CarbonBuilt: Decarbonizing Concrete Blocks - Rahul Shendure Flashcards
Today’s episode is the second in our series on hard to abate sectors, those sectors with some of the most significant contributions to global greenhouse gas emissions and where decarbonization depends on scalable cost-competitive technologies. In this episode I’m talking with Rahul Shendure, CEO and Director of CarbonBuilt. His company is developing technologies to decarbonize concrete by replacing carbon-intensive cement with a combination of industrial waste materials and carbon dioxide, often captured directly from industrial sources.
I’m the CEO of CarbonBuilt, but that means I partnered with our founder who’s a professor and the original inventor of the technology at UCLA to spin the company out in late 2020. This is very much a culmination of a journey that began at HBS almost 25 years ago in terms of when I landed there. I was already focused on the environment coming in, but B-School really gave me the opportunity to pivot from working primarily as an engineer or analyst to product or general management, and really to narrow my focus from the environment broadly to climate specifically and been very focused on climate and climate tech since then.
22/11/23
28/02/24
Concrete accounts for close to 10% of global emisisons, but as we make improvements globally on lots of other things, the share here is going up.
The basics as I understand is that cement is the glue that’s used in concrete and cement is produced with a combination of limestone and clay and a lot of processed heat, which then becomes a material that you grind down, add gypsum, and then you’ve got cement. And then from cement, you add aggregates, which can be sand or gravel and water, and then you get concrete. Cement as the glue only makes up 10-15% of the mass of that finished product, but it’s responsible for 90% of its emissions. The emissions that come from cement, 2/3 of those relate to the core reaction that’s happening. The other third comes from the heat required to do it. Today, the only way to do this is coal. Cement is kind of its own category: carbon-emitting activity and hard-to-abate materials.
There is no silver bullet in this. To decarbonise concrete will require lots of different solutions. Different solutions are going to make more sense in different parts of the world. There’s also the time aspect and the risk aspect.
They’re striving to be impactful, but they require fundamental rethinking of the chemistries involved. The equipment that’s involved almost always very capital intensive, probably requiring lots of new permitting, regulatory, and so these things are going to take time and there’s execution risk, technical risk. At the other end of the spectrum, there’s lots of different options that are available that are incremental that can utilize a lot of the existing infrastructure or business practices, but each just make a small change and oftentimes these are very local in nature.
You could also layer in there things like carbon capture where you’re doing it the same way, but you’re putting in the equipment and the energy to take that CO2 and either put it underground or put it in a pipeline
So that’s the spectrum that as I was looking at this prior to starting CarbonBuilt as an investor. The challenge I had was that I wasn’t really interested in coming in and working on something for 30 or 40 years or the sort of moonshot ideas. I’ve spent plenty of my career working on those things and while there’s a joy that comes from that, that’s just not what I was interested in doing today. My time horizon had shrunk. And at the other end of the spectrum, I was not interested in incremental solutions. The thing I was really looking for was something that could bridge those two, could have a near term impact.
When you step back and think about some big global trends, it’s very clear that the normal uses of concrete are going to dominate that growth. Examples here, I think we’re all aware of the massive increase in data centers as an example or warehousing related to e-commerce and AI. As this continues to grow around the world, we need concrete to do that. You’re not going to be able to solve all of this with wood certainly, and also I think the environmental trade-offs are not necessarily quite as clear as you might think. The other trend that I think is inescapable as we think about over the next coming decades is just the growth of urban centers and housing across the global south, India, Africa. For the most part, these are buildings that need to be built for low cost and concrete is going to be the answer.
Whether it’s for IT and AI related stuff or for low-cost housing. If we miss those windows, we miss the window, and so trying to be ready for that growth is critical.
When we think about geographic strategy, that becomes a great piece of knowledge to focus where we work. I’ve talked about not trying to be too broad in terms of trying to take on too many applications at once. The same could go for geographies, right? We get inbound inquiries from all over the world. We’re focused on the US right now for a reason, but as we move forward, moving into some of these specific countries and geographies that are going to be experiencing large infrastructure growth that can only be met with concrete is paramount in our mind.
One of the things I was looking for when I was looking at investments was innovations that could be implemented at the next point in the value chain, which is the production of concrete. As much lower capital required in order to do transformation of at a given site, much easier to execute in terms of the speed of a transformation, whether it’s the engineering or the permitting, you could do many more of those pretty quickly with less CapEx, that meant easier access to debt capital.
So philosophically I was sort of looking at the concrete position of the value chain and the opportunity that really allows is rather than changing cement or how it’s made, just reducing its use in concrete. Can we decarbonize concrete by getting rid of cement in the mix? While there were a number of people working on this, what I found at UCLA was the combination of high impact on the carbon side, limited or no impact or a benefit on the cost side. I’ve been doing climate tech in commodity sectors long enough to recognize that there was something different and special here, which I had not really seen before.
This team had been at it since 2013. Much of that time had been spent not just in the lab working on the technology, but actually working through one of the XPRIZE programs being a five-year competition that imposed a set of requirements and discipline on an academic team that normally wouldn’t have that. And as a result, when I met them, they had already piloted the technology at about 10th scale. They demonstrated about a 50% carbon reduction and cost parity. That was a huge important data set for me to be able to look at in my own diligence for what I was going to spend time on.
But the other thing that was cool about it is I was able to see that there was still some room in front for improvements, so it didn’t seem like it was going to be that difficult for us to take that to 70%, 80% reduction in carbon and price parity, which was from my perspective, was critical to that near term adoption rate.
In terms of the technology itself and how some of it works, we’re replacing most or all of the Portland cement in our customer’s mixes with a combination of several industrial by-product materials that exist at very large scales and are typically used in very low value applications or landfill. These materials, you can’t just substitute them for Portland cement and do nothing else. In order to make them work and deliver strength, you need to react them with carbon dioxide. That’s really where the equipment and capital for our retrofits comes in is how do we bring not just carbon dioxide to bear, but low cost carbon dioxide in an energy efficient manner. And so you get these low cost by-product materials combined with low cost, easy to deliver carbon dioxide, and those two things together can substitute for much or all of the Portland cement that’s used.
This process then results in a product that is indistinguishable from concrete. Does it have different properties? Do regulators get involved here and say, “Hang on a minute, you’re lots of different ingredients, are buildings going to still hold up and our roads and our sidewalks still going to be in place?”
That was one of the key questions that motivated both my interest in this specific team and what they delivered to date, but also our business model going forward. Taking a step back, concrete, while it’s a pretty common material, there’s lots of different applications and there’s things at the hard end. You’re trying to build a state-of-the-art skyscraper in down cities urban core, and there’s things at the easier end. We are very deliberately focused on some things at the easier end, and by that I mean applications that are easy to decarbonize, easier for us to deliver an economic return to our producers and are made in a factory so we can test them against an existing specification.
So this product is being used to create concrete masonry blocks, which are dry cast as opposed to the wet cast ready mix, where you see the cement trucks down the street, pouring foundations and walls and sidewalks. You’re doing the block concrete masonry, which sounds like is much more controlled environment in factories.
That’s correct. Masonry represents about 10% of the US market, and so this is not just blocks, but things like pavers and retaining wall segments. And so these are all generally made in the same types of factories by the same company. So this is where we’re starting. It’s our beachhead (an area of land near the sea or a river that an attacking army has taken control of and from where it can move forward into enemy country), if you will. It’s a big enough market for us to build the company around. I think that’s a business strategy question for us is how do we allocate our resources between growth in our initial markets and expansion into other applications. Geographies would be the other vector.
To ensure the quality or the performance of these pavers, retaining walls, applications. These are sent to test labs to validate that it meets regulatory and private sector standards. Is that right?
Exactly. So there’s ASTM specifications that govern all of these. One of the other nice things about some of these applications at this end of the spectrum is that there’s a history around using alternative materials. So the specifications already have some flexibility in them as long as the materials you’re using have some connection to things that have been used before, which is the case in our situation. So you’re able to test this stuff upfront. At the end of the day, the real test is, is your customer, the producer, ready to put it on their trucks and send it to their customers, right? Because they’ve got a business that has been running for probably decades in most of these situations is very likely to be a family business or one with some heritage, and that’s not a decision they would make lightly if they were concerned about it.
I imagine with your go-to-market strategy and your efforts to convince folks to adopt this technology, you could go directly to the factories who would purchase your technology or you can skip over them and go to their buyers, the people who buy say pavers and retaining walls and try and get them to ask for it of their suppliers, who then would ask you, “Please sell us your technology so we can satisfy this growing demand that we’re seeing.” So where have you put your effort? Are you tackling both of those or are you focusing on one much more than the other?
We do tackle both, but I would say we are principally focused on concrete producers as our customers. There’s a couple of reasons for this. One is it’s a very fragmented industry and any given customer is going to be a very small portion of one producer’s marketplace. There might be an exception or two here or there if you’ve got a very large university that dominates concrete deployment in town or something like that, but that’s the exception.
The ability to go to producers with a economic value proposition is key, they’re really not doing this for the sustainability aspects. That’s icing on the cake for many of them, but there’s a clear economic value proposition in here that enables them to make this their mainstay product, and that’s how we focus our conversation with them.
Now that we’ve got a first commercial plant up and running, one of the benefits of this being a fragmented industry is our producer in Central Alabama is happy to have 99% of his theoretical competitors come and visit. The other people producing these products come visit the plant because he really doesn’t compete with them, and that’s kind of cool. We have access to end customers who are interested in sustainable lower carbon product.
So the technology must have matured quite a bit. When you entered, there was the one-tenth size pilot project, which was a cost parity, and so now there’s an economic incentive, which means they’re going to pay for your technology and have, I presume, lower operating costs than before in order to pay back for the technology and make profit. So is that where you are right now?
Indeed, it has. And I would say there’s been two phases of that. I mean, it hasn’t been that long. It’s been a few years, but we spent about a year after spinning out getting the business model right. So this whole idea of retrofitting existing concrete plants was new and really related to our thinking around company strategy and not around things that UCLA had done in advance, but over the course of that year, we were also able to push the technology further, and that was both from the standpoint of materials and in terms of the mineralization use of CO2 aspects. So that was about a year of continued work in the lab and figuring out what was our go-to-market going to be. We landed our first customer in terms of getting them under contract in April of 2022, took us until early this year to go from that contract to starting production.
So actually relatively short timeframe illustrating the point I made earlier that even for our first plant, it was a year or a little less than a year, and we’ve been in production since Q2, been making deliveries since Q3, and really delivering on the unit economics out of the gate. So not one of these technologies where we’re up and running and we have to keep making improvements and hopefully if we make improvements, we’ll get there. First plant’s up and running. Plenty of lessons learned and improvements to make. It’s delivering on the unit economics, which feels pretty good.
What’s the ballpark payback period that you talk to customers about? I imagine it ranges with the scale of the technology, scale of the plant.
While there are certainly some economies of scale, you don’t see a huge range in terms of the scale of these plants, because the product is so heavy and there’s a big transportation penalty if you have to move it too far. So these tend to be very localized plants and as a result, they tend to have a certain scale to them. Vast majority have two production lines of a certain size.
The cost reductions that we’re able to deliver, deliver a pretty good return, five, six year payback, and this is with no other incentives or anything else. That’s where we can use on top of that, either incentives that are out there today or carbon credits as a way of accelerating that to get below three years, which is what we need to really put this at the top of their list in terms of what’s the best use of my dollar. We can also use these early deployments as a way of accelerating our access to debt capital, and that’s another way of accelerating the payback period on equity. When you put any of those situations together, we’re looking at less than three year payback, and that’s what we think is required if we’re going to transform the industry.
We have the Inflation Reduction Act, which has lots of incentives for lowering carbon intensity. Is concrete part of that story?
It is. We’ll see where it all shakes out, but concrete is definitely named in the text, and so we’re optimistic there’ll be some of that. I think the three specific vehicles are first grants, so there’s big grants available for industrial retrofits, for demonstration greenfield plants. You don’t have to be a finance pro to know that that can materially change the payback. If we’re getting a 50% grant on the initial CapEx, for example, that can go a long way. There’s also some great new tax credits.
These are things that have worked for solar or wind or other sectors in the past more energy related and that these have been used as a model for accelerating and improving the economics for hard to abate innovation. There’s an investment tax credit, for example, that is something we could look at and are looking at that would apply a 30% tax credit to any equipment. It could have a similar impact on the core economics and payback.
And on the carbon credit side, I guess the logic there is if customers, or at least some customers, wouldn’t take on this technology even though it has roughly six year payback period unless it had a three-year payback period, then if carbon credit buyers could provide incremental capital, then you could offer it to customers with a three-year payback. Is that the basic logic of the carbon credits?
That’s correct. I mean, we would think about it as a source of additional revenue. So if the core piece of the value proposition is around cost reduction, the other way we can expand margin is by increasing on the revenue side and really taking an attribute that they haven’t had the ability to monetize in the past because it’s just their baseline product. But if we’re making a change on the carbon side and we can package that up and sell it and bring in more revenue, that can also work to improve the financial.
One other way to add value to the market deployment of your technology to the factories that are building these blocks might be to try and convince their customers to pay a premium. Now, you mentioned it’s viewed right now as a commodity product, but so too were many things at one point like coffee for example, that’s far from a commodity product now. Do you see any movement toward a willingness to pay for green concrete?
That’s a great question. You could come at this from two angles, right? You could come at it from the angle of we’re going to look for those customers and condition the way we think as a business and as a team around this is a premium product because it does have value. Those of us who are working at CarbonBuilt don’t question the fact that there’s more value in this product we’re making. Or you force yourself to say, “This is a commodity.” And at least for the people that I need to start driving volume, which is what we’re interested in, they are willing to do that, and that’s great when that shifts. If you’ve conditioned your business and your approach to be foundationed on a commodity world where people don’t care, you’re at a good position to take advantage of it as things change.
I think I read 70% less carbon emissions than traditional?
Those are choices that we make. So we could make the product less economically interesting and more beneficial carbon wise or vice versa. And so these are choices we need to make. I’m pretty firm in my conviction that if we can deliver a strong economic value to producers with a 70% reduction, we’re going to make a bigger carbon impact than something that is carbon negative or 150% reduction that is uncompetitive price-wise. That’s a bet I’ll make any day.
Let’s talk about the growth trajectory. Your first deployment here, Central Alabama, what are you seeing in terms of the factories you’re speaking with? Where are you finding more interest in uptake?
Let’s focus on the US for a second. Geographic hotspot, we have a pipeline that includes more than 25% of US production capacity, and that includes small businesses that have one plant with one line, and the market share leader that’s part of a big global materials conglomerate. So entities across that spectrum brings something to our adoption strategy. The smaller companies are able to move faster than the bigger ones are, and the big ones bring the volume.
So I suspect that our next geographically area of focus is probably going to be the Southwest US. That’s a combination of where we’ve got some good materials, but also just the right producers who are energized and ready to move next. Really for the near term, the thing that gates us is just our own resource, how big of a team we are. That’s the biggest issue we have.
There’s also, of course, the economics of it, like who’s most eager to reduce costs? And then I imagine proximity to feedstock must play a role as well. Is that right?
There’s certainly enabling materials, including some of the CO2 sources that we find preferable. We take care of all of that. So it’s not like we hand a package over to our customers and say, “You figure this out.” For us, as we look at the opportunities that come next, the access to what’s the delivered cost of a particular byproduct material to that site is a part of it, but that criteria doesn’t lead us to saying, “Oh, there’s one geography that works until we have a tax credit or a grant,” or something like that. There’s opportunities all around the country that we can make work.
Let me ask you the final question I ask all of our guests, which is for folks interested in getting into this space or more broadly into business and climate change, what advice or recommendations do you have?
This is the defining problem of the next century. If this is an area of interest, don’t analyze it to death. We don’t have time. There’s windows of opportunity. Sometimes you just need to move, and so my advice is jump in, learn on the fly. Climate is really huge, so I think we sometimes put it all together and treat it as one sector for someone looking at where is venture capital dollars going or something like, it’s a cut across the entire economy.
Like anything else, everyone should ask themselves, what sort of industries do they like to work in? What kind of work day-to-day gets them excited and motivated to get up? If you put the layer of climate on top of that, there’s an answer. There’s a bunch of things one could do, and working on something that you know is this critical to the planet, to our kids and grandkids, I think adds a level of satisfaction to work. That is really tough to quantify. There’s going to be plenty of challenging days, plenty of hard days working in a sector like this, but as one of my colleagues likes to say, a bad day working in climate is better than a good day working in almost anything else.
