Three Keys to Unlocking Energy Transition: Partnerships, Permitting, and Finance

International Energy Agency Executive Director, Dr Fatih Birol, described the U.S. Inflation Reduction Act (IRA) as “the single most important climate action since the Paris Agreement.”¹ The IRA along with other U.S. legislation provide grants, loans, loan guarantees, and tax incentives to drive investment in technologies that will help decarbonize the U.S. economy. Other countries, including Canada, are having to monitor and respond to the IRA with their own investment incentives to support energy transition investment at home.

As reported by the Clean Investment Monitor, in the United States there was $213 billion (C$296 billion) in “new investment in the manufacture and deployment of clean energy, clean vehicle, building electrification and carbon management technology” in the 12 months ending June 2023.² Investing on such a large scale in these and other energy transition sectors brings with it important issues and challenges.

BMO’s second annual Transition Think Summit brought together key voices from the corporate, investor, and policy worlds to discuss energy transition issues and, critically, solutions. The summit focused on decarbonizing agriculture, critical minerals, small modular reactors, and energy transition policy. At the summit, three key themes emerged: the benefits of partnerships, permitting challenges, and the need for creative financing solutions for energy transition.

Partnering to de-risk energy transition projects

In many sectors of the economy, the capital requirements and risks associated with reducing a business’ carbon emissions are too onerous for an individual company to bear. Building emissions reduction projects and infrastructure, particularly involving new or newly combined established technologies, comes with heightened construction cost, operating performance, and energy policy change risks. Often, partnering can reduce such exposures through risk sharing and knowledge transfer opportunities.

Capital and risk mitigating partnerships can be built with customers (long-term capital and operating cost sharing contracts often at a premium to market prices), investors (co-ownership structures), government (investment and production tax credits), and other companies with aligned interests in reducing emissions (joint ownership and use of decarbonization facilities).

More efficient permitting processes to accelerate energy transition

In some circumstances, decarbonizing the economy means developing new, large-scale infrastructure or resource projects which can impact the environment. In such cases, lengthy and complex federal, state, and local permitting processes impede development of projects or infrastructure necessary for energy transition and energy security.

In the U.S., for example, it can take over a decade to obtain the necessary approvals for a new mine—even for critical minerals vital to the manufacture of equipment needed to electrify the economy. And since it is only when a mine goes into operation that the developer earns a return on investment, costs can be a deterrent to mine development.

Key to the construction of projects necessary to support energy transition and energy security will be finding ways to make permitting processes more efficient while maintaining and potentially strengthening safeguards for the environment, communities, and Indigenous groups.

Financing plays a critical role in supporting energy transition

Decarbonizing the economy requires energy transition infrastructure and resource project development on a massive scale and brings with it an equally massive need for funding. The capital needed to finance the developments must come from both private and public sources where government policies and incentives work to mobilize private capital.

The Canada Growth Fund’s mandate, for example, is to “… build a portfolio of investments that catalyze substantial private sector investment in Canadian businesses and projects to help transform and grow Canada’s economy at speed and scale on the path to net-zero.” ³

Ultimately, energy transition projects and businesses must generate returns on investment to be sustainable. Capital providers can play a significant role in that regard by providing lower cost capital to energy transition projects. They will need to find ways to manage risks associated with financing new, immature energy transition technologies and industries, and develop new, innovative financial instruments designed to support energy transition projects.

For its part, BMO has committed to mobilizing US$255 billion (C$300 billion) in capital through green, social and sustainable lending, underwriting, advisory services and investment.

Driving forward in energy transition is nothing if not complex. Industry, capital providers, and policy makers should meet this complexity with cooperative, multifaceted, and strategic approaches. We can build off strong North American policy foundations to create an enduring energy transition across the economy. And as we heard at our Transition Think Summit, the path forward should include strategically developed partnerships, more efficient permitting processes, and creative financing solutions.

 ¹ Justin Worland, The Inflation Reduction Act Has Already Changed the World | TIME, August 2023.

² The Clean Investment Monitor

³ https://www.cgf-fcc.ca/