On March 24, the Ontario Energy Association (OEA) released its analysis and recommendations on Bill 172, the legislation introduced in February to implement a cap-and-trade system for regulation of emissions.
OEA identified five key principles and highlighted the importance of ensuring there is proper consideration for the benefits of CHP (Combined Heat and Power) in the rules. The principles in summary form were as follows:
a) Recognition of Past Actions
Ontario’s energy sector has been the leading industry in facilitating GHG reduction and climate change adaptation in this province. Ontario consumers and the industry have already invested heavily in clean energy generation, energy conservation, and technology to lower GHG emissions, often in partnership with the provincial government. These significant actions to date must be recognized in some fashion – e.g. in providing allowances or setting GHG emission caps for the industry.
b) Role of Energy Moving Forward
In the same vein, the Ministry of the Environment and Climate Change must take into account the role electricity and natural gas can play in contributing to Ontario’s overall climate change strategy: in particular, fuel switching (e.g., greater adoption of LNG/CNG vehicles) will help improve the emissions profile of Ontario’s transportation sector, the single largest source of GHG emissions in Ontario. The Ministry of the Environment and Climate Change must also take into account numerous existing commitments made by the Ministry of Energy and Ministry of Economic Development, Employment and Infrastructure to expand natural gas access in rural Ontario and procure natural gas generation as a replacement for coal.
c) Consideration of Financial Impact to Ratepayers
The financial impact of a cap and trade system on Ontario’s already-stretched energy consumers must not be ignored. Based on analysis completed for the OEA, a typical residential natural gas customer using 2,500 m3 of natural gas per year and emitting 4.7 tCO2e will pay $70.50 to $94.00 per year more at $15 – $20/tCO2e. A typical family with 1.45 vehicles getting 10.6L of gasoline per 100kms and travelling 16,200 km per year will consume 1700L of gasoline per year. This consumption will lead to emissions of 5.9tCO2e, which will increase annual expenditures by $88.50 – $118. All in, a typical consumer will be facing increased annual costs of $159 – $212 with emissions priced at $15 – $10/tCO2e. A typical mid-sized manufacturer in Ontario could use 5,000,000 m3 of natural gas per year. The use of this natural gas results in 9,500 tCO2e emitted. This is below the 10,000 tCO2e limit at which a facility can opt-in and receive free allowance. At $15 – $20/ tCO2e, this would impose a cost of $142,500 to $190,000 per year.
It is therefore essential that funds collected by the cap and trade system be spent in a manner that is demonstrably and directly beneficial to ratepayers. For more information on the OEA’s calculation of the cost impacts on energy users, please see pages 1 and 2 in Appendix 1.
d) Process / red tape / timeline
The process used to establish the cap and trade system – and the broader climate change strategy – will be an important determinant of its success. Red tape and other administrative barriers to stakeholder participation in program development and deployment processes must be minimized. In addition, the current timelines are very optimistic given the complexity of what is being proposed, and that complexity also means that there must be ample opportunity for in-depth stakeholder consultation. For comparison, the timelines from California and Quebec are stated at 6+ years and 5+ years in length, respectively.
The five recommendations made by OEA were:
1. Ensure cap and trade revenues stay in Ontario and support investments that reduce greenhouse gas emissions.
2. Specific timelines should be published for key content.
3. There must be adequate allowance available for fuel distributors to access.
4. Offset related emission reduction credits should be Ontario-centric.
5. Recognize the benefits of CHP related to energy efficiency and province-wide emissions and ensure the cap and trade rules enable continued growth of CHP.
The OEA describes itself as representing "Ontario’s energy leaders that span the full diversity of the energy industry."
With respect to CHP in particular, the OEA said, “[I]t is significant that the current proposed methodology for allowance allocation to EITE industrial facilities disadvantages facilities with integrated cogeneration. It does so in three ways: 1) there is no recognition of the net emissions benefit associated with cogeneration; 2) integrated cogeneration at EITE facilities is disadvantaged (with respect to carbon costs) compared to those using stand-alone boilers to supply steam; and 3) the risk of carbon leakage is not appropriately addressed.
“A facility that uses cogeneration for steam will have higher direct emissions when compared to a facility that uses a boiler for steam generation. However, the facility that is producing electricity using cogeneration is displacing emissions from power plants that supply the grid (the source of electricity for the facility using a boiler to generate steam). The result of the electricity displacement is a net decrease in province-wide emissions. In other words, the emissions at one individual facility increase (thereby increasing that facility’s carbon cost burden), while emissions from grid-connected electricity supply decrease. Furthermore, the proposed energy-use based methodology for allowance allocation to EITE industrial facilities does not put all steam consumption on a level playing field. It follows the California approach, applying a standard boiler efficiency for steam supplied by an on-site cogeneration unit, and for steam imported from a third party. However, unlike California, it excludes the standard efficiency term for steam generated by an on-site boiler. A consistent approach to determination of allowances for steam consumption, regardless of the steam’s origin or method of generation, must be considered.
“With respect to carbon leakage, the current design assumes that all electricity generators can pass on the cost of carbon to an end-consumer; however, this is not the case for facilities with integrated cogeneration or long-term pricing contracts. Stand-alone electricity generators can pass through costs to consumers and respond to price signals (generating only when profitable). A facility operating an integrated cogeneration unit does not have the ability to respond to price signals – i.e., it cannot shut down or ramp up power generation in response to system electricity prices. Additionally, there is typically no ability to pass through carbon costs to an external ‘electricity end consumer’ if the power is consumed on-site. Therefore increased costs associated with the cap and trade program need to be internalized into operations, rather than passed through to end users.”