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December 1, 2016

Green Shoots and Strong Headwinds: A Cleantech Reality Check

clean-growth-economy-coverEarlier this year, the DEEP Centre was asked by the Federal-Provincial Working Group on Clean Technologies, Innovation and Jobs to take stock of how Canadian firms are doing with respect to adopting clean technologies that will help Canada achieve a successful and prosperous transition to a low-carbon economy. As the climate science suggests, avoiding profoundly negative ramifications for human health and the environment requires a 40-70% reduction in GHG emissions below 2010 levels, along with some fundamental industrial and behavioural changes. Some of the changes include boosting the adoption of electric vehicles and improving transportation efficiency; adopting smart grid technologies and shifting power generation to renewable energy sources; massively increasing the efficiency commercial buildings and running corporate facilities using clean energy sources; and making dramatic improvements in the energy efficiency of products, including the processes to make them.

Understanding Canada’s Cleantech Adoption Track Record
A transition of this magnitude will require a vigorous and sustained commitment by all stakeholders to leverage low-carbon technologies and innovation at a much greater and faster rate than before. And since Canadian firms are not renown for their early or vigorous adoption of technology, the Working Group wanted DEEP to not only survey current adoption practices but also document any barriers and obstacles to future investments in clean technologies.

Better understanding the role of domestic adoption in enabling cleantech commercialization was another key objective for the study. Our assumption was that greater investment in low-carbon solutions by large companies could dramatically expand the number of opportunities for domestic cleantech suppliers to demonstrate and scale-up their technologies. Strong domestic adoption partnerships, in turn, would serve as a launching pad for exporting Canadian cleantech solutions to a large and rapidly growing global market. Was there any evidence of such adoption/innovation partnership forming and, if so, what have been the results to date?

Our report on Accelerating Canada’s Clean Growth Economy captures the key insights from this research and complements the work done by the Federal-Provincial Working Group itself. The rest of my post provides a quick summary of what we learned and some commentary. You can find a more detailed summary of findings and recommendations on the DEEP Centre website.

Green Shoots and Strong Headwinds
First and foremost, we found that a small, but important group of leading Canadian companies see the low-carbon economy as a rich source of vibrant new business opportunities, including opportunities for innovative, green products, for renewable and clean energy, for smart and efficient materials, and for new transportation and housing options. Industry collaborations such as Evok Innovations, Canada’s Oil Sands Innovation Alliance, the Carbon Impact Initiative and FPInnovations provide evidence that industry leaders and cleantech innovators are knitting together the need to enable traditional industries with cleantech innovation with the need to empower entrepreneurs to commercialize and scale-up powerful new solutions. That is the good news.

However, while these significant green shoots of cleantech leadership activity hold promise, they are not yet the norm for the Canadian economy. In fact, the research shows that Canadian industry as a whole could be characterized as late or reluctant adopters of clean technologies, with less than 10% firms having made cleantech investments. As part of the research, we were asked to survey these early adopters. What we found is that early adopters in key industrial sectors—including sector such as transportation, power generation, heavy manufacturing, forestry, mining, oil and gas—are overwhelmingly focused on opportunities for reducing costs through energy efficiency rather than game-changing innovations with the potential to unlock new growth opportunities in the low-carbon economy.

Slow Innovation Cycles Make Cleantech Investments Tough
In talking to executives, we learned that clean technologies typically compete for internal capital and management attention with other investment priorities that hold the potential to boost business growth and productivity. The high costs and long time horizons often associated with cleantech makes it difficult to frame a business case in which cleantech investments will win over more immediate and profitable investment opportunities.

More broadly, many of Canada’s highest-emitting firms are typically in conservative, low-margin, commodity-based businesses where innovation cycles are slow and access to investment capital is highly constrained. Thus the prevailing approach to clean technology adoption in Canada is focused on incremental investments with short-term payoffs. Absent stronger regulatory incentives (i.e., a price on carbon) cleantech adoption is going to remain pretty low on the priority list of corporate Canada, with the exception of the progressive companies that are investing now to manage risk and seize future growth opportunities in the low-carbon economy.

Lacklustre Adoption is Undermining Cleantech Commercialization
The other big takeaway is the degree to which anemic adoption is undermining Canada’s cleantech commercialization efforts. Cleantech firms that aspire to grow need to be present in larger, fast growing markets in the United States, Europe and Asia. However, to do so it helps to have domestic reference customers who have already deployed or at least piloted their solutions.

Up to this point, Canada’s comparatively small domestic cleantech market has arguably put a handbrake on commercialization by denying Canadian startups the opportunity to test, refine and demonstrate their technologies at an industrial scale. The lack of engagement with large Canadian firms then becomes an obstacle to export growth, as international customers expect domestic references before making technology investment decisions.

One implication is that the invention, commercialization and adoption of clean technologies needs to be seen as part of an end-to-end process by which promising Canadian cleantech firms use our domestic market as a launchpad to succeed on the international stage. A weakness in any link of the chain undermines the strength of the whole ecosystem and Canada’s lagging adoption is an example of this. Fortunately, measures that increase domestic demand for cleantech innovations will also help complete this circle of invention and commercialization by expanding opportunities for entrepreneurs to demonstrate and scale their solutions.

Corporate Venture Capital 2.0
One clear example of a promising new model is Evok Innovations, a $100-million entrepreneur-led innovation fund that was created to expedite the development and commercialization of cleantech solutions to key issues facing the oil and gas industry. As a trilateral partnership between Cenovus, Suncor and the BC Cleantech CEO Alliance, one of Evok’s strengths is its ability to blend the experiences and competencies of the respective partners to provide cleantech startups with a visible and accessible entry point into the global energy value chain. While Cenovus and Suncor provide capital, industry knowledge and opportunities for implementation, seasoned cleantech entrepreneurs are managing the business acceleration process and bring an acute understanding of how start-ups can overcome the product development, marketing and sales challenges they face.

For industrial sectors where the pace of innovation has traditionally been slow and incremental, a structured process for engaging with early-stage start-ups can provide exposure to breakthrough ideas and build a pipeline of new innovation opportunities that would otherwise be difficult for companies to replicate internally. For cleantech firms, business acceleration partnerships with large adopters can give entrepreneurs access to the deep domain expertise required to build a scalable solution that meet validated industry needs.

At Evok Innovations, for example, cleantech entrepreneurs work directly with the engineering and operations teams at large companies to optimize product performance and minimize costs during the product development phase. Porting industry-backed investment and acceleration models like Evok Innovations to other natural resource sectors could help position industries such as forest products, mining, fisheries and agriculture as world leaders in cleantech innovation and sustainability.

Time for Step-Change in Cleantech Innovation
So, where does Canada go from here? As part of the Paris Agreement, Canada has committed to reduce its GHG emissions by 30% below its 2005 level by 2030, which is equivalent to a reduction of 291 million (M) tonnes below business-as-usual GHG projections. As things currently stand, Canada is not on track to achieve this target. In fact, in the business-as-usual scenario, Canada’s GHG emissions will rise by 11.5% from 732 M tonnes in 2014 to 815 M tonnes by 2030.

There is widespread consensus that innovation and global adoption of low-carbon technologies are essential to achieving needed reductions in GHG emissions, including proven technologies available today and new technologies not yet developed. In this respect, the slow pace of technology development and adoption in Canada is a significant problem. Canada needs a step change in clean technology adoption to reinvigorate high-emitting industries around low-carbon solutions, including industries such as transportation, resource extraction, heavy industry and construction.

That said, the adoption of clean technologies is not just an environmental issue. While central to meeting Canada’s climate change obligations, industry leaders and public policymakers should not underestimate the degree to which the future competitiveness of Canada’s core industries is at stake. As the global race for clean growth heats up, regulations everywhere will tighten and global supply chains will reconfigure around firms that can deliver efficient, low-carbon solutions. The ongoing growth and international success of resource-based industries (along with sectors such as construction, manufacturing and transportation) will be increasingly linked to their capacity to reinvent their businesses accordingly.

Strategies for Accelerating Canada’s Clean Growth Economy
In this context, a strictly cost-optimizing, short-term approach to clean technologies will not deliver either the emissions reductions or the future competitiveness that Canada needs. Canada’s incremental and conservative approach to cleantech adoptions needs an infusion of urgency and, above all, radical market disruption. To this end, we proposed 15 recommendations, with some suggesting measures to boost cleantech adoption and others addressing the role that corporate Canada could and should be playing to boost cleantech commercialization efforts.

Among other things, our report calls for continued investment in the creation of world-class research to provide the scientific foundation for revolutionary process innovations and new products and services, and for vertically-focused incubators and accelerators with deep market knowledge and industry connectivity to support the development of a thriving cleantech sector. We call on corporate Canada to shed its risk aversion and muster the leadership to play an active role in developing and adopting cleantech innovations, at a much greater rate than before. We also recommend that all levels of government to work together to bolster investment in clean technologies through smart regulations and by addressing the sector’s need for large-scale project funding to support demonstration projects and build out the manufacturing capacity to ensure world-class science and innovation converts to industrial-scale solutions.

For the complete set of recommendations for accelerating Canada’s clean growth economy (along with survey results and case studies), please check out the full report.

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