Energy efficiency’s role in Canada’s economic recovery
Canada is facing a major public health crisis and that needs to be everyone’s priority right now. This includes physical distancing to stop transmission, re-directing productive capabilities to support the healthcare system, and immediate support to maintain incomes.
Canadians face the prospect of a deep recession due to the multiple shocks spurred by the pandemic, coinciding with a reduction in international oil prices. When the health crisis is abated, governments will need to lead the economic recovery with substantial investments. Many world leaders are calling for economic recovery plans to lead transition to a zero-carbon economy.
Part I of this blog discussed what energy efficiency initiatives might occur during physical distancing measures. This blog will discuss the role energy efficiency can play in promoting economic recovery after the health crisis is abated. It outlines objectives likely to be associated with economic recovery in Canada and discuss how different energy efficiency strategies can contribute. The term “economic recovery” rather than “stimulus” is used intentionally to recognize that a durable recovery will require directing public and private capital towards long-term productive investments rather than speculative bubbles.
Energy efficiency, and other sustainable energy solutions, can provide both immediate and quick increases in aggregate demand and lay out a trail of high-value investments in the decades to come. Serious energy efficiency scenarios call for average annual investments of $11-12 billion per year (see the PCF+ scenario and the Capital Plan for Clean Prosperity).
While we know efficiency can be a vehicle for large-scale investment, it is also important to consider how different efficiency strategies contribute to the policy objectives likely to define economic recovery in Canada. Five objectives immediately come to mind:
- Create jobs
- Increase consumer spending
- Aid most impacted regions
- Build investor confidence
- Prepare for the future
Below, I provide examples of how energy efficiency can lead the economic recovery with these objectives in mind.
Energy efficiency is a powerful job creator because it is more labour-intensive than other sectors. Work in the US estimates that 4.5 direct and immediate jobs are created for every $1 million invested in residential and commercial retrofits compared to 0.7 jobs in the oil and gas sector. These local jobs can provide employment in rural areas, small towns, as well as big cities.
More jobs are created as demand is increased in the supply chain – for example through the increased manufacturing of insulation, heat pumps, and windows. As workers receive income and consumers save money, more jobs are created through re-spending in the local economy. In Canada, a study on the macroeconomic impacts of energy efficiency shows 16-30 jobs created per $1 million invested taking into account all of these effects (note that these figures are net of any job losses due to things like lower energy demand). An aggressive efficiency scenario increases annual jobs by 175,000, on average, over 14 years.
Governments can launch these job creation efforts by supporting efficiency in all sectors and regions. Upgrading federal buildings is a quick way to start. For instance, Canada can follow Europe by setting a goal to retrofit 3 per cent of the public building stock, per year.
Increase consumer spending
As noted above, energy efficiency is a powerful tool to increase consumer spending because new jobs and energy savings put money in Canadian pocketbooks. Energy efficiency programs can also be targeted towards getting money in the hands of low- and moderate-income Canadians more likely to spend it.
The latest data available shows 2.8 million households in Canada spending over 6 per cent of their income on energy costs. That includes Canadians below typical poverty lines as well as the working poor and seniors.
These Canadians are less likely to be helped by efficiency strategies contained in Ministerial mandate letters, because they focus heavily on loans to homeowners. Lower income Canadians will either not qualify or will be reluctant to participate due to already high levels of personal debt.
Our energy efficiency scorecard shows that almost every province has a low-income energy efficiency program. Yet, many of these programs are underfunded because utility regulatory systems do not fully consider the substantial societal health and macroeconomic benefits. Yet, these are “shovel ready” programs and portfolios that can be expanded through federal match funding to promote greater outreach and less strict income qualifications. Provinces spent about $73 million on low-income efficiency in 2018. Ramping up to retrofitting about 3 per cent of the households experiencing energy poverty per year could be a $2-3 billion annual investment.¹ Boosting this program spending will provide immediate economic recovery benefits, but it should also launch a long-term agenda to ensure low- and moderate-income Canadians are part of building an affordable net-zero emissions economy.
Aid most impacted regions
The drop in oil prices is another characteristic of the economic challenges Canada faces, with particular impact in Alberta, Saskatchewan, and Newfoundland and Labrador.
Our provincial spending data from the efficiency scorecard shows that each of these provinces has existing program delivery infrastructure, yet the lowest per capita spending. Alberta, in particular, built up program delivery capacity which is being lost due to the closure of most of Energy Efficiency Alberta’s programs.
Oil and gas workers have found meaningful employment in energy efficiency. Maintaining and rapidly growing energy efficiency in provinces with oil and gas sectors could be particularly important.
Build investor confidence
For a long-term, durable, recovery we need to outline new areas for capital investment. Recessions linger when investor confidence is low, and directing capital towards unproductive speculation will create future economic vulnerabilities.
Retrofitting the entire nation’s building stock is a decades long project, capable of delivering financial returns from energy savings, and in need of innovation and new business models. Other jurisdictions have created “green banks” to lead this initiative. In Canada, the Expert Panel on Sustainable Finance suggested creating regional green banks and having the Infrastructure Bank play an enabling and aggregating role.
In a low-interest rate environment, governments can lead by making substantial up-front investments and taking on initial risks. Co-financing with banks, credit unions, pension funds etc. will demonstrate the long-term investment opportunity. It is also important to create the right structures for energy efficiency finance by working with initiatives like the Investor Confidence Project that define consistent underwriting and measurement criteria, and having green banks capable of aggregating multiple projects into larger scale investment-ready portfolios.
The Expert Panel on Sustainable Finance quoted a $250-$300 billion building retrofit investment opportunity. This is large-scale, initiative that can productively direct investment dollars, both immediately and for decades to come.
Prepare for the future
Economic history teaches us that durable recoveries from recessions occur alongside structural changes that define new industries and areas for investment. As noted above, energy efficiency and the larger transition to sustainability, can define the contours of our economic recovery. Thus, an economic recovery policy should focus on developing the skills, business models, and new manufacturing systems we need to build a net-zero emissions economy and withstand future shocks.
Skills for the future: Part I of this blog discussed ramping up online training supplemented with in-person and on-site training during economic recovery. Training will speed up the introduction of net-zero energy ready building codes, and prepare the workforce for a national goal of retrofitting all buildings to achieve a net-zero emissions economy.
Manufacturing re-tooling: Economic recovery policies can help manufacturers re-tool to produce products such as energy efficient windows, cold-climate heat pumps, and heat recovery ventilators. A recovery plan that supports provincial adoption of new building codes will increase demand for these high-performance building materials. Green economy streams can be created within programs such as the Strategic Innovation Fund and the Canada Industrial Research Assistance Program.
New business models: Finally, we should be encouraging the exploration of new business models and innovations. The hard technologies, such as insulation and air sealing, are well known but we need a new mix of logistical, marketing, and financial innovations to substantially scale up energy retrofits. The recovery should launch a wide diversity of demonstration projects, focusing on undertaking energy retrofits at much larger scale so they are accomplished at lower cost and higher speed.
1 This estimate is based on data on the types of households experiencing energy poverty from Canadian Urban Sustainability Practitioners Network energy poverty backgrounder, deep energy retrofit and general home repair cost estimates of $200 per square metre for apartments and $100 for moveable dwellings, and $40,000 per house, using average square meter size per apartment and mobile home.