Natural Resources Committee on May 9th, 2007

[The Chair, Conservative, Lee Richardson]

Ladies and gentlemen, we will begin the 48th meeting of the Standing Committee on Natural Resources. I welcome committee members and the crew here up front on our continuing study on the greening of electricity consumption in Canada--natural gas and cogeneration.

Our witnesses today are from the National Energy Board. We're welcoming John McCarthy, business leader in commodities, and also Bob Modray, technical specialist, economics and energy analysis, in the commodities business unit. In addition to that, we will also hear from the Forest Products Association of Canada, Avrim Lazar, the president and chief executive officer. Welcome.

We are, as you'll note, televised today, so just to those millions in the viewing audience across Canada and around the world, I'll explain that many of us are wearing a carnation today for multiple sclerosis. So that explains that to those television viewers on CPAC, the Internet, and around the world.

We will begin today with opening statements from our witnesses. We're asking you to try to keep it to about ten minutes each, at which time we will proceed with questions.

We decided we were going to start with the National Energy Board, I think. For the National Energy Board, then, John McCarthy. John.

[John McCarthy, Business Leader, Commodities, National Energy Board]

Mr. Chairman, thank you for inviting me to speak to the committee.

You have invited us here to speak about cogeneration, or the simultaneous production of thermal heat and electrical energy. While cogeneration is not the main focus of our work, it is nonetheless one of the many factors to be considered in our market and energy analyses. We are planning to publish one of these analyses, the Report on Energy Futures, in October 2007.

Like many of the reports of this nature, it is a long-term balance of supply and demand in Canada, going out to the year 2030.

We have a number of other studies that we have conducted over the years, and I've distributed to the members of the committee a list of those studies. The ones I'd like to draw attention to, which will be the basis of our remarks today, are a study on emerging technologies that was conducted in June 2006 and a report that we completed on the challenges related to oil sands, which we produced in October. We were here with the committee in October to discuss that report.

We undertake all this work in the context of our mandate under the National Energy Board Act. Today I'd just like to very briefly touch on our mandate. I'm sure most of the committee is very familiar with it, and I won't go into great detail. I'll talk briefly about cogeneration, and my colleague Mr. Bob Modray will focus more on some sectoral and regional aspects of cogeneration, some benefits and challenges that come from the work. Then we will talk a little bit about our ongoing work on energy futures, which I referred to earlier.

Firstly, with respect to the National Energy Board, we are an independent federal tribunal. We are located in Calgary. We have been there since 1991.

Our responsibilities are twofold: regulatory as well as advisory. It's in the construct of the advisory role that we're here today, primarily talking about how we monitor energy markets and how they're functioning, and we produce a number of reports.

Just moving on to cogeneration, the focus of our comments today, it really has to do with the simultaneous production of thermal heat as well as electric energy, and it's often referred to as combined heat and power. Generally speaking, conventional power plants will emit a fair amount of heat that's created as a byproduct in the production of electricity, and cogeneration systems are a means to capture that lower-grade heat and turn it into a useful purpose, such as paper drying from the chemical processing, or space heating. The important thing is that you do need a use for that heat in order for cogeneration to work.

The next two slides are really just a very simplified process of how that heat is captured and reused. Essentially, you can take a standard thermal generation station from an efficiency of about 35% of the usage of the heat, and through cogeneration you can bring it up to 75% efficiency. So it's a significant gain as far as the reduction of waste heat and the use of that energy.

With that, I'll turn it over to my colleague, who's one of our senior economists who has been focusing mostly on electricity markets.

Bob.

[Bob Modray, Technical Specialist, Economics & Energy Analysis, Comodities Business Unit, National Energy Board]

Thanks, John.

What I would like to do over these next few slides is give a bit of the sectoral and provincial perspective, and, as John mentioned a little earlier, some of the benefits and challenges associated with cogeneration. Then I would like to bring it back to some of the long-term outlook work that we're doing.

I'm on slide 8 now. With respect to the sectoral applications, cogeneration currently occurs mostly in the industrial sector, in the industries indicated here. Somewhat less than commercial, this is more in the institutional setting. There are very limited, if any, commercial applications right now in the residential sector. As mentioned, electricity is often a by-product of the primary uses for process and heat in a lot of these sectors.

Regionally, cogeneration occurs on a volume basis. It's obviously predominant in some of the gas producing and consuming regions, Ontario and Alberta. With respect to B.C. and some of the eastern areas, there are fairly big applications in the forest industry.

The main fuels tend to be biomass or wood waste in the forest products area. Natural gas is increasing. Of course one of the big emerging uses—and I'll talk a bit about that later—is in the oil sands.

Going down the road, with respect to emerging technologies, we have tremendous waste heat being produced from fuel cells and coal gasification, which could also go into a combined cycle mode.

In terms of the benefits of cogeneration, there's a clear efficiency benefit that translates eventually into lower energy costs and lower emissions. From the standpoint of a producer, it can provide him with energy system reliability, and from the social standpoint, system security.

To the extent that we get into going down the road of more uses for distributed generation, say in an urban setting or in some of these bigger institutional settings, we can see cogeneration being an enabler to allow those distributed generation systems to occur.

With respect to the challenges, one of the big things with respect to cogeneration is that you've made an investment in these facilities, and if you're using something like natural gas or another fuel that has volatile prices, then you could be in a situation of not making the return on your investment.

Some of the other challenges we've listed here are ones we noticed in a study John referred to, which we released about this time last year. It was entitled “Emerging Technologies in Electricity Generation”. There are such factors as sometimes cogenerators cannot always access their markets. At other times, there are difficulties in obtaining access to the transmission grid.

It's sometimes stated that some of these technologies have social and environmental benefits and perhaps they are not able to capture the value of that. Perhaps there should be some sort of environmental premium attached to them.

When it comes back to large-scale application, say in the commercial sector, perhaps even in the residential sector too, so far in Canada and North America overall, there has not really been a lot of the coordinated planning that needs to be happen in an urban setting. Perhaps that's something that will be there in the future.

With respect to the oil sands, this is one area that has really been growing. I'm sure members on this committee know that we currently produce close to a million barrels a day. The study we did last year indicated a future range of something like two million to four million barrels over the next ten years.

Coming along with that will be tremendous process heat and opportunities to produce electricity in that cogeneration mode.

One interesting thing about the oil sands use is that a few years ago the producers wanted to size their facilities more for their own heat and power requirements. There was the real prospect of making a lot of power available--oversizing the cogeneration units and shipping that power south. Although that idea is still there and still a prospect, it seems to be less of one than it was a few years ago.

Another issue with the oil sands as a fuel source is the higher gas consumption coming very soon. I think there will certainly be other options pursued there. One of the most recent has been talk about nuclear in that area. It's quite speculative at this point.

On program incentives, I have a page here on some of the federal programs that are available through taxation, and some direct assistance as well. The provinces have some programs geared for cogeneration as well, through direct purchases that some of them are arranging.

On our energy futures work, a report will be coming out in October. We've consulted quite broadly across the country. We've had two rounds of consultations on this document.

We're basing it on three scenarios. We've represented the scenarios in terms of price tracks on slide 14. We have a reference or continuing trends case, with prices receding to the $50 range in the future. We have what we call a fortified islands scenario that results in a higher price track--over $80. Then we have what we call our triple E scenario, where we have a balance between energy, economy, and the environment. It shows higher prices initially but then receding, with a number of options available relative to the current conventional fields.

On the next slide we show those prices and the implications they have through the pricing system for the other main energy products--coal, natural gas, and the renewable fuels. Based on that we've done a preliminary projection. We still have some work to finish it up, but this is what we were talking to people about in our last round.

I guess what's evident on this chart is that all scenarios show significant growth in electricity demand. The other thing that stands out is that hydro will continue to dominate over the next 25 years or so. Particularly in the triple E case, we see more of the emerging technologies. One of the big ones there is wind, growing rapidly from less than 1% now to perhaps 11% in the triple E case.

In the other scenarios we have variants on that, obviously less in the case of the fortified islands, which has more traditional fuels; and continuing trends where we are today, moving ahead more gradually with respect to those fuels.

Overall we would look to something like a triple E scenario that has more emphasis on efficiency, and this balance being more amenable to a cogeneration situation.

[John McCarthy]

I just want to summarize our thoughts here. First, we feel that cogeneration offers significantly improved efficiency in energy use. It can reduce the demand for primary fuels, reduce emissions per unit of energy consumed, and make lower-cost power available.

There are also the benefits of more diverse sources of energy, with diversification in the locations of energy generation. But there are associated risks with respect to capital costs and price volatility when you're working in two markets--a heat market and an electricity market.

The opportunities vary significantly from coast to coast and are dependent upon a need for the waste heat that's located where you're going to be generating the electricity. The oil sands is a good example of where that waste heat will be needed. Finally, it complements strategies toward distributed generation.

Mr. Chairman, I hope that gives you an overview of cogeneration.

In speaking with the researcher in advance, he mentioned that there may be some interest among committee members in natural gas. The last slide shows the same scenarios but with Canadian gas production taken out, so you can see what our view is there.

This again is preliminary work. We're finalizing it and incorporating the consultations that are just concluding. We will be publishing in October. I would be more than happy to come back to meet with the committee at that time to present our final results.

[The Chair, Conservative, Lee Richardson]

Thank you very much. I appreciate the work that goes into these graphs and charts. It's very helpful for us to have empirical data to work with here in the committee.

We'll get to questions, but first I think the committee would like to hear from the Forest Products Association of Canada and Mr. Lazar.

[Avrim Lazar, President and Chief Executive Officer, Forest Products Association of Canada]

Thank you.

I can't help but remark that it's quite charming to see so many carnations. Not since my high school prom have I seen so many people dressed like this. When I came in, I thought no one told me about the dance and you guys had all rushed in from some prom to do this.

Thank you for inviting us. The Forest Products Association of Canada represents the industry from coast to coast: lumber, wood, pulp and paper. I've come here to give you some good news, in fact some great news: that it is possible to generate green energy. It's possible to be environmentally responsible and it's possible to make a buck while doing it. Cogeneration in Canada's forest industry is the example of that good news.

We have switched our fuel usage to renewable biomass, sawdust, bark, chips, stuff that would otherwise have gone to landfill. When we did this, we reduced what goes to landfill by 40%, stuff that would have rotted in the ground.

We have reduced our greenhouse gases by 44%, not in intensity but an absolute reduction, and 54% in intensity. We've reduced our air pollution by 70% and we've improved our cost-effectiveness, because we are no longer dependent upon fossil fuels. Our fossil fuel use is down by 45%, and we're now at about 54% cogeneration.

So instead of bemoaning the price of fossil fuels, instead of polluting through the use of fossil fuels, we've switched to renewable biomass. We use what's at hand and we are now generating enough clean, green energy just in our mills to replace three nuclear reactors. We generate enough electricity just in our mills to power all of Ottawa-Gatineau, and we're not stopping there.

Our intention is to become energy self-sufficient. Our intention is to export green energy to the communities where we work. So instead of sending expensive energy through long grid lines from some coal or nuclear plant in southern Ontario or southern Quebec, our plan is to work to the point where our mills generate not only enough energy to run the mill, but also to run to the nearby town and thereby have a more sustainable, affordable, and environmentally responsible approach to energy generation.

All of this will be done through industry innovation, through business innovation. It's not through regulation, not through government intervention, but by business, by local communities finding solutions that work using materials at hand.

We can go further, of course, and faster if the policy climate favours us: if there's a robust trading regime for greenhouse gas credits so that we can use that to help finance new boilers; if all renewable energy, not just wind and solar, is recognized in government programs; and if the accelerated capital cost depreciation is extended from two to five years. All of these things would make it possible for us to speed up this good news revolution by retooling our mills still faster.

But even if government does nothing, we will continue down this road, because it makes sense and because we didn't wait for regulation to start and we're just going to do the right thing regardless.

Thank you so much for inviting us, and we're ready for questions.

[The Chair, Conservative, Lee Richardson]

Thank you very much for the great sustainability report. I think you were just busting to find a place to tell people, and we're glad to be the audience, because it's very impressive. Thank you also for getting us back on schedule in terms of time.

I think we will move to questions. I will just ask the committee again, because we have a shortness of time today, that we're going to pretty carefully try to keep it to about a five-minute question. That way, we can get through everybody once.

I'll begin with Mr. Tonks.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you, Mr. Chairman.

Thank you to the energy board representatives and to Mr. Lazar for being here.

This is good news that comes from the forestry industry with respect to cogeneration and the reduction from natural gas, because where we have travelled, and particularly in Fort McMurray, at the oil sands, that's been a major challenge.

Mr. McCarthy, you mentioned nuclear. We think there are some inherent problems with respect to the interface between nuclear and the energy requirements. But having said that, my first question is to you, Mr. McCarthy. This report that's coming out in a matter of months, will this be your strategic plan based on different scenarios for a projected long-term implementation of alternate and renewable energies?

[John McCarthy]

Yes, but I'd probably phrase it a little differently. We use scenarios because we can't predict the future. We can't predict the policy or environment that we're going to be working in, particularly up to the 2030 timeline, so we create a scenario.

We have created three scenarios to kind of give us a balance, a spread, if you will, of what's possible. Through that analysis, we hope that we can identify pinch points, identify things that are common across the scenarios, identify things that influence one scenario over another, and then try to understand the system a little better.

[Alan Tonks, Liberal, York South—Weston, ON]

Do you have some concern with respect to decisions that may be made now that will pre-empt the findings or the strategic positioning from that report's perspective? I'm thinking of, for example, decisions being made--apparently as we speak--with respect to the nuclear alternative in the province of Ontario.

[John McCarthy]

We don't necessarily choose one option over the other. It is difficult for us to model. One scenario we have is what we call “continuing trends”, which takes into account all existing policy decisions. Those are changing rapidly. We're trying to model that.

So that does make it difficult for us, but I think our work will help to give people a sense of what might be the long-term implications of some of these decisions, or what might be the pinch points that perhaps wouldn't be considered.

One thing that I think is unique about our work is that we do integrate all energies. We look at it with a completely holistic approach with respect to energy. That's unique in the Canadian economy or in the Canadian resource review.

[Alan Tonks, Liberal, York South—Weston, ON]

We have been informed, through one of our briefing documents, that the consumption of energy has risen 22% in Canada from 1990 to 2004. We have been listening to municipal applications with respect to innovative renewable technologies in subdivisions, in geothermal applications for heating water for residential and industrial use, and a number of other things.

My question is twofold. One, what scenario do you think is most reasonable, against conservation and so on, with respect to the percentage increase in terms of electrical energy requirements? Second, do you see a major impact made through local applications--for example, energy conservation, the EnerGuide programs, both residential and industrial applications? Do you think we're on the path to a reasonable match in terms of the projections of electrical requirement and the actual implementation of new technologies?

[John McCarthy]

One thing we do with our scenarios is that we do make a balance. We do make demand and supply meet. That's one of the outcomes that happens in all of our scenarios.

You asked me a couple of questions there. One was with respect to whether the increase is reasonable. I'm not familiar with the data you referred to, and I couldn't say exactly what the numbers are that we're using. But one thing we do note is that there seems to be a very strong link between energy usage and GDP growth. As we all get a little more wealthy as a country and as an economy, we tend to use energy a little bit more. So we tend to see there is an overall linkage towards those.

At the same time, we're seeing a significant improvement in efficiencies. Energy use is still growing. It's not growing as fast as GDP, but it is growing, and it's growing faster than population. If you look at it, it's sort of between the two.

With regard to the percentage, if we're talking about the energy needs increasing over time, I think that's true; they will increase over time, and that's what we indicated. We just looked at the electricity demand aspect in our slide. You can see there's quite a significant growth. From now until 2030, I think in one case there was a 25% increase up to about a 50% increase in energy demand over that period of time. And that's only electricity; there are other forms of energy as well, of course.

The other thing to note is that where you source that energy changes. It doesn't change significantly, but there are shifts. For example, in one of the scenarios, we had a significant growth in wind contributing to the larger consumption needs in that period of time up to 2030.

So to answer your questions, it's a bit of both; it's both.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you.

I had a question, Mr. Lazar, but we'll get it in next time, perhaps.

[The Chair, Conservative, Lee Richardson]

Right. We'll hopefully get to another round.

Now I'm going to go to Madame DeBellefeuille, for cinq minutes, s'il vous plaît.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Any time I have remaining I plan to split with Mr. Ouellet.

Mr. Lazar, it is refreshing and reassuring to hear an association of forest producers tell committee members that it has succeeded in achieving an absolute reduction in greenhouse gas emission and pollution levels. This has translated into lower energy costs for you. People had been predicting a catastrophe if the government opted to go with absolute reduction targets. It's interesting to see that it's possible for an industry to achieve these targets and to come out ahead of the game.

You wrapped up your presentation by making some fairly specific requests of the federal government. What are you asking for exactly, in dollar terms, to move ahead even more quickly with cogeneration development? What type of incentives are you looking for from the federal government to further develop your cogeneration network on an industry wide basis?

[Avrim Lazar]

The first thing that would help the law would be to take.... I'll explain what it costs. To replace a boiler costs between $30 million and $80 million. In an industry that is suffering the economic hardship our industry is suffering, getting that kind of cash is very difficult. So even though it's

profitable in the short, medium and long term, initial start up capital must be found. The government has introduced a measure that helps us a great deal, namely an accelerated capital cost allowance provision. However, the measure is only good for two years. That's not enough time to implement these changes. We're asking that this measure be extended for a period of up to five years.

The government has also introduced another very useful measure.

That is a recognition of renewable energy from solar, wind, or cogeneration, I think of about 1¢ a kilowatt-hour. But the total money available for it is quite constrained. An increasing of that pool would make it easier to increase the number of projects we could undertake.

In addition to that, the new technology necessary to do this

does exist, but more effective and cost-efficient technology is being developed and should be available shortly. Ramping up investment in renewable energy technologies would also be very useful. On that score, we have no complaints about the government's efforts. I think that it's doing a good job and that Mr. Lunn will do his share as well. However, it's only a first step and much more needs to be done.

[Christian Ouellet, Bloc, Brome—Missisquoi, QC]

Mr. McCarthy, I have here in my hands a chart that shows the prevailing trends. Could you explain to me the significance of the line in the middle of the chart?

[John McCarthy]

The line you're referring to is the production of gas from Canada. As a bit of background, the majority of Canadian gas currently comes from the western Canada sedimentary basin, and the basin is mature, in that the ability for the basin to increase its production is very much dependent upon the economic incentives, if you will, or the environment, including price, that's provided to the folks who produce that natural gas.

In the scenario here, we have reflected a steady state as far as level of price and level of activity are concerned. We can see that if that assumption continues, we will continue to see a slow decline in western Canada sedimentary basin gas.

[Christian Ouellet, Bloc, Brome—Missisquoi, QC]

The green line at the bottom is the cogeneration line.

[John McCarthy]

No, the green below is.... One thing I should say is that this is “all of Canada” natural gas. I've been focusing on the western Canada sedimentary basin, but it is all of Canada.

Concerning the green line, you may remember from the scenario that we used a much lower price for energy. At the lower price there was less activity. With less activity you have a steady decline in the amount of production of natural gas from Canada. One of the assumptions that's part of this scenario is that the decline in natural gas from Canada is made up with natural gas sourced from elsewhere in the world through liquefied natural gas. That is part of this scenario.

The big story from this is that there isn't a huge amount of new natural gas within Canada. There is an ability to increase it, but it's limited. Even maintaining it will be difficult.

[Christian Ouellet, Bloc, Brome—Missisquoi, QC]

Thank you.

[The Chair, Conservative, Lee Richardson]

Monsieur Ouellet, perhaps you can continue this in the next round.

Mr. Bevington will speak on behalf of the NDP in the first round. Mr. Bevington.

[Dennis Bevington, NDP, Western Arctic, NT]

Thank you, Mr. Chair.

Thank you, presenters.

I'm looking at the electrical generation graphs you've created here, and I'm thinking of the work that's gone on in Parliament around the development of the greenhouse gas target reductions for, say, 2030. All parties have basically accepted a very significant decrease in greenhouse gas emissions from all sectors by 2030.

Where does this show up on your graph and in your thinking about where energy is going in Canada? If it doesn't show up there, does that suggest you're not able, without some kind of instruction about the nature of our energy system going into the future, to come up with projections that would actually show us where we have to go?

[John McCarthy]

That's a very good question.

Time is very important when we are doing this work. This document comes from our consultation document, which we consulted with over the period probably from March to.... It's ongoing. Since then, the policy environment has changed significantly, and what we thought was a rather aggressive policy environment when we were setting it out turns out to be in fact a little soft copmared with what people are actually moving towards. When we are re-doing our numbers, first of all in the triple-E scenario, for example, which is our most aggressive policy scenario, you will see some shift.