Canada: Gas In A Low-Carbon Environment

The Energy Information Administration (EIA), an agency of the US Department of Energy, has prepared an Analysis of the Impacts of the Clean Power Plan (the EIA Study) to study the impact of the Environmental Protection Agency's (EPA) proposed 2014 Clean Power Plan on the fuel mix used to power the US electricity generating fleet.  The Clean Power Plan would establish rules and requirements, to be implemented on a state-by-state basis, to reduce carbon emissions from the US electricity generating fleet by roughly 30% from 2005 levels by 2030.

The EIA Study included historical information as well as a variety of projections (Projections) over the period from 2015 to 2040 (the Projection Period) including:

  • as a base case, a Clean Power Plan Projection, assuming the Clean Power Plan was implemented at the start of, and remained in effect throughout, the Projection Period; and
     
  • a Clean Power Plan and High Oil and Gas Resource Projection combining the projected effects of the Clean Power Plan together with a Projection assuming that natural gas remains relatively cheap (less than $4.50/mmbtu measured in constant 2013 dollars) over the Projection Period.

The results of the EIA Study were as follows:

 

Historical

Projections to 2040

 

2010 Fuel
Mix

Clean Power
Plan

Clean Power Plan and High Oil and Gas Resource

   

(%)

 

Renewables

10

27

19

Natural Gas

24

29

47

Coal

45

26

18

Nuclear

20

16

16

Of course any set of Projections out as far as 2040 cannot plausibly be a totally reliable indicator of the actual levels of electricity production or fuel mix.  For our purposes though, what the various Projections can usefully and plausibly show are the larger economic forces at work, and the economic incentives generally applicable in a low-carbon environment.

The principal conclusions of the EIA Study with respect to their principal Clean Power Plan Projection were that:

  1. carbon emissions from the power sector would be reduced from 2005 levels by roughly 25% by 2020, by roughly 34% by 2030 and by anywhere from 30% to 45% by 2040, depending on whether the Clean Power Plan was extended beyond its current 2030 time horizon;
     
  2. the Clean Power Plan would substantially encourage the retirement of existing coal-fired power plants and a relatively small number of older model and less efficient gas-fired power plants;
     
  3. for the first half of the Projection Period  (to 2025 – 2027, roughly) and under all or virtually all modelling assumptions, the principal compliance strategy would be for utilities to replace coal-fired generation with new gas-fired generation; and
     
  4. for the second half of the Projection Period the principal compliance strategies would likely be a combination of constraining demand through demand side management initiatives (such as time-of-day pricing, full marginal cost pricing or other power conservation initiatives) and/or meeting new demand principally through renewables together with some continued reliance on replacing base-load generation fired by coal with natural gas.

It is, however, particularly worthy of note that any increased reliance on renewables in the second half of the Projection Period appeared to be regarded as a "second-best" choice by utilities.  In the words of the EIA Study:

The use of renewables as a primary long-term compliance mechanism is sensitive to fuel price assumptions.  In the [High Oil and Gas Resource Projection] renewables generation represents less than 20% of total generation throughout the [Projection Period] as regions tend to choose compliance strategies involving re-dispatch and displacement of existing coal-fired generation with generation from new natural-gas fired...capacity.

The first question is how is this study relevant for a Canadian audience. While the EIA Study was a study only of the particular Clean Power Plan in the particular prevailing circumstances in the United States, we believe it serves as a useful proxy to understand the broader economic incentives at work in other markets as they look at the consequences of policy choices designed to encourage the transition to a low-carbon environment. We would expect also that the advice and conclusions form the EIA Study will be adopted or acknowledged over time by various diverse groups.

For major gas companies, the introduction of moderate carbon emissions regulations or pricing mechanisms now represents a commercial opportunity more than an economic threat.  In the transition to a low or lower-carbon environment, there is a major opportunity for gas to be the single most favored transitional fuel for electric utilities.  This helps to understand a variety of recent initiatives by some major oil and gas companies (including Shell and Total) to support the global introduction of moderate carbon pricing regimes.

In the case of Canada, the transitional role of gas could be assumed by other fuel choices – such as hydropower in some Canadian provinces.  But the principal conclusions of the EIA Study, about the incentives to decrease coal usage, the likelihood that nuclear power might at best sustain its market share and the dynamics of the competition between natural gas and renewables to fill the resulting void, all ring true to us and would appear to be as broadly applicable in many parts of Canada as anywhere else. Indeed, the move away from coal to natural gas is already well underway in parts of Canada.

In any event, the consequences of a transition to a low-carbon environment for the natural gas business are material, have already been identified and anticipatory compliance strategies have already been initiated.  The results will likely transform the natural gas industry over the next several decades.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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