Cleantech in the crucible

Economic uncertainty can derail many a promising company, and since U.S. President Donald Trump took office in January, the business landscape has been mired in paralyzing doubt. Since early March, Trump’s on-again, off-again tariffs – and threats of more of them – have disrupted global supply chains, and companies around the world are scrambling to minimize impacts on their businesses.

At the same time, the Trump administration is pursuing major cuts to U.S. government programs, including incentives meant to drive the country’s transition to clean energy. All of this turmoil has roiled financial markets, threatened higher inflation and slower growth, and made investors leery of risking their money.

For tech companies in Canada, the combination of trade war and Trump’s opposition to action on climate change can be deadly.

Morgan Solar CEO Mike Andrade has spent his career managing supply chains in the electronics industry. He has built a diverse, global supply chain for the solar energy start-up that he believes will withstand tariffs. However, the second-order impacts of Trump’s policies – the economic uncertainty and threat of higher interest rates and slower growth – are tougher to manage for the Toronto-based company as it nears its goal of becoming fully self-sustaining so it can rely more on operating revenue than financing. 

“What uncertainty does at the very least is delay things, and at worst, stops things,” Andrade says. “For any company, this is a challenge. But for a smaller company, it could be the difference between survival or not.”

Reassessing supply chains and markets

The economic upheaval in the United States comes at a perilous time for Canada’s cleantech sector. The federal government’s flagship funder, Sustainable Development Technology Canada, has been paralyzed by a conflict-of-interest scandal over misallocation of funds, leading the innovation minister to halt funding for the arm’s-length program. At the same time, the Liberal government has been slow to finalize tax credits meant to spur investment in clean technologies. Prime Minister Mark Carney has promised to finish the job on those incentives, begun by his predecessor, but as of press time, the credits were still MIA.

Over the past few years, private-sector venture financing slumped under the twin impacts of inflation and higher interest rates. Start-ups looking to finance their commercialization from financial market investors often hit brick walls.

“The tariffs just make everything worse,” says Lynn Côté, executive director of the Canada Cleantech Alliance. “For the cleantech companies, insecurity about a whole bunch of elements has been there for a while.”

For any company, this is a challenge. But for a smaller company, it could be the difference between survival or not.

—Mike Andrade, CEO, Morgan Solar 

The Canadian cleantech sector exported some $9.8 billion worth of goods last year, with 77% of those exports going to the United States, according to Natural Resources Canada.

As of mid-April, the Canadian sector was spared the large tariffs that were levied against steel-, aluminum- and automakers, so long as they comply with the United States-Mexico-Canada Agreement. However, many smaller start-up businesses never bothered to verify their compliance with the trade agreement because they faced no tariffs until now. 

Côté says the crisis is driving companies to reassess their supply chains and their markets, but those reviews take time and money to complete, and many cleantech executives are short on both. “If you are building a quality product and you have inputs that you know work, it may not be that easy to displace them. You have to test them out, and you have to guarantee your work.”

Côté says companies in the sector must diversify their markets, but few have the capacity to do so on their own. “If not the U.S., then where?” she asks. “I think this is where the government has the opportunity to do meaningful trade missions. And I tend to favour the EU because it’s closer; we have a meaningful free trade agreement, and the regulatory environment is better.”

Diversify or die trying 

Canadian tech firms like Morgan Solar, CarbonCure Technologies of Dartmouth, N.S., and Calgary’s Sensor Inc. are marketing technologies that promise both cost savings and decarbonization opportunities for their business customers.

Morgan Solar has two lines of products: analytics that drive monitoring, diagnostics and forecasting of solar plant performance; and photovoltaic blinds that produce solar energy and deliver it into a direct current (DC) microgrid. The sensor business is mainly selling into the United States, while Morgan has been testing its blinds in a few projects in Canada and is poised for a move into the U.S. market – subject to the emergence of a more stable business environment there.

“When we are shipping our product into solar projects, that’s part of a large capital investment,” Andrade says. “If they delay the installation, that delays our revenue.”

The solar industry is heavily reliant on China for silicon chips and photovoltaic panels; there is no way to diversify that supply chain. But all solar panels have long faced tariffs into the United States, so companies like Morgan Solar have had to adjust. 

Other components – circuitry and electronics and motors – have more geographically diverse supply chains, and the key issue with those items is to design your products so you are not reliant on a single source. “The more unique componentry that you use and the more unique manufacturing processes that you use, the greater the risk is . . . If any of your components are in a singular jurisdiction, you’re pooched,” Andrade says.

Strong returns make the difference

CarbonCure produces technology that mitigates the notoriously carbon-intensive process of making concrete from cement. It reduces emissions by on average 5% by locking the captured carbon into the concrete while reducing the amount of cement needed per tonne of concrete. CarbonCure technology is currently deployed at more than 600 plants worldwide, with three-quarters of those in the United States. CEO Robert Niven expects solid results for the future, but there are dark clouds on the horizon. The company relies on buoyant construction activity to sustain the concrete industry, and economists are forecasting slower growth in the United States and around the world because of Trump’s trade wars.

At the same time, the Trump administration’s opposition to climate action is resulting in “green hushing” as companies downplay climate goals that only a few years ago they loudly proclaimed. “It doesn’t mean that good climate activity isn’t still happening,” Niven says, “but it’s not being discussed as much.” CarbonCure also trades carbon credits it earns through carbon capture at concrete plants. The political backlash against climate action in the United States could also affect the value of those credits.

There may be a silver lining for the company. The United States imports cement to make concrete – lots of it. As the price of the raw material rises because of tariffs, companies will be looking for ways to reduce costs. The CarbonCure technology saves on costs by reducing the amount of cement needed per tonne of concrete produced.

In this political and economic climate, cleantech companies need to be able to clearly demonstrate their return on investment as well as their environmental benefits, Niven says.

Few short-term solutions

Evok Innovations is a late-stage venture capital fund that aims to support start-ups that can help existing firms, especially in the oil and gas industry, reduce their carbon footprints in a cost-effective way. Evok was initially capitalized by Cenovus Energy and Suncor Energy but has since broadened its investor pool to include mining companies and utilities like Ontario Power Generation.

Many of its small client firms are struggling, says Erin Madro, a principal at Evok. The tariff wars have led many Canadian start-ups to reassess their supply chains, which tend to be heavily reliant on Chinese suppliers. “In many cases, the alternative to Chinese may not exist,” Madro says. “It will take many years for supply chains to become re-envisioned and reoriented. In the short term, it just means everything is going to become more expensive and harder to get.”

At the same time, the venture capital market has shrunk significantly, and some Evok clients are running out of time to meet key milestones needed to raise more capital. The start-ups face unpalatable choices of diluting existing investors with expensive capital or cutting staff and overhead to stay in business.

Madro sits on the board of Calgary-based SensorUp, a start-up that offers software technology that helps oil and gas companies detect and repair methane leaks from their operations. The company has clients around the world, including supermajors from Europe and the United States. At this point, it’s unclear what impact the trade wars will have on SensorUp’s commercialization plans, Madro says. It shouldn’t be directly affected by tariffs, but its customers may be hit by higher costs for steel and other materials.

The tariffs just make everything worse. For the cleantech companies, insecurity about a whole bunch of elements has been there for a while.

— Lynn Côté, executive director of Canada Cleantech Alliance

Perhaps the bigger question is whether the oil and gas industry will invest in methane-reduction applications as pressure from the U.S. government subsides. Former president Joe Biden had set a target for the industry to reduce methane emissions by 35% from 2005 levels by 2035 and imposed a fee on emissions as an incentive for industry to cut them. In March, the Senate voted to repeal that fee, and the Trump administration has proven itself openly hostile to anything resembling climate-related constraints on the industry.

Still, Madro insists that oil and gas companies will continue to invest in technologies like those offered by SensorUp. Methane is a product in their pipelines, so there is financial interest in minimizing leaks, while companies still face pressure to reduce emissions in markets like the EU and China. “It makes good business sense to reduce methane leakage,” she says. “Companies are taking a bit of a pause to reassess and maybe delaying some initiatives” in light of economic uncertainty and slumping oil prices. “But ultimately they are still broadly committed.”

Those long-term assurances provide little consolation to the struggling cleantech start-ups that will have to hunker down and conserve cash in the short term. “Everybody is just looking for some hard ground to stand on before they action anything,” says Tyler Hamilton, senior director of climate tech at MaRS, Ontario’s cleantech incubator.

Companies with strong technology solutions and good business plans will survive to meet the needs of a transitioning economy, Hamilton says.

Shawn McCarthy is an Ottawa-based writer and senior counsel with Sussex Strategy Group.