This insight summarizes key takeaways from GIIA’s member event in Toronto focusing on emerging opportunities in Ontario’s energy sector.
Canada leads the world in investor sentiment, according to GIIA’s latest Pulse Survey. With seemingly endless opportunity for investment, particularly in clean energy, large-scale digital infrastructure, and grid buildout, it isn’t difficult to see why – and Ontario is right at the heart.
GIIA members were welcomed to Brookfield’s offices in Toronto for an in-depth look into the country’s largest province, where investments in nuclear energy are setting Ontario ahead in the race to the first Small Modular Reactor.
GIIA’s CEO Jon Phillips sat down with Michael Fedchyshyn, CEO of the Building Ontario Fund, followed by a panel moderated by Rene Lubianski, Managing Partner at Brookfield with panelists Stephen Zucchet, Managing Director at OMERS, Geoff Hayes, Managing Director at Alvarez & Marsal and Krista Hill, Partner at Torys LLP.
Barriers to Investment
Despite Ontario’s strength in energy infrastructure growth, with more than 50% of power coming from nuclear, attracting private investors into the market has not always been straightforward. Speakers cited merchant risks as one of the most significant obstacles to investment in the past in the province. Faced with little policy intervention to de-risk projects, and the need to reevaluate risk and allocation of assets, investors historically found it difficult to get involved.
Structural issues in electricity distribution have also been a significant barrier to investment. Although the number of Local Distribution Companies (LDCs) has fallen significantly since deregulation in 1999, the market remains fragmented and requires further consolidation. Panelists noted five-to-seven large companies requiring capital would be the most attractive for investors. Furthermore, with many infrastructure investments taking course over many years, long-term investors often saw inflation as a significant risk, especially in the move to deploy capital. The Province is taking note and seeks to improve the landscape for investors, with the launch of an expert panel earlier this year, noting it will seek to understand and address barrier to attracting investment.
Investor concerns persist over many different factors, demonstrating the importance of crowding in private capital. While billions are needed to fund upgrades in energy alone, provincial governments face many demands, meaning private investors need a clear and derisked pipeline. Although many of the energy utilities that need upgrades are exempt from federal tax due to being owned by local governments, the same standard isn’t applied to private investors, leaving room for government to improve ‘investibility’. Similarly, Canada levies departure taxes for overseas investors, triggering significant a capital gains tax for many investors and disincentivizing international capital flow.
Existing policies barriers make it difficult for private capital to flow into infrastructure. Many utility investors in Ontario note regulatory concerns, while the timeline for project approvals can take up to 6-8 months.
Expanding Opportunities in Ontario
The Darlington New Nuclear Project represents a shining example of the positive role that private investment offers to Ontario’s clean energy future. The province is facing an infrastructure backlog of $2 billion, intensified in the past by limited interest in public ownership and weakened de-risking mechanisms making private capital less viable.
The Canada Growth Fund and Build Ontario Fund’s combined $3 billion equity commitment serve to de-risk and incentivize institutional investment in the development of four small modular reactors (SMRs) – positioning Canada as the first G7 nation to have an operational SMR.
Deployment of all four units over 10 years will rely on the steady deployment of capital, enabled by Darlington’s special purpose vehicle to attract global investment.
Building Ontario’s Infrastructure Momentum
Ontario’s energy sector is entering a period of significant growth and buildout, with speakers highlighting peaking AI infrastructure and rising population as major drivers for grid demand. Independent transmission developers particularly see expanding opportunities for innovation, even with a strong incumbent. This can be demonstrated through Darlington as well, with underwater cables being built out from the new SMRs near Toronto.
While the expansion of SMRs bodes well for investors, international expertise will be critical in building these opportunities. Panelists also drew a line underneath permitting and execration – explaining that blockers must be resolved before the province can make the most of its increasing grid demand.
However, for many projects in Ontario, the intention is rightly placed. Promoting the growth of an efficient, equitable energy grid will be a challenge, but also proves increasingly central to the regions’ movement toward indigenous reconciliation and expanding population.