Canada has a huge and timely opportunity to invest in and attract investment in clean energy projects during the global energy transition given the Trump administration’s cuts to “green” energy incentives, say investment managers.

Canada has all the necessary ingredients – natural resources, talent, trust by the international community – and now a federal government committed to accelerating big projects that are in the national interest, they said during a webinar by the Institute for Sustainable Finance in the Smith School of Business at Queen’s University.

“There’s never been as much momentum in terms about talking about projects in Canada,” said Ralph Ibendahl (photo at right), London, U.K.-based managing director, global head of energy transition, investment banking at RBC Capital Markets.

“Now it’s about turning that momentum into action and getting projects off the ground,” he said.

“There is demand for what Canada has to offer and it’s about seizing that now.”

“We do need to have one vision for Canada and move forward on that,” said Graham Takata (photo at left), director of climate change at BMO Global Asset Management.

“[We need to] get out of the little skirmishes we have on each individual project and start thinking about what’s in the national interest for Canadians and our prosperity,” he said.

Takata said he’s excited about the renewed interest in nuclear power [such as building small modular reactors in Ontario, which is also planning new conventional large reactors] and growing interest in offshore wind power [including on Canada’s East Coast].

“This resurgence of interest does signal that we are not only looking at new solutions of emerging technologies, but [also at] solutions that we’ve already had and give them a second look.”

He pointed to Northland Power and partners’ Oneida Energy Storage project in Jarvis, Ont. as an example of a clean energy project that had all the right aspects that investors like to see.

The project is 250 megawatts/1,000 megawatt-hours lithium-ion battery energy storage facility, the largest grid-scale battery energy storage facility in Canada. The facility delivers critical capacity and improved efficiency to Ontario’s electricity grid and doubles the amount of energy storage resources on the provincial grid from 225 megawatts (MW) to 475 MW.

Takata said not only does the Onedia Energy Storage facility enable peak-shifting of electricity loads and thereby the expansion of renewable energy, “it was also done in partnership with First Nations [and] co-investment.”

The International Energy Agency (IEA) in its World Energy Investment 2025 report released in June, said this year would see about US$2.2 trillion of global capital investment going to clean energy.

“To really get at the heart of how we invest in creating a more sustainable economy in the future, [we] really need to focus on that $2.2-trillion number,” said John Cook (photo at right), vice-president and co-lead of the Mackenzie Green Chip Team.

However, in the longer term, reports by the IEA, the Organisation for Economic Development and Co-operation and others suggest that there needs to be US$5 trillion a year invested for 30 years to get the world to a low-carbon future, Cook said.

Ibendahl pointed out that of that $2.2 trillion to be invested in clean energy this year, China is the world’s largest investor with about $800 billion.

The European Union is investing about $380 billion and the U.S. $330 billion. Canada’s investment totals $35 billion.

“Different regions [and countries] are moving at different speeds and focusing in different areas.

But certainly progress is being made,” Ibendahl said.

The challenge with the clean energy transition is that Canada and other countries are doing “a few things for the first time [both in terms of projects and technologies] and we’re doing it with large-scale capital,” he said.

“Attracting that capital is hard, in part because some of the technologies are at early stage,” he added.

But if clean energy developers can get through the growth equity phase and to a final investment decision on a project, and have secured an off-taker for that project’s clean energy or emissions-reduction service, Ibendahl said, “There’s no shortage of capital that is looking to back attractive projects with appropriate returns [on investment].”

Lack of a defined approach for clean energy projects inhibits investment

Takata noted that the global energy transition is more complex than just increasing the number of clean energy projects and securing investment in these projects.

“It’s a fundamental shift in our energy systems globally in how we produce goods, how we heat our homes, how we get from A to B. And that’s a systemic shift,” he said.

However, there’s a gap in the lack of a formalized transition taxonomy to define what are  “green” and transitional projects, to give investors a consistent direction for channelling investments in certain ways, he added.

Many countries facing similar investment gaps to Canada have been developing taxonomies as part of broader policy frameworks, to help mobilize and accelerate the deployment of capital in support of achieving climate objectives.

Taxonomies can provide a standardized approach for benchmarking economic activities that are consistent with domestic and global climate goals.

They set screening criteria that allow users, such as investors, companies and financial intermediaries, to evaluate the climate credentials of economic activities (for example, in connection with investment and business decisions).

By providing clear definitions and technical thresholds, taxonomies are a tool to prevent greenwashing and enable investors to make informed decisions that realistically consider the sustainable growth prospects of an economic activity, according to an article from the RiA Digital Academy.

“The lack of this taxonomy coming down and being formalized is one of the reasons why we’re not seeing more investment in these other areas of the solution,” Takata said.

For example, there’s lots of investor interest in natural gas projects and “there’s plenty of demand right now for natural gas,” he said.

But there’s an ongoing debate about whether natural gas – which still produces carbon emissions but much less than coal, for example – is or isn’t a clean energy transition fuel.

“There’s no such thing as a transition fuel – ‘Yes’ or ‘No’ It comes down to performance [and] expectations by your customers on what kind of carbon emissions per megawatt are going to be acceptable or not,” Takata said.

In May 2021, the federal government mandated the Sustainable Finance Action Council (SFAC) to provide advice and recommendations to federal ministers on defining green and transition investment taxonomy.

The SFAC subsequently convened a Taxonomy Technical Experts Group (TTEG) to harness the leadership and expertise needed to deliver on this mandate item. Following substantial research and engagement, the TTEG prepared the Taxonomy Roadmap Report, which was endorsed by the SFAC in September 2022.

Nearly three years later, however, Canada still doesn’t have a green and transition investment taxonomy in place. The framework has been developed, but the government is still working on the specific criteria for each sector.

In contrast, the EU Taxonomy was implemented in mid-2020 as part of the European Green Deal, a set of policies designed to help Europe reach its climate targets by 2030 and become the first climate-neutral continent.

Webinar panel moderator Delia Cristea (photo at right), partner, chief operating officer and general counsel at Power Sustainable, said industry has been pushing for a taxonomy, which she noted would create clarity in terms of capital flows.

Canada’s taxonomy is now expected to be finalized and implemented within the next two years, she said.

However, the U.K announced last week it has dropped plans for a guidebook that certifies certain investments as green. The U.K. Treasury said a survey showed fewer than half of 150 respondents from a range of sectors believe that such a green taxonomy would be an effective tool within the country’s sustainable finance framework for attracting capital and preventing greenwashing.

Shortage exists of some key components needed for the clean energy transition

Canada needs to have an ongoing discussion about what needs to be included and accepted as green and clean energy transition investments, Cook said.

“Copper and some of the other building blocks [of the clean energy transition] aren’t always included in taxonomies,” he noted.

Another example is the graphite need for electric arc furnaces, one of the lowest-carbon ways to make steel, producing about one-fifth of the carbon emissions compared with making steel using coal-burning blast furnaces.

Graphite electrodes are a key input in electric arc furnace-made steel. They’re essentially solid graphite, made from needle coke, which is a heavy oil byproduct.  

“We often feel we can’t be investing in areas like graphite production because it’s very dirty,” Cook said. “And yet it’s a key building block not only for electric arc furnaces but almost all the lithium-ion batteries use graphite for the anode.”

“We need to be very pragmatic and open-minded about what should be included and needs to be financed, because we are going to be missing some key building blocks as we move forward,” Cook said.

Another challenge is that there’s already of shortage of “some of the bits and pieces” needed for the clean energy transition, especially for the two-fold to three-fold increase in electricity generation required, he said.

For example, there are only a handful of companies around the world that make high-voltage cable and high-voltage transformers. There’s currently a 48-month wait time to secure this equipment.

Similarly, “I think it’s very clear right now for the next four or five years the world is going to be short of natural gas turbines,” Cook said.

Very few companies have the ability to make these turbines, which have very specific engineering specifications and little variance in production, he said.

“When we talk about the [clean energy] industry, a lot of the focus is often on the disruptive technologies,” Cook said. “I actually think what’s really missing are the key components to actually build it, the infrastructure that we need.”

Considering the geopolitical shifts and current barriers to securing materials needed for the clean energy transition, electric vehicle batteries “are going to be so incredibly expensive that we are handicapping dramatically the [energy] transition is some parts of the world,” he said.

Also, Canada currently has only 16 percent of the US$2.2-trillion global investment expected this year in clean energy and related infrastructure, Cook noted.

But a lot of that represents Canadian companies with planned projects in the U.S. that hoped to take advantage of the clean energy tax credits under the U.S. Inflation Reduction Act (IRA).

Republicans in Congress this month passed a wide-ranging law that slashed tax breaks for wind and solar energy and phased out many of the IRA credits. Trump then issued an executive order directing the Treasury Department to “rapidly eliminate” any remaining “green energy subsidies.”

Cook said if a lot of the IRA provisions are taken away, he wouldn’t be surprised if Canada’s investment in clean energy falls to eight percent of global investment from the 16 percent expected this year.

Ibendahl said the IRA put the focus on the U.S. for his investment clients, including the non-U.S. clients. “I think we’ll see a reversal [under the Trump administration]. I think there’s a pullback and I think what we’ll see is a bit of [that clean energy investment] flow into Europe.”

The lineup for electricity grid access in Europe is for natural gas and renewables, he said. From 2030 onward, “you’re looking at nuclear [and] geothermal, scaling up from a small base.”

“Where there’s the use case and where you can deliver firm, clean power to that demand, I think there’s a very strong space and we will continue to see capital flowing into that,” Ibendahl said.

Where should Canada focus its clean energy investments?

As for where Canada should focus its efforts in building clean energy projects, Cook said “the moonshot for Canada is to build an East-West electricity corridor.”

The distance between Vancouver and Halifax is about 4,500 kilometres, he noted. At $5 million per kilometre for a high-voltage, direct current transmission line, the project would cost $20 billion to $25 billion.

That’s comparable to the cost of an Eglington LRT-type project, Cook said, referring to Toronto’s 19-kilometre long Eglinton Crosstown LRT project, which is expected to cost at least $12.8 billion.

Canada’s electricity grid already consists of about 83 percent low-carbon energy. The East-West transmission line would link clean hydroelectric power in B.C., Manitoba and Quebec, along with nuclear power in Ontario, he said.

“It would enable all sorts of renewable energy across the country, including offshore wind on the East Coast,” Cook said. “If we end up in this country with cheap, low-carbon energy that could help us attract all sorts of industry.”

“I think it’s the ultimate enabler. It is the modern-day ‘railway,’ in my opinion. That to me is the game-changer.”

Another investment opportunity is in motors and the more than 45 percent of the world’s electricity that goes into turning motors. However, only about 25 percent of these motors have drives attached to them.

Drives are the electronic components that modulate the voltage or current at the speed or direction the motor is turning. The cube of a speed that a motor turns is directly related to the power it consumes, Cook noted.

“We could dramatically reduce the energy consumed by adding drives to those motors,” he said. “It’s a big investment opportunity but it really would change efficiency.”

Takata said there’s need to deliver the investment dollars to where the emissions are highest and work on decarbonizing those sectors and industries.

Investment managers are trying to get away from the concept that decarbonization and reducing emissions results in lower productivity, he said.

“What we’re trying to do is de-tether emissions and the harm of our energy systems from productivity, and that’s how you get the prosperous society that continues operating in the future,” Takata said.

“The solution is transforming our energy systems and appropriately addressing the emissions that we generate.”

Green projects need to be linked to energy security, affordability and sustainability

Ibendahl said investment managers talk about the energy “trilemma” of energy security, affordability and sustainability.

“If you haven’t got security and affordability linked to your project or your business today, that’s going to be harder to attract capital,” he said. “Those two [requirements] are really the driving force.”

Just because a clean energy project incorporates an environmental, social and governance framework or is “green” or “transitional” doesn’t count for much anymore with investors, Ibendahl said.

“I think people are looking for what’s the investment profile, what’s the exposure that I want, do I need yield, do I need growth, what’s the right mix between the two, what’s the relative return, the relative valuations between different segments and different regions, and I will allocate my capital accordingly.”

There’s now a level of sophistication to capital allocation that probably didn’t exist at the start of the energy transition discussions, he said. “We see people be more selective and quite picky.”

Ibendahl said clients tell him the biggest challenge in clean energy technologies is being able to scale up and deploy in size, especially when it comes to asset-heavy large capital-intensive projects. It is easier to raise capital for asset-light, or less capital-intensive projects such as software, business services and other parts of the clean energy transition, he noted.

Investors are attracted to the capability of the parties to execute on a project, and ultimately whether there are off-takers and if the project has government support, Ibendahl said. “You need to get all of those together to create the opportunity.”

Cook said the conflation of industrial policy and economics is slowing the path to a lower-carbon future.

“We shouldn’t be tariffing away low-cost producers of the pieces and parts we need in the dream of bringing what every often are low-paying manufacturing jobs back to our country,” he said.

“Get the politics out of the energy transition space and leave it to the investment management and the economics and we will move this [transition] much, much faster and the returns will be much better,” Cook said.

“We need to make progress on this,” Ibendahl agreed. “There’s a big investment opportunity but we have to deliver, and it doesn’t work with one part or two parts. We need everything to pull together.”

The challenge of making the transition to clean energy is enormous, he said. “We’re talking about trillions of dollars required to fund the transition.”

“We’ve been on the power decarbonization transition for decades now. We’re not finished. We still have a long ways to go.”

Editor’s Note: The Institute for Sustainable Finance, in collaboration with Accounting for Sustainability, has released The Transition Finance Playbook, a practical guide for financial institutions on the practical action they can take to scale up their transition finance activities. The playbook includes a range of practical examples, market realities, further information and additional resources.

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