Energy innovation and economic development

An affordable and reliable supply of energy has been critical for securing investment and propelling growth of Ontario’s economy for over a century. Today, Ontario’s ability to supply electricity that is among the cleanest in the world presents significant opportunities to enhance Ontario’s prosperity. The International Energy Agency (IEA) estimates that global decarbonization will require a tripling of annual clean energy investment to around $4 trillion by 2030. Ontario’s energy industry and economy are well positioned to take advantage of this global transition and to capture the benefits it will bring for economic development and export growth. By providing abundant clean, affordable and reliable energy, Ontario can attract future-oriented investment and grow its economy while ensuring that people across Ontario have access to the energy they need.

The Panel heard a wide range of perspectives on how to approach economic development, technology and innovation. This included focusing on maximizing value and cost efficiency, economic and decarbonization potential, supported by Indigenous partnerships and community acceptance. Respondents also highlighted the need for regulatory and policy framework improvements, as well as the challenges and opportunities for markets to support electrification and energy transition. Overall stakeholders told the Panel that a technology-agnostic approach is important, with a focus on the clean energy economy objective.

Engagement participants also made clear the need for meaningful collaboration and partnership with Indigenous communities. As mentioned throughout this report, building a clean energy economy requires development on traditional territories. Strong relationships with Indigenous partners will be necessary to achieve long-term business, sustainability and collective goals, in addition to advancing reconciliation.

The Panel also heard that labour supply questions were of critical importance to almost every sector and industry during this period of transition. Specific labour supply questions are outside the scope of the Panel’s work and therefore, the Panel does not offer detailed recommendations in this regard. But it will be crucial to develop an adequate supply of skilled labour to electrify energy services at pace and scale and achieve a clean energy economy. The Panel urges the government, utilities and the whole sector to work together on a long-term strategy for labour amid electrification and the energy transition. The proposed Energy Transition Advisory Council could facilitate these deliberations with engagements and targeted research.

Facilitating economic growth

Ontario’s energy sector will play a critical role in the move to a clean energy economy. A primary focus of the energy sector must be to help attract future-oriented investment by providing clean, affordable and reliable energy. The energy sector can thus become a catalyst for expanding prosperity and building a dynamic economy. It can also link the social and economic objectives of economic development with the imperative for meaningful reconciliation with Indigenous communities. Partnerships and collaboration with Indigenous partners will be critical to facilitating province-wide economic growth and can contribute to an integrated view of economic development that maximizes not only competitiveness but also the long-term socio-economic health and well-being of people across Ontario.

At the same time, there are significant opportunities for the energy sector itself to be an engine of economic growth in the province. Achieving Ontario’s clean energy economy goals is estimated to require at least a doubling of total electricity generation capacity. The necessary build-out of infrastructure implied by such capacity expansion, as well as the space for innovative solutions in a decarbonizing economy, present opportunities for large-scale investment and economic development. Ontario has an opportunity to position itself as a leader in established and emerging technologies like conventional and small modular nuclear reactors, energy storage, hydrogen, carbon capture, utilization and storage (CCUS), grid modernization and other solutions that will be critical to global decarbonization.

Building on a legacy of affordability and reliability

Electricity affordability and reliability are long-standing, widely acknowledged determinants of economic competitiveness. Businesses need to know that they can count on an abundant supply of electricity at a reasonable price. Uncertainty on this critical business input poses a major threat to investment and growth, particularly in the energy-intensive manufacturing and industrial sectors. Affordability and reliability are key pillars of energy sector development that will continue to be crucial. Particularly as the end-use delivery of critical transportation and heating services is electrified, and with the proliferation of digital smart devices mediating how Ontarians live, work, and play, reliability of electrical service is more important than ever. In the face of increasing extreme weather events as a result of a changing climate, the energy sector must ensure that reliability is maintained and energy resilience strengthened.

A key factor in attracting investment and enabling economic development is access to energy where and when it is needed. In the move toward a clean energy economy, the risk-return balance between proactive build-out of energy infrastructure and reactive energy planning has shifted. Energy planning must work proactively to ensure that adequate, affordable, and reliable supply is available in a timely manner to support economic development projects and secure investments. This can be achieved by enhancing and expanding existing mechanisms for active coordination between energy and economic development ministries to anticipate when and where new energy demand is likely to materialize and to actively steer new investment to suitable sites that allow for timely and cost-effective connections.

It also means enhancing the efficiency of planning, permitting and approvals processes for clean energy projects. Many jurisdictions across North America and the world are currently grappling with the challenges of streamlining and expediting the development and delivery of energy infrastructure. In a recently released study the IEA demonstrates the critical importance of electricity grid upgrades and expansion in achieving emissions targets and ensuring energy security and cost-effective energy transition. Ontario is no exception. The Panel heard that lack of clarity, predictability and timeliness of regulatory permitting issues create significant uncertainty for investors. The engagements underscored the need for greater streamlining of permitting processes, along with clearer delineation and alignment between federal and provincial rules to avoid duplication and lengthy processes. The Independent Electricity System Operator’s (IESO’s) Pathways to Decarbonization report identified the imperative to streamline and appropriately resource regulatory and approval processes to enable faster planning, permitting and siting of new energy infrastructure. Expediting these processes was identified as a clear need to support decarbonization. Proactively planning energy infrastructure development, clarity and predictability of regulatory requirements and executing approvals in a timely fashion will be critical to ensuring that reliable and affordable clean energy is available for potential investment opportunities.

Towards a clean, sustainable energy system that strengthens competitiveness

In addition to affordability and reliability, the sustainability of energy supply is emerging as an important factor in economic competitiveness. Companies across all sectors are worried about continuity of business in a world threatened by the physical impacts of a changing climate. Clean electricity and a clear roadmap for a clean and resilient energy economy are emerging as additional competitiveness factors for businesses and key arguments for attracting new investment.

Companies are paying closer attention to the embedded emissions associated with their production processes, especially in highly competitive, emerging global green markets like clean hydrogen, green steel and aluminum, and zero-emission vehicles and batteries, among others. For example, German auto manufacturer Volkswagen cited Ontario’s abundant and affordable clean electricity as a key factor for selecting the province as the site for its $7-billion electric vehicle battery factory.

Stakeholders – especially from heavy industry – told the Panel that in addition to affordable natural gas, an abundant supply of affordable clean electricity is becoming critically important for decarbonization, retaining industry and remaining competitive amid the rapid emergence of environmental, social and governance (ESG) measures.

The United States (U.S.) and the European Union (EU), two of Ontario’s major trading partners, are moving toward stricter corporate sustainability disclosure regulations, requiring corporations to disclose their exposure to climate-related risks and the implications for their financial metrics. The U.S., the EU and the Canadian federal government are also implementing or exploring Carbon Border Adjustment mechanisms, which compensate for carbon pricing differentials by imposing a price on the embedded carbon emissions generated in the production of imported goods.

In a future environment of Carbon Border Adjustments and strict corporate sustainability disclosure requirements, the prospect of reducing the emissions intensity of manufacturing processes by providing abundant clean electricity will be a crucial competitive advantage. By ensuring that Ontario has an abundant supply of clean electricity, delivered with timely and proactive planning, the energy sector can facilitate the economic growth of the future.

Finally, there is clear alignment between Indigenous interests and ESG perspectives. As the influence of ESG on corporate decision-making increases, Indigenous perspectives should be considered and included across ESG pillars. As described in Section 4, the government can advance economic reconciliation through flexible financing models and mechanisms that incentivize Indigenous project ownership.

Recommendation 23: Recognizing the key role that clean, affordable and reliable energy will play in the development of globally competitive and future-oriented industries, the ministry should:

  1. Reflect in planning, policy-making and direction to IESO and OEB that in the rapid shift to electrification and the transformation toward a clean energy economy the risk-return balance between proactive build-out of energy infrastructure and reactive planning has shifted
  2. Ensure that planning, permitting and approvals processes are clear, predictable, effective and efficient and lead to timely decisions and project development that has the support of local and Indigenous communities. Engage with other levels of government as appropriate to pursue this objective, as referenced in Recommendation 3
  3. Identify key clean energy value chains, encourage local energy sectoral depth, and strategically kickstart energy innovation.

Recommendation 20: The government should advance economic reconciliation through flexible financing models and mechanisms that incentivize Indigenous project ownership across small, medium, and large-scale projects. This could include:

  1. Expansion of the Aboriginal Loan Guarantee Program and development of other programs, following an assessment of any barriers to program access
  2. Opportunities to align funding and cost-sharing agreements, where possible, with the federal government and other provincial governments in Canada, as appropriate
  3. Opportunities to pilot emerging, flexible financing instruments/mechanisms, such as the use of Indigenous-value themed bonds
  4. Review of current agency frameworks, including regulatory and procurement policies, to identify opportunities to improve flexibility and enhance Indigenous project ownership

Innovation and strategic opportunities

The Panel believes that the energy sector has the potential to do more than just facilitate economic growth. The energy sector can act as a catalyst that propels the transformation toward a clean economy in a way that maximizes prosperity for Ontario. The province has an opportunity to kickstart innovation and growth by providing support for the development of clean energy technologies. Strategic support for innovative energy technologies can build on Ontario’s existing strengths and help scale innovative businesses to position the province in key clean economy value chains and attract future-oriented investment.

Effecting an economic transition of such scale requires strategic focus, and the government’s clean energy economy objective can provide the overarching policy target. In seeking to achieve similarly ambitious policy goals, other jurisdictions have employed mission-oriented policy to align actors around a common challenge or objective. The U.S. Apollo Program and the Alberta government’s Energy Breakthrough project of the 1970s to develop the technology for in-situ oil sands extraction are examples that reached their core mission and had significant technical and economic spin-off effects.

Mission-oriented industrial policy uses the mission, here to build the clean energy economy, to stimulate private sector activity, creating the conditions for new growth by directing business expectations toward where future growth opportunities may lie. Under such an approach, government creates value by coordinating resources, actors and institutions around an objective and thus accelerating alignments that are otherwise too slow and uncoordinated to achieve given the speed and intensity of technological global economic change.

The Panel heard from stakeholders that Ontario is well positioned to capitalize on several economic and industrial opportunities related to the energy sector, including:

  • Opportunities to expand the clean energy grid via nuclear and hydro, distributed energy resources (DERs) and energy storage
  • Opportunities to build out wind and solar industries/supply chains, create conditions for economies-of-scale and reduce reliance on imports
  • Opportunities to harness mineral deposits in the north and northwest by working with Indigenous partners and developing a robust electricity supply to the region through connections to the bulk grid and development of renewables
  • Production of biofuels and renewable fuels to meet domestic requirements and to reduce fuel security and employment risks
  • Opportunity to demonstrate/deploy technologies to help activate capital and develop industrial opportunities, for example, through the establishment of hydrogen hubs in regions such as Sarnia-Lambton, Hamilton and Durham Region, or CCUS in hard to abate sectors

The innovations necessary for global decarbonization will include both safe bets and wild cards in technology development and application. According to the Canadian Climate Institute’s 2021 report, Canada’s Net Zero Future, safe bets are solutions that rely on commercially available technology, face no major barriers to scaling, and have a “reasonable expectation of continued cost declines.” On the other hand, wild cards are those solutions that may play an important role in achieving goals but may be unproven because they are still in the early stages of development. Achieving a clean energy economy will require both safe bets and wild cards. This provides Ontario with opportunities to capitalize on both incremental and radical innovations in clean energy solutions.

The Panel is not positioned to recommend which of these opportunities is the most advantageous for the province nor which should receive targeted government support. Government, with the help of rigorous, forward-looking analysis, is best positioned to parse the economic, social, environmental and political dimensions of these opportunities.

The Panel believes that strategically targeting growth opportunities in the energy sector as a catalyst for attracting future-oriented investments presents the best opportunity to maximize the benefits of a transition to a clean energy economy. A common vision for strategic sector development helps build alignment for industrial strategy, empowering Ontario – as a small economy in a global economic system – to find strategic niches and pursue them. Much of this work should build on existing strengths, while carefully developing new areas of capability.

A good example is the province’s ongoing support for the development of Small Modular Reactor (SMR) technology. Supporting the development of SMRs provides opportunities for Ontario companies to develop business opportunities in providing nuclear equipment and servicing nuclear power assets. This business development in turn catalyzes further investments to expand operations and serve the growing SMR market, both in Canada and abroad. In this way, strategic support for specific economic and industrial opportunities can help Ontario stake a position in the global clean economy.

Ontario can strengthen these opportunities further through, for example, Ontario’s recently signed new Economic Cooperation Memorandum of Understanding (MOU) with Michigan to support joint initiatives in priority areas, such as electric vehicles and related supply chains; and its broader trade engagement strategy of pursuing Strategic Investment and Procurement Agreements (SIPAs) with U.S. states.

Other jurisdictions are identifying priority areas for technology and innovation funding to support the growth of the clean energy economy. The United Kingdom’s Net Zero Innovation Portfolio, British Columbia’s Net Zero Innovation Network and the California Energy Commission’s California Testbed Initiative are examples of programs designed to strategically support the development and commercialization of clean energy technologies.

The Panel heard concerns from stakeholders that trade-exposed industries could be subject to significant shifts if Canada and Ontario do not keep pace with other jurisdictions in incentivizing clean energy technological and economic development. Stakeholders specifically cited the US Inflation Reduction Act (IRA), which leverages tax credits, loan guarantees and grants to kickstart the development of green manufacturing industries and scale green innovations.

The long-standing critique of this kind of industrial policy is that it amounts to governments “picking winners and losers.” Ill-conceived government interventions in the private market can certainly produce inefficient outcomes and perverse incentives. But this should not stifle the pursuit of critical strategic thinking and investments required to meet the current global moment. Future-oriented industrial strategy, with an integrated, long-term view to the development of future markets, is crucial to building the kinds of deep sectoral strengths and mature value chains that will position Ontario to prosper in the emerging global clean economy.

In the energy sector especially, Ontario has an opportunity to support innovations that can build on existing strengths and regional assets and position the province as a key player in select global clean economy value chains. Ontario will need to take a measured and realistic approach that focusses on areas in which the province has already built expertise and enjoys long-term competitive advantages relative to other jurisdictions, such as nuclear technology, grid modernization and digitalization.

This strategic focus will be critical. The Smart Prosperity Institute, the Transition Accelerator and the Pacific Institute for Climate Solutions have produced research on the crucial role of strategy and future-oriented thinking for succeeding in the clean energy economy. As a relatively small, trade-oriented economy, Ontario has limited ability to drive change in mature global value chains, particularly those dominated by big economic players. Even in emerging industries, maintaining competitive advantage can be difficult with technologies and products that have mass global market potential. To compete in the future clean energy economy, Ontario will need to be intentional in targeting growth sectors that present opportunities for long-term competitive advantage, often based on existing strengths. Without that strategic focus, the province runs the risk of uncoordinated capital spending and investment that fails to produce any true sectoral strengths.

In their analysis of Canada’s strategic opportunities for green economic growth, the Smart Prosperity Institute and collaborators identify core characteristics for assessing opportunities in the future clean energy economy. These include the possibility of developing and maintaining long-term cost advantages from availability of natural resources or upstream inputs, the likelihood of building advantages through innovation and the market potential of the product in a decarbonizing world. Maintaining this strategic focus will allow Ontario to better target sectors of potential growth, building on areas where the province has existing strengths.

This strategic focus will require Ontario to undertake careful analysis to determine what specific investments offer the greatest opportunities to enhance the province’s competitiveness in the clean energy economy. Executing on such a strategy will also require pursuing policy alignment on key priorities of economic and energy development and collaboration with the federal government and other provinces, as referenced in Section 5.

Recommendation 24: With the commitment to a clean energy economy as the guidepost, the government should consider a mission-oriented approach to economy-wide industrial strategy. Such a strategic approach can provide the necessary focus to align government efforts and mobilize private actors, including finance, in order to develop and scale the key economic sectors that will support a future clean energy economy in a way that uses resources wisely. It would leverage regional clusters and build on various industrial sector strengths and can position Ontario as a key player in select global clean economy value chains.

In the energy sector, the government should consider which existing and emerging technologies and sub-sectors are likely to play a critical role in a future clean energy economy and where Ontario can maintain or develop long-term competitive advantages. This will require realistic assessments of existing and emerging strengths, as well as technological and economic potential. The province’s current Cost-Effective Energy Pathways Study can help inform these assessments.

Funding mechanisms for the energy transition

The Panel heard that a variety of diverse funding mechanisms – including tax incentives, subsidies, the rate base and private financing – are required to finance the investments needed to build a clean energy economy.

The Panel believes that ratepayers cannot and should not be expected to be the sole funders of the energy transition in Ontario. A clean energy economy is a collective goal that carries significant social, environmental and economic benefits, not just for electricity customers but for all Ontarians. The transformation will require investments that do not solely, or even primarily, benefit ratepayers, and the scale of investments required will often dwarf the capacity of the rate base to support it. This is particularly true in cases where energy sector investments are made to support economic development and decarbonization.

One example is the proposed expansions of transmission infrastructure to support electrification of steelmaking and the mining of critical minerals in northern Ontario. Such projects are crucial to support economic development in strategically important clean energy economy sectors, as well as contributing to regional economic development, decarbonization and economic reconciliation with Indigenous communities. Their benefits are also social and economic, justifying a potential shift of some costs from the rate base to the tax base.

Recommendation 25: The government should clearly set out a policy vision for how electrification and the energy transition will be funded, including a realistic assessment of the distributional impacts of funding choices on different groups. A comprehensive range of funding options and mechanisms should be considered and used, including taxpayer funding, ratepayer funding, investment subsidies, investment tax credits, as well as leveraging and/or requiring private funding whenever possible. Opportunities to leverage funding from federal and municipal sources should also be pursued to the greatest extent possible.

The key guiding principle should be that the beneficiary pays, with the understanding that the definition of who the beneficiary is in the energy transition is broader. If the developments and investments associated with electrification and energy transition will benefit only the electricity system and those who pay electricity rates, then the costs should be borne by ratepayers. But if electrification and energy transition are expected to carry significant and broad economic, transition and social benefits for the province, then the province should consider shifting some of the cost to the tax base and provide clarity to sector entities on how to consider this in planning and decision-making.

The province should develop its policy vision with a rigorous and transparent accounting of expected costs, benefits and distributional impacts.