Pilot projects are a smart place to put stimulus dollars

May 12, 2020

This post is part of Smart Prosperity Institute’s Smart Stimulus Project. To see other posts from this project, click here.

Want to receive the latest analysis and insights on smart stimulus for a resilient economic recovery? Sign up for our monthly updates here.

For Canada, discussions around a green recovery from the COVID crisis are front and centre. Discussions between experts are ongoing about how to grow greener in every sector from oil and gas to manufacturing to freight shipping.

But meeting a net-zero emissions target by 2050 requires more than becoming greener. Canada needs to substitute existing technologies, adopt new innovations and transform the systems we use today. In an ideal world, stimulus spending could invest in the technologies we will use in this net-zero future and help commercialize them right now. Unfortunately, it isn’t that simple.

Not every solution we will use in a net-zero Canada is ready for mass deployment in 2020. Some are too expensive, others lack the necessary market or regulatory supports, and others are not mature enough to be attractive to private investors.

Yet stimulus can still play a role in supporting these ideas. Pilot and demonstration projects represent an opportunity to invest in solutions that are not quite ready for market deployment yet. They can build the expertise needed to set standards and drive future investment, which will be essential in lowering the costs of a net-zero transition. They can also help create career paths for new graduates in emerging markets. Governments should fund some of these high-potential opportunities. They would create good jobs today and help the next generation of Canadians.

Great ideas

When thinking about which clean technology solutions make sense for stimulus, it's useful to remember that one of the principles of good stimulus is that it be “temporary”. That means public sector capital should be short-term, focus on boosting supply, and avoid crowding out investment from the private sector. It also means that when public capital is tapped out, the market conditions left behind should be mature enough for private sector dollars to step in and meet newfound demand.

However, the need for stimulus to be temporary should not disqualify other projects from consideration. Pilots can help create jobs for the currently unemployed or underemployed. Given that this downturn has hit young people (especially young women) hardest of all, there will likely be an idle labour pool of unemployed university graduates. These highly-educated workers can be employed building demonstration projects in communities across Canada, offering both immediate job creation and the skills training to support future career paths. This will be critically important, as forecasts note this labour market crisis could devastate the career prospects of new graduates for years to come.

Stimulus packages should also fund demonstration or pilot projects because they can offer co-benefits to market-ready technologies. One example is in electricity markets —smart grids and utility-scale energy storage solutions will dramatically increase the attractiveness of renewable energy, and the feasibility of electrification at scale. Supporting demonstration projects in these areas therefore serve to increase the attractiveness of future low-carbon electricity investments. The proof-of-concept offered by pilots can also provide valuable data for policymakers and investors about a solution’s potential performance at scale. The 2009 US Recovery Act invested $8 billion in 99 smart grid projects for these reasons, which included a number of demonstration projects for advanced technologies.

Finally, investing in pilots is smart policy. Our Smart Stimulus Framework emphasizes that Canada should both respect the principles of good stimulus and use this opportunity to invest in technologies and solutions that offer lasting benefits. Clean competitiveness, improved resilience, increased generation of Canadian cleantech IP, improved career prospects for young people, and supporting progress toward a net-zero transition are all examples of long-term value offered by piloting good ideas.

Which projects should get piloted?

There are a few steps to thinking through what projects are a good fit to pilot. Policymakers should not limit potential projects to advanced technologies. Natural capital investments and business model innovations around the circular economy are great examples of solutions that will need to be developed and de-risked if they are to attract private sector capital and be part of a net-zero Canada.

The first step is understanding which projects could benefit from being piloted. If a given technology or solution requires a demonstration project to offer additional proof-of-concept, that is a good start. Pilots can also be appropriate if a project would help mitigate existing risk, validate economic viability, support the further development of a solution, or help create a market for a given product or service.

Second, there are some solutions we know we will need in the coming decades to transition to a net-zero economy. These include hydrogen fuel in freight and home heating, utility-scale energy storage, and advanced smart grids. Some of these solutions are already being piloted with federal support and have potential to be deployed in other regions for testing under new conditions. Supporting pilots for these solutions makes sense, since any investment today will help advance innovation in an area where it is needed.

Third, some solutions will make sense because they represent significant market opportunities in the coming decades. One pressing example is natural infrastructure. The job creation and investment potential associated with natural capital and ecosystem restoration is enormous, but there are barriers to investment. A lack of standardization between natural accounting frameworks, staff constraints at municipal governments, and private sector uncertainty about how to assess risk are all slowing demand. Piloting these projects would offer a chance for standards to develop, to provide skills training on these projects for young people in an emerging sector, and to prime the pump for future growth.

Recommendations for piloting smart solutions

The federal government’s options for supporting pilot projects vary by solution-type. For advanced clean technologies, they could simply create new, or allocate more, funding to administer through Sustainable Development Technologies Canada (SDTC). But if the aim is to support a large number of pilots that touch on emerging technologies, processes and service provision models, they will need to get more creative.

1) Develop specific funding streams for demonstration. Funding for demonstration projects typically takes the form of cash grants or capital contributions. Creating specific funding streams within a stimulus package that provide financial support to high-value projects would be smart. These could be modelled after Innovative Solutions Canada, and broaden the challenge criteria to capture a wider range of potential prototypes and projects that could be supported through cost-matching, direct investment or procurement.

2) Identify partners and give them the flexibility they need to succeed. Demonstration projects are, by definition, spaces to test new ideas in the real-world. Doing so requires engaging lots of perspectives to understand how technical, operational and logistical challenges can be addressed and overcome. If the federal government wants to deploy projects across the country, they will need partners on the ground to serve as financial intermediaries, delivery agents and contributors. Delivery agents could include utilities, municipalities, academic labs or innovation hubs. Additionally, in order to give delivery agents the flexibility required for testing, these streams should be accompanied by “regulatory sandboxes” that allow for certain regulatory requirements to be relaxed for a given project. That way, innovations will not be slowed down by red-tape that limits the growth of promising ideas.

3) Think about piloting ideas in high-growth sectors moving forward. The trajectory of this recovery remains unknown, but if an economic downturn proves more persistent than anticipated, theory suggests far greater government intervention will be required to get back to growth. Supporting sectors that offer hope of swift progress towards net-zero, and career prospects for new graduates, will have incredibly positive spillover effects. If a downturn goes on for long enough, there is a chance that pilots could successfully be commercialized and grow into viable markets. This means that piloting promising solutions today could be a driver of a recovery in the years to come if a return to normal takes longer than expected.

Stimulus is about supporting job creation today. But not every solution we will use in a net-zero future is currently ready to commercialize. The federal government should put money behind piloting promising solutions that offer tangible benefits, de-risk future investment and create new markets for jobs for unemployed and underemployed young people. In a world full of uncertainty, there are some opportunities we know we should seize. Smart Stimulus can ensure that we get an early advantage in supporting the ones that will matter most.