Canada: All Change — Alberta Overhauls Climate Policy, Ushers In Sweeping New Requirements

Last Updated: November 24 2015
Article by Alan Ross, Kent D. Howie and Beth Reimer-Heck, QC

Most Read Contributor in Canada, July 2019

On November 22, 2015, Alberta Premier Rachel Notley announced a far-reaching and comprehensive new strategy on climate change. It not only responds to recommendations of the Climate Change Advisory Panel ("Panel"), which the provincial government appointed this past summer, but also fulfills the Premier's promise to disclose Alberta's new climate change policy initiatives before the 2015 United Nations Climate Change Conference ("COP 21") in Paris later this month. Premier Notley's announcement is a framework only which draws from the Panel's report, but does not specifically endorse all of the Panel's conclusions.

Premier Notley states that the intent of her new policies is to "bend-the-curve of Alberta's emissions" and engage in "new collaborative conversation about Canada's energy infrastructure".1 This will result in new greenhouse gas taxes for all corporations and individuals in Alberta with a carbon footprint. Moreover, the provincial government ushered in sweeping new regulatory requirements for the electricity, oil and gas industries.

Increase Renewable Electricity and Coal Phase-Out

Coal has traditionally been Alberta's low-cost source of reliable electricity, and under the existing federal regulations, 12 of Alberta's 18 coal-fired generating plants would be retired by 2030. The provincial government's new plan aims to accelerate the retirement of coal-fired power plants with all emitting coal-fired electricity generation phased out by 2030.

To encourage the move to natural gas or renewable energy, beginning in 2018, all coal-fired generators will pay a carbon price of $30 per tonne of CO2 on emissions above what Alberta's cleanest natural gas-fired plant would create to generate the same amount of electricity. Two-thirds of the generating capacity lost by the phase out is to be replaced by renewable energy.

The new plan aims to increase renewable electricity with a goal of up to 30% of Alberta's electric power coming from renewable sources by 2030, including wind and solar generation. The province will offer incentives to encourage renewable generation capacity. Further details on the scope of these incentives, including their impact on existing power market price signals, remain to be determined.

The provincial government promises to address impacts to coal-dependent workers, communities, and companies and ensure that potential capital is not stranded while ultimately eliminating coal-fired electricity generation. It is unclear exactly how this will be accomplished. However, the government has indicated that it will work with the Alberta Utilities Commission and the Alberta Electric System Operator ("AESO"), as well as appoint a facilitator to implement the plan, including potentially determining "fair compensation".

Carbon Pricing

Under the Specified Gas Emitters Regulation ("SGER"),2 Alberta's current carbon pricing regime, facilities that emit 100,000 tonnes or more of greenhouse gas emissions must annually reduce their site-specific emissions intensity by 12%. The emissions intensity reduction increases to 15% as of January 1, 2016 and 20% as of January 1, 2017. Under this system, there are four ways a facility could comply. For an overview of the previous regime, please see BLG's discussion.

In what is labelled the "backbone" of the new climate change strategy, Alberta will replace the old "arge-emitters tax" and will phase in a $30 per tonne economy-wide carbon pricing system, to be implemented in a two-step process. The carbon pricing process will be applied across all sectors, starting at $20 per tonne on January 1, 2017 and increasing to $30 per tonne on January 1, 2018. The carbon price will be adjusted thereafter to keep pace with prices and growth, and the levels set in other jurisdictions.

The carbon pricing system will be revenue neutral with all capital reinvested into pollution reduction measures in Alberta, including clean research and technology, green infrastructure like public transit, financing the transition to renewable energy, and efficiency programs to help people reduce their energy use. In her announcement, Premier Notley stated that once the Alberta economy recovers, her government will consider using climate revenues to relieve public debt.

Capping Oil Sands Emissions

As many in the oil and gas industry expected, the climate change plan will also introduce an overall oil sands emissions limit. Oil sands facilities are currently charged a SGER levy based on each individual facility's historical emissions.

The oil sands sector currently generates roughly 70 megatonnes of carbon a year. The plan will set a legislated overall emissions limit of 100 megatonnes of carbon emissions plus provision for new upgrading and co-generation. This 100 megatonnes of carbon emissions cap allows for an increase in current emissions for economic growth with innovation and technology expected to help reduce the carbon output per barrel in the future.

Oil sands facilities will also see a $30 per tonne carbon price applied based on results already achieved by high performing facilities. This will move them away from the current intensity-based SGER system.

Reducing Methane Emissions

Canada is currently the fourth largest oil and gas methane emitter in the world. In Alberta, the oil and gas industry is the largest source of methane emissions. Currently two carbon offset protocols exist to support methane reductions in the oil and gas sector: (1) an offset protocol to encourage converting existing pneumatic equipment to highly efficient options; and (2) an offset protocol for solution gas conservation.

In what is supposed to be "not far" from the reductions to be achieved from phasing out coal, the provincial climate change program will act to reduce methane emissions from oil and gas operations. The targeted goal is to reduce methane emissions from oil and gas operation by 45% by 2025.

The provincial government expects to reach the 45% reduction by applying new emissions design standards to new Alberta facilities and developing a 5-year voluntary Joint Initiative on Methane Reduction and Verification. The joint initiative will include Alberta industry, environmental groups, and Indigenous communities. It will be tasked with taking action on venting and fugitive emissions from existing facilities, including enhanced measurement and reporting requirements for new and existing facilities. The implementation of the new methane standards will be led by the Alberta Energy Regulator, in collaboration with Alberta Energy and Alberta Environment and Parks.

Industry Implications

Impacts of the new provincial climate policy will vary among industries. Alberta will be moving from 10% renewable power production to 30% renewable power production by 2030. As one of the last jurisdictions moving off its reliance on coal — quickly — this reflects significant opportunity for renewable project development. However, project developers and investors will want to follow the potential "incentives" offered as well as AESO procurement processes. BLG discusses potential renewable power opportunities in further detail in "Alberta's Power Play: Potential Changes Should Bring New Renewable Power Project Opportunities."

There may also be further opportunities for renewable and energy efficiency project financing. There is a nexus between the climate strategy and last month's provincial budget, which BLG discussed in further detail in "Alberta Bound? Province Releases Budget, Projects $6.1 Billion Deficit for 2015-16."

In a ground-breaking initiative, Premier Notley will mobilize $2.1 billion through the province's government-created financial institutions, including Alberta Investment Management Corp., Alberta Enterprise Corp. and Crown-owned bank, ATB Financial, focused on economic diversification, including renewables. $540 million will be allocated from the Heritage Savings Trust Fund to be "targeted to growth-orientated companies", $1.5 billion made available to ATB Financial to lend to "entrepreneurs and job creators", and $50 million for AEC "to support the development of a vibrant capital market". In an unprecedented step, the provincial government has become — overnight — a leading source of VC/PE financing for renewable and energy efficiency projects in Alberta.

The new plan suggests the potential for future renewables and energy efficiency financing announcements. Specifically, the Panel's report recommends re-designing the Climate Change and Emissions Management Corporation or creating a successor with a portfolio-driven funding approach allowing it to invest in riskier projects, and striking a task force with a four month timeframe to re-organize Alberta's innovation system. In addition, the Panel recommended that for the phase-out of coal, it would be "supported by a clean power call through which the government would provide partial, long-term revenue certainty for renewable power". Although the government did not specifically reference these recommendations yesterday, it did not discount them either.

Coal and coal-fired generation companies will be disappointed with the government's climate announcement. Their efforts will now likely be focused on the potential for "fair compensation" plus opportunities to convert their coal plants to natural gas and to further diversify their business into the renewable power space.

For Alberta oil and gas companies, several of whom vocally supported the new plan,3 the long term climate change landscape is now more complex. In the short term, carbon pricing levels are certain and incremental over the next few years. A 100 megatonne per year limit provides some flexibility and growth over the current level of 70 megatonne per year. Moreover, gas will be the near-term transition energy source, which will potentially benefit natural gas producers.

With an overall climate change framework announced, the provincial government will start to implement that policy. The federal government, as BLG discussed in "New Energy? Trudeau Unveils Cabinet, Mix of Newcomers and Veterans in Key Portfolios," will be pursuing its own climate change agenda. Borden Ladner Gervais LLP will be watching and reporting on material developments at the federal and provincial levels, as well as international commitments arising out of COP 21.

Footnotes

1. Rachel Notley, "Climate Change Statement" (Media Release delivered at the Telus World of Science, Edmonton, 22 November 2015).

2. Specified Gas Emitters Regulation, Alta Reg. 139/2007.

3. See, for example, Oil Sands Companies Demonstrate Leadership on Climate Change.

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