm Rebekah Emanuel and this is Climate Rising, a podcast from Harvard Business School. We explore the business implications and opportunities of climate change. In this season of Climate Rising we focus on entrepreneurship tackling climate change. I'm the Director of Social Entrepreneurship at Harvard Innovation Labs and I work with current and future entrepreneurs every day.

Today, we're talking with David Crane, who was famously fired from NRG after pushing the company from being the third largest emitter in the US to being climate forward. He recently announced his newest endeavor, climate real impact solutions. It's a new investment vehicle, one that allows him to raise money from the public market and then use that money to acquire a company, essentially taking the company public, sidestepping a traditional standard IPO process. This is called a special purpose acquisition company, usually termed a SPAC. Crane thinks that this new vehicle solves many of the hardest problems with transitioning a big company to being green, and it's especially transformative for climate. He tells us why, starting with this time at NRG.

David Crane:
You know that I'm probably best known for my tenure at NRG and that ended five years ago.

Rebekah Emanuel:
So maybe you can give me a sort of big picture of the transformation you were trying to lead at NRG.

David Crane:
Well, NRG was a non-utility, basically power-generation company that happened to have its greatest strength in coal-fired power plants, and I always used to say, in fact I would not say that I started my adult life as being particularly an environmentalist. I mean, I was always sort of progressive in my thinking, but if I think way back to when I was younger, the social issue that really animated me back in the day was actually capital punishment and being opposed to that.

But when I got involved in power companies, because I was a sort of project finance person, you quickly become an environmentalist or have to deal with environmental issues and particularly the air quality. And so in the earlier parts of my executive career, I went through the SOx and the NOx and the mercury, and then when greenhouse gas emissions came up, my first reaction was trying to deny that it was anything different from the other pollutants. It would be just something that we would ultimately figure out how to control with backend equipment.

But it became clear to me sort of in the 2006-2010 timeframe that this was completely different. And so I'm running this company that was actually through growth and mergers, we had become sort of the third largest emitter of CO2 in the United States, and I just went to the board and said, "This is not sustainable. We probably can get away with this for something like five to 10 more years, but ultimately this isn't going to fly." And one of the sad things even to this day about corporate America is I never made the moral argument to the board. I referred to it all within acceptable board talk, "This is an enterprise risk and if we shift into renewables that's a high growth area," and all of that. And it does seem to me that in the 21st century we should be able to go to boards of directors of American companies and say, "We're just going to stop doing this because it's wrong."

Rebekah Emanuel:
You made that argument in economic terms to them, and what did they say?

David Crane:
Well, the board of directors of NRG, and I respect the confidentiality of board deliberations, but never at any point was there any serious alternative for NRG discussed or put forward by anyone or multiple number members of the board that there was a different approach. So I'm not saying that all of them were a 100% bought into my vision, but they never offered an alternative vision to this approach. And so we started things like the electric vehicle charging network. We became the largest solar power company in the United States for a couple of years. We did the largest carbon capture project. So we had this multi-phase thing and what ultimately did me in was that we were not able to shift the shareholder base.

Rebekah Emanuel:
Can you tell me more about why it was so difficult to shift the shareholder base?

David Crane:
What happened was we got to the point where we were pouring everything into these green zero carbon energy solutions so that we had these growth engines and we never ever attracted a green investor because... And we actually sent a firm out to talk to them, to investors, the green investors, and uniformly they said the response they got back would be, "Oh yeah, we think NRG has got the strategy completely right. We really admire what they're doing." And when the people we sent out, this investor relations firm said, "Well, then why don't you invest in them?" They're like, "We can't invest in them. Whatever they hope to be in the future, right now they're the third largest polluter in the United States. We're a green fund. We'd get laughed out of the room if I took that to investing committee." So that was the problem that we faced and ultimately at the end, at the end of 2015, I had alienated the shareholder base.

Rebekah Emanuel:
So at the time that was a catch 22?

David Crane:
At NRG, even with a CEO like me who had sort of drunk the Kool-Aid about, "We need to transform this company from its reliance on coal-fired power plants to a sort of distributed green vision of the energy future," even with the CEO fully on board and leading the charge, there are pockets of internal resistance, both within the employee base, although even more pronounced at the board level and in the institutional shareholder group, that you constantly have to justify why.

I mean, I find it hard to believe in retrospect that I had to justify why I was taking the profits from coal-fired power plants that were 40-50 years old and plowing them into new solar development, or the thing that was unbelievably annoying to my shareholder base back in 2015 was that we had started the first electric vehicle charging company in the country, a company called EVgo, and at that point in build out phase it was costing NRG sort of a minus $10 million a year in EBITDA. This is for a company that's a $3 billion a year EBITDA, and I would regularly get grief from the board and from investors. "Why are you spending on money on that?"

And I would just pull my limited amount of hair out of my head and say, "How can you... this is such an obvious thing that someone's going to have to build an electric vehicle charging network to serve this transition in the mobility space. And I thought that our investors would respect the idea that we were to prepare NRG for a future, five to 20 years in the future, and they absolutely had no respect for that at all.

Rebekah Emanuel:
Having a shareholder base and a board that wasn't aligned with transitioning NRG is an incredible challenge. It sounds like you're on a new adventure right now, launching the SPAC, this blank check company in the climate space. Can you tell me why you chose it and how it solves this specific issue?

David Crane:
What the SPAC allows now, and you haven't actually seen many of these SPACs, but you will over the next year, is that big companies that have been doing cool green things are going to start to sort of carve them out and SPAC them so that they can get the purpose-built shareholder base and they can get the sort of sum of the parts valuation in that there'll be a clear market indicator of what this business that's otherwise buried inside this giant corporation is worth. And I think that that's going to be a very, very important part. It's going to be a lucrative opportunity for all these companies number one, and number two I think it's a phenomenal thing. As a climate activist, I think it's great to show these big incumbent companies that there is a way to get value for their green innovative businesses.

Rebekah Emanuel:
I see the value in getting a custom-made, climate-aligned investor base right up front. From a financial side, can you tell me why a SPAC is particularly helpful in the climate space?

David Crane:
As you know, a lot of areas like clean energy, it's sort of a tradeoff between capital and operating costs. So with solar or something with zero marginal costs of production, all the cost is up front. So a lot of the companies in our space are a little bit inhibited in terms of the pace of their growth by access to capital or capital that's too expensive, and this SPAC phenomena is allowing them to access all sorts of capital and at reasonable prices, and get value for their growth potential. You look at companies like Nicola, but also Quantum Scape, and other companies and people with a straight face are valuing these companies based on 2027 earnings and it's 2027 projected earnings based on a product that's not even going to be developed at scale until 2023.

I never thought I would live to see the day when the public markets was rewarding the sort of future growth story like that. What the market has shown, at least in the ESG sustainability climate space, now the public markets, is an unbelievable appetite right now for a Ford growth story, even if it's a growth story that's going to take several years to realize.

Rebekah Emanuel:
Nicola makes electric trucks and Quantum Scape makes batteries. So the SPAC allows climate-focused companies to access capital up front at a reasonable price, so what types of companies should consider SPACs?

David Crane:
I sort of divide the world of companies that should consider SPACs into two groups. One is what I would call moonshot companies and those are tech-driven companies like Nicola and Quantum Scape that are addressing a sort of blank space that has endless potential in terms of total addressable market. A lot of them are pre-revenue, but there is also more... And for those companies, SPACs are basically displacing late-stage venture capital. Then there's another category what I would call more classic emerging growth companies that would have normally at this point looked at middle market private equity outcomes for their next sort of round of capital as they graduated out of VC.

For those companies, the market is still willing to look forward, but those investors are going to look at more traditional metrics about revenues and unit costs, and they're not going to be looking forward to 2027. They want to know what you think you can do in the next two to three years.

Rebekah Emanuel:
So can you walk me through how a SPAC works? First, you raise money from the public markets, and then you choose a company. When you buy them, they effectively become public, but with a little bit of a different process than a regular IPO, is that right?

David Crane:
First, you do the IPO of the blank check company, which we finished just three weeks ago and then you have two years to actually buy something. And there's a big incentive in the current marketplace not to use your two years, but to get something done in the first six months. So yes, probably the greatest equivalent I would call it speed dating. You're trying to get it down to two or three companies that they like you and you like them.

Rebekah Emanuel:
You just did this specifically in the climate space. What criteria is your team using as you narrow down the pool of potential fits?

David Crane:
Well, what I would say is interesting is what's not... Usually when you enter an MNA transition, the first three things you think about are value, value, and value, and interestingly, while value's not unimportant in a SPAC context, ultimately the market's going to set the value of the SPAC company after the de-SPACing transactions.

Rebekah Emanuel:
And that frees you up to look at other criteria?

David Crane:
Well, I guess what our SPAC would say is that we start with the fact we called ourselves Climate Real Impact for a reason. Let's say you looked at a large renewable power company that builds solar plants in the desert. It's undeniably green, it's doing the right thing, but if it did not exist would the world be a different place? And the answer is probably no because there's so many solar development companies that if one company didn't do a particular project than others would. So in that way, some of these moonshot companies that I'm talking about are very appealing because they're definitely higher beta, but they're actually trying to do something transformational that would actually move the needle on the 40 billion tons of CO2 that humans emit into the atmosphere every year.

So that's one criteria that maybe is different from others, but this is very much my personal point of view that a lot of "impact investing" should be renamed as "I want to feel good about myself before I go to sleep investing" in the sense that people won't invest in cigarette companies, they won't invest in coal-fired companies, but are they really having impact on the climate?

Rebekah Emanuel:
Do you feel like SPACs are particularly useful for climate change at this moment relative to anything else on the ESG list?

David Crane:
No, I think SPACs are a huge... In a period that's been pretty dark for climate activists over the last four years, the emergence of SPACs, the warm embrace that the public markets are of this whole space is one of the most encouraging signs that I've seen. It's going to ripple all the way through the system to stimulate sort of in-the-garage innovation. The idea that you could actually bring forward not only doing good by doing well, you could bring all parts of that forward and maintain your company and its integrity.

And the fact that we're looking for companies that are mission-driven and that the market's embracing that, it's an implicit rejection of sort of the single bottom line approach. It's just all a positive thing for climate movement.

Rebekah Emanuel:
So while SPACs may sound a little bit wonky as this public company that merges with a startup and then takes the startup public, in some ways it actually feels transformational all the way down the line, all the way to people who have a new idea that's just an idea in their head and in their garage?

David Crane:
Yeah. I mean if you think of the flexibility of it, all the way down the line from the people that are in their garage, but let's look at the other end of it. Let's take as a case study, let's not use specific names, but let's just call their company, let's use the name Tesla. Tesla, which has been validated by the market many times over with over 200 billion market count, and this is all notwithstanding a truly charismatic visionary CEO, but one whose sort of quirky by standards of traditional public company CEOs in terms of the things he says and gets involved in.

If you look at Tesla, they've had to try and develop the value chain from beginning to end as the first plugin electric light duty vehicle company, but they might make the decision, for example that, "Well, our capital structure, we don't really need to own the global electric vehicle charging network that we've spent a very large sum of money, that we spent billions of dollars in, in order to enable our sale of these cars."

The SPAC market is that if Elon wanted to do this, he could carve out his electric vehicle charging network, shine a light on it, form it as a different company, still call it Tesla charging. He could maintain majority control if he wanted to consolidate the accounting, or he could go minority and de consolidate, but for him who is singularly focused on maintaining the Tesla customer experience from beginning to end, he could SPAC and get the financial benefits of that without ever losing control of the branding or the customer experience.

And so it helps not only the person in the garage, but big companies who are thinking about how to rack and stack what they do.

Rebekah Emanuel:
It seems like one of the core things in your head that matters for climate is how our investors are going to think about things and that that will drive a lot of what's possible and what's not for a business. So I wanted to just ask you about this argument that you talked about that investors want a less diversified investment. Either they want green energy exposure, or they want coal. If they're going to do coal, they don't want something hybrid. Does that feel like the right path going forward?

David Crane:
That is an area where I don't think that the public markets have changed too much is the discrediting of the conglomerate as a business form. You're way too young to remember, but in the 1970s with companies like ITT there was a virtue seen in conglomerates in terms of sort of risk mitigation internally. But the market went away from that and the last surviving conglomerate was GE, which obviously has fallen on hard times in the last few years. So the fact that the public markets want a pure play has not changed, and I don't think will change over time. And so, again, to the point that some of these big companies which have been trying to develop these green businesses internally, again, I think the SPAC is a great option for them to give the market what it wants, which is a pure play.

Rebekah Emanuel:
Fantastic. David, thank you so much for joining us.

David Crane:
Thank you, Rebekah. It's been fabulous speaking with you.

Rebekah Emanuel:
On January 22nd, David Crane's team at Climate Real Impact Solutions announced that they had merged with EVgo, the nation's largest public electric vehicle fast charging network. With more than 800 locations in 34 states, they charge from 100% renewable energy. The deal raised around $575 million for EVgo and made EVgo a publicly listed company. The following day, Crane's SPAC soared more than 80%.

That's it for this episode of Climate Rising. Next time we dive into the world of sustainable fashion.

Matt Scullin:
Reishi is literally made of carbon that's been pulled out of the atmosphere and so the Reishi production process itself is carbon negative. It then of course ends up moving around the world. It ends up being tanned, albeit with a very green chemistry compared to what's used for traditional animal leather tanning, but the overall carbon footprint ends up far, far lower than that of animal hides and that of polyurethane PVC letters.

Rebekah Emanuel:
Thanks for joining us. I'm your host, Rebekah Emmanuel. This is Climate Rising, a podcast produced by the Business and Environment Initiative at Harvard Business School. This episode was made possible by the collaboration between this episode's associate producer, Jake Mayo, HBS class of 2021, producer, Mary Dooe, and our team from the HBS Business and Environment Initiative, faculty chair, Mike Toffel and Jennifer Nash, Lynn Schenk, and Elise Clarkson.

You can subscribe on Apple podcasts or wherever you listen, and please leave us a review. We appreciate the feedback. You can also find show notes and links to resources discussed on this episode on the Climate Rising homepage, climaterising.hbs.edu.