Taking Risks in a Complex Ecosystem

How do you solve a 37 gigatons-a-year greenhouse gas emissions reduction challenge? That’s the question executives and investors are trying to answer in their quest to reduce carbon emissions even as global demand for energy rises.

By Greg Heath
Published June 27, 2023 | 4 min read

In an energy transition symposium hosted by RBC Capital Markets in May, leaders across the field highlighted different types of new and emerging technologies, reinforcing the fact that no single solution will solve the complex problem. The energy transition involves an entire ecosystem; every part must be in sync – from cost to policies to the readiness of the technologies. At the same time, companies should be creative in exploring who they can partner with to help make that ecosystem flourish.

To successfully navigate the energy transition, companies and investors will need to consider multiple solutions, take risks with investing in early stage projects, and establish strong partnerships and joint ventures, symposium executives said. While businesses and governments are setting near and long-term emissions reduction targets, many of the most innovative technologies still need to mature, executives told institutional investors.


New and Emerging Technologies

Large companies like TC Energy face particularly sizable challenges. How do they reduce emissions from 90,000 km of natural gas pipelines and infrastructure that power homes, fuel industries and generates power, some of which has been in operation for 80 years?

It’s not just about whether technologies like direct air capture (DAC), carbon capture, usage and storage (CCUS), or methane pyrolysis are the best fit, but also the digital technology involved with capturing the data to help with decision making. For example, what is the most efficient way to move natural gas from one location to another, that will reduce costs and lower emissions?

Even as companies look to retrofit existing infrastructure to help reduce greenhouse gasses, they also need to be investing in low carbon energy facilities that will help further their decarbonisation goals. Some of the most popular and interesting emerging technologies still have some drawbacks: they need to be proven cost effective and commercially viable on a large scale, and energy efficient in their own right. These promising solutions are not quite ready for prime time yet – one of the biggest challenges is the electrical power demands required to run many of these processes.

“That's why we're looking at how we can invest, accelerate and drive these technologies a lot faster,” TC Energy’s Roland Muwanga, Vice President of Energy Transition - Technical and Operations Strategy said in his keynote speech.

“There are a few technologies that we've looked at that are in that range we’re interested in. But once again, these are not at the readiness – from a technological point of view – that we can put those out there … Some are getting close and they’re getting very interesting but they're not there today.”

In order to reach its emissions targets, companies like TC Energy are also keeping close tabs on incubators and research consortiums to stay on top of the newest technologies. It also allows larger companies to participate in very early-stage funding in a joint, low-risk manner.


Financing a Project and Competing with U.S. Cash

With an estimated US$100 trillion worth of investment into new infrastructure required to achieve net zero globally by 2050, how projects will be financed is a huge part of the solution to the emissions reduction challenge. What’s the best approach without destroying equity value for investors? When should investors pivot, change their approach, walk away, or kill a project if it no longer makes sense?

Much like the LNG market decades ago, a key part of the energy transition will require companies to put in earlier stage capital and take risks. Capital is a finite resource, however, and the reality is, the returns on certain energy transition models will be skinny or uncertain. The investment community must demonstrate how they will ultimately finance these innovations through to commercial adaptation. At the same time, as these technologies move past the concept and experimental stages, governments too should help fund the development of commercial models, the conference heard.

Even when all the moving parts appear to be in alignment, however, the most formidable challenge is competing against the U.S. and the massive stimulus of cash available – particularly the hundreds of billions in tax breaks and spending earmarked for clean energy through the Inflation Reduction Act, subsidies designed to not discriminate against the source. But some executives say there are other ways to access enough capital that can help generate internal rates of return that are comparable to the U.S. Importantly, there are plenty of uniquely Canadian, non-financial metrics that can entice businesses to invest in Canada.


The Legacy of Indigenous Partnerships

One of Canada’s greatest advantages and most important considerations are Indigenous rights and title issues, executives told investors. RBC has seen through its own investment banking practices the rapid rise in Indigenous partnerships and Indigenous financing, both of which have a significant role to play in the energy transition and project developments.

There are a lot of misconceptions regarding how First Nations partnerships are established. Unlike many First Nations partnerships struck decades ago, these are not token gestures of reconciliation, but transformative, material ownership and involvement in major infrastructure projects.

“When I say material, I don't mean 10 percent…I don't mean 25 percent. When we have conversations with corporate Canada, it's a minimum of 30 percent,” Stephen Mason, Head of Reconciliation Energy Transition Inc, told investors.

“When you talk 30 – there's a place at the table, but there is also significant capital available for Indigenous people to come in as partners, whether it's through the various grants in the federal government. And certainly in Alberta, we also have the Alberta Indigenous Opportunities Corporation – which really helps to underpin the equity component.”

Over the past five to seven years, incredible strides have been made in this area, with broader acceptance of Indigenous financing. The bond market, for example, is starting to recognize debt financing for Indigenous participation based on the merits of a project. It is another example of the Canadian advantage and how entirely new opportunities and sources of capital can be created.

Indigenous partnerships are not just about formal ownership and financing either. The partnership is woven into all aspects of a project. It means having meaningful input on the project from the concept phase all the way to the execution phase, including training programs and creating substantial employment opportunities. It is a partnership that strengthens communities, establishes a legacy and lays the foundation for generational wealth.


Taking Risks

The RBC symposium highlighted some of the key themes investors need to consider while navigating the energy transition: investing in technologies, taking risks, and creating strong Indigenous partnerships. As we’ve seen in the U.S., and in certain provinces in Canada, governments also play an important role in ensuring the transition over the coming decades is successful. Understanding the jurisdictions that will drive how this market builds and plays out is essential.

“You can’t have an energy transition conversation without talking about policy, policy resilience, or policy certainty….policy is the leading force today,” TC Energy’s Muwanga said.

There are many interesting technologies under development, but a lot of hurdles remain, even as scientists urgently call for a drastic reduction in carbon emissions. In order to accelerate the development of these new technologies, risk-taking and investments at all stages of development is needed.

The good news is, the industry is experiencing strong momentum, capital is flowing into the sector, and huge opportunities await. Governments and companies are highly motivated to find solutions. In this dynamic space, all eyes are focused on policies, innovative developments, investments, and decisions, and how these components will come together to cultivate a thriving ecosystem.

Stay Informed

Get the latest insights and news from RBC Capital Markets delivered to your inbox.