Thursday, December 28, 2006

“Conservatives go big on wind power”
Imagine it’s Monday, April 2, 2007. The Wind Power Production Incentive (WPPI), a federal government subsidy that pays wind power producers 0.8 cents for every kilowatt hour they feed into any Canadian power grid, wrapped up last Friday. It wasn’t renewed.

But rather than ending federal financial support for zero- and low-emitting electricity generation technology, the Conservative government ramped it up, big time.

The Conservatives announced a billion dollars worth of power production tax credits. Not a direct subsidy like the WPPI, but a major incentive nevertheless to any power company looking to quickly buy down the capital cost of an expensive generating plant. It’s a major boost for the Canadian wind power industry.

After skimming the Conservatives’ press release, power experts will surely point out that there’s no way wind generators in Canada will ever earn so much from electricity sales that they owe a billion dollars in taxes. But when the experts read the fine print in the press release, they’re impressed.

The press release puts wind at the forefront of its message, but in reality wind is just one of the technologies that qualify for the tax credit. Nuclear and gasified coal also qualify.

As I have pointed out in this blog, nuclear is where we will get the biggest greenhouse gas (GHG) reductions in the electricity generation sector. And since every modern power system needs the ability to turn some generators off and others on in order to manage minute-by-minute transmission congestion problems and maintain system stability, every power system needs some form of generation capacity it can turn on and off at a moment’s notice. I.e., some of its generators must be gas-fired. Hence the government’s desire to also encourage investment in gasified coal generation: it provides the needed system flexibility while cutting the GHGs of conventional pulverized coal by two-thirds.

Therefore the government’s tax credit ensures major new investment in proven GHG-reducing technologies. This is no bet; it’s a sure thing.

From today (April 2, 2007) forth, every Conservative stump speech trumpets the Canadian government’s support for wind power, “and other low- or zero-emission technologies,” as the way forward on climate change.

That’s how I’d approach it if I were the Prime Minister. Good policy is good politics. But he’s the one who won the election, and it is his decision.

Wednesday, December 20, 2006

Industrial strategy and Kyoto implementation in Canada
Earlier this week Prime Minister Harper linked, for the first time in public, progress on climate change with a comprehensive national industrial strategy. He’s thinking big, and he’s on the right track.

The conflation of environmental progress with industrial strategy need not be overly complex. Electricity generation represents a fifth of Canada’s greenhouse gases (GHGs), transportation a quarter, and heat generation (particularly in Alberta’s oil sands) more than 5 percent. Together, these three broad activities pump over 312 million tonnes of GHGs into the atmosphere—over 40 percent of Canada’s annual total.

How can we reduce those emissions? By shifting more electricity generation toward low- and zero-emitting technologies, and by spurring consumer interest in hybrid gasoline-electric vehicles. The government’s strategy should be to encourage these developments.

I have argued in these posts that the way to do this is to emulate the American approach in electricity generation (see Backing the winners), and emulate the Ontario approach with respect to hybrid vehicles (see Suing the automakers).

Ontario is an excellent example of what to shoot for with U.S.-style incentives in nuclear generation. This province has chopped 12 million tonnes per year from its power generation sector since 2000, by returning laid-up nuclear power reactors to service.

If the government of Canada were to follow this route and support Ontario and other nuclear provinces, it would achieve major emission reductions—guaranteed. But would it reap the political benefits? As things stand now, not likely. The media has been climbing all over the Conservatives’ apparent confusion regarding Kyoto. Two days ago Harper announced federal support for a major hydroelectric project in Quebec. Not a single story linked this to climate change.

Which means it’s as much about communication as about policy. But it is possible to successfully combine the two. I’ll elaborate in upcoming posts. Stay tuned.

Saturday, December 16, 2006

Epic battle shapes up over power-sector emission caps in U.S.
Will a national cap-and-trade system be established in the U.S.? The answer depends on whom you ask. The two areas of the U.S. where a cap-and-trade system is either planned or about to be implemented—California, and the seven northeastern states that formed the Regional Greenhouse Gas Initiative (RGGI)—say yes. Fitch Ratings, a ratings service, says a national cap-and-trade system is imminent. So do a number of high profile senators, congressmen, and governors. And some observers of the public nuisance lawsuits against big emitters predict there will be a landmark ruling against a big emitter sooner or later.

But the devil is in the details, and that’s where those in the power industry who oppose cap-and-trade have the upper hand. Few prospective players agree on the basic rules of the game, even in cap-and-trade areas like the RGGI—although New York has said it wants to sell emission permits at auction rather than handing them out for free. (According to some, freely allocated permits are the reason the European Union’s Emission Trading Scheme had such a bad first year; see my November 12 post).

For example, to whom should emission permits be allocated: electricity distributors or generators? It is far from clear whether this market incentive would be more effective if targeted at one or the other. Who would—more to the point, who should—suck up the cost of permits? How quickly would this de facto carbon tax speed investment in nuclear and/or IGCC? Faster than the incentives the U.S. federal government has already provided, through the EPAct? Why not wait to see those results?

We in Canada need to pay attention to this. In fact, we should be actively involved: we trade electricity with the Americans. Emissions from their generating plants enter our airshed, and vice versa. There could be major commercial opportunities.

This question—allocating permits to generators or distributors of electricity—applies to deregulated electricity markets, where distributors and generators are usually separate companies. But the problem of how best to organize for-profit companies using understandable cost and service incentives has dogged deregulated markets everywhere. One of the biggest problems of deregulation has been figuring out the costs of transmission and distribution. A cap-and-trade system will add a further dimension of complexity. Opponents of cap-and-trade argue, fairly in my view, that governments need to really game these issues through before plunging headlong into creating an emission market.

Complexity becomes an even more powerful card in the case of regulated markets, where generators and distributors are different parts of the same company. Though the Federal Energy Regulatory Commission (FERC) could set rules that favour sales of low-emitting power across state or international boundaries (assuming the current or subsequent administration directed FERC to do so), state governments in regulated areas might have other ideas.

Lobbyists for coal-based utilities are working their federal and state government contacts furiously, sensing a shift in the political balance as a result of the November mid-terms. You can bet one of their main arguments is that cap-and-trade will drive retail power prices up. If this happens (they will surely point out), everyone will blame the government. Does any elected politician want to risk that?

Friday, December 08, 2006

Sunsetting wind power program spells opportunity for major emission reductions in Canada
In previous posts I have suggested extending the Wind Power Production Incentive (WPPI) to include other low- and non-emitting forms of electricity generation, including nuclear and coal gasification. But now I wonder if instead of a subsidy like the WPPI, a tax credit might be a more effective way of spurring investment. A tax credit would certainly be more palatable to the current federal government.

In terms of politics, framing this tax credit in a way that emphasizes that it is for clean electricity—including wind—would take some of the edge away from the fact that its chief beneficiaries would surely be nuclear and coal generators. In this way it might soften the criticism from the anti-nuclear, anti-coal crowd. As I have said, putting wind at the forefront of a government incentive program would be smart optics: windmills would provide gigantic physical evidence of our commitment to reducing emissions.

And if we take a good look at the very recent tax credit selection process in the U.S. (see the DOE’s press release, as well as recent posts in the Gasification and IGCC Forum), we could avoid some of the glitches that have muddied the debate in that country over whether gasification is still uneconomical.

To qualify for the WPPI, a project must be commissioned before this coming March. Does this mean the WPPI will sunset in March? If so, all the more reason to replace it with something more wide-ranging. The Kyoto debate will continue to rage between now and then, with the Conservatives working hard to come up with a workable and palatable plan to reduce industrial emissions. A move like this could bring the opposition into agreement.

Sunday, December 03, 2006

Backing the winners: how can Canada jumpstart capital investment in electricity infrastructure?
Faced with a massive turnover in capital stock in the electricity sector, together with growing environmental concerns regarding the use of coal as the primary generation fuel in North America, the U.S. government decided, in the Energy Policy Act of August 2005, to provide financial incentives for investment in low-and zero-emitting industrial technologies, especially in power generation. The intent of the EPAct is, in part, to spur investment in nuclear and coal gasification.

The incentives include loan guarantees and tax credits (for power production and advanced gasification; see the DOE’s press release), as well as construction delay insurance for nuclear generators.

Has it worked? Yes in some cases, no in others. The Internal Revenue Service has approved applications for projects totaling $1 billion in gasification tax credits. But the loan guarantee program is stalled as various players in and out of government argue over what the EPAct actually guarantees.

Some might argue that the gasification projects—whose generation industry proponents include the Southern Company and Duke Energy, favorite piñatas of the environmental movement—are yet more government handouts to profitable major emitters.

That might be true if coal gasification suffered from the same technological hurdles as biomass gasification (the Moby Dick of government-sponsored energy research all over the world). But it doesn’t. Coal gasification is miles ahead. And while its potential as a power-generation technology might still be somewhat over-stated—there are still economic and technological considerations impeding scale-up of gasification reactors to the 12,000 tons-per-day range, which they would have to reach in order to be competitive with modern pulverized coal generation systems—there is no denying gasification’s potential as a solution to the natural gas supply problem in North America. Most of the tax credit applications came from companies that use natural gas as a manufacturing feedstock, not as a fuel for power generation.

(A suggested solution to the economic impediments of gasification for power generation is polygeneration—i.e., converting gasified coal to chemicals and liquid fuels, in addition to electricity. This would help investors get more use out of their gasifiers, and could make the overall proposition more profitable.)

Moreover, when you have companies like General Electric, ConocoPhillips, Shell, and Siemens rolling out gasification reactors and power turbines—and big electricity market players like American Electric Power applying for licenses to build gasification plants for commercial power production—you know that gasification in power generation is a serious technology whose time may have come.

But the big question is will the gasification industry work out the scale-up problems before generation companies decide to go with what they know and replace ageing pulverized coal plants with new pulverized coal plants? And will this happen before the RGGI cap-and-trade system takes effect in the U.S. northeast, or the U.S. federal government imposes national emission restrictions on power generation?

In Canada, where we have similar investment/environment problems—and, thanks to our massive western coal reserves, similar opportunities—we could and should offer incentives similar to those under the EPAct. Alberta’s oilsands get all the bad press from the environmentalists but the province’s power generation sector is its biggest single emitter. Those emissions can only drop if generators build nuclear and/or low-emitting coal plants. If we want that to happen, let’s make it worth their while.

What form should these incentives take? Should they mirror those offered in the EPAct? Given that our federal finance minister, Jim Flaherty, has indicated he wants more private investment in infrastructure in Canada, this is becoming a hot topic. So I’ll take it up in subsequent posts. Stay tuned.