There is widespread consensus that the development and global adoption of low-carbon technologies are essential to achieving needed reductions in GHG emissions to cap the rise in average temperatures at 1.5°C or less. This includes the adoption of proven technologies available today and new technologies not yet developed.
Some of the changes include dramatic improvements in the energy efficiency of products, including the processes to make them; shifting to renewable and recyclable materials; increasing transportation efficiency and the adoption of electric vehicles; and running commercial buildings and corporate facilities using clean energy sources. According to the 2021 IPCC report, nothing short of a complete industrial transformation will avert an economic and environmental catastrophe. Moreover, the bulk of this low-carbon re-industrialization must occur within the next two decades—much faster than previous industrial transformations such as the transition to steam power and electricity.
In this respect, investments in the commercialization and growth of cleantech solutions and companies in Canada are an urgent priority. Canada must significantly reduce its carbon footprint and seize this historic moment to become a leader in generating jobs and prosperity from the clean growth industries of the future.
So how do Canada’s investments in clean technologies and low-carbon solutions stack up? To find out, the DEEP Centre analyzed five years of investment data (2016 to 2020) and consulted with industry investors and other key stakeholders to identify opportunities and risks shaping investment decisions in the cleantech sector. The resulting investment analysis and executive consultation reveal mixed news regarding whether the current level of investment has put Canada on track to meet its emissions targets and build a robust cleantech sector.
On the one hand, Canada has a diverse population of cleantech companies offering an array of innovative cleantech solutions to a broad cross-section of industries. Our data shows that 223 companies collectively raised $1.4 billion in venture financing in the last five years. Signature deals include $367m in total funding for Enerkem, a waste-to-biofuels company; $172m for Toronto-based smart home device company, ecobee; $90m for Carbon Engineering’s direct air capture technologies; and $77m for Minesense’s suite of digital mining solutions.
However, a closer inspection of the investment data reveals an overwhelming concentration of investment dollars in software-based cleantech plays focused on industrial efficiency, energy analytics, building automation, and smart grids. Collectively, the top energy-related verticals in the DEEP Centre’s analysis account for 73% of the $1.4B in venture funding between 2016 and 2020.
Investors consulted by the DEEP Centre acknowledge that a large proportion of VC deals over the past five years have focused on the so-called “low-hanging fruit” of clean technologies. Most investors also concede that Canada and other countries will not meet their climate obligations pursuing software-based solutions alone. “Software-based efficiency plays can enable incremental improvements like a 5 to 10% efficiency gain,” said one investor. “A lot of the environmental challenges require transformational hard tech that will significantly lower Canada’s carbon footprint.”
When asked about where they plan to focus their upcoming investments, investors pointed to areas such as hydrogen, carbon capture, energy storage, green chemistry, and the bioeconomy. However, the considerable barriers to expanding investment include the risk profile of hard tech companies, the lengthy timelines for commercialization, and the relatively small size of the cleantech funds in Canada, which constrains the ability to finance CAPEX-intensive companies. As one investor put it, “50 – 60% of the GHG reduction will come from low-hanging fruit. The next 40% will be very hard.”
A further concern is the significant concentration of risk capital amongst a small number of companies. For example, the top 10 companies by total venture funding collectively raised over $1B, or about 74% of all cleantech VC funding between 2016 and 2020. The following 27 companies shared $336 million, while the bottom 50 raised just $39 million. The presence of mega-deals demonstrates that some companies are receiving the large injections of capital required to become world-class competitors. However, the data and executive input also reveal that a significant proportion of early-stage cleantech companies are heavily reliant on public grant funding for survival. Of the 133 companies that secured public grants between 2016 and 2020, 65% (or 87 companies) have yet to raise a venture round.
What can the Government of Canada do to help ensure more cleantech companies attract the financing required to reach scale? Synthesizing the insights from sector leaders, we developed a list of ten key domains where urgent action is warranted:
- Strengthen the capacity to create investment-ready companies with additional funding to enable specialized BAIs to offer startup capital, run demonstration projects, and hire the talent to bring private-sector discipline to the process of building new ventures around breakthrough science and technology.
- Boost early-stage cleantech financing and angel investment by incentivizing angel investors and creating new seed-stage funds to diversify the pool of early-stage cleantech investors in Canada.
- Close the late-stage funding gapwith a dedicated funding envelope to support the growth of cleantech venture capital funds in Canada with the capacity to participate in late-stage venture rounds.
- Facilitate connections between cleantech SMEs and corporates with a matchmaking service that will publicize technology and decarbonization roadmaps, identify connection points, validate solutions, and broker partnerships.
- Increase support for large-scale demonstration projects with public procurement, investments in testbed facilities, and matching funding to encourage large industrial companies to come to the table as early adoption partners.
- Leverage the federal government’s convening power to build new consortia projectsthat will share the costs & risks of cleantech adoption, strengthen clean growth value chains, and fast-track the decarbonization of traditional sectors.
- Ensure regulations, tax credits and funding programs are globally competitiveby working with ecosystem leaders to identify and remove barriers to commercialization and create an attractive environment for hosting ambitious cleantech deployments.
- Build a national cleantech data clearinghouse to increase visibility into cleantech solutions, companies, and pilot/demonstration projects across Canada.
- Launch ambitious innovation challenges with private sector buy-in to incentivize the development of new technologies at several points along the innovation spectrum, from stimulating applied R&D to securing first sales and bringing new technologies to market.
- Strengthen the Government of Canada’s cleantech leadership to ensure that key agencies have the competencies and sector insights to deliver value-added and effective solutions to their partners in the cleantech ecosystem.