Contributed to CVCA Central by: MKB Growth Equity
Owing to a convergence of factors relating to technology, policy, capital, and demand, the energy transition has more momentum than ever before. Key technologies have seen steady progress in cost declines and performance gains. Landmark legislation is providing long-term visibility and support for the innovation and deployment of low-carbon technologies. Despite the macro pull-back, over $130 billion of assets under management (AUM) has been raised in climate-focused venture capital, growth, infrastructure, and other private equity funds since 2021. Plus, corporate and consumer demand are shifting in part because technology advancement has positioned energy transition solutions as rational and economic.
Concurrently, the geopolitical turmoil and COVID-related logistics issues of the last few years have made business leaders and policymakers rethink the value of a just-in-time, globalized supply chain. In particular, the war in Ukraine thrust the physical and political geography of sourcing energy products into the spotlight. In considering how best to gain long-term strategic advantage in the shifting energy landscape, countries with the capacity to develop, supply materials for, and manufacture energy transition technologies are best placed. Canada has all the ingredients to be among the next generation of energy leaders, starting at the top of the value chain.
Minerals:
Underscored by language agreed upon at Dubai’s COP28, the coming decades of energy transition are slated to shrink the demand for oil and gas resources, which have historically been important contributors to the Canadian economy. Electric vehicles (EVs) already displace 1.5 million barrels of oil demand per day, with that number to grow dramatically. Carbon-free electricity sources are likely to have a similar impact on natural gas demand for power generation.
In the medium term, the energy transition is unlikely to mean that resource extraction will disappear — rather, the resources extracted are likely to change. Fortunately for Canada, oil and gas are not the only resources that it has a long history of extracting. Low carbon technologies and infrastructure are predominantly tangible products that require minerals from the earth. The electrification of transportation, buildings, and industrial processes will require growth in power generation assets, transmission, distribution, and storage. Lithium ion batteries, for example, require minerals such as lithium, nickel, copper, graphite, and cobalt. Grid expansion needed for electrification requires significant growth in aluminum and copper production.
Canada does not currently produce lithium, but it has large hard-rock and brine-based resources from which it can be extracted. It also has leading technology companies pioneering cheaper and more environmentally friendly ways to extract and refine lithium, such as Summit Nanotech and Mangrove Lithium.
Canada also has an estimated 2 million tons of nickel reserves, 7th most of any country, and 681,000 tons of cobalt reserves, 6th most in the world. Electra Battery Materials is building North America’s only cobalt processing plant in Ontario, where it will also process nickel sulfate. Canadian mines produced 542,000 tons of copper in 2021, 11th most of any country. It also produced the 4th most aluminum and the 9th most graphite. Alongside Australia, Canada is one of only two countries with all the minerals required for battery cathodes.
In addition to its natural resources, Canada has the world’s most developed capital markets ecosystem for the mining industry. 75% of the world’s mining companies are based in Canada, and approximately 40% of them trade on the TSX and the TSXV. The Canadian government also has an explicit Critical Minerals Strategy, enacting policies like a 30% exploration tax credit and providing funding for R&D.
Scaling up domestic mineral production and processing is challenging, given long-lead times for new mines and siting concerns. However, Canada’s natural resources, capital markets, and know-how position it as well as any nation to become a leader in energy transition minerals and develop its capabilities further down the value chain in the manufacturing of energy transition products.
Industry:
Once raw materials are mined, there remains substantial industrial value creation in the production of final energy transition goods. A combination of factors make Canada similarly well positioned to grow this sector of its economy.
According to the IEA, electricity as a source of the industrial sector’s energy mix must climb from 21% in 2021 to 30% by 2030 in a Net Zero Scenario, with a growing proportion coming from zero emission sources. Canada already has an abundance of cheap, clean power resources, with plans to develop even more. For energy-intensive industrial uses cases, Canada’s power system will be a key advantage.
Canada and its American partners have begun taking meaningful policy action to set North America up for strategic advantage in the industrial portion of the energy transition value chain. The Inflation Reduction Act (IRA) was the most significant piece of climate legislation to date, and in a few important ways, it included Canada. For EV tax credits, minerals and battery components have steadily rising requirements to be sourced from North America this decade.\
The IRA also put in place funding to purchase more than US$5 billion of low-carbon construction materials for homes and federal infrastructure, and another US$5.8 billion for advanced technology in steel, cement, and other industrial facilities. Canada’s steel, aluminum, and cement exports are typically less carbon intensive than US products, advantaging Canadian producers. Plus, Canada is developing its own Buy Clean strategy for the longer term.
Canada’s response to the IRA through its budget has begun to attract major EV and battery manufacturing projects. The federal government and Volkswagen agreed to a deal that will see Volkswagen invest more than $20 billion for a new battery Gigafactory in Ontario. Similar deals have been reached with General Motors and Northvolt to build factories in Bécancour, Quebec, where an industrial hub around EV components is being created. Emphasizing these recent announcements, research firm BloombergNEF singled Canada out as best placed amongst the 30 countries that it monitors to participate in global battery supply chains.
Canada is also an emerging leader in creating innovative industrial technology companies that accelerate the transition to a low carbon economy. Critical mineral recycling companies like Li-Cycle, Lithion Recycling, and Cyclic Materials are ramping up production to enable high recovery rates of key energy transition materials. There are also Canadian leaders in the low carbon concrete industry — companies such as CarbiCrete, Carbon Upcycling, and CarbonCure.
Through a combination of factors over which it has control and those that are a matter of geography and geology, Canada has the recipe to become a global leader in the energy transition through its upstream prowess and should prioritize employing its advantageous ingredients to full effect.
MKB is a North American private investment firm that specializes in providing growth equity to companies driving innovation in the energy, transportation, the built environment, and related industrials sectors. MKB takes significant minority positions in its portfolio companies and proactively assists management teams in reaching their full potential. To learn more about MKB, visit www.mkbandco.com
