|
Energy @ Gowlings |
| April 14, 2010 - Volume 8, Number 2 | |
|
|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||
Alberta Reduced Crown Royalty Rates
Introduction On March 11, 2010 the Government of Alberta announced a reduction in the royalties payable by producers of petroleum and natural gas wells on Crown lands. The effect of this announcement is to substantially reverse the “Alberta Royalty Framework” (ARF) which was introduced in October of 2007 to ensure that the Province received its “fair share” of the benefits of energy development. The ARF altered the royalty structure to boost the Crown’s take by 20%, which the Government predicted at the time would translate into an extra $1.9 billion a year. Under the ARF, conventional royalty rates for both oil and gas under the ARF ranged as high as 50%. Not surprisingly, the increased royalties rates caused tremendous consternation in the Canadian oil and gas industry. The introduction of the ARF also turned out to be very ill-timed. Gas producers were suffering from low commodity prices; and gas prices continue to stagnate. The price of oil hit an all-time high in early 2008 but then dropped like a stone before stabilizing in the $70 to $80 range. As a result of all of these factors, exploration and development expenditures declined and the increased royalty rates never translated into the forecasted $1.9 billion or anything like it. On the contrary, many companies voted with their feet by moving their exploration focus to Saskatchewan and British Columbia, both of which had markedly less aggressive Crown royalty regimes. In November, 2008 the Government introduced “transitional” royalty rates for new gas and conventional oil wells. While not technically imposing a cap on the ARF rates, the transitional program had the effect of capping rates on conventional oil at around 38% and on gas at around 30% for companies electing to participate in the program. In an article published in Energy@Gowlings at the time, John Iredale and Chiara Woods predicted that the transitional program was unlikely to have a substantial effect on the majority of oil and gas producers operating in Alberta. This prediction turned out to be correct. These transitional royalty rates were shortly followed in March 2009 by the Province’s three-point incentive program. Among the highlights of this program was a 5% royalty rate for the first year of production for new oil and gas wells. However, this program was announced as a temporary measure and did little to persuade the industry to become more active in Alberta. Features of the New Royalty Reduction Program The new royalty reduction program is in essence a return to the pre-ARF royalty scheme or an entrenchment of the transitional royalty rates on a permanent basis. Key features of the new regime are as follows:
“Competitiveness Review” The royalty reduction program was part of a “competitiveness review” which the Province announced at the same time, as detailed in a publication titled “Energizing Investment: A Framework to Improve Alberta’s Natural Gas and Conventional Oil Competitiveness”. In addition to the changes to the royalty scheme, the Framework proposes to:
Fiscal and Economic Impacts The Government predicts that the lowered royalties rates will be offset by increases in land sales, personal and corporate taxes, and jobs, and that there will be a positive net impact on government revenues through 2011/2012. A net decline in government revenues of $363 million is forecast in 2012/2013, when revenues generated by increased activity will only partially offset declines in royalty revenues. Industry Response In contrast to the very negative reaction to the ARF in 2007 and the decidedly unenthusiastic response to the transitional program in 2008 and the three-point program in 2009, the oil and gas industry’s response to the new Framework has been positive, with some predicting that more companies will now seriously look at redirecting their exploration activities back into Alberta. Some industry spokespersons have cautioned that the devil is in the details, and that since gas prices in particular are a long way from the prices which would attach the maximum rates under the new Framework, the shape of the curves still to be worked out by the Government will be absolutely critical. One point of particular note is that some shale gas developers have indicated that they will now be investing in Alberta because of the lowered royalties rates. Shale gas has become a booming part of the energy sector that has largely bypassed Alberta to date. Conclusion The Government’s stated goal was to increase Alberta’s competitiveness while realizing the full economic benefits of Alberta’s oil and gas resources by taking stock of new circumstances and market realities. It is still to be seen whether the revised Framework will have the desired effect of fairly distributing the benefits and costs arising from the development of resources between government and industry.
OPA Announces Initial Feed-In Tariff Contract Recipients
On March 10, 2010, the Ontario Power Authority (OPA) announced the approval of 510 new renewable energy generation projects to be built in the Province of Ontario over the next few years. The projects are to be built in 120 communities, range in size from 10 kilowatts to 500 kilowatts and have a total generating capacity of 112 megawatts. These projects will be connected to the grid without being subject to an impact assessment, which is required for larger scale projects. About 95% of the projects are solar power projects, while the remaining projects are biogas (20), water (4), onshore wind (3) and biomass (1). A detailed list of the approved projects is available at the OPA’s website at www.fit.powerauthority.on.ca. The largest recipient of approvals was Loblaw Companies Limited, which had 136 FIT applications approved for rooftop solar installations at its stores in Ontario. In total, the OPA received 956 eligible applications for the first round of FIT contracts. Further, on April 8, 2010, the OPA announced the approval of 184 new large scale renewable energy generation projects to be built in the Province of Ontario over the next few years. These projects will generate enough energy to power 600,000 homes. Included in the 184 projects are 36 community and aboriginal projects located throughout the Province. Of the 184 projects, 76 of the projects are ground-mounted solar photovoltaic, 47 are on-shore wind and 46 are waterpower projects. There are also seven biogas, two biomass, four landfill gas, one roof top solar and one off-shore wind projects. Information about the projects is available at the OPA’s website (provided above). In total, the 694 FIT contract offers will create 20,000 direct and indirect green jobs and attract about $9 billion in private sector investment. Projects that did not receive a FIT contract will be put through the economic connection test to identify transmission or distribution system expansion projects that support renewable generation and meet economic requirements. The first test will start in late summer or early fall of 2010. A detailed list of the projects that must go through the economic connection test is also available at the OPA’s website.
Smart Grid Challenges and Choices Report Released
Smart Grid Challenges and Choices Report Released Oracle, a software applications service provider, has released a report entitled “Smart Grid Challenges & Choices”. The report surveyed 150 North American C-level utility executives with 45% of those interviewed noting that Canada was the primary country of operation. The respondents noted that, over the next decade, their primary focus will be on improving reliability and operational efficiency and implementing smart metering. It was noted that the greatest challenges are going to be ensuring effective customer communication and incorporating the cost of the transition to the smart grid into rates. Even with these challenges, these executives expect that there will be wide acceptance of the smart grid and that consumers will benefit. However, only one in five of the utilities is moving to a full system-wide smart grid deployment. The following are the smart grid priorities over the next decade as set out by the respondents:
The following table describes the utilities’ approach to smart grid deployment.
The following were the responses when asked about which smart grid component will see wide-scale adoption most quickly;
The respondents believe that consumers will benefit from the implementation of the smart grid over the next 10 years. The following table lists the top benefits that these executive expect to be realized.
With this group believing that consumers will benefit from the smart grid, they were asked which two advancements will take off the fastest if the smart grid becomes a reality.
Before the grid can be transformed, the business will need to be transformed. With this in mind, these executives are grappling with: What will the smart grid cost?; How will we recover our investments?, and How will consumers react?. Their top recommendations on making smart grid implementation a success include:
LDC CORNER - Enercom 2010: Exploring the Promise of a Smarter, Greener Ontario
LDC Corner features items of interest to local distribution companies. The first article in this new regular feature of energy@gowlings provides a summary of Enercom 2010. Enercom 2010 promised to explore the economic impact of a smarter, greener energy industry on the Ontario market. By all counts, the conference fulfilled this promise with a roster of speakers tackling a wide array of subjects. Experts discussed topics ranging from a national energy strategy for Canada to smart grid developments in the United States to strategies being implemented by Ontario’s local distribution companies (LDCs). One thing was clear – in each and every discussion, you could find smart, green kernels. While no one professed to have all of the answers, each speaker genuinely expressed a desire to contribute to them. A Greener Ontario The opening keynote by Deirdre McMurdy set the stage with a discussion on climate change policy in Canada. Delegates were given a world tour of climate change developments, effectively setting the global backdrop for the actions of Ontario’s LDCs. Some might argue that this particular local-to-global link remains disjointed: after all, Ontario and Canada have yet to fully implement a comprehensive regulatory framework for carbon emissions. But whether or not Ontario ever implements a carbon tax, carbon cap and trade regime or other form of carbon regulation, the province can justifiably lay claim to having a green electricity agenda. Ontario’s closure of coal based power can be viewed as nothing but a direct contributor to carbon reduction in Canada. The trail from green to smart becomes evident. The desire for less dirty power means that more green power will be needed since power consumption is not expected to offset completely capacity reduction. But green power usually costs more, so we need to do more with less. How? At least part of Ontario’s answer lies in the Green Energy and Green Economy Act (GEA). LDCs have always known that they are a key linchpin in this conundrum. The GEA enshrines this in the role that LDCs will play in achieving a smarter, greener Ontario. Every LDC already knows what it is charged with under the GEA. An LDC must provide priority access to renewable energy. An LDC must make system infrastructure investments that will accommodate an expected influx of renewable energy, as well as power from new sources that have not even been invented yet. The discussions at Enercom 2010 left no doubt that, for green energy to be a significant reality, everything needs to be smarter. Smarter Energy Indeed, the term “smart” was sprinkled generously throughout the discussions at Enercom 2010. Two key strands of smart themes emerged: (1) energy efficiency, to be achieved through technological and operational advances and the requisite financial investments, and (2) the facilitation of consumer engagement to unprecedented levels. We heard from GE about the billions of dollars being invested by the company in research and development of such smart things as hybrid vehicles, smart appliances, and other energy efficiency tools, consumer energy dashboards and technologies that can contribute to the necessary smart grid. We heard from Spirae about the billions of dollars being invested in the United States in smart grid infrastructure research and development. Closer to home, a group of LDCs shared updates on their smart grid development. More than half of Ontario’s customers have smart meters installed and the implementation of time of use pricing has begun. This is just the beginning. A glimpse into Burlington’s GridSmartCity showed us the potential of a fully implemented smart, green electricity system with projects focussing on distribution automation, hybrid electric vehicle support, load shifting electricity storage, conservation programs, distributed generation and, perhaps most significantly, the effects of the interaction between such initiatives. The Cost, the Cost! Cost can often be the elephant in the room, but not so in the large ballroom where Enercom took place. Delegates heard in no uncertain terms that, from the perspective of the Canadian Federation of Independent Business, Ontario’s green agenda would cost small business dearly. This, in large part, results from the limited ability of small businesses to shift their electricity demands outside of peak periods. Certainly, Toronto Hydro did not shy away from baldly suggesting that, since customers will need to bear a significant part of the cost of a greener, smarter energy system, an LDC`s costs for related activities, including generation, ought to be recouped through regulated rates. Discussions on LDC investment plans were mirrored by comments from the investor’s perspective. Unsurprisingly, we heard that regulatory risk remains a critical component in investment decision-making. We also heard that while the Green Energy Act provides a supportive framework for smart grid and green energy infrastructure development, the remaining regulatory uncertainty as to what constitutes acceptably prudent investment will affect the availability and quantity of available financing. So where are we? Enercom focussed on the present challenges faced by and achievements of LDCs in their contribution to the development of Ontario’s greener, smarter energy landscape. Bigger picture comments from Perrin Beatty and Diane Francis reminded us that the full optimization of a greener, smarter energy industry in Ontario can really only be achieved with the support of an effective national energy strategy in Canada. The discussions at Enercom took place and will continue in the unavoidable midst of the climate change debate. It was fitting then that the final presentation had Jeffrey Simpson passionately arguing that Ontario’s green plan would be undermined by Canada’s unwillingness to make carbon reduction a true requirement. And so the final curtain at Enercom 2010 mirrored its opening act. The Enercom 2010 program comprised current issues which will reach far into the future. It will most certainly be worthy of a sequel in 2011. Presentations will be posted on Enercom's website at www.enercom.to/presentations.html.
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||
