Brian Zinchuk is editor and owner of Pipeline Online
Cenovus’ Rush Lake Lloyd Thermal plant operation. Photo by Brian Zinchuk
Cenovus Inc. was one of several oil companies that provided submissions to the Saskatchewan Economic Impact Assessment Tribunal, which was tasked with looking into the proposed federal Clean Electricity Regulations. This is Cenovus’ highly detailed submission, verbatim. A much more simplified overview report has also been published on Pipeline Online. This submission includes many recommendations and is one of the most detailed of all the submissions made to the tribunal.
Here’s the detailed submission, with footnotes excluded:
Cenovus Energy appreciates the opportunity to provide input to Environment and Climate Change Canada’s (ECCC) consultation on the draft Clean Electricity Regulations (CER). Cenovus is one of Canada’s largest oil and natural gas companies. We are an integrated energy company with upstream operations including oil sands projects in northern Alberta, thermal and conventional crude oil and natural gas projects across Western Canada, crude oil production offshore Newfoundland and Labrador, and natural gas and liquids production offshore China and Indonesia. Our downstream business includes upgrading and refining operations in Canada and the United States and commercial fuel operations across Canada. We are focused on managing our assets in a safe, innovative, and cost-efficient manner, integrating sustainability considerations into our business plans. Our commitment to environmental, social and governance performance is key to how we work and approach sustainability at Cenovus.
Cenovus has made public commitments to reduce absolute scope 1 and 2 GHG emissions by 35 percent from 2019 levels by year-end 2035 and has announced our long-term ambition of reaching net zero by 2050. To address our scope 2 emissions, we are an active participant in the renewable power purchase agreement (PPA) market and intend to continue to add to our portfolio of renewable PPAs. In addition to our broader GHG goals, we have a new milestone that will see us reduce absolute methane emissions in our upstream operations by 80% by year-end 2028, using a 2019 baseline. Since our oil sands operations have only trace amounts of methane emissions, this work is primarily focused on our conventional oil and natural gas production. Turning to our oil sands emissions reduction initiatives, Cenovus is a founding member of the Pathways Alliance, which consists of Canada’s six largest oil sands producers who represent about 95 percent of Canada’s oil sands production. The members are Cenovus Energy, Canadian Natural Resources, ConocoPhillips Canada, Imperial, MEG Energy, and Suncor Energy. We are committed to holding each other accountable to take the actions needed to get to net zero emissions from operations by 2050 and to working closely with governments to ensure necessary policy supports are in place.
Cenovus recognizes the need to address emissions associated with electricity generation to move the Canadian economy toward net-zero emissions by 2050. However, we have significant concerns related to the draft regulations’ ability to manage critical issues affecting Canadian power markets. As currently drafted, we believe that the Clean Electricity Regulations do not adhere to Government’s stated core principles; maximizing GHG reductions from the grid; maintaining electricity affordability for Canadians and businesses; and maintaining grid reliability to support a strong economy. Instead, the outcome will be lower emissions, but at the significant expense of both affordability and reliability for a sizable portion of the economy and Canadian residents. The impacts will be particularly acute for Alberta and Saskatchewan electricity users.
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Cenovus has meaningful power market exposure, and many of our decarbonization projects will serve to increase our reliance on electricity imported from provincial grids. However, by driving up costs and the prospect of power shortages, the CER risks significantly eroding the viability of our decarbonization projects. More broadly speaking, we are concerned that the CER will be a major impediment to investments in the power grid due to a lack of operational flexibility, an excessively stringent performance standard with minimal compliance flexibility, if any at all, and the potential for protracted legal challenges. We also have concerns about risks to the broader economy and the likelihood that vulnerable Canadians will be hard-hit by soaring power bills at a time when household budgets are already stretched to their limits.
Cenovus is aligned with and endorses the comments provided in the respective submissions of the Business Council of Alberta and the Pathways Alliance, and echo their concerns regarding affordability, reliability, and impacts to decarbonization initiatives. We would also like to offer additional comments and recommendations for further consideration.
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Primary Concerns
Higher power costs and the potential for reduced reliability add further challenges to the economics of decarbonization
It is widely expected that the overhaul of Alberta and Saskatchewan’s power grids required by the draft Clean Electricity Regulations will be costly; the short timelines imposed by the regulations also threaten to undermine grid reliability. While there are conflicting estimates of the true cost of reaching a near-zero grid by 2035, meeting the requirements laid out in the draft regulations will cost ratepayers billions. Meanwhile, an increasing reliance on intermittent power sources like wind and solar leaves markets vulnerable to shortages without adequate backup generation when weather conditions change. The draft regulations only allow peaking plants to operate unabated roughly five percent of the hours in a given year; we are concerned this will not be sufficient to ensure that intermittent power sources are supported with backup supply. It is also highly unlikely new peaking capacity will be added to the grid to support additional intermittent renewables due to the economic impact of the restrictions imposed by the CER.
The prospect of rising power costs will put additional pressure on the already-challenging economics of large-scale decarbonization projects, many of which are heavily dependent on electricity or electrification. Projects that are heavily power-dependent, such as carbon capture and storage (CCS), would also face the potential for reduced effectiveness in the event that outages prevented them from operating. Prior to the release of the draft regulations, electricity was expected to account for approximately half of the carbon capture operating costs for projects we intend to build at our oil sands facilities. EDC Associates, a prominent Alberta power market consulting firm, projects the regulations will push electricity prices up materially from our base case assumptions, resulting in a 40 percent increase in CCS operating costs. Meanwhile, the decarbonization of conventional oil and gas extraction is almost wholly dependent on electrification. It is important that major pieces of government policy, like the Clean Electricity Regulations, do not disincentivize the energy sector’s decarbonization initiatives by driving up costs.
This commentary extends more broadly to other sectors and households. Without measures to stabilize power prices, the draft Clean Electricity Regulations risk disincentivizing the widespread adoption of electricity-based technologies, such as electric vehicles and heat pumps.
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Broader economic implications
A reliable, cost-effective power grid is the lynchpin of all modern economies. It is imperative that any proposed regulations affecting the functioning of electricity markets be thoroughly vetted. To illustrate, recall the energy price crisis experienced by Ontario in the late 2000s and 2010s. The price spikes experienced by the province, which have been directly attributed to provincial government policy, had a devastating effect on the economy. It has been estimated that high electricity prices were responsible for approximately 75,000 job losses in the Ontario manufacturing sector. The productive capacity of its manufacturing industries was badly hit during the 2008 recession, but unlike other regions, Ontario did not enjoy a robust recovery.
The current design of each provincial power grid is largely a function of geography. As drafted, the CER will have dramatic implications for the competitive landscape within Canada. While many regions will be unaffected, provinces that do not enjoy existing large-scale nuclear or hydroelectric capacity will face escalated costs, in some cases multiples of current expenses. Indeed, Government has stated that a $170/tonne carbon price on 100 percent of electrical generation emissions is insufficient to prompt significant decarbonization of provincial power grids. In making this claim, Government is indirectly stating it intends to transfer even greater costs onto citizens in provinces that have no choice but to pay.
Cenovus is highly supportive of the Federal Government’s focus on society’s most vulnerable populations. However, we are concerned that the draft regulations threaten to exacerbate energy poverty at a time when a cost-of-living crisis is already hitting the poorest Canadians particularly hard. Energy poverty is currently estimated to afflict between six and 19 percent of Canadian households2; those struggling to heat and cool their homes and power their appliances face multiple challenges such as sacrificing essentials like food and medication to keep the lights on, increased incidence of respiratory illness in young children, poor mental health outcomes, and significant discomfort from living in under- or overheated homes.3 New Brunswick and Saskatchewan already face above-average energy poverty rates4 and will now bear a disproportionate share of the costs associated with the Clean Electricity Regulations. In a resource-rich country, it should be Government’s top priority to ensure households are not afflicted by energy poverty, yet the draft regulations are liable to exacerbate the issue.
We have provided a series of recommendations below that we feel will ameliorate some of the issues that have arisen as a result of the draft regulations.
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Recommendations
- Refer the question of constitutionality of the regulations to the Supreme Court of Canada prior to implementation
We are aware the Government’s view is the proposed regulations are within Federal jurisdiction. However, the recent Supreme Court of Canada ruling regarding the Impact Assessment Act has called this stance into question.5,6 In its decision, both the Court’s majority and the dissent agreed that greenhouse gas emissions from intra-provincial projects do not automatically result in a project having effects within federal jurisdiction. The decision explicitly reiterated that the matter of national concern recognized in the References re GGPPA did not extend to enabling the federal government to comprehensively regulate GHG emissions. In the same ruling on carbon pricing, the Court cautioned that the Government of Canada does not have the right to regulate specific industries.
Policy uncertainty has been a major impediment to the deployment of decarbonization projects in Canada for several years. The questions regarding the constitutionality of the Clean Electricity Regulations will inevitably result in further court challenges. Rather than prolonging uncertainty and effectively freezing investment decisions, Government should proactively ensure the proposed regulations are legal. This would allow generators more time to design and build facilities required to adhere to the regulations. The 2035 timeline is very ambitious; Government must ensure the policy landscape is settled as soon as possible to avoid a disorderly transition featuring suboptimal grid design, high prices, and significant reliability issues.
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- Extend the timeline for compliance with the Clean Electricity Regulations
Cenovus accepts that mass electrification of the economy is crucial to reaching Canada’s GHG reduction commitments, and that power supplying the economy must be as low emitting as possible given tested technology. However, Government has not provided an adequate explanation for why decarbonization of the grid must occur 15 years earlier than the rest of the economy. A molecule of CO2 emitted from an electricity generator fundamentally bares no difference to a molecule emitted from a combustion engine, residential or commercial furnace, manufacturing facility, or volcanic eruption. The effect on our climate is the same. Given that, as far as the atmosphere is concerned, CO2 is a homogenous product, the decision to specifically regulate certain sectors is a fundamental deviation from the underlying principles forming the basis for carbon pricing.
The scale of the investments required to fully green Canada’s grid is unprecedented; it cannot realistically be accomplished in 12 years. Rushing the timeline will serve to force suboptimal results and put enormous pressure on the cost to build technologies required to bring existing natural gas power generation facilities into compliance. At a time when there is a rush to build CCS capacity both domestically and internationally, there is already significant risk of labour and materials shortages that will cause delays and material cost inflation. This will amplify the risk of cost escalation to investments targeting the decarbonization of power generation, as well as our own CCS projects.
The fiscal supports for technologies such as carbon capture should be similarly afforded an extension. Halving the value of the yet-to-be finalized investment tax credit (ITC) for CCS after 2030 will sharply reduce supports at a time when the largest amounts of capital will need to be deployed. Since the announcement of a CCS ITC in Budget 2021, additional requirements have been rolled out that have layered substantial risk and ambiguity onto companies accessing funding. The draft legislation does not provide sufficient certainty on project eligibility, the scope of qualifying expenditures, or the provisions allowing for the disqualification or repayment of the ITC. Taking full advantage of the CCS investment tax credit by 2030 is not possible, and its overall effectiveness has been eroded by the addition of ambiguous requirements in the associated legislation.
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- Allow further compliance flexibility if installed carbon capture technology is unable to achieve the performance standard
The performance standard being contemplated by the draft regulations is extremely stringent, requiring generators to install CCS capacity capable of capturing 90-95 percent of emissions. While achieving 30 t/GWh may be feasible under ideal testing conditions, practical real-world circumstances make it improbable that operators will consistently achieve this optimal level. To date, there have been no instances where large-scale combined cycle gas turbine plants, equipped with CCS, have consistently captured 95 percent of emissions. Hypothetical technological advancements should not form the basis of government regulations.
The implication for generators is that even if best efforts are made, and the realized capture rate of installed CCS falls even slightly short, a generation facility and its newly installed CCS infrastructure immediately become stranded assets that are prohibited from operating. Without guaranteed compliance with federal regulations, companies will not invest in the required CCS technology, but seek to place capital in higher return ventures. This is particularly true in Alberta, where electrical generation is dominated by the private sector. Capital will flow to less risky jurisdictions, leaving generators unable to make investments required to comply with the CER. While the draft regulations allow for some flexibility in the initial years of operation, it is not sufficient to justify the deployment of hundreds of millions of dollars in investment capital. This lack of flexibility increases the risk of severe power shortages when the regulations come into effect.
We propose an adjustment to the capture rate requirement, setting it at levels achievable in real-world applications, which can be modified as CCS technology evolves. We recommend a performance standard reflective of top quartile Canadian performance. We also recommend affording generators who made good faith efforts to meet the performance standard in the regulated timeline the flexibility to pay a carbon tax in the event they are unable to meet the extremely stringent 30 t/GWh threshold in time. This will help support grid reliability by helping to partially de-risk their investments.
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- Provide clarity on the criteria for emergency circumstances and place the authority to declare emergencies with the Systems Operator
The draft regulations define emergency circumstances that warrant lifting the performance standard as circumstances that arise due to an “extraordinary, unforeseen, and irresistible” event. This language is nebulous and vague. To illustrate, in this submission Cenovus has cautioned Government that an overly onerous timeline and performance standard could result in power shortages and energy poverty. Should any of those come to fruition upon the regulations’ implementation, they could scarcely be called “unforeseen,” but would constitute an emergency by reasonable interpretation.
Additionally, the authority to declare emergencies must reside with the Systems Operator. To place it with the Minister of Environment and Climate Change Canada risks politicizing decision making. Systems Operators have the technical expertise and knowledge needed to evaluate the needs of grids under their direct management and are best suited to judge when climate targets must be put aside to ensure the safety and well-being of customers.
- Exempt all cogeneration that is subject to industrial carbon pricing
Industrial facilities use cogeneration to fulfill both heat and power requirements for operations. Unlike traditional natural gas or nuclear facilities, the energy produced by cogeneration facilities is not lost as waste heat. Instead, it can be recovered for other applications such as generating process steam. Without cogeneration capacity at our operations, Cenovus would require additional natural gas boilers for steam generation.
Although the bulk of our cogeneration capacity will be unaffected, provided the final regulations maintain the exemption for non-exporting units, the proposed regulations undermine the flexibility granted by economy-wide programs for emitters to find the most innovative and cost-effective solutions to reduce emissions. We are concerned that the CER will force industrial facilities to prioritize less effective and/or economic projects at their cogeneration units rather than focusing on projects that would be more suitable for addressing sitewide emissions.
Given industrial facilities are already subject to carbon pricing under the Federal Output Based Performance System, or its provincial equivalents, layering on a stand-alone, highly stringent performance standard for cogeneration is needlessly restrictive and risks undermining the optimal economics of companies’ emissions reduction plans. Barring an exemption for all cogeneration, we urge ECCC to delay the imposition of the 30 t/GWh performance standard on cogeneration facilities until 2050 if the cogen is part of a project that is covered by another emissions regulation.
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- Allow more flexibility for peaking plants to back up intermittent renewable power generation
For provinces without large-scale hydroelectric capacity, the most viable forms of renewable power generation come with intermittency challenges. Alberta has among the best solar and wind resources in Canada, but the wind does not always blow, and the sun does not always shine, and utility-scale power storage has yet to become a viable backstop for these generation assets despite ongoing efforts.
Peaking facilities that can quickly ramp up with weather changes are a critical compliment to wind and solar generation capacity. Allowing them to operate unabated only five percent of the year is not economic and will result in their retirement while providing no incentive for new peaking facilities to be built. This presents a significant reliability risk. We recommend further analysis of what is required to ensure critical capacity is available to support further deployment of intermittent renewables while maintaining reliability.
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- Provide generators with additional financial support to address the high upfront cost of decarbonization and new generation capacity that is proportionate to the required levels of grid decarbonization for each province
As noted previously, provincial grid development has largely been a function of geography. The regions most affected by the draft regulations are those not endowed with considerable hydroelectric capacity, nor the large water resource required to facilitate the safe and sustainable operation of large-scale nuclear power. While provinces like Alberta do enjoy abundant wind and solar resources, grids need reliable baseload power and the ability to back up intermittent renewables with peaking capacity.
Since the brunt of the costs of the regulations will fall to provinces without major hydroelectric or nuclear capacity, Government should offer fiscal support proportionate to the investments needed to support the objective of reaching a near-zero grid by 2035. This would help de-risk investments, ensure sufficient generation capacity to maintain grid reliability, and mitigate the possibility of widespread energy poverty. Regulatory approvals for required infrastructure should be similarly prioritized.
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- Revise the Regulatory Impact Assessment Statement to reflect reasonable assumptions
Electricity is one of the most fundamental inputs to any developed economy. For a country like Canada, where temperatures can range from extreme lows to extreme highs, a properly functioning power grid is critical to the safety of its population. The Regulatory Impact Assessment Statement (RIAS) associated with the draft regulations does not provide a fulsome account of the true cost of attaining Government’s ambitious electricity targets by 2035. It simultaneously ascribes significant benefits to the policy, which are largely based on the speculative Social Cost of Carbon.
- The RIAS must account for direct and indirect costs
A major omission from ECCC’s accounting of the draft regulations’ effects was the cost of intra-provincial transmission. This enormous cost was deemed “not incremental” in the RIAS because it is, “a key compliance strategy for coal-dependent provinces to meet the requirements of the Reduction of Carbon Dioxide Emissions from Coal-fired Generation of Electricity Regulations as amended in 2018.” However, Alberta, the province that will bear the largest share of the costs of the CER, is not coal-dependent. The omission of required transmission build within Alberta was not given any justification, yet modelling shows significant changes to the grid that would undoubtedly require additional transmission infrastructure.
The RIAS should also lay out anticipated “knock-on” effects of the regulations. As we saw in Ontario in the 2010’s, power prices can be deeply detrimental to an economy. Given the RIAS calculates the indirect benefits of the CER on a global basis, an analysis of second-order costs to the domestic economy should not be omitted. Such analysis should include the risk of labour and materials shortages resulting from the requirement to expand CCS capacity in a compressed 12-year time horizon.
- The RIAS drastically understates projected demand growth
The assumption that power demand will grow by only 40 percent from 2024 to 2050 directly contradicts industry forecasts; systems operators; and even the Canadian Energy Regulator, who released its Canada Net Zero modelling in June 2023 and produced power demand forecasts to 2050. According to their analysis, in the Canada Net Zero scenario there would be an 81 percent increase in power demand between 2024 and 2050. Even under its Current Measures scenario, the Canadian Energy Regulator projected a 47 percent increase in power demand. Similarly, the Canadian Climate Institute has stated that in a net zero future, Canadian electricity demand will grow to be 1.6 to 2.1 times larger by 2050 compared to today.
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The Treasury Board of Canada Secretariat guidance on cost-benefit analysis states that regulators must consider whether the scenarios that are most likely to occur.8 Given the widespread belief that power demand will climb substantially through 2050, the assumption by ECCC of a modest cumulative increase of just 40 percent warrants scrutiny. Although the RIAS does offer a brief overview of sensitivity analysis where demand rises by up to 2.5 times current levels, the results are not combined with results presented in the main cost-benefit analysis because they employ separate models, and the discussion of results was limited.
In scenarios where power demand growth exceeds 40 percent, it stands to reason that provinces not currently relying heavily on emitting power generation will also need to dramatically expand baseload capacity. The question of how those provinces can adapt to regulations in light of extremely long lead times to build further hydroelectric or nuclear capacity should be considered, particularly since ECCC has indicated it believes provinces like British Columbia and Manitoba will simultaneously be exporting significant quantities of power to neighboring provinces. Indeed, the three most populated provinces in Canada (Ontario, Quebec, and British Columbia) have already publicly announced they will need to source additional supply to meet projected demand levels and circumvent rolling blackouts to sustain economic growth.
- Costs to consumers have been underestimated
Particularly in the context of the cost-of-living crisis facing Canadians, it is imperative Government make a concerted effort to ensure the cost of the regulations is well-understood. The E3MC modelling work conducted to estimate the effect of the regulations on provincial electricity rates for residential, commercial, and industrial customers implied that power costs would scarcely be affected. However, as noted in the RIAS, the model is unable to take provincial rate setting and market structures into account, raising questions on the validity of the conclusions. Transmission and distribution cost effects were not modelled, even though they comprise a substantial component of an end user’s electricity bill.
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- Benefits associated with the draft regulations are speculative
Cost-benefit analysis is meant to provide an apples-to-apples comparison of the costs and benefits within a consistent scope. The RIAS ECCC has released, however, does not adhere to this principle. While the cost of the CER will be borne almost entirely by ratepayers in provinces not geographically endowed with large hydropower capacity, the purported benefits of the regulations are calculated globally. The costs are only modelled out to the year 2050, yet the Social Cost of Carbon (SCC) is based on modelling out to the year 2300.
SCC estimates are highly sensitive to chosen discount rates, the climate sensitivities to estimate the impact of increases in atmospheric GHG concentration, the timespan chosen to estimate cumulative damages, the assumptions chosen regarding the potential for adaptation to mitigate the cost of climate change, and the socioeconomic assumptions. They have been roundly criticized for being easily manipulated. The climate scenarios employed to calculate the SCC envisage enormous emissions of carbon dioxide from the burning of fossil fuels to 2300, and the damage curves associated with these scenarios are highly back-ended, with the majority of damages occurring after 2100.9
The US EPA’s SCC estimates were then run with below-market discount rates, inflating the perceived present value of future climate damages and emissions reductions10. ECCC has chosen to utilize an even lower discount rate of 2%, which is far below the cost of capital for utility providers. The use of below-market discount rates is particularly significant when cumulative damages are calculated over a 300-year period, which is well beyond the limits of informed speculation about future economic vulnerabilities and adaptive technologies.
Despite the speculative nature of the SCC, it comprises the majority of the benefits calculated in the CER RIAS. Of the total monetized benefits, over 85% are based on applying the SCC to expected emissions reductions. Meanwhile, the very real costs associated with the regulations are not fully captured due to the limited scope of the cost analysis. Given the wide-reaching effects the CER is expected to have, the RIAS should be revised to provide Canadians with a full accounting of the anticipated implications of the regulations.
Concluding Remarks
Cenovus appreciates the opportunity to provide feedback on the CER and agrees with the government’s goal of decarbonizing the electricity sector. However, as drafted, the CER’s requirements cannot be achieved within the proposed timeline without significantly impacting affordability and grid reliability – two fundamental principles Government committed to upholding. The success of any electricity policy regime will require Government to work closely with industry to design a framework that enables Canada to meet its substantial climate commitments while maintaining Canadians’ standard of living. We look forward to the opportunity to collaborate with ECCC on the CER to achieve our decarbonization goals.
Sincerely,
Rhona DelFrari
Chief Sustainability Officer & Executive Vice-President Stakeholder Engagement
Cenovus Energy Inc.
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