To Maximize Your Energy Transition Exposure, Think Thematic
May 6th, 2021 | John A. Cook
Business-as-usual has plenty of inertia in Alberta. That shouldn’t be surprising, given that historical growth, jobs, and rates of return have long been tied to the province’s natural resources sector. And it’s tempting to depend on that model of prosperity. After some lean years, the price of oil is high, oil and gas firms are profitable, and economic recovery is far surpassing expectations. The war in Ukraine has brought the issues of energy security and affordability into sharp focus and highlighted the geopolitical implications of where our energy comes from. But that doesn’t change the longer-term realities.
Because here’s the thing: investors know that past performance doesn’t necessarily predict future returns. A savvy investor reads other cues, from increasingly mainstream net-zero government policies to increasingly cheap net-zero technologies. There’s a reason investment capital isn’t flooding into new oil and gas projects, despite the high price of energy. In the medium- to long-term, Alberta’s future prosperity will look different than its past.
For Alberta to thrive, policymakers, investors, and businesses in the province need to work together to create the conditions to attract the attention of those forward-looking investors. That means creating an economy built for a net-zero future, not a carbon-intensive past. Fortunately, the expertise, capital, and infrastructure already in the province can build this foundation.
Ambitious Change Requires Ambitious Policy
If we want the Alberta energy sector to reinvent itself, we will need to be intentional about it. Governments will need to get the conditions right, not in the form of small one-off successes, but at scale. The building blocks of this new future include carbon removal and management, the hydrogen economy, lithium extraction, geothermal power, and non-combustion uses for bitumen.
In a nutshell, Alberta needs a policy direction that creates a bridge to a lower-carbon economy and builds on the immense human capital and assets of the sector today.
But first are two hard truths to swallow: not everything will fit, and not everything will work. Complicating matters, what “fits” can and will be a moving target over time as prices, consumer needs, and investor expectations change. As an example, removing carbon from traditional sources of energy is essential to bend the emissions curve now, even though opportunities for different forms of energy like clean hydrogen or geothermal will likely overtake this down the road.
One way to think about fit and risk together is by characterizing different opportunities – and the respective policy action needed – from lowest to highest risk and from immediate opportunity to longer-term possibility.
We can call these policy options “quick wins,” “goldmines,” and “moonshots,” and Alberta can capitalize on all of them.
Quick wins can be implemented, well, quickly. They build momentum and lead to immediate progress but, on their own, do not create larger transformation. Embracing corporate reporting standards that align to the Task Force on Climate-related Financial Disclosures and Sustainability Accounting Standards Board frameworks would be an example of a quick win that anticipates the eventual world of mandatory reporting, while streamlining regulations to incent the repurposing of aging oil and gas assets could open the doors to brownfield development of solar farms and lithium extraction.
In contrast, goldmines can drive significant change for the sector and address larger barriers to attracting investment. But, as a result, they take more time and effort to put in place, are situated higher on the risk curve, and might be politically challenging. A core foundational goldmine policy that is currently lacking is a provincial net-zero commitment that aligns with our national targets, backed up by robust plans and interim targets. Alberta could also feed the growing investor desire for transition finance opportunities by securitizing transition-aligned loans into bond instruments, bringing much needed capital to critical transition projects. Piloting an Indigenous equity ownership or participation requirement for new energy infrastructure in Alberta could herald a new dawn for economic reconciliation.
Finally, moonshots are where things get interesting, where the challenge and reward are greatest. Success depends on getting a number of factors right. They are not only difficult to advance but they also vary widely in terms of how long it takes to become reality—it could be years or even decades, if at all. But getting them right yields huge returns for the industry, investors, and Albertans. This is where Alberta can look to accelerate net negative emissions technologies, blending the province’s expertise in carbon capture and underground storage with the agricultural sector’s growing interest in carbon sequestration, plus the province’s natural infrastructure to develop nature-based capture solutions founded in traditional ecological knowledge.
We sit at an inflection point. It’s time for forward-looking investors to participate in these emerging net-zero policy conversations actively, even loudly. Investors need to encourage all levels of government to embrace the policy shifts required to make ongoing investment in Alberta attractive and aligned with net-zero objectives. That doesn’t mean going all-in on windmills and solar panels. It means building a diverse portfolio of new emerging opportunities and leveraging existing assets and expertise in transformative ways.
Because with each step forward, expectations shift a little bit more. The more carbon risks and climate opportunities become mainstream in boardrooms, the more capital flows into exciting new transition-consistent projects. The more that climate policies become normal operating conditions, the more valuable emissions-reducing projects become. And the more investments in net zero pay good returns, the more other sources of capital join in.
Before long, business-as-usual will look dramatically different. And that’s precisely the point.
Alicia Planincic, Dale Beugin and Jamie Bonham are all members of the Energy Futures Policy Collaborative, a multi-partner collaborative focused on helping policy leaders create the policy signals that can help scale new low-emissions pathways, bridge our polarized divides, reignite investor confidence, and ultimately transform Alberta’s hydrocarbon sectors. A detailed discussion of the ideas above, and more, can be found in the EFPC’s recent report Same Game, New Rules.
RIA Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.
Author
Dale Beugin
Vice President, Research
Canadian Institute for Climate Choices
Dale Beugin is the Vice President of Research at the Canadian Climate Institute. Dale has previously worked as both Executive Director and Research Director of Canada’s Ecofiscal Commission, as an independent consultant providing analysis and advice to governments and organizations across Canada and internationally, and as policy advisor with the National Round Table on the Environment and the Economy.
Jamie Bonham
Director Corporate Engagement
NEI Investments
Alicia Planincic
Manager, Policy & Economics
Business Council of Alberta
