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What could cap and trade mean for energy costs?

May 2015

  • The Ontario Government’s cap and trade system will not impact the cost of electricity for Class B customers. For Class A customers able to mitigate half of their Global Adjustment payments, the maximum impact, based on Aegent’s analysis, would be about CAD $6/MWh.
  • The impact on natural gas costs is unclear but based on an initial threshold of 25,000 tonnes of CO2 per year, large businesses in steel and cement manufacturing as well as power generation from fossil fuels would be affected.

In April, the provincial government announced that it intends to implement a cap and trade system to limit greenhouse gas pollution in Ontario. A cap and trade system will affect energy consumers since energy consumption is the major source of carbon emissions.

Impact on electricity costs

The government’s carbon pricing scheme will not impact the cost of electricity for Class B customers in Ontario.

With the retirement of the coal fleet, natural gas and oil-fired generators are the only utility-scale generators in Ontario subject to carbon pricing. During the last two years, these types of generators set the Hourly Ontario Energy Price (HOEP) approximately half the time. Assuming an average market heat rate of 7.8 MMBtu/MWh during these times, and the Environmental Protection Agency (EPA) emission factor of 0.05302 tonnes CO2/MMBtu, approximately 0.4 tonnes of CO2 per MWh were released into the atmosphere.

As of April 20, 2015, the market price of CO2 was USD $12.70/tonne CO2 in California, or about CAD $15.50/tonne. If this carbon price is factored into the marginal cost of fossil fuel generation in Ontario, HOEP would have been on average about CAD $3/MWh higher during the last two years. When Bruce and Darlington are being refurbished and Pickering is retired, natural gas generation will likely set the HOEP for more hours and at a higher average heat rate. If natural gas resources set HOEP 75% of the time at an average heat rate of 9.5 MMBtu/MWh, the average HOEP impact of carbon pricing would be about CAD $6/MWh. If carbon prices also double over this time period, the impact on HOEP would be CAD $12/MWh.

Unlike changes due to deemed gas costs, a higher HOEP would reduce the Global Adjustment (GA) by a commensurate amount. The impact on Class B customers would be zero. In contrast, a Class A customer has a greater exposure to increases in HOEP, depending on the degree to which they can mitigate their GA costs. If a Class A customer is able to avoid half of their GA payments, the maximum impact of carbon pricing, based on this analysis, would be about CAD $6/MWh.

Impact on natural gas costs

For emitters in Ontario that are not in the electricity generation sector, cap and trade would still affect those that emit over a certain threshold. The Quebec and California cap and trade systems, which Ontario plans to join, have a treshold of 25,000 tonnes of CO2 per year. For the sake of argument, assume that the emission factor to be used in Ontario will be the same as the EPA’s (0.05302 tonnes of CO2/MMBtu) and the price will be CAD $15.50/tonne CO2. For an emitter whose source of emissions is running a natural gas-fired generator, burning more than about 500,000 GJ/year will exceed an annual threshold of 25,000 tonnes. In other words, if the emitter burns over 1,360 GJ/day of natural gas, then it will emit annually more than 25,000 tonnes of carbon dioxide and be subject to cap and trade.

In addition, the emission factor varies from one fuel to the next. For example, the EPA’s emission factor for liquid propane is 0.06287 tonnes CO2/MMBtu. Given the energy content of 0.0242 MMBtu for every litre of propane, then an emitter whose sole source of emissions is liquid propane consumption would need to consume in excess of 16.43 million litres of the fuel per year (~ 45,000 litres daily) to exceed an annual threshold of 25,000 tonnes and be subject to cap and trade.

It is expected that the government will release more details over the next few months including emission allowances and the sectors subject to cap and trade. Until these details are known, the full impact on natural gas costs is unclear. Based on an initial threshold of 25,000 tonnes of CO2 per year, large businesses in steel and cement manufacturing as well as power generation from fossil fuels would be affected. Ontario may at some point also open the cap and trade system to emitters that are below the threshold (including individuals) by letting them obtain allowances and participate voluntarily in the carbon market as is being done in Québec.

Carbon Pricing and Its Impact on Electricity Prices Read more »