Decline of alternative-energy projects in Canada: the result of oil-and-gas prices and government budget crises?

January 14, 2012

A particular trend during 2012 that went largely unnoticed was the decrease in the number of announcements of new capital investment projects by private enterprises for alternative energy and environmental technologies in Canada. During 2010 and 2011, investments worth between $7 and $8 billion in such “green” projects (e.g. wind farms, biofuel plants) were announced in Canada, while less than $3 billion worth of similar projects were announced during 2012. In comparison, $27 billion of new projects related to hydrocarbons (extraction, processing and transportation) were announced in 2011 in Canada, and an even larger amount (upwards of $80 billion) in 2012. The gap in investment activity is growing, in favour of conventional energy.

The fault of decreasing oil and gas prices…?

Production of shale gas has pushed down North American prices of natural gas, as everyone now recognizes. Although oil prices are not in a structural decline, they appear to have peaked for a while. This price ceiling seems more obvious as the price rarely moves above $100 US per barrel (West Texas Intermediate).

Conflicts in producing (and exporting) regions have temporarily raised oil prices, hiding the fact that the global economic recovery has yet to truly begin. Even if emerging economies continue to grow, this growth is not as strong as it was before the 2008 financial crisis, and is not sufficient to offset the structural weakness of the economies of the United States and many European countries. Finally, the current worldwide ratios of reserves:production levels are generally increasing, thanks to the development of technologies that provide access to deposits once considered unexploitable. This last factor is undoubtedly disappointing for those who anticipated a steady rise of oil prices, such as investors in alternative-energy projects. This would not be the first time oil confounds forecasts. Indeed, the development of environmental technologies that followed the oil shocks of 1973 and 1979 was largely crushed by the prolonged decline of crude oil prices between 1986 and 1998. Once again, predictions of the end of the oil era seem premature, much to the chagrin of a new generation of investors.

…or the fault of government budget crises?

Another possible explanation for the decline in announcements of new alternative-energy projects lies with dwindling support among governments for financial incentives in the sector. Concerns about deficits, public image and the realities of energy prices have forced governments to become more discreet about lowering support for new alternative-energy projects. The looming budget crises facing many provinces brings into question the substantial financial support many governments have provided to these projects.

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