Ontario gambling that feds will allow new gas plants despite net-zero targets

By Alan S. Hale October 21, 2022

Ontario has a lot riding on the outcome of the federal government’s forthcoming Clean Electricity Regulations, which will govern how Canada will alter its power grid to ensure net-zero greenhouse gas emissions by 2050.

The PCs are betting Ottawa will be accommodating to Ontario’s plan to build more natural gas plants to ward off a looming energy crunch, but organizations involved in the crafting of the regulations say that is far from certain. It could end up being a very expensive bet to lose, leaving Ontario scrambling for other options or potentially taking the feds to court.

“As a fundamental rule, we in electricity do not like uncertainty. Uncertainty is not good for electricity systems,” a worried David Butters, CEO of the Association of Power Producers of Ontario, told Queen’s Park Today.

The regulations intend to create a new Clean Electricity Standard, which would contain emissions performance targets set at a “stringent, near-zero value” for greenhouse gas (GHG) emissions. Although the regulations are set to officially come into force on January 1, 2025, they wouldn’t be binding on producers until 2035, giving them time to adapt their operations or close their facilities down.

Energy Minister Todd Smith‘s office didn’t address questions from Queen’s Park Today on how the province would respond if new federal regulations effectively kill the possibility of building new gas plants, but said “an unreliable grid is a non-starter for our government.” (Government of Ontario)

The concern is that the emissions targets could be so stringent they would make the business case for new gas plants impossible — and even if Ontario were to build them anyway, they would be forced to close when requirements become enforceable in 2035.

Butters and other energy industry sources told Queen’s Park Today Ontario must be allowed to use natural gas as a “transition fuel” to help fill the gap in electricity production capacity as society becomes increasingly electrified. Gas plants would act as a kind of backup, used to reliably generate electricity during times of high demand — the “hot-hot days or the cold-cold days” as one industry source put it.

Ontario’s Independent Electricity System Operator (IESO) agrees, recommending this month the province use natural gas plants to provide 1,500 MW of energy to keep up with demand by 2025-27. It warned the alternative is that Ontario could face rotating blackouts to stabilize the grid.

But adding new gas plants will increase GHG emissions, contrary to the federal government’s goals. IESO data projects that with the new natural gas production electricity system, GHG emissions will rise from 3.6 megatons of carbon dioxide equivalent emitted in 2021 to a peak of 18.6 megatones by 2041. Meanwhile, the federal net-zero plan aims to have a 108-megaton reduction by 2030.

Feds’ net-zero credibility at stake

York University’s Sustainable Energy Initiative chair Mark Winfield said this puts the federal government in a difficult position.

“This is more than a 10 per cent deviation from the [federal] plan, so it’s a very good question on what happens from here,” said Winfield. “If they allow people to build new gas plants, it raises some pretty fundamental questions about how serious they are about achieving a net-zero grid by 2035 and achieving their 2030 targets, because electricity is the place where they expect to see the largest reductions in emissions.”

Bryan Purcell from the Atmospheric Fund — another organization providing feedback on the new regulations — agrees. Ottawa, he said, cannot easily allow Ontario to push ahead with new natural gas plants without badly undermining its own goals.

This would be particularly bad news for Ontario because Energy Minister Todd Smith has already promised compensation to companies that agree to open up a gas plant, even if it is shuttered in 2035 when the new regulations become legally binding.

Purcell is referring to a section of Minister Smith’s directive to the IESO which states that if a “project is unable to comply with such laws or regulations in order to continue meeting its obligations under the [provincial] contract,” they can shut down their facility, “while retaining payments under the contract.”

When the Liberals cancelled the contracts for two gas plants in 2011, prompting the eponymous scandal, the final cost of pulling the plug was around $1 billion.

Purcell said the province had no choice but to assure energy producers they will get paid should regulations force the plants to close because that is the likeliest outcome. The PC’s track record of cancelling contracts out from under other projects — including 750 renewable energy contracts early in their first term — hasn’t helped confidence either.

“Without a contract clause like that to compensate for the regulatory risk, you wouldn’t get natural gas projects bidding in the procurement. Asking private entities — or public entities, as the case may be — to bear that risk, it would be hard to rationalize building new plants or get the necessary financing,” said Purcell.

Back at the power producers association, Butters said he’s not sure that promises of compensation will be enough to find lenders willing to finance new gas plants if there was a risk they would have to shut down later.

“Would it be financeable? That’s where the issue is,” said Butters. “What if you go ahead and build something and are not able to recover the cost of the investment? No one is interested in losing money.”

Winfield noted there may be one way out of this problem for Ontario.

The federal government proposes that “newer” natural gas facilities built prior to 2025 will be able to continue operating past the 2035 deadline for meeting emissions targets “for a short prescribed duration,” the length of which will be determined when the first draft of the  regulations are published by the end of the year.

“That may be part of what Ontario is up to here,” he said. “They’re trying to get in under this deadline, which hasn’t been finalized yet.”

But Purcell poured cold water on that idea, noting the IESO has already estimated the plants would be completed in 2026 or 2027. There is no way for the province to build natural gas plants quickly enough to qualify for that deadline, he said.

“If they’re not already under construction right now, there is no realistic way to have them constructed by the end of 2024,” he said.

Province should push for later deadline: Butters

One industry source said any new gas plants are likely to be built on the sites of existing natural gas plants in Ontario. Possibilities include the Portlands Energy Centre in Toronto, which has sufficient land, as does the Lennox Generation Station in Napanee and another facility in Windsor.

There are also former coal plant sites, some of which are still hooked up to the grid. For instance, the Lambton Generation Station was recently imploded and is set to become an unused brownfield and could be another good choice.

Butters notes that the feds are soon expected to hold environmental roundtable discussions on the upcoming regulations, including with members of the provincial government. He argued that would be the time for the province to argue to have the 2025 deadline pushed back.

“This is something where the province has to get together and have further conversation about,” said Butters.

He also said that other exemptions for emergency circumstances that are “extraordinary, unforeseen and irresistible” have also been floated.

Minister Smith’s office didn’t address questions from Queen’s Park Today asking how the province would respond if the new regulations effectively kill the possibility of building new gas plants, but said “an unreliable grid is a non-starter for our government.” A spokesperson added the province isn’t looking to give producers carte blanche to flout the new regulations.

“Any natural gas-fired generation projects that are successful in these competitive procurement processes will be required to submit GHG emissions abatement plans should new laws or regulations on GHG emissions come into force, including considerations for operating in special circumstances such as emergency events, if applicable,” said a spokesperson.

For his part, federal Environment Minister Steven Guilbeault‘s office argued new regulations are “technology-neutral,” so the province can use natural gas as long as it takes steps to mitigate the GHG emissions.

“Co-firing fossil fuels with non-emitting fuels, completely switching to these non-emitting fuels, such as hydrogen, ceasing operations, or installing abatement technologies — the regulations will not be prescriptive on which pathway should be taken,” a Guilbeault spokesperson suggested.

Nonetheless, the issue could end up in court, sparking yet another fight for the federal government with a province over the constitutional limits of imposing national environmental standards.

“There are a lot of questions about … constitutional issues surrounding who has the constitutional authority to do what. It all has to be worked out,” said Butters.