Natural Resources Committee on March 9th, 2017

[The Chair, Liberal, James Maloney]

I call the meeting to order.

Good afternoon, everybody. We will get going right on time, which is not always the case.

We have two people standing in. David and Ron, thank you for coming today.

To our witnesses, Mr. Love, Mr. Finet, and Ms. Bak, thank you for joining us today to participate in our study.

I will give each group up to 10 minutes to do their presentation, which will be followed by questions. You are free to deliver your remarks or answer questions in either official language. In all likelihood, you will be asked questions in French and English.

I won't take any more time. I will open the floor to Mr. Love and Mr. Finet first. I hope I pronounced your names correctly.

[Jean-Pierre Finet, Vice-President, Energy Services Association of Canada]

Yes.

[Peter Love, President, Energy Services Association of Canada]

Yes. Thank you very much.

I appreciate the opportunity to come and speak to you. My name is Peter Love and I'm the president of the Energy Services Association of Canada. J.P. Finet is the vice-president responsible for our Quebec office.

I will make some comments in English. J.P. will add to them, and if there are questions, J.P. can respond to those in French. He may respond to the ones in English, too, depending on how hard they are.

I wanted to give you a bit of background on our industry because we think we can play an important role here.

We represent what's called the ESCOs, the energy service companies. There is a number of them in Canada. Many of them are large companies that you would recognize: Siemens, Honeywell, Johnson Controls, Trane. These are large multinational companies that do many things. One of the things they do is a guaranteed energy service performance contract. That's what we're here to talk to you about.

Our association was created in 2010 to advocate the use of these performance contracts. Most of these contracts are in the public sector, for government buildings, hospitals, universities, colleges, or schools. They've been used in Canada for over 30 years. The industry accounts for about $300 million a year in doing these projects. We've done about 280 of them over the last 10 years. It's an existing industry. It has been here for a number of years, and the essential feature of these contracts is that it's a competitive industry. As much as our members would love to think they can get a sole-sourced contract, it's all for public entities, and so it's bid, and there's a competitive process.

They do a detailed assessment of the building. They identify the measures that they think should be undertaken. They undertake those measures. They guarantee that the energy savings from those measures are sufficient to pay back the project, and if they're not, they make up the difference.

As part of this process, they spend quite a bit of time as well in monitoring the project to make sure it's on schedule and on budget and making sure that the performance guarantee is being met, because they're actually guaranteeing it with their own money. They are obviously very conscious of that. It's a guaranteed project.

They also spend quite a bit of time in terms of commissioning the project once the equipment has been installed to make sure it's working correctly. They also spend quite a bit of time in education, talking to the staff and the custodians who are actually operating the building. It's one thing to talk to the CEO or the CFO about the project, but it's also really important to talk to the people in the mechanical room and the electrical room so they understand the system that's put in place and can fully utilize its benefits to achieve the results we're looking for.

That's the nature of the industry. Some of you may know that Natural Resources Canada has had a program to promote the use of these contracts in the Canadian government. It's called the federal buildings initiative. I don't have to tell you what the acronym is. It's an unusual one, but that's what they've called it, and it has been very successful.

The program has a qualified bidders list of companies. They have to fill out information to ensure that they are qualified to do this work and NRCan maintains it on an ongoing basis. They have model RFPs, model contracts, and they actively promote these sorts of contracts to departments to achieve energy efficiency.

Almost a hundred projects have been done over the last 25 to 30 years. It has gone up and down. It's in a real upswing right now. The former assistant deputy minister of defence, Jaime Pitfield, committed to having all 35 of Canada's military bases retrofitted to increase their energy efficiency. Some of those RFPs have already been issued and some have already been contracted. You're going to see that work in almost every one of your ridings, and in every one of your provinces at least. That's under way.

We've actually just come from a meeting with Treasury Board. As you may know, the Office of Greening Government Operations is now part of Treasury Board. It is interested in using these contracts and this type of solution to achieve the government's greenhouse gas emissions reduction target and in working with us to do that.

That's a little bit of background on our industry. I'd be delighted to take any questions on that and give you more background on it. However, I think the main thing we wanted to come and talk to the committee about was the role our industry could play in encouraging innovative technology and in encouraging new companies with innovative technology that are approaching you and have opportunities. We would love to see these technologies included in the performance contracts that we do. This is something our members would be very interested in including.

However, because it's unproven technology, we would not be able to take on the performance risk of those technologies. Our suggestion is that that risk be taken on by the government in some fashion. We don't have an exact idea of what that would be, but in some way a contract would be structured so that the winning bids using a performance contract would include some elements of these technologies. They would be then tested as part of this performance contract. We would be delighted to see how that technology, or those groups of technologies, are performing and then report back on whether they're better than expected, they're about the same, or they really had problems.

We see this as an ideal opportunity to be a testing ground for these new technologies. Often our members can get a price on these new technologies, so that's not a risk; we know going in what the price is. It's the performance that we just don't know how to guarantee.

That's our main suggestion: that the government could address those types of performance risks. Some of these technologies, as well, may not be at mass-production size, so their pricing may be a little bit higher than it would be once they became more mainstream. Again, there's a little bit of risk...well, it's not risk; it just means the project would be a bit more expensive, but we think that expense could be included in contracts.

You had three questions. One of them was the types of risks the federal government could address. I think that performance risk is the key one for our industry. In terms of best practices, we think the federal government's FBI program is a best practice. We do a lot of work with provinces, and we highlight this as a best practice when we're talking to people across the country. We know that the Quebec government is looking at some version of an FBI program to promote the use of performance contracts in Quebec. We're talking to B.C., Ontario, and Alberta, which in particular are looking at this. You have a best practice. It's not perfect—it can be improved—but certainly it is something that's very effective.

The other element of best practice that we identified in our presentation was the idea that Alberta has a borrowing act. They actually encourage school boards to borrow money for energy efficiency, but there is a condition that they must get a performance guarantee. There was a recent report in Alberta that recommended to the government that it extend that to other public entities—hospitals, schools, and universities—to encourage them to borrow for energy efficiency, but to have a performance opportunity.

I think there's a list of products that you already have, so we'd like to work with you on that. As I said, I think the FBI program could be encouraged to help us in the de-risking of that technology. We think that would be a great vehicle to use.

I know my time is almost up, so I'll just end with one comment about performance contracts.

A lot of people believe, first of all, that ESCOs are financial institutions. They're not. They are indifferent to who provides financing. If the federal government has money it wants to invest in these projects, we're delighted to use that instead of just going to banks, insurance companies, or life insurance companies.

The other thing is that these contracts are cost-effective, especially when you look at the cost of multiple contracts, multiple RFPs, multiple winners, multiple losers. The cost to a department of managing all those contracts and all those negotiations is very high. NRCan, in its 25 years of experience, has found that the cost of these performance contracts is about the same as conventional costs, yet they get a lot more done. They're more comprehensive, and of course the big thing is that they're guaranteed by the private sector.

[The Chair, Liberal, James Maloney]

Thank you very much, Mr. Love.

Ms. Bak, we go over to you.

[Céline Bak, President, Analytica Advisors]

Hello, ladies and gentlemen. Thank you for inviting me.

I am very pleased to appear before the Standing Committee on Natural Resources.

I will start with a brief introduction on the Paris agreement and the nature of clean technology firms. I will address three barriers to adoption of clean technology and will make three recommendations on de-risking its adoption.

Despite the collective ambition that yielded the landmark Paris agreement and despite the enhanced commitments to climate action by countries embodied in their nationally determined contributions, including Canada's, the world is still far away from collective action to keep global temperature increases to well under 2°C.

I would like the committee to know that after Russia and China, Canada's is the world's third most GHG-intensive economy on a GDP basis, the most GHG-intensive economy on a per capita basis, and the ninth-largest emitter in absolute terms. Your work on de-risking clean technology adoption is therefore vitally important.

In regard to clean technology innovation, Canada invests a great deal in de-risking technology, whose primary purpose is remediating or preventing environmental damage. According to firm-level research, in 2015 some 28% of R and D for Canada's more than 800 clean technology companies was publicly funded. Two-thirds of Canada's clean technology firms are engaged in commercializing their products; that is to say, they have proven that the technology works at scale and are looking for markets in which they both can improve environmental performance and also either increase revenue or decrease costs. This has just been described by Mr. Love.

The committee's work on methods for de-risking technology is vital. I would like to focus my remarks on recommendations to de-risk the markets for these solutions, the markets that I have just described. This is because clean innovation solutions are ready now, before markets for these solutions have formed. This situation is due to Canada's investment in programs during the past 15 years.

Clean technology firms operate capital-intensive business models because they invest in all three of R and D, manufacturing, and distribution. Think of the way Henry Ford and Massey Ferguson established the concept of dealerships for their products. Their dealers put forward their homes as security; that's how they attracted capital to the industry.

I'll speak about three risks to the adoption of clean technology solutions.

The first is that there are no net prices on carbon pollution because fossil fuel subsidies are in place today. Clean technology firms operate in areas in which prices for the commodities they replace, including energy derived from oil and gas, are volatile and in which prices for the externalities they reduce, including carbon, are in fact still negative.

Yes, we will have negative carbon prices in Canada for some time. This is because in Canada we have tax expenditures in the form of subsidies to the fossil fuel industry. In Canada these tax expenditures, under the most conservative method of calculation, are estimated to be $3.5 billion in direct fiscal subsidies and $3 billion in publicly funded loans.

The second risk to adoption of clean technology solutions is that regulators assume no innovation in setting environmental performance standards. Canada does not have accountability methods requiring that environmental regulation, whether federal or provincial, stipulate that best available technology be used as the benchmark to establish environmental performance standards.

This means, for example, that when methane regulations are established today, there is no requirement to consult with either academic researchers or clean technology firms to ensure that regulatory standards reflect what is made possible by innovation. In the U.S., civil society ensures that this happens; in Canada, it's not yet the case. There's a very good example of that quite recently with methane regulation.

Also, where permits and approvals are required to implement new technologies, delays are lengthy, because authorities grapple with assessing new technologies based on precautionary principles and legacy technology.

For example, they're used to regulating a certain kind of solution to an environmental problem, and when a new solution comes up, it's hard to figure out how to give permits for these new solutions. If we were to imagine clean technology firms in a sports league, we would picture on the one hand a newly established and very talented team of millennials playing on a field not yet served by lighting, a stadium, or a transportation system for the spectators. Their older opponents—people of my generation—are on the other hand playing on a covered field that is level, well-lit, and well-served by public transportation and other regulatory infrastructure.

A third barrier, speaking of infrastructure, is within infrastructure investments. There is predetermination of how electricity, mobility, water, and waste water services should be delivered, and therefore it tilts the playing field away from innovation towards legacy solutions. Meeting environmental protection goals such as Canada's commitment to the Paris agreement will require investment in infrastructure, and innovation can play a role in this to both improve performance and reduce costs. However, today Canada has no mechanisms to stimulate the adoption of best available technology as part of project assessments for infrastructure.

I'd like to make three proposals for Canada.

The first is for increasingly stringent standards for energy infrastructure. In November 2016, Minister Catherine McKenna set an aspirational goal for Canada's electricity sector to be 90% non-emitting by 2030. Today, it's at 83%, and getting to 90% will be largely achieved by phasing out coal. However, if natural gas is the primary replacement for coal, getting beyond this target will be difficult to achieve, so how will we avoid lock-in and stranded assets, for example, in natural gas infrastructure? Implementing increasingly stringent performance standards will de-risk markets for technological innovation for the natural gas industry.

Second, I'd like to recommend a principles-based approach to capital cost allowance. Today, fiscal advantages are in place for the fossil fuel industry and for sectors that can lobby to their advantage. If our tax code was subjected to a principles-based assessment of its alignment with our Paris treaty obligations, these tax expenditures would be identified and the money they represent—in the case of fossil fuel subsidies, $6 billion—could be redeployed much more cost-effectively and in a way that is transparent in terms of both outcome- and performance-based principles, such that markets for innovation would be de-risked.

My third recommendation is for full cost accounting of infrastructure, including a price on carbon for the length of the useful life of the infrastructure. In establishing criteria for long-lived infrastructure, full life-cycle cost accounting for these projects, including a shadow price on carbon for the life of the project, will stimulate innovation. This, combined with the principles of best available technology, will ensure value for money while de-risking markets for innovation.

I applaud the committee's work on de-risking clean technology adoption, and I look forward to your questions.

In regard to de-risking technology in terms of performance, you have a policy paper from my research at the Centre for International Governance Innovation, both in French and in English. In its policy recommendations section, there is a reference to a de-risking fund, which you may refer to in regard to Mr. Love's matter.

Thank you.

[The Chair, Liberal, James Maloney]

Thank you very much, Ms. Bak.

Mr. Serré, you're up first.

[Marc Serré, Liberal, Nickel Belt, ON]

Thank you, Mr. Chair.

Thank you for your very thoughtful presentations and the preparation for today's presentations.

My first question is for Mr. Love.

In your presentation, you highlighted the federal government's success in upgrading its office facilities cost-effectively with the NRCan federal buildings initiative.

I wonder if you could provide us with an overview of whether and how the ESPCs are being used to upgrade buildings in the private sector. Are there any recommendations along those lines that you could provide to us?

[Peter Love]

Thank you.

The private sector represents about 10% of the work we do. One of the more high-profile buildings recently was the Empire State Building, done by Johnson Controls and using a performance contract. It was heavily monitored, so there is a great deal of data available on it. One of the pieces of information that I use in presentations is the employment impact, because they monitored that quite carefully and found it very positive. It was very labour-intensive. That was something that people had known.

We do have some projects in Canada. Typically, in the private sector they are looking for very fast payback, and five years is a long time for many of them. Some of the owners of properties have a lot of access to capital owned by pension funds or very wealthy companies, so they just don't seem to be as active. I think it's a growth opportunity for our industry, as some of these companies look to go beyond making smaller, incremental changes to their building performance. We'd be delighted to do more of that work.

There was a very interesting example of a fairly small project here in Ottawa. They did a $2-million project through a performance contract, and part of that performance contract improved the accessibility, the elevators, and the washrooms, because it was an older building. They were then able to rent to the federal government, which they had not been able to do before, and the value of the building went from $15 million to $20 million, so their $2-million investment was immediately paid back on the value of the real estate. That's a little unusual. I'd love to see more examples of that.

[Marc Serré, Liberal, Nickel Belt, ON]

Thank you.

My second question is for you, Ms. Bak.

Your 2016 report on green technology states that, in the past six years, the economy of the green industry has slowed down after a period of strong growth, which was approximately four times the growth rate of Canada's economy.

Can you tell us about the specific factors that led to the slowing of the industry in Canada as compared to that in other countries? What could the federal government do to offset these factors in order to better support the industry?

[Céline Bak]

It is a new industry in which Canada has invested a great deal. We have the capacity to create companies. These companies already employ more than 55,000 people. It is a very promising sector in terms of economic benefits.

In the 2016 report, we noted a drop in the revenue growth rate. According to our analysis, if the economy in this sector has slowed, it is simply because the markets to which the companies are selling their solutions are not yet robust enough. I am here today to talk about ways of making the market system more effective so companies can sell their solutions.

If companies sell a solution that reduces carbon emissions and carbon pollution has no price, they will clearly not be profitable. Trying to sell a solution to remedy something that has no cost will not work. That is why we maintain that there is a very important link between the price of pollution and the ability of companies to achieve the profitability that their investors deserve.

[Marc Serré, Liberal, Nickel Belt, ON]

Thank you.

I have another question for Ms. Bak.

Mr. Love talked about the issue of performance risks and de-risking the fund, and you indicated you had some specific recommendations on that. Can you elaborate a bit about de-risking infrastructure and the barriers there, again linked to the federal government?

[Céline Bak]

We've taken the metaphor of the CMHC for the low-carbon economy.

All of you, I'm sure, are well aware of what the CMHC does. It makes it possible for Canadians to guarantee their mortgages by taking the last part of risk in the loan that the bank, the private sector, makes. We have nothing like that for performance, for innovation. The federal government could create the equivalent of the CMHC for the low-carbon economy, and this type of fund could be last in and first out in the sense that if there were a performance problem for a particular technology within an application in the federal government, then the government could provide that guarantee.

That's strategic for many reasons, in that it would enable financial institutions to learn how to do that. Actually learning how to underwrite performance risk is not something that financial institutions do today, so it's a very strategic approach in that it not only addresses a priority today but it also teaches the private sector how to do it for the future, because you don't want to be in the business of doing this forever.

[Marc Serré, Liberal, Nickel Belt, ON]

I have seven seconds.

Thank you, Mr. Chair.

[The Chair, Liberal, James Maloney]

Ms. Stubbs is next.

[Shannon Stubbs, Conservative, Lakeland, AB]

Thank you, Mr. Chair.

Thanks to the witnesses for being here.

I just want to start off with some broad comments. I have to say it probably won't surprise you that I am a little concerned when there are comments made about contracts the government is undertaking along the lines of it's “a bit more expensive”, or a risk to government, because I am concerned that what that actually means is it's a risk to taxpayers and potentially to future generations. Therefore, if you'd like to comment a little bit more around that concern in your responses, I'd welcome you to take that opportunity.

Mr. Love, given your knowledge and experience with these programs in the past, can you give us more information in terms of your understanding of what investments are picked and what contracts are picked and what the measures for those are, and how the best options are determined?

[Peter Love]

I'll ask JP to think about that as well.

It depends on the building. Labs are different from air force bases, and they are different from office buildings, and they are different from hospitals.

One of the advantages is that the performance contracting industry has been around, as I say, for 25 years, so there's a lot of experience with almost every type of building, but it's not simple. It's not a cookie cutter.

Some of them have moved pretty quickly from innovation at an early stage to wide adoption. LED lighting is an example. Ten years ago, it was really expensive. The colour quality wasn't very good. The white on the Christmas tree lights was pretty blue, and of course, in a home application it was very expensive. A few crazy people like me had it, but that was.... I wouldn't expect the federal government to take on that large a risk.

Over a fairly short period of time, the performance has improved hugely, almost like a Moore's law, and the cost has come down, and now it's competitive. That's a model we would love to see for other technologies.

Having been with a government agency in Ontario, I think the biggest challenge for governments occurs when they start to try to pick winners and losers. They end up saying, “That's a good technology; sorry you didn't make it.” That's very dangerous, because they never have the information available. They're listening to people who have interests, and it's hard for them to balance that.

The lesson I take from this is a really interesting role, a trend that we're starting to see in more of the provincial programs on energy efficiency. It's performance-based. They're not going to say they want that and that; they're going to say they want this level of performance, this level of carbon reduction, and this level of energy reduction. That's what they'll say they want. Now, private sector, you go figure it out. Use your innovation and creativity and come back to us with what you think is the best way to achieve that.

We're starting to see a bit of a move for that with the building code, which has gone from what they call prescriptive—thou shalt have R16 here or R40 there—to a performance basis, saying to an architect or a builder, “Here's the performance I want for your building. Figure it out.” It's harder to monitor it and harder to know whether that actually happened or not, but it's that performance base that really encourages innovation.

I agree with you. The government has to know what its risk is. This is why Céline's idea of putting something together.... Say that we're not going to blow our brains out, but we want to have this innovative technology and we want Canadians to play a role in it, so here's some money and here's a program to apply to. Again, you're going to have to have somebody say, “We got 50 applications, but we can only support 20. We're going to use some criteria to select them.” You have to do that because you can't do everything.

[Jean-Pierre Finet]

I would like to add that our members already take a lot of innovative risk on their own, but past some thresholds it would be nice to share that risk of innovating in clean technology. We don't want to give you the impression that we want to dump the whole risk on you for clean technologies. We're ready to do our share. We already do, actually, but the more ambitious your objectives are.... We're part of the solution, but we can't take on all the risk by ourselves.

[Shannon Stubbs, Conservative, Lakeland, AB]

Certainly I would say that goes for the vast majority of investors and developers in Canada's natural resources sectors. They also have a long track record of innovation and technology to minimize their environmental footprint while also producing their products under the strongest standards and strongest regulations in the world.

I had that here in a letter your organization sent to the Ontario department of energy in 2013. I just want to draw this link between contracts and performance, because I think what you're saying is important in relation to Ontario's long-term energy plan. I think your conclusion was that it actually discourages conservation.

We've seen that Ontarians' power bills have increased, even though they have also decreased their consumption. I think it has increased 60% since 2006, which is nearly four times the rate of inflation, while they have decreased their consumption by 10%. At least it's clear in that case that even if the costs are rising astronomically because of contracts that governments have imposed, it is consumers who are being gouged by that decision. I think it is important, if you can, to give more specifics around how exactly you protect consumers and taxpayers.

[Peter Love]

That's a good point. I'll give you a 20-second response on electricity prices in Ontario—

[The Chair, Liberal, James Maloney]

Good, because that's all you have.

[Voices]

Oh, oh!

[Peter Love]

It was about $15 billion that was invested in the electricity system in Ontario. There was all-party support for a decision to close coal-fired generation plants. That was 25% of the fleet. No matter who was in power, that was going to cost a great deal of money, and it did, and there have also not been significant investments in the transmission or the distribution systems. Ontario had gone through some peaks and valleys and had a big building boom in the eighties, and then not much happened. Then we began to have brown-outs in the early 2000s, so no matter what party was in power, a large investment was needed in Ontario's electricity system, and that investment was made.

Was it perfectly made? Were there mistakes made along the way? I think conservation did play an important role in that. I think it still has an important role to play in any energy policy, and that was part of our submission to the long-term energy plan.

[The Chair, Liberal, James Maloney]

Thank you very much.

Mr. Cannings, we'll go over to you.

[Richard Cannings, NDP, South Okanagan—West Kootenay, BC]

Thank you.

Thank you all for being here.

Mr. Love, Mr. Serré asked you a question, and you mentioned concerns around payback time for some private sector firms.

When these investments are made, the way I understand it is that there's an investment made that reduces your energy consumption, so there would obviously be a reduction, and the amount that the company would be paying would somehow relate to that. What are the usual payback times? I assume that their power bills are going down right away.

[Peter Love]

Right. The typical payback for most of the FBI projects would be 10 to 12 years, and that would be a 10- to 12-year contract. In order of magnitude, a $10-million project would pay back a million dollars a year, and at the end of 10 years we're done, and that building continues to have reduced energy bills for the life of the equipment, another 15 to 20 years.

That has been traditionally how it goes. We are seeing, though, some longer contracts now. We've seen them as long as 35 years. The longer the contract, the deeper the retrofit. Typically, most of the projects done to date would have achieved savings in the 20% to 25% range for that 10- to 12-year payback. The government now is looking to go much deeper than that, with a 40% target. It can be done, but not with that 10-year term. It would need an extension of that term, and I think that's part of the challenge .

We actually made a presentation to the federal building initiative a week and a half ago, suggesting that they alter their RFP process to focus on greenhouse gas emissions, and this isn't going to happen quickly. If that's what you want, ask for it in an RFP and judge people on how much your greenhouse gas emission reductions would be. It has to be cost-effective. It has to be certainly a positive, net present value.

We've seen the FBI program. It's interesting. When it first started off, it was mainly to save money. Then it was to save energy, just because that was a good thing, and we believe now, with the current interest and Canada's commitments, it should really be focused on carbon. The advantage is you're getting all three. You're going to save money, you're going to reduce energy, and you're going to address carbon. You're also going to be hiring a lot of people. It's very labour-intensive, and that's what that Empire State Building project really confirmed.