Alberta carbon fees to fund energy efficiency

Natural gas surcharge will be transparent; electricity cost impact difficult to forecast
Tuesday, April 19, 2016
By Barbara Carss

Electricity will carry the heftiest surcharge for real estate operators under Alberta’s newly unveiled carbon pricing scheme, but the exact impact can’t yet be calculated. As outlined in the 2016 provincial budget last week, Alberta carbon fees will show up differently in the key utilities of electricity and natural gas, creating a blend of transparent and more nebulous new costs.

On the flipside, commercial and multi-residential property owners/managers should have the opportunity to recapture some of their expenditures, based on the provincial government’s budget commitment to reinvest $645 million of the collected revenue in energy efficiency and micro-generation initiatives over the next five years. A promised new coordinating agency, Energy Efficiency Alberta, is a novel step in a province where utilities are statutorily prohibited from offering conservation incentives.

“Some municipalities have sponsored some local programs, but in the past few years there has been nothing available, and certainly nothing in the commercial sector,” reports Julien Poirier, a Calgary-based project manager with the engineering consulting firm, WSP Group.

Earlier neglect might actually have served landlords well since those who have been late to implement energy-saving measures should now have abundant low-cost options with quick paybacks to help curb consumption and cushion the coming utility price bump. Nevertheless, carbon pricing could be seen as another hit on bombarded territory — as Colliers International reports a 20.5 per cent vacancy rate in Calgary’s downtown office stock at the end of first quarter 2016 coupled with a 31 per cent decline in average net asking rents since March 31, 2015.

“There will be an impact on older and class B buildings that are unable to match the lower greenhouse gas (GHG) production of newer buildings. It would add to the cost of operating B buildings and place additional downward pressure on rents in these buildings to offset the differential in overall costs,” notes Keith Reading, research director with Morguard. “Perhaps it’s simply a function of the strongest and most efficient thrive.”

Flow-through cost calculations

For budgeters, natural gas is the known entity. Beginning in January 2017, a new carbon levy will be applied on direct purchases, initially at $1.01 per gigajoule (GJ) then rising to nearly $1.52/GJ in January 2018. (In comparison, British Columbia introduced a $0.75/GJ carbon tax on natural gas in 2008, stepped it up to $1.49/GJ by 2012, and has since held it at that rate.)

This is an approximate 20 per cent increase above the current cost, but with fairly modest impact on overall operating costs. Expressing it in cost per kilowatt-hour (kWh) for consistent comparison, Doug Webber, vice president, sustainability and energy, with WSP Group, calculates the levy will amount to about 0.5 cents/kWh in 2018.

Electricity is an unknown. As of January 2017, operators of facilities that emit more than 100,000 tonnes of GHGs annually are mandated to either reduce their GHG output by 20 per cent or purchase carbon allowances at $30 per tonne for emissions above that threshold.

This makes pass-through costs to consumers something of a moving target depending on emitters’ performance. However, power plants are unlikely to rank as keeners, at least in the short term, given the heavy reliance on coal-fired generation.

“The difference in the carbon intensity among electricity grids in Canada is something that’s not necessarily well understood. It ranges from less than 10 grams per kilowatt in Quebec, British Columbia and Manitoba to about 100 grams in Ontario to almost 800 grams in Alberta,” Webber says.

Any future downward adjustment in large emitters’ allowable emissions threshold will drive electricity prices up further, but that’s a potential eventuality to be weighed against other more immediate pressures. As a stick, Webber suggests the new Alberta carbon fees aren’t particular forceful.

“In some ways, the price signal is valuable. It’s not nothing, but in the context of a lease at $20 per square foot, it’s not huge,” he reflects.

Conservation strategy

As a carrot, the associated new provincial agency to “provide education and outreach, energy audits and incentives to encourage energy efficiency and community energy systems” fills a void.

“Alberta is currently the only jurisdiction in Canada or the U.S. without energy efficiency programs for households and businesses,” Jesse Row, executive director of the public interest group, Alberta Energy Efficiency Alliance, remarked earlier this month, upon releasing recent poll results showing that 81 per cent of respondents strongly or moderately support the creation of energy efficiency programs in the  province.

Industry advocates in Ontario see parallels with a decade ago when the Building Owners and Managers Association (BOMA) of Toronto came forward to be a key delivery agent, piloting the Ontario Power Authority’s conservation and demand management (CDM) incentive programs for the commercial sector. They advise their Alberta counterparts to make productive use of this time before revenue starts flowing into the program funding pool, to consult within the industry and collaborate with policy drafters.

“We take pride in having greatly influenced Ontario CDM programs,” says Bala Gnanam, director of sustainable building operations and strategic partnerships with BOMA Toronto. “The Alberta government should reach out to associations like BOMA to get input at the grassroots level. That’s the way to design programs that will have uptake and will be effective.”

Energy management specialists identify some obvious places to begin catching up.

“In the commercial sector, you tend to see more older equipment, like T12 lighting and magnetic ballasts, here than you would in British Columbia or Ontario,” Poirier says. “Retro-commissioning could also achieve some good results — focusing on controls, part-load balancing and making sure systems are operating to meet actual demand not at excess capacity.”

As in Ontario, where CDM programs are financed through the inscrutable Global Adjustment buried in electricity rates, Alberta property owners may simply find it reasonable to take advantage of incentives that they will be paying for anyway. In this, Calgary and Edmonton’s economic woes might even be a supporting factor if landlords can offer sitting tenants some modest improvements.

“With the current recession, there is no particular end in sight so tenants are more in long-term survival mode. Some will take the flight to quality, but I wouldn’t be surprised if many others will be looking at staying put in a smaller footprint or even downgrading to save money,” hypothesizes Edmund Lee, senior vice president with LaSalle Investment Management. “They also have to consider the image issue. It doesn’t look good moving into shiny new digs — even if it’s a great sublet rate — when you’re gutting staff and pay-freezing the rest.”

Barbara Carss is editor-in-chief of Canadian Property Management.

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