Finance Committee on Nov. 7th, 2017

[James Bradley]

They took it off me at security.

[The Chair, Liberal, Wayne Easter]

Thank you.

Okay, we have Canadian Geothermal Energy Association, Ms. Thompson, president.

[Alison Thompson, Chair of the Board, Canadian Geothermal Energy Association]

Thank you.

I know that you can't see these slides. As an introvert, the slides are more for me to know that you're probably looking at the slides and not at me. If you'll just humour me, I'll turn them in your direction and you can glance over.

[The Chair, Liberal, Wayne Easter]

Members do have the slides, Alison.

[Alison Thompson]

Okay, fantastic. Then it's all for my privilege and for the other witnesses.

Good evening, everyone.

Thank you very much for having us. I'd like to acknowledge that we're on the traditional territory of the Algonquin and Iroquois first nations. I equally bring you greetings from Kitselas First Nation, who will be mentioned later in this presentation, as they are developing a geothermal project.

We represent CanGEA, the Canadian Geothermal Energy Association. I'm the chair of the association. I'm also a member of CanGEA, and I work with two companies that are also mentioned later in the presentation.

Cutting right to the chase, on slide number two, Bill C-63 and geothermal energy, thank you to this committee. Because of this committee and the March budget, geothermal heat is now considered an eligible renewable energy. Up until March 22, geothermal electricity was renewable, but geothermal heat was not. This kind of inequity in how geothermal was treated was holding the industry back. We want to reach out to you personally this evening and say thank you. We are now eligible for the Canadian renewable and conservation expenses, as well as the accelerated capital cost adjustment.

On the next slide are our five members. I want to bring to everyone's attention the fact that because of your work, what you did as a committee, and because of the budget that was tabled, we now have five heat and power projects going forward. The ones I'm highlighting tonight are from western Canada, starting with Borealis GeoPower out of Valemount. They're making a power and a heat project. Then we have the Kitselas First Nation leading a project out of Terrace, B.C., and that's also for heat and for power. DEEP, out of Saskatchewan, is also heat and power. Up until March, these companies would have been ineligible to claim the heat part.

What Bill C-63 will also unlock—in the bottom—is that we have two Alberta companies who are also developing heat only projects and, again, up until recently, they wouldn't have been considered renewable.

All of these companies are using clean tech, but they're also using technology transfer from the oil and gas industry and repurposing talent from the oil and gas industry.

What's further interesting to note is that in Yukon, the Northwest Territories, Nunavut, and Quebec, projects are also progressing. I hope that the next time I have an opportunity to appear here, I can report on those areas as well. I would especially note that Nunavut right now is running an RFP for a feasibility study to use heat in the Nunavut territory. That RFP closes on November 15. They have been absolutely inspired that geothermal heat can now be classified as renewable, and hopefully used abundantly in that territory to decrease our fossil fuel reliance.

I could stop the presentation here, but since I have five minutes, I'd like to go on. I want to bring to your attention that there are further improvements that our industry requires. I'm hoping that the committee is able to make these amendments as well.

Most notably, other renewable energies currently achieve both test turbine status and transmission expenses, so there is parity that is not yet being achieved by geothermal. When people ask why the industry isn't progressing, people start to make up reasons why. However, they're really economic, and it's because other industries are provided with incentives or are eligible for programs that geothermal is not.

I want to bring a consequence, a real life example, of that home. I'm now on the slide talking about geothermal test turbines. The wind industry has been granted test turbine status for up to 20% of its projects. Here we have a project in Valemount, B.C., that's going to be a demonstration, not just demonstrating and testing of a reservoir, but also demonstrating the capabilities of the geothermal industry.

This small project, again just as a test facility, is looking to employ 50 to 80 people. If this sounds incredible, a few slides later I talk about how it's not in fact incredible. If you look at countries like Iceland, New Zealand, and the U.S.A., they routinely achieve huge employment numbers based on deploying geothermal heat along with power.

The Iceland example I bring for you this evening shows that at a mere 175 megawatt plant, they're able to employ 60 people, but also an additional 840 people in other businesses that are using their heat. This is all off of two power plants that are commingled and have the heat part.

Going back to Sustainaville, it is pitching to get test turbine status so it too can have a test facility and demonstrate geothermal power and heat, but as well create 50 to 80 jobs. We're not making that up.

I'll end by talking about another item that we did not get. Wind, solar, and even tidal and hydro power all get transmission expenses. Our industry too would like to have transmission expenses. Here's a real world example from Valemount, where British Columbia power, BC Hydro, is serving the town. It's a 300-kilometre transmission line. Unfortunately, it stops short of the village.

There's a new load developing as an ecotourism resort. Because BC Hydro cannot serve the ecotourism resort, the province has approved a seven megawatt diesel power plant to be installed. Here we are, in the era of a pan-Canadian framework for clean growth and climate change, trying to shut down diesel and switch away from fossil fuels, and here's an example of a brand new diesel power plant that could go into operation. Standing between that spewing out of up to 50,000 tonnes of CO2 a year, or about 1.5 megatonnes over 30 years, is a 26-kilometre transmission line. If I were tidal, wind, solar, or hydro, geothermal wouldn't have to ask for this amendment.

I want to close by saying, in the United States they're targeting an additional 30,000 megawatts to build. They currently have about 3,500 megawatts on line, and 1,200 megawatts in development. Just to frame that, 1,200 megawatts is about a $4.5 billion contribution to GDP. We could have this too. We have the technology and the talent. We just don't have parity with the other types of energy.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Thompson.

Turning to the Macdonald-Laurier Institute, Mr. Cross.

[Philip Cross, Fellow, Macdonald-Laurier Institute]

Thank you. Thank you for having me back.

The Asian Infrastructure Investment Bank is a Chinese-founded alternative to the U.S.-led World Bank. It's far from clear why Canada wants to help pivot the world economy away from the U.S. to China. Nor is it clear that there is shortage of capital in Asia that Canada needs to help finance, especially at a time when plans are being made for a new infrastructure bank to help make up for our own infrastructure deficit.

While Asia's infrastructure needs are massive, so is their available pool of capital, as reflected in their large trade surpluses. Many Southeast Asian nations have savings and investments rates of over 30% or 40% of the GDP. Their priority should be finding a mechanism ensuring that capital is deployed where it is needed the most.

It is well known that it is not the amount of investment that drives long-term growth, but the efficiency of investment. Many Asian countries like Thailand, Malaysia, Indonesia and Taiwan had high rates of investment leading up to the Asian crisis of 1997. But these investments, often state-directed as part of their industrial policy, did not pay off.

Canada's enthusiasm to have a place at the table when the AIIB chooses investment bodes ill for investment being driven by market considerations alone. Canada and other late joiners to the AIIB appear motivated to get a share of the contracts for infrastructure work in the region. This suggests that a certain cronyism is anticipated in the process of awarding contracts, with local citizens in Asia ultimately paying more for investments they may not value highly.

What's the reason for Asia's emphasis on infrastructure? Well, good infrastructure is certainly necessary for sustained growth. Maintaining growth beyond the early developmental phase requires an ability to move into consumer products with the flexibility and ability to adapt to rapidly changing consumer tastes. Japan and South Korea have auto and electronic companies that have demonstrated that capacity. China and other Southeast Asian countries have not. It is not clear that more investment in infrastructure would help make that leap.

Canada's contribution to the AIIB also appears premised on the idea that China inevitably will be one of the world's dominant economic powers. This is far from a sure thing. Before the global financial crisis of 2008, its rapid growth was built on exports. However, since 2009, it has relied more on domestic demand for the growth, much of it fuelled by debt. This is not a sustainable foundation for growth.

In The Rise and Fall of Nations, Morgan Stanley's chief global strategist, Ruchir Sharma, observed that nations posting increases of over 50 percentage points in their debt to GDP ratios inevitably experienced a prolonged period of slow growth, if not financial crises. China's debt to GDP ratio has almost doubled from 150% in 2007 to 282%. Canada has nearly kept pace with an increase from 250% to 350%. He predicts that China will face poor growth prospects over the coming years as a result of its recent debt binge, as well as steep population decline.

Projecting that China will sustain rapid economic growth seems to echo claims by experts in the 1970s that the Soviet Union would surpass the United States. Then, in the 1980s, there were claims that Japan was poised to become the world's dominant superpower. Finally, there were forecasts in the 1990s that the European Union would dominate. All of these predictions were wrong.

There are other reasons to be wary of increasing our reliance in China as the emerging power in Asia. It's policies are often the exact opposite of what economists usually advocate for in achieving economic growth. Rather than encouraging liberty and the free flow of thought with innovation protected by property rights, China controls its own Internet and social media, steals intellectual property, initiates cyber-attacks on nations and companies around the world, makes unsupported territorial claims in the South China Sea, engages in human rights violations, has rampant corruption, and increasingly pursues a cult of personality instead of fostering democracy. Even more than infrastructure or investment, growth in emerging market economies beyond the middle-income range requires good institutions, something China sorely lacks. It is not clear that the AIIB will help or retard the development of good institutions.

It briefly became fashionable among the Davos elite to speak of the new Beijing consensus on state-directed economic growth as the successor to the IMF's so-called Washington consensus. Belief in the Beijing consensus peaked in 2014 just when the AIIB was being launched in Beijing. Confidence in the Beijing consensus was soon undercut by the sharp drop in growth in emerging market economies in 2015, when slumping commodity prices and a strong U.S. dollar revealed that this model of growth was ultimately another illusion underpinned by debt, the most precarious source of growth.

Even the Chinese seem to be losing faith, judging by the increasing amount of capital that local investors are moving out of China—$1.7 trillion in 2015 and 2016—leading China to impose capital controls this year. Such capital flight by local investors also preceded the Asian financial crisis in 1997. The steady outflow of capital from China, including an unknown amount into Canada's housing market, reflects that China's own leaders are skeptical about the sustainability of economic growth and political stability.

It is worth recalling that the growth breakthrough in many emerging markets in recent decades was not remotely the result of investments made over time by multilateral institutions such as the World Bank. It reflected countries adopting capitalism—tentatively at first, in China—around 1978, then in eastern Europe after 1989, and then increasingly around the world, as nations realized that it was institutions and not government-directed investments that fuelled economic growth.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Cross.

We will turn to questions. The first round will be seven minutes, with Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair.

Thank you to all the presenters here today for coming out to share your information with us.

I was very excited to hear from the Geothermal Energy Association. I'm from the Northwest Territories, and it's a very big riding. There are a lot of issues with generating power and heat. It's a very costly place to operate, and over the period of my life I've seen a lot of initiatives come forward. I was involved with a lot of projects. We looked at biomass, and we're still working on biomass.

However, the farther north you go, the smaller the tree is, to the point where there are no trees. Even in the southern part of the territory, it takes probably four trees to make up what is a normal tree in the southern part of Canada.

We looked at wind turbines. Every projected that we tried had issues. The turbines are expensive, the technology is expensive. If you're way up in a remote community and it breaks down, it takes about six months to get a part shipped up from another country, and it will take another six months to a year to get somebody who is willing to come up to fix it. It's very expensive to look at wind.

We are trying some projects around the community of Inuvik this coming summer, and I hope they work well, but we have problems with freezing rain and ice and those things. Solar has huge potential. In the summer, we have 24-hour sunlight, but we don't have that from October to February, so it doesn't work at all. We're looking at hydro. Hydro is very costly.

For us, geothermal is the solution, but geothermal hasn't been able to move forward. We've tried several projects and they didn't work. We just couldn't get geothermal right. We didn't have the expertise, all the ingredients, but we know that the ground is suitable. We have everything else.

I wasn't aware that there are projects being looked at in the far north, especially in Nunavut. I never expected to hear that. As we move forward, I think this area is going to get a lot of interest.

Could you tell me a couple of things? First of all, you talked about a number of different companies. The reason I want to ask this is because there's a lot of interest from indigenous corporations, indigenous people, on renewable energy. There is a huge need for us to convert in the north, and our government has committed to doing that.

Can you tell me, first of all, if there's any way, with some of the initiatives you're looking at, for indigenous people to play a role?

[Alison Thompson]

Absolutely. Let's start right in your territory. In the Northwest Territories hamlet of Fort Liard, the National Energy Board has already granted a geothermal permit to one of CanGEA's member companies, one of the ones I work with. It was 51% Acho Dene Koe, which is with the local first nation, and then the CanGEA member company, Borealis GeoPower. They were able to do a front-end engineering study with the support of NRCan. The project did not go forward, and this was several years ago. At the time, the Northwest Territories Power Corporation could not come to a power purchase agreement with the Acho Dene Koe and Borealis GeoPower.

Since that time, the governments, both federal and territorial, have changed. There is also a new initiative that NRCan is supporting that is trying to get the remote communities off diesel. That particular project has reapplied, and we hope that it goes forward.

The discovery well was actually drilled by Chevron, decades ago. The funny thing about Chevron, an oil company, is that it's actually the largest geothermal company in the world—it's not even a renewable company; it's an oil company—because of course it knows how to drill really well. Here we have an example of Chevron drilling the well and leaving the area and the country. Now other companies are coming in after Chevron and using Chevron's discovery wells, and they would like to take it forward.

Kitselas Geothermal Inc. is a first nation-led project. Kitselas First Nation is out of Terrace, B.C. It owns 51% of the Terrace project, and it's looking to move that forward under a first nation banner. Local employment means a great deal in skills training opportunities.

With regard to the Nunavut feasibility study, I'd like to applaud Qulliq Energy Corporation, which is the crown corporation for both power and heat. Most utilities are just power, but in its situation, it's power and heat. Its CEO, Bruno, is a visionary about the fact that this works. It has worked in 25 other countries for power and in over 80 countries for heat, so why not in Nunavut, why not in the Northwest Territories, why not in Yukon and in the rest of Canada?

There is an Inuit minimum concentration that needs to go towards the feasibility study, so many of our members are now expanding our network and working with the Inuit and with the Nunavut people to help them fulfill their energy dream of energy sovereignty and security, and do it in a renewable way.

[Michael McLeod, Liberal, Northwest Territories, NT]

Can you tell me, of all the different alternative energy and alternative heat practices out there, why geothermal would be better? Are there one or two reasons, or a number of reasons, that geothermal would work better than anything else out there?

[Alison Thompson]

Thank you for giving me the opportunity to say that there are two reasons.

I think one is the two-for-one. You may have heard that geothermal is costly. For example, an average international statistic to take with you is $5 million per megawatt installed. That's about double what it costs for wind and double what it costs for natural gas. Of course, you get that with having no emissions, and you get that with basically a 100% online factor versus wind perhaps being at 25% or 33%. On the levelized cost, even though the installed cost is higher, you actually get more electricity out of that power plant.

But here is where it gets better: from that power plant you also get heat. I don't want to call heat “waste”, because it's obviously a very valuable product, but in that paradigm shift of people thinking that geothermal is expensive, they're not considering that you're going to be selling two different things. In some cases—and B.C. and Alberta are prime examples—there is already a carbon tariff or a carbon tax, and that's obviously coming federally by 2022, so now you're selling three things for that same capital build: carbon credits, heat, and power—all renewable. There is the number one thing.

Second, we cannot talk about this industry without thinking about the jobs. There are 1.7 jobs per megawatt. We are the highest job creator of all energies. The first thing people say to me is, “Oh, your operating costs must be huge if you have so many jobs”, but these aren't jobs that are just associated with the operating costs. These are induced jobs that are created because people are using the heat.

Here's an example: 175 megawatts of power employ 60 people at the power plants, but employs 840 people in the geothermal industrial park or the geopark. That tiny half a megawatt....

You have a 500 kilowatt demonstration project, Sustainaville, that's looking for test turbine treatment. That's aimed at creating 50 to 80 jobs—these are clean-tech jobs—in using clean technology.

[The Chair, Liberal, Wayne Easter]

Okay, we'll have to end that there. Thank you for the discussion.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

My question is for former Statistics Canada chief economist, Philip Cross.

Mr. Cross, you made reference to the trendy thinkers in Davos and their admiration for the so-called Beijing consensus. It's really state-controlled corporatism. It exists in the form of government subsidies for favoured companies and industries, regulatory protections to keep challengers out and incumbents on top, tariffs and trade restrictions to ban competition, and a myriad of other government interventions that increasingly favour the world's wealthiest and most well-connected.

Do you see this as a troubling phenomenon in modern economics, and if so, what are some of the other examples of it to which you would point our attention?

[Philip Cross]

Let me go back to the Washington consensus, which preceded the Beijing consensus. The Washington consensus ultimately didn't work because it basically said that if developed countries adopted macroeconomic stability—low inflation and low government deficits and so on—growth would then take care of itself. The Beijing consensus, similarly, is focused on what the state does.

There is a long list of interventions, which you gave, but both of them actually had the same problem. They focus on what the government does instead of what the government doesn't, which to a considerable extent could be described as simply getting out of the way of market forces. Neither the Washington nor the Beijing consensus has its primary emphasis on what it is that firms need to innovate and grow.

[Pierre Poilievre, Conservative, Carleton, ON]

What do you think about the approach of these infrastructure banks? We now have this Asian infrastructure bank. We've already seen the Canadian domestic infrastructure bank legislated into existence. It will presumably begin operations shortly.

What do you think of these mechanisms that take risk off the shoulders of investors for big megaprojects and put it onto the shoulders of taxpayers, in effect separating the natural marriage of risk and reward in the construction of major high-risk projects?

[Philip Cross]

It seems to be an increasing trend in our society. I'm writing a paper with a co-author, and I don't want to scoop my co-author, but we're doing a study of pension plans in Canada and particularly how the public sector pension plans—not the ones for the civil service solely, but I'm also thinking of Ontario teachers and those types of public sector pensions—increasingly are taking on high-risk investments. They can afford to do so because the rate of return is guaranteed by the taxpayer. The taxpayer accepts the risk. The members get the reward.

It's a classic case of moral hazard. When you separate the risk from the rewards, you're going to end up with some very poor and, frankly, occasionally dangerous decision-making. It's a trend that, regrettably, seems to be growing in our society.

[Pierre Poilievre, Conservative, Carleton, ON]

Do you think this approach of using government money to guarantee high-risk adjusted rates of return to investors may have also as a ramification that investors can get lazy? They can invest in things that would not otherwise produce that superior rate of return, or that have all of the risk taken off them by taxpayers, instead of investing in innovation.

Very quickly, I think of the example of Israel. When it stopped running massive deficits about 20 years ago, bondholders could no longer just lend to the government to get a rate of return. They actually had to invest in innovation. That's why we now call Israel the “start-up nation”: all of this money rushed into high tech and created Israel as a start-up nation. Do you think this government intervention is actually directing investment away from innovation and towards otherwise unmeritorious investments?

[Philip Cross]

I don't know if I would focus on innovation per se. I'll go back to the example of our public sector pension plans. They used to be constrained to buying only provincial government bonds.

In a way, I think that might have been better than what we have today, which is having them running all around the world making investments in infrastructure and real estate, investments where we have no idea of how they are going to turn out over 30 or 40 years. They are putting taxpayers and potentially the members at risk, and I'm not sure they're evaluating that risk. Sometimes you can go too far in taking risks.

Yes, I suppose that ideally I don't want people investing in just government bonds, but I don't want them running around the world investing in whatever crazy idea they can think of, knowing that if the investment doesn't pan out, the taxpayer is on the hook and the managers will just dance away with their bonuses.

[Pierre Poilievre, Conservative, Carleton, ON]

Mr. Robinson, you said that the Asian infrastructure bank had received some sort of rating. Was it from Moody's?

[Michael Robinson]

It was Standard & Poor's.

[Pierre Poilievre, Conservative, Carleton, ON]

It was from Standard & Poor's.

What exactly was the rating in regard to?

[Michael Robinson]

The securities that they would issue.

[Pierre Poilievre, Conservative, Carleton, ON]

To the private sector?

[Michael Robinson]

To anybody.