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What is Deep Sky?
Phil De Luna - Deep Sky is a technology-agnostic project developer of carbon dioxide removal infrastructure. So, we are an oil and gas company in reverse; rather than taking carbon out of the ground and putting it into the air, we do the opposite, yet have a very similar business model. Rather than developing the technology ourselves, we partner with technology developers to deploy projects; we've seen this happen in every other sector in clean tech, whether renewables, biomass, etc. In solar, for example, Panasonic builds the solar cells, but they're not creating the solar projects in your neighbourhood; that’s someone else. So we're the first project developer that's technology agnostic both on the capture and the storage side. We're focused entirely on building up to gigaton-scale projects in Canada.
Exciting CDR Breakthroughs
Through your research, what carbon removal breakthroughs or innovations are exciting you the most?
Phil De Luna - The most exciting opportunities are technologies that allow us to lower the energy requirement for capture, and right now, when you think about first-generation CDR projects, the ones that have scaled, like carbon engineering, Climeworks, Global Thermostat, all require high-temperature heat or, to some degree and are very energy intensive. The breakthroughs I'm particularly excited about are either electrochemical and, therefore, don't use heat at all or can be entirely electrified. If they use heat, it's low-grade heat. It's heat that you produce through heat pumps or electricity-resistive heating. This is important because it allows for greater flexibility in deployment.
Current CDR projects’ business models work out better if you co-locate to industrial parks with waste heat to recover, but in places like Canada and Quebec, particularly where we have an abundance of hydroelectricity and parts of the grid that are underserved or have low population density, that also overlays with areas where you could do storage. It makes sense for us to deploy in those remote areas. To do that, we want technologies that need the least number of inputs and have the lowest energy intensity. So, that's why I'm excited about electro-chemical-based approaches.
Challenges to CDR Scale
What challenges do you see in scaling carbon removal initiatives to meet global climate goals?
Phil De Luna - So many! I would break them down into operational, technology-based, economic, and policy barriers.
On the technology side, the technology itself isn't all that complicated. We know how to move liquids, solids, and fluids around. We've built an entire industry to do that. Unfortunately, that industry emits CO2 into our atmosphere. So I'm not too worried about the tech, but we must understand from first principles. How do we scale up the technology in a purposeful way for removal? I'll give you an example. Drilling holes into the ground to remove fossil fuels differs from drilling holes into formations in the ground to put liquid CO2 or CO2 back underground, so you can't just repurpose old wells.
We must purpose-build and think about what we're doing for the storage side. It's the same thing on capture; a lot of the industry has been scaling up by looking at HVAC systems and cooling towers, which is excellent. But we need to think about modularity. How do we manufacture these things in a mass production way to drive down the costs, and how do we avoid the big chemical plant model and more of a data centre model where it’s reproducible. There’s a blueprint that you can replicate and then put down anywhere in the world. So, designing things for scale, we have to define what scale means and understand those first principles, which is very different from just taking existing industries and augmenting them to work for removals.
On the economic side of things, we have to bring down the cost. That's the biggest issue, but on our pathway to bringing down the price, we have to find ways to project finance and do it uniquely, allowing the funders of project finance to be comfortable with the technology risk. So, if you go to a pension fund through a GIC at Temasek or any of the significant Canadian Pension funds and go to their infrastructure arm, our project does not meet their criteria. It doesn't fit the box because there's still a technology risk. So are there ways we can tranche project financing so that you can deploy faster and in smaller increments to get down the learning curve quicker? We must find investors willing to take on that risk and be part of the upside and cost savings as things scale.
Finally, on the policy side, you have these fantastic tax credits in the United States and Canada; the US has the Inflation Reduction Act (IRA) and Act 45Q tax credit on every tonne captured. In Canada, the CCUS investment tax credit is a 60% reduction and rebate on all capex funded for carbon removals, but the incentives are not the issue. It's the permitting and processing for getting these projects off the ground. So, in the United States, the Class VI well-permitting process for storage is super long and challenging. In Canada, many provinces still don’t have regulatory regimes to allow storage. We can’t unlock CDR’s full potential until we overcome the complexities with significant capex builds and stakeholder engagement. How do we ensure that we engage the communities, Indigenous Nations, and local municipalities in the territories we operate in? How do we ensure genuine engagement, focus on community-centric issues, and promote opportunities? It’s these things the industry hasn't yet worked out or doesn't have enough muscle to execute.
Bridging the Gap Between Academia and Industry
How can academic research better bridge the gap between theory and real-world implementation in the carbon removal industry?
Phil De Luna - I’m a recovering academic, so I’m sympathetic to the complexities of this question. Papers and research are often conducted to make it into high-impact journals, and often, that's doing something for the first time or breaking some sort of performance record. But, all of these things don't necessarily translate 100% into a commercial product; because you break a record doesn't mean it's economical to mass produce. Just because you have done something for the first time does not mean that you can do it repeatedly or that doing it in the real world is practical. So, academia is great for discovery and should continue to do that. However, it should do that in a way that is applicable for the industry to scale. The only way to do that is to increase conversations and communication between the two realms. There aren't enough business people who understand academic research and what is applicable. There aren't enough academics who understand how their research can be translated into the real world and what it costs to do something. So, we need to increase the frequency of those collisions so that more lessons can be shared.
Explaining CDR to Sceptics
What's the best way for a layperson to explain CDR to sceptics?
Phil De Luna - We've all heard the bathtub analogy, but I'll just reiterate - the atmosphere is an overflowing bathtub. When your bathtub is overflowing, you either turn off the tap or pull the plug. Emissions reduction, particularly point source capture, is turning off the tap, reducing the water flow. Carbon removal is pulling the plug and scooping water out of the tub. So we need to do both, and we need to do it quickly. For a layperson, they need to think about it from first principles. Science states we are warming drastically, and the reason for that warming is CO2 emissions in the atmosphere. Then, you need to be able to think about either reducing the amount of emissions you put into the atmosphere or taking it out. The biggest sceptics will say, (1), it's too energy-intensive or (2) that'll never work, that will never scale and (3) we should be using these finite resources for other things that do emission reduction faster. The rebuttal to those things, and I'll work backwards, is that we are trying to do that but are failing drastically in terms of reductions. We need to reduce emissions faster and if we don’t invest in the technologies to remove emissions, then it won't be there when we need it. The energy intensity statement is fair today, but every single technology in its infancy was always too expensive, and too energy-intensive before it scaled and dropped down. Suppose we felt that way about computers because computers were always the size of a large room, and then we would never get to a laptop. If we felt that way about cell phones because they were only in our cars or these massive things that you had to carry around with a backpack, we would never have advanced cell phones to where they are today. If we felt that way about solar cells, which were so inefficient that they could only be used to power a calculator, we would never have gotten to where we are today. So, the point of it being too expensive and too energy-intensive is short-sighted and foolish. Then finally, the fact that it'll never work, again, it's already working, and we're doing it today.
So, I always tell sceptics you can judge a technology based on the stages of scepticism: stage one, that'll never work; stage two, that's too expensive, and it'll never scale; and stage three, that was my idea the whole time. So CDR is currently on stage one/stage two right now, depending on who you talk to.
What was the inspiration that led to the creation of Deep Sky?
Phil De Luna - The story starts with our co-founders, Fred Lalonde and, Joost Ouwerkerk; they founded Hopper, a $5bn tech travel company and the second largest privately held tech company after Shopify in Canada. They do travel, and they’re a competitor to Expedia, helping customers book travel cheaply and efficiently.
A few years ago, they began off-setting their customers' emissions by planting trees. They just did this off of their P&L, and it wasn't even an opt-in on customer registration. They planted 30 million trees over three years. They thought they were doing a great job. They went to conduct PR about it, and they got completely burned by activists and climate journalists saying that they were greenwashing. So it forced them to look into this and the more they dug into it, the more they realised two things. The first is that the IPCC models are likely all wrong. Why? Well they don't take into account tipping points. They tell you when a tipping point could occur, but it's impossible to model what a tipping point could do and its runaway effects because it is a guess. So the IPCC is a very conservative organisation and all of these estimates for emissions warming are likely conservative. That's also driven to bear by real-world warming, which we are experiencing today, this year being an example. 2023 is far higher (hotter) than any of the projections predicted, our projections are clearly off, and the IPCC reports are conservative estimates, not realistic ones.
Planting trees is not enough; it's a temporary solution; trees die. There are forest fires as the world continues to get warmer and warmer. It makes it worse. That's not to say we shouldn't plant trees. There are excellent environmental co-benefits, which we must understand and disassociate from emission reduction. Planting trees leads to better biodiversity. It has a neat internal cooling effect on the local jurisdiction. It allows for greater resilience to floods because of root systems. But, when it comes to emission reduction, more is needed. We have to remove CO2 from the atmosphere. So they founded Deep Sky to do that.
When they first started looking into the space, they found all of these technology companies with brilliant scientists building them. But these companies kept on running into a wall: access to renewable energy and access to storage. They looked around and saw in Quebec that we have 98% renewables through hydro, which is actually curtailed today. They also noticed many areas in Quebec where you could undertake in-situ mineralisation. Which is deep underground storage through mafic and ultramafic rock and deep saline aquifer storage in St Lawrence land. So, this was a perfect place to unlock the barriers these technology companies faced. Combine this location with the business model of a technology-agnostic project developer, and Deep Sky was born.
Breakthroughs
Can you share that 'aha' breakthrough in the business's journey that left you especially excited about its potential?
Phil De Luna - I think it was the business model - the fact that we are the first to the market, technology-agnostic project developer. You've had project developers in the past like 1PointFive, which is really an extension of Occidental Petroleum, that picked one technology and said we're going to take this technology and we're going to scale it. And you have companies like Climeworks that started out as technology developers, but because they've raised so much money have slowly morphed into project developers by necessity. But we are the first-to-market company that exists only to find technologies and scale them and we don't care which technology. Which is a huge benefit right? If you think about it, first principles thinking: if you don't know which technology will scale, why would you pick just one? Why not try them all, see how they work in our environment, choose the best ones, and then try to scale many of them? Approaching this from a portfolio approach will reduce the amount of technology risk because if one of our Air Processing Units (APU) works better in the summer versus the winter and vice versa, then as a whole, we can deliver on our credit over the year. So this blended technology approach of being technology agnostic both on the capture and storage side was a huge ‘aha’ moment for us, and it flies in the face of traditional VC.
Many VCs say, “You need to have your own differentiated technology,” or “You need to own IP.” We own no IP. We don’t want IP. If they develop a new IP while trialling at Deep Sky Alpha, the companies that come to us keep their IP. We don't ask for exclusivity. We care about being first to the market and scaling this as quickly as possible. And the only way you're going to be able to do that is to collaborate with others. And so, that realisation of a diversified technology approach, being partner-oriented first and not caring about the IP so we can scale faster. That is where the value lies.
Scalability
How are you approaching scalability, and what tools or strategies have proven most effective in levelling up your solution?
Phil De Luna - Ultimately, we have to think about the manufacturability of these air and water processing units. Modularity is always a key in terms of deploying quickly and then scaling. So, we often look for technologies with a modular build so that they can either be shipped or rapidly assembled on-site, allowing for fast deployability. We also look for technologies that have a relatively simple supply chain. This means that no exotic or rare materials go into the processing unit build itself. We also look for technologies that do one thing really well: capture CO2! Some technologies try to diversify their product stream by doing utilisation or creating a byproduct like an acid or hydrogen and try to go to market with both, but that actually complicates things for a project developer because now we have to find multiple different off-take avenues and deal with the permitting, regulatory and safety issues for all these other byproducts. So, as project developers, we don't care about that stuff. We just want to capture CO2. That's another piece that could indicate scalability: how complex are the auxiliaries involved in both input and output.
Challenges
What's the biggest challenge your business is facing, and what do you think is required to solve it?
Phil De Luna - There are so many different challenges. Public perception is a big one, as is education and getting people to understand CDR, especially at the local community level. There's a lot of nimbyism out there, and we have to make sure that we engage communities thoroughly, thoughtfully and genuinely so that they're part of the solution from the very beginning.
Project financing is always an issue as well. Everyone talks about bridging the Valley of Death; everyone loves to talk about it. But we're still looking for ambitious, creative and visionary investors willing to go in on this with us. To give you a sense of the scale required, our commercial facility will cost $800m to build. We've raised $75m to date on a Series A; it's one of the largest Series A raises in the carbon tech industry. But it's just a drop in the bucket for what needs to be raised to deploy this at scale. So, how do we mobilise that capital? It is a big question.
And then manufacturability, how do we build the supply chain? How do we ensure there’s a labour force and a skilled labour force that can build and undertake this at scale? Then, how do we reinvent and hack the traditional construction and build process? This industry is highly dependent on stage gating and Final Investment Decision (FID), which makes sense if you're a large multinational company, but if you're a startup trying to build things quickly, we need to find ways of circumventing the traditional process.
Collaboration
Do you see that circumvention coming through private sector collaboration, or do governments need to get involved to make things easier for startups? Or is it a combination of both?
Phil De Luna - It's funny; the government is good at setting the rules. But, as soon as they start playing the game, they usually make a mess of it. I can say this unabashedly because I was a director at the National Research Council of Canada and a public servant for much of my career.
Governments are amazing, and they do so much to help draw the lines and create an environment for industry and mature it. But ultimately, what they lack is speed and flexibility. And so, if you ask me what the government's role is, it is to provide the market with guidelines, rules, and clarity so that the investors and the private sector feel confident in moving. And once that happens, everything will follow suit.
