Canada wants more investment in clean technology. We need it.
Scaling Canadian technologies, building first commercial facilities and developing major clean energy and industrial projects can require tens, hundreds or even billions of dollars in capital.
So it is understandable that much of the conversation focuses on the supply of capital: How do we attract more investors? How do we bring international capital to Canada? How do we encourage pension funds, banks, strategic investors and other institutional investors to participate? Those are important questions. But there is another side to the equation that deserves just as much attention:
Do we have enough projects that are ready for that capital?
Because a promising technology is not automatically a good project.
And a good project is not automatically an investable project.
The Investability Test
Investors don’t simply ask whether a technology is innovative or whether it could help reduce emissions.
They need to understand whether a project can actually be built, whether customers will buy what it produces, whether the economics work and whether the risks can be understood and appropriately allocated.
The exact requirements will vary enormously depending on the technology and project. A battery materials facility is not the same as a carbon capture project. A clean fuels plant is not the same as an energy efficiency platform.
But there are some fundamental questions that almost every investor will ask.
Think of them as the Investability Test.
1. Does the technology work — at the scale proposed?
A successful pilot is important. So is a demonstration project.
But moving from a pilot to a first commercial facility can introduce an entirely new set of technical and operational risks.
Investors will want to understand what has already been demonstrated, at what scale, under what conditions and what still needs to be proven.
For first-of-a-kind projects in particular, the gap between the technology works and the technology works reliably and economically at commercial scale can be significant.
2. Who is the customer?
One of the most powerful ways to reduce risk is to demonstrate that somebody actually wants to buy what the project will produce.
That might take the form of an offtake agreement, long-term contract, anchor customer or another credible commercial commitment.
Customer interest is useful.
Customer commitment is considerably more valuable.
For an investor, the question isn’t simply whether there is a market for hydrogen, recycled materials, low-carbon fuels or another clean technology product.
It is:
Who will buy this project’s output, how much will they buy, for how long and at what price?
3. Do the economics work?
A technology can deliver enormous environmental benefits and still struggle to attract investment if the underlying project economics don’t work.
What will it cost to build?
What will it cost to operate?
What are the expected revenues?
How sensitive is the business case to energy prices, commodity prices, interest rates, carbon pricing, exchange rates or other assumptions?
And critically, what has to go right for the project to make money?
Investors don’t expect projects to be risk-free. They do need to understand the risks they are being asked to take.
4. Is there actually somewhere to build it?
This sounds obvious, but project readiness depends on much more than having an address.
Does the project control the site?
Is the necessary power available?
What about water, transportation, transmission, pipelines or other infrastructure?
Can the project connect to the grid when it needs to?
Are there local or Indigenous partnerships that need to be developed?
A compelling technology without the infrastructure required to operate it is still a long way from construction.
5. Is there a credible path through permitting and approvals?
Permitting risk is investment risk.
Investors need to understand which approvals are required, who issues them, how long the process is expected to take and what uncertainties remain.
That doesn’t mean every permit has to be issued before investors become interested.
It does mean that a project needs a credible and understandable pathway from development to construction.
6. Are the inputs secure?
Many cleantech projects depend on feedstocks, critical minerals, biomass, waste streams, electricity, hydrogen or other inputs.
Investors will ask whether those inputs are available in sufficient quantity and quality — and at a price that supports the project’s economics.
A facility designed to operate for 20 years needs more than an assumption that its essential inputs will be available.
7. Who is going to build and operate it?
Scaling a technology company and developing a major infrastructure project require different capabilities.
Investors will look beyond the technology itself to the people responsible for delivering the project.
Does the management team have the necessary experience?
Who will handle engineering and construction?
Who will operate the facility?
What happens when something inevitably doesn’t go according to plan?
This is one reason strong partnerships can be so important for emerging cleantech companies. A company doesn’t necessarily need every capability in-house, but it needs access to the people and organizations that can execute.
8. What does the capital stack look like?
Large cleantech projects are rarely financed with a single cheque from a single investor.
The capital stack might include company equity, strategic investors, project equity, commercial debt, government loans or guarantees, grants, tax credits and other forms of support.
Different sources of capital also have different appetites for risk.
The question therefore isn’t simply:
“Who will fund the project?”
It is:
“Which type of capital is appropriate for each stage and each type of risk?”
That distinction matters enormously for first commercial projects.
9. What role does government support play?
Government participation can be critical in helping new technologies cross the gap between demonstration and commercial deployment.
Investment tax credits, grants, repayable contributions, loan guarantees, procurement and other mechanisms can all improve project economics or reduce particular risks.
But investors will want to understand how certain that support is.
Has it been approved?
What conditions apply?
When is it received?
And does the project still make sense if a particular incentive changes?
Good public policy doesn’t necessarily eliminate risk. It can help make risks manageable enough for private capital to participate.
10. What could stop the project?
Perhaps this is the most useful question of all.
What are the three or four things that could prevent this project from reaching construction?
A permit?
A customer?
A grid connection?
Another $50 million of equity?
A loan guarantee?
Successful completion of a demonstration?
A feedstock agreement?
Identifying those barriers is important not only for investors. It is also important for governments trying to accelerate investment.
Because once we know what is preventing an otherwise promising project from becoming investable, we can start asking whether there is a practical way to address it.
Capital follows de-risking
There is a tendency to describe Canada’s cleantech financing challenge primarily as a shortage of capital.
There are certainly real capital gaps, particularly as companies move from technology development into demonstration, first commercial deployment and scale-up.
But simply putting more capital into the system doesn’t automatically create more investable projects.
Projects become investable as risks are progressively reduced.
Technology risk.
Market risk.
Construction risk.
Regulatory risk.
Financing risk.
Supply-chain risk.
Execution risk.
The objective isn’t necessarily to eliminate every risk. That is rarely possible.
It is to understand those risks, reduce them where possible and allocate the remaining risks to the parties best equipped to manage them.
Capital follows de-risking.
Canada’s missing middle is about more than money
This is particularly important in Canadian cleantech.
Canada has been very good at supporting research, innovation and early technology development.
We also want institutional and international capital to finance large-scale projects once they become sufficiently mature.
The difficult territory lies between those two points.
Demonstration.
First customers.
First commercial facilities.
Project development.
Engineering.
Permitting.
Offtake.
Building the financing stack.
This is the missing middle where promising Canadian technologies have to become investable Canadian projects.
And it is why the question facing Canada isn’t simply:
How do we attract more capital?
We also need to ask:
How do we get more Canadian projects to the point where capital can invest?
Those are two sides of the same challenge.
As Canada seeks to attract more domestic and international investment, success will ultimately depend on both.
We need investors looking for Canadian opportunities.
But we also need a strong pipeline of projects that can pass the Investability Test.
Because attracting capital is only part of the equation.
The ultimate objective is getting good projects financed — and built in Canada.