Last week I joined almost 200 cleantech peers from across Canada to sign a letter asking the government to take 4 key actions in support of the cleantech industry.

These include:

  1. Setting up a $1B loan guarantee program to support clean energy infrastructure projects
  2. Creating a $500 million venture capital program
  3. Investing $1.25 billion to expand Sustainable Development Technology Canada
  4. Introducing tax credits similar to those supporting mining, oil and gas industries

The capital markets can help us transition to a clean energy future – and smart government funding is crucial as a bridge to fill key gaps. 

Governments help support strategic industries. In Canada, we’ve done this for resources, aerospace and countless others. Some industries are too important not to succeed, and government can help bridge a market failure.

I believe that recommendation #1 – a federal loan guarantee program – would be particularly impactful. Here’s why:

1.Energy markets are hardly free markets. There are (historical and present day) direct subsidies, indirect subsidies, and hidden subsidies that favour the incumbents.

A report by DBL’s Nancy Pfund and colleagues (DBL is an investor in Telsa, Solar City and other clean tech startups) looked at historical subsidies in the US that oil and gas and nuclear energy received over their lifetime. The bottom line: government dollars supported these energy sources at almost every step. Even today, Canadian subsidies for oil and gas have reached $2.7B (2015).

  2. Loan guarantees fill a crucial gap

There are a range of proven technologies that can help us to make our buildings and communities cleaner and more efficient.

The biggest barriers for many of these firms is finance and business model innovation. Most clients don’t want to pay for the equipment upfront, they want a service contract. And so the firm needs upfront capital (investment and loans).

The frustration if you are a project developer is that the bank will be first in line to finance your second project. At CoPower we hear this refrain  all the time, and it is the reason why we focus on providing financing for this mid-market clean energy segment.

It is not that these projects have inherently more risk than the bank is willing to take on. Rather, there are structural gaps that prevent financing: the infrastructure team at the bank or pension fund that wants to invest in $100M increments (at a minimum), and the fact that these clean energy projects are usually smaller, even if the pipeline will eventually reach a large scale over time.  the infrastructure banker would rather finance something they know more about, for example a bridge or even a solar project (which is now relatively mainstream), than a $10M district heating and cooling project.

Additionally, there is more perceived risk related to the project. Banks want to see a few years of track record for the project and sponsor; it is just part of their standard checklist.

A federal loan guarantee acts by helping to eliminate this perceived risk and/or increase some of the returns in order to make these deals more attractive to investors. Managed by a professional and technical team whose goal would be to leverage private capital, a loan guarantee program would help bridge hundreds of clean energy projects to mainstream financial markets.  

 3. Loan guarantees are an effective use of taxpayer dollars (**when they support infrastructure projects, as distinct from picking winning or losing companies.)

Projects and businesses are like apples and oranges, and this is a critical point that can often be confusing.

A company can be a firm that manufacturers or installs a clean energy product or service. By providing a loan to a company, you are betting that the company will continue to attract customers, earn revenue and be able pay back the loan. Inherently, this means making predictions about the future, and the government picking what companies they believe should win or lose.

Consider the experience of the US Department of Energy’s (DOE) loan guarantee program: the government sometimes picked winners –(e.g. Telsa) and sometimes losers (e.g. Fisker, a failed electric vehicle company, and Solyndra, a solar manufacturer that went under).

However, financing a project is a different beast.

With an infrastructure project, the risks can be contained, largely understood and managed. A project uses a certain proven technology to generate and sell power under a long-term contract; from the beginning, you know roughly how much power will be produced and who will pay for it. This makes the risk profile inherently different.

The US Department of Energy has backed solar PV, solar thermal, and other projects that helped propel these industries. The respective Green Banks of New York State and Connecticut have backed energy efficiency retrofits, small wind projects and others.  And the Toronto Atmospheric Fund has shown how effective this model can be in Canada as well.

Because these are usually loans (meaning that there is also a private investor that is taking on more of the risk), there is a large buffer for taxpayer money to be repaid.

This is the case with the DOE loan portfolio: of the $30B portfolio, over $5B of principal has been returned, plus $1B of interest (with <2% in default, and most of these being loans to companies).

Smart government financing for the next generation of clean energy infrastructure projects is crucial to develop Canada’s cleantech industry, necessary to help level the playing field with conventional fuels, and is the most appropriate use of taxpayer investments. 

 

Tags: Canadian CEO - Clean energy careers - Clean capitalism - Green investing