Back in 2014, Canada ranked a respectable but not inspiring seventh place in the Global Cleantech Innovation Index. These were tough years for the cleantech sector due to its capital intensity, long development timelines, and reliance on an unpredictable regulatory environment.
This was still the case when BDC launched the $600M Cleantech Fund in 2018, which was instrumental in reigniting investment in Canadian cleantech with investments in 50 companies.
We have seen an incredible new generation of entrepreneurs emerge in recent years, supported by a well-coordinated network of private and public organizations and increased investments, which has significantly accelerated Canada’s innovation outcomes in cleantech.
By 2021, Canada had made impressive strides to rank 2nd on the Global Cleantech Innovation Index. And despite accounting for just 1.4% of the World’s GDP, Canada took 12 of the top 100 spots on the Cleantech Group’s 2022 Global Cleantech 100.
The macro-environment for cleantech has also fundamentally shifted in the last decade, both in Canada and globally.
“Eight countries have already achieved net-zero emissions, paving the path for more nations to follow suit.”
First off, with real-time climate disasters playing out at an ever-accelerating rate, public awareness of the urgency to act has never been higher and has translated into increasing actions from governments all over the world. For example, net zero commitments have been made by over 120 countries, including Canada and all other G7 nations. Remarkably, eight countries have already achieved net-zero emissions, paving the path for more nations to follow suit.
And it’s not only governments making this type of commitment. 622 of the largest 2,000 publicly traded companies in the world have made a pledge to reach net zero. Some of them have also created Climate Funds, including Amazon, which put $2 billion into its fund and Microsoft, which put in $1 billion.
There are significantly more climate-related disclosures and low-carbon investments from institutional investors. Climate Action 100+ is a good example with more than 700 of the largest institutional investors, including BlackRock, representing $68 trillion in assets. Global asset managers such as Brookfield, TPG, and BlackRock announced Climate Funds worth more than $30 billion in 2021.
Carbon pricing is also playing a role. It is increasingly accepted, and common − 27 countries now have a carbon tax, and many more have adopted various pricing schemes (e.g. cap & trade). Canada recently launched a series of initiatives that have made and will continue to make a real difference. The carbon pollution price, or carbon tax, launched in 2019 at $50/tonne, is now at $65 and it will rise to $170 by 2030. The Canadian government also tabled Clean Fuel Regulations and a plan to require 100% of vehicles to be zero-emission by 2035.
Challenges and Opportunities for Canadian Cleantech
Let’s face it, an invisible enemy is harder to fight. CO2 is odourless and colourless, but evidence of climate change is all around us. The hottest day ever recorded globally was July 3, 2023, and we witnessed a stream of climate disasters from forest fires to floods to hurricanes. To solve climate change, the efforts of many are required.
Canadian cleantech and climate tech companies are up to the challenge, but they face unique challenges of their own. To bring their technologies from the lab to full-scale commercialization takes significant time and money. They need deep-pocketed, patient investors. They also face policy, regulatory and market barriers which result in a less predictable path to market and profitability.
VC Funding for Canadian Cleantech
We must accelerate investment in sustainable innovation to support Canada’s net-zero commitments. Canada needs investors able to support cleantech’s longer development lifecycle as well as later-stage funding rounds for companies with larger capital needs. For comparison, in the US, cleantech firms raised an average of three times more investments than Canadian firms on an adjusted GDP basis. Furthermore, only 5% of Canadian venture capital (VC) dollars are invested in cleantech versus greater than 25% globally, according to PwC’s State of Climate Tech 2022 report.
“In the US, cleantech firms raised an average of three times more investments than Canadian firms on an adjusted GDP basis.”
Cleantech VC remains insufficient in Canada and can result in later-stage firms raising predominately foreign capital, operations and management becoming increasingly non-Canadian and/or being acquired by foreign entities. This undermines the earlier stage R&D investments we are making in cleantech.
Responding to the Inflation Reduction Act
Beyond VC, the US government’s landmark Inflation Reduction Act (IRA) legislation enacted last year pours billions − estimates range from US$350 billion to close to a trillion − into the space. This poses both a threat and an opportunity. The threat is that without matching incentives in Canada, critical clean infrastructure projects and private sector capital may flow to the US. Fortunately, the Canadian government unveiled an $80 billion investment plan − $60 billion in tax credits and $20 billion in sustainable infrastructure investments − aimed at promoting clean energy and sustainable infrastructure.
“As the US is Canada’s largest trading partner, many Canadian cleantech companies will be well-positioned to take advantage of the quickly growing export market.”
Since many Canadian climate tech companies are exporters and the IRA provides tax incentives, loans, and grants to encourage faster decarbonization and deployment of clean technologies, it also represents a great opportunity for the Canadian cleantech sector. Broadly speaking, a total of $3.5 trillion is expected to be invested in new clean energy infrastructure in the US between 2023 and 2035.
As the US is Canada’s largest trading partner, many Canadian cleantech companies will be well-positioned to take advantage of the quickly growing export market for renewable energy, energy storage, hydrogen, carbon capture, utilization, and storage (CCUS), and electrification.
“Canada needs to see more projects built on Canadian soil for a twofold effect: to spur our economy and job growth as well as to reduce our own GHG emissions.”
Several of our portfolio companies see the IRA in a positive light. For example, FLO, a leading electric vehicle (EV) charging solutions company with a comprehensive line-up of charging stations and an existing coast-to-coast charging network, is very well positioned to benefit from the IRA incentives to build out its network in the US. Meanwhile, Silfab Solar, a solar module producer for the residential rooftop market, has already seen explosive growth in the U.S. It has grown into the second-largest supplier in its market and is now building production capacity.
Although it is encouraging to see Canadian cleantech companies benefiting from the IRA and building projects in the US, Canada needs to see more projects built on Canadian soil for a twofold effect: to spur our economy and job growth as well as to reduce our own GHG emissions.
How Canadian Cleantech Can Lead
For Canada to lead in the cleantech space, we need to hit our GHG targets and build cleantech into a robust industry. Here’s how we should go about doing that:
If you think of CO2 as water overflowing from a bathtub that you want to empty, the first thing to do is to turn the taps off. There is no silver bullet here but rather many technology-based decarbonization pathways.
- Electrify as much as possible: We must replace fossil energy for industrial processes, building heating, and mobility (cars, trucks, trains, short haul flights and shipping). This will require vast amounts of new renewable generation, a grid infrastructure to handle the new load, and terawatts of long-term energy storage combined with grid intelligence to manage the intermittency of renewables. We also believe small modular nuclear reactors, nuclear fusion, and next-generation geothermal are critical and dispatchable complements to renewables.
- Hydrogen and next-generation fuels: Because at present it is not cost-effective or practical to directly electrify everything, including flights, vessels, and trucks, there will be a need for direct use of green hydrogen or green hydrogen-derived fuels (e-methanol or other e-fuels) and advanced biofuels.
- Carbon capture: This technology will be instrumental for high-emitting sectors such as steel and cement production and certain industrial processes.
- Critical minerals: Electrification and our domestic energy security will demand a rapid increase in the availability of critical minerals. The Canadian Critical Minerals Strategy lays out the need to establish our own supply chain. Technologies that help recover and recycle these minerals will become ever more important as well as technologies that help eliminate the need for critical minerals in certain intensive applications such as motors.
- Forest management: Emissions from forest fires since May generated 600 million metric tonnes of CO2, which is equivalent to 88% of Canada’s GHG emissions in 2021. Early detection technologies combined with early intervention could help reduce the number of fires that are out of control.
While we are turning the taps off, we also need to start bucketing the water out using carbon dioxide removal technologies like direct air capture and ocean-based solutions. This will be critical to not only CO2 emissions that are too small for carbon capture, but also to draw down gigatons of historical CO2 emissions in the atmosphere.
If we’re looking for inspiration, no need to look further than at some of our Canadian cleantech companies. Let me just mention a few:
- Eavor is a grid-scale geothermal technology company that uses a proprietary closed-loop system that harvests heat from deep in the earth to be used for commercial and district heating applications or to generate enough electricity for the equivalent of 16,000 homes from a single installation.
- Hydrostor is a cost-effective solution for grid-scale, long-duration applications. It delivers hundreds of megawatts and 4 to 24+ hours of storage using water and compressed air.
- Svante’s technology captures carbon dioxide from flue gas, concentrates it, and then releases it for safe storage or industrial use, all in 60 seconds. Their approach is tailored specifically to the challenges of separating CO₂ from nitrogen contained in diluted flue gas generated by industrial plants such as cement, steel, aluminum, fertilizer, and hydrogen, which is typically emitted in large volumes, at low pressures, and dilute concentrations.
“Not only can Canada’s ingenuity help us achieve our 2030 and 2050 climate targets, but it can also form the backbone of Canada’s economy for decades to come.”
It is more critical than ever that Canada protect its hard-fought gains in the cleantech race by doubling down on its most promising cleantech companies and entrepreneurs. Not only can Canada’s ingenuity help us achieve our 2030 and 2050 climate targets, but it can also form the backbone of Canada’s economy for decades to come.