The Role of Market Design on the Path to Net Zero

Sheldon Fulton

President, Forte Business Solutions

Achieving Net Zero and Other Worthy Social Objectives

The electricity market has a key role to play in Alberta’s Net Zero objectives both for the electricity grid and for other key economic sectors. Accordingly, any discussions on Net Zero need to examine the best utilization of electricity to facilitate opportunities for other emissions intensive industries such as oil and gas, agriculture, transportation, forestry, mining to reduce their carbon intensity as well as for electricity generation. Each of these are key industry sectors to the Alberta economy and should not operate in opposition to each other as Net Zero silos, but instead should function in markets where the industry sector with greatest demand can be satisfied with the most efficient supply of emissions reductions.

Currently the electricity generation sector emits an average of 0.53 tonnes of CO2 per MWh (current emissions factor), or 45 million tonnes on 85,000 GWhs of supply. Reducing this by 25 million tonnes per year and getting to a 0.25 emissions factor (through deployment of renewables, energy efficiency, increased use of combined-cycle or co-generation gas facilities) by 2030 can be readily achieved and the generation sector is well on its way to these levels. The following graph from the MSA sets out this decrease from an Intensity Factor of 0.95 in the early 2000’s to around 0.80 by 2014 to 0.65 to 2019, with a continued slide toward 0.50 by 2024.

The key question for Albertans is what is the relative value to the Alberta economy of pushing this below 0.25 beyond 2030 (at potentially significant costs to ratepayers) as compared to harnessing electricity to achieve significant reductions in emissions in other sectors through offset displacement?

Before we get too deep into the potential for Net Zero and the role of electricity markets we need to deal with a lot of the misunderstandings currently propagated about emissions, reductions and offsets. The product that should command the highest value in the emissions reductions universe is sadly the one that is most frequently vilified, the Carbon Offset. The product that seems to be championed broadly is the REC or Renewable Energy Certificate.

But in terms of value, the Carbon Offset does actually result in a reduction of CO2 emissions – one unit of eligible carbon offsets is one tonne of reduced CO2. By way of contrast, the REC from a hydro proficient jurisdiction such as Quebec generally cannot trace a genealogy to a carbon reduction’ neither through direct displacement of higher emissions emitting electrical generation nor through indirect displacement such as powering EVs. And Nirvana is supposedly achieved through an ever-increasing carbon levy that has no direct claim to a carbon reduction other than through a problematic relationship between an increased cost for a direct purchase (natural gas levy) to a quarterly rebate deposit from CRA which may or may not be used to pay for the higher priced heating costs.

But the current evolving marketplace tends to favour RECs and discredit Offsets. If we ever want the achieve Net Zero, wherein the ‘Net’ means the sum of emissions minus offsets equals zero, then we have to change social perceptions and government cow tailing.

The government of Alberta, and hence those responsible for the electricity market and advocating for a Net Zero grid, need to assess whether the current market design can achieve such objectives. Furthermore, they must consider whether this can occur without continued and increasing severe costs to consumers for not just generation but for transmission, distribution and the Net Zero premium. A functional market, after all, requires both buyers and sellers to be treated fairly and equally, otherwise it will emit contradictory price signals and will be subject to market abuses.

Some questions that need to be considered include:

• What role do renewables play in reducing the 45 million tonnes of annual carbon emissions from the electricity sector, and how does a continuously reducing emissions factor affect the investment decisions?

• What role does rooftop solar play in adoption of EV vehicles to displace emissions from the transportation sector and how is this accounted for in the broader scheme of things?

• How critical will small nuclear reactors become in production of hydrogen as a fuel substitute and does the current market design enable such investments?

• What is the 'offset' potential for a Net Zero grid in isolation? Does it mean that electricity is no longer a source for offsets? And if this is the case will the market lose the support of other high emissions industrial sectors like oil and gas and forestry?

This is one of the reasons that I think the carbon emissions market needs to become a central part of an electricity market redesign. I have had discussions with people from forestry, oil and gas, and renewable providers (solar and wind) but there is very little understanding of how an emissions offset market would deal with electricity at Net Zero. The perception is that a wind project would still have offset benefits for sale to other industrial sectors yet the emissions reductions, by definition, would be zero.

The implications of this for renewable developers have not been considered in the market designs. This is the ultimate Catch 22. As we continue to produce more electricity from renewables so that we get to Net Zero for the electricity grid our supply of offsets to sell diminishes. And this, of course, changes the P&L for these projects in the long term.

Admittedly the renewables could still sell RECs into the California market, but that doesn't help the other key Alberta industries. The problem is a classic supply/demand conundrum where the increase in price (carbon price) results in diminishing the supply rather than increasing it as more renewable projects are built. As the carbon price increases the demand increases, since oil and gas and forestry sectors, for example, need more offsets to meet targets.

Market design can solve these problems if the will is there to look at emissions reductions in less fragmented manner. A market design that embraces carbon intensity as the key pricing mechanism and that rewards intensity reduction from any industry sector should be Alberta’s driving factor in on-going design. If we don’t pursue market design to achieve this, then we face the risk of more heavy-handed approaches such as the risk of carbon emission caps and more imposed regulations – which further exposes Alberta to the risk of industry migration to other jurisdictions.

The electricity sector can be the core for change, but the emissions offset market must link into the other sectors to ensure a growing supply of offsets to meet a growing demand to reduce output intensities. Also at the core is the need to re-structure the market such that the residential, farm, commercial and institutional consumers are not paying a disproportionate share of the costs to achieve these Net Zero targets.

Simply put let the demand for one unit of offsets be homogenous across the energy, forestry, agricultural and mining sectors, and let supply of that unit be seamless between displacement or sequestration projects and let price determine who has the greatest need at the least cost.