Despite strong 2022 for cleantech, EDC report finds Canada lags peers on R&D spending, funding, converting startups to scaleups

VC investment in Canadian cleantech jumped 63 percent in 2022 despite a tough economy.

In the past few years, pandemic lockdowns, geopolitical strife, and the Russia-Ukraine war have put a strain on critical supply chains for the energy industry, notes Export Development Canada (EDC) in its latest annual cleantech report.

Rising energy costs as a result of these conditions and the aggressive climate policies rolled out in response to them helped make 2022 “a landmark year” for cleantech, reports EDC.

“Boosting Canadian competitiveness … means addressing the ‘startup to scaleup support gap.’”

According to the Canadian Venture Capital and Private Equity Association (CVCA), despite a challenging economic climate and broader tech downturn, total cleantech venture capital investment in Canada in 2022 jumped 63 percent year-over-year to $1.2 billion CAD across 46 deals. This rise is even more impressive given the 19 percent year-over-year decline in total cleantech investment globally, per EDC.

“Cleantech investment has nearly quadrupled since 2018 and our analysis of a range of data has revealed that public policy is the driving force behind the momentum—and a key ingredient to the sector’s growth in Canada,” EDC chief economist and vice president Stuart Bergman said in a statement.

But as the EDC report notes, despite this growth, Canada’s cleantech sector still faces an array of challenges, including inadequate levels of private research and development (R&D) spending per capita and difficulty converting startups to scaleups compared to fellow member countries in the Organization for Economic Cooperation and Development (OECD), as well as a lack of local investors, and continued pressure from other markets that are more favourable to cleantech.

Per EDC, some of these challenges are being addressed through government support programs. Canada’s latest federal budget takes steps towards filling the gap, but EDC argues that there is still plenty of room for Canada to increase its cleantech competitiveness on a global scale, particularly as it relates to tech development, funding, and at-scale demonstrations.

“As each country adjusts to the realities of the new global green economy, Canada must focus its efforts [on] helping high-growth, IP-generating companies scale while providing the appropriate funding across each stage,” the report states.

RELATED: Ecosystem fears cleantech funding gap as ISED pauses SDTC funding following mismanagement investigation

As energy prices have surged and supplies have fallen, some large energy consumers—including the United States (US) and the European Union (EU)—have prioritized “energy security,” passing major new legislation last year that offers big tax incentives for cleantech players as countries look to become more self-sufficient.

EDC expects competition from the US Inflation Reduction Act and other global industrial policies, including REPowerEU in the EU, to serve as headwinds to the cleantech sector’s growth in Canada. The report also anticipates that these bills will cause some Canadian capital, labour, and tech to move “to more lucrative destinations” in the US and Europe.

According to EDC, Canada has few at-scale cleantech demonstration projects or companies. Making matters worse, some top Canadian startups are migrating to more favourable markets.

As BetaKit has reported, cleantech capital and companies have already been heading south of the border in pursuit of US incentives. In a push to help bring Canada’s green transition efforts up to speed with the US and Europe, the Government of Canada promised a multitude of new cleantech and green economy tax measures as part of Budget 2023.

RELATED: Canada is falling behind on cleantech as capital and companies flee south

However, some experts believe that Canada is still at risk of missing out on global market opportunities, arguing that the budget falls short with regard to mechanisms that support pilots for emerging, innovative clean technologies and their commercialization.

In terms of private R&D spending per capita, Canada trails its peers: the report notes that US R&D investment per capita is quadruple that of Canada; meanwhile, Germany and the broader OECD group beat out Canada by at least 2.4. The report also identifies low levels of research commercialization, as reflected in Canada’s patent production, and a “brain drain” in science, technology, engineering, and mathematics labour as areas for improvement.

As far as funding is concerned, EDC notes that investors in the US, which has roughly nine times the population of Canada, deployed 40 times more funding towards its cleantech sector than Canada last year. Of the funding that does exist, relative to its OECD peers, Canada has a lower share of larger, $50-million-plus deals and sees fewer startups converted to scaleups.

“Boosting Canadian competitiveness, and the success of Canada’s cleantech ecosystem, means addressing the ‘startup to scaleup support gap’, and investments are needed across value chains to support nascent technologies,” EDC senior vice president of mid-market Guillermo Freire, who is responsible for EDC’s cleantech practice, said in a statement.

RELATED: Federal budget a “huge win” for cleantech, but Canada still at risk of missing out

On the investor side of the equation, the report indicates that most Canadian cleantech investments are driven by international investors or pension funds, and the local market relies heavily on Government of Canada funding. In terms of the Canadian cleantech investors that do exist, EDC reports that they deploy most of their funding internationally, with some estimates suggesting that nearly 80 percent of it is invested outside of Canada.

Meanwhile, earlier this month, the Government of Canada suspended Sustainable Development Technology Canada (SDTC) from funding new projects. The move came after a third-party investigation discovered evidence of conflict of interest and governance issues at the federal cleantech investment agency.

The decision makes things more difficult for the country’s cleantech ecosystem at a time when financing has become harder to obtain, and cleantech capital and companies are already fleeing south. Industry players that BetaKit spoke with believe that even a temporary pause on new SDTC funding could significantly impact Canada’s early-stage cleantech startups.

Feature image courtesy Unsplash. Photo by Igor Kyryliuk.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling in-depth Canadian tech stories and breaking news. His coverage is more complete than his moustache.

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