Next Generation: Ottawa’s Proposed Rules Push Provinces To Build Cleaner Grid

Canada is facing a major electrification challenge at a time of rising demand—and intense competition for decarbonization dollars.

We have a head start with a low-emissions grid but building on that advantage would require significant new investments to develop a larger and reliable electricity infrastructure that attracts clean industries.

As the new Net Zero race heats up, the U.S.’s Inflation Reduction Act (IRA) has emerged as a key catalyst, with its slew of incentives running into billions of dollars. While offering Canada fresh opportunities to capitalize on energy transition, IRA also challenges Ottawa, the provinces and industry to raise their game. If Canada gets it right, a substantially bigger and sustainable grid would serve as a springboard for the new energy economy.

In a bid to meet the challenge, the federal government unveiled its much-anticipated Clean Electricity Regulations (CER) last week, sketching out a roadmap for a Net Zero grid by 2035—with a few detours.

Ottawa’s original, stringent stance on a non-emitting grid has given way to a more flexible approach, accounting for each province’s unique challenges and the sheer scale of managing the energy transition without hurting affordability and reliability. It’s an acknowledgement that the country needs all the energy sources at its disposal to build out a reliable energy infrastructure, with guardrails to ensure new dollars heavily favour low-emission sources.

The proposal also offered more clarity on the role of abated natural gas in the power grid—a contentious issue between Ottawa and the provinces. Despite some latitude, the proposed CER still requires electricity generation in Canada to achieve a low-carbon grid 15 years sooner than legislated targets for the whole economy.

The regulations are going to be play a critical role in boosting the country’s green credentials. A diverse mix featuring gas-fired power with carbon capture, nuclear, hydro and renewables will be needed to meet growing electricity demand. It would also help attract investments to build an electric vehicle supply chain, sustainable mining and other new energy sectors.

The onus is now on provinces to adopt the new regulations. The federal government is seeking feedback until November 2023 with plans to publish finalized regulations by 2024.

Some provincial grids will find it harder to hit Net Zero targets by 2035

GHG emissions in electricity sector by jurisdiction

Source: Environment & Climate Change Canada, Canada Energy Regulator, RBC Climate Action Institute

A Role For Natural Gas

The CER consultations launched last year had sparked tensions between Ottawa and fossil-fuel reliant provinces such as Alberta—which recently announced a six-month moratorium on renewable energy projects. Other gas-powered provinces such as Saskatchewan, Ontario and Nova Scotia had also expressed concerns.

Provincial utilities worry that as more power comes from wind and solar power, it will be harder to reliably match supply and demand of electricity, risking blackouts. Ontario’s Independent Electricity System Operator (IESO) noted that 40% of severe weather events that could cause renewables outages exceeded the length of time it can store power in batteries. Rising demand and higher costs of alternatives such as energy storage or nuclear power makes the case for gas a lot stronger.

The proposed rules offer some flexibility to help alleviate those concerns and ensure natural gas has a role to play, albeit diminishing, in provincial grids:

• The draft regulations require that grid-connected electricity generating units online as of 2035 with a capacity of 25 megawatts (MW) or more meet an annual average emission threshold under 30 tonnes of CO₂ per gigawatt-hour (GWh) of electricity produced. An unabated gas-fired generator produces 400-500 tonnes per GWh.
• For reliability, unabated peaking gas turbines can fire for up to 5% of the year without meeting an emissions performance standard. Ottawa considered allowing peakers to run more but found it decreased costs by only 2% while increasing emissions.
• Natural gas turbines already in service before 2025 have 20 years of uncapped emissions before being subject to the rule (this likely will not apply to any gas units not already planned, which won’t be commissioned before 2025).
• Natural gas-fired generators that install carbon capture can apply for exceptions to the emissions threshold (increasing allowed emissions to 40 tonnes/GWh on an annual average basis) for up to 7 years after commissioning the unit, to allow for capture system downtime.
• “Behind-the-fence” (i.e., own-use) power generation is exempt, as are emissions associated with the heat element of combined heat-and-power systems (e.g., those used in the oil sands). They are still covered under the large emitters carbon price.

That gives gas-reliant Alberta and Saskatchewan some breathing room before they need to reduce their dependence on fossil fuels. Still, incentives are firmly nudging the provinces to transition natural gas out of the grid over time.

Provinces Take Charge

We think these are material concessions in response to provincial and industry feedback, without sacrificing the core intent of the regulations. We expect the regulations will have a significant impact on the role of unabated natural gas in the grid.

The 5% threshold for peaking is restrictive (many peakers operate above this capacity factor) but existing transition gas (e.g., Alberta’s recently grow in gas to get off coal) will be allowed to operate for at least 20 years, enough time for operators to be paid out for their investments.

Future gas baseload plants will likely be significantly challenged in areas without access to carbon storage. If the regulations come into force as proposed, gas baseload power is unlikely to offer a solution for eastern Canada without significant work to develop a carbon, capture and storage (CCS) strategy and studies of storage opportunities. Indeed, the federal government’s model sees little role of emitting generation under the regulations even with the peaker provisions, with natural gas providing somewhere between 0.5% and 1% of Canada’s electricity after 2035.

The sum of the regulations and investment tax credits from Budget 2023 would help move the needle.

Teasing a forthcoming clean electricity strategy, Ottawa suggested federal funds would be restricted to provinces that “take concrete action to achieve Net Zero.”

Indeed, provinces will likely need to publicly commit to the 2035 Net Zero Electricity goals and start cutting emissions beyond electricity. Supporting the required permitting for transmission lines, power storage projects, and carbon capture equipment will also be critical for provinces to move at an accelerated pace.

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