New Canadian Clean Energy Incentives and COP 27
This week on the podcast, Peter and Jackie talk about the news from the Federal Government’s Fall Economic Statement 2022. The Government announced new incentives that will come into force in 2023, including credits for green electricity, clean hydrogen, energy storage and heat pumps, and a new fund to support private investment in Carbon Capture and Storage (CCS). They also introduced plans to develop incentives for manufacturing competitiveness. These incentives increase the opportunity for clean energy investing in Canada.
They also weighed in on President Biden’s recent threats of a windfall tax on oil and gas producers in the United States if they do not start using their profits for growing oil and gas production.
Next, they talk about the IEA’s latest World Energy Outlook. The agency has revised down its outlooks for natural gas demand due to the events of the past year.
Finally, COP 27 has kicked off in Egypt this week. Do these meetings actually make a difference in reducing emissions? What will be the topics of discussion this year?
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Episode 176 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. And welcome back. Well, Jackie, we are solidly into November. The snow has been falling. I think there’s more expected, and I think the ski hills are opening.
Jackie Forrest:
We went from summer to winter.
Peter Tertzakian:
Winter.
Jackie Forrest:
There seemed to be a very little fall. So here we are. And we also had a bunch of news fall news such as Canada’s fall economic statement and bunch of other things we want to cover today.
Peter Tertzakian:
The fall economic statement, which was delivered by Chrystia Freeland, Minister Chrystia Freeland on November 3rd. And then there was all sorts of news south of the border and the International Energy Agency put out the World Energy Outlook, which had a few interesting comments that are worthy of pause and discussion.
Jackie Forrest:
And we are going to talk a little bit about the COP27. It’s kicking off the day we’re recording. It’s kicking off this weekend. So when we make this podcast available, it’ll already be in full-fledged. So we’ll talk a little bit about what to be looking for and what we’ll be looking for in terms of what’s being talked about at that big climate meeting.
Peter Tertzakian:
So where do you want to start?
Jackie Forrest:
Well, let’s start with the newest news, this economic incentives for clean energy that were announced by the Canadian government yesterday as we’re recording by finance Minister Chrystia Freeland. This is good news. Well, we talked on the podcast before about how the Americans had an advantage here when it came to clean energy and-
Peter Tertzakian:
Inflation Reduction Act.
Jackie Forrest:
Yes, that came out in August and that it was going to be harder to justify maybe investing in Canada. And I know the details, the devils in the details, and we don’t have a lot of details, but the headlines look pretty promising.
Peter Tertzakian:
Well, they do. And for Canada it was much needed because certainly you and I have known several companies that have been considering or are already executing on plans to move their plants and future expansion plants to the United States rather than set up shop here when it comes to things like manufacturing, solar panels, and other things-
Jackie Forrest:
And batteries there some.
Peter Tertzakian:
And batteries and so…
Jackie Forrest:
There some pretty big incentives in the US for doing that.
Peter Tertzakian:
So this is a national competitive issue. Yeah. So tell us a little bit about what’s in the kitty.
Jackie Forrest:
Well, let’s start with the manufacturing. We actually don’t have a lot of details. It promises measures to increase advanced manufacturing competitiveness, and there’s going to be a consultation process with the idea that by the time we get into the 2023 budget, which usually happens around the springtime, April, May of next year, we would have details on that. But the fact that’s coming I think is really important because those companies that are manufacturing here in Canada might be sort thinking about their investment plans and at least a signal that we might have something that looks something like what the Americans have is helpful. I think another really important piece of information was the Clean Growth Fund. It talked about $15 billion in startup capital. In the actual statement, there’s what, 80-page document or whatever. It had some information that this is going to accelerate carbon capture storage by giving concession loans and contracts for differences.
And remember when we had Jared and Rachel from the Bank of Montreal on, and we talked about the fact that the problem with CCS in Canada is, although we have a carbon price, it’s a little uncertain where the price will trade and maybe some government change comes, and you don’t even have it at all. And so I think this is going to go a long ways to create some certainty hopefully for that carbon price.
Peter Tertzakian:
So I mean, to elaborate on that, a company needs that assurance. Let’s say the carbon price is going to be $175 a ton by 2030 and that it endures because many of the projects that multi-billion-dollar projects that are being considered to be built have well beyond a 20-year, 30-year timeframe. So you need some sense of assurance when you fill out the spreadsheet that you know what the carbon price is going to be to make the whole project economically viable and that it endures past different governmental changes and so on. So what the federal government has done here is set up a clean growth fund of $15 billion in startup capital. Potentially there’s going to be more to negotiate with various industries, if not individual companies, to allocate capital so that they get things like CCS moving carbon capture and storage moving.
Jackie Forrest:
And then we had that tax credit, which gave an investment tax credit for 50%. And we talked about that quite bit on the podcast where that seems good. But the problem is if it’s a billion-dollar project, you’re still putting a half a billion dollars in and you only get paid if there’s a price on carbon. So I think this is going to spur some investment here. Hopefully we’ll see some final investment decisions. Now, I did say in the details that it’s going to be organized by an institution within the Canadian government, and that would kind of get going by the end of 2022. So hopefully next year at some point we start to see some final investment decisions on some CCS projects.
Peter Tertzakian:
I think you’re going to see them sooner than later. And by the way, this is not just an oil and gas thing, it’s really for any heavy emitting industry company, electrical utilities that are still on the fossil fuel paradigm. Other industries, fertilizers, steel, you name it, that are heavy emitters that can access this sort of capital presumably. But anyway, we’re going to get more details to find out exactly how it’s going to impact the various heavy emitting businesses.
Jackie Forrest:
Now, another big piece of news is announcements that there will be tax credits for green energy up to 30% and refundable. And this would include green electricity production, which include wind, solar, but also small nuclear was talked about energy storage and that could include batteries, but it could include things like compressed air or other types of water storage. And a broad category, things like heat pumps. So this is a big deal, 30% tax credit. So that means if the project costs you a $100 million, you actually get 30% of that back as refundable tax credit. So we think that is going to accelerate investment in renewables in Canada. And it’s good to see the Americans have something similar. And so now there’s some caveats in terms of the type of labor you use and well, I’m sure there’s lots of details, but assuming that it’s not too hard to get, I think you’re going to see that spur some investment in Canada.
Now, as in Canada, we can’t invest in renewable projects anywhere because many provinces have regulated power systems and the authority that regulates the power system has to put out a request for proposals. But here in Alberta where you can come and just build projects, I think you’re going to see this type of incentive potentially create more investment.
Peter Tertzakian:
Yeah, I think so. The skeptic might say, where is all this money coming from? So actually, where is it coming from?
Jackie Forrest:
Well, there was a little news that there would be an increase in taxes on corporate stock buybacks 2%, but that would only generate about two billion over five years. So that’s definitely not going to pay for this whole thing. So there is deficits projected into the future, although I do think they’re expecting maybe a balance to surplus as we get out into kind of 2027. So maybe this gets paid because all things the same. It generates more jobs, and those people pay taxes and that helps pay for it.
Peter Tertzakian:
The fiscal deficit was not as big as anticipated. There’s taxes and things that are coming from, well, even the oil and gas industry, which is performing very well. So anyway, I mean I’m not keeping track of the federal balance sheet and income statement at the moment, but I think it is something worthy of note as we think about all these programs that are coming to the forum. Maybe we’ll save that for another podcast.
Jackie Forrest:
One other thing I wanted to talk about was the hydrogen. So there is going to be credits, probably investment tax credits for clean hydrogen projects. No information on that. There is going to be some consultation about that. So we’ll find out more. But I think that’s important because today in Canada there isn’t really a lot of incentives to support anyone producing hydrogen. And it’s quite a bit more expensive than the alternative natural gas, so that’ll be interesting to see. And in the US of course, there’s some pretty strong incentives for hydrogen.
Peter Tertzakian:
I mean to clear this is a green hydrogen sort of produced by renewable electricity into electrolyzers and a lot of it.
Jackie Forrest:
Well, I don’t know, it said clean hydrogen. So I mean I would argue that blue hydrogen is also clean. So I guess we’re going to get more information on what’s supported with that in the US they actually support the different colors of hydrogen, but they give different levels of subsidies. The green getting the highest subsidies. So I don’t know if it’ll look like that. Look forward to come.
Peter Tertzakian:
Okay, well, we’ll see. And more on hydrogen at a lighter podcast as well.
Jackie Forrest:
But as the takeaway is this is good news for clean energy investing in Canada, and I think for the Canadian economy to compete with what’s going on over the border.
Peter Tertzakian:
And over the border, there’s all sorts of saber rattling going on with President Biden and the oil industry as the country heads into its midterm elections.
Jackie Forrest:
Yeah, I know a few podcasts ago we talked about the actions the Americans could take in response to OPEC, things they could do to weaken or soften oil prices. And one action we didn’t consider is Biden threatening. If you guys don’t start investing in new production here in the United States, well we’re just going to tax all your profits. So that’s created quite a bit of debate with the different oil companies. And I know their argument is that, “Yeah, we’re doing good today, however, go back into 2020 and most of us were losing money and one of those kind of cyclic businesses and we invest through the cycles and sometimes they’re really profitable and sometimes we’re not.”
Peter Tertzakian:
Yeah, I mean it’s this whole other subject, but Biden chastising the industry to invest more. I mean it’s really, the message has to go to the financial community, the investors, because they’re the ones that are basically telling the oil and gas companies, “Hey, don’t put the money back into the ground. Give it to me as dividends and share buybacks.” And so I think the message is a little bit misdirected, but it makes for good politics.
Another thing is that even if the industry wanted to invest a lot more money back into the ground in North America, not just the United States, we’re hearing that there’s really not a lot of oil field service equipment to be able to grow that much more. I mean, we’re sort of maxing out. And that’s something we talked about, I don’t know, maybe it was six months ago, I can’t remember, maybe longer, that the economic downturn in oil and gas over the course of the last seven years, and especially in 2020 when the price of oil and natural gas collapsed, especially oil, that the service industry was basically gutted and concerns about being able to ramp back up when what was needed.
So I just think this whole thing about chastising the industry leaders for not investing more is kind of a superficial headline, not really acknowledging all the other dynamics that are at play here.
Jackie Forrest:
And it’s ironic because this Joe Biden is actually saying the opposite of what he said a few years ago when he got elected, he actually ran under a slogan of no more drilling, it killed the Keystone XL pipeline. He put a pause in oil in natural gas leases. He didn’t want the industry to grow either. So really inconsistent with his messages before. And some of the conditions that he sent, which were kind of to slow down production growth in North America.
Obviously, we got this. I think the day that podcast gets released is the US midterm election, November 8th. I don’t know if this is just posturing before, but I will say that there was some research done by actually the Congressional Research Service, which is a US government entity. And it went back and looked at when they put a Winfield profit tax on the US oil industry in the 1980s and said that ultimately this did raise a lot of money, something like $80 billion in gross revenues for over eight years for the government. But US crude production declined as much as 8% over the same time period. So it doesn’t get people too excited about investing when you start to put windfall taxes on.
Peter Tertzakian:
No, that’s the big thing is investment uncertainty is certainly a byproduct and negative consequence of the government intervening and putting any kind of extra tax on industries, whether it’s banking, oil and gas and others. It’s just when foreign investors look at the country and say, “Hmm, do I want to put money there because I don’t know what the government’s going to do if I start making money.”
Jackie Forrest:
Right. Well, and all things the same, you’re taking more money out of, we have that fiscal pulse. So by increasing the taxes, more money’s leaving the cycle. And today it’s leaving because it’s going to investors as well. But it’s certainly not going to come back to capital spending if it’s going out to the government and it’s required. So it takes away that the potential for that.
Peter Tertzakian:
Okay. Well, let’s go to more of a global view. What’s happening with the International Energy Agency? They came out with their World Energy Outlook 2022.
Jackie Forrest:
Yeah, this is always a big report that’s everyone who loves energy has to look at, and it is big. It’s like hundreds and hundreds of pages. So we’re not going to do it justice today. There’s lots there. But I did want to highlight what the natural gas outlook that had quite a large downward revision because of the events of the last year. So often things change slowly in these reports. Every year, oil demands a little bit less than it was the year before, but it’s not a big step change. Oil demand, by the way, was a little more bearish than the previous year, but natural gas was the one that was surprising. So they have different scenarios of the future. One is called the stated policy scenario, and this would be the policies that exist in the countries today. And they dropped the long-term view of natural gas demand out to 2050 down by about 15% below last year’s report.
Gas still grows from today, but not much. It’s only about 5% higher in 2050 than it is today. The announced pledges is the scenario where all the countries that have gone to these COP meetings and made pledges to get to 1.5 degrees at some point or net zero by 2050, all those countries actually achieve those goals. And in that case, they have gas production in 2050 down 30% compared to what it was last year. And it’s down 35% below today’s levels by 2050, so that’s a pretty big revision in one year. And a lot of it is to do with the events of the last year and what’s happened in natural gas markets.
Peter Tertzakian:
In the war in Ukraine driving and the sanctions against Russia, the drive by the European countries to get off Russian natural gas importing a lot more LNG driving the price globally higher. So that’s the number one thing is when you drive the price of any commodity higher, the demand starts to fall off. There’s also more rapid deployment of heat pumps and energy efficiency measures. This is over the course of many years. This is not something that’s going to happen overnight, but it feeds into that forecast that suggests that natural gas demand is going to growth, is going to slow down. The developing world is using less gas. And I think this is a critical thing. I mean, it’s not necessarily in the near term a great story for clean and green because the first substitute for natural gas is to go back to burning coal.
And its coal prices have gone up too, but not nearly as much as natural gas. And there’s definitely, and we talked about this in an earlier podcast, there’s sort of an anger that has been brewing in parts of the world like Southeast Asia, the Asian subcontinent that the Europeans are hogging all the LNG because of the Ukrainian war driving the prices up. We were told to switch to natural gas over the course of the last 10, 20 years. And so we built up our infrastructure, got onto natural gas, and now look what’s happened. The prices are through the roof. We can’t afford any of this. So guess what? We’re going back to coal, and I guess we’re going to build out our renewables, but the easiest thing to do is to have a regressive transition, as I call it, back to the traditional way.
So I think there’s some merit in this IEA outlook in the end. I don’t think it’s going to be as bearish as they say, but there’s no question that when people sour on a certain commodity and the memories are long. So I don’t think, as I said, particularly Southeast Asia and the Asian subcontinent, they’re not going to come back to this commodity very quickly even if the prices fall.
Jackie Forrest:
Yeah, that’s it. That they talk about the developing world not using gas. And by the way, it is real. Countries like Pakistan have literally had rolling power blackouts because of a lack of fuel because they switched to natural gas. There’s also going to be a lot more build out of renewables. That’s going to happen in places like Europe and US Inflation Reduction Act is another thing. It’s going to lower natural gas demand in the US because it’s creating a lot of incentive for things like hydrogen clean power, extending life of nuclear plants. So even this policy that we just talked about in Canada is ultimately going to result in the displacement of some natural gas.
Peter Tertzakian:
Some. I just want to stress that a duel of electricity generated by renewable energy is not completely fungible. In other words, substitutable with a duel of energy created by a natural gas turbine. I mean there’s different reliability factors in terms of being able to deliver a duel of energy, whether that’s wind is blowing or not, sun is shining or not, it’s just not the same.
Jackie Forrest:
Well, I get what you’re saying, but all things the same. If we put in a whole bunch of wind and solar, when the wind is blowing, when the sun is shining, we’re not going to be using natural gas. And so it does result in a displacement of natural gas use.
Peter Tertzakian:
Sure. And you bring about the large-scale grid storage over the course of the next 10 years. I mean, there’s going to be a substitution for sure.
Jackie Forrest:
So we’re still going to need gas. It’s just we’ll be using less of it. We’ll only be using it at the times when those other alternatives aren’t there. I think there’s just a whole series of factors here. The higher prices in the near term are going to drive efficiency and alternatives. And once those are structural changes, once someone puts in a heat pump, they don’t go back. Now, of course, they still need electricity and then a lot of these incentives. So I think it’s real. I don’t know if it’s as extreme as what we’re seeing here, but I think it is real that all things the same. The outlook for natural gas isn’t as strong as it would’ve been before this crisis.
Peter Tertzakian:
Yeah, I think that’s fair. I think that’s fair. But it’s not like it’s going to be declining dramatically to be able to reduce demand by a third.
Jackie Forrest:
By 2050.
Peter Tertzakian:
Let’s put this in perspective. I mean, to get 35% reduction in 28 years means that you have to, or we have to reduce natural gas consumption by over 10% per decade or over 1% per year. And just very simple math that is very difficult to do.
Jackie Forrest:
Yeah, I mean, when you look at historical situations, you haven’t seen too many right instances. Now, I would just say the climate imperative maybe makes this time different.
Peter Tertzakian:
Well, it may make it different. But the other dynamic here is if you have that rapid demand loss, then price comes falling down and then people start using it again because it’s cheap. So I mean, there’s so many dynamics here. It’s all theoretical for now. I would say in the near term, there’s no question the high price of gas is burdensome. Countries are seeking alternatives. They’re regressing to coals, they’re progressing to renewables, and that is going to put pressure on natural gas demand growth.
Jackie Forrest:
Okay, well hey, on that topic, let’s switch to COP27. These types of meetings are part of why we have these announced pledges scenarios that we just talked about. By the way, the stated policy, today’s policies wouldn’t get you there. We’d still see gas growing. So these meetings are, I guess, pretty consequential in terms of countries making pledges to what they’re going to do in the future around reducing their use of fossil fuels. I think it’s worth just looking at some history on these climate meetings. This has been around since 1995. The most famous agreement was the Kyoto Protocol, which was adopted in 1997. That was the third. That was COP3.
Now, many countries, including Canada, did not deliver on their promises there. Then we had the Paris Agreement, that was another really big meeting that was COP21 in 2015. And that’s of course when the less than two degrees and aiming for 1.5 degrees of warming goal came. But it’s worth noting that none of these processes have actually resulted in greenhouse gas emissions reductions except for pandemics or recession years. Greenhouse gas emissions continue to trend up, and 2022 is expected to be higher, yet. The IAA came out with an estimate of 2022 saying that it may not be as big as the previous year, but it’s still going to grow. Some people look at that and say, “Well, these meetings are kind of not working and maybe a waste of time.”
Peter Tertzakian:
Yeah, I’m in that camp. COP27, it’s 27 years and it’s still going up Paris Agreement 2015, seven years and nowhere near on track in terms of the spirit of that agreement. So I am the first to want to gather people and get them to talk about things, but clearly in my mind, there’s something wrong here that this plan A is not working and we need to think about plan B. So nice that everyone’s getting together and talking about things. But I think structurally there is something not working with this whole scheme.
Jackie Forrest:
Well, I guess right now it looks like there are no results. I would just say if we didn’t have these meetings, would it even be worse than it is today potentially.
Peter Tertzakian:
Well, potentially.
Jackie Forrest:
So this is the way I look at it. This is kind of a tragedy of the common’s kind of problem in that the atmosphere, nobody owns it, and everyone contributes to the problem. And if each individual country, it would look at this situation if they were just on their own and say, “Oh, I’ll do nothing on climate.” Because if I sacrifice my economy and cause higher energy prices because I’m going to these alternatives, if I do all that, but nobody else does, it won’t make any difference. The outcome will be the same. Climate change will continue because other people are contributing to putting CO2 in the atmosphere. And I mean there’s look, just go look at a chart. I actually have one here of China’s emissions growth compared to everybody else.
Although historically they haven’t had a lot of emissions compared to the developed countries. It’s just going up like a hockey curve. So if everybody makes sacrifices, but developing countries like India and China still going to continue to have the problem of more warming in the future, then would be ideal. So I think these meetings are important because you need to have peer pressure, have everyone come together, remind everyone why this is important, continue to pressure these politicians to think about the broader goal.
Peter Tertzakian:
Well, I agree, but this is not going to be a fun meeting. I’m not going. But I can imagine further to my comments about Europe perceived to be hogging all over the world’s LNG driving prices up, and then the developing countries pointing at the developed countries saying, you’re not even living up to your previously held agreements of, what is it, a $100 billion in commitments to help us out. So I just think that amidst all the other ailments in the world right now, the war in Ukraine, the hostilities in Korea-
Jackie Forrest:
Yeah, tensions between China and the US.
Peter Tertzakian:
Yeah. Plus, Taiwan. I mean everything. And then inflation on top of that and threat of looming recession. I mean, people are not going to be in a good mood going to this thing.
Jackie Forrest:
I totally agree. I don’t think we can expect a whole bunch of progress. Now, what are going to be the issues that people bring up? I think, I don’t expect actually new pledges that actually isn’t really one of the things that’s expected anyway. There were a lot of new pledges made last year in COP26, and I don’t expect much there, but I do think a big discussion will be developing countries looking for more money. So there are two buckets of discussion. Peter, you talked about the 100 billion and that was agreed to, by the way, today, I haven’t seen the most recent numbers, but I think 2021 numbers are about $80 billion is being given to developing countries to help them increase their low carbon energy. And so that is working. It’s not the 100 billion, but there is a fair amount of money going that direction.
And there was an agreement at Glasgow that I think it’s by 2023 or 2025 that a 100 billion would be met. So I don’t think that will be the topic. The topic is now this idea that there should be a new pool of money to support adapting to the impacts of climate change and the loss and damage. So for example, with the current thing, you could go get money for building solar panels, but you can’t get money to repair all your bridges and your infrastructure after a big flood like what just happened in Pakistan. For those not following these floods in Pakistan, like something like 1500 people died, 33 million people were displaced and there was major damage to things like water plants and other critical infrastructure. So there’s nothing to pay for that sort of thing. And so the idea is the developed countries, they put all the CO2 into the atmosphere and that’s created the warming and the climate issue. And they therefore should be paying for some of the costs that happen in some of these poorer countries. So I think that is going to be contentious, but a huge topic.
Peter Tertzakian:
I think it is going to be very contentious. It’s just a very complicated thing to accomplish.
Jackie Forrest:
Well, and I think at this moment, it may not be the time. Rich countries are struggling with the high energy prices. They’re writing checks what to buy higher cost energy. They’re giving subsidies to consumers within their own country because of affordability issues they’ve taken on debt from COVID, and now due to the energy crisis, more debt. I just don’t know that this is the time where you’re going to see them just open up the checkbook. And there’s issues too, in how you use this money and the governance of it. I mean, let’s be honest, some of these countries, they’re kind of corrupt. If you’re going to start writing checks to them, is it really going to go towards this infrastructure? And so there’s a lot of questions about how it would be done fairly and go to the projects where it’s needed. So I think it, there’ll be discussion, but I don’t expect there’ll be a lot of resolution on it.
Peter Tertzakian:
Well, let’s follow it and talk about it in subsequent podcasts soon.
Jackie Forrest:
As I said, it just kicks off now, so from November 6th to November 18th, so I’m sure there’ll be lots of news. I do expect maybe, see the biggest news coming from corporates last year they made a lot of news with that Glasgow Financial Alliance. So private entities, not countries that are committing to reducing emissions. And maybe that will be where the news comes from, we may see more movement both on GFANZ, but other corporations that are stepping up in a big way.
Peter Tertzakian:
Okay. Well, we’ll stay tuned.
Jackie Forrest:
With that, we’ll wrap up the podcast. If you like this podcast, please rate us on the app that you listen to and tell someone else about us.
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