Framework of Opportunity

Canada’s new framework on clean growth and climate change is designed to stimulate the economy and fulfill pledges to reduce emissions and adapt to climate-change issues
IN DECEMBER 2016, Canada’s federal government introduced the pan-Canadian framework on clean growth and climate change (PCF), which seeks to implement carbon tax or cap and trade regimes throughout Canada by 2018. The introduction of this framework endeavors to fulfill government objectives related to Canada’s ratification of the December 2015 Paris Agreement at the United Nations Framework Convention on Climate Change Conference of the Parties, with the goal of reducing global temperature increases.

The pan-Canadian framework is very much a work in progress. “Each province and territory has or will have its own, often very different, greenhouse gas reduction legislation and regulations,” says Bob Booth, a partner with Bennett Jones LLP in Calgary. As a result, he says, it will not likely lead to a harmonized regime across all provinces and territories in Canada, but an equivalence standard will apply.

Linda Bertoldi, a partner with Borden Ladner Gervais LLP in Toronto, says the framework reflects several of the federal government’s objectives: namely, to stimulate the economy, and also fulfill its pledges in terms of reducing emissions and adapting to climate-change issues. She says the government is trying to transition Canada to a low-carbon economy, while recognizing there are multiple ways to achieve these goals. “The government is trying to provide guidance,” says Bertoldi, “but still allow for a lot of innovation and creativity within that framework.”

For US companies and their in-house counsel who do business in some parts of Canada, cap and trade or carbon tax is not new, says Booth. “Some provinces — namely, British Columbia, Alberta, Ontario and Québec — have, for some time, had carbon-tax or carbon-emission regimes in place, so some domestic and US businesses have experience with these regimes.” For example, he says, in British Columbia there has been a general carbon tax since 2008. In Alberta, there’s been the Specified Gas Emitters Regulation (SGER) since 2007, which applies only to large industrial emitters. Ontario implemented its cap and trade regime in 2016.

Still, if you talk to lawyers who practice in the energy field as to the near-term effects of the pan-Canadian framework, the conversation ultimately veers toward changes — and subsequent opportunities and challenges.

Booth, who practices in Calgary, cites the Alberta government’s Climate Leadership Plan, including the 2017 Climate Leadership Act, which introduced a carbon levy in Alberta as an economy-wide tax on combustion and, in some cases, emissions, of greenhouse gas (GHG). The Alberta carbon levy does not change the SGER regime, which continues to apply to large industrial emitters.

RISING RENEWABLE

One aspect of the pan-Canadian framework, says Nick Williams, a partner with Davies Ward Phillips & Vineberg LLP in Toronto, is the reduction of emissions through increased use of renewable energy. Ontario, British Columbia and Québec have already invested heavily in renewable energy. As an example, Ontario phased out all coal generation as of 2014. Alberta has announced that it is going to phase out coal and generate 30 per cent of its electricity through renewable power by 2030.

As a result, says Williams, many in the power industry are looking at Alberta as the next province that will create opportunities for developers, investors and others in renewable energy projects. “Also, Saskatchewan, which did not endorse the framework, is encouraging investment in renewable energy and recently issued an RFQ for 200 megawatts of wind power.” He says the Maritime provinces have also seen a considerable number of renewable energy projects developed.

In Alberta, says Booth, there are large and small investment opportunities in wind, solar and other renewable generation projects. The first renewables tranche is for 400 MW to be awarded in late 2017 for service by late 2019. “There is a five-megawatt minimum per project, and eligible electricity sources include any of water, wind, solar or biomass,” he says. “However, these projects must supply to the existing grid, which is a condition that will remove some potential projects from being eligible to participate in this first tranche.”

Chris Christopher, a partner with Torys LLP in Calgary, says renewable energy developers, whether they’re situated in Europe or Canada or the US, “have capital ready to invest and they’re looking for opportunities to deploy it for a number of reasons: they believe in renewable energy and/or the technology is improving so the cost of deploying these technologies is decreasing, and the profits are therefore increasing.”

In addition, says Christopher, “these days, Canada may look like happy times to US renewables investors, particularly for those who are wary of a Trump administration. Because in the US, those developers have, under the Obama administration, relied on federal assistance.” In contrast, says Christopher, “consider [President] Trump’s comments on climate change and his apparent focus on traditional forms of energy.”

Still, the rosy picture in Alberta, for example, is not without challenges, he adds. Debt financing for renewable energy projects is typically repaid using revenue from operations, says Christopher. So investors, banks and other financiers are looking for certainty on income. But, in Alberta, he says, “we don’t have that certainty because Alberta’s energy market is currently set up as an energy-only market, so the prevailing power pool price is what you would get, and currently, electricity prices are low.”

Consequently, in these early days at least, Christopher suggests, “companies that can ‘balance sheet finance’ a project — funding the project through their own cash flow or corporate debt facilities based on their balance sheet, as opposed to relying on cash flow from the actual project — may find the province more attractive.”

Looking forward, the Alberta government, says Christopher, has proposed a subsidy through its renewable energy program that’s basically a contract for differences.

The project finance industry in Canada has developed over the years, with Ontario, Québec and British Columbia primarily benefiting, says Bertoldi. In the renewables area, “the generator gets paid for what they’ve produced and the price is stipulated in the contract. So lenders look at this and say, ‘Great, I know that in year five, with the escalator that’s provided in the contract, this is the revenue for that project, so I’m willing to lend.’”

She says if there’s a 25-year life to a project where the developer receives a 20-year power purchase agreement, the lender will often match the loan to the duration of the power contract while allowing a small time buffer. “The challenge for Alberta is how to replicate that kind of structure, when Alberta’s current market is a dynamic wholesale generation market where electricity prices are determined on an hourly basis through a competitive bidding process.”

WIDESPREAD EFFECTS

Booth is fielding questions from a broad range of US companies and their in-house counsel. That’s because, although it’s still early days, “the potential effects of the pan-Canadian framework and existing provincial climate programs are widespread, potentially impacting oil and gas companies, both non-renewable and renewable power generators, and investors.”

He says it is still unclear how the different provinces and territories in Canada will respond to the pan-Canadian framework. Alberta, British Columbia, Ontario and Québec, for example, will likely adjust their existing climate-change legislation to comply with the requirements of the framework. Others that do not have any greenhouse-gas-reduction strategies in place will likely adopt the federal regime. “As for Saskatchewan, which presently has neither a carbon tax nor a cap and trade regime, the province has indicated that it will not adopt the pan-Canadian framework,” says Booth, “which may lead to a constitutional dispute between the province and the federal government.”

In addition to existing economic factors, the way in which each jurisdiction implements the pan-Canadian framework will also have an impact on companies’ decisions on where to invest in Canada. For example, cast the net a little wider and US companies that at first blush may not seem to be affected may have to, for example, re-examine the cost of their supply chain. “If you’re a US company,” says Booth, there may be a cost impact to your supply chain components coming from Canada. “Did your costs go up as of January 1, 2017, for inputs produced or manufactured in Alberta? If there is a very energy-intensive aspect to inputs produced or manufactured in Alberta, that may be the reason.”

Bertoldi agrees that changes by the provinces as they work toward the goals in the pan-Canadian framework will have a significant impact on a wide range of the economy. Take, for example, the convergence of different expertise needed to build a power plant. There are the lenders to finance it, the developer to find the location and line up the site and do the preliminary engineering, the contractors to build it, as well as the turbine supplier if it’s wind, or the panel supplier if it’s a solar project.

“There’s a whole universe of businesses that will benefit from these policies because of the opportunities to play their role in developing, financing, constructing and operating these facilities.” As a result, according to Bertoldi, large contractors with expertise in renewables who have recently completed building, for example, wind farms in Montana may find that opportunities in Canada look very attractive.

Shane Freitag, also a Borden Ladner Gervais LLP partner in Toronto, adds that, going forward, it is likely we’ll see existing companies wearing multiple hats, with oil and gas companies having a renewable energy arm. He says this is a way for these companies to reduce their overall environmental footprint by having these companies become more energy efficient, and in some cases, creating offsets through the development of renewable energy projects. “Not only does it reflect increased corporate responsibility but it has become good business.”

BALANCING ACT

Williams says it’s important to view the pan-Canadian framework through the lens of larger macro-economic issues. In the context of inbound investment into Canada by both US and international investors, he says there’s potential for a perfect storm.

“On the one hand, there’s President Donald Trump coming in and saying, ‘I’m going to streamline regulatory requirements to make it easier for companies to extract shale and natural gas reserves, especially on federal lands,’ which likely means there’s going to be more oil and gas produced in the US over the short to mid term.” At the same time, continues Williams, “you’re layering on the pan-Canadian philosophy, which at its heart espouses a carbon tax. How will this affect the competitiveness of the oil sands, for example, in Alberta?”

This is obviously a situation that will require a balancing act by Canadian and provincial governments. If our policies make Canadian oil and gas producers uncompetitive with carbon levies, says Williams, “this could lead to a loss of investment as investors may decide the US affords better opportunities. We see an example of the balancing act governments will need to perform with the federal government’s support of the Keystone XL Pipeline.”

Christopher agrees, saying “balancing act” are definitely words that apply to the oil and gas sector in light of the pan-Canadian framework and the oil and gas market in western Canada. He foresees governments looking at ways to alleviate the impact on export industries through, probably, a mix of technology investments, tax breaks and emissions exclusions, all in an effort to maintain competitiveness.

He says there’s still uncertainty, “but if I were an international investor, given the massive oil and gas resources at play and considering that pipelines are being approved, with the potential consequence that export markets will open up, I would be keeping my eye very closely on the opportunities to see how these policies end up shaking out.”
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