SUBMISSION TO ENVIRONMENT AND CLIMATE CHANGE CANADA

CLEAN ELECTRICITY REGULATIONS

NOVEMBER 2, 2023

Introduction

The Coalition of Concerned Manufacturers and Businesses of Canada (CCMBC) represents small- and medium-sized (SME) manufacturers and SME businesses in other sectors across Canada. We work with business members to actively promote the interests of manufacturers and other businesses through outreach to lawmakers, regulators, think tanks, the media and the voting public. The CCMBC seeks to advance policies to benefit SMEs, support and maintain healthy economic growth and keep good jobs in Canada.

The Coalition is very concerned about the policy direction that the Government of Canada has taken in its published statements concerning an “energy transition”, and especially that effecting such a “transition” in Canada’s electrical energy system may require costs that far exceed any credible calculation of the benefits. We consider that the proposed approach is based on false premises about global energy and environmental trends, about the feasibility and desirability of sacrificing Canada’s energy-intensive industries, and about the benefits of government-funded, centrally planned economic transitions compared to those that would be achieved through reliance on competitive market forces with limited, and highly targeted, governmental involvement. The implementation of measures to “decarbonize” Canada’s economy and electricity system could have profoundly adverse economic consequences that have not been adequately measured or considered. Many manufacturers have already left Canada for more competitive jurisdictions in the US and elsewhere, and this exodus will be worsened as the cost of operating in Canada increases with the so-called “clean electricity” policy direction.

General Background

The Canadian manufacturing industry plays an extremely important role in the Canadian economy, but that role has changed with time. This can be seen from the data in Table 1.

Table 1

GDP BY CANADIAN SECTOR TWENTY YEAR CHANGES

(MONTHLY TOTALS IN JUNE- BILLION 2012 DOLLARS)

Industry sector              June 2002    Share(%)    June 2022    Share(%)

All industries                  1,413           100             2,054           100

Goods-producing             474             34               586               29

Service-producing           938             66               1,465             71

Industrial production        354             25               400               19

Manufacturing                208             15               194                 9

Source: Statistics Canada

The table illustrates some key points. Notably, over the last two decades:

· the goods-producing sectors of the Canadian economy have increased their income by 24 per cent (from $474 billion to $586 billion), but declined as a share of all-industrial income from 34 per cent to 29 per cent.

· the income of the manufacturing sector has actually declined in inflation-adjusted terms from $208 billion to $194 billion, and has declined as a share of all-industry income from 15 per cent to only 9 per cent.

The decline in manufacturing sector income has been accompanied by a decline in employment in the sector, which fell from 1,978,000 in 2001 to 1,514,000 in 2021, a reduction of 464,000 permanent, well-paying jobs. All is not well in Canadian manufacturing.

The future for manufacturing and for the Canadian economy as a whole under current policies and trends is also less than promising. A recent report by the OECD secretariat examined the long-term scenarios to 2060 for the entire OECD group with a special focus on fiscal sustainability and risks, and paid special attention to trends in productivity. The study projected slowing GDP growth in most of the OECD countries, but with considerable differences among them. Considering the trends in labour efficiency, capital per worker, and potential employment (given aging populations) the study assessed potential GDP per capita. While Canada ranked 15th in GDP per capita among OECD countries in 2021, its stagnating economy and productivity will drop it to 21st or lower by 2060. Moreover, Canada ranks last among all 38 OECD member countries in the projected rate of change in GDP; in fact, average per capita income in Canada by 2060 is likely to be lower than it is today, again based on the continuation of current policies and trends. That’s potentially two generations of stagnating income per capita. If Canada continues to lose manufacturing and climate policies hollow out our traditional resource industries, things may be far worse.

The manufacturing sector in Canada offers significant opportunity for growth in income and employment but faces major challenges in terms of the cost of inputs, notably energy. If the cost of electricity rises relative to the cost of energy in neighbouring jurisdictions, this will place Canada’s remaining manufacturers at a greater competitive disadvantage, causing them to further decrease their investment in the country or to move their operations elsewhere, as has already happened in many cases.

The Presumptions Underlining the Clean Electricity Policy

The central presumption that appears to underlie this policy is that decarbonization of Canada’s electrical energy system is desirable, even when significant economic costs may be imposed on businesses and individuals and our electrical grid could become increasingly unreliable. CCMBC views this presumption as mistaken.

There have already been reports published by various provincial regulators and system operators that highlight serious problems. For example, the Independent Electricity Systems Operator (IESO) in Ontario has already provided to the government of Ontario two reports that indicate very clearly the problems associated with pursuit of the “net-zero emissions” or “decarbonization” objective. In the Decarbonization and Ontario’s Electricity System report of October 2021 and the Pathways to Decarbonization report of December, 2022, IESO set out its professional assessment of the costs and risks associated with decarbonization by 2050. The following, in our view, are some of the most compelling observations in those reports:

· Ontario’s electricity system today is 94 per cent emissions-free and contributes only three per cent to the province’s total greenhouse gas emissions.

· Natural gas generation plays a crucial role in the reliability of the electricity grid. It provides a range of services that no other resource today can provide on its own, including producing large amounts of power to meet high demand and running for extended periods when other resources are not available.

· Phasing out natural gas generation by 2030 would entail a capital investment of more than $27 billion and bring the cost of carbon reduction in the electricity industry to at least $464 a tonne (far above any reasonable estimate of the “social cost of carbon”).

· A “Pathways scenario” to decarbonization projects a system designed to meet winter peaks that are almost three times higher than those we experience today, and thus require an additional 69,000 MW of “non-emitting” supply and 5,000 MW in demand reduction from conservation. (“Conservation” is sometime a euphemism for demand destruction, the process whereby consumers are forced by higher prices to reduce their use.)

· The scenario includes an additional 17,800 MW of nuclear supply, and additional 17,600 MW of wind and 650 MW of new hydroelectric, plus an additional 2,000 MW of long-duration storage added in the late 2030s. It assumes that hydrogen becomes a cost-effective resource for meeting peak demand by 2036 and that new hydrogen capacity of 15,000 MW is available by 2050.

· This would require anywhere from 50 to more than 280 new transformer stations, at costs ranging between $5 billion and $10 billion. This would require new transformer stations to be built at the rate of up to 10 stations per year, a pace exceeding the addition of new stations over the last decade.

· The cost of building out the bulk 500 kV and 230 kV transmission systems to meet the Pathways scenario is estimated to be between $20 billion and $50 billion. This construction will pose “substantial” siting challenges. This is the understatement of the century.

· The bulk system expansion needed to enable decarbonization, including transmission, in this scenario would require an investment in the range of $375 billion to $425 billion.

The IESO reports did not include an estimate of the rate impact on electricity consumers, which was buried in an appendix. All of the foregoing is only related to one province, Ontario. Other provinces, notably Alberta, Saskatchewan and Nova Scotia, also rely heavily on natural gas and other fossil fuel sources. Phasing out these

fuels for generating electricity is not feasible by 2035 as the costs will be enormous and the risks to system reliability will increase greatly.

It should be apparent to anyone familiar with Canada’s electrical energy system that the costs associated with decarbonization vastly exceed the benefits. Considering that Canada’s electricity grid is already 83 per cent emissions-free and that Canada represents about 1.5 per cent of global emissions, bringing the grid to 100 per cent emissions-free would be hugely costly for miniscule impacts on global emissions. In the global context, they would be too small to measure. This should make it obvious that these changes are being pursued for reasons that are ideological and assumed to be politically popular but have no connection to facts or the alleged goal of avoiding global temperature increases.

Flawed Assumptions Behind the Decarbonization Objective

The scenario of complete decarbonization by 2050 in Canada is riddled with false assumptions about the costs of the measures required, the availability and costs of the technologies and the capacity of governments to centrally plan the economy to achieve revolutionary change in a period of 27 years.

To cite one example of a technological barrier, consider the prospects for hydrogen. It is highly debateable whether hydrogen power will play a major role in the future energy economy. Despite the investment of many billions of dollars in hydrogen power research, especially in the USA, the fundamental problems with hydrogen as an energy carrier remain. Consider, for example, the problems of transportation and distribution. Before hydrogen can be transported anywhere, it needs to be either liquified or compressed. To liquify it, it must be cooled to a temperature of −253◦C. At this temperature, refrigerators are extremely inefficient; as a result, about 40 per cent of the energy in the hydrogen must be spent to liquify it.

In addition, because it is a cryogenic liquid, still more energy would be lost as the hydrogen boils away during transport and storage. As an alternative to liquifying it, one could use high pressure pumps to compress it. This would “only” waste 20 per cent of the energy in the hydrogen. However, safety-approved steel tanks capable of storing hydrogen at 5000 psi weigh approximately 65 times as much as the hydrogen they can contain. Consequently, to transport 200 kilograms of compressed hydrogen, roughly equal in energy content to 200 gallons of gasoline, would require a truck capable of hauling a 13-ton load. In principle, a system of pipelines could, at enormous cost, be built for transporting gaseous hydrogen. But because hydrogen is so diffuse, with less than one third the energy content per unit volume of natural gas, these pipes would have to be very big, and large amounts of energy would be required to move the gas along the line.

Another problem is that hydrogen can penetrate readily through the most minutely flawed seal, and can actually diffuse right through solid steel itself. This would create ample opportunities for much of the hydrogen to leak away during transport. As hydrogen diffuses into metals, it also embrittles them, causing deterioration of pipelines, valves, fittings, and storage tanks throughout the entire distribution system. Unless very carefully monitored, the pipeline system could become a continuous source of catastrophes. Given these technical difficulties, the implementation of an economically viable method of hydrogen distribution from large scale central production factories is essentially impossible.

The net-zero by 2050 goal is an arbitrary target conceived to meet another arbitrary target; that is, to keep global temperature rises to less than 1.5 degrees. The goal is only meaningful if it is pursued by all countries, but as of today not one country in the world is “on track” to meet even the goals they have set. Global emissions growth is being driven by the aspirations of billions of people in other countries for access to the modern energy services and improved quality of life that we take for granted. Nothing that Canadians do will suppress those aspirations. Further, net-zero rests upon the rapid commercialization of many technologies that are either immature or simply not proven, such as hydrogen, carbon dioxide capture and storage, second generation biofuels, and small nuclear reactors. The continued pursuit of present policy will not only raise prices to unheard-of levels but it will lead to a future of rationing, oppressive regulations and economic decline.

It is important to move from pretending that we can control the climate to acknowledging that we first need to understand the climate. Even more to the point from a policy perspective, governments need solutions that provide more opportunity for people to thrive. The Canadian government has an opportunity to chart a new and better climate policy. The touchstones of that policy would be environmental responsibility, the pursuit of prosperity, reliability and resilience.

One of the best ways to improve electricity planning and policy making would be to establish realistic timeframes for decisions and actions. For far too long climate and electricity policy has been steered by the fiction that action is desperately urgent; that decisions must be taken at breakneck speed; that doing anything is better than doing nothing; and that there is no time for debate; no time to plan; no time for normal prudent analysis. The fact that virtually none of the climate goals set domestically in Canada or by international agreements such as the Paris Accord have ever been met demonstrates the futility of this approach.

The goal of electricity policy and planning should be defined in terms not of emissions reduction targets but of improved environmental quality through genuine pollution reduction and the preservation and advancement of prosperity, through assurance of safety, reliability, flexibility, affordability and operability. Electricity policy need not, and should not, become an instrument of social policy and “social justice”. There are many other instruments of public policy available to achieve those objectives.

The assumption that electricity demand will grow substantially in future may well be misplaced. It is certainly based on a long series of assumptions, many of which could turn out to be false. The potential renewable energy and other supply choices being championed today by various self-interested groups would produce trivial emissions while operating, but have large up-front capital (and environmental) costs. There is an alternative in preparing for a possible higher demand scenario that has low capital cost, and perhaps higher operating costs. That alternative is natural gas plants.

The Policy and Planning Process

Current discussions on electrification assume a greater role for political decision-makers rather than technical experts who can credibly predict future demand and how the system needs to change to ensure supply. Very little is left to markets, which are much more accurate in gauging what is needed than political whims. Many provincial energy systems operators are subject to legislated and political directions that control independent actions and decisions at every turn. The politicization of the entire decision-making process impairs it and subjects it to the vagaries of short-term political considerations rather than the attainment of long-term public interest objectives.

The system is made worse when politics determines the rates charged for electricity rather than considerations related to the underlying costs and benefits. Specifically, using billions of dollars a year in taxpayer subsidies serves to hide from the consumers the true costs of the electricity decisions being made. A key objective of electricity system reform should be a phased reduction in taxpayers’ subsidies.

Deciding what proportion of every province’s energy mix should be provided by any one generation source should not be the responsibility or function of politicians, government bureaucrats or the self-interested renewable energy industry, but rather the responsibility of independent regulators based on technical facts and market considerations.

The composition of the federally-appointed Canada Electricity Advisory Council is also problematic. It is composed entirely of various electric utilities and regulatory bodies across Canada, First Nations groups and a few representatives of organizations that make their living from preaching environmental extremism. There are no representatives from consumer groups, taxpayers or business groups who will be footing the bill for this extensive exercise. At a time when affordability is the number one issue for Canadians, this is a serious oversight.

Other Issues

A customer-centered approach must include customer choice. Customers, including CCMBC members, must be free to make their own decisions about energy use that rely on their knowledge, experience and needs. A government central planning top-down approach may result in the further destruction of valuable manufacturing companies and jobs.

Transition and electrification is a political initiative and should be paid for by the government using tax money. In other words, if a transition were justified, the costs of it should be borne by the federal treasury in a transparent manner, so that voters can see what is being spent and make their own judgments as to whether the expenditure is justified in the public interest. The massive spending on climate initiatives to date have been anything but transparent and no analyses of their benefits in relation to their costs has been made available to Canadians.

Public opinion polls indicate that about half of Canadians do not want to spend any additional money in the form of taxes or higher costs of goods to mitigate the effects of climate change. Others are willing to pay relatively small amounts of additional taxes to mitigate the effects of climate change.

Yet in Budget 2023 the federal government announced that over the period 2016 to 2022, it had spent over $120 billion on climate measures and that it planned to spend another $120 billion on climate measures over the next decade. Provincial governments have spent large amounts but these have not been published. The federal government expenditures do not include the costs to taxpayers and rate payers of climate policy-inspired regulations. It is clear from this that Canadian citizens already are paying far more than Canadians have shown themselves willing to pay.

CCMBC members are concerned that the government plans for energy transition away from natural gas will proceed without adequate sources of energy in place that are as reliable and flexible as natural gas. Any reduction in reliability will have serious economic consequences for Canada at a time when our economy is already uncompetitive with other countries.

The recent Supreme Court decision to strike down the Impact Assessment Act on the basis of it being unconstitutional has altered the legal landscape around these types of legislation. Given the clear recognition of electricity systems being an area of provincial jurisdiction in Canada’s Constitution, the Clean Electricity Regulations could well also be considered unconstitutional. The federal government should not proceed with this initiative until the courts have ruled on its constitutionality.

Conclusions

The electricity system in Canada should return to being managed by energy professionals who focus on ensuring an adequate supply of electricity at reasonable cost. The politicization of the system over the past couple of decades to pursue unrealistic ideological agendas has led to increased costs, decreased reliability, uncertainty for investors and a reduction in competitiveness for the Canadian economy. Low cost, reliable electrical power used to be a competitive economic advantage for many parts of Canada and a benefit to its citizens. We need to return to that beneficial model instead of jumping on to politically trendy bandwagons that have negative medium- and long-term implications for the country and accomplish little for the environment.