Research – Global Climate Finance Accelerator

Forward

Climate change and other global challenges – war, political polarization, inflation and the after-effects of the pandemic – make for an uncertain world and uncertain markets. In Canada, continuing dependence on oil, unclear carbon pricing policies and cancellation of renewable energy programs contribute to continuing uncertainty in industry, in capital markets and among international observers.

Nevertheless, the investment needed for Canada and the world to meet climate goals and undertake an energy transition continues to grow.

Government, industry, capital markets and universities must be part of finding the way to meet these needs. In 2023, with the support of the Dobson Climate Project, the Rotman School of Management launched an experiential learning program in collaboration with the Global Climate Finance Accelerator and the University of Toronto’s Climate Positive Energy initiative. Graduate students in science, engineering, policy, and finance explored innovative ways to enable investment in promising climate positive projects.

The proposed financing structures they developed are presented in this report. They are not new. Rather, they adapt existing structures to build finance solutions that make climate positive projects “investible” when otherwise they would face traditional financing, policy and regulatory barriers. Whether these proposed solutions unlock capital remains to be seen, and lessons will be learned either way. By developing a process for working together with project developers, financiers, and policymakers to advance climate solutions, Rotman’s experiential learning program has provided Canada’s future leaders with the tools to accelerate progress against society’s pressing climate goals.

Kenneth S. Corts
Vice-Dean, Research, Strategy, and Resources
Academic Director, Lee-Chin Institute for Corporate Citizenship
Marcel Desautels Chair in Entrepreneurship Professor, Economic Analysis and Policy
Rotman School of Management

Introduction

The Global Climate Finance Accelerator is a not-for-profit intermediary with a mandate to catalyze the relatively nascent Canadian blended finance ecosystem to alleviate access to capital challenges for climate solutions. The Accelerator evaluates prospective projects on their climate impact, feasibility, and potential for financial return. Common financial obstacles such as outdated risk perceptions, policy uncertainty, and legislative barriers are also identified and assessed. Strategies to adapt mainstream structures are proposed to potential investors and other financial backers, as well as government and other facilitators.

The University of Toronto’s Climate Positive Energy initiative develops social, scientific, technical, economic, and policy solutions to transform Toronto’s energy systems, ensure energy access and production is equitable, and helps Canada become a global clean-energy model. It facilitates collaborative research, builds partnerships, promotes knowledge translation, and provides training opportunities for students and faculty.

The Rotman School of Management’s Accelerating Climate Finance experiential learning program was launched in 2023 to scale up investments in climate-positive technologies and infrastructure in Canada and beyond. Working with graduate students across finance, business, engineering, science, and policy, the program identifies, evaluates, and proposes strategies to address common financing challenges that often include outdated risk perceptions, capital costs, infrastructure capacity, policy and legislative barriers, and technological uncertainty. The objective is to implement financing strategies applying mainstream structures in new ways to support pioneering projects not yet implemented at scale.
The Accelerating Climate Finance program focuses on bottom-up financing solutions to identify and address gaps between top-down financial commitments, models, and tools, and on-the-ground results.

The objective of this work is to develop and refine a process – one project at a time to capture new opportunities and lessons learned – for expediting the decarbonization and increasing the resilience of Canada’s economy.

Program analytics were supported by Bloom ESG’s insights and suite of digital tools.

Acceleration

Financing the Sustainable Development Goals (SDGs)

There are trillions of dollars that can be invested by the private sector into the SDGs through procurement strategies and joint ventures. Despite the opportunity, the world is still lacking funding and investment at the levels required to achieve economically resilient and equitable societies.

If we have any hope of achieving the SDGs, all stakeholders must work in collaboration. Business needs a front seat at the international fora where pathways forward are being created.

Section 1 of the Report proposes strategies for financing solutions that could directly advance four of the 17 Goals and indirectly influence six.

Direct

#7 – Affordable and clean energy
#9 – Industry, innovation and infrastructure
#13 – Climate action
#17 – Partnerships for the goals

Indirect

#1 – No poverty
#4 – Quality education
#5 – Gender equality
#8 – Decent work and economic growth
#10 – Reduced inequalities
#11 – Sustainable cities and communities

Financing solutions exist but need to be scaled.

A 2022 report by the BMO Climate Institute stated that buildings account for 16 percent of Canada’s annual GHG emissions, of which 57 percent (66 Mt CO2e annually) is from residential buildings. In a 2023 survey by Natural Resources Canada, Canadians called for “new or scaled financing models and solutions that help support and set investment milestones for decarbonizing buildings”. They noted the need for mechanisms to determine if government funding is effective in incentivizing low carbon, climate resilient buildings, and to help identify where strategies could be improved. Survey participants also noted that “retrofits were unlikely to occur if they are not affordable.”

In addition to the GHG reduction imperative, many multi-unit residential buildings (MURBs) across Canada require retrofits simply to replace existing systems reaching the end of their life cycle. These required upgrades to maintain or improve the current quality of life create an opportunity for a parallel decarbonization strategy. Other benefits include expanding employment opportunities through investments in building decarbonization technologies, supply chain capacity, and workforce training.

A bottom-up analysis of one MURB provides insights into how public and private market mechanisms can be scaled to achieve a decarbonized buildings sector.

The Accelerator modelled retrofits financed through a “Financial Aggregator”, which invests the full cost of the retrofit in return for a cash flow waterfall comprised of energy and financial incentive savings under different scenarios over the life of the project. Under five of the six scenarios modelled, the equity NPV and IRR were positive. The sixth scenario, replacing air source heat pumps with geothermal, was not economically viable on a single project basis, however, should benefits from multiple properties be incorporated, the project economics potentially shift to positive as well.

Investment in mine site decarbonization leverages the financial structure used in building retrofits.

According to an IEA report, there is a large variation in the GHG footprint of different producing sites for the same material, which indicates significant opportunities to further decrease emissions globally through fuel switching and electrification alongside process efficiency improvements. In the case of the simulation mine site, a Special Purpose Vehicle (SPV) invests the CAPEX required to electrify an open-pit mine haul fleet so that what could otherwise be a prohibitive cost is off the company’s balance sheet and the techno-economic risk is shared among multiple partners.

Different decarbonization technologies were evaluated for their ability to achieve a scientifically credible net-zero outcome. Investment in trolley assist over fleet electrification, for example, can be a beneficial interim measure while waiting for full electrification technologies to become more cost-effective and widely available. The systems, however, are at risk of becoming stranded as more advanced and efficient electrification solutions come to market, resulting in underutilized infrastructure and a poor return on any government investment in such interim investment.

Implementing a credible, science-based, standardized taxonomy helps guide investment decisions.

Taxonomies remove the guesswork for investors and lenders by categorizing investments based on their long-term viability and alignment with national and global climate mitigation goals.

The Accelerator’s analysis found that the most profitable technology assuming an escalating price on carbon to $170/tCO2e by 2030 and stable carbon credit revenues for the pilot open-pit mine site is replacing the diesel truck fleet with an electric fleet. The trolley assist generates a high IRR for investors primarily due to extremely low comparative CAPEX alongside government grants and incentives captured in the savings cash flows. It has, however, the lowest GHG emission abatement potential, which negatively impacts cash flows over the life of the mine under high carbon price assumptions.

More concessional financing and risk transfer support for heavy duty battery electric (eHDV) hauling trucks will yield the greatest GHG abatement aligned to a net-zero pathway. The challenge is access to a sufficient level of electricity capacity. While the high CAPEX associated with new infrastructure for hydrogen makes these technologies economically challenging, they are high potential in terms of achieving net zero and expanding energy capacity. Achieving the equity returns required to attract private capital, however, requires an escalating price on carbon; in this case assumed to reach $170/tCO2e in 2030, at which time the price remains stable.

With strategically designed programs, governments can crowd in private capital for decarbonization solutions.

The most effective solutions are coordinated across all levels of government to streamline access and avoid competitive or duplicative initiatives. Options to alleviate financing gaps are explored in Section 4 of the Report. Programs include loan guarantees and insurance products, alongside tax credits, subsidies, co-investment strategies and other incentives focused on risk mitigation to enhance returns for private sector investors and lenders.

Enablers

Real Estate

There is a dearth of innovative financing tools for MURB retrofits. Existing government programs target individual homes and social housing. A framework is needed to support single platform financing solutions for multiple autonomous individuals in MURBs.

On-Bill Financing (OBF), which typically uses ratepayer funds or utility shareholder funds to service energy related projects at a very low interest rate could be leveraged. This loan is then added to the monthly utility bill payments. On-Bill Repayment (OBR), which is established through a similar structure as OBF, instead uses private capital from institutional investors, who are repaid through monthly utility bills. The property and the newly installed building systems serve as collateral for these types of repayment tools. OBR is easily scaled to other projects and asset types once the utility supplier has established this program. The program allows for investors to secure their lending to a property asset and not only rely on energy cost-savings as a form of security.

Private capital has to date not come in at a cost that makes retrofits for small commercial and multi-unit residential buildings (MURBs) economically viable for building owners at scale. Bundling multiple MURBs into a retrofit portfolio financed through a green bond as collateral for banks is one mechanism to unlock financing solutions for multiple autonomous individuals that reside in the MURBs. Multiple levels of government would have to work together to modify current green bond structures and expand eligibility.

Another opportunity to crowd in private capital is the the US Property Assessed Clean Energy Programs (PACE), which requires a lien to be placed on the property, versus owners of individual units. The lien is then passed through each condominium unit until the full cost is recovered. The cost of investment including capital, interest, and administration costs are recouped through the property tax lien. Private investors invest in the annual property tax revenue to pay for the retrofits, with the payback period agreed within an annual property tax agreement. It works through the establishment of a governing body at the City to collect tax payments, which are allocated to the retrofit loan repayment. As this structure replaces City-issued loans and/or grants (to accommodate its loss of tax revenue), the City could redirect a portion of the property tax payments to a financial institution, which can top up the level of debt as required. This structure would also work well for commercial development.

Property tax revenue payments is not common practice in Canada, however. It would require municipalities and provinces to implement new legislation regulating permissions for retrofit payments through property taxes, and for municipalities to agree to forgo property taxes associated with the asset for the agreed payback period.

Mining

Despite possessing vast reserves of essential metals and minerals necessary for manufacturing batteries and electronic devices, Canada has yet to fully capitalize on these resources due to current market conditions and prevailing regulatory hurdles that deter potential investors. Work is underway to foster a conducive investment environment for advancing the nation’s critical minerals strategy and securing its position in the global supply chain. The global investment community is starting to recognize the opportunities for patient capital in the critical minerals sector with sustainable and responsible investment management firms providing long-term patient capital to the mining and metals sector.

Adapting non-recourse project financing or streaming structures to shift decarbonization risks from mining companies to third parties by leveraging government funds and private placements will help juniors overcome CAPEX constraints and operational transition challenges and reshape its investor base to more patient capital.

Novel financing solutions for junior miners in critical minerals are presenting themselves, including offtake agreements with the end users, such as car manufacturers. More is needed, however, in particular long term, patient capital as China is doing. Investment firms are coming online globally to fill exactly this gap. The Canadian government can help secure a net-zero pipeline of critical minerals materials through a coherent strategy for its allocation of limited funds. Investment in carbon reduction solutions that do not contribute to achieving net zero—representing a ‘dead-end pathway’—wastes resources that could be directed towards more effective and impactful technologies.

Streamlining funds will also help. Government expenditures on decarbonization efforts can often be fragmented across various departments and initiatives, leading to duplicative investments in the same solutions. This not only risks crowding out private capital, which could potentially bring innovative solutions and additional funds, but also creates inefficiencies as project developers navigate multiple funding streams, awaiting decisions that could provide low-cost or free capital.

Electrification

The Report illustrates the enormous opportunity of industrial electrification in achieving net-zero targets. Renewable energy development in Canada, however, remains a challenge.

Recommendations to address this challenge are summarized below and outlined in further detail in Section 4 of the Report.

Review and refine current policies to facilitate easier, more efficient grid interconnections for renewable energy producers.
Review and modify existing, or create new, incentives for the development and integration of energy storage solutions.
Re-purpose regulatory frameworks for a more flexible electricity market that facilitates distributed energy resources and new business models.
Develop new utility models to account for the changing role of consumers to prosumers and the bi-directional communications of the grid.
Identify regulatory changes required to incentivize utilities to innovate.
Expand the scope of electricity service operations’ cost guarantee to increase developers’ eligibility.
Ensure incentives are transferable and stackable with other funding support
Implement a streamlined process for private or corporate PPAs with producers alongside carbon credits for offtake corporations.
Implement a two-layer all-in tariff to help increase the certainty of cash flows and thereby enhance equity and debt investor confidence.
Build a concessional financing platform to leverage low-cost debt financing for on-site renewable energy.

Alberta, which operates under a deregulated Free Merchant Market Model, must contend with price volatility and government uncertainty. According to the Canadian Renewable Energy Association (CanREA), Alberta accounted for more than 92% of Canada’s overall growth in renewable energy and energy-storage capacity in 2023.

In August 2023, however, the province announced a moratorium on all new renewable energy projects. While this moratorium does not impact approved projects, it will put projects with potential to come online in 2025 and beyond at risk.

CanREA lists Ontario as the province with the largest installed capacity and, while no new projects came online in 2023, the Association expects capacity to increase with energy storage.

Political uncertainty is the greatest risk for investment in Alberta, which otherwise enjoys strong fundamentals. Renewable energy projects could tap into the more mature carbon markets in the province. With the expected increase in carbon prices to $170/tCO2e by 2030, these projects could present a compelling investment opportunity, providing more lucrative opportunities for solar photovoltaic (PV) than other jurisdictions. Using assumed capacity factors of 20.0% and 22.0% and CAPEX of $1,450/kW and $1,500/kW for Ontario and Alberta, respectively, the equity IRR was compared for the two hypothetical 100 megawatts (“MW”) solar power plants.

The greater potential for strong IRR in Alberta compared to Ontario for renewable energy investments is likely due to a more favorable market structure for competitive energy pricing and a less saturated renewable energy market. While Ontario has strong renewable energy availability, Alberta benefits from high solar irradiance and strong wind profiles, which can result in higher energy output and profitability. Alberta’s favourable investment potential is also supported by a deregulated energy market, which allows for competitive pricing that potentially results in higher returns for investors. Ontario’s fixed returns, while less risky, are less profitable. Ontario’s earlier saturation of the market compared to its grid capacity may also result in reduced opportunities for high IRRs compared to Alberta, where the renewable market is less mature and rapidly expanding.

Ontario’s market is likely to shift with the need to increase electricity capacity.

Transmission and Distribution Infrastructure

Transmission and Distribution (T&D) infrastructure presents a critical bottleneck in the deployment of renewable energy projects. Existing grid infrastructure has limited capacity to integrate and manage the variable and decentralized nature of renewable power sources such as solar and wind. Current grids also are not designed for the bidirectional flow of electricity characteristic of distributed renewable systems such as rooftop solar. Policy and regulatory frameworks must evolve to support faster grid integration of renewables. Without addressing these T&D infrastructure challenges, renewable energy project delays are likely to continue, hindering progress towards clean energy goals.

The University of Toronto’s Climate Positive Energy (CPE)’s $23 million Grid Modernization and Testing Centre provides unique testing capabilities for the Canadian electrical energy industry to help in the evolution to a more decarbonized, decentralized, and digitalized power system. Its objective is to address the market capacity gap through technology testing and real time simulation of various grid models. Micro-grid connections to renewable energy in rural areas specifically in Northern communities is another important aspect that the centre will service through its modelling capabilities.

The transformation of the electricity sector presents a wealth of career development opportunities.

Collaboration

For historically marginalized communities, the shift towards sustainable and renewable energy sources can mean not only jobs but also pathways to long-term careers and leadership roles. Opportunities extend beyond simply participating to actually shaping the new energy landscape. New roles include policy and advocacy positions to guide the electricity sector’s regulatory and ethical compass in ensuring it meets the needs of underserved populations. Opportunities for entrepreneurs will also grow to help launch and scale energy-focused businesses.

Recognizing these opportunities, and the fact that electrification in Canada relies on lands and resources to which Indigenous nations are rights-holders, the First Nations Major Projects Coalition (FNMPC) and Mokwateh partnered to create a National Indigenous Electrification Strategy to “position Indigenous nations as leaders of Canada’s net zero transition and remove economic, political, and regulatory barriers to support and promote the development of Indigenous-partnered and -led clean energy projects in Canada”. The Transition Accelerator’s Electrifying Canada also supports ”sustained collaboration” among power producers, regulators, system operators, industry, organized labour, Indigenous organizations, financial institutions, and civil society to eliminate identified barriers to accelerated electrification.

Transformation Culture

In the wake of the pandemic, many people have forgotten that cities can and should be more than just centers of work and habitation. Designed correctly, they become engines of innovation, propelling economic growth and social evolution. They house commercial activity, leading universities, and research institutions that generate cutting-edge knowledge and attract global talent, building a community of practice that transcends knowledge into craft by putting theory into action, sharpening practical skills through shared experience and dialogue. Individuals expand their ideas through chance encounters on the streets or the various knowledge-sharing and ideation collective hubs and events. This collaborative environment fosters an instinctive understanding of which approaches are likely to succeed and which may falter, informed by the collective wisdom and diverse perspectives of the group.

Strategic Planning

One key challenge in appropriately allocating capital to an equitable energy transition in Canada lies in how the country decides to define and articulate its vision. Critics often characterize Canada’s business environment as an oligopolistic hegemony, which potentially leads to less favourable conditions for employees, consumers and other stakeholders due to a lack of competitive pressure. Those who support Canada’s current economic environment believe that industry consolidation is an imperative for global investment (e.g., favourable to shareholders).

This difference in approach highlights a fundamental debate about the role of government in the economy: Whether to protect certain industries considered vital for national interest and ensure stability through regulation or to promote an open competitive market environment that encourages companies to innovate and differentiate themselves independently. A clear strategic vision for determining which industries need government-protected competitive advantages, and when these protections should be lifted to foster technological progress and economic growth, will support the development of long-term, non-partisan policies designed to increase Canadian innovation and productivity.

Next Steps

The Accelerator’s immediate next step is to pilot the proposed financing solutions with two project developers in the mining and real estate sectors. The objective of this work is to develop and refine a process – one project at a time to capture new opportunities and lessons learned – for expediting the decarbonization of Canada’s economy.

Contact us at info@globalclimfin.com to express your interest in participating in our research and pilot initiatives and lay the groundwork for securing the necessary capital to realize your net-zero aligned industrial decarbonization projects.

Alternatively, join us in our efforts to move three pivotal projects from vision to reality, ultimately contributing to the resilience and sustainability of communities on both a global and local scale.

Learn more in the Accelerating Climate Finance Report.

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