Canadian buildings scrutinized in OECD review

Canadian buildings scrutinized in OECD review

Net-zero prognosis comes with advice for federal and provincial governments
Monday, March 13, 2023

Artificially low electricity rates and indiscriminate dispersal of retrofit incentives could be undermining efforts to curb greenhouse gas (GHG) emissions from Canadian buildings, a new report from the Organisation for Economic Co-operation and Development (OECD) contends. As part of a biennial review and benchmarking of Canada’s economic performance against other OECD countries, it scrutinizes progress toward the interim 2030 target and 2050 goal for net-zero emissions and repeatedly highlights how the national patchwork of provincial/territorial regulations and agendas complicates that journey.

“Canada uses large amounts of energy to heat buildings. Hitting emissions reduction targets will require, along with market-based incentives, fast adoption of tough energy standards for new buildings and rapid retrofitting of existing ones,” the report advises.

Jurisdictional discrepancies in codes and standards are a well-documented constraint. The report points to the federal-provincial/territorial commitment to harmonize and streamline future code development, but also charts the uneven adoption of the most up-to-date model codes. Canada-wide, that currently translates into three different vintages of the model national energy code — 2011, 2015 and 2017 — setting the baseline for new building performance.

Nevertheless, there is always optional leeway to surpass code standards in the design, construction and retrofit of buildings, whereas building owners/managers are generally more captive to electricity market dynamics. The OECD report is critical of the insularity that sees major hydroelectric generators export more low-carbon power to the United States than to other provinces, and it decries regulated rates that undercut the market price and do little to encourage conservation.

Provincial engagement required on electricity prices and networks

The report endorses market-based pricing and time-of-use rates for residential customers. It also underscores the vast investment in renewable generation, transmission infrastructure and energy storage that will be required to comply with Canada’s proposed clean electricity regulations — which envision a near-zero-emission electricity grid by 2035 — and suggests more interprovincial cooperation could better support economies of scale.

“A small number of interconnectors limit east-west power transmission between Canadian provinces, which have tended to prioritize self-sufficiency in supply,” the report observes. “Implicit barriers to electricity trade between provinces may also influence costs of generating and storing power in the years ahead…Greater electricity trade between provinces could facilitate more competition in markets currently dominated by a small number of large generators.”

Looking to provinces with vast hydroelectric resources, Montreal, Winnipeg and Vancouver figure prominently at the low end of the report’s chart of average residential electricity prices in select North American cities — with Montreal’s rate notably about 80 per cent lower than chart-topping prices in New York City and Boston.

OECD analysts argue that prices more in tune with the market would prompt greater energy efficiency within dominant hydro power jurisdictions, freeing up supply that could displace fossil-fuel generation in neighbouring regions. That would also garner higher earnings that could be reinvested in retrofit programs. Elsewhere, below-market regulated prices are critiqued for muting carbon prices.

“Carbon cost pass-through ideally reduces the dispatch of carbon-intensive electricity, improves the cost competitiveness of clean energy and encourages power conservation in peak demand periods. Such channels can break down in highly regulated markets, necessitating additional higher-cost policy interventions to stimulate clean energy and encourage energy efficiency,” the report states.

Addressing regulatory impediments, incentive effectiveness and investment hesitancy

Turning to where the constitutional division of powers gives the federal government direct influence, the report calls for a ban on fossil-fuel heating in new home construction. It urges the government to facilitate the uptake of low-carbon building materials and products, and recommends scoping residential retrofit incentives more toward low- and middle-income households. Of potential interest to large commercial real estate players and their service providers, the report also endorses the carbon price contract mechanism that has been proposed as an element of the $15-billion Canada Growth Fund for low-carbon investment, which was announced in last year’s federal budget.

OECD analysts predict carbon pricing will continue to push steel and concrete manufacturers toward more innovative manufacturing processes and product formulas, but urge the federal government to address regulatory impediments and support the market for these key construction materials. On that front, federal and provincial initiatives to foster hydrogen fuels and technologies line up with emerging low-carbon steel production, which uses green hydrogen in place of coke-base blast furnaces, and Canada is one of the OECD countries, along with Germany and the United Kingdom, which has pledged through the United Nations Industrial Development Organization (UNIDO) to buy low-carbon steel and cement.

“Ensuring building codes permit the use of safe low-carbon alternatives to new steel and cement could improve recovery of building materials and reduce need for new production. Government procurement of ultra-green buildings and materials will also help test and improve green products and create new markets for them,” the report submits.

It also commends moves to incorporate lifecycle analysis into the model codes. “Lifecycle analysis could improve the environmental impact of building codes in Canada, including by better targeting of renovation rules,” it states.

The report highlights the higher carbon intensity of Canada’s housing stock compared to other OECD countries with similar climates and heating demands, including Sweden, Finland, Denmark and Lithuania, and points to the example of OECD countries like Sweden, Norway, Germany, France and United Kingdom, which have either already prohibited or have set deadlines for a ban on fossil-fuel heating systems. Canada is urged to follow suit.

“Without regulatory intervention now, further installation of conventional fossil fuel heating systems may necessitate expensive retrofitting further down the track,” the report warns.

Meanwhile, it argues that retrofit funds under the federal Green Homes Initiative could be allocated more effectively. “Many well-off households would likely undertake energy-saving renovations without support. Governments might achieve bigger emission reductions with larger incentives aimed at lower and middle-income homeowners more likely to face financial constraints,” the report states.

Similar criticism is aimed at provincial governments that have dismantled energy efficiency incentives for residential customers in recent years and are now broadly conveying rebates to cushion against soaring utility costs. “While some support was needed to relieve living-cost pressures on vulnerable individuals and families, subsidies also benefitted higher-income households. Equivalent resources, if instead allocated to retrofitting incentives, could have longer-lasting impact on energy affordability while also reducing energy-use emissions,” the report maintains.

To support large capital expenditures on emissions reduction and/or enabling technologies, OECD analysts see promise in proposed carbon price contracts, which are described as a means to provide prospective project proponents with more certainty about future returns on investment. The mechanism, termed “contracts for difference” in the federal government’s proposal, would draw on the Canada Growth Fund to cover the shortfall between projected returns pegged to the presumed carbon price and potential lower actual returns due to a price decline.

This is intended to provide assurance against future regulatory policy adjustments, but would also include conditions for the Canada Growth Fund to share in surplus returns above the projected target. The United Kingdom uses a similar instrument to encourage investments in clean power.

“Regulatory uncertainty can mean that firms delay costly capital expenditures or underinvest in green technologies,” the OECD report observes. “Once put into practice — ideally initially for a small range of investments for which abatement can be estimated and verified — carbon-price contracts for difference should improve the investment climate for green technologies in Canada, motivating abatement in carbon-intensive sectors. ”

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