Embracing a New Energy Future for Atlantic Canada

In December 2013 I wrote an opinion piece for the Chronicle Herald congratulating the UARB and the Department of Energy for their steadfastness in ensuring the Maritime Link deal was completed.  I also acknowledged their vision in establishing a ‘global first’ feed in tariff for tidal energy.   Most commentators accepted that the Maritime Link represented a hedge against long term fossil fuel price increases and a contribution to energy security rather than a short term guarantee of lower priced electricity. According to a CRA poll, in the end two thirds of Nova Scotians recognised it was a sound investment, with those in favour outnumbering those against by 4 to 1.

And although billions of dollars will be required to bring tidal energy to full commercial viability, and it is certainly true that one small Canadian province cannot hope to achieve that in the absence of serious levels of Federal support, a 1.5-2% increase in electricity rates to secure a stake in a $500 billion global industry in 30-40 years time could well turn out to be a very smart move one day.[2]

Reflecting on several years of spectacular progress in energy efficiency in Nova Scotia[3] and a planned tripling of renewable energy generation within 10 years, I made an argument for toning down the partisan rhetoric on energy policy.  Conscious of the fact that energy had become a highly divisive issue in the run up to the October 2013 provincial election, I wrote that perhaps “we can now return to a period of relative political calm and consensus, which we know is so important for investor confidence.”

Who could have predicted in late 2013 that in the subsequent twelve months the Federal Minister of Finance would be chiding the province for its proposed legislated prohibition on hydraulic fracturing in such clear and undiplomatic terms: “When a government steps back from the responsible development of its resources and that development doesn’t create an environmental risk, there are economic consequences inevitably to that.”

Or that the benefits of the community feed in tariff to regional economic development would now be at risk?

Or that Nova Scotia Power, once such a strong supporter of the establishment of Efficiency Nova Scotia, should find itself forced into a more equivocal stance on investments in energy efficiency?

Meanwhile, in the last year the value of crude oil has halved to around $50 per barrel and bp has predicted a very slow recovery based on their understanding of current OPEC geopolitical strategy.  The implications of this for Nova Scotia will likely be felt less in the direct impact on our revenues than in the importation of an unemployment problem from Alberta.

Clearly 2014 was a roller coaster year for everyone with a stake in energy policy in Atlantic Canada.   And those of us with particular industrial, technological or environmental perspectives will have different views on what risks that year brought to the Province and its future energy mix.  But what we can probably all agree on is that policy stability diminished and uncertainty increased.  And we know that cannot be good for investment.

Given that the security and cost of energy is probably going to be the single most important factor driving the competitiveness of the Atlantic regional economy and therefore the wellbeing of our citizens in coming decades, it is worthwhile stepping back for a moment to see whether our current policy trajectory provides grounds for optimism.

Energy and Technology

In January 2015, the Economist published a special report on energy and technology that contained much useful analysis and provided several important insights for the future.

One of the most telling observations was of course the contribution of energy efficiency to reducing energy costs.  Citing a study by the American energy efficiency group ACEEE, the Economist noted that the average cost of a kilowatt hour saved in the US is 2.8 cents, making it even cheaper than wind on a levelised basis, and 2-3 times cheaper than natural gas, coal and nuclear.

In 2012 an estimated $310-$360 bn was invested in energy efficiency globally, greater than supply side investments in power generation from either renewables or fossil fuels.

The second highly relevant observation in the Economist report was the game changing coincidence of rapid decreases in the cost of electricity generation by renewables, most notably solar, and the advent of technological breakthroughs in energy storage and distribution.

Recently released data from Bloomberg New Energy Finance (BNEF), show that $310bn was invested in  green energy last year, just short of the record $317bn invested in 2011.  In 2014 $73.5bn was committed to small distributed capacity projects of less than 1MW, mostly rooftop solar.  The International Energy Agency expects solar energy to halve in price in the next two decades and predicts that solar will provide 16% of the world’s electricity by 2050.  These developments have fundamental implications for the future profitability of investments in conventional energy, including natural gas fired power stations, according to a new study by Wood MacKenzie.

[Future profitability of investing in solar, wind and natural gas plants in California (CC = combined cycle and CT = combustion turbine). © Wood MacKenzie]

As one small but interesting example of things to come, Dubai Electricity & Water Authority recently agreed to commission 200 MW of solar energy at a levelised cost of 5.84 cents per kWh from ACWA Power and TSK.  Dubai plans on raising its solar capacity to 5% of total energy production by 2030.

Prospects for solar energy also feature significantly in Shell’s ‘new lens’ scenarios. In addition to the rapid growth of onshore natural gas development and a modest renaissance in nuclear energy, the possibility of solar energy becoming the world’s largest single source of energy by the 2070s and dominating primary energy supply by 2100 is feasible, according to Shell.[4]

[New Lens ‘oceans’ scenario to 2060 and 2100 showing potential importance of solar. © Shell]

According to Bloomberg, and consistent with the rapid growth of renewables, global energy storage capacity is set to exceed 10 gigawatts by 2020, 3 gigawatts in the US alone.  In late 2013, the California Public Utilities Commission committed to 1.3 gigawatts of that total.  Similarly astute political leadership in Ontario led to the procurement of 35 megawatts of storage in 2014.  By 2020 global investments in storage will be running at $5bn per annum, driven in part by the allure of dramatically reducing the costs of satisfying peak demand through grid enabled technology.

According to Accenture’s Digitally Enabled Grid program, the number of energy utility executives[5] believing that distributed generation would adversely impact revenues by 2030 jumped to 61% from 43% in 2013.  The number believing that competition from plug in electric vehicles and associated infrastructure would increase in the next 5 years was 81% – up from 59% the year before.  And those expecting competition to increase from power electronics hardware and services was 73%, up from 46% just one year earlier.

Similarly, a recent survey of 433 electrical utility executives in the US conducted by Utility Dive, showed that “88% see distributed energy resources as an opportunity” although interestingly “63% of those same respondents are not sure how to build a successful business around it.”   31% of respondents said that distributed energy was their biggest single opportunity.  Only 18% believed their business model would be that of a vertically integrated regulated utility compared to 54% today.

The statistics on executive attitudes are highly revealing.  Under three different scenarios, Accenture estimated that displacement of demand through competition and the deployment of distributed renewable energy technologies might result in lost annual revenues to utilities of between $18 and $48bn in the US between €39 and €61bn across 10 EU jurisdictions.

Unsurprisingly Accenture concluded that utilities will have to fundamentally reinvent their business models in the near future.  The Utility Dive survey indicates that executives already realise this.

One of many wild cards is the potential growth of electric vehicles, projected to grow to 2-8% of total sales in Europe during the 2020s.  Electric car registrations were up 34% in Europe in 2014, with the UK,  Germany and France leading that growth.  Little wonder that Nova Scotia’s Integrated Resource Plan acknowledges significant future supply side uncertainty with future demand completely dependent on technological, industrial and other assumptions within a projected range of 8-13 terawatt hours in 2040.[6]

Energy and Environment

Of course one of the most significant drivers of policy that has not yet begun to seriously impact the global energy mix is climate change.  Two decades of mounting environmental evidence, numerous studies by the UN, warnings from Alexander Graham Bell, and hundreds of speeches by Al Gore have – to date – failed to deliver an effective political response to climate change.

[©Jon Kudelka]

At the recent World Economic Forum in Davos, PwC’s 18th annual survey of global chief executives, confirmed that climate change is not among the top 19 risks they lose sleep over.

However, there are signs that economic, employment and energy security arguments will deliver what up to now environmental concerns have failed to.

Clearly the abundance of unconventional gas and oil in assessed and non-assessed basins around the world is enormous – more than 7000 trillion cubic feet of unconventional gas is technically recoverable according to most recent estimates by the US Energy Information Administration – more than 500 tcf in Canada alone.

And while the potential environmental and social impacts of hydraulic fracturing are disputed, the UN Intergovernmental Panel on Climate Change and the US Administration are united on the possibility that if well managed, shale gas extraction and use may be less carbon intensive, and therefore less climate damaging than other fossil fuels.  This argument will undoubtedly continue to provide sufficient environmental justification for those like US President  Barack Obama who assert the economic, employment and energy security benefits of unconventional natural gas resources to massively accelerate the rate of exploitation.

Inevitably it will be a convergence of economic and business interests that will deliver serious progress on climate change.  And it seems that convergence will soon lead to the implementation of carbon pricing.

Meanwhile there are clear signs that the long running love affair between the capital markets and the increasingly volatile fossil fuel sector is showing serious signs of strain.  This has profound implications for the energy sector.  At the New York UN Climate Summit in September 2014, 181 representatives of the finance and investment community signalled their commitment to carbon pricing.  Investors at the UN Summit also committed to decarbonising $100bn of assets under management and disclosing the carbon footprint of a further $500bn of assets.

Economist Lord Nicholas Stern, author of the eponymous and highly influential 2006 ‘Stern Review on the Economics of Climate Change’ for the UK government, has delivered the clinching argument.  Writing in the Guardian in September of last year Stern and Angel Gurria wrote that the world needs “a strong and rising carbon price, implemented through tax or emissions trading schemes, is an essential foundation….it ensures that polluters pay and efficiency is rewarded. The opportunity to use the revenues to consolidate public finances or to cut other taxes is a valuable bonus in difficult economic times.”

Speaking at Davos this year Stern noted that now is the ideal time to consider introduction of carbon taxes and the removal of energy subsidies.  With oil prices so low and set to remain low for several years, the time is right to introduce measures that will not disadvantage consumers or hinder the short term prospects of energy intensive sectors.  Of course in Canada we have the highly successful experience of carbon pricing in British Columbia,[7] and it will have escaped no-one’s notice that Laurel Broten has proposed a similar measure for Nova Scotia.  Because, by law, the BC carbon tax must be revenue neutral, today BC has the lowest personal income taxes in Canada and one of the lowest corporate tax rates in North America.

[Baron Stern of Brentford at WEF]

There can be little doubt that the economic and fiscal attractions of carbon pricing will become irresistible for other Canadian provinces in coming years, regardless of the climate change case.

[©Zachary Shahan]

Implications for Atlantic Canada

If I learned anything from Nova Scotia study on hydraulic fracturing, and indeed from the stakeholder processes that led to the establishment of Efficiency Nova Scotia and the 2010 Renewable Electricity Plan, it is that Nova Scotia stakeholders are very good at helping formulate sound energy policy.   We have a very smart and energy-savvy citizenry in Nova Scotia – as we do in other Atlantic provinces.  It is just they don’t trust industry to be environmentally responsible and they don’t trust government to manage risks and regulate effectively.

[©Bruce MacKinnon]

I have also learned that it is possible to create cross-party consensus and establish more stable conditions for investment with reduced levels of political risk.  There is no reason why this should not happen across Atlantic Canada.

It is my hope that with all the changes that are to come, our Atlantic Canadian governments play a proactive role in driving the region to more consensus-based energy policy-making.  Wherever technological, environmental and economic change takes us, core elements of the future must undoubtedly include:

  1. A commitment to ensuring that energy conservation remains at the heart of energy policy.  Let us reinforce the principle of arms length accountability for delivering energy efficiency excellence under an effective regulatory and governance system.   And let us make sure that if we must change the business models of DSM agencies like Efficiency Nova Scotia we do not inadvertently set them up for failure.
  2. Some form of carbon pricing.  The rest of the world is going there, Canada has an excellent model in BC, and we should signal that this will be one of the future rules of the game for energy production and distribution in Atlantic Canada.
  3. A return to the kind of evidence-based analysis that we presented in the Nova Scotia independent review of hydraulic fracturing.  We should reaffirm that whatever the results of further research and community engagement in the region, we will keep learning and we will keep an open mind on the potential costs and benefits of the technology.
  4. Strategic coordination with the rest of Atlantic Canada in responding to the impacts of technological change and the future for market based reforms to energy production and distribution.  Strategic coordination would certainly help with managing issues of carbon pricing and hydrocarbon development at an Atlantic regional level, it would also provide greater resilience in our own approach to the development of our energy mix.
  5. We should also acknowledge that some of the fundamental and far-reaching implications of technological change will be highly disruptive to our utilities and the way we produce, store and consume energy and yet we lack the scale, finances and governance models at the provincial level to respond effectively to these changes.  The time has arrived to think through what a consumer and environment friendly, non-monopolistic model of energy production and supply will look like for Atlantic Canada.
  6. And finally, we must encourage our politicians to resist at all times the temptation to compete with each other on these questions; rather they should be encouraged to do whatever it takes to create cross-party consensus and political stability both provincially and regionally, as that is the only way to secure stability and the levels of private and public investment that the inevitable transitions will require.   This means that energy policy is not just for Departments and Minsters of Energy to decide.  It is for Ministers of Finance, Economic Development, Health, Environment, Industry and Aboriginal Affairs to co-determine if we are to make the right decisions for the region.

[1] This article is based on a speech delivered to the Maritimes Energy Association Annual Dinner, 10th February 2015.

[2] This would of course also require the proper integration of energy, industrial and economic development policies and the building of a supportive R&D community in Atlantic Canada, something that has not occurred to date at anywhere near the level that countries like Scotland, Ireland, France and Korea have already established.  It should be noted that commercial development in the UK is stalling and so we need to be cautious before deploying significant amounts of ratepayer money in the absence of a clear strategy to maximise the return on investment for those dollars in Nova Scotia.

[3] A 5.5 per cent reduction in demand and nearly $80 million in first year savings in electricity costs from 2014 investments alone.

[4] Shell currently has two dominant scenarios: the more politically regulated ‘mountains’ scenario and the market based ‘oceans’ scenario which is referenced here.

[5] 85 executives were surveyed across 20 countries

[6] The government has also commissioned a comprehensive general review of emerging technologies that may impact Nova Scotia’s future electricity generation, distribution and storage options to 2040 from ICF International.

[7] See also The Economist of July 31st 2014: British Columbia’s carbon tax.  The evidence mounts.