OTTAWA — The federal government is working on ways to bring Canadian pension funds into major green projects, as it looks to bridge a gap of hundreds of billions in investment needed to decarbonize the country’s industries. But cleantech and infrastructure executives question whether the new programs will address persistent challenges the sector faces, including the design flaws and slow pace of existing funding schemes.
Canada needs to spend as much as $125 billion more every year for the economy to reach net zero by 2050, Finance Canada estimates, and Ottawa is now seeking private capital to fill much of the gap. The April 2021 federal budget allocated up to $1 billion over five years on a new Propelling Clean Tech Projects (PCP) initiative, to attract investment in large-scale efforts to decarbonize heavy industries, or in carbon capture and energy storage.
Talking Point
The federal government is considering establishing a pooled-capital fund to encourage Canadian pension funds to invest in efforts to capture carbon, store energy and decarbonize heavy industries. Institutional investors have told Ottawa that domestic cleantech projects are too small and risky, and the payoff too uncertain.
Ottawa is targeting “meaningful and broad participation from Canada’s largest pension funds,” according to a memo prepared by Innovation, Science and Economic Development Canada’s (ISED) industry sector for deputy minister Simon Kennedy ahead of a December 2021 meeting with executives of OMERS Infrastructure.
Between the winter and fall of last year, the department sought input from other pension funds and financiers, as well as cleantech companies. “Consultations validated that clean-technology projects often don’t meet the investment metrics of institutional investors,” said ISED spokesperson Hans Parmar, with firms citing the small size, high technical risk and uncertain financial returns of such investments as barriers. The internal memo, which The Logic obtained via access-to-information request, shows the department has considered establishing a pooled-capital fund or insurance products to address their concerns.
“In Canada, pension funds just can’t get their heads around new technologies around decarbonization,” said Dominique Boies, CEO and CFO of Enerkem, a Montreal-headquartered biofuel and chemical-recycling firm. For example, while industry groups expect demand for sustainable aviation fuel to take off, there’s limited historical data on prices and thus the revenue it will generate.
Enerkem has raised about $1 billion to date, from backers that include major U.S. asset managers BlackRock and Monarch Alternative Capital. Boies said the company also helps find financing for projects that use its systems, including more than $1 billion for a plant in Varennes, Que., with energy giants Shell, Suncor and Proman. Those strategic investors validate the technology, he said; pension funds that still can’t get comfortable with it are “just missing the ride.”
For several years, Ottawa has been considering ways to help green firms access funding. In an October 2018 report, the advisory Clean Technology Economic Strategy Table identified “low access to patient growth capital” as a significant barrier to the sector’s growth. Funding availability has since improved, said panel member Karen Hamberg, now a partner at Deloitte. She cited such recent examples as the Canada Pension Plan Investment Board putting US$25 million into Toronto’s Hydrostor, an energy-storage startup, in April.
“There’s quite a lot of money sloshing around in the system at the smaller end of the spectrum,” said Nicholas Hann, previously head of investments at the federal government’s $35-billion Canada Infrastructure Bank (CIB). The same isn’t true for commercial-sized projects likely to have a significant environmental impact, such as a carbon-capture and -sequestration plant capable of removing a million tonnes a year. Such a facility would cost more than $1 billion, with as much as 10 per cent in upfront development and design costs, Hann estimated. “There’s virtually no funding currently in Canada for that.”
Industry executives say Ottawa’s existing policies can create barriers in the market. Firms trying to finance pilot projects to prove their technology “get caught in a Catch-22 situation,” said Hann, because government programs that write large cheques often require companies to demonstrate a higher technology-readiness level, equivalent to already having full-scale plants running. That means firms can’t find funding for the pilot-plant phase between their early stage ideas and the kind of full commercial project in which a pension fund might invest.
Hann noted that grants or incentives like Ottawa’s proposed carbon-capture investment tax credit can reduce the ultimate capital cost of projects, but don’t set a long-term price on the emissions that cleantech projects reduce or eliminate, making it harder for major financiers to project their returns. By contrast, the U.K.’s system assures low-emissions companies both a purchaser for their green gains and a minimum rate.
The slow approval processes of Canadian government programs create another impediment. Enerkem received more than $70 million from the federal agency Sustainable Development Technology Canada to help bridge the pilot-to-commercial gap. But Boies said it’s waiting on an application to Ottawa’s new Clean Fuels Fund for about $75 million for the Verannes facility; the program originally promised to make final decisions last fall, but extended its timeline by up to a year. Government support “should be a way to accelerate those projects, not to slow them down,” said Boies.
The options ISED has considered for structuring the PCP initiative may not work, sector stakeholders said. In a typical pooled-fund structure, Ottawa would contribute capital alongside institutional investors, which would be used to back projects that meet predefined criteria. “The pool approach is a really nice political thing, because you get to make a big announcement,” said one longtime infrastructure executive, who spoke to The Logic on condition of anonymity because they are active in the space. But project financing, the executive noted, “is bespoke—there are very few formula solutions that work.”
In the meantime, Canadian institutional investors are hardly ignoring climate financing. In September 2021, the Caisse de dépôt et placement du Québec (CDPQ) pledged $10 billion to help new portfolio firms reduce emissions, while CPP Investments set a target in February of $130 billion in green and transition assets by 2030, up from its current $67 billion. Both have also bought significant stakes in Indian renewable-energy firms. CDPQ, CPP Investments and OMERS all declined to comment.
Pension funds have acquired existing solar, wind and hydroelectric assets with signed power-selling agreements—holdings that produce predictable yields—and are increasingly willing to develop new such projects, said the infrastructure executive. But they remain reluctant to take on the risks they associate with newer technologies like battery storage or carbon capture.
ISED said it will share details of its plans for a pooled-capital fund “in due course.” But Ottawa is now considering an even bigger effort to fill the national gap in climate-transition investment, via a new Canada Growth Fund, proposed in the April budget. Finance Canada has promised to find $15 billion in capital from money already budgeted for other programs. ISED spokesperson Parmar said the government has not yet decided whether to roll the PCP initiative into the new fund.
UPDATE:This story has been edited to note that the memo referenced was obtained through an access-to-information request
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