Last year, we characterized 2022 as the “beginning of the Great Energy Transition.” Many regulatory and fiscal measures were either implemented or announced in 2022 to accelerate this transition. For 2023, we foresee some potential for movement in the transition in the area of electrification to meet Canada’s future energy requirements, and sequestration of carbon to facilitate continued production of oil and gas. However, 2023 may mark a new trend of increasing regulatory friction that risks slowing the pace of energy transition.

Electrification

In 2022, after years in development, the federal government enacted its Clean Fuel Regulations (CFR) , deferring their implementation into 2023, but increasing their stringency to require a reduction in the emission intensity of gasoline and diesel fuel by 15% by 2030. Some of this reduction may be achieved through the production of advanced biofuels, but most of the reduction will likely be achieved by the adoption of electric vehicles (EVs). The CFR were designed to encourage the development of EV charging infrastructure by creating clean fuel credits for the construction of EV charging stations. The credits can then be used by suppliers of conventional gasoline and diesel to meet their increasing reduction in carbon intensity. The EV charging stations will be required to fuel the growth in EV adoption caused by rising gasoline and diesel prices due to annual increases in the federal carbon tax and the CFR, as well as the proposed federal regulations announced at the end of 2022, which will require all new passengers cars and light trucks sold in Canada to be zero emission vehicles (ZEV) by 2035. It is currently believed that most ZEVs are likely to be EVs. In addition to EVs, increasing hydro-carbon fuel prices could incent the use of electrical heat pumps for space heating, displacing natural gas. The rate of this conversion was muted, however, by the federal government’s decision to exempt natural gas from the CFR. Regardless, achieving net zero greenhouse gas (GHG) emissions would require a huge shift in Canadian energy consumption away from hydrocarbons, to electricity generated by renewables and other low or non-emitting sources. In the last Canada’s Energy Future report, the Canada Energy Regulator (CER) estimated that to achieve net zero emissions (NZE), Canada would have to more than double its electrical generation capacity, largely through the addition of wind and solar power, backed up by storage.¹

Sequestration

All electrification to achieve NZE does not have to come from renewables. Electricity can still be produced using natural gas to achieve NZE by capturing and sequestering the carbon dioxide produced in underground reservoirs. Oil and gas producing provinces are believed to have vast geological storage potential to accommodate foreseeable sequestration requirements, making it feasible to continue to use natural gas to generate electricity at cumulative cost significantly less than more heavily relying on renewables. Wind and solar comes with significant costs associated with intermittency that must be overcome through the use of storage, which requires a lot of battery power, as well as greater transmission capacity. The Alberta Electric System Operator (AESO) estimates that to achieve NZE through the deployment of renewables would cost Alberta power consumers at least CA$52.1 billion, which would be CA$8 billion more than a scenario using natural gas and hydrogen (derived from natural gas) by capturing and sequestering the carbon dioxide they produce. ²

The more pressing need for carbon sequestration, however, is to accommodate continued industrial production. The chemicals, plastics, fertilizer, cement and oil and gas industries all produce large volumes of GHG emissions that are not directly associated with the generation of electricity. These industries face the most pressing need to reduce their emissions in order to comply with the federal government emissions reduction plan (ERP). For example, in 2022, the federal government announced that it would adopt legislation or regulations in 2023 that will require the oil and gas industry to reduce emissions by 42%, from 2019 levels, by 2030. ³ To the extent this is feasible without cutting production, carbon sequestration projects will have to be deployed at a massive scale by 2030. In order for this to occur, regulatory applications for carbon sequestration projects will likely have to be filed in 2023, in order to get construction approvals in time to complete construction of the necessary facilities before 2030.

Friction

The development and transmission of Canada’s energy resources faced growing regulatory friction for more than a decade, causing extended delays to the projects that did proceed, and the cancellation of many others that did not. Much of this delay was the result of concern about the environmental impacts of pipeline and oil and gas development. These environmental concerns were largely driven by a singular focus on climate change. The federal government has now put in place a framework of regulations and fiscal incentives aimed at facilitating the great energy transition to address climate change. However, regulatory approvals are still required for this energy transition to occur. What 2023 will determine, is whether the regulatory friction that thwarted oil, gas and pipeline development for more than a decade, will manifest itself in the regulatory processes required to permit the rapid energy transition sought by the federal government. There is a significant risk that it will.

Jurisdictional disputes over energy project development were the source of some of the delays to energy project development. These challenges have continued and are now targeted at the federal government’s jurisdiction to legislate and regulate a reduction in emissions to implement its ERP. The federal government withstood challenges to its carbon tax, but it will be returning to the Supreme Court of Canada in the spring of 2023 to try and uphold the Impact Assessment Act (IAA) against challenges stemming from the potential for that legislation to allow the federal government to move beyond taxation and broadly regulate GHG emissions from projects.

Even if the IAA withstands this latest challenge it, along with stringent provincial regulatory regimes, will apply to projects that are essential to the energy transition. They will have to be assessed in light of their environmental and social impacts to determine whether the GHG emission reduction benefits they are intended to achieve justify any negative impacts they risk causing. 

Electrification will likely face the greatest resistance in regulatory hearings considering new electrical facilities and the rate impacts of building these new facilities on consumers. This should not be surprising, as approximately 80% of Canada’s electricity production already comes from non-emitting sources, largely from hydro-electric dams and nuclear plants. Both these sources of electricity generation have caused significant regulatory friction because of concerns about their costs and environmental impacts, unrelated to GHG emissions. Wind and utility scale solar power projects have already experienced regulatory friction, and this can be expected to increase with the number and scale of these projects needed as part of the transition. Renewable energy projects in general, and wind and solar in particular, have a very low energy density, meaning they take up vast tracts of land. This causes both land-use conflicts and environmental impacts. These projects also have  finite lives that have started to raise concerns about reclamation and abandonment liabilities. The additional electrical transmission facilities required to connect all of the new generation to the grid might also be expected to encounter regulatory friction. Historically, electrical transmission lines have encountered more regulatory friction than oil and gas pipelines because of their larger and more visible footprints.

There will also be utility regulatory issues about the costs of electrification and the risk of reduced reliability. In its Energy Efficiency report issued at the end of 2022, the International Energy Agency (IEA) drew attention to these risks, stating:

“The share of electricity in the total energy consumption has been steadily increasing over the last ten years, rising from 15% in 2000 to 20% in 2020. As part of the transition to meet net zero goals, a rapid increase in electricity demand, fueled by renewable energy, is needed to power fuel switching from internal combustion engines to electric vehicles and from gas heating to heat pumps.

However, if unmanaged, this additional electricity demand will place huge strains on the power systems. This is especially true in systems with increasing levels of variable renewable energy sources.” ⁴

Finally, there will be issues associated with developing all of the materials required for the batteries that will be needed to power NEVs, and back up intermittent renewables. Our current energy system, based on oil and gas that Canada supplies for itself, provides us with the highest possible level of energy security and very low energy prices relative to the rest of the world. In late 2022, the federal government announced a critical minerals strategy to develop the resources needed to provide Canada with security of material supply required to support the energy transition. However, the scale of this development, which will include  large mines, will have the potential for environmental impacts that will  be assessed in regulatory processes, including the IAA if the Supreme Court upholds it and the federal government decides not to defer to provincial regulatory processes to avoid regulatory delay of these projects.

Sequestration projects do not hold the same potential for regulatory friction. They are unlikely to trigger the IAA, and these projects will occur in areas that have already been subject to decades of oil and gas development under the supervision of provincial regulators that have applied resource conservation principles to this type of development. There will be a small risk of in-situ resource conflicts to the extent that different resource tenures have been issued by provincial governments, but it is unlikely that the scale any conflict would be unmanageable.

The main risk to sequestration is fiscal and policy certainty. Sequestration projects will require the investment of billions of dollars of private capital that requires a return. In Canada, the return has to be derived from a combination of fiscal incentives and regulations imposing a price on carbon. Fiscal incentives provide greater certainty than regulated carbon pricing, which is subject to being changed or unwound based on changing public sentiment. This risk of changing public sentiment is the same underlying risk that causes regulatory friction in the case of electrification. There is a risk that the environmental and social cost of a rapid energy transition will be either determined to be, or perceived to be, too great. This could lead to back tracking on the energy transition, which may become a trend in 2024 or later years.

For more information on this topic, please reach out to the author, Bernard J. Roth.

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1. Figure NZ.1, page 69, Canada’s Energy Future 2021  
2. Page 70, AESO Net-Zero Emissions Pathways Report
3. https://www.canadaregulatoryreview.com/regulation-of-oil-and-gas-sector-ghg-emissions-is-it-a-crime-or-just-a-price-to-be-paid/
4. Page 70, IEA Energy Efficiency 2022