Update on the Canadian renewables sector and prognosis for the 2020s

16 March 2020

Once one of the darlings of the global renewables sector, and the recipient of a not insignificant proportion of global investment into the sector, the Canadian renewables sector has now reached a steady state with levels of investment more in line with actual market size. In the process the sector has developed impressive knowledge and skills capacity and an increasingly global outlook on projects, development opportunities and sources of capital.



Less Drama, More Business

Some of the excitement went out of the sector after the demise of Ontario's FIT program in 2018, but ongoing private-sector led investment, record low solar panel pricing, strong public support for clean energy and deep-seated public concern regarding climate change risks all foretell stable, steady growth for the sector in Canada in the 2020's. As wind, solar, storage, demand response capacity and other low cost, low-GHG resources offset and replace historic, centralized-plant assets, Canada's position as a leading FDI destination, its highly skilled renewable energy sector workforce and its stable, liberal, democratic polity will continue to make it a top destination for international investors in the 2020s.

Indeed, amidst global trade tensions, U.S. political uncertainty and Brexit, in 2019 Canada recorded its largest inflow of foreign direct investment in four years. 

Tax This. A Minority Federal Government.

Since October of 2019, Canada's federal parliament has been led by a minority Liberal government with substantial numbers of seats held by the Conservative, New Democratic and Bloc Quebecois parties.  Although the prospect of minority rule by Canada's Liberal parliamentarians does leave many questions unanswered, one safe prediction is that Canada will continue to have a carbon tax – at least until the next election. 

A minority parliament, by its very nature, necessitates compromise and negotiation with the other political parties. There is, however, enough public support and, more importantly, more than enough political support for a carbon tax among the Bloc Quebecois and the NDP parties, that the Liberal government will not have to negotiate a wholesale rollback of the carbon tax policies which it had put in place during its previous majority tenure. As noted by the editorial board of the Washington Post immediately after Canada's October election, "Parties favoring [environmental] policies at least as tough as Mr. Trudeau's won 216 seats and 63 percent of the popular vote". The Government of Canada is very likely to find support for its carbon tax among two of the three main opposition parties so as to stay the course.  

The Canadian federal carbon tax started at C$20/ton in 2019, rising at C$10/ton per year up to C$50/ton in 2022. Absent amending legislation, the carbon tax will stay at $50 CAD/ton after 2022 – still relatively cheap considering the nature and impact of the economic externalities involved. Canada's carbon tax will translate in to higher energy costs for Canadian voters. Gasoline prices will rise by approximately 8% (assuming fuel prices remain unchanged) on account of the tax (though offsetting declines in demand for oil will likely mask this increase); coal will more than double in cost; and natural gas costs will rise by more than 50%. All other things being equal, these changes in cost will strengthen demand for cheaper, carbon free energy solutions. Although it will raise energy costs, critically, from a political and a policy perspective, the carbon tax itself is revenue neutral: even after paying more for carbon-based energy, the vast majority of individual Canadian tax-payers will end up with more money in their pockets after the rebate of carbon tax revenues through provincial agencies.

In addition to the launch of the federal carbon tax, the federal government of Canada has also pledged to put itself on the path to using 100% renewable electricity by 2025. This is a vast undertaking. The Canadian government owns or controls thousands of buildings and other power consuming assets in virtually every far-flung corner of the country. From large defense installations in every province, to remote post offices in the arctic, to sprawling federal office complexes in all major cities, this undertaking will create significant growth opportunities and increased demand for renewable project developers willing to take on project development risk and find creative financing solutions to enable flexible power purchase agreement arrangements.

Not So Fast - Provincial Matters

In Canada, energy –like a lot of things - is mostly a provincial matter. One very large, intransigent obstacle stands between the federal government's forward-leaning, clean, green policies and on-the ground implementation: the staunch opposition of several rather important provincial governments, namely, Ontario, Alberta, Saskatchewan, New Brunswick and Manitoba. 

For instance, though quite possibly without legal merit, the Government of Ontario has opposed the federal carbon tax with old school vigour, mounting an unsuccessful legal challenge in the Ontario Court of Appeal with appeal now set to be heard by the Supreme Court of Canada.  This largely symbolic appeal has buttressed Ontario's 'Federal Carbon Tax Transparency Act' – dubbed the "Sticker Act" – which forced gas/petrol station owners everywhere in Ontario to post signage regarding the cost of the federal carbon tax on gasoline at the pump.  The Sticker Act is largely symbolic, has been criticized as being less than transparent (for example, there is no mention of the corresponding consumer rebate), and may well be without legal merit.

Perhaps more importantly, but less publicized, the Ontario Government also nixed the environmental approval of the 'Nations Rise' wind farm. In doing so, it slightly undermined the business reputation of the province and built upon the earlier decision taken by the Government with respect to the White Pines Wind Farm in 2018 to send a strong message of support to a minority of rural Ontario voters opposed to wind energy. Perhaps nothing contrasted more with the images of millions of young people protesting the lack of effective global action on Climate Change, which appeared worldwide throughout September 2019, than the image which appeared in the media on September 27, 2019 of five Ontario residents victorious after stopping the construction of the fully contracted and nearly completed Nation Rise Wind Farm. 

The provinces of Ontario, Manitoba and Saskatchewan all saw their courts deem the federal carbon tax constitutional, though the Alberta courts have recently ruled the other way, so we await the Supreme Court's reconciliation of these apparently conflicting decisions. After these court decisions are finally dealt with, Canada will very likely have an effective carbon pricing regime (half federal tax half provincial equivalent) nationwide – the net effect of which will be to support the development of low cost, clean energy projects by private sector innovators.  Given this, and given the widespread support for carbon pricing, even in oil reliant Alberta, the runway for renewable project development modelled on the basis of the Canadian carbon price looks fairly smooth. 

From the Heartland

Alberta, in contrast to Ontario, has shown itself significantly more adept when it comes to hedging the politics of climate change. Though it comes from Canada's heartland –with all that implies - Albertan oil and gas is more expensive  to produce than oil and gas sourced from most other jurisdictions worldwide. In the post-Soleimani world, with greater uncertainty surrounding Gulf oil resources and friendly, neutral Canada able to ship crude south at moderate prices, Alberta may prove willing to play-along with federal carbon pricing and climate change initiatives –provided that everyone can make the numbers work. 

It is noteworthy that, despite replacing the provincial NDP party with the provincial Conservatives, the Province of Alberta has not moved to cancel existing wind and solar contracts. Renewable energy plays well in Alberta, particularly in the current context of anti-pipeline blockades. If the numbers work, using solar and wind based energy solutions to replace or supplement legacy coal and gas generating assets makes sense – particularly if export markets for these fuels froth with U.S. and Iranian led uncertainty. Indeed, in late August, 2019, Greengate Power secured approval from the Alberta Utilities Commission (AUC) to build what will become Canada's largest solar project – the Travers Solar Project in Vulcan County, Alberta. 

Meanwhile Business Keeps Getting Done

In Ontario, the name of the game is storage with major industrial and MUSH sector players actively seeking projects which will help shave annual energy peaks and avoid the dreaded 'Global Adjustment' charge while providing a measure of long-term price stability. In some cases, they will also provide on-site power back up for essential services. Highly innovative, at-scale storage projects aimed at utilizing off-peak power, from the grid or from local capacity, combined with sophisticated peak predictive algorithms and battery-operating tools, are being installed across Ontario  A new industry is being born, which presages the broader anticipated advance of "distributed energy resources" (DERS) based energy systems.

Simultaneously, large commercial and industrial sector power consumers are capping off future energy cost uncertainty and greening their corporate brands by paying to have solar panels installed behind the meter at their site. Known as "captive commercial power purchase agreements" – unlike previous green power investments; no feed-in tariff required. As a result, the nascent renewable industry that grew up in the era of Ontario's FIT Program (2009-2019), Quebec's wind energy boom (2005-2012) and Alberta and Saskatchewan's smaller but no less important eras of renewables growth (2006-present) is continuing to innovate, learn, and build projects.  

What is perhaps more interesting is that many of the skilled workers, engineers, project developers and finance specialists who cut their chops under the Ontario FIT Program have gone on from Ontario to develop projects in New York, Texas, Alberta, Taiwan, Japan, Mongolia, Ivory Coast, Bermuda, and elsewhere. Go to a renewable energy project conference anywhere in the world and you will be hard pressed not to find Canadian developers pitching long term renewable energy contracts, valued in U.S. dollars and reliant upon international equity, DFI debt and country credit risk insurance.  People do stay busy.

In fact, Canadian firms are rather good at developing energy projects in hard locations. Because distributed energy systems like solar, wind and storage become economical first in grid edge locations – think islands, remote mining sites, isolated communities - the wave of innovation and technological change rolling across the energy sector is moving in exactly the opposite direction than one otherwise might expect. Typically, cities and large population centers gain access to new technology first. In the case of solar-plus-storage solutions, for instance, it is likely that farmers living outside of Norland, Ontario will go solar before City of Toronto residents. Because much of Canada, including Norland, is grid edge, Canadian companies have a distinct advantage when it comes to finding energy solutions for difficult locations. As a result, Canadian companies have gone across the world in search of applications requiring Canadian solutions.

The Coming Supply Gap

It is no great secret that the Province of Ontario will be facing an electricity supply gap by 2023 coming as a result of the planned closing of Ontario Power Generation's Pickering nuclear plant and the cancellation of 758 renewable projects in 2018 which would have added 450 MW of capacity to the grid.

Ontario's Independent Electricity System Operator (the IESO) predicts that the Province will see a summer shortfall of 1.4 GW in 2023, growing to 3.5 GW a few years later as the Province's Darlington and Bruce nuclear power stations go offline for refurbishment or closure.  

Given the tight timelines and the relatively low cost and flexibility of renewable assets, it seems likely that future Ontario governments will turn to the renewables sector to help right the ship.

Finding 12% Cost Savings

The present Ontario government is focused on the laudable goal of reducing ratepayer costs by a stated target of 12%. With that goal in mind, in late 2019 it issued a ministerial directive to the Independent Electricity System Operator (IESO) asking it to commence "identifying viable opportunities to lower electricity prices for Ontario consumers while maintaining system reliability". The ministerial directive asked the IESO to focus their review on large gas, wind and solar contracts that expire within the next ten years. The directive expressly excludes the Bruce Power Refurbishment Agreement from the scope of review. The Premier has more recently reiterated his promise to find the 12% reduction, with a plan expected in the coming weeks and despite noting that it is "very complicated".

Although the ministerial directive did (and should) create some consternation among existing power sector stakeholders - plant owners and operators, banks, life insurance companies, pension funds, etc. - the idea of opening up FIT, RESOP and NUG power purchase agreements for renegotiation may produce interesting opportunities for existing contract holders. 'Blend and extend' power purchase agreement renegotiation has been done before in U.S. power markets and may hold the key to lowering rates now and, possibly, guaranteeing at least some supply into the coming supply gap years. One hopes that the IESO might consider solutions with sweeteners attractive enough to lower short-term system costs and add greater certainty and opportunity for all parties in the 2020's. Ideally, they would be able to accomplish this while simultaneously avoiding contract-by-contract negotiations.

One topic that has fallen out of discussion recently has been the idea of Ontario's local distribution company (LDC) sector reform and rationalization. By our count, Ontario, with a population of less than 15 million, still has over 60 local distribution companies (LDC's) providing last mile service to rate payers.  Each LDC has a President, a CFO, a COO, a board of directors, office facilities and equipment and, because of the capital cost recovery model used to set rates in Ontario, a degree of dis incentive to rationalize operations or adopt new technology. Ever since the Report of the Ontario Distribution Sector Report Panel in 2012, the case has been plain that there is ample room to reduce at least one-fifth of rate-payer costs by rationalizing and improving the LDC sector. A serious look at LDC sector reform may yield a large proportion of the savings that the Ontario Government is seeking to produce. Rationalizing the sector to the smaller field of competitors envisioned by the 2012 Panel might also right size some of the players, permitting them to look beyond Ontario's borders to opportunities to become international players and innovators.

The Future Looks Sunny

As solar and storage options continue to decrease in cost and Canada's national power sector continues to pivot toward distributed energy resources, the future seems bright for renewable energy technologies in most key jurisdictions in the country. Wind, biomass, hydro, clean gas and demand-response capacity solutions can all play key roles in Canada's continuing energy transition. Despite the immediate pipelines crises, in the longer term we are optimistic that the country's continued stability, its strong reputation for good governance and the rule of law, its over-all economic health, the deep experience of its highly-skilled energy workforce and the tremendous strength of its innovation sectors make it highly likely that innovative and profitable new energy projects in Canada will continue to be built across the country and that these projects will continue to attract international interest and global investment.


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