North America Report: Emissions market starts to take shape

Applied to the competitive electricity market operating in the Canadian province of Alberta, Canada's proposed carbon emission reduction strategy would make wind power the cheapest electricity generation along with hydro power. That strategy, however, may never see the light of day if the US introduces its cap-and-trade market for emissions.

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Wind energy generators will be among the winners when the Canadian government's greenhouse emissions reduction strategy is applied to Alberta's competitive electricity marketplace, says a new analysis, but whether the federal plan actually survives in light of US action on climate change remains in question. While Canada is choosing an emissions intensity approach, which measures reductions per unit of production, the US is leaning towards a cap-and-trade market for emissions. Canada may have to fall in line with whatever direction its largest trading partner takes.

By 2010, the Canadian government wants an 18% cut in emissions from 2006 levels, followed by a 2% reduction per year. Ultimately, the government expects to get to a 20% cut in absolute emissions below 2006 levels by 2020. In Alberta's largely fossil-fuelled electricity system, the cost to industry "could add up to as much as C$2-3 billion a year," says Duane Reid-Carlson of EDC Associates, an electric industry analyst based in Calgary.


Wind, hydro and natural gas co-generation can expect to earn emissions credits that will see their prices relative to coal decrease. EDC expects that by 2018 those credits will be worth C$42 MWh for wind and hydro, making them the two lowest cost generation sources in the Alberta market. "Clearly, the order has switched very substantially in terms of who is the lowest cost producer," Reid-Carlson told a recent meeting of the Independent Power Producers Society of Alberta.

Coal-fired generation, which makes up about half of Alberta's supply mix, will see its relative price rise. Because of how Alberta's power pool works, with the hourly price set by the bid of the last generator to be dispatched, coal producers will have trouble flowing those costs through to the market. EDC's forecast shows the pool price will be about C$20/MWh higher in 2020 than it would have been without emissions charges, but that is only about half the cost rise faced by the biggest emitter.

"The conundrum is that these price increases, even with our forecast of greenhouse gases, don't reflect the total cost levied on some of the generation types. That is a significant issue for the coal generating fleet, which is how do you recover your costs? That becomes a problem," says Reid-Carlson.

The question facing potential investors right now, though, is whether Canada's approach to climate change will have to change to align with the plans of its large neighbour. Reid-Carlson thinks it will. "Given the current direction of where discussions are going, our emissions intensity policy will probably be replaced by something like cap-and-trade to align with other jurisdictions, says Reid-Carlson."

Timothy Juliani of the Virginia-based Pew Center on Global Climate Change agrees. He points out recently introduced US climate change bills have the proviso that international trading can only happen with countries that have comparable programs with absolute tonnage caps and offset standards. "While that is really directed at China and India, if the Canadian system were not of a similar make up you would also have a hard time."

Canada's Conservative government has long favoured a co-ordinated North American strategy for greenhouse gas emissions. But Juliani says the focus of US policy makers is now on establishing a domestic system. After that, the US will likely set its sights broader than North America. "Obviously we would like to see a co-ordinated international system that includes as many countries as possible in order to get the lowest possible price for carbon. As you increase the market, the marginal abatement costs should come down as more players come in. It would be great to have Canada involved in that market. But we'll need to harmonise the systems."

Emissions standards

Canadian power exports to the US could also be affected by climate action, a scenario that could favour wind energy producers. California has instituted a requirement that all new base-load generation and electricity imports do not emit more than 0.5 tonnes of CO2 per MWh, equivalent to a gas-fired combined cycle facility. "That is important because, as you all think about tie lines into the United States and selling power into the US grid, you're going to see more and more of this," says Juliani. "California tends to lead the nation in terms of environmental policy and we expect performance standards will be a part of overall US climate legislation."

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