September 11, 2020
Guest post by Jeremy Oppenheim & Mark Meldrum
This post is part of Smart Prosperity Institute’s Smart Stimulus Project and supports the work of the Task Force for a Resilient Recovery. Want to receive our latest analysis and insights? Sign up for our monthly updates here.
Recently, the Task Force - an independent group of 15 finance, policy and sustainability leaders - launched its preliminary report on 5 Bold Moves for a Resilient Recovery. The preliminary report aligns with the Task Force’s ongoing work to make Canada’s economic recovery from COVID resilient: getting Canadians back to work at the same time as supporting the jobs, infrastructure and growth that will keep Canada competitive in the clean economy of the 21st century.
The Task Force for a Resilient Recovery’s preliminary recommendations present a sound compilation of actions that fit the criteria of investing in a sustainable & resilient economy, with an appropriate bias to nearer-term jobs growth. We also like the emphasis on building the skills needed to create competitiveness in the medium-term. This development is the basis for creating good, secure jobs that will be skilled or semi-skilled and certainly embrace Canada’s construction and nature-based sectors. It’s also true for regenerative agriculture, with its strong blending of digital with more field-based know-how (although in our opinion the interim report would have also benefited from a stronger regenerative agriculture proposition).
In all cases, there is the potential to create good, long-term competitive and productive jobs, which are better than the ones we have today. Creating equal, fair access to these attractive and sticky jobs of the future should be a big selling point – moreover, it is hard to replace many of these jobs with Artificial Intelligence.
We see opportunity to ground the Task Force’s recommendations with elements most applicable to the Canadian context. There is some appreciation of this with references to “clean competitiveness,” however there are areas where extra focus would be relevant, given Canada’s distinctive structural features:
To this end, we would propose the following additional recommendations to the Task Force:
Relative to other countries, Canada has high heating and cooling demands. Canada has the potential to become the leading global manufacturer for reversible heat pumps if we adequately stimulate the national market. In time, as other markets come along (namely the North-Eastern US) we can export to them as well.
Reversible heat pumps are already cost competitive on a new-for-new basis vs. a gas-boiler and air-conditioner solution (as illustrated in the RMI report here). Cold climate heat pumps are improving in performance, now able to maintain high levels of efficiency (240% +) even in cold temperatures (-15C) – (see supplier information, for example, from Northeast Energy Efficiency Partnerships (NEEP) cold climate air-source heat pump product list.) Though temperatures in Canada frequently run below -15C and efficiency of the heat pump will degrade, this can be addressed via complementing heat pumps with electric storage heaters, hot water storage tanks, and most importantly, improved building insulation (thus reducing costs & improving comfort).
To drive roll-out, there is a good example to learn from – Energiesprong – which started in the Netherlands, though it has now expanded in Germany, France and has inspired projects in New York State. It combines installation of a new building envelope with heat pump, offers financing, industrialises the manufacturing and installation, and then works with government institutions to establish the early demand (e.g. from housing associations) and supportive regulation to bring it all together.
There is a proven correlation between higher energy efficiency of homes, and lower mortgage default rates. Hence there is financial justification for lower mortgage rates to more energy efficient homes. These rates could be further motivated in part via stress-tests of banks applying a lower risk factor to mortgages for highly energy-efficient homes.
Home sale is a good time to drive a deep retrofit. Banks could be encouraged to structure mortgage products that give the home buyer the option to invest in an energy efficiency retrofit in the first 6 months of home ownership, roll those costs into the mortgage, and then receive a lower mortgage interest rate if the home achieves a better energy efficiency assessment following the retrofit. Other ideas for financial products that can enable a rapid shift are explored in a recent report from the Green Finance Institute in the UK on Financing energy efficient buildings: the path to retrofit at scale.
Canadian drivers cover long distances, given the expansiveness of the country. Government funds for EV charging should be focused on building out a fast-charging network on the nation’s highways, with a sufficient number of chargers per site and decent coverage of sites, to kill range anxiety and prepare for high levels of electric vehicle penetration.
Beyond range anxiety, it is also important to ensure that there isn’t a crunch point when electric vehicle adoption starts to take off, where a limited number of chargers in key locations (e.g. on route to cottage country north of Toronto) become highly congested, leading to long wait times to access a charger, thus creating a poor driver experience and slowing down further electric vehicle adoption. Potential partners in these areas would include the networks (e.g. Hydro One), as well as the EV charger network owners (e.g. OPG’s Ivy Network).
These investments can be thought of as a public infrastructure good, much like the telecom networks’ reach into remote regions (i.e. the low utilisation of the asset isn’t enough to justify private investment, but to provide coverage it’s required). Therefore, public funds should be deployed to provide this public good and speed EV adoption.
Let’s bring together the low-cost early supply of blue hydrogen, with early demand markets (e.g. heavy-duty long-haul trucking) to give Canada an early advantage in the hydrogen economy.
Regarding supply: currently, blue hydrogen (SMR or ATR + CCS) is cheaper than green hydrogen (via electrolysis). This is particularly the case in Canada with low cost natural gas and good carbon capture and storage sites in Alberta. Albertans also bring gas expertise from the oil & gas sector. Green hydrogen, currently at ~$4-7/kg will reach ~$2/kg within the decade which will have it outcompete blue in most geographies. However, within the next 20 years it will struggle to get below the c.$1.5/kg cost of blue hydrogen achievable in parts of Canada. Therefore, investing in a 20-30-year asset (SMR or ATR plant + CCS) to deliver low-cost blue hydrogen today in Alberta is sound – a statement that cannot be made in almost every other geography.
When it comes to demand: two of the more promising early demand markets for hydrogen use include:
1) Heavy-duty trucking: Fuel-cell electric vehicles for heavy-duty trucking are nearly cost competitive with internal combustion, and the long-term outlook is they will remain competitive with battery-electric. This is biased toward long-haul heavy-duty trucking. Canada’s expansiveness means more trucking routes are going to be long-haul and thus well-suited to long-haul heavy-duty hydrogen trucks.
Refuelling infrastructure for trucking is much easier to solve than for passenger cars. c.25% of trucks serve the same route going back & forth, meaning they only need refuelling along that specific route; this makes installing the required refuelling infrastructure, for this 25% of trucks much easier.
2) Green ammonia (including for use in fertilisers) is another considerable early demand market considering it can be a ‘drop-in’, directly displacing grey hydrogen, at the cost of CCS.
Canada’s considerable agricultural industry, and the fertiliser production that feeds into this, could potentially be a considerable early hydrogen market. Note: this is not the case where the fertiliser production uses the CO2 bi-product from SMR in a subsequent step of the fertiliser process.
Canada’s considerable agricultural industry produces a scale volume of agricultural residues, which is one of the few sources of sustainable bioenergy. Limited volumes of sustainable bioenergy need to be prioritised to hard-to-abate end-use sectors, with aviation (bio jet-fuel) being foremost among these. Canada could lead the world in bio jet-fuel production, leveraging its access to vast volumes of sustainable biomass feedstock.
Materials resource extraction will become a larger part of our global economy as we deliver low-carbon energy infrastructure (such as solar modules, wind turbines, batteries, electrolysers, electricity network wires). Canada’s mining sector is well developed and can again lead in advancing low-cost and sustainable mining. One question in this respect is whether/how to develop the mining assets in ways that are environmentally low-impact. Canada could be an advantaged supplier in this (and other security-related) respects.
It is very good to see the heart of the Task Force’s work includes equitable access to the benefits of building the low-carbon economy. For Canada in particular, it will be critical to:
a. Focus support for building energy retrofits to lower-income households, driving down energy costs for these households, and lifting people out of energy poverty. This is particularly important in Canada given the high heating needs & associated costs.
b. Develop robust re-training programmes for oil & gas workers in Alberta, seeking to take advantage of those very competitive engineering and technical skills, to build new industries in for example:
More so than most geographies, Canada has access to and can mobilise long-term private capital. This is critical in the transition as low-carbon solutions call for higher upfront capital investment in exchange for lower operating costs – which also delivers increased resiliency. An ability to deploy scale volumes of long-term private capital, at competitive cost of capital, provides Canada an advantage to lead in the transition. With the right policy settings combined with good public procurement policies and targeted public R&D support, a huge amount of private capital could be mobilised to accelerate the transition and build a clean, ultra-competitive and resilient future for Canada.
It is our hope that the input explored above helps identify ways to strengthen the upcoming final recommendations report for the Task Force, and provides additional policy details for the Bold Moves for Recovery that Canada may undertake to build back better.
Jeremy Oppenheim is a Founder & Senior Partner of SYSTEMIQ, a systems-change company that partners with business, finance, policy makers and civil society to make economic systems truly sustainable. He is the lead author of the “Better Growth, Better Climate” report of the New Climate Economy project, and previously spent over 20 years at McKinsey, developing and leading its Sustainability and Resource Productivity Practice from 2007-2015. He is also an Expert Advisor to the Task Force for a Resilient Recovery.
Mark Meldrum is a Director in the Energy platform at SYSTEMIQ. He was previously Head of Corporate Strategy at National Grid. At SYSTEMIQ his work focuses on how countries and companies can drive and capitalise on the transition to low-carbon energy systems.