How Canada Can Win in Cleantech

As the world rapidly shifts towards a net-zero emissions future, Canada must act now to accelerate cleantech innovation and deploy new technologies to decarbonize major economic sectors, from energy and natural resources to heavy industry, buildings, and transport. Quick action is essential to simultaneously avoid the worst impacts of climate change while taking advantage of the significant growth opportunities that stem from this transition. 

“To win, Canada must be one of the best places in the world to grow a cleantech business.”

The good news: Canada is already a world leader in cleantech development, with both the policies and financing in place. The challenge lies in developing the solutions that are needed to scale and retain new Canadian cleantech companies. Other jurisdictions like the US and EU are taking unprecedented steps to calibrate towards a net-zero transition. To win, Canada must be one of the best places in the world to grow a cleantech business. Achieving this objective entails building upon its existing strategic advantages and adopting new coordinated and collaborative governance approaches to capture a growing slice of the cleantech market opportunity.    
 

Canada’s Cleantech Opportunity

The cleantech sector represents a growing portion of the Canadian economy. According to Statistics Canada, the value of the environment and cleantech sector is around $73.1 billion, accounting for 2.9% of the GDP in 2021. During this period, it contributed $17.9 billion to exports and supported more than 300,000 jobs. Cleantech solves a range of problems — such as how to store clean energy, cut pollution by removing carbon from the atmosphere, or reduce energy use from street lighting. As a result, the sector comprises a diverse set of actors and technologies and sector players are at varying levels of maturity, with cleantech companies catering to industrial applications ranging across energy, heavy industries, transport, agriculture, water, and others. 

“The economic gains associated with the global low-carbon transition are conservatively estimated at US$26 trillion by 2030.”

The economic gains associated with the global low-carbon transition are conservatively estimated at US$26 trillion by 2030 — providing a tremendous opportunity for all parts of the Canadian economy. Cleantech will play a defining role in this transition. According to the International Energy Agency, the combined market size for five critical cleantech equipment (solar panels, wind turbines, batteries, fuel cells, and electrolyzers) is projected to be around US$1.2 trillion by 2050. Canadian cleantech firms are well-suited to capitalize on these market opportunities.

Canada has competitive advantages to capture these opportunities, including:

• Abundant clean energy
• Critical and strategic minerals
• An educated workforce with transferable skills
• A strong financial system.

The country has also made significant progress in creating the conditions to drive clean innovation. This includes the legislated commitment to reach net-zero emissions by 2050, a federal carbon pricing system which is committed to growing to $170 per tonne of carbon dioxide emissions by 2030, and public investments of more than $100 billion towards climate action coupled with specific policies and regulations.

These advantages and efforts are starting to show results. Canada ranks second on the Global Cleantech Innovation Index 2023 with 12 companies amongst the top 100 in the world. It is also making headway in manufacturing and adopting cleantech, such as batteries for zero-emissions vehicles, electric arc furnaces for steel manufacturing, carbon capture utilization and storage equipment, and others. The recent announcement that Volkswagen and PowerCo are locating their first battery cell manufacturing plant outside Europe in St. Thomas, Ontario is a testament to that progress.  

Challenges Facing Cleantech

Despite these opportunities and competitive advantages, there are several obstacles. Clean innovation is both capital and time-intensive. It takes millions of dollars of investments and around 12 to 15 years to commercialize innovative cleantech and make them profitable — much more than for counterparts like information technology or biotechnology. The latter also have clear exit models such as obtaining patents which may make these investments seem less uncertain.

“It takes millions of dollars of investments and around 12 to 15 years to commercialize innovative cleantech and make them profitable.”

Most Canadian cleantech firms are small and medium-sized enterprises (SMEs). More often than not, these SMEs fail to connect with aligned, long-term capital sources and confront a severe funding shortage, often referred to as a “valley of death”. Without this funding, many firms are unable to build their products and teams, gain broad market acceptance for their products, and become cash flow positive. As a result, they are acquired or have to shift their business elsewhere to obtain resources to successfully grow.  

On top of these pre-existing challenges, other jurisdictions such as the US and EU are taking bold steps through the US$369 billion Inflation Reduction Act and the over €250 billion Green Deal Industrial Plan respectively. These aim to transform their economies, in large part by deploying cleantech, to be compatible with and competitive in a net-zero emissions future. They are also backed up by sectoral targets and roadmaps developed through strong public-private collaboration. If Canada does not take the necessary steps, it may lose winners to these other jurisdictions.

Indeed, some of the incentives are unprecedented. The US production tax credits — which provide credits on per-unit production for solar, wind, carbon capture, hydrogen, etc. — are “uncapped”, which suggests there is no fixed dollar amount of public investment. Under the Green Deal Industrial Plan, the proposed European Sovereignty Fund may be granted large budgetary support to pool together resources and jointly finance critical projects across the entire EU bloc. Canada cannot match these incentives on a dollar-for-dollar basis. To win, it is more critical than ever for Canada to take strategic steps to keep pace with its competitors.

How Canada Can Lead

In a positive development, Budget 2023 takes critical steps by identifying priority areas and defining the building blocks of a clean economy. It also laid out an additional $83 billion through investment tax credits for clean electricity and cleantech adoption, new manufacturing investment tax credits, strategic financing from existing and new investment vehicles — Canada Infrastructure Bank and Canada Growth Fund — and the redeployment of targeted government programs through Natural Resources Canada and Innovation Science and Economic Development Canada. 

“There is a need to adopt innovative policy and financing solutions tailored to Canada’s unique requirements through collaboration.”

These new and existing measures need strong follow-up to make Canada the best place in the world to incubate and scale a cleantech business. Achieving this ambitious objective requires moving beyond “copy-pasting” policies from other jurisdictions. Rather, there is a need to adopt innovative policy and financing solutions tailored to Canada’s unique requirements through collaboration across the cleantech ecosystem. Here are three broad recommendations on how Canada can scale and retain innovative cleantech companies:

1. Collaboration for Cleantech is Key

Governments, Indigenous communities, financial institutions, cleantech businesses, academia, and other key stakeholders must engage in collaboration across sectors to identify opportunities and key bottlenecks to develop an ecosystem focused on scaling cleantech. Such coordination and collaboration mechanisms are much needed to design policies for each technology and tip the scales toward commercialization. 

The federal government’s Regional Energy & Resource Tables provide a platform for collaborative engagement building upon existing value chains and regional advantages. One approach worth emulating for the Canadian ecosystem is the US Department of Energy’s Pathways to Commercial Liftoff initiative, which is a set of “living documents” creating a common fact base and a tool for ongoing dialogue with stakeholders to accelerate the commercialization and deployment of key cleantech.

2. Improve Access to Funding

To scale and retain firms, financial institutions such as Sustainable Development Technology Canada, Business Development Canada and the new Canada Growth Fund need to expand their financial intermediary roles. The new roles that they need to play, possibly through separate research and advisory teams, should be akin to a “flight control tower” — helping guide companies of different sizes and characteristics to “land” at their destinations. 

This can be done by accumulating and disseminating relevant (and often private) information about companies or projects to post-commercialization stage investors through innovative financing structures and frameworks used in other areas (such as development finance). This would allow these investors, mainly private equity providers, banks, institutional investors, and more to be aware of upcoming cleantech companies and projects, reduce information asymmetry, and coordinate and structure financing in ways that blend capital and match their respective investor risk-return profiles.

3. Open Up More Market Opportunities

Cleantech companies need quick access to markets, especially export ones, to scale their business due to Canada’s small open economy structure. One way to provide more market access is to develop federal cleantech procurement. When the government acts as the first buyer of these innovative technologies, it validates the product both within and outside of the domestic market, eases the diffusion of cleantech in the market, and eventually leads to the growth of innovative cleantech and cleantech companies. 

This can be done by understanding pre-existing challenges and developing innovative procurement strategies. Examples include extending current government pilot support programs to offer commercialization assistance to cleantech companies, creating buyer groups open to adopting cleantech post-pilot testing phase, making necessary changes to government procurement processes, and building capacity within both cleantech firms and governments through continual education and learning support. 

In terms of export markets, the main destination for Canadian companies is the US. There is a need to provide Canadian cleantech companies access to information and other related advisory support to expand their sales to other export markets, especially niche markets in emerging and developing economies that are advancing their own low-carbon transitions. This can be done by adopting governance approaches and coordinating information flows with key stakeholders such as Trade Commissioner Services and Export Development Canada. 

Overall, the net-zero transition presents a clear economic growth opportunity and Canada has the ideas, technologies, firms, and resources to win in this space. Stakeholder coordination and action-oriented collaboration are imperative to support future policy development and scale financing. Without these pieces in place, the country may fail to carve out a niche for itself and keep pace with other jurisdictions in cleantech development.