Finding The Signal In The Noise: Electricity And Climate Policy In Canada
By: Cameron Brown
In recent weeks the Clean Electricity Regulation (CER), a proposed federal scheme to put major new requirements on natural gas as a way of generating electricity, has gone from a relatively obscure “energy wonk” discussion to the front burner of our national energy debate.
Provinces and business are concerned that the CER will impact the cost and reliability of electricity at a time when policy makers seek to electrify large segments of the broader economy to reduce emissions.
None of the provincial leaders have been as vocal as Alberta Premier Danielle Smith. Smith has threatened to take the federal government to court or use the Sovereignty Act fight the application of the CER in Alberta. The province has also launched a large advertising and awareness campaign that is on billboards, TV and transit ads across the country. The campaign has made residents in cities like Toronto and Ottawa wonder “just what is coming that will leave me shivering in the dark?”
At the same time, despite the recent Supreme Court Decision on environmental assessments the federal government insists they have a right to mandate changes to provincial electricity systems and will press ahead with the proposed regulations.
Electricity and Canadian Climate Policy
Global’s Cameron Brown, who spent 20 years working on energy policy with the Alberta government, has taken a deeper look at the regulations compared to the cost of emissions reductions from the electricity sector and reaches the conclusion: The regulations are a good example of the laws of diminishing returns.
Electricity has been at the heart of the Canadian climate policy conversation from the beginning. This made sense when Canadian governments were starting to get serious about climate policy a couple of decades ago. Back in 2005, electricity generation was the third largest source of sector emissions in Canada, even accounting for the fact that historic investments in hydroelectricity and nuclear meant Canada’s grid was already much less carbon intensive than most countries. Electricity generation was a logical initial focus for government climate policy action, as it was perhaps the only sector where large industrial sources of emissions could be combined with off-the-shelf commercially available lower-carbon technologies that significantly lower emissions at costs comparable to historic ways of generating power.
For example, switching from coal-fired to gas-fired generation typically results in more reliable and demand responsive units, immediate improvements in local air quality and at least a 50% reduction in greenhouse gas emissions. While there is always a capital cost for new facilities, some of the prior buildings, equipment and transmission infrastructure from the old coal facility were often reused. Once the upfront capital investments were made the new gas units were also typically less expressive to operate over the long term.
Ontario led the way. Ontario’s phase-out of coal fired electricity still likely holds the title of achieving the biggest reductions from any government policy action in Canadian history. A few years later, in 2018, a little heralded change in Alberta’s industrial carbon pricing regime meant that coal in Alberta started paying on the majority of its emissions. The market reaction was swift and ruthless, with rapid conversions to natural gas following. As you read this in late 2023, Alberta’s last coal unit is in the process of switching to natural gas. When that last unit converts, Alberta will be off coal a full six years faster than is mandated by federal regulation.
It is not just gas replacing coal driving sector emissions down. Over the same period we have seen a dramatic decrease in the cost of wind and solar technologies. Where a couple of decades ago, these were expensive technologies that needed government mandates and programs to be deployed, now in many parts of the world (and Canada) they are simply the cheapest form of power generation to install new, even after accounting for their intermittent nature.
This has led to the shocking statistic that in 2022, over 80 per cent of the new electricity generation installed world-wide was renewable. While the majority of Canada’s renewable installations in recent years was driven by the market in Alberta, other Canadian provinces from British Columbia to Atlantic Canada have announced their own plans for new wind and solar generation additions.
Put it all together and there have been dramatic reductions in emissions from the electricity sector in Canada. Emissions are down a remarkable 56 per cent in 2021 (the most recent year available in national data which is painfully slow to roll out) relative to 2005 levels. To put those reductions in perspective, the next biggest reduction from any other sector in the Canadian economy over that same period was a 13 per cent reduction in emissions from non-oil and gas heavy industry. Emissions in several other sectors have even grown over that same period. Given the continued cost declines in wind and solar, coupled with the fact this 2021 data snapshot was still in the midst of a flurry of coal-to-gas conversions in Alberta, expect electricity sector emissions to continue to fall much faster than any other Canadian sector over the next few years.
When Does Low Hanging Fruit Become Diminishing Returns?
Canadian governments are of course ultimately political animals. The success in reducing emissions from electricity stands in stark contrast to the comparatively frustrating and often costly experience of governments of all political stripes making significant reductions in other sectors. So, it should come as no surprise that it has become standard political practice to again go back to the electricity well anytime there is a desire to make new climate commitments.
This brings us to the draft federal Clean Electricity Regulations (CER). They started as a federal Liberal campaign commitment in the runup to the fall 2021 election. Being a campaign commitment, they were not the result of extensive government department analysis or stakeholder consultation, rather political platforms are usually put together relatively quickly and only by political staff. When developing this particular platform, the playbook from the past couple decades calls for something specific to electricity. With net-zero 2035 electricity commitments coming out of the US and Europe, this must have seemed like a no-brainer. Surely, if those other places could make this kind of commitment, then Canada’s already lower-carbon generation mix meant that Canada should be jumping in that same pool.
When the Liberals formed government after the 2021 election, the task of developing this policy was given to Environment and Climate Change Canada (ECCC). Having previously developed the policy mandating a 2030 end-of-life for coal-fired generation in Canada, the same unit in ECCC set to work developing this new policy using the same model. They would again make use of legislative authority under the Canadian Environmental Protection Act (CEPA), creating a new regulation that would place significant obligations on natural gas fired generation in 2035. The national conversation around coal 2030 had largely died down by this point, so ECCC would apply to same model to natural gas, presumably anticipating similar outcomes to their prior coal experience.
For those of us who have worked closely on the CER since inception, it was clear that the approach was chosen before any real modelling or stakeholder engagement was done. This isn’t conjecture, the discussion papers that kicked off the engagement stated this outright leaving no room for input on the underlying legal approach that would be taken to the CER.
As a model, CEPA was designed to deal with dangerous pollutants so there is no alternative to onsite compliance, no ability to for example pay for reductions elsewhere to comply when it would be much less expensive than physically modifying a facility with technologies not yet in commercial use. This means the approach used by ECCC forgets the “net” in net-zero as there is no way to net out facility emissions by making reductions elsewhere. This is why regulation as currently drafted drives as close to pure zero as ECCC judged they could require, kicking of a firestorm of debate on the feasibility of the approximately 95% emissions capture rate it requires in 2035 for emissions from natural gas generation.
Another headwind facing the CER is the effectiveness of existing climate policy in the sector. CER does not kick in until 2035, long after coal units are gone and the sector historically most responsive to carbon pricing has faced an escalating price for another 12 years. To illustrate this point, take Alberta as an example being the largest source of electricity emissions in Canada. In 2005, Alberta’s electricity emissions were just over 50 megatonnes (MT). Today those emissions are about half that total and Alberta’s modelling estimates will be down to under 10 MT in the 2030s before the CER even takes effect. From 50MT down to 10MT in just a few decades, but those last 20% of emissions from the sector are still hanging on because they are by far the most expensive to eliminate.
How expensive?
The Regulatory Impact Assessment Statement (RIAS) that ECCC released with the draft regulation stated:
The Department has conducted various modelling exercises and determined that a carbon price of $170/tonne applied to every tonne of electricity sector emissions does not move the sector far enough towards net zero by 2035. Furthermore, in a high-demand modelling scenario, a carbon price of $170/tonne was not found to be sufficiently high so as to make near-zero emission electricity generation technologies significantly more competitive than emitting technologies.
There is some nuance in this language that is important. In 2023, the carbon price on power plants is $65/tonne, but the mechanics of industrial carbon prices in Canada means that most emitting facilities currently pay on only a portion of their emissions. The “applied to every tonne” in this language is the key. This means they modelled an increase in carbon pricing much greater than just the dollar per tonne sticker price would imply. The math works out to this being a more than ten-fold increase in carbon prices relative to today, and yet the resulting reductions were deemed insufficient by ECCC relative to their direct regulatory approach compelling specific on-site equipment changes.
For those of us who have experience in government developing emissions policy, this would normally be a major red-flag that these are very expensive reductions. Given the global climate does not care where the reductions come from the typical response to very expensive reductions in a single sector would be to look to an approach that allows for cheaper offsite reductions. However, for the reasons outlined above, including the perceived need to focus on the sector in isolation given the sector specific 2035 target and the restrictions of the CEPA model, the federal government opted to forge ahead with the CER as currently drafted.
How Diminished Are the Returns?
There is currently a loud public debate about what the CER will end up costing electricity consumers in provinces where the generation fleet is most impacted. Anyone who has listened to a podcast in Canada in the past month as probably heard the “Tell The Feds” advertisements sharing Alberta’s side of that debate. It is notoriously difficult to predict how the additional costs on the generation side will cascade down the end consumer (although they inevitably will) especially given the differences in how each provincial electricity system operates. Governments also tend to do things like make direct investments into the systems or capping/subsidizing rates with tax payer dollars, which will bring down the costs that show up on bills, but ends up being paid for by many of the same Canadians as taxpayers.
A less politically charged way of assessing the value and cost of climate policy is a comparison of the effective carbon price. The Alberta Electric System Operator (AESO) did an assessment of the reductions that would result in Alberta from the CER beyond current policy relative to the costs of the new generation required and AESO and came up with the shocking value of over $5,000 per tonne. Ottawa did not release their version of that number in the RIAS, but Alberta’s more recent CER submission states that “data provided by ECCC” puts the cost at over $350 tonne, even before accounting for some assumptions in the federal model that likely underestimates to cost.
There is obviously a big difference between $5,000 and $350 dollars to reduce a single tonne of emissions, likely attributable to differences in modelling assumptions, but even if taken as bookends of a range these costs are well beyond anything previously seriously proposed in the Canadian climate policy conversation. For comparison, there is a lot of interest in Direct Air Capture, emerging technologies that hold the promise of pulling past emissions out of the atmosphere. These technologies are often positioned as something that will emerge in the coming decades given the sticker price of $200 to $300 dollars a tonne is currently seen to be prohibitively expensive relative to other reduction opportunities.
Given these numbers, my personal conclusion is that much greater emissions reductions could be had for the same economic investment the federal government is currently proposing with the CER if we adopted an approach with a basis in carbon pricing that again lets the broader economy find the lowest hanging fruit in terms of emissions reductions even if the end goal is a political desire to say electricity will be the first sector to net-zero.
References:
[3] https://canadagazette.gc.ca/rp-pr/p1/2023/2023-08-19/html/reg1-eng.html
[4] Alberta’s submission noted that federal data resulted in an “average cost of at least $184 per tonne” and that “this cost is in addition to the federal carbon price scheduled to rise to $170 per tone by 2030. Page 5. https://www.alberta.ca/system/files/epa-government-of-alberta-submission-on-draft-federal-electricity-regulations.pdf