U.S. Clean Power Plan

Canadian opportunities in U.S. Clean Power Plan

Mandate to cut greenhouse gas emissions could fuel a market for clean-tech expertise
Wednesday, November 11, 2015
By Barbara Carss

Canada’s renewable energy and clean technology sectors could figure prominently and profitably in American states’ efforts to comply with the recently introduced U.S. Clean Power Plan. Many Canadians can also expect improved air quality along with even higher electricity costs during periods of peak demand if, as envisioned, a vast network of U.S. based coal-fired generating plants are shut down.

The plan, which is a regulation under the U.S. Clean Air Act, was released in final form in August 2015 after 14 months of sometimes contentious consultation. It establishes a national target, and contributory state targets with deadlines, for cutting carbon emissions from power plants. It calls on the states to collectively deliver a 32 per cent reduction from 2005 levels by 2030, with each player fulfilling specified requirements and hitting reduction thresholds along the way.

“In the context of the American marketplace, this is substantial,” says Adam Chamberlain, a partner and environmental law specialist who leads the climate change practice group at Borden Ladner Gervais LLP. “It looks like it could be quite transformative, and I would say this is an opportunity for Canada.”

States are now presumably developing the compliance strategies they are required to submit — either in completed form or with enough progress to merit a two-year extension — to the U.S. Environmental Protection Agency (EPA) by September 6, 2016. This  prompts them to implement policies and programs for cleaner fossil-fuel generation, emissions trading, renewable energy and conservation and demand management (CDM). While some of the 26 states that have petitioned the U.S. Supreme Court to negate the Clean Power Plan may be holding back on this work, if upheld, the rules would impose the EPA’s model implementation plan in states that fail to develop their own.

Performance would be measured beginning in 2022, as states track and report carbon dioxide (CO2) emissions. They would also have to meet interim reduction targets in 2024, 2027 and 2029 to prove they are on pace to the final goal.

In the bigger picture, the U.S. has pledged to reduce nationwide greenhouse gas (GHG) emissions 26 to 28 per cent below 2005 levels by 2025 as part of its commitment to the United Nations Framework Convention on Climate Change (UNFCCC). That will require an approximate doubling of its achieved reduction rate thus far.

“We can choose to believe that super-storm Sandy and the most severe droughts in decades and the worst wildfires some states have ever seen were all just a freak coincidence. Or we can choose to believe in the overwhelming judgement of science and act before it’s too late,” U.S. President Barack Obama said when the final version of the Clean Power Plan was released.

Coal replacements needed

The target for the power sector is ambitious, but the solution for meeting it is no great puzzle. Electricity accounts for 31 per cent of total GHG emissions in the United States versus approximately 12 per cent in Canada. As of 2012,  the American Council for an Energy-Efficient Economy reported that 13 states rely on coal-fired generation for more than 50 per cent  of their power production, including seven that produce more than 75 per cent of their power from coal. In total, 29 states — largely aligned with those now challenging the Clean Power Plan at the Supreme Court — derive more than 25 per cent of their in-boundary power supply from coal.

“Obama is clearly targeting America’s single biggest source of emissions, which is coal,” observes Tom Rand, senior advisor with the Cleantech Venture Group at the MaRS Discovery District in Toronto. “The option in the short term is to use natural gas as a bridging tool.”

Yet, as his affiliated role as managing partner of a venture capital firm specializing in clean technologies indicates, he sees longer term opportunities, and predicts the Clean Power Plan will both stimulate the market for renewable energy and associated goods and services, and broaden the base of the nascent North American cap-and-trade market among California, Quebec and Ontario.

“It will be a catalyzing factor,” Rand says. “There is a massive economic upside.”

He sees prospects for: bio-fuels from forestry and agricultural waste; energy storage, which will be critical for exploiting the massive solar potential in the U.S. southwest; and smart grid technology that enables demand management and stabilizes delivery of fluctuating sources like wind that also require seamless backup contingency. While Canada has a UNFCCC commitment to reduce national GHG emissions to 30 per cent below 2005 levels by 2030, Rand maintains it has an even bigger role to play through continued development and commercialization of its clean-tech expertise.

“There will be more reductions from the transfer of technology around the world than we can get from reducing our own emissions,” he predicts.

Renewable energy marketability

There is also potential for Canadian power exports to the U.S. from hydroelectric, natural gas, wind and tidal generating sources. Chamberlain suggests there could be a ready-made new market for some of Ontario’s so-called non-utility generators with soon-to-expire contracts with the provincial Independent Electricity System Operator (IESO). The timing seems even more opportune in Atlantic Canada where construction is now underway on the 520-kilometre Maritime Link between Newfoundland & Labrador’s 824-megawatt Muskrat Falls hydroelectric project and Nova Scotia’s connection to the North American transmission grid.

Beyond forging Newfoundland & Labrador’s first electricity transmission link to the rest of the continent, the $1.5-billion initiative includes upgrades to Nova Scotia’s existing system to enhance the capacity of the high-voltage direct-current line to the U.S. This could support the development of the Bay of Fundy’s tidal power potential, now at an embryonic stage.

Two turbines with a combined 4-megawatt generating capacity are slated for deployment before the end of this year, as part of the Cape Sharp Tidal pilot of open-centre turbine technology. This will be grid-connected, via sub-sea cable, with a power purchase agreement through Nova Scotia’s feed-in tariff program.

At a current cost of about 40 cents per kilowatt-hour (kWh), proponents acknowledge that there is a substantial price gap to close before tidal power can compete, even with other renewable sources like wind, which is now priced around 10 cents/kWh. However, they see promise in technological advances, economies of scale with broader rollout, the likelihood of carbon pricing and, of course, tidal power’s absolute reliability. The U.S. Clean Power Plan now enhances the marketability of a future tidal-hydroelectric power mix flowing into the grid from Atlantic Canada.

“About 2,500 megawatts could be extracted from the Bay of Fundy without any significant environmental impact,” says Stephen Dempsey, Executive Director of the Offshore Energy Research Association in Halifax. “That’s more power than the entire installed capacity that Nova Scotia has right now. So the space for tidal energy is created by the removal of coal-fired generation capacity in Nova Scotia and in other markets in the U.S.”

Cap-and-trade market growth

The Clean Power Plan’s promotion of emissions trading among U.S. states also portends new and/or returned participants in the Western Climate Initiative (WCI) cap-and-trade market, currently comprising California, Quebec and imminent new entrant, Ontario. Although all but California eventually bailed out, eight U.S. states initially signed on to the concept in 2007-2008. (Three of them – Arizona, Montana and Utah – are now among the states challenging the Clean Power Plan at the U.S. Supreme Court.)

Particularly for states that opt for the rate-based pounds-per-megawatt-hour approach to meeting their reduction target, cap-and-trade provides the means to compel generators to get on board. For industries like commercial real estate that potentially have offset credits to sell, more market players should also be good news.

“One question is, if other U.S. states start to join up, will that diminish Canadian influence on market design? But I think we are well placed to take advantage of an expanded market because we have already been at the table,” Chamberlain reflects. “The development of offset protocol is going to be something we need to push for.”

In Quebec, for example, the first three approved offset credits – destruction of methane at covered manure storage facilities; destruction of methane at landfill sites; and destruction of ozone-depleting substances removed from refrigeration and freezing appliances – provide little to engage building owners/managers, but regulations to designate new categories of activities are in the works, as Ontario and Quebec are now committed to harmonizing their efforts. Meanwhile, its stature as a global asset class gives the commercial real estate industry common North American interests, and perhaps collective clout, to make the case for including reductions gained through energy retrofits of buildings.

“If you want to be able to sell offsets, you are going to need a protocol in place so the offset markets are usually on the softer side initially. The allowances are easier because they have already been defined,” Chamberlain says.

In Quebec, 2015 is the first year that emission allowance costs of cap-and-trade have been added to consumers’ natural gas prices, equating to 3.072 cents per cubic metre as of November 1. Presumably, coal would carry a higher monetary penalty.

Price jumps and health gains

Pricier electricity in the U.S. will have the most discernible negative impact in Canada during peak demand periods when the domestic price is already high and power imports are necessary. Ontario has generally experienced its peaks in the summertime, but in a winter peak scenario (as occurred in the winters of 2014 and 2015), market analysts warn of new price pressures in the U.S.

“Like falling dominoes, retirement of coal-fired power plants leads to greater use of natural gas, which leads to higher winter gas demand on pipelines, which leads to pipeline constraints, which leads to higher pipeline transportation charges, which leads to higher local gas pricing, which, where gas is a major power plant fuel, causes higher winter electricity pricing,” advises Lindsay Audin, a U.S. based energy management specialist.

On the flipside, public health watchdogs applaud air quality improvements in Canada’s most populous region since the decommissioning of Ontario’s coal-fired electricity plants — albeit also in sync with a decline in manufacturing. Sulphur dioxide emissions within the province have fallen 93 per cent, while the number of designated smog days has dropped from 53 in 2005 to none in 2014.

“The wind around the Great Lakes basin blows in a north-easterly direction. Ohio has the industry; we get the pollution,” notes Joe Mihevc, a city councillor and chair of the Toronto Board of Health. “If coal power was shut down in the U.S., it would be the next big tranche for us in air quality.”

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

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