CALGARY – The question of who should bear the financial risk for expensive carbon capture and storage projects has become a stumbling block slowing adoption of the technology in Canada. It’s been six months since privately held Entropy Inc.
CALGARY – The question of who should bear the financial risk for expensive carbon capture and storage projects has become a stumbling block slowing adoption of the technology in Canada.
It’s been six months since privately held Entropy Inc. struck a deal with the federal government under which Ottawa agreed to assume much of the risk for the company’s proposed carbon capture and storage project.
Entropy said it would move forward with the second phase of the $49 million project – located at parent company Advantage Energy’s Glacier gas plant in Alberta – after the two sides signed the first deal of its kind. The agreement, also called a “carbon purchase agreement” or “contract for difference,” was hailed by many as an example of what needs to happen if Canada wants to see a significant rollout of carbon capture and storage.
But six months after the Entropy deal, no other company has successfully completed a similar deal. And the majority of carbon capture projects proposed for Canada still exist only on paper, with final investment decisions yet to be made.
Carbon capture, or CCUS as it is often called, captures harmful greenhouse gas emissions from industrial processes and stores them deep underground. Its deployment is widely seen as key to successfully decarbonizing the energy sector.
So what’s the delay? It stems in part from tension between government and industry over the perceived financial risk of CCUS investments, and differing views on how much of that risk should be borne by taxpayers.
“If you’re government, you want to make sure the money taxpayers pay is spent wisely,” said Mike Belenkie, CEO of Entropy.
He added that not all carbon capture projects are the same. Their costs can vary widely depending on factors such as the intensity of emissions being captured and whether the site has access to local underground storage or needs to invest in pipeline transportation.
“For carbon capture and storage to work, there must be a ruthless focus on choosing the best projects,” Belenkie said.
Captured carbon has no value in itself as a product, but can reduce a company’s own carbon tax costs by reducing overall emissions. In addition, companies that deploy CCUS can generate carbon credits that they can sell to major polluters looking to offset their own emissions.
But companies have said that for carbon capture projects to make financial sense, they need some kind of assurance that no future administration will come along to eliminate the industrial carbon price, or that the bottom won’t fall out of the carbon credit will fall. to market in ten years and take away the expected return on investment.
That’s where carbon contracts for difference, or carbon purchase agreements, come in handy.
The federal government, through the $15 billion Canada Growth Fund, has committed to such agreements with issuers deploying CCUS — essentially guaranteeing that if the price of carbon falls below a certain level in the future, the fund will pay the difference .
The sticking point, however, seems to be at what “strike price” these contracts will be activated. Entropy’s successful carbon offtake agreement saw the Canada Growth Fund agree to purchase up to 185,000 tonnes of carbon credits from Entropy for a 15-year term at an initial strike price of $86.50 per tonne.
That means if the market price Entropy can expect to receive for the captured carbon falls below $86.50, the Canada Growth Fund will step in and pay the difference.
While that assurance was enough to convince Entropy it could go ahead with its project, other proponents are likely seeking a significantly higher strike price, said Michael Bernstein, executive director of the nonprofit Clean Prosperity.
“What the Canada Growth Fund has tried to do is tailor-make negotiations with different issuers, prioritizing projects that they believe are particularly valuable to taxpayers,” Bernstein said.
“It means they could face disagreements with companies, as I think they did with Capital Power over what was the right price for that project.”
Earlier this spring, Edmonton-based Capital Power canceled plans for a proposed carbon capture project at the Genesee power plant, saying while the project is technically feasible, the economics don’t work.
The Pathways Alliance, a consortium of companies proposing to build a $16.5 billion carbon capture and storage network for Alberta’s oil sands, has also yet to successfully negotiate a carbon offtake agreement with the Growth Fund.
In a February report, global consultancy Wood Mackenzie warned that there is a real chance the Pathways project will be “delayed and potentially undermined” if industry and the federal and provincial governments cannot come together to underwrite the existing risk.
During a recent investor update, Pathways Alliance member Suncor Energy Inc. echoed the industry’s refrain that it needs more certainty before moving forward with “material capital commitments” for carbon capture.
For its part, the federal government has pledged to develop a broader range of carbon take-off offerings tailored to different markets and their unique risks and opportunities. It is said that the Canada Growth Fund – which has another $6 billion earmarked for contracts for difference – will explore developing off-the-shelf contracts for certain jurisdictions so that each contract does not have to be renegotiated one by one.
That would go a long way to removing uncertainty among investors, Bernstein said.
“There are several ways you could do this, but Clean Prosperity’s recommendation is to have a standard strike price,” he said.
“You would essentially design a contract that says, ‘Come one, come all, for $100 a ton’ or whatever price you choose, and then have whoever is cheaper than that come and fill it out,” Belenkie said.
In an emailed statement, Carolyn Svonkin – press secretary to federal Natural Resources Minister Jonathan Wilkinson – said the government is already investing more than $90 billion to help Canadian companies decarbonize, so it’s time for the industry to step in to take action and help carry the burden.
“The federal government expects all companies committed to CCUS projects to implement these projects as quickly as the climate crisis requires,” Svonkin said.
This report by The Canadian Press was first published June 4, 2024.
Amanda Stephenson, The Canadian Press
