During 2012’s first quarter, as the Canadian government reworked the federal budget, there was significant concern in the scientific community that the scientific research and experimental development (SRED) program, one of the world’s richest incentive programs, would face major cuts.
Although the cuts were not as dramatic as some had feared, cuts in the general investment tax credit (ITC) and the 10% reduction in the prescribed proxy amount (PPA) for calculating overhead are expected to have a major impact on capital intensive projects, chief among them clean-tech development.
The SRED funding changes, coupled with unfavourable conditions in the U.S. – one of the biggest buyers of Canadian energy – have created uncertainty for the Canadian energy sector. Despite this challenge, Cascadia is seeing promising signs for Canada’s clean-tech sector in several key areas.
We are expecting continued strength across these areas during the rest of this year:
•Rapid consolidation in the energy efficiency sector. The sustainable industries market shifted in the last year as investor money left biomaterials, biofuels, wind and other high capital cost sectors and migrated to less capital-intensive sectors such as energy efficiency. Managed services providers are looking to acquire technology-focused energy efficiency companies to meet growing customer demand for real-time energy solutions, and with lower barriers to entry, we expect to see these energy efficiency companies thrive. As Canadian clean-tech companies and investors begin to experience the full brunt of the changes to the SRED program through 2014, we expect to see this trend continue and grow in 2012.
•Light on the horizon for solar.Although the U.S. solar market has taken a beating over the past year, with highly publicized failures like Solyndra making investors wary, these bankruptcies resulted from failure to respond to important market trends, not an overall industry weakness. Indeed, interest in solar energy is still high, as indicated by recent cross-border transactions. Notable among these is the recent deal, which closed in late August, between Canadian Solar, one of the world’s largest solar power companies, and Penn Energy Renewables Ltd. This deal will help the construction and operation of two new solar energy farms in Ontario, which are expected to produce enough electricity to power about 2,600 homes.
•Early-stage investments will continue to accelerate. Despite the adverse effects that some of the changes to SRED are expected to have on clean tech, the government did attempt to offset these decreases with a $1.6 billion investment over five years targeted at early-stage venture capital and commercialization funds. This Canadian investment in early-stage projects reflects a trend toward early stage investments in the U.S. In fact, 44% of all financings in the first quarter of this year were early-stage transactions. This investment trend signifies that investors are becoming more comfortable with the risks inherent in early-stage deals and that entrepreneurs are creating companies that investors find attractive from business model and technology perspectives.
•Natural gas will benefit renewable energy in the long term.Canada is home to a wealth of natural resources, chief among them natural gas. With major investments by the U.S. and other developed nations in the natural gas sector, Canada – one of the few net exporters of energy outside of South America or the Middle East – stands to benefit significantly. The downside to the focus on this relatively cheap and abundant form of energy is that we will likely see a decrease in renewable energy investments as the natural gas infrastructure is built out over the next several years. However, that infrastructure will drive overall economic activity, which in the long run will be positive for the renewable energy sector and Canada as a whole. •
