Last week, I was graciously invited by CCEMC and Céline Bak of Analytica Advisors to participate in ZERO 2014, an exciting conference held in Edmonton that has set for itself the bold goal of bringing carbon emissions in Alberta down to zero. At the conference, I participated in a panel discussion with Céline and others in an exploration of the role of innovation in reaching a low-carbon future. It was a fascinating and entertaining discussion, with representation from cleantech venture capitalists, the oil sands industry, and others. I had the pleasure of presenting some of my thoughts on the role of financial innovation in achieving this audacious goal, and thought I would share some of those thoughts with our followers on Medium.
For the low-carbon market to achieve scale—in fact, for any market, to really move the needle on that market—it is necessary that participants are making money. Noble but unprofitable propositions soon run out of steam!
What’s necessary to make money on some new proposition? There are three requirements: profitability, reliability and accessibility.
The first two, profitability and reliability, can be largely driven through technological innovation, which is where the other panelists, such as SDTC here in Canada, have been leading the charge. This means making your LED lighting cheaper (profitability), your solar panels last longer (reliability).
Accessibility on the other hand comes from financial innovation. And you really can’t have major scale without that key component of accessibility, because that’s what allows investors to put the dollars they’re holding into the profitable, reliable vehicle you’ve created. This is a key pathway: financial innovation drives access to capital, which drives deployment and scale.
So what do I mean by financial innovation?
You’re probably thinking of the obscure derivatives and structured products that famously contributed to the financial crisis. These are a form of financial innovation, but the first type of financial innovation I’d actually talk about is something much simpler: third-party financing.
And this seems a little trite, but SolarCity is a massive company that’s basically built on the backs of allowing major investors, like Google, Goldman Sachs and others to use small residential rooftops to generate clean energy and get returns from that. This is pure: financial innovation making difficult investments accessible, thereby driving massive deployment (280 MW in 2013, on track for 500 MW in 2014!).
There is a lot more innovation that can be done with this basic tool: for instance, in energy efficiency (which is an even bigger market than clean energy!), there are companies that can finance retrofits such as thermostats, new boilers, LED lighting or other energy-efficient equipment for your building, and share the returns with you, and that’s how they get the benefits of energy efficient buildings. We will see a lot more of this — in Canada, the Toronto Atmospheric Fund is leading this charge.
A second type of financial innovation that improves accessibility has been the renewable-energy income trust market, which has been quite a large market. This is basically taking large holdings of clean energy assets, and putting these trusts onto the TSX so that institutional shareholders can buy portfolios of large hydro and wind assets, and that’s important too at the large, so-called utility scale.
The final thing that I really think is a game changer in accessibility is what’s being called “equity crowdfunding” or “crowd-financing” these days. This is basically leveraging the power of the internet to completely sidestep the financial middlemen and appeal directly to the Canadian retail investor, who can make investments and receive returns online.
This is exciting to me for two reasons.
First, this “end run around the middlemen” is huge– we think in fact that there’s enough interest among Canadians for accessible, values-oriented impact investments, that this is a billion-dollar market in Canada alone. It’s giving average Canadians the opportunity to invest in clean energy, and energy efficiency, for a competitive, secure return.
Second , we think that these tools of automated aggregation of investments is extensible to use by pension funds, asset managers and other entities that manage the rest of Canadians’ wealth — this is over nine trillion dollars, counting wealth locked up in funds such as the Canada Pension Plan.
The impact that making these investments really accessible will have is hard for me to overstate. It will drive competition on costs, standardize and simplify the industry, and lead to exponential deployment.
I want to re-emphasize how financial innovation drives scale by pointing out what happened to the housing industry when it became possible to aggregate and securitize residential mortgages starting in the 1980s: Enormous scale, enormous increase in market size, enormous increase in residential home values and wealth creation over the subsequent decades (the housing crash in 2008 being driven by other factors).
I’m excited by what will happen as we apply these and other new models to clean energy.