Giant U.S. subsidies begin luring Canadian clean tech companies and talent to move south

The timing couldn't have been better for Calgary-based Kanin Energy to open an office in Texas last year. It was just as the U.S. government unveiled its massive climate bill, including tens of billions of dollars in new subsidies and other incentives for clean energy.

Kanin Energy develops facilities that use high temperature waste heat from industrial facilities to produce electricity. The new U.S. subsidies now cover up to half the cost of those projects.

"Not only are we seeing a lot of traction in Houston and Texas and in the United States in general, now there's all these incentives that have really turbocharged our economics for our projects,"Janice Tran, the company'sCEO, said from her office in Houston."So it made even more sense to actually kind of double down and grow here."

U.S. President Joe Biden's Inflation Reduction Act (IRA) is driving many Canadian clean energy startups to shift their focus and resources south of the border to capitalize on the subsidies and the related influx of activity.

Experts say this could result in the loss of investment in Canada, which could slowthe development of clean energy and emission reduction projects north of the border and make it more difficult to achieve national climate goals. There is also the risk of losing trained workers, known as brain drain.

The Canadian government is introducing its own grants, but some industry executives say Ottawa's support is too narrow or not robust enough to compete with what's offered in the U.S.

For Tran, her company doesn't qualify for the investment tax credit in Canada, which can cover up to 30 per cent of the cost of many green energy and clean tech projects such asrenewable energy,battery storage and hydrogen production.

Kanin Energy is now hiring in the U.S. and will begin shifting staff south of the border if it doesn't gain any traction on its Canadian proposals.

"We're going to grow in the United States because that's where it makes sense," Transaid. "In Canada, the economics, they're just not as high. So we don't have any projects that are currently in late-stage development. Everything that we have in Canada is early stage."

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Heading south

Since the passing of the IRA last year, dozens of multi-billion dollar energy transition projects were approved,said Kevin Krausert, CEO ofAvatar Innovations, an energyinnovationand investment firm.

"Companies are fleeing Canada right now," said Krausert. "I can't think of an interesting energy technology startup working on net-zero ambitions that is not actively setting up shop in the United States right now."

The federal government needs to offerincentives that are comparable to the IRA, he said, to slow down the amount of investment dollars leaving Canada.

"Ifyou are an investor and you want to invest a dollar in emissions reductions technologies, are you going to invest that dollar in Canada or are you going to invest in the United States where you can generate a much superior return right now?" he said.

The federal government began consultations this month on its proposed investment tax credit. Government officials say the tax credit is one piece of its overall strategy to attract clean energy investments. Overall, Ottawa has committed $120-billion to building a clean energy economy since 2015, a spokesperson said.

"We will continue working hard to build Canada's 21st century clean economy and ensure more good-paying middle class jobs, more vibrant communities, and more prosperity for Canadians for generations to come," said finance department spokespersonAdrienne Vaupshas, in an e-mailed statement.

Despite criticism, a report by TD Economics in April said the federal government's financial support for the clean energy transition is "yielding positive results and has established a competitive position relative to the U.S."

The report did cautionthe country's competitiveness in the years to come will depend on continuedinvestment and other factors such as improvingskills development and expediting project assessments.

Last week, Finance MinisterChrystia Freelandpointed to the deal struck withVolkswagento build a new battery plant in Ontario as an example of Canada competing with subsidies offered in the U.S.

"We simply could not and will not accept a universe in which investment is sucked out of Canada to south of the border. And so when the IRA came into place, we understood we needed to level that playing field and ensure that Canada was competitive," she told reporters.

Despite the U.S. subsidies, some analysts south of the border and here in Canada say governments shouldn't be picking winners and losers in business, or engaging in a financial arms race to lure investment with tax dollars.

Historic climate spending

The IRA will provide $370 billion US in subsidies, but its true value will be the amount of investment it could attract.

The bill creates the most supportive regulatory environment in clean tech history, according to Goldman Sachs Research, which estimates the IRA's impact could encourage $11-trillion US of total infrastructure spending by 2050.

The subsidies are why Kanata Clean Power is focusing less on Canada and more on the U.S. The company is proposing to build a facility in Wyoming to use natural gas to produce ammonia primarily for the fertilizer industry.

The facility would be part of a much larger system to capture emissions from industrial facilitiesand sequester themunderground. Kanata is part of a consortium of companies pursuing the project, which has received financial support from the U.S. government.

The U.S. climate bill is an "incredible financial incentive," said company president Robert Delamar, from his Vancouver office.

"We're talking of hundreds of millions of dollars per year for the dozen years that the subsidy will be in place. So that ends up resulting in roughly two-thirds of the cost of building an ammonia plant," he said.

The company is proposing a similar ammonia plant in Alberta, but Delamar said Canada's investment tax credit is more complicated as certain pieces of equipment would receive different levels of subsidies than others.

"It's just cheaper to build these facilities in the United States because of the IRA," he said.

Kanata's largest shareholder is the Frog Lake First Nation, located about 200 km east of Edmonton.

Canada isn't the only country feeling pressure to compete with the IRA, as many government leaders in Europe and other parts of the world have been blindsided by the climate bill and are now having to decide whether to introduce robust subsidies of their own.