Demand for renewable energy is no match for high costs

(As originally appeared in FEI Canada F.A.R. member e-newsletter, February 2010)

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By Cathy Cobey, Canadian Leader, Climate Change and Sustainability practice, Ernst & Young LLP

As Canadian businesses work to rebuild the economy, there has never been a better opportunity to replace carbon-based fossil fuels with alternative energy. Green energy use will be a key to success for our nation in the new economic landscape ahead — but there are several barriers keeping businesses from incorporating a renewable energy strategy.

According to a recent survey, Renewable energy in North America, Canadian businesses have been slow to invest in renewable energy, despite the rising demand from the public, stakeholders and investors. The survey, conducted by the Economist Intelligence Unit and sponsored by EY, gathered insight from 132 executives in the US and Canada. It found that the most significant drivers for renewable energy are public perception and government incentives, while cost and technological immaturity are still significant barriers.

Clean energy is necessary for Canada’s businesses to reduce our reliance on fossil fuels — including coal, natural gas and oil— but many are reluctant to implement this change due to the costs. Despite government incentive programs, renewable energy still remains expensive for both consumers and suppliers in Canada. In our survey, 64% of Canada’s suppliers say high costs make renewable energy unattractive to their customers. It appears that their concerns are not unfounded, as 68% of energy consumers surveyed say their organization has not taken steps to develop and adopt a renewable energy strategy with high costs their primary concern.

Suppliers are mixed in their plans for future investment in renewable energy. Thirty-eight percent of our survey respondents indicated that renewable energy is a high or extremely high priority; however, almost as many (34%) indicated that it is still not much of a priority.

Public opinion is a significant driver of green energy use

Public perception is a key driver for energy suppliers, pressuring them to commit to incorporating renewables into their energy portfolio. This opinion is the only concert to trump both profitability and social responsibility as a perceived driver toward renewable energy in the survey, and businesses should not underestimate its importance. According to the survey, energy suppliers seem to be attuned to the public’s favourable opinion of renewable energy — with almost 60% of respondents from energy companies saying that an opportunity to position their firms significant contributors to environmental improvements is one of the largest benefits to incorporating renewable into their portfolios.

Regulations are top barriers for energy suppliers

In order to make significant progress with renewable energy, both suppliers and consumers agree that government has a crucial role to play in providing the necessary impetus. Almost 50% of respondents note that regulations — their lack of clarity as to incentives, pricing structure and renewable energy targets — are the greatest barriers to companies investing in renewable energy. Government needs to lead the way by setting a clear agenda, which means providing enhanced education, regulation, investment in the right infrastructure and incentives such as grants and tax credits.

Government regulation is of particular importance in Canada, where 73% of supplier respondents see it as a barrier, compared with only 42% in the US. On the bright side, 46% of respondents say that recent and proposed policies in their country are a step in the right direction — although more incentives are needed.

The right technology can make all the difference

Renewable energy’s lack of competitiveness in comparison to fossil fuels is largely attributed to the fact that existing energy infrastructure is geared toward fossil fuels. At a national level, government regulations, the reliability of supply and grid connectivity stand in the way. At a company level, respondents consider the immaturity of renewable energy technology, the significant cost differential to fossil fuels and high capital outlays required for investment in renewable energy infrastructure significant barriers to increasing the supply of renewable energy.

Now is the time to prepare for the future economy

Despite the fact that energy producers in North America are projecting significant increases in renewable energy production over the next five years, Canadian businesses have been slow to invest — due to financial, market and technological constraints.

If renewables are to be pushed by demand, corporate consumers should look at a full cost-benefit analysis of making the switch — considering not just the financial impact, but also the effect on your company image. Executives need to be attuned to the growing public focus on corporate social responsibility. This can be done by adopting a pre-emptive renewable energy policy to shield the company from public disfavour and add a green component on your brand.

In order to meet international commitments related to climate change, Canada has a long way to go. Accelerating the adoption of renewable energy is a step in that direction, but will require a concerted group effort by energy suppliers, corporate consumers and government.