Hesitation is the New Cost of Capital: Monetizing Ambition in Canada’s Clean Economy
By: Ava Kleiser
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Hesitation is the New Cost of Capital: Monetizing Ambition in Canada’s Clean Economy
In the global race for energy, hesitation has quietly become one of the most expensive line items on a project's balance sheet. In today’s market the mandate is simple: fund projects now or lose them to the markets that will.
Invision a clean energy developer comparing two offers. The first is a generous tax credit accessible only after a long wait with conditions that limit its use. The second is a guaranteed revenue stream that can be kept or sold immediately for cash. This example highlights Canada’s delayed, conditional subsidies versus the United States’s immediate, liquid incentives.
Before the passing of the “One Big Beautiful Bill Act” (OBBBA), the U.S. undoubtedly had the advantage in attracting capital for clean energy projects. However, the advent of the OBBBA has accelerated the retirement of key Inflation Reduction Act (IRA) production-side incentives for clean energy. Given that the U.S. has ceded competitive ground, can Canada restructure its financial, and legislative, architecture to draw capital investment north of the border?
Mind the $2 Trillion Gap
In December 2015, The Paris Agreement was signed, requiring countries to commit to reducing emissions, and kicked off a clean-energy industrial race among major economies. This industrial race extends beyond policy designs, it carries consequences that could undermine Canada’s economic stability and ability to meet its climate goals. Canada is already facing a major funding gap, requiring an estimated $2 trillion CAD over the next 30 years to achieve a 75 percent emissions reduction. Without sufficient capital, Canada risks losing the industrial base of the future net-zero economy.
The disadvantage becomes clearer when you look at key supply chains. In the EV battery sector, the total gross revenue available through U.S. tax credits and grants can be more than 20 times higher than what Canada offers for specific components. The disparity is just as stark in hydrogen. A major hydrogen project located in Canada instead of a comparable U.S. site could forfeit as much as $500 million CAD per year in financial support. Faced with these numbers, it’s no surprise that capital and manufacturing capacity were shifting south.
Stars, Stripes, and Subsidies
Before the OBBBA, the U.S. Inflation Reduction Act (IRA) was a vast, uncapped industrial policy framework that incentivized every step in the clean energy supply chain. Since the IRA’s system was uncapped and volume-dependent, it was both production-linked and demand-driven. The incentive system was broad, encompassing Investment Tax Credits (ITCs), Production Tax Credits (PTCs) and Advanced Manufacturing PTCs for component production.
The core advantage of the U.S. IRA system was its seamless conversion of tax credits into cash through transferability and direct pay options for both ITCs and PTCs. Allowing tax credits to function as immediate cash injections eliminated the need for developers to secure high-interest upfront construction loans, thereby lowering the weighted average cost of capital (WACC).
IOU, Not ITC
With a total estimated scale of $103 billion CAD throughout 2024-2035, Canada’s Clean Economy Anchor Strategy focuses on overcoming high initial investment costs. Refundable ITCs are administered under the Income Tax Act as a tax refund processed by the Canadian Revenue Agency, and are only accessible after the project is “available for use.” Since refunds are processed after the project has been constructed, developers are required to cover 10 percent of initial project costs. Developers must secure high-interest bridge loans while waiting for their refunds to process, but the cost of these bridge loans impose a substantial penalty to the weighted average cost of capital, offsetting the generous nominal ITC percentage.
To complement the ITCs, the Canada Growth Fund (CGF), an independent investment fund, attempts to de-risk projects through Carbon Contracts for Difference (CCfDs), hedging instruments that guarantee a future price floor for carbon or commodity revenues . However, these contracts only offer long-term revenue guarantees, and do not address short-term capital needs.
Bureaucratic friction significantly slows down approval processes for complex projects as they typically require certification from Natural Resources Canada (NRCan) for technical eligibility and carbon intensity modelling, in addition to the CRA for financial administration. The Canada Growth Fund (CGF) mitigates some long-term revenue risk by providing up to $7 billion in Contracts for Difference (CCfDs) and offtake agreements to guarantee carbon or commodity prices, but these non-standardized contracts can not be used as collateral for alternative forms of financing. While Canada offers high nominal ITCs and opportunities for long-term revenue certainty, insufficient upfront liquidity and bureaucratic friction renders projects less competitive compared to systems offering immediate monetizable incentives.
Three-Phase Action Plan from Net-Zero Promises to Net Present Value
Canada is at a crossroads in the global clean energy race. Tax credits are not enough. To redefine how Canada funds clean energy, it needs to inject liquidity with sovereign-back instruments, modernize financial and legislative frameworks to make incentives bankable, and introduce production-based guarantees that level the playing field with the revenue certainty the pre-OBBBA U.S. IRA system provided. Together, these reforms could transform Canadian projects from bureaucratic delays into globally competitive, investment-ready assets.
Phase 1: Breaking Ground on Capital
To counteract the U.S. liquidity advantage and eliminate the WACC penalty imposed by Canada’s deferred refund system, the government must deploy targeted Crown financial instruments. The first step is transforming the perceived risk associated with a future ITC claim into a secure financial instrument. To achieve this, the creation of an Initial Credit Authorization (ICA) could convert the projected ITC refund into a Federally Guaranteed Receivable (FGR).
The process would mandate NRCan, in coordination with the CRA, to issue a legally binding ICA upon a developer’s final project submission, including all necessary Front-End Engineering Design (FEED) studies and carbon intensity calculations. The FGR then transforms the government’s promise to pay into a sovereign obligation suitable as high-grade collateral for lending purposes. To protect the FGR’s integrity against construction risk, the final credit value must be subject to third-party verification and released according to pre-approved construction milestones, ensuring the guarantee is contingent on demonstrable progress and incurred capital expenditure.
To ensure this mechanism achieves competitive velocity, administrative guidelines must be updated to impose strict SLAs. The turnaround time for issuing the ICA/FGR, from submission to issuance, must not exceed 14 days for priority projects to eliminate the regulatory timeline uncertainty. By accelerating final investment decisions, the government maximizes the GDP multiplier effect of the estimated $40 billion CAD annual investment catalyzed by the ITCs. However, achieving true velocity requires a Federal-Provincial Accord that harmonizes regulatory standards and mandates binding SLAs across provinces for non-federal approvals such as site, water, and grid-interconnection, ensuring timely project clearance.
From a sovereign risk perspective, the FGR restructures an existing fiscal liability, the $103 billion commitment, by formalizing and accelerating the government’s promise to pay. Assuming the ICA process maintains rigorous due diligence, the FGR minimizes credit risk for private lenders seeking to bridge the construction gap without increasing the government’s aggregate financial exposure beyond the existing budget.
Phase 2: Let the Credits Flow
Phase 1 operationalizes existing ITCs, but competitive parity requires legislative reform to modernize Canada’s capital structure. Phase 2 enacts “transferability” and maximizes the bankability of long-term risk mitigation contracts.
Transferability
To compete on capital fluidity, Canada must introduce a mechanism for private market monetization for its tax incentives that mirrors the U.S. IRA. This requires enacting new legislation to amend the Income Tax Act, permitting the sale of the pre-certified FGRs to unrelated taxable Canadian corporations or financial institutions for cash.
This measure would help mobilize Canada’s domestic institutional capital seeking stable, long-term, low risk returns, and align with diversification goals as institutions increasingly commit to investing in renewable energy and infrastructure. Transferability is key to making domestic clean energy infrastructure an attractive, low-risk asset class, and provides more accessible opportunities to channel resources towards domestic development.
Standardized Carbon Contracts for Difference (CCfDs) as Collateral
To maximize the CGF’s current ability to de-risk projects, it must adopt a dual-mandate: 1) manage complex, non-standardized contracts for first-of-a-kind (FOAK) projects, and 2) issue high-grade, pre-approved CCfDs for proven technologies. This second mandate ensures that standardized instruments designed explicitly for collateralization are available to the market. This requires establishing a standard protocol, in collaboration with the Bank of Canada and major commercial lenders, whereby the Net Present Value (NPV) of a standardized CCfD contract is recognized as a high-grade financial asset.
Treating the CCfD NPV as high-grade collateral allows lenders to assign high advance rates or Loan-to-Value ratios, stabilizing the borrower’s cash flow. This reduces the project’s overall risk profile, improving debt terms, and confirms the project’s bankability prior to the final investment decision.
Phase 3: Turning CapEx into Cash-Ex
While Canada’s ITCs are valuable for capital cost recovery, they can not compete with the uncapped revenue certainty provided by PTCs. PTCs shift the focus from initial capital cost recovery to guaranteed operational revenue, moving ongoing technology performance and commodity price risk from the private sector to the sovereign balance sheet.
To compete with the U.S. IRA, Canada’s PTC must be structured as an uncapped, volume-dependent credit that mirrors the scale and certainty of the U.S. model. The credit must guarantee long-term revenue certainty for clean hydrogen, providing the stable, multi-year cash flow necessary to secure non-recourse project financing. The incentive must be technology-agnostic, using carbon intensity tiers to determine the credit value rather than prescribing a specific production method. The PTC must integrate seamlessly with standardized CCfDs from Phase 2 to create a dual mechanism: CCfDs guarantee a floor price for carbon, addressing regulatory risk, while PTCs guarantee a floor price for the clean product, addressing market, or commodity, risk. Integrating these two de-risking mechanisms provides comprehensive sovereign support which would make Canadian projects competitive globally.
The key fiscal challenge in this reform lies in managing the cost multiplier risk. As demonstrated by the U.S. IRA, uncapped credits could exponentially exceed initial financial projections. If Canada introduces a Clean Hydrogen PTC, the sovereign liability becomes directly linked to realized production volumes. To explicitly forecast potential budgetary overruns beyond initial estimates, the fiscal model must calculate the sovereign outlay based on the anticipated credit value multiplied by the total volume.
To manage the cost multiplier risk, Canada must incorporate sunset clauses tied to commercial maturity or demonstrated cost reduction triggers, ensuring the subsidy is temporary. These phase-outs would ensure subsidies are both temporary and uncapped; “temporary” referring to the duration of the project and “uncapped” referring to the per-unit payouts.
Although uncapped PTCs introduce immediate budgetary risks, the alternative of ITCs alone guarantees continued capital flight and economic stagnation. The adoption of targeted PTCs is not a matter of fiscal preference, but a strategic, unavoidable cost of competing for global industrial assets.
P0: Uncompetitive capital stack; expensive bridge loan inflates WACC and leaves lenders with weak collateral.
P1: ITC is pre-approved and converted into an FGR, replacing the bridge loan with a sovereign-backed receivable.
P2: FGR sold to an institutional investor; standardized CCfDs unlock cheaper construction debt and lower WACC.
P3: Internationally competitive risk profile; stacked PTC + CCfDs provide long term revenue certainty for lenders and sponsors.
Go Big or Go Green
Canada is no longer competing in a clean energy contest measured by promises or headline-grabbing funding announcements. The real focus is on execution: who can move fastest, deliver projects on time, and channel capital into initiatives that generate tangible, lasting impact.
The advent of the OBBBA, alongside America’s retreat from earlier clean energy incentives, has brought Canada to a crossroad. Every policy delay, every hurdle to financing, and every project that stalls before construction is more than a missed opportunity. It is market share ceded to competitors, innovation left unrealized, and global influence quietly eroded.
Canada’s clean energy future will not be secured by ambition alone. Canada must focus on strategic, well-sequenced investment, agile financial frameworks, and projects designed to shape global market dynamics rather than simply react to them. That means modernizing legislative and financial structures, and putting liquidity and speed at the center of decision making. The decisions taken in the coming years will determine whether Canada helps define the next energy system or adapts to one designed elsewhere.
Editor(s): Howard Yu
Researcher(s): Miranda Lee, Justin Chen
