The question of who should bear the financial risk for pricey carbon capture and storage (CCS) projects has become a stumbling block slowing the technology’s adoption in Canada.
It has been half a year since privately held Entropy Inc. inked a deal with the federal government that saw Ottawa agree to underwrite much of the risk for the company’s proposed carbon capture and storage project, The Canadian Press reports.
Entropy said it would go ahead with its $49-million second phase of the project—located at parent company Advantage Energy’s Glacier gas plant in Alberta—after the two parties signed the first-of-its-kind deal. Called a “carbon offtake agreement,” or “contract for difference,” the deal was hailed by CCS proponents as an example of what would need to be done to begin addressing the barriers to widespread rollout of the technology.
But six months after the Entropy agreement, not a single other company has successfully negotiated a similar deal, CP writes. The bulk of carbon capture projects proposed for Canada still only exist on paper, with final investment decisions yet to be made.
CCS proponents say the technology, which has been under development for decades, can reliably trap harmful greenhouse gas emissions from oil and gas development and other industrial processes and store them deep underground. The Pathways Alliance, whose members account for about 95% of Canadian oilsands production, insists carbon capture is the key to successfully decarbonizing their sector.
But the CCS industry freely admits the technology won’t be ready in time to meet even a 2035 target date for widespread application, much less the 2030 deadline the Intergovernmental Panel on Climate Change (IPCC) has set to reduce global greenhouse gas emission by 45%.
And last month, the Institute for Energy Economics and Financial Analysis concluded that the showcase system at Boundary Dam CCS plant in Saskatchewan was capturing just 57% of the carbon dioxide from the coal plant to which it’s attached, just under two-thirds of the 90% the project has consistently promised. Moreover, “all the carbon dioxide (CO2) captured at the plant is used for enhanced oil recovery (EOR) that injects captured CO2 into the ground to extract more oil,” analysts wrote at the time.
While technical problems continue to plague the industry, CP says the holdup on funding comes down in part to a simmering disagreement between government and industry over the perceived financial risk of CCS investments, and differing opinions about how much of that risk should be borne by taxpayers—especially with oil and gas companies raking in obscene profits.
“If you’re the government, you want to make sure the money that taxpayers are paying is being spent wisely,” said Entropy CEO Mike Belenkie. Last March, the IPCC identified solar, wind, and methane reductions in oil and gas as the wisest investments to deliver the fastest, most affordable emission reductions by 2030. It cited CCS and nuclear generation as the slowest and most expensive.
Belenkie told CP that not all carbon capture projects are the same. Their cost can vary widely based on factors like the intensity of the emissions being captured and whether the site has access to local underground storage or must invest in pipeline transportation.
“For carbon capture and storage to work, there has to be a relentless focus on picking the best projects,” he said.
Captured carbon doesn’t have any value on its own as a product, but can lower a company’s own carbon tax expenses by reducing its overall emissions. In addition, companies that deploy CCS can generate carbon credits to sell to big polluters looking to offset their own emissions.
But companies have said in order for carbon capture projects to make financial sense, they need some kind of assurance that a future government won’t come in and eliminate the industrial carbon price, or that the bottom won’t fall out of the carbon credit market 10 years down the road and remove the expected return on investment.
That’s where carbon contracts for difference, or carbon offtake agreements, come in.
The federal government, through the C$15-billion Canada Growth Fund, has committed to reaching such agreements with emitters who deploy CCS—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, though, appears to be at what “strike price” these contracts will be triggered. 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 its 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 make a go of its project, other proponents are likely seeking a significantly higher strike price, said Clean Prosperity Executive Director Michael Bernstein.
“What the Canada Growth Fund has been trying to do is bespoke negotiations with various emitters, prioritizing projects that they think are particularly good value for taxpayers,” Bernstein told CP.
“It means they could face disagreements with companies, as I believe they did with Capital Power around what the appropriate price was for that project.”
Earlier this spring, Edmonton-based Capital Power cancelled plans for a proposed carbon capture project at its Genesee power plant, saying while the project is technically viable, the economics don’t work.
The Pathways Alliance, which is proposing to build a C$16.5-billion carbon capture and storage network for Alberta’s oilsands, also has yet to successfully negotiate a carbon offtake agreement with the Growth Fund.
In a February report, global consultancy Wood Mackenzie warned there is a real chance of the Pathways project being “delayed and potentially scuppered” if industry and the federal and provincial governments cannot come together to underwrite the risk that exists—and, ultimately, to continue subsidizing the companies over the entire life of the project.
At a recent investor update, an executive for Pathways Alliance member Suncor Energy Inc. reiterated 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 an expanded range of carbon offtake offerings tailored to different markets and their unique risks and opportunities. It has said the Canada Growth Fund—which still has $6 billion left earmarked for contracts for difference—will explore developing ready-to-go contracts for certain jurisdictions, so that each contract doesn’t have to be negotiated from scratch one by one.
That would go a long way toward removing investor uncertainty, Bernstein said.
“There are various ways you could do this, but Clean Prosperity’s recommendation is to have a standard strike price,” he said.
“You would basically design a contract that says, ‘Come one, come all, at $100 a tonne’ or whatever price you choose and then let everyone that’s cheaper than that come and fill it,” 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 industry to step up and help carry the load.
“The federal government expects all companies who have committed to CCS projects to move as quickly on these projects as the climate crisis requires,” Svonkin said.
As far back as May, 2022, with oil and gas companies already raking in record profits, Environment and Climate Minister Steven Guilbeault said CCS proponents shouldn’t expect further federal subsidies to prop up their projects.
This report by The Canadian Press was first published June 4, 2024.
