CER Update: Ottawa’s Flexibility On Natural Gas Gives Provinces Major Win

• The federal government’s latest Clean Electricity Regulations update shows it’s softening its position on sharply cutting emissions from natural gas-fired power plants by 2035.
• Ottawa has demonstrated that it’s receptive to the provinces’ and utilities’ concerns about their ability to meet 2035 Net Zero targets.
• We see this as a major win for Ontario, and it also gives Alberta and Saskatchewan more leeway in how they manage their transition to cleaner sources.
• The proposed changes are not expected to compromise the 2035 Net Zero target set for the electricity sector if the regulations for offsets are included.
• The devil will be in the detail, as the white paper does not provide any details on what the regulations could look like when finalized.
• In terms of next steps, comments on potential changes to CER are due to be submitted by March 15, and final regulations are set to be released by the summer.

Ottawa’s draft Clean Electricity Regulations (CER) has sparked significant debate among provinces since its release in August 2023. Various stakeholders, including provinces, industry, and utilities, have raised concerns about the draft’s strict approach to phasing out natural gas from the grid. Most provinces worry that achieving the federal target of a Net Zero electricity grid by 2035 across the country will be challenging while ensuring system reliability and affordability. There were particularly large backlashes from Alberta and Saskatchewan, which are currently phasing out coal in favour of less emitting generation like natural gas.

The federal government responded last Friday with an update on the consultations and design options that are being considered for the final regulations. It comes several months after the consultation period for the draft regulations closed.

The feedback that the federal government received from the consultation raised concerns about the effectiveness of carbon capture and storage (CCS), potential operation of inefficient units, short end-of-prescribed life, challenges for existing cogeneration facilities, provisions for greenhouse gas offsets, and post-facto emergency exemptions review. These concerns could impact units under development and how existing units are operated.

In last week’s update, the federal government proposed major changes to its draft to reduce carbon emissions from Canada’s electricity sector by 2035. The new design options show more pragmatism in the federal government’s approach, indicating that it is softening its position on sharply cutting emissions from gas-fired power plants by 2035.

What’s in the update?

The updated design options for the regulations would provide electricity system operators more flexibility to continue operating their natural gas power plants past 2035. This includes setting annual emission limits rather than performance standards, allowing plants to operate longer without constraints, and permitting the purchase of offsets when emissions from natural gas generation exceed those limits.

The improvements to the regulations currently being considered are a significant win for provinces that will still need to rely on natural gas generation past 2035. This ensures that provincial electricity system operators can continue to provide reliable and affordable electricity while maintaining Canada’s ability to achieve its emissions reduction goal.

Flexibility for provinces

The federal government is considering several options to provide more flexibility to provinces, utilities, and other electricity regulators and providers, while still ensuring significant emissions reductions. One such consideration is changing the approach from a performance standard, which is a fixed emissions intensity standard, to a possible emissions limit. This limit would be tailored to each unit’s capacity, replacing the current “performance standard approach.”

This new approach could potentially incentivize efficiency improvements and provide flexibility. However, it could also eliminate the “peaker provision approach” that was included in the draft regulations, and was an area of concern for Ontario.

We see this as a major win for Ontario, and it also gives Alberta and Saskatchewan more leeway in how they manage their transition to cleaner sources.

Additionally, the regulations could permit a unit to exceed its emissions limit by a certain amount, provided it compensates for all excess emissions with greenhouse gas (GHG) offsets. In this scenario, the federal government will be faced with the task of ensuring a reliable supply of high-quality GHG offsets. Additionally, they need to establish effective market mechanisms to manage potential increased demand for offsets within Canada.

Other considerations include extending the “End of Prescribed Life” beyond the current proposed level of 20 years and allowing responsible parties, such as utilities and crown corporations, to pool the emissions limits of their multiple existing units in the same jurisdiction.

Regulatory treatment of cogeneration is also under review, potentially shifting to an emissions limit. The approach under consideration would also differentiate between “behind the fence” electricity emissions and the emissions associated with electricity provided to the grid.

The federal government plans to continue engaging with stakeholders, including provinces and utilities, before finalizing the CER later this year. Ottawa has stated that continued collaboration will be essential to ensuring the regulations can provide significant emissions reductions while supporting electricity system reliability and affordability. Comments on potential changes to CER are due to be submitted by stakeholders by March 15.

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