Clean Energy Innovation: Does Leadership Count?

By John W. Tak

Canada, together with other nations around the globe, faces enormous challenges in balancing economic and environmental sustainability. In the midst of this, one thing is clear — with increasing urgency, innovation is required by government and industry. In this regard, how does Canada fare?

Canada has slipped 13th place in the most recent OECD productivity ranking, and ranks 27th relative to other OECD countries in our "overall innovativeness factor" – our ability to compete on the basis of unique products and processes. Does this performance reflect Canadian industriousness or innovation capability? Hardly. It's a result of our mediocre R&D record. Canada ranks 14th in the OECD's listing of R&D intensity, part of a declining and disturbing trend for a country with one of the highest standards of living in the world.

The root of the R&D problem lies with both government and industry, but not in equal measure. In R&D, a private/public investment ratio of 70:30 is considered a healthy benchmark within OECD countries. In comparison, Canada's private/public investment ratio is 53:47. Our traditional R&D model relies heavily on public investment in government labs, universities and NGOs. Industry often benefits from this investment through commercializing the resulting technology. It's a good model so what's wrong with Canada's performance?

Well, innovation isn't something you can easily model, box, predict or control. Government must always be on the alert; able to adapt innovation policy, programs and investment to achieve its goals. To achieve the government's stated objective of ranking among the top five countries in the world in terms of R&D intensity by 2010, we'll need an "all hands on deck" approach. Industry must invest more in R&D, and government must identify and partner equitably with new technology sectors that demonstrate capability and technology leadership.

In the clean energy sector, Canada need not look far. Thanks primarily to significant private sector investment, we have developed a strong position in hydrogen and fuel cell technologies. Canadian companies can now point to early sales of hydrogen production, purification and storage products; hydrogen-powered fuel cell forklifts; residential power units (in Japan); and back-up power systems for data centres. Japan's prime minister has a Canadian fuel cell providing electricity to his official residence, not one made in Japan.

Canada's lead in this next-generation, clean energy technology resulted from R&D investment led overwhelmingly by the private sector. Industry invests over $200 million annually in R&D to bring the technology from concept to product. This private capital equals 85% of the total Canadian R&D investment in the sector and 30% of the entire private sector investment in all energy R&D in Canada. Compare industry's 85% share of hydrogen and fuel cells R&D to Canada's overall 53:47 private/public investment ratio.

One might ask why industry would continue its strong R&D leadership without first establishing a more balanced government-industry partnership commitment. Compare the hydrogen and fuel cell sector investment with the traditional R&D model followed by the Canadian biotech sector. Industry Canada statistics show that there has been more than one dollar of public funding supporting each dollar of private investment in biotech. Yet on average, for every dollar of private sector investment in the hydrogen and fuel cell sector it's been a struggle to find five to 15 cents of partnership funding.

In demonstrating a unique, and perhaps isolated, Canadian grassroots approach to developing clean energy technology, industry seems to have reversed the usual R&D model followed in Canada. Companies invested risk capital upfront in R&D to develop the technology but now find themselves with limited access to the capital required to finish the last leg of the race as they launch commercial products. Ironic doesn't really capture the sentiment here.

Government has clearly stated it wants industry to show more R&D leadership, particularly in the clean energy sector. Yet based on a preliminary review of the new eco ENERGY Technology Initiative, support for the hydrogen and fuel cell sector is set to decline from current levels. The signal to industry to boost R&D is not positive.

Canada took the early lead in hydrogen and fuel cell technology. But the opportunity to address clean air and climate change while fostering economic growth through the development of this clean-energy technology is no longer lost on foreign governments. Among others, the US, Japan, and EU governments each fund hydrogen and fuel cell strategies with over $300 million per year in partnership programs. Denmark, with a population of five million, leads the world in wind power technology. And it recently announced its National Hydrogen and Fuel Cell Strategy with public funding of $35 million per year. Canada is well ahead of Denmark, but we have no national strategy!

Of course, why wouldn't foreign governments support the sector? They've seen Canada develop, demonstrate and de-risk the technology. Now they can benefit from our early investment. In some way, we benefit as well. Beyond validating the technology path, it also develops new markets overseas and provides funding to the Canadian companies that can supply equipment and components to partners in those countries. We have to credit some of our early sales to government purchase incentives provided by US and Japan.

Canada has come far enough to launch products, but access to capital is limited in part due to industry's large up-front investment. Exacerbating this situation is government's relatively small up-front investment. Given the growing support for the technology by foreign governments, this sends a confusing signal to potential investors interested in Canada. Access-to-capital issues faced by Canadian companies are real. Witness the recent sale of two Canadian fuel cell companies to US competitors in the last six months.

Thanks largely to industry investment, Canada enjoys a global leadership position in hydrogen and fuel cell technology as well as 2,000 new innovation-based jobs. About 90% of our sales are outside Canada where 98% of the world's GHGs are emitted. Global technology leadership, domestic industry R&D leadership, export sales, new innovation-based jobs, clean air, lower GHGs — what's not to like?

But there is one caveat. There is an expiry date on Canada's opportunity in this sector and without a fair and equitable government partnership, it's fast approaching.

John W. Tak is president and CEO of Hydrogen & Fuel Cells Canada (H2FCC). www.h2fcc.ca.